The origins of the growth deficit in the euro area

For two decades, and especially since the financial crisis, the euro zone has shown lower growth than the United States. From 2002 to 2022, GDP in the United States increased by 50%, and in the euro area by 28%. Several cumulative factors account for this gap.

Europe is not at the origin of the digital revolution and is paying dearly for its consequences. Despite progress in economic cooperation, Europe remains fragmented and cannot rely on a single financial market. Its energy dependence, as well as the population’s complex reporting on progress, punish it.

Investment gap

The growth gap against Europe is explained by a persistent deficit in terms of public and private investment. From 2002 to 2022, depending on the year, public investment is as high as 0.2 to 0.8 percentage points of GDP, as Europe is characterized by higher levels of public spending and greater intervention.

Similarly, total corporate investment in the US has always been higher than in the euro area over the same period. For four years, Europe has prioritized consumption through support policies while the United States has pursued a supply-side policy. From 2019 to 2022, consumption in the US is steady at 68% of GDP, rising from 52% to 54% of GDP in the Eurozone.

Lack of research

In terms of research and development, the deficit is even more pronounced. From 2002 to 2021, total R&D spending in the US rises from 2.5% to 3.5% of GDP, and for the euro area from 1.8% to 2.4%. The latter allocates a smaller share of GDP to education: 5.5% compared to 7% in the US. Adding deficits in investment spending, research and development, and education, the gap between the U.S. and the euro zone has been between 4 and 5 points annually for the past three decades.

Lack of productivity brings profit

Higher growth across the Atlantic is also a result of higher productivity. In the Eurozone, the latter are on a downward trend due to reduced working hours. The productivity gap per capita will reach 8 points from 2019 to 2022. During this period, working time in Europe decreased by more than 5%, while it remained stable in the United States. For several years now, the eurozone has been making a collective choice to use hourly productivity growth to reduce effective working hours.

As the number of jobs in Europe increases, production stagnates. The decline of industry and the rise of domestic services explain this development, with high-productivity jobs being replaced by low-productivity ones. Moreover, even if this phenomenon is observed in the US, more and more workers in Europe are turning away from jobs with heavy or confusing hours. Before 2019, companies were often forced to hire two people for one position, when only one person was enough. Unlike the United States, the eurozone cannot rely on immigration to meet labor shortages. Moreover, for sociological reasons, automation takes longer in the Old Continent than in America.

Lack of energy

While the US is a net exporter, Europe is dependent on foreign sources for hydrocarbons. With the war in Ukraine, Europe is suffering from taxes of two percentage points of GDP, which the United States does not know about.

Demographic deficit

Europe’s demographic decline is hampering its growth. Fewer workers and fewer hours, with little or no productivity growth, can only lead to decline. This combination comes at a time when there is a strong need for investment in the energy transition. The latter logically requires an increase in production capacity.

Closing the growth gap with the United States implies major changes at the economic level for Europe, with the need to increase population and investment efforts. Creating a broad financial market and structuring community policies on, for example, innovation and the energy transition are also priorities.

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

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