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Are Europeans getting (relatively) poorer?

Oscar Guinea and Oscar du Roy / Jul 2023

Image: Shutterstock

 

This is a question recently asked by the Wall Street Journal when comparing the EU and the US economy and echoed by the Telegraph for the UK.

The answer to this question is: unfortunately yes. The gap in GDP per capita – a proxy measure for economic prosperity – between Europe and the US has become too big to ignore. Until 2000, GDP per capita on both sides of the Atlantic behaved similarly. However, the path started to widen, and the divergence became particularly acute from 2010 onwards when US GDP per capita grew at an average of 3.4 percent while EU GDP per capita increased by 1.6 percent. Such a sustained difference matters a lot: in 2010 US GDP per capita was 47 percent larger than the EU, while in 2021, this gap increased to 82 percent. If the current trend of GDP per capita carries forward, in 2035, the average GDP per capita in the US will be $96,000, while the average EU GDP per capita will be $60,000. This is the same difference in GDP per capita as between Japan and Ecuador today.

FIGURE 1: DEVELOPMENT OF EU, US, UK GDP PER CAPITA

Source: World Bank, authors' calculations

Money is not everything. Europeans live longer, work less, and have more generous benefits than Americans. Lower material prosperity may be the price to pay in exchange for a European way of life. But these factors have hardly changed over time and, therefore, are unlikely to have been the driven force behind the divergent GDP trajectories captured in Figure 1.

It is true that the working age population in the US has grown faster than in Europe (boosting US GDP) but not by much. Other factors like longer working hours and higher income inequality in the US than in Europe have remained relatively constant, and if anything, the gap in social spending between the EU and the US is narrowing, not widening.

Part of the explanation behind the growing gap in GDP per capita between the EU and the US can be found in our recent ECIPE Policy Brief. Labour productivity, the keystone of prosperity, has grown faster in the US than in the Euro Area – which member states represent 80 percent of EU’s GDP – as capital deepening, meaning the amount of capital per worker, and Total Factor Productivity (TFP), which is the rate of technology and innovation, grew more in the US than in the Euro Area.

Europe’s lagging performance in these abstract economic indicators has had real life implications. Today a nurse in America can expect a pay check of $85,000, compared to the $48,500 for a nurse working in the UK. A trucker in Oklahoma can earn more than a doctor in Portugal. These glaring wage gaps are the result of the power compound interests in economic growth. Small but sustained variations over time can result in significant differences down the line. An economy that grows at 3 percent will double in 24 years while an economy that grows by 2 percent will need an extra twelve years to double.

Many EU countries are a walking example of relative economic decline. In 2000 France boasted a higher GDP per capita than 14 US States and was on par with Ohio or South Carolina. More than two decades after, France has dropped 11 positions and its GDP per capita is closer to Arkansas. The same can be said about other EU’s leading economies like Italy, Spain, Denmark, the Netherlands, Finland or Germany. When EU member states and US states GDP per capita are ordered from the highest to the lowest, most EU member states find themselves at the back of the queue (Figure 2).

FIGURE 2: US STATES AND EU MEMBER STATES GDP PER CAPITA (2021)

Source: World Bank, US Census Bureau, US Bureau of Economic Analysis, author’s calculations.

The US economy has clearly outperformed the EU and this analysis should serve as a wake-up call for EU policy-makers. However, every cloud has a silver lining. The example of the US states, which are comparable to the EU member states in their economic development, demonstrates that achieving higher rates of economic growth is possible. To do so the next European Commission must bring back economic growth and competitiveness to the centre of its economic policy. If Europe is to face the challenges presented by climate change and the digital transition, the growing burden of an aging society and defence budgets, higher productivity growth and technological change is not an option but a necessity.

 

Oscar Guinea

Oscar Guinea

July 2023

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Oscar du Roy

Oscar du Roy

July 2023

About this author ︎►

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