Europe's economy is said to be a flop. Held back by high taxes, overprotected workers and inept policymakers, Europe appears to be slipping further and further behind the dynamic US economy.
In fact, over the past three years, living standards, as measured by GDP per capita, have risen by 5.9 per cent in the EU but by only 1 per cent in the US. So says the IMF, an institution hardly biased against the US. An unfair comparison, perhaps, given America's recent recession? Then look at how the EU and the US size up since 1995, a period that includes America's late 1990s boom. While living standards in the US have risen by a healthy 16.1 per cent over the past eight years, they are up by 18.3 per cent in the EU. This is not a sleight of hand. Pick any year between 1995 and 2000 as your starting point, and the conclusion is the same: Europe's economy has outperformed America's.
It is true that the US economy has grown by an average of 3.2 per cent a year since 1995, whereas Europe's economy has swelled by only 2.3 per cent. These headline figures transfix pundits and policymakers. But this apparent success is deceptive. Not only are US growth figures inflated because American statisticians have done more than their European counterparts to take into account improvements in the quality of goods and services, but the US population is also growing much faster than Europe's. It has increased by nearly one tenth in the past eight years, whereas Europe's population has scarcely grown at all. So although the US pie is growing faster than Europe's, so too is the number of mouths it has to feed. Most people care about higher living standards, not higher economic growth.
Europe-bashers also claim that America enjoys markedly faster productivity growth. Although productivity is notoriously hard to measure, let alone compare across countries, the Conference Board, a New York-based business research group that is hardly a fan of European ways, has taken a stab at it. Their figures show that, although the average US labour productivity growth of 1.9 per cent a year since 1995 exceeds the EU average of 1.3 per cent, five individual European countries have done better than the US. Belgium managed 2.2 per cent a year, Austria 2.4 per cent, Finland 2.6 per cent, Greece 3.2 per cent, and Ireland 5.1 per cent. If you take a longer timespan, 1990 to 2002, not only does the EU as a whole outpace the US, so do ten EU member states.
Not only is productivity growth higher in several European countries than in the US, so too are absolute productivity levels. The average American produces $38.83 of output an hour, measured in 1999 dollars, according to the Conference Board. But six European countries have overtaken the US: Germany, the Netherlands, Ireland, France, Belgium and Norway. Hourly output in Norway is $45.55, over one sixth higher than in the US.
Admittedly, even though those six European countries enjoy higher average productivity levels than the US, they still have lower output per person. One reason is that less of the population works, by choice or because of higher unemployment. But the main reason is that Europeans work shorter hours. In some cases, as in France, they may be compelled to do so by law. But, typically, they choose to do so. Whereas US workers toil ever longer hours, Europeans prefer to take more time off as they get richer. Working more to earn more is a perfectly valid lifestyle choice. But one should not conclude that Americans' higher output is a result of greater efficiency, when it mostly reflects greater toil.
The myth of Europe's decline warps expectations of the future as well. Most economists think prospects for the US economy over the next few years are brighter than Europe's. But there is good reason to believe they will be proved wrong. Why? Because while Americans harp on about Europe's structural problems, they turn a blind eye to the unsustainable imbalances in their own economy.
Europe's problems are serious, but not terminal. Its cyclical downturn does not imply long-term decline. Although Germany is still struggling with the burden of reunification, which eats up 5 per cent of national income each year, it still has higher productivity levels than the US. And while European leaders have yet to implement many of the reforms they announced in Lisbon in 2000 to make the EU economy more dynamic, Europe is still heading in the right direction. Nor are Europe's more stringent labour market regulations (which vary widely) as great a hindrance to growth as is claimed. After all, Europe's labour laws have existed for years. Despite them, as we have seen, many European economies have outperformed America's. What's more, they are being reformed. The German government has announced ambitious plans to loosen job protection and cut unemployment benefits. France, Spain and Italy have all made part-time work much easier.
Europe's higher taxes also are not as big a burden as some think. At some point, taxes undeniably get so high that they dampen economic growth. But it should be obvious that, if taxes are spent well, they can boost an economy's productivity. Well-educated, healthy workers-and trains that get them to work on time-are pluses. Fans of small government point out that Ireland's low-tax economy has grown the fastest in Europe since 1995 and Germany's high-tax economy the slowest. But Finland, whose government takes half its citizens' incomes in tax (more than Germany's does) comes in just behind Ireland in the growth league table-and far ahead of the US. Another relatively low-tax economy, Britain, came in ninth out of the EU's 15 countries. Look again at the list of five countries that have notched up faster productivity growth than the US since 1995: Belgium, Austria, Finland, Greece, and Ireland. Consider the six that have higher productivity levels: Germany, the Netherlands, Ireland, France, Belgium, and Norway. Only Ireland is a low-tax economy.
Nor is all of Europe the unemployment black hole it is said to be. Although joblessness is very high in some countries, it is lower in others-lower even than in the US in seven of the 15 countries that make up the EU.
The truth about Europe is that its weaknesses are not as big as they seem-and its advantages are underplayed. Obscured by all the cyclical gloom, Europe's new common currency, the euro, is already having a significant impact. Soaring cross-border trade and investment within the eurozone are melding individual economies into one. Germany trades one sixth more of its economy with its European partners than it did before the euro's launch in 1999; France, one eighth more. Cross-border investment within the eurozone quadrupled in the first two years of the new currency as companies restructured their national operations along continental lines. The long-term boost to growth from the creation of a real single market with a single currency will be huge: just look at how the US economy took off at the end of the 19th century.
Ironically, the biggest threat to Europe's resurgence is that America's unbalanced economy will finally crash, dragging the rest of the world down with it. America's brief recession has not purged the excesses of the bubble years. The US economy is still awash with excess capacity from the investment splurge of the late 1990s. Americans still live beyond their means. The gaping US current account deficit, which swelled to $503bn in 2002-more than 5 per cent of GDP-bears witness to it. The economy's continued growth relies on foreigners lending Americans nearly $2bn extra every working day. And this is at the trough of the economic cycle, when spending on foreign goods is subdued. How unsustainably huge might the deficit grow if the economy took off again?
The point is not that Europe is better than the US; still less that the US should ape European ways. Each has its strengths and weaknesses. Besides, tastes differ: the American dream differs from European concepts of the good life. But it is simply not true that the US is miles ahead of Europe or that the old world must abandon its social model and reshape itself along US lines. More generally, economies with higher taxes and stricter regulations are not destined to fail, however much talk there is of them being unsustainable in a global economy.
Although there is no denying that Europe faces important challenges of economic reform, its economy has matched America's in recent years. There is every reason to believe it will do even better in years to come.
