The Eurozone is in turmoil

The war in Ukraine highlights the structural weaknesses of eurozone member states. They are, in fact, facing several major challenges: population aging, lack of innovation, declining productivity, and the energy transition. The lack of federalism is an increasingly obvious handicap.

Growth over the decade is lower than the US

The single currency, created more than two decades ago, requires improvement to adapt to the new economic and financial situation. If the financial crisis of 2007/2009 was of American origin, it severely punished Europe. Over the past decade, European nations have experienced lower growth than the United States. Several factors explain Europe’s underperformance.

The first factor: demographic decline Europe is aging faster than the United States. Since 2012, the labor force has been declining in the euro zone, while it has continued to grow in the United States. It will be even higher across the Atlantic by 2025, when the eurozone will exceed 25 million in 2022. In 2030, the working-age population of the eurozone will be 10 million less than that of the United States. Aging also increases pension, health and dependency costs. This would account for a growth deficit of 0.7 percentage points per year compared to the United States.

Major technological advances were born in the United States or in Asia

The second factor: the disappearance of productivity growth in Europe. Total spending on research and development is just 2.4% of GDP in the euro area, compared to 3.5% of GDP in the United States. The difference, which was 0.6 points in 2002, has now reached 1.1 points. Major technological advances in the last two decades have originated in the United States or Asia. It missed out on the latest technological revolutions due to the fragmentation of the European market.

If France, under the impulse of Valéry Giscard d’Estaing, pioneered data transmission with Minitel, then it could not extend its system beyond borders. The electric car industry is dominated by the Chinese when it comes to batteries and the Americans with the success of Tesla despite the technology being of European origin.

Europe is also characterized by a significant reduction in working hours. That’s down more than 5% since 2007, when it remained flat in the US. The Great Resignation, reviving the post-Covid debate, actually began in Europe. If the leisure community is inspired by America, Europe seems inclined to make it its own. The result is a significant reduction in productivity.

Negative productivity

Since 2002, per capita productivity in the US has increased by 35%, compared to just 10% in the euro area. Since 2014, per capita productivity (adjusted over four years) has been negative in Europe, while it has increased by 1.5% in the US. The productivity gap between the Eurozone and the US leads to a growth barrier of 1.5 percentage points per year in terms of potential growth.

Dollar Euro parity one to one exchange rate

Energy costs and deindustrialization

The third factor: the high cost of energy. Europe, which is less secure than the US, pays higher energy bills. The European population’s rejection of shale oil and gas fields is a choice that affects prices and growth. The war in Ukraine has highlighted Europe’s dependence on energy supplies. In recent years, the low level of investment in the energy sector has led to an increase in the cost of the latter. Thus, France has been paying a high price for ceasing investment in nuclear energy since the 1990s. Since the turn of the century, the United States has become an oil exporter with shale oil.

Europe is more committed to the energy transition than other economic sectors out of conviction and necessity. This option is expensive in terms of growth, the cost of renewable energy is higher than that of fossil energy, especially because of the intermittency of renewable energy production.

Since 2007, the eurozone has reduced greenhouse gas emissions by 25%, compared to 15% for the US. Declining productivity and high energy prices are driving the deindustrialization of the eurozone. Since 2002, manufacturing output in the euro area has grown by only 10% compared to 20% in the US. Since 2016, European production has been prone to erosion.

Low employment rate, high social costs

The fourth factor: the low level of employment in Europe. With the exception of northern European states and Germany, the eurozone is handicapped by low employment rates. This leads to significant social costs, reduced tax revenues and therefore high government deficits.

A number of European countries (France, Italy, Spain, Greece) face skills problems both at the level of students and workers. Unlike the United States, the euro zone does not have an arsenal of federal economic intervention. It has no real budget or asymmetric crisis management tools.

Since 1999, differences in terms of living standards or economic specialization are clearly visible. If in 2004 France’s GDP per capita was comparable to Germany’s, in 2021 it was 16% lower. Compared to Germany, the gap for Italy increased from 10% to 30%, for Spain from 20% to 40%, to 40%. 60% for Greece. The added value of the manufacturing sector is 20% of GDP in Germany, compared to 14% in Italy, 10% in Spain and 9% in France.

Countries experiencing deindustrialization accompanied by low employment rates are characterized by high public debt, making them vulnerable during episodes of rising interest rates. The European Central Bank does not have the same maneuverability as the United States to eradicate inflation.

  • Philippe Crevel is an expert on macroeconomic issues. Lorello Ecodata, founder of economic research and strategy company, is also our economics expert and runs Cercle de l’Epargne, a research and information center dedicated to savings and retirement.

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