The 1980s Economic Growth Weakness in Europe: Focusing on the Supply Side

Juergen B. Donges

The Economic Record, 1989, vol. 65, issue 2, 165-176

Abstract: For some years now, most West European economies (including Germany) have been operating with a striking lack of dynamic growth The consequences are that (i) domestic unemployment stays stubbornly at high levels. (ii) the capital stock is ageing, which makes European firms more vulnerable to growing international competition; (iii) the production structure does not shift sufficiently to keep abreast of current technological breakthroughs (iv) the attractiveness of Europe as a location for investment suffers, and (v) the correction of the large external imbalances among the major trading nations is delayed. The paper emphasizes that Europe's predicament is basically due to supply rigidities of various kind They have been created on the one hand by the governments' persistence in completing the Welfare State up to a point at which behaviour patterns and attiudes in society have been seriously deformed On the other hand governments have been caught in a train of well‐organized special‐interest groups and as a result, have spread defensive interventions in markets over ever wider areas of the economy. The key to getting Europe's economies back onto a path of sustained non‐inflationary, job‐creating growth, for which there is certainly much potential, lies in the provision of a climate favourable to imaginative and risk‐taking investors and innovators As domestic demand is expanding it is now essential to enhance the supply responsiveness of the economic system Steady and foreseeable policies at the microeconomic level can help a lot They must aim at (i) dismantling non‐tariff barriers in international trade, including the long overdue overhaul of the Common Agricultural Policy; (ü) cutting public subsidies across‐the‐board and using the corresponding budget savings for significant tax cuts; and (iii) deregulating the economy where needed, in particular in services and the labour market The official commitment to complete a truly common market in the EC by the end of 1992 should impart a strong momentum to supply‐oriented policies, since widespread deregulation is central to the prospects of reaching this objective efficiently.

Date: 1989
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