Europe is changing. Against all expectations, the advent of a single European currency, backed by a strong fiscal "Stability and Growth Pact", could prove the catalyst for a much more efficient corporate sector. Despite the economic absurdity of the Maastricht criteria, the struggle to meet them is producing what Europe needs most a smaller government take from national income.
And labour's share in Europe's national income is about to fall too. That means profits in Europe are set to rise through more efficient use of capital and labour under conditions of increasing global competition. Europe is on the brink of something momentous that should make its equity markets outperform the world's over the next five years.
How can this be? Up to now, the return on assets for corporate Europe has been much lower than that for us corporates by a massive amount, under 15% compared with the us at nearly 19% this year. The reason is competitiveness and capital productivity. Europe's small national markets and administrative "mind-over-market" approach to liberalization produce sub-optimal use of labour and capital.
In a truly competitive market place, with its sharp price signals and high rates of business creation and failure, Schumpeter's "creative destruction" is at work.