Changes in social and religious climates, population, and other demographic indicators often take place over longer time spans, for instance, yet their resulting economic affect can be just as profound.

Europe is in a unique position-while overall there exists a great deal of economic stability, other forces, both internally and externally, will undoubtedly leave a lasting imprint on the economic landscape in the coming year and beyond. The outcome will be felt differently in each European country, and collectively within the larger groupings of countries, such as the European Union, the European Monetary Union, and those European countries that are candidates for the next wave of EU enlargement.

The influences that will shape the broader European economy over the course of the next year and a half range from "nuts and bolts" policy, legislative, and market-driven effects, to those that are inspired more by ongoing dialogues and the sharing of ideas. In his Autumn 2000 EU Economic Forecasts (2000-2002), Pedro Solbes, EU commissioner for economic and monetary affairs, highlights specific items that the EU economy will face through 2002. We will consider these, as well as get an update on the euro as it prepares for its final launch on January 1, 2002. In addition, to get a more interpretive perspective, we will examine some developments and conclusions from this year's meeting of the World Economic Forum in Davos, Switzerland.

EU: Economic Conditions Will Remain Stable

Commissioner Solbes' 2000-2002 forecast for the EU is generally quite positive. The average GDP growth is expected to remain steady at around 3%, tempered slightly from last year's projected 3.4% because of a hike in oil prices. While rising oil prices have affected nearly every economy world wide, the commissioner believes the effect will not be as severe as the "oil shocks of the seventies." According to the commissioner's report, the EU's continued economic growth will be supported mostly by growing levels of private consumption.

Furthermore, Commissioner Solbes cites four elements that will shape the economic outlook for the remainder of this year and in 2002. First, higher oil prices and the depreciation of the euro have lifted inflation, which weighs on real incomes of households and production costs of firms. However, tax cuts and continued strong job creation will contribute to maintain a relatively strong pattern for aggregate disposable income, further underpinning private consumption. Meanwhile, the boost that EU exporters received from strong world demand and a weak euro in 2000 will wane over the forecast period, but world demand will remain strong. And, while rising short-term interest rates will affect economic activity, from a historical perspective, long-term interest rates remain low.

Core inflation will also remain relatively steady through 2002. The Harmonized Index of Consumer Prices (HICP) annual growth rate for 1999 was only 1.1% for the euro area, while last year's rate was up slightly to an estimated 2.3%. The increase is attributed to a jump in import prices, mainly oil prices, coupled with the euro's depreciation. For this year, HICP inflation is expected to settle at 2.2 % in the euro area this year, and fall back below 2% next year. The commissioner says inflation rates in some smaller member states, particularly Ireland and the Netherlands, will stay well above the EU average, in part because of rising indirect taxes. Nonetheless, inflation rates in these countries are expected to fall more markedly than the EU average. Therefore, inflation differences in the euro area should narrow from last year's 3.4 percentage points to 1.6 percentage points in 2002.

Eastern Europe: Brighter Prospects

While the economic outlook for most Western European countries is positive, the outlook for Eastern Europe is enthusiastic. Together, the economies of the Czech Republic, Hungary, Poland, Slovakia, Bulgaria, Romania, Russia, Ukraine, and Kazakhstan achieved an estimated average GDP growth of 5.1% for 2000. Much of the reason behind the region's performance is due to an improvement in the external environment. The effect of the Russian crisis in 1998, the Kosovo conflict the following year, and the slowdown in the EU economy, have largely subsided.

In the meantime, the prospects for continued economic health remains optimistic, helped significantly by the EU enlargement process and its emphasis on maintaining fiscal discipline, while at the same time stimulating trade and investment flows between the EU and the region. Separately, the Czech Republic's economy stands to benefit from ongoing price deregulation; special incentives for large foreign investors; and a realigning of its tax system with EU norms. Opportunities for foreign investors in Hungary, though, are a little less attractive due to government meddling in politically sensitive sectors. In Poland, the push is on to finalize "strategic" privatizations, and to further liberalize the energy and telecommunications sectors.

The Euro "Pays" Its Part

Just as the EU enlargement process is credited for helping Eastern European countries build an improved economic climate by way of implementing stricter monetary policies; simultaneously it has facilitated the EU's efforts toward the removal of protectionism and the enhancement of a single market. Furthermore, while the reputation of the euro has been damaged somewhat because of its performance against the dollar, the euro zone has experienced broad-based economic recovery with stable prices and falling unemployment since the currency's introduction.

In addition, the circulation of common coins and bank notes beginning January 1 will go a long way toward instilling European citizens' support of the euro. Traveling throughout the euro zone will be less cumbersome if people aren't required to exchange currency, and comparing prices will also be easier. Moreover, the euro will play a major part in promoting pan-European thinking and solidifying a single European identity.

Bringing the "Spirit of Davos" to Life

As usual, the agenda for this year's meeting of the World Economic Forum was ripe with a host of stirring questions and compelling insights. At its best, the annual gathering of business leaders, government officials, and academicians in Davos, Switzerland, encourages a creative approach to key economic, political, and social issues that might otherwise gets squelched during day-to-day concerns and responsibilities.

