Stern School of Business
New York University


We have recently observed been a major reversal of the economic fortunes of Europe, Japan and the U.S in the 1990s.

Only a few years ago, the US economy appeared as affected by a serious malaise: low growth, a sharp recession in 1990-91, large trade imbalances, a weak dollar, a hollowing out of the manufacturing sector and persistent talk of a structural decline of US power.

Conversely, Japan was viewed as an exemplary economic success story and a model of successful economic long-run growth. People talked of "Japan Inc." and the Japanese growth model was being suggested as a case study to be followed by other Asian and developing countries.

Europe had not been as successful as Japan but the overall economic performance of Europe in the 1980s was at least as good as the one of the U.S. Also, the 1992 Single Market project and the prospective of a European Monetary Union (EMU) energized the European continent in the early 1990s and led to a phase of Euro-Optimism after a long period of Euro-Pessimism in the 1980s.

Today, the situation appears almost exactly reversed.

We have seen four year of serious economic recession and turmoil in Japan from 1992 to1995 only partly reversed in 1996. The recovery has stalled in 1997. The Japanese model does not work anymore even in Asia (see the recent currency and economic turmoil in East Asia).

Europe has been growing very slowly in the 1990s and high unemployment rates remain a serious issue; also, there is skepticism and many doubts about wisdom of a monetary union in Europe.

Both Japan and Europe seem afflicted by structural economic problems.

Conversely, the US has had five years of dynamic economic performance and competitive resurgence. Because of a dramatic restructuring process over the last decade the US economy is now "lean and mean", highly productive, with low labor costs, highly innovative and very competitive in world markets.

Talk about a "new era", "new paradygm", "new economy", "Goldilocks economy"

The US was ranked #1 in competitiveness according to the recent "World Competitiveness Report"; Japan #9; Germany #14 and France #20; Italy #34.  

2. Features of the European Economic Model


Is the traditional economic model of Europe now partially flawed and in need of structural change and reform?

Simple answer: Yes. Why?

3. Serious labor market rigidities


Labor market rigidities in Europe:

  1. Excessive regulation of labor markets.
  2. High taxes that discourage job creation and job search.
  3. Excessive job security.
  4. High levels of unemployment insurance.
  5. Excessive fringe benefits (above wages) that increase labor costs.
  6. High severance benefits.
  7. Union strength leads to power for "insiders" (job holders) relative to "outsiders" (the unemployed).
  8. Flat wage differentials not rewarding sufficiently productivity.


4. Fiscal policy problems


Trends in the Global Economy and Challenges Faced by Europe:  


5. Structural changes in the nature of technological innovation.


6. Globalization and greater trade competition



7. Deregulation policies fostering competition

8. Corporate restructuring

The combined forces of:

led to major Corporate Restructuring in the US that took the forms of:

a. Re-engineering

b. Out-Sourcing

c. Large scale Downsizing of firms

d. Massive corporate control restructuring through Mergers and Acquisitions, LBOs and Takeovers

Because of this dramatic restructuring over the last decade the US economy is now highly productive, with low labor costs, innovative and competitive in world markets.


9. Costs of this corporate restructuring

Of course, there were very high socio-economic costs of this restructuring process first for blue-collars and now for white collars and managers:

a. Major job turnover

b. Great job insecurity

c. Need for disrupting occupational and regional mobility

d. Little real wage growth for average workers

e. Increase in income and wealth inequality

However, such corporate restructuring has led to:

    1. higher productivity growth,
    2. a resurgence of manufacturing,
    3. high employment growth
    4. low structural unemployment rates


10. Europe's Response to Global challenges



View of Stephen Roach: "The road to European and Japanese competitive revival is going to be a lot longer and more arduous than which the US has traveled since the early 1980s" (Financial Times, October 22, 1996).


11. Costs and Benefits of EMU





12. Euro/Dollar Relations


Features of an international currency:

 1. Means of payments role.


2. Unit of Account Function

  3. Store of value function    

Scenario for Euro/$ rate: Greater use of Euro in its three functions will make it an international currency competing with US$. Effects of this:
    1. Initial appreciation of Euro relative to US$ as Euro demand exceeds its supply. Overshooting relative to its long-run value.
    2. Initial improvement of Europe current account balance because of J-curve effects.
    3. Worsening of current account over time as the effects of the real appreciation occur.
    4. Financing of the current account deficit through capital account. This will increase the supply of Euro assets.
    5. As the Euro overshot its long-run value and the current account worsens, the Euro will depreciate.