As industries evolve and restructure, the capacity of an economy to adapt to new economic conditions determines its success over the long run. Three key forces are currently driving change in the developed economies: expanded global competition, the increased use of information and communications technologies, and the development of the global financial system. Arguably, these forces have created a new economy due to increased intensity of competition, as well as altered demand patterns and changes in the way businesses operate. Europe grew rapidly for many years, but now, faced with greater challenges, several of the large economies in Europe have either failed to generate enough jobs or have failed to achieve the highest levels of productivity (or both). Realizing these difficulties, the European Council, meeting in Lisbon in March 2000, proposed reforms to promote a "radical transformation of the European economy." In this study, Martin Neil Baily explores why Europe's growth slowed, what is the contribution of information technology to growth, and what policies should be followed to facilitate economic transformation. He emphasizes a system with strong work incentives and a high level of competitive intensity. It is not necessary to eliminate the protections for individuals that Europe has built up. But both social programs and policies toward business must be reoriented so that they encourage economic change.
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