I recently saw [this article: “Europe has fallen behind America and the gap is growing”](https://www.ft.com/content/80ace07f-3acb-40cb-9960-8bb4a44fd8d9), which was also posted to reddit, and it has sparked a lot of discussions, both online and IRL. A point of view that I read and hear often is that overregulation and employee benefits are holding European economy back. So I took a look at data to validate it.
This is GDP in nominal terms, EU compared to the US: [https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=US-EU](https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=US-EU)
So we see that what FT says is true: the EU economy was slightly larger than the US in 2008, but now the US have expanded by nearly 50%. Actually a bit more complicated, it looks like the EU was lagging behind in the late 1990s, but quickly caught up during the early 2000s. I remember those times, there was strong growth and optimism in the markets due to the recent adoption of the single currency. Then we stagnated again.
A lot changed in 2008. To some extent the crisis had been developing in the previous years, but the Lehman Brothers bankruptcy in September 2008 destroyed investor confidence. Markets crashed everywhere, leading to a global recession. Most governments reacted approprately to the crisis: unlike 1928, which led to protectionist policies in most developed countries, this time they stimulated international trade and consumption. Particularly, most European countries were giving fiscal incentives to replace old cars with newer, more ecological ones, and stimulate consumption this way. The policies were working, though 2009 was a dark year for our economies, by early 2010 we were already seeing some recovery.
But it didn’t last long because in early 2010 Greece stated that it was unable to pay its debts. The EU’s reaction was an important loan for Greece, and not much later the ESM was created to boost confidence in the markets. It wasn’t enough, and in 2012 Greece launched an exchange of its bonds for others worth 20%. Market confidence collapsed, there were fears that Italy would be next. (Side note: the Italian situation was substantially different, as it had taken advantage of the single currency to lower interest rates and get rid of part of its debt during the Early 2000s. In fact, it peaked in 1994 at 120% of the GDP but had been reduced to 99%-100% in 2008. But investors didn’t pay much attention to this and just went paranoid with Berlusconi’s and Tremonti’s mismanagement of the debt.) All these facts led to the Euro crisis in 2012.
And of course, it also impacted in exchange rates. The Euro was at 1.595 against the US dollar in 2008, then it fell significantly. This was more accentuated after 2014 when the US dollar strengthened when compared to most currencies:
* US$ to JPY: [https://www.xe.com/it/currencycharts/?from=USD&to=JPY&view=10Y](https://www.xe.com/it/currencycharts/?from=USD&to=JPY&view=10Y)
* US$ to CNY: [https://www.xe.com/it/currencycharts/?from=USD&to=CNY&view=10Y](https://www.xe.com/it/currencycharts/?from=USD&to=CNY&view=10Y)
* USD to BRL: [https://www.xe.com/it/currencycharts/?from=USD&to=BRL&view=10Y](https://www.xe.com/it/currencycharts/?from=USD&to=BRL&view=10Y)
* USD to GDP: [https://www.xe.com/it/currencycharts/?from=USD&to=GBP&view=10Y](https://www.xe.com/it/currencycharts/?from=USD&to=GBP&view=10Y)
With a further decline of the Euro against US$ in 2022 due to the war and the energy crisis.
**So, if the Euro was at $1.59 in 2008 and not it’s barely above $1, it’s really expected that the US economy is now around 50% larger in absolute terms.** Exchange rates alone are enough to explain a large part of (if not all of) the gap. For this, I’m assuming that other EU currencies are strongly correlated with the Euro, mostly due to intra-EU trade.
Let’s take a look at it in PPP terms: [https://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD?locations=US-EU](https://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD?locations=US-EU)
The gap appears to be widening at first glance. This is expected as well: economies grow as a percentage of their previous size, so a larger economy will grow more in absolute terms. To see it relative, let’s do some ratios:
* In 1990, 23888.6/148258.7 -> The US economy was **61%** larger than the EU’s.
* In 2008, 48570/32492.1 -> The US economy was **49%** larger than the EU’s.
* In 2022, 76398.6/54248.6 -> The US economy was **41%** larger than the EU’s.
Numbers show the gap is actually shrinking in relative terms. We’re slowly catching up, which is equivalent to saying we’re growing faster.
I hear a lot of discussions that having long paid leaves for vacation, maternity, disease, etc. and having higher minimum wages is worth it despite the impact on the economy, becase the ultimate goal of the economy is to improve our living conditions, so it makes no sense to worsen them in favor of the economy. I came here to say that this is a fallacy because these benefits are not holding our economy back. We can totally have both, as the data show.
Of course, this doesn’t mean our economy doesn’t have problems. First of all we must wonder why has our currency become so weak. To some extent this is expected due to the ECB’s expansive monetary policy during so many years, but then, the policy was supposed to stimulate recovery in Southern Europe, which it really hasn’t. A strong currency would be beneficial in international trade, as imported goods would be cheaper, but it also has a negative effect on exports, and consequently on jobs. So probably it’s a good thing that it stays low? Second, in both GDP graphs we see that both the US and the EU have recovered nicely from the pandemic, but the US have recovered a lot better and are now growing faster. If the trend continues, the gap will become larger.
