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Speeding up Europe's economy

IN the present debate over burden-sharing in NATO, one often hears from United States allies that they could contribute more to defense if their economies were in better condition. A survey of comments at the recent Bonn summit, however, provides ample evidence that European economic recovery has been modest so far. A strong and lasting economic expansion is not as near as many hope, and this fact has major implications for both European defense policies and alliance relations. Progress on burden-sharing will require patience and will be slower than many in Congress would like. Many West Europeans today view the US with astonishment, even envy. The rate of recovery of the US during 1983-84 far surpassed the slower pace in Europe, although figures from the first quarter of 1985 suggest that the growth rate of the US economy is slowing. Between 1973 and 1984 the US had a net increase of 15 million jobs, while the 10 nations of the European Community (EC) suffered a net loss of 2.5 million jobs. High unemployment in the EC remains stubbornly entrenched. By the end of last year, 11.5 percent of the work force -- some 20 million Europeans -- was unemployed.

European views of their economic relationship with the US have been cyclical. Sixteen years ago, Jean-Jacques Servan-Schreiber pondered American dominance of Europe's economy in his famous book, ``The American Challenge.'' In the early 1970s, the energy crisis, inflation, and a troubled dollar made some Europeans and Americans question the vitality of the US economy. Today, ``Europessimism'' causes European leaders to wonder whether Europe will be left behind in a technological race with Japan and the US. Such pessimism is exaggerated, but Europe's problems are real.

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The US economy is more dynamic and flexible than Western Europe's. The US has a much higher rate of starts for new companies. Some succeed brilliantly, and others fail. Europeans, on the other hand, are less venturesome. Unemployment remains high in Europe, in part because of workers' unwillingness to move or change jobs. Likewise, social spending, which supports the unemployed as well as many domestic programs, consumes an ever higher share of most European national budgets. Recent attempts by European governments to reduce expenditures on social programs have not reversed this trend enough to release money for other programs or new investment.

Europeans have traditionally relied more on the state to promote economic growth, but some are beginning to question the wisdom of this dependence. No better illustration of this change of attitude exists than in France, where a Socialist government is openly encouraging an entrepreneurial spirit and private investment, after the failure of earlier policies which expanded the public sector and fueled a destructive reflation of the economy. Yet, the French admit they have a tough road ahead in their quest to stimulate the productive sector.

Solutions to Europe's structural problems will be essential for European economic recovery. Social spending must be pruned, and private-sector growth must be encouraged. Steps should include relaxing laws that have hampered job creation, productivity growth, and the ability of companies to fire people. In the Netherlands, for example, employees can only be fired upon mutual agreement or with the approval of the government. As a result, European companies are often reluctant to hire additional workers when business picks up for fear they will be stuck with them later if business drops.

Europeans also hold high US budget deficits responsible for many of their problems. They contend that high US interest rates lead European investors to finance the US budget deficit instead of their own economic recovery.

For NATO, the European economic malaise has implications that extend beyond spending levels for new conventional weapons and NATO infrastructure. The inability of nations to put people back to work creates a despair and cynicism about governing institutions and leaders. The political turmoil that affected Europe because of the Great Depression may seem academic today, but prolonged stagnation and unemployment might make this analogy more disturbing. In a shorter time frame, NATO governments have already had to pay a political price because of industrial restructuring. The coal strike in Britain was one example, but similar problems have occurred with French and Spanish steelworkers. NATO's founders knew that its strength and security depended in large part on Europe's vitality and its political stability; thus, they supported the Marshall Plan and the creation of the European Community. This fact is as important in 1985 as it was in 1949, when NATO began.

No one expects the US to mount another Marshall Plan, but it can do two things that would greatly assist NATO. First, the US must accept the relationship between its own budgetary policies and Europe's recovery. This means budgetary responsibility, which would not solve Europe's problems but would certainly encourage European investors to bring some of their capital home once American interest rates began to decline. At Bonn, the US stated its highest priority was to reduce the budget deficit. Second, when the US urges its allies to do more for their defense, it must have realistic expectations. This will not be easy, but our own budget deficits and limits on growing defense costs should lead to greater understanding of European financial dilemmas.

Caution is also necessary for the US to avoid pressing Europe so hard that it creates resentment rather than cooperation. Europe's recovery is slow, and solutions to our own budget problems will require time as well. Once good progress is made on these issues, then will be the time to urge genuine changes in alliance burden-sharing.

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Rep. Lee H. Hamilton (D) of Indiana is chairman of the subcommittee on Europe and the Middle East of the House Committee on Foreign Affairs.