Europe cannot grow by yoghurt alone

GO into a supermarket and you can see how Europe has become rich. Half the yoghurts have labels in a foreign language. Something similar applies to cars. The brand name gives little indication of where it is assembled - Japanese cars may have been assembled in Britain, Fords in Germany - and the parts will have come from all over Europe. Buy shampoo and you learn the word for dandruff in half a dozen languages.

This is just the outward sign of intense economic specialisation. The variety of languages refects the fact that one plant somewhere in Europe is making one product for the whole European market.

European nations have become the most specialised on earth. The Netherlands

exports nearly half its output, Switzerland one-third, Germany a quarter. Even Britain and France, exporting a little less than 20 per cent of their output, sell twice as much abroad as the United States or Japan. In terms of exports per head the only comparable countries in the world are the expatriate Chinese communities of Hong Kong and Taiwan.

Intense specialisation has made Europe rich. The average income per head in Western Europe is just behind North America and Japan, but the richest parts of Europe, such as Switzerland or northern Italy, are probably the richest parts of the world.

There are reasons to suspect, however, that European countries are reaching the limits of efficient specialisation. Political considerations mean it is becoming difficult to specialise further, and economic considerations mean there is little point in trying to do so. This has profound implications for the future of the European Community.

Specialisation is not just about increasing exports. It is about increasing imports as well and therefore, in practice, abandoning areas of economic activity. An idealised picture of Europe would have the Germans making all the cars, because they do it best; the French producing the luxury goods; the Italians providing the clothes; the British offering financial services and entertainment.

But the flip side would be Germany moving out of textiles, France out of consumer electronics, Italy no longer making cars and Britain shutting down even more industry.

If Europe were a single state that might well have happened and, to an extent, different spheres of activity in Europe already locate themselves in different regions, irrespective of national boundaries.

But there are limits to this process. A recent paper by the investment bank CSFB compares the US and Europe as though the EC were a single country (Europe: Core vs Periphery, by Sean Shepley and Jonathan Wilmot, published by Credit Suisse First Boston, December 1992). It points out that the US Midwest, the region that in structural terms most closely resembles Germany, has moved out of textiles. It does, however, make 66 per cent of American cars.

Germany still has a textile industry proportionately nearly half as big as that of Italy, and it makes 42 per cent of the EC's cars. But there would be almost as much political resistance if Germany further increased the size of its motor industry as there would be if it shut down its textile trade - or if Italy shut Fiat. For purely political reasons, it will simply not happen.

But maybe, for purely economic reasons, that degree of specialisation ought not to happen. Differences in national taste should allow more specialisation in Europe than exists in the US. Midwesterners have more or less the same taste as Southerners in cars, or even (allowing for climatic difference) clothes. Germans and Italians actually like rather different ones.

In any case, manufacturing itself is changing. It is moving away from the Fifties US model, producing long lines of identical products as cheaply as possible, towards the Nineties Japanese approach of making customised batches of products intended for specific markets.

Factory size, too, is coming down so that products can be made efficiently in smaller numbers and closer to the appropriate market. Nissan's car plant in Sunderland is much smaller than Ford's at Dagenham, yet vastly more efficient.

If Western Europe is likely to find it tougher to raise its living standards in the next 30 years by boosting trade within the continent, there is enormous scope for creating more wealth by increasing trade between Western Europe and the rest of the world.

The European Community has the highest labour costs in the world. The obvious way to improve living standards is to import products that require a lot of labour input from countries with lower wages. On its doorstep lie the former Comecon countries, eager to buy the sophisticated output of the West but limited by Europe's failure to take enough imports and so supply them with the hard currency to pay for it. The same logic argues for more imports from less developed countries and from the Far East.

Top Europeans must recognise that the trick which has worked in the past will work less well in the future. This is tough even for the most outward-looking. Helmut Schmidt, the former West German Chancellor, recently attacked British attitudes towards the EC, pointing out that the Italians had overtaken the British in terms of GDP per head (Wall Street Journal Europe, 1 February 1993).

'One important reason,' he wrote, 'is that Italian entrepreneurs have since the late Fifties successfully made use of the enormous opportunities of the Common Market, while British entrepreneurs prefer to look to Hong Kong.'

He has a point, for rich Germany and France have been wonderful markets for Italy, though if he had looked at the figures he would have seen that Britain exports more than Italy, even now. But during the Eighties the world's fastest-growing region was mainland China, and Hong Kong will become its financial capital in another five years. On any objective view, getting commercial relations with China right will be just as important as trying to sell more to slow-growing European neighbours.

This has serious political implications. Europe can proceed by trying to achieve an even closer union and it might, as a result, gain more clout in the world. But the potential economic gains from, for example, establishing a single currency, are limited.

Economic self-interest requires Europe to accept that it is approaching the practical limits of internal specialisation, and that it needs to start specialising as an entire region. It must export the goods and services where it has a comparative advantage, and import more of the products where it does not.

Economic self-interest used to make European countries look inwards at each other. From now on it should make them look out to the rest of the world. There is a limit to how much richer we can become by buying each other's yoghurts.