The European Envy Effect

Germany's new prosperity will also have Pan-European effects. Two years ago, Euro-skepticism had reached a new peak. With the exception of those living in the shadow of the Russian bear, hardly anybody could see the advantage of more European integration. Why get closer to a lumbering neighbor like Germany, then growing at a sclerotic 1 percent per year, with 9.5 percent unemployment? No wonder voters in France and the Netherlands rejected a proposed European constitution, and Britain decided to skip the euro and stick to sterling.

But with the economic revival of Germany, the tide of public opinion around both European unity and the euro itself is now turning. German Chancellor Angela Merkel last month brokered a deal to revive some key elements of the failed European constitution. Nearly half the EU's 27 members have adopted the euro as their common currency. Most of the newest members, from Estonia in the north to Bulgaria in the south, will likely switch to the euro within the next five years. That could turn these countries into even better places to do business. And it could force Old Europe to safeguard its competitiveness with further domestic reforms.

The envy effect might spread across the Atlantic. The United States generally pays more attention to fast-growing Asia than it does to Europe, and rightly so. No developed country can match the Asian dragons' 10 percent growth rates. But over the next few decades, the only economy that will come close in size, prosperity and opportunity to America's is the expanding euro zone. Europe and the United States may thus still have a lot to learn from each other.

Schmieding is head of European economics for the Bank of America.

© 2007