The Rise and Fall of Economic Powers

In 1967, the French journalist and politician Jean-Jacques Servan-Schreiber published the international bestseller “The American Challenge.” The author argued that the United States had not only become the most powerful country on earth after World War II but that it also seemed to be winning, on all fronts, the silent war against European economies. The U.S. had the most advanced technologies, management methods, research and development techniques and most famous universities. American cars were the most popular in the world; American skyscrapers were wonders of engineering. Young European families were trying to emulate the American way of life that the powerful Hollywood industry promoted all over the globe.

According to Servan-Schreiber, strengthening transnational cooperation and integrating European nations into a tight union were the only solutions that Europe could adopt in order not to lose the race against this unstoppable opponent. However, over the following decades, the American miracle started to fade, and U.S. economy, weakened by the Vietnam War, was dealt a severe blow during the oil crisis. The crisis caused high inflation and gave way to a period of economic stagflation, which culminated in the 1980s with the worst financial crisis after World War II. A new wonder child appeared on the world stage: Japan. Japan gained admiration for its high economic growth (up to three times higher than in the U.S.), its innovative production and management methods, the quality of its products and, last but not least, its avant-garde position in the electronics, computer and robotics industries.

Japanese products invaded the American market, and the Japanese automobile won the race against its American counterpart by a distance. Japanese companies were no longer satisfied with building skyscrapers that competed with the American ones (although they were built in a country that is particularly prone to earthquakes). They also bought many American symbolic buildings using the money earned from the huge trade surplus with the U.S. In 1980, Servan-Schreiber published a new book, “The Global Challenge,” in which he expressed both his enthusiasm and concern over the rise of Japan.

In the context of considerable economic development and the Japanese people’s high hopes for the future, the real estate and stock markets also experienced significant growth. The Tokyo Index of stock prices reached a historic peak of 38,916 in December 1989, and shares sold at a price to earnings ratio of over 70. Nevertheless, 1991 saw the stock market slowing down and prices starting to drop. Banks realized that the huge number of loans that they had given could not be repaid, and Japan had to face the most severe financial crisis in its recent history.

The entire economy entered a downward spiral that has not stopped to this day, 20 years later. The value of the stock market index is currently a quarter of its peak value, and the prices of real estate are a third of their value 20 years ago (in some cases they are as low as a tenth), while the gross national income is the same that it was in 1992. The Japanese authorities have tried various measures to end the crisis, ranging from the same measures meant to support the banking system at the beginning of the 90s, to loose monetary policies meant to stimulate the economy. Japan’s public debt is currently 200 percent of its GNI, double than that of European countries with the highest debts. The prolonged economic stagnation has facilitated the occurrence of an unusual phenomenon: deflation characterized by a drop in prices. This tendency is as uncommon as it is difficult to control, and it changes behaviors and prevents economic growth. The crisis has become permanent in Japan.

At the moment, the new star on the stage of global economy is China, a country that has managed to maintain high growth rates for several decades and can today aspire to become the second greatest economic power after the United States. It has already become the world’s largest exporter. Its ability to overcome the 2007–2009 crisis has also improved its rank in the global economy. The country’s huge potential cannot be underestimated. The “Chinese challenge” seems to be on everybody’s lips, and a large number of analysts are trying to determine the possible consequences of its rise as a world power. Although China will inevitably also experience periods of crisis and even decline, they seem far off for now.

The difficulties that Europe must deal with today are similar to the ones Servan-Schreiber identified in 1967. In spite of efforts and strategies such as Lisbon 2010, Europe has not managed to regain the dynamism, competitiveness and status it once had in global economy. Now, as then, development is to be found somewhere else.