Economic View: The Scandinavians are sheltered from the storm, while in southern Europe the climate is distinctly inclement

With the strong euro hitting exports, only those EU countries with the right conditions for growth will come through the downturn unscathed
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The euro is soaring, particularly against the dollar but also – as anyone who has been to the Continent may have noticed – against sterling too. So is the eurozone going to come through the downturn in better shape than the US or UK?

There are two issues here. One is whether continental Europe, or at least parts of it, will be better placed than the US and UK thanks to its lower debt burden and more balanced fiscal and current account positions. The other is whether it has made enough progress in structural reforms to start to close the gap between Europe and the US. The link between the two is that even if the eurozone economy were better balanced than the US and UK, if it is not flexible it will continue to disappoint. All this matters enormously to us because the eurozone remains the UK's biggest export market.

Last week saw the euro rise to another all-time "high" against the dollar but the economic news from Europe was actually not that encouraging. We will get some new projections this week from the European Central Bank and they are expected to forecast higher inflation and slower growth. Meanwhile we had eurozone inflation rising to 3.2 per cent in January, another decline in economic sentiment (the ninth month down on the trot) and a contraction of the Italian economy during the final quarter of last year. It is possible that Italy may already be in recession.

So why, against such a muted outlook, is the euro so strong? It is strong against the dollar because high eurozone inflation is expected to postpone any cuts in interest rates, in contrast to what is happening in the US. But it also strong against sterling, and a similarly sharp decline in rates here does not look on the cards. I think other forces are at work, including a wider distrust of sterling assets and a fall in money coming in across the exchanges for UK mortgages. The UK had to import a lot of savings in order to finance our housing boom, and the rate of new lending has fallen sharply, so that support for the pound has gone.

At any rate, the euro has been very strong and seems likely to remain so for a while. That ought to protect the region from the worst ravages of rising world commodity and energy prices but of course will make it harder to export. What seems to be happening is that strong exporters, notably in Germany, are managing to cope with the strong euro but weaker ones, particularly in Italy, are struggling. That leads to surely the most interesting thing about the European economy – its diversity. It is diverse in macro-economic terms: for example, Spain is over-borrowed and faces a housing crash, whereas Germany is arguably under-borrowed and could grow faster if it loosened up a bit. But it is equally diverse in micro-economic terms: for example, some parts, such as Scandinavia, are world-class at embracing new technology, whereas others, particularly in southern Europe, lag behind.

Tomorrow sees a new report on this from the Centre for European Reform, a "Lisbon scorecard" to be launched by the Secretary of State for Business, John Hutton. The reference to Lisbon is because it was here in 2000 that the European Council set out a plan for the EU to become: "the most dynamic and competitive knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion, and respect for the environment by 2010". Since then Europe has lost more ground to the US in terms of GDP growth and on most productivity measures, raising questions as to whether the whole exercise was a waste of time. Indeed, some have argued that the Lisbon agenda was actually damaging: by aiming at a big and amorphous goal, the EU missed the chance to select a number of specific smaller initiatives that really would have improved Europe's performance.

Be that as it may, the CER scorecard is still a useful exercise. This year the CER has singled out Austria, the Netherlands and Estonia as reform "heroes". The "villains" are Italy and Greece. There are lots of different measures, including spending on research and development, ease of starting a new business, transport and so on. Its general message is to be more upbeat about European growth and job prospects than many other commentators, but to worry whether structural reforms have gone far enough to allow the EU to withstand the global downturn.

There are also a couple of essays by people I admire: one from Sir Ronald Cohen, the venture capitalist, on what really helps hi-tech start-ups and another from Michael Schrage of the Massachusetts Institute of Technology on why the EU's targets for R&D spending are misguided. I do agree with him there.

One statistic the report quotes is broadband penetration, something that seems to me to be especially important. The chart on the left shows how Scandinavia and the Netherlands have shot ahead, the UK is doing OK, and the Mediterranean countries are at the bottom.

Having access to broadband enables people to work from home or from a variety of locations with home as a base. Close to 10 per cent of the UK workforce is now a teleworker, blurring the line between the home and the office. Broadband makes things much easier for part-time workers and is bound to increase labour participation rates, something that Europe has to do. But what seems to me most interesting is the divergence across Europe and there, surely, lies an opportunity. The best in Europe is wonderful but there is a lot of mediocrity too. If, during the forthcoming downturn, it becomes clear that the countries that weather it best are those that have pressed ahead fastest with structural reform, it is a bit of a no-brainer what the politicians should do. Tell voters we have to follow the Lisbon agenda and they will yawn; show them conclusively that structural reforms enable a country to come through a global downturn in better shape and they might sit up and listen.