According to economists Pierre-André Buigues and Elie Cohen, the relative impoverishment of the Eurozone compared to the United States is a reality, not a myth.
People on the street in Italy Photo: Alessandro Barone/Pacific Press / Shutterstock Editorial / Profimedia
The United States, which benefited from the effects of World War II and took the lead in economic growth and technological innovation, later saw its lead eroded by European countries. The trend was undeniable and suggested an economic convergence of the most developed countries in Europe. However, recent indications suggest that the mechanism has stalled and the gap is widening again, in favor of the United States, writes Le Monde.
The consulting firm McKinsey, in a July 2022 note, pointed out that between 2010 and 2020, i.e. in a period of ten years, the European Union recorded an average annual increase in gross domestic product (GDP) per capita of 0 .8%, which is half that of the United States (1.7%).
Data from the World Bank (WB) seem to confirm this economic decline in the Eurozone countries. In 2010, GDP per capita measured in dollars was 30% higher in the United States than in the euro area. In 2022, twelve years later, the gap has doubled: 87% more in the United States than in the euro area.
An undeniable diagnosis
A similar observation for France, especially after the Covid-19 pandemic: “Labor productivity has stagnated in France since 2019” and, according to experts cited by the National Bank of France, the gap between the level of productivity observed in the second quarter of year 2023 and the level that would have been reached if productivity per capita had increased according to the 2010-2019 trend would be 8.5%.
The Wall Street Journal, in its July 17, 2023 edition, noted that Europe is characterized by “an aging population that prefers leisure and job security to income and challenges.
The diagnosis seems indisputable, but it is contradicted at the European level. For Zsolt Darvas (Bruegel Institute, Brussels), comparisons in current dollars are misleading, due to significant fluctuations in the exchange rate between the euro and the dollar: in 2000, 1 euro was worth 0.92 dollars; in 2008, $1.47; today, $1.09.
The economist therefore suggests a correction of the GDP calculation using purchasing power parity (PPP) data, a good indicator for international comparisons, as PPPs correct for exchange rate fluctuations and suggests the use of labor productivity measured by the amount of wealth created per hour and per employee.
The heterogeneity of the euro area
According to the economist at the Bruegel Institute, in 2022 Germany and France had a level of PPP-adjusted hourly productivity close to that of the United States, so there would be no decline in euro area productivity compared to the United States. However, this optimistic speech is contradicted by economic growth in Europe compared to the United States. According to World Bank data, US GDP has grown by 28% since the 2008 financial crisis, compared to about 13% in Europe.
How can we explain this economic decline by focusing only on the Eurozone? Let us first note the strong heterogeneity of this area: the four largest countries (Germany, France, Italy and Spain) account for 75% of the population of the Eurozone, which includes 19 countries, but these four countries are characterized by very different parameters in terms of demographics , productivity, activity rates and research and development expenditure.
Demographics: The working population (ages 15-64) grew by 21% in the United States from 1998 to 2022, compared to 17% in the euro area, and the gap is widening. Today, it is 1% per year, which in the coming years will have a multiplying effect.
Working hours: With the total number of hours worked much lower in the Eurozone compared to the United States – this gap is 25% in the case of Germany, it is clear that Europeans have chosen leisure time. The trend is downward in Europe, reflecting this preference.
Between 1960 and 2023, there is less than a 10% decline in hours worked in the United States, compared to 20% to 30% in Europe (Erik Nielsen, Unicredit, February 2024).
Activity rate: The percentage of the population between 15 and 64 in the workforce is 72% in the United States, certainly lower than Germany, but significantly higher than France, and especially Italy, and Spain. France’s pension reform shows the difficulties of policies aimed at increasing the activity rate in Europe.
Energy prices: The United States enjoys very favorable energy prices, three times lower than Europe, and has considerable reserves of fossil energy. Compared to the Eurozone, this is a competitive advantage now and for years to come, which is causing certain European industries to relocate their factories across the Atlantic.
Technological innovation and R&D spending: The United States spends 3.5% of GDP on R&D, compared to 2.2% in the Eurozone (France) and about 1.4% in Italy and Spain. Only Germany stands out, having only 0.4 points of GDP less than the United States. In addition, the latter have an environment favorable to technological innovation, ease of raising capital, research partnership between prestigious universities and large companies or start-ups.
Therefore, Europe is becoming poorer and poorer compared to the United States. The five factors mentioned here have played a decisive role in explaining the growth gap, and it is difficult to imagine how the euro area could, in the coming years, correct structural employment trends to compensate for Europe’s growth deficit.
On the other hand, no inevitability condemns Europe to underinvest in research, to neglect the opportunities of artificial intelligence and to give up the transfer of the energy transition to China. The issue of productivity and innovation is decisive for Europe to break the spiral of relative poverty.
(Article made with the support of Rador Radio Romania)
