Almost everybody agrees that one prerequisite for a more sensible international level of the dollar is a meaningful reduction of the U.S. budget deficit -- and much has been written about that.
But it is also agreed that, regardless of what happens to the deficit, the United States still will look like a safe haven for foreign investment compared with Europe, if Europe doesn't shake off its lethargy and resume a better level of economic growth. Next to news of the dollar, that is Topic A in Europe, although less has been written about that here.
Europe's inability to match the pace in the United States, Canada and Japan has been described under the heading of Europessimism, and even, in the words of an Italian banker, Eurosclerosis.
But there are early signs that Europe, having made some painful decisions to trim welfare-state spending and to force both business and labor to be more efficient, is regaining a measure of confidence. Yet, it is clear that Europe faces a long catching-up process to match the pace of North America, Japan and some other Asian countries.
Europeans concede the dimension of the problem. The main evidence is that, in the last decade, while the United States created 18 million jobs, Europe had a net loss of a couple of million. In part, this represented a massive labor shakeout, which had the effect of boosting productivity rates over the past five years to twice the rates in the United States.
The resultant high levels of unemployment are "one of our black areas," said the new secretary general of the Organization for Economic Cooperation and Development, Jean-Claude Paye. Even with somewhat faster growth, Paye said here that an upturn in employment is not yet on the horizon.
In a new report, the OECD admits that public spending for welfare-state programs grew at twice the rate of overall economic growth from 1960 to 1981. By 1981, social expenditures in France, West Germany and Italy were running at 30 percent of the budget. In the United States and Canada, the percentage was only about 21 percent, while in Japan it was 17 1/2 percent.
For the rest of the decade, there will be little room to expand the welfare state, the OECD report added. And with obvious reference to Europe, the agency added that "in a few countries," the welfare state must contract further.
Grudgingly, Europeans concede that the more flexible, less-regulated labor and capital markets of the United States have promoted the sort of entrepreneurial magic that creates jobs. Lower tax rates and business incentives attract investment in the United States -- capital that otherwise might have financed expansion in Europe.
Slowly, European governments are trying to make the atmosphere more conducive to investment, hoping to replicate the American experience. This is seen especially in West Germany and Britain, where Helmut Kohl and Margaret Thatcher have an ideological kinship with Ronald Reagan's free-market orientation.
In France, Francois Mitterrand, looking anxiously to an election now only three years away, has junked much of his socialist dogma in an effort to stimulate new investment. Even Italy, where the notorious scala mobile produced an inflation during the 1970s that topped all of industrial Europe, has been able to hold annual wage increases to single digits. As a result, business profits in these countries have taken a dramatic leap forward.
And the high dollar helps. Earl Jellicoe, chairman of the British Overseas Trade Board, bragged in a New York speech that British exports of $15 billion worth of merchandise to the United States were up 34 percent over 1983, as much of a percentage increase as West Germany's exports, and not too far behind France's increase of 35 percent and Japan's 39 percent.
Thus, as New York economist Henry Kaufman suggests, a main driving force in Europe's projected 2 1/2 percent real growth rate for 1985 comes from swelling exports to the United States, induced by the cheap European exchange rates. Kaufman suggests that so long as there is no "independent strategy for growth," Europe is likely to lag behind the United States.
A more optimistic appraisal comes from Horst Schulmann, a former West Germany Finance Ministry official, who said in a Harvard speech that obituaries for the European economy are premature: "Europe is alive and kicking and is in the process of getting its act together. . . . Europe has come to realize that it cannot build its future on smokestack industries, not even on yet more productive smokestack industries. And governments, industrialists and bankers are doing something about it."
I hope Schulmann is right, for the world needs a strong and vibrant Europe. Yet, doubts remain. In the face of overgrown welfare-statism, the best that the OECD secretariat could venture to put in its press release was that, "Through the end of the 1980s, there will be little or no room for increasing the scope and coverage of the welfare state." And the organization conveyed the assurance that the "essential features of the welfare state can be preserved through to 1990."
In a meeting with reporters here, Paye, not wishing to overstate the outlook, would not guess at a prospective European growth rate over the next few years of more than 3 percent, or a potential growth rate above 4 percent, even if further eradication of structural rigidities is achieved.
What it comes down to is that most of the political leaders in Europe know that economic growth is a must, and to get it, some of the antiquated customs and mores must go. The technological gap between Europe, on the one hand, and the United States and Japan, on the other, is appalling, as even Schulmann admits.
European research and development expenditures are high, and European scientists collected the bulk of last year's Nobel prizes, Schulmann points out. But can Europe capitalize and commercialize what is developed in scientific labs? It will take more than a dogged insistence on "Euro-optimism." As painful as the wage reductions and cuts in welfare spending have been, more may be needed.
Overall, what Europe needs is the courage to turn away from protectionism and political leadership that will help fulfill some of the original promise of a truly integrated Common Market.