We must totally demand our governments for better economic policies. But we see that overregulation, welfare, public health and employee benefits are not the cause.
^(And I think this deserved a separate post because I see that discussions in this topic go on well beyond that single thread, and a lot of them are taking place outside of reddit as well.)
by logperf
8 comments
>Actually a bit more complicated, it looks like the EU was lagging behind in the late 1990’s but quickly caught up in the early 2000’s. I remember those times, there was strong growth an optimism in the market due to the recent adoption of the single currency. Then we stagnated again.
This is not quite what happened. There was strong growth in both the US and Europe during the early 2000’s, but the reason why your graph shows a huge leap in increase in the EU’s GDP at that time was because Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia all joined the EU in 2004. That step change relative to the US back then was the result of new members joining the EU, not the result of underlying economic growth being higher in the EU.
Lots of copium, sour grapes and not a lot of will to compete or change and the like in the US vs EU GDP/ capita threads. It does NOT bode well for our future, unfortunately it will take a geopolitical or economic shock to wake us up (even bigger than Ukraine war). We are NOT at the end of history and this illusion need to go IMO.
USA has a lot of dark spots but they have the cultural libido to keep going.
I wish it were that simple my friend but I am 99,999% sure that the EUR/USD conversion was already taken under consideration.
Check this:
https://ec.europa.eu/eurostat/documents/2995521/16921720/2-08062023-AP-EN.pdf/70e6937f-93ad-2936-ed03-5dbc9fd762f6
Check the chart under “gdp levels in the euro area and the EU”. It pretty much shows the gdp evolution for the US, EU and eurozone from 2008 until 2023 using 2015 GDP as basis (100). From there you can clearly see that EU (and euro zone) gdp was 100% in 2008 and stayed between the 90-100% range from 2008 until 2015. Only after that did it go above 100%.
The US gdp in 2008 was at 90% levels (meaning it was 90% of 2015 gdp) and it always kept on growing steady until 2020 and always above EU’s progression.
The EU lost nearly one decade (2008-2015) of progression whereas the US did not. My personal belief was the turmoil from the southern countries that only came to an ending after Draghi’s famous words “whatever it takes”.
In many ways the EU can be compared to the union of the US but we are not as united as the US and that comes with its price
Europe is resource starved and trying to become a service economy won’t work.
Absolutely OP! I’ve been saying this for a while, the EU economy is doing more than fine, no matter what you would read from the English press. In per capita terms since 2008 [the EU has actually outperformed](https://data.worldbank.org/indicator/NY.GDP.PCAP.PP.KD?end=2022&locations=EU-ZG-ZQ-ZJ-S2-AU-NZ-US&name_desc=false&start=2008) Africa, South America, the Middle East, Canada, Japan, Australia, and it’s just a smidgen behind the US despite using 4 times less debt. And that’s according to the World Bank, the IMF has the EU a tiny bit better than the US and ahead of New Zealand but behind Australia. This is all per capita growth ofc.
Anglo media is just very biased against Europe, especially in economic matters. Like that FT article is a joke, acting like high tech manufacturing amounts to chipmaking and nothing else. (Considering all the government funded overinvestment in chips I wouldn’t be surprised if that sector is the least profitable in the coming years.) And citing those ridiculous education indices that basically rank you on how English you are.
However I do disagree with you that Europe’s success is unaffected or because of overregulation, it’s in spite of it. What Europe has going for it is that the EU’s Single Market is the single most neoliberal thing on the planet. So even if most of Europe (except for the Nordics and some EE states) trail the best on things like economic freedom, which usually predict growth, the Single Market makes up for it. Still that doesn’t mean we should draw the wrong conclusions and think that Europe is an example of successful left wing economics and some alternative to the US model. Europe is far more economically right wing than people realise, and while it’s mellower in some regards, it’s even more extreme in others.
As we speak German Chemical Plants are relocating in masse to the United States and China to take advantage of massive state subsidies and cheap energy costs. BSAF will open a $10 billion dollar plant in China and is the process of selecting an American site.
The automotive industry is becoming increasingly competitive due to the transition to EV’s and while US and Chinese companies achieve record EV sales year on year, EU companies are trailing behind. By the 2030’s it’s a possibility that Europe will be a service economy with virtually all mass consumer heavy industries relocating to Asia or America to take advantage of supply chains, energy costs and state subsidies.
Such a future might be fine for southern and Eastern Europe but Germany will experience mass unemployment at a scale unseen since the 20th century, what will that do to German civil society and politics?
Correct. There is slower growth in Europe, but the huge difference (the “shocker” graph that every article about this topic has) is driven by exchange rate differences. Now, PPP is the adequate measure when we talk about quality of life/consumption, but in terms of geopolitical economic weight only the nominal matters… And there has been a big shift.
Europe will be behind economic until it decides to fix its population decline.