Stagnation and Competition in the European Economy

Abstract

In this Chapter, it is argued that European economic performance, which was on a high level in the fifties and sixties, has given way in the seventies and early eighties. However measured, the European economy showed a deteriorating absolute performance and, in comparison with its major competitors, the United States and Japan, exhibited relative stagnation. The growth of output declined to a level below the average of the past hundred or so years, investment stagnated, unemployment rose, profitability fell, and new opportunities were missed or picked up rather late. The main explanation for this disappointing performance of the past 15 years has been the shift from free to controlled competition. Under free competition, entrepreneurs, who are the prime movers of the market process, get the opportunities to create added-value, while established firms have to imitate and emulate them and ultimately to rearrange their processes or to disappear from the market. By means of a restructuring of their activities, they would be equipped to renew the economic process and to improve economic performance. This sequence of events is shown schematically in the concept of the competitive cycle (Figure 6-1). However, in Europe, controlled competition blockaded a sufficiently fast restructuring and resulted in relative stagnation. Under controlled competition, the effects of the free entrepreneurial moves are prevented from working out or those moves themselves are suppressed and restrained. The main elements here have been public regulation in its myriad forms, private combinations in maturing markets, supported by subsidies and protection, and inflexible labor market institutionalism. Thus, the competitive cycle was blocked, restrained, or prevented from smoothly running, depending on the relevant market. Of recent years, it has dawned upon European opinion that controlled competition offers no solution to the problems of the future. European competitiveness was threatened, both in advanced and in low-demand sectors. The key to the prevention of relative stagnation degenerating into absolute stagnation has to be sought in a restructuring of the economy so that free, entrepreneurial competition is restored. Important steps were already taken to effectuate this goal, but more has to be done. Restructuring means not only the creation of a unified European market but also instituting an enterprise culture.