Is the European economy sinking or swimming? The discouraging headlines are by now monotonously familiar. “Europe is lagging in global recovery,” declared the New York Times recently. “U.S. Outshines Expanding EU in Economic Competitiveness Study,” reported Bloomberg in April. “Most Europeans who want to watch an economic recovery,” one U.S. economist quipped in September 2003, “will have to watch it on TV.” (Okay, that was me during my farewell remarks as chief economist of the International Monetary Fund.) But it's not just economists and journalists who are discouraged; Europeans are as well. Beneath the veneer of exuberance surrounding the European Union's (EU) recent eastern enlargement lies deep concern over the region's economic future.

Yet, recall how just 15 years ago everyone was heralding the slowdown and ultimate collapse of the U.S. economic juggernaut. At the time, economist Paul Krugman wrote the popular Age of Diminished Expectations, which envisioned a U.S. economy in perpetually low gear. Business guru Michael Porter wrote about how U.S. companies needed to learn from the Japanese economic model. Indeed, during the 1980s, other economic models, particularly Japan's, looked pretty good. When it came to manufacturing a superior automobile, Japanese firms and workers had much to teach the rest of the world. But then the 1990s arrived with waves of technological innovation, and suddenly the free-spirited and relentlessly entrepreneurial U.S. approach proved more adept at embracing new opportunities. So Japan dropped the baton and the United States reclaimed it. Times do change, and an economic system well suited to one set of historical circumstances often proves less appropriate for another.

Fast forward to 2004. Today, if you really want to get a rise out of top European ...