The Power of Europe.(what the world will look like in 2012)(economic forecast)

Name this superpower: its "miracle economy" dominated the world for a decade, before the miracle was exposed as a mirage. Stocks tanked. A housing bubble threatened to burst. Billions in business investments that had looked so smart in the boom were exposed as a waste. The money men, so recently envied pop heroes, were hunted down as criminals. The uniquely cozy fraternity of bankers and businessmen, once seen as a source of national strength, was attacked as corrupt. Yet economists continued to believe this country would dominate the next decade, too. The superpower is, of course, America today, and Japan little more than a decade ago. "Unquestionably," says a recent commentary from Standard & Poor's, "the parallels are eerie."

From the U.S. Federal Reserve to major Wall Street investment banks, economists spent this summer debating whether the United States could follow Japan into a period of stagnation and deflation--and the answer was almost always no. There is an abiding faith that America is now so quick to change, it can't fall into a Japanese funk.

But one doesn't have to assume the worst to begin questioning America's future dominance. After all, economists failed to fore-see the rise of not only of the United States in the 1990s and Japan in the 1980s, but OPEC in the 1970s and Germany in the 1960s. Now, under all our noses, there is an emerging economy more populous than the United States, nearly as wealthy and saddled with far less of a post-bubble hangover. "Why not Europe?" says Martin Hufner, chief economist of Germany's HypoVereinsbank. "Two years ago I gave a speech in Washington on the 'Coming Decade of Europe,' and everyone looked at me like I was crazy. Now I get a more thoughtful response."

Europe, argues Hufner, has been the most dynamic region in the world over the past decade. In 1992 no one would have believed that Europeans would so soon submit themselves to the rule of one central bank, or scrap their currencies for a newly minted paper called the euro. All the daily squabbling within Europe tends to obscure the fact that it is achieving its historic aim: to end the threat of world wars by uniting its former antagonists in a United States of Europe. Why is it, asked German diplomat Klaus Scharioth recently, that the world fails to recognize "this European miracle"?

The pace of change in Europe is critical to its coming dominance. No one doubts that Europe needs to scrap a thousand old traditions and rules in order to unleash its full economic potential. In the Anglo- Saxon world, the revolutionary reforms during the conservative era of Reagan and Thatcher carried through to the neoliberal era of Bill Clinton and Tony Blair, setting the stage for the miracle economy of the later '90s.

The same consensus for reform is starting to take hold on the Continent. Under socialist leader Gerhard Schroder, Germany has dropped corporate tax rates to 40 percent, level with the United States. What's more basic than taxes? Polls show that neither the French nor the Germans are as afraid of reform as the stereotype of "Old Europe" suggests, and governments are pushing ahead regardless. Under socialist Prime Minister Lionel Jospin, France has begun a process some call "stealth" reform by, for example, spinning the privatization of Air France as mere "opening up."

The notion that Europe was too slow to enter the Internet age, and will never catch up, is gospel in many quarters. Yet some economists (like Bradford DeLong of the University of California, Berkeley) now say Europe looks much like America in 1992--poised for a "productivity miracle." In an almost uncanny way, European spending on information technology mirrors American patterns of exactly 10 years ago, both as a percentage of GNP (about 2.8 percent) and in plans for the future. European firms say they plan to raise IT ...