Europe 1992: Macroeconomic Implications

Rudiger Dornbusch

RD

Rudiger Dornbusch

ONLY A FEW YEARS ago Europe was beset with stagnation and mass unemployment. A Brookings study, concluding that accepting the state of European unemployment was not a solution, recommended a two-pronged attack involving macroeconomic stimulus and microeconomic flexing. Europeans, particularly the Germans, considered the first a typically American naivete. They accepted the second as an inevitable suggestion, about which nothing much could be done. Under the heading of Europe 1992, the discussion has now moved from Eurosclerosis to the growth potential of the internal market, and Europessimism has yielded to pervasive Europhoria. Together with the sharp fall in oil prices in 1987, the disinflationary effects of dollar depreciation, and expansionary policy measures, Europe 1992 has set the stage for growth. Table 1 shows an outlook for European economic growth that two years ago would have been considered extravagant. Where stagnation had almost seemed inevitable, with discussion of work-sharing a routine response, the prospects have now shifted altogether. This paper first assesses the macroeconomic implications of the internal market project. That assessment highlights the sources of improved macroeconomic performance, its likely magnitude, and its spillover to the rest of the world. I turn then to three special areas, the prospects for European protectionism, the implications of financial integration, and the fiscal effects of the present exchange rate system.