Stephen King: Yes, the Sixties were groovy - but it's time for Europe to embrace the modern world

Most of what I know about the Sixties comes from films, books and music. I didn't spend too much time dreaming about California, wearing flowers in my hair or taking LSD. You might be thinking that I simply lacked the rebellious streak required to get the most out of that decade. The truth, though, is simpler: as the Seventies arrived I was, at the tender age of six, still in short trousers. The only pills I popped were from my local sweet shop.

Much of the iconography of the Sixties is, of course, associated with fashion, music, exploration and rebellion. Mary Quant, the Beatles, the first moon landings, student protests. Those of you of a certain age are no doubt wistfully reliving those happy moments when, before taking your economics and accountancy exams and embarking on your City career, you had that moment of rebellion - the illicit joint, the miniskirt, the free love, the occasional LSE sit-in. Ah, happy days.

But the Sixties had other characteristics, too. Those of you who come from France, Germany or Italy but, for some reason, are choosing to read a British newspaper might also look back fondly on a decade that proved to be the high-water mark of economic success.

Back then, your economies were the envy of the world. World GDP growth averaged a remarkable 5.1 per cent a year in the Sixties, almost double the rate of expansion seen in recent years. And Europe played a big part in this success: the Continent accounted for roughly a third of all the growth seen in the Sixties. Productivity growth was way ahead of Europe's competitors: from 1950 through to 1973, during the Continent's so-called Golden Age, annual growth in GDP per hour worked averaged 6.0 per cent in Germany, 5.1 per cent in France and Italy, 4.4 per cent in the Netherlands ... and just 3.0 per cent and 2.9 per cent in, respectively, the US and the UK.

No longer, though, do people look on continental Europe as a region of economic success. Once a centre of dynamism, the Continent is now more a region of economic calcification. And Europe's populations know it: Sunday's French "non" may be, in part, an expression of frustration at this gradual descent into economic impotence.

Of the reasons for the slowdown, some are easily understandable. Demographic trends are becoming less helpful as populations age and the dependent elderly rise in number relative to the working young. And Germany's reunification may have been a wonderful political event but the economic costs have been substantial.

On top of these factors, though, there has been a significant deterioration in productivity performance: in other words, had Europe had exactly the same demographic trends as other countries, and had Germany not had to bear the economic costs of reunification, continental Europe would still have underperformed countries elsewhere.

Since the mid-Nineties, annual productivity growth has averaged 1.9 per cent in Germany, 1.3 per cent in France, 0.5 per cent in Italy and 0.6 per cent in the Netherlands. For the US and the UK, the equivalent figures are 1.9 per cent and 1.8 per cent respectively. Germany's performance still seems relatively good, although clearly the productivity data mask other weaknesses: GDP growth has been pathetic and I doubt that the 4 million unemployed workers are regularly dancing in the street. Overall, though, what these numbers show is that while productivity growth has slowed everywhere compared with the Sixties, the slowdown in Europe has been particularly acute.

What's gone wrong? It's perhaps no accident that the recent relative outperformance of the US and the UK has coincided with the technology revolution. Continental Europe's economic system, which worked so well in the Sixties, seems to have been ill-equipped to deal with this seismic change. One reason for this may be continental Europe's historic reliance on vocational training rather than university education: equipping people with a specific set of skills which, later on, become redundant in the light of new technologies increases the risk of job loss and also, inevitably, makes people resistant to change. University graduates may not always have the specialist skills but they may have a greater ability to "reinvent" themselves throughout their careers.

Another reason lies with a lack of competitive pressure within Europe's distribution network, implying that the rapid decline in computer prices seen in the US has not been seen to the same degree on this side of the Atlantic.

And then there's the high level of job protection, notably the costs of redundancy. In many ways, new technologies merely "enable" productivity gains. The more important issue is whether the technologies lead to the efficient reorganisation of workplace practices.

If redundancy costs are high, companies will choose not to pursue investment that might, otherwise, make a significant contribution to faster economic growth (for a more detailed discussion of some of these issues, see Fifty Years of Economic Growth in Western Europe: No Longer Catching Up But Falling Behind? by Nicholas Crafts, siepr.stanford.edu/papers/pdf/03-21.pdf).

Another way to put this is to argue that Europe's social market system is one brilliantly designed to cope with the rigours of economic "catch-up" - the growth that we saw in the Fifties and Sixties - but poorly designed to cope with the lottery aspects of new technologies and globalisation. The Europe of the Sixties succeeded in part because it relied on a social contract: workers would restrain their wage demands so long as companies ploughed their profits back into investment.

That way, economies could expand quickly, workers with vocational qualifications could be absorbed and everyone ended up better off (the British also tried this system but never succeeded: too many poor managers reliant on the old school tie, too much suppression of competition and too many bolshie unions).

But how can you create a social contract when none of the parties - companies, unions, government - can really be sure of what the economic environment will look like in a few years? Agreements become worthless because the world changes too quickly and in unexpected ways. Companies can't promise workers that they will invest in any one country. Unions can't promise employers that their members will have the necessary skill sets. Governments cannot guarantee to be able to deliver their manifesto pledges.

The difficulty lies in coming to terms with this new reality. The same system that served Europe well in the Fifties and Sixties now looks increasingly defunct. Yet no one seems able to offer an alternative that is palatable to electorates, politicians and shareholders. Moves towards the more free-market model espoused by the US and the UK are seen as giving in to naked capitalism. Attempts to maintain the status quo simply lead to capital exodus and tax revenue shortfalls. Plans to "protect" Europe from the outside world create a "Fortress Europe" mentality, which can only be anathema to the competitive pressures that ultimately lead to creative progress.

I can happily pretend from time to time I'm a child of the Sixties. After all, I was born then. But that's no more than nostalgia for times past - and, even so, I was too young to have properly experienced the decade myself. Continental Europe, though, still seems to be pretending.

There may be plenty of people still willing to buy Johnny Halliday albums - and doubtless there are plenty who still think Cliff Richard is the cutting edge of popular music in Britain - but times have moved on, as have the requirements for economic success. Europe's economic trauma lies in coming to terms with this change.

And, judging by Sunday's French "non" vote, there's still a long way to go before any meaningful consensus finally emerges.

Stephen King is managing director of economics at HSBC stephen.king@hsbcib.com