ABSTRACT

Is “Old Europe” in decline and if so why? Over the past two decades at least, the growth performance of the US economy has systematically outpaced that of the European Union (EU), and especially that of its larger members. Why is the former living through “prosperity” while the latter has been experiencing mostly “depression”? (Prescott 2002) Almost three decades of “falling behind” have followed the three decades of “catchingup” in the aftermath of the Second World War. Not really depression, but sluggish economic growth, so that average per capita output in most European countries has not kept pace with that of the US, and poor employment performance and persistent mass unemployment, in all large countries of the Continent. Back in the mid-1980s, there were already signs of this divergence, and mounting evidence of a “slump in Europe” (Fitoussi and Phelps 1988). At the time, the most common suspect was the macroeconomic “policy mix”, and its consequences on interest rates, exchange rates and prices: the focus was on international transmission mechanisms.2