At first glance, Europe seems to be getting a little further away from the US every day in purely economic terms (aggregate GDP). Given the structural problems that afflict the Old Continent, it now seems normal that the US grows faster year after year. The greatest power in the world is a dynamic, flexible, entrepreneurial and inventing economy. Meanwhile, in Europe it is a pioneer in the creation of regulations for those US inventions (artificial intelligence, for example). While the US invents the technologies that will mark the next revolution, Europe invents the regulations. Despite all of the above and although it may seem surprising, the European Union is managing to converge on some key indicators with the US. Not only that, if Europeans worked the same hours as Americans, the EU’s GDP per capita would be close to the heels of that of the US.
The European Union suffers from numerous weaknesses compared to the United States. The list is endless: absence of technological giants, there is hardly any innovation, the universities here (in Europe) are of the ‘lot’, the labor market is rigid, there is a lack of entrepreneurial spirit, limited availability of private capital… All of this , together with a mediocre aggregate economic performance (in the market of the cases), has developed a kind of ‘black legend’ about the economy of the European Union, a mantra that is constantly repeated and is not entirely true: the The economic gap between the EU and the US is getting bigger.
Zlotan Darvas, a Bruegel researcher, explains it perfectly in a document published at the end of last year by this institution: “A frequently heard statement about the US and the EU is wrong: in terms of production growth, “The EU has not fallen significantly behind the US. In fact, it has converged towards the US in terms of output per capita, output per worker and, especially, output per hours worked.”
The myth or ‘black legend’ of Europe
If the EU has gotten closer to the US in these very relevant indicators, why does that predominate? ‘black legend’ about the European economy that has been repeated and has become the great ‘truth’ in recent years? The truth is that the aggregate GDP (everything produced by the US and the EU) has become more distant when analyzed in US dollars. But this is due, in large part, to the fact that US demographics are much more favorable and that the US dollar has done much better in recent years than the euro.
Aslak Berg, researcher at the Center for European Reform, explained in a paper published in December last year that in 2007, the United States and the EU had a similar demographic burden: the dependent population in each of them represented around 49% of the working-age population. However, by 2022 that figure had increased to 57% in the EU and 54% in the United States. “This seemingly small difference means that each worker in the EU would have to increase output by almost 2% more to keep GDP per capita at the same level as in the United States, assuming all other factors remain the same.”
The result is a relative demographic dividend in favor of the United States, which will continue to be a key factor as Europe continues to age faster, while the United States continues to benefit from the highest birth rates it has had and continues to have today. Each worker in Europe has a larger dependent population to support and the demographic burden is increasing faster in Europe than in the United States. Although in the very long term everything indicates that the United States will follow the same path as Europe, the slowness of demographic change allows the United States to continue benefiting from more favorable demographics during the coming decades, says this expert.
However, when the demographic factor is eliminated (countries that grow a lot in population see strong increases in their GDP), it can be seen how both economies have experienced cycles of convergence and distancing due to the movements of their currencies in terms of GDP. per capita. Official data reveal that from the creation of the euro until 2008, the EU experienced a kind of ‘miracle’ (which was not such). From 2000 to 2008, the EU even managed to surpass the US in GDP per capita (measured in US dollars). However, in 2022 and after several crises, the European economy was once again a third smaller than that of the United States. “This sounds like a disaster,” says Darvas. But it turns out that it is not.
“The truth is that there were no European miracles between 2000 and 2008, nor no European disaster between 2008 and 2022. The indicator, GDP per capita in US dollars, is useful for measuring economic output at a given point in time, but not for assessing relative time trends. This is because it is strongly influenced by exchange rate fluctuations and measures production at current prices, which differ between countries,” says Darvas. In a simple way, it can be said that, during cycles of dollar appreciation, the economy Europe has problems following the US. However, in cycles in which the euro is strong, the EU gains ground and sometimes even surpasses the US. All this is noise.
The key is in the GDP per capita PPP
So how can Europe’s economy compare to that of the US? Well, Darvas resorts to an indication that is sometimes somewhat controversial, but which for this type of situation is the most reliable: GDP and per capita income in purchasing power parity: “The appropriate metric for international comparisons is GDP adjusted by purchasing power parity (PPP) and GDP per capita PPP,” says this economist.
