Viewed from the United States, Europe's economy increasingly resembles a Rolls-Royce in disrepair: a comfortable contraption that won't go very fast. Much of the continent is prosperous and, as always, full of culture and charm. But the economy is dawdling. It's growing at a meager rate of about 2 percent a year.
What's remarkable is that this sluggishness -- best symbolized by nearly 16 million unemployed -- has become a nonevent. Many Europeans accept it as inevitable and desirable. They've created the good life for the majority and an expensive welfare state to support everyone else. Even the United States is muting its efforts to spur faster European economic growth, particularly in West Germany. But don't be deceived: Europe's slow growth may be the central problem of the world economy.
Although Japan dazzles us, size still matters. The economy of the European Community (population: 322 million) is almost as big as ours and twice as large as Japan's. A sluggish Europe implies a sluggish global economy and more protectionism. It means poor export markets for the United States and developing countries. It makes Europeans reluctant to spend more on defense or to stop protecting their farmers at the expense of more efficient American, Australian and Argentine farmers.
What's frightening is that Europe's high unemployment and slow growth are now self-perpetuating. In 1986, 63 percent of unemployed men in Belgium had been without a job for a year or longer. The comparable rate was 46 percent in France, 32 percent in Germany and 46 percent in the United Kingdom. Women's long-term unemployment was almost as high. (By contrast, 11 percent of unemployed U.S. men were jobless for more than a year.) So much long-term joblessness may corrode the capacity to grow.
"Skills decay. Workers get despondent. They've been out of work so long that no one wants to hire them," says economist Robert Lawrence of Washington's Brookings Institution. "Employers get used to slow growth and are reluctant to make new hires."
What's happened in these countries is a breakdown of the conventional mechanics of job creation. Normally, high unemployment would depress wage gains. Relatively lower labor costs would make it more profitable for businesses to increase hiring. But in Europe the process works poorly.
Consider Germany. The pool of long-term unemployed is increasingly separated from the regular work force. Unionized workers with secure jobs successfully press for higher wages. Although only 30 percent to 40 percent of workers are union members, many nonunion firms are forced -- either by law or custom -- to adopt the same wage gains, reports Harvard economist Jeffrey Sachs. Government restrictions on firing further deter companies from adding more workers.
To U.S. pleas for faster growth, the Germans have responded: Lowering interest rates or raising government spending would only spur inflation. The rebuttal is overstated. German consumer prices have risen 0.4 percent in the past year. Some faster growth, at least temporarily, is possible. But the basic point -- that high unemployment doesn't indicate an economy with huge excess capacity -- is correct.
Most Germans like their orderly prosperity. Americans view Germany as a bastion of the free market. It isn't. German society is highly regulated. There are strict closing hours for shops in the evening and on weekends. Subsidies are widespread; in 1987 Germans will spend more than $5 billion to sustain inefficient coal mines. Unemployment benefits are among Europe's best and can last indefinitely. These payments pacify the jobless, and everyone else fears higher inflation.
"Many Germans today can't believe how well they're doing," says Klaus Friedrich, a German economist who has lived in the United States since the 1960s. "They're puzzled when Americans say they should take higher risks to get an extra 1 percent growth."
Slow growth in Germany, the continent's largest economy, affects everyone. Moreover, German problems and attitudes are shared elsewhere in Europe. Well, so what? If Europeans don't mind high unemployment and costly welfare, who are we to complain? The answer is that Europe's sluggishness could tip everyone into recession.
Part of Europe's growth has stemmed from exporting to the United States. But the trade imbalance -- our deficit, their surplus -- may lead to a further depreciation of the dollar. In Europe, then, exports would fall (because they would be more expensive) and a recession might follow. In the United States, inflation would rise (because imports are more expensive) and a recession might follow. To reduce this risk, Europe needs to grow faster and import more.
That seems unlikely. Among many Europeans, there's a huge complacency. The United States has quieted its criticism of Germany in part because it seems so futile. Faster economic growth requires political changes that Europeans reject. It's a classic Catch-22. Faster growth -- by allaying fears of change and demands for security -- would make it easier to reduce the subsidies, restrictive regulations and high welfare benefits that hamper growth.
There's a standoff. Politically, Europeans crave stability. But the economy may be unstable. They ought to repair their creaky Rolls before it stops altogether. Sadly, they aren't.