One topic addressed during the meeting was, "Why has Europe's economic performance lagged so significantly behind that of the United States?" Ron Sommer, chairman of the board of management of Deutsche Telekom, noted that Europe has made strides in reducing structural employment, and that European companies are among the world leaders in the technology, media, and telecommunications industries. However, he questioned if European leaders had the drive to create a single "harmonized, dynamic, and competitive" market. Apparently, the other panelists had equal doubts.

Daniel Bouton, CEO of Societe Generale, said that too many barriers to capital formation still exist in the public sector. He pointed out that in France, for example, no less than 16 major regulatory steps are required to start a new business, compared to just four in the US. Michael E. Porter, professor of business administration at the Harvard Business School, identified five key economic weaknesses he believes are keeping Europe from attaining its full potential. They include: excessive government intrusion in the economy; lack of proper incentives for more innovative work from European managers and employees; an absence of competitive pressures, specifically that too many industries remain sheltered from domestic and foreign competition; cultural ambivalence toward a capitalist system, in other words a competitive economy is not compatible with social harmony; and a reluctance to accept high levels of immigration.

The theme of this year's World Economic Forum gathering, "Sustaining Growth and Bridging the Divides: A Framework for Our Global Future," was especially timely. For instance, the internet, with all it has done to open borders and promote communication between people the world over, has also separated those who have access to information technology from those who do not. The gap widens for people in those countries that are well positioned to accommodate the growth in e-commerce (see sidebar).

During the "IdeasLab Workshop: Europe of My Dreams-The Views of European Business," a number of key ideas emerged. To begin, there needs to be a stronger political agenda for Europe. Deep divisions are evident, which requires greater European harmonization in areas like taxation. A common base tax system would enable Europe to compete more effectively with North American markets. Also, Europe needs to sell itself better, especially among its citizens. Ideas such as a single passport, single license plates, and other marketing schemes were discussed. Europe is also hampered by policies that restrict competition. Agriculture was cited as one example.

Finally, while many are worried about the slowing US economy and its effects on the rest of the world, a survey of Davos participants revealed a cautious optimism about the global economy. Moreover, participants were relatively upbeat about the US economy, too. As for Europe, the euro zone in particular would benefit from a slowing US economy.

The economic outlook for Europe over the medium term therefore remains promising. The continent is in a moderately peaceful state of affairs politically and socially, yet there is also an undercurrent of exciting changes taking place. Over the next few years, the enlargement process, euro, and restructuring policies, combined with the development of fresh ideas and visions will leave us with a different Europe-a new and better Europe to be exact. wt

sidebar: Snapshot: The Netherlands

The New Definition of Economic Success

In the digital age, e-business readiness has become the calling card of a strong economy. Internet connectivity is now an element central to the concept of global economic integration, and integration is still European for growth.

It follows that foreign investment has become a function of advanced internet infrastructures and skilled, tech savvy labor pools, leaving countries scrambling to position themselves as "plugged in" to the global economy. An investment in internet infrastructure is an investment in an area's economic future-the international equivalent of sending your kids to college.

So far, the Netherlands, along with the well-wired Scandinavian countries, has led the European pack in terms of connectivity. Currently ranked the 5th most e-business ready nation in the world (the Economist Intelligence Unit, May 2000), the Netherlands is rapidly becoming both the physical and virtual gateway to Europe. According to a recent report from eMarketer, "the Netherlands is among the best-positioned in Europe to succeed in the digital economy." (January 16, 2001)

Amsterdam, crown jewel of the Dutch high-tech sector, has already joined the ranks of Europe's wired hotspots. The burgeoning Amsterdam business community includes information and communications technology (ICT) leaders such as Cisco, Unisys, IBM, and Fujitsu Network Services, and the high-tech sector remains the driving force behind Amsterdam's growth. What next? The Netherlands is now turning its attention to nurturing a handful of budding new ICT hubs.

One major development at the end of January 2001 underscores the critical role digital infrastructure plays in economic development. Tycom, a leading builder of worldwide undersea fiber-optic cable networks, announced that it would route its global digital network through the province of Groningen in the Northern Netherlands, developing a new internet hub to connect Amsterdam with Hamburg. A sparsely populated and historically agricultural area, Groningen has the good fortune of being located between the two well-established high-tech clusters. In the face of mounting demand- the growth of data traffic triples every six months and the need for transatlantic capacity increases by 120% every year- the Tycom network will more than triple the existing transatlantic capacity now in place in the region. This newfound connectivity, along with proactive public/private initiatives such as the ICT City project, promises to make Groningen an important high-tech center in its own right.

Enschede in the East is another area poised to become one of Europe's next high-tech hubs. Earlier this year, Enschede became the home of the Netherlands' second internet Exchange, NDIX. A Dutch-German initiative, the NDIX will work as a large intersection for internet traffic that will augment bandwidth, speed and reliability, and reduce costs for both individuals and businesses in the eastern part of the Netherlands. The project represents an investment of over 1 million Guilders (almost US $400,000) by a consortium of private and public sector organizations, and is expected to become a considerable incentive for ICT companies to locate in the area.