This indicator corrects for exchange rate fluctuations and differences in various national prices. GDP per capita in PPP is the most used metric to make development comparisons between countries, since it eliminates the distortion generated by demographic growth. The US population has grown faster than the EU population in recent decades and is expected to continue this trend. This means that although the level of development in the US and the EU advances at the same pace, The US GDP will grow more due to the demographic factoreither.
What happens then if GDP per capita in PPP is used to buy from Europe and the US? What is happening is that, to the surprise of many, the EU has become closer to the United States in terms of GDP per capita: in 1995 the EU’s GDP per capita was 67% of the US GDP (the first year for the that data is available from the EU27), while in 2022 it already represents 72%. Still, Darvas explains that, unfortunately, within the EU there have been different stories. Although ground has generally been reduced with the US, there have been countries that have done very badly and others that have done very well.
“The EU is made up of countries with various levels of economic development. Western EU countries moved away from the US between 1980 and 2004 (from 88% to 80% in terms of GDP per capita), but since then, per capita income capita has fluctuated approximately at the same level,” explains Darvas.
The gap between the northern EU countries and the United States has been more or less the same since 1980. However, it is the eastern EU countries that have converged impressively: from 32% of GDP per capita over that of the United States in 1995 have approached, reaching 55% in 2022. Finally, GDP per capita in the South was 73% of the United States level in the early 2000s, but had fallen to 61% after the harsh impact of the pandemic. However, in 2022, 2023 and the coming years it could reduce this gap.
The ‘problem’ of vacations
To put an end to this ‘shake’ of data, it would be interesting to include the factor of hours worked. There is a lot of literature on this issue. For very varied reasons, Europeans work many fewer hours per year that the Americans. Although there are countries in Europe that work a similar number of hours to that of the US, the truth is that the average is much lower. Economies like Germany or Denmark do not even reach 1,400 hours per year, while in the US, on average, more than 1,800 are worked per employee. Darvas explains that this is because in the EU we have many more paid holidays, holidays and, above all, shorter working days. Working fewer hours per year means a lower level of production, unless your productivity is much higher.
Regarding paid vacations, in Europe most countries have minimums that range from 20 days in Poland to 28 in the United Kingdom. To that we must add the holidays (public holidays). In this parameter there is more equality, since in the US they have ten days, according to the OECD, while in European countries there is quite a variety, but it could be said that the average is slightly above those 10 in the US.
And what would happen if Europeans worked the same hours as Americans? To see what would happen in a context of equal hours worked, it is more useful to compare production per number of workers and production per hours worked. Since 2005, The EU-27 has converged with the US in both metrics. “Convergence was faster in terms of hours worked than in terms of number of employees, suggesting that labor productivity in the EU is closing the gap with the United States,” says Darvas.
Germany, the largest economy in the EU, has the lowest number of working hours per employed person, explains the Hungarian economist. This is related to the greater rights of German workers and the strong presence of voluntary part-time work (people who work part-time because they prefer to work fewer hours). In 2022, a German employee would produce 20% less than an American employee, simply because he prefers to work less. In terms of production per hour, a German hour of work was 1% more productive than an American hour of work,” says Darvas. That is, if Germans decided to work the same number of guys as Americans, they would be richer.
Productivity measured as output per hour worked also exceeded the US value in Luxembourg, Ireland, Belgium and Denmark. In the Netherlands, it was the same as in the US, while it was slightly lower in Austria (1%), France (2%) and Sweden (5% less).
The importance of time and leisure
The point is that European countries seem to value free time more and prefer to work fewer hours, thus obtaining lower monetary income, but obtaining a quality of life, perhaps, higher or less stressful. This is difficult to quantify, since there is no exact metric that can indicate the level of stress or happiness of a German, a Spaniard or a Dane compared to that of an American. However, there is an indicator that attempts to measure happiness at a global level and it turns out that the first three countries are from the European Union.
In summary, when the economy is analyzed in terms of per capita purchasing power parity, the EU has narrowed the gap with the United States over the last two decades. The convergence of the EU with the United States has been even faster in terms of output per hours worked. What’s more, “some western and northern EU countries are at least as productive as the United States in terms of output per hours worked, but Europeans seem to prefer free time over money. Thus, the narrative that “EU is significantly behind the US in terms of production is wrong. The crucial question is why the EU economy is doing so well despite its many well-known weaknesses.”