THERE are, writes Barry Eichengreen, two popular views of the European economy: it is either a “phoenix” or a “basket case”. The optimists point out that after the second world war, west Europeans produced only half as much per hour as Americans did; now Europe's average is not far below America's and some countries, notably France, do even better. Since the turn of the century, the euro zone has created more jobs than the United States.
The gloom-mongers scoff that American productivity has outstripped Europe's in the past decade. They run through the familiar litany of Europe's failings: high unemployment, despite all those new jobs; rigid markets for goods, services and labour; and burdensome taxes.
You can perhaps reconcile these two extremes, suggests Mr Eichengreen, if you choose your periods carefully. Compare the end of the last century with the middle of it, “and there is no disputing the phoenix view.” More recently, however, Europe has tended to lag behind America. And that, concludes this sympathetic American observer (a professor at the University of California, Berkeley), gives rise to doubts about the old continent's future economic prowess.
The key to these two facets of the economy lies in Europe's institutions. In lesser hands, “institutions” might be a lazy, catch-all explanation. Mr Eichengreen, though, crafts his arguments well. Western Europe's rapid post-war growth, he says, stemmed from more than the free play of market forces: cohesive trade unions and employers' associations, often inherited from pre-war times, and growth-minded governments were needed too. Hence the “co-ordinated capitalism” of his subtitle.
He makes a strong case that Europe did not start from scratch after the war. A good deal of physical capital remained; and of the roads, railways and factories that had been destroyed, much could be quickly rebuilt. By 1947, industrial production had surpassed 1938 levels, if Germany is left out of the European average; by 1948, production was as high as it had been a decade earlier even if Germany is included. The continent also had plenty of what economists call human capital and the rest of us call skilled and educated people.
Co-ordinated capitalism worked well in those countries that had it. Britain, with its fragmented unions and employers' groups, was a conspicuous exception, and its attempt to mimic French indicative planning in the 1960s was a conspicuous failure. Co-ordination crossed borders too, in the shape of what eventually became the European Union.
Strains showed even when co-ordinated capitalism was in its prime, most clearly in the series of exchange-rate realignments from the 1950s to the 1990s. Pride played as big a part as economics in patching up the system: just about every devaluation of the French franc seems to have been dressed up as a revaluation of the D-mark.
Europe's institutions served it less well once it had more or less caught up with America. They were much less good at fostering “intensive growth”—pushing back the bounds of economic possibility as opposed to merely catching up with them. Even in the 1950s and 1960s, while America put its research and development dollars into aerospace and electronics, Europe went for marginal improvements in chemicals, textiles and machinery—in Italy, for example, adding numerical controls to existing textile looms rather than coming up with altogether new machines. This was already beginning to matter by the end of the 1960s, with labour tight and living standards getting close to American levels. It is not clear that Europe has cracked this problem even now.
To be sure, structural reforms are afoot. Competition from central and eastern Europe, as well as China and India, is shaking unions and bosses in the west of the continent out of their old complacency. Expensive health-care and pension systems are being rethought, if not yet sufficiently overhauled. Mr Eichengreen does his best to sound optimistic—although, guessing that new technology will be as important to growth prospects as in the past decade, only cautiously so.
He sees reform efforts such as the Lisbon agenda, intended to make Europe the world's “most competitive” economy by 2010, as an attempt to overcome institutional inertia. Progress has been slow. Many old strains are still there. Some take the same form: witness the perennial battles over how much political integration should accompany the economic variety. Some have a new twist: grumbles from France and Italy about the wage restraint that has led to Germany's economic revival (see article) have echoes of the old demands for a stronger D-mark. The difference now is that there is no franc or lira to be devalued: French and Italian labour and product markets must change instead.
Naturally, no single story will fit such a varied continent. Mr Eichengreen has made a decent job of weaving different national shades into his book, while keeping the whole within reasonable bounds. In particular, he does justice to central and eastern Europe in communist times, helped by vivid examples of planning failures and partial reforms—for example, a quarter of all shoes sold in Hungary in 1951 were officially classed as substandard. And he has much to say about communism's collapse and its aftermath, as well as the reintegration of those countries with the west of the continent.
Almost as a matter of definition, no book of modern economic history can expect to remain the standard work for long. Mr Eichengreen, by posing the question of Europe's ability to adapt, foreshadows his study's mortality: within a few years, answers will have been supplied and new questions asked. But there is more than enough here to digest for now. For both Americans who want to understand Europe's successes and failures, and for Europeans who want to know where their continent was right and where it has gone wrong, Mr Eichengreen has provided an excellent summary.