America was a magnet for investors during the prolonged 90s boom that made some analysts wax lyrical about a “new economy” that could grow indefinitely, , writes Mark Tran in today’s London Guardian.

Europe was considered an “old economy”, hamstrung by too many regulations and inflexible policy making. Analysts and the U.S. Federal Reserve Board chairman, Alan Greenspan, argued that the US economy had reaped a productivity miracle through massive investments in technology.

As a result, global capital poured into the U.S. and sent the dollar soaring. Just as a strong dollar reflected a potent U.S. economy, so a weak and unloved euro now mirrors an anaemic eurozone. Those architects of the euro who thought the single currency might become an alternative reserve currency have been sorely disappointed.

But no one talks any longer about the new economy since the U.S. entered recession in March last year, and now there has been a reappraisal of America’s productivity miracle. Not only that, but some economists wonder whether European productivity was so bad after all.

Rudi Dornbusch, a leading American economist, has cited in the latest World Economic Trends (December 2001) an OECD study showing that German GDP per employee and GDP per hour worked both rose faster than the U.S. during 1990-1998. Could it be that the European tortoise has been beating the American hare all along?

And it appears that investors are reassessing their views of the U.S. and Europe. According to figures compiled by State Street, the U.S. financial services group, there has been a discernible shift in capital flows between the U.S. and the eurozone.

Foreign direct investment (spending on physical assets) in the U.S. has dropped to $55B (£38B), down sharply from a peak of $155B in mid-1999. Meanwhile FDI outflows from the eurozone have been cut in half to 91bn euros in the past year.

Equity flows (money spent on shares) to the U.S. have also tapered off by 40% to $115B, while equity flows to the eurozone have accelerated sharply to 251B euros over the last year, from just 34bn euros.

Investors seem to have caught on that U.S. equities are still overvalued despite the bursting of the hi-tech bubble, whereas there are bargains on offer in Europe, where, unlike in America, profits have been holding up.