The Transatlantic Yin and Yang

Are Europe and the United States headed in opposite directions?

January 19, 2005

Are Europe and the United States headed in opposite directions?

While politicians trumpet visions of the future that are possible, business executives have tended to focus — more modestly — on a future that is plausible.

The art of scenario planning, made famous by Royal Dutch/Shell three decades ago as a means of mapping likely prospects for the global business environment, is making a useful comeback.

As companies and countries grapple with the onrush of trends and events beyond the control — or even comprehension — of any single entity, they must plan for different scenarios.
Applying this technique to the rocky state of the transatlantic relationship, one begins to see that the United States and Europe are not only very different — but are becoming more so with each passing year, even if their ultimate destinations remain hard to foresee.

Rather than reiterating calls for renewed commitment to shared interests and values, might we be better off if both parties began to acknowledge their diverging paths?
Where we once had one West and two Europes, today we have one Europe and two Wests.

No doubt, Europe and the United States were already growing apart when the external threat posed by the Cold War evaporated.

In the meantime, America's robust demographics and full-bodied capitalism have set it upon a very different path from a faster-aging, more regulated Europe.
The latter is focused on the preservation of its — (admittedly agreeable) — way of life, but does so at the expense of innovation, risk-taking and growth.
While Europe's median age is projected to increase from 38 today to 53 in 2050, the current U.S. average age is likely to be maintained at a relatively youthful 36 over the same period, sustained by higher birth rates and immigrant assimilation.

Structuring a spectrum of plausible scenarios for the United States and Europe, one might well see America moving further into an orbit one could call “Chicago Boys II” — a red-blooded free-market system turbocharged by technology and entrepreneurial activity.
Meanwhile, Europe continues to evolve towards a scenario one might tag “Immigration Queue” — a still-affluent zone that can’t quite come to grips with either importing workers or exporting jobs.

But the true dividing line is taking place on the political — not the economic — front.

If the United States was constructed in the 18th century as an alternative to Europe, in some sense the European Union is now being constructed as an alternative model and counterweight to the United States — an objective that is as important as it is unspoken.
For their part, Americans seem unsure whether to hope for European strength or weakness. The ten new EU members represent only a modest addition to the size of the EU economy (around 5%), but they do seem to be imparting a fresh vigor to a continent that continues to wrestle with essential structural reform.

The new accession countries are growing twice as fast and their productivity growth is three times higher than that of the older members.
These trends are no longer just fueled by catch-up demand. Rather, they are driven mostly by lower tax rates and very low private sector debt levels that could rise significantly, thus unleashing waves of new consumer spending.

Despite this challenge, the EU's core countries still cannot manage to reduce entitlements and reform labor markets, while would-be reformers — across the political spectrum — are regularly punished by angry voters who would prefer to see Europe’s welfare state system remain untouched.

The well-known consequences have been what some call the shift from welfare state to “farewell state”: very slow growth, malaise and that symptom of creeping Third World status — continental European elites increasingly sending their children abroad to be educated at the better-funded and more creative Harvards, Stanfords and Oxbridges of the Anglosphere.
Foreign direct investment — rather than forcing structural change — may well have had a weirdly opposite effect. By manufacturing VW Golfs in Bratislava, for example, Germany may be outsourcing just enough to lower costs and preserve its existing structures and social consensus.

Is all this a recipe for continued stagnation? If bottom-up regeneration is too difficult, it may be worth recalling that — throughout European history — the great modernizers and reformers have made things happen from the top down: think Louis XIV, Peter the Great, Bismarck.
Perhaps tough, pro-competition EU commissioners, working with the market forces unleashed by the new members, will break the deadlocks, producing a more economically dynamic — if also more diverse and less politically harmonized — “multi-directional” Europe.

The United States, for all its inventiveness and restless energy is — and will likely remain — a vast, inwardly-focused world unto itself.

It combines generosity of spirit and heartfelt patriotism at times with a tin ear and an inability to connect with the views, motivations and national feelings of others.
In a curious reversal of roles, the once-warlike European continent has become the proponent of international harmony-seeking and negotiation.
In contrast, the idealistic United States has become the prime user of force in what it has come to see as a fundamentally brutish and dangerous world.

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