There are two veins that tend to run through the tone of European economic commentary when the continent’s residents – or at least those in Western half – compare themselves to the United States. Broadly put these can be classified as either hand-wringing pessimism or rather smug complacency.
The pessimistic case is based on the rather straightforward case that on almost all the traditional headline economic measures, the United States is simply a much richer place than Western Europe. The latest figures from the International Monetary Fund, for example, place US GDP per capita, in 2017 dollars adjusted for purchasing power parity, at $66,762 in 2023. By contrast, the equivalent figures for Germany and France are just $53,638 and $47,964. That is say the average German citizen has an income of just 80% of the typical American and the average French citizen just 72%.
That, in and of itself, is perhaps grounds for pessimism, but the real hand wringing tends to start when observers look at the longer time series. If one goes back twenty years and looks at the 2003 data, then German GDP per capita, using the same dataset, was at 86% of US levels and French at 83%. The pessimism only continues if one looks ahead at the IMF forecasts, by 2029 they foresee the German/US ratio falling further to 77% and the French/US ratio falling below 70%.
This then is the story of such despair amongst some commentators – the US is richer than Western Europe’s largest and most successful economies, it has become richer over the previous two decades and this trend is expected to continue into the future. Europe with (and people can insert their favorite reason for worry here) an aging population/a less dynamic tech sector/etc is doomed to relative economic decline.
But there are those who choose to cut the numbers rather differently. If one looks at output per hour worked, rather than GDP per capita, the measured difference shrinks considerably. The US still maintains but the lead is far less sweeping and, importantly, it has now varied so much over time. The story told by those who occasionally veer so far away from pessimism that they risk sounding complacent is that Europeans simply prefer a different balance of life and work. They work fewer hours each week and take more vacations than their American peers and consequently earn proportionally less. But, and here is where the occasional smugness comes in, enjoy better healthcare outcomes, are less at risk of crime, and have access to better amenities such as public transport than those over the Atlantic.
The truth, as usual, lies somewhere in-between. Europe and the United States have different social models and individuals living in them have often made different decisions about what they prioritize. Europe is not an economic backwater doomed to perpetual decline but nor is it an example of shining economic health where people have chosen to work less and enjoy the fruits of their labor.
The US has much healthier demographics and its industrial structure does look far more aligned with the likely growth sectors of the future.
This week, talking to the Financial Times, the IMF’s Managing Director Kristalina Georgieva summed up the situation neatly. In her view, “Europe is rich” and the real question is how to “regain self-confidence”.
In the context of the debate on the European Union’s efforts to increase its own competitiveness vis-à-vis the United States and China, she had one concrete suggestion to make:
“The capital markets union is absolutely essential for European competitiveness because, in the absence of it, the financial assets of Europe do not work hard enough”.
Her logic appears sound. The financial markets of 27 member states of the EU, taken together, are not vastly dissimilar in scale to those of the United States. But they remain, despite some progress on integration over the last two decades, still fundamentally 27 distinct national capital markets. That allows for fewer economies of scale than in America and to capital being deployed less efficiently across the continent as a whole than it could be.
Coincidentally enough the Clark Center’s European Expert Panel weighed in on this very topic last week. Asked whether a common European capital market, with a shared rulebook and a strengthened European Securities and Markets Authority – would lead to a substantial shift in the number of firms choosing to list in Europe rather than the United States 71% of respondents, weighted by confidence, either agreed or strongly agreed.
Perhaps more immediately relevant to the question of economic competitiveness, asked whether a move towards a capital markets union would boost the resources available to start-ups and growing firms in the EU 85% of respondents, again weighted by confidence, agreed.
Whether or not a functioning capital markets union would represent a total fix to Europe’s competitiveness challenges is of course a rather different question. Macroeconomic policy, especially around questions of medium to long term growth, rarely throws up quick fixes and silver bullets.
The European Single Market – the standardization of regulations and rules across member states – has been its greatest economic achievement. But whilst the single market in goods is well functioning, there is far more to do when it comes to services. Perhaps none as important as progressing with unifying the Union’s capital markets. The hand wringers may think it will not solve anything and the very smug may think it is unnecessary but it is, in reality, exactly the sort of steady, incremental economic progress the EU is capable of making.
