Europe is an economic miracle
Just as Cinderella was ultimately recognized for her inner worth and abilities, Europe deserves more credit and appreciation for its own economic "transformation"
Since the Russian invasion of Ukraine, the economic and financial community has been bearish on the European economy. They’ve been pointing out all the flaws it has, the disastrous policymaking, and how the US has been stealing all the factories from Europe. While there is truth in the issues that are pointed out, Europe has been able to grow despite everything. Europeans are living better lives today than they were back in 2006.
All media commentary on Europe stagnating economically compared to the US has all been based on GDP numbers indexed in USD. As you can see in the image below, when comparing the US and European GDP per capita, you’ll find that the US has continued to grow despite the 2008 financial crisis while the European economies haven’t recovered from the same crisis. That’s because the numbers are based on dollars, which have appreciated considerably when compared to the Euro.
Because of this distortion in currency, the US looks to be the only Western country that has grown while all other top Western economies have stagnated. To show you a more specific example, let’s look at France. In terms of USD, their economy hasn’t gone far since 2008.
But in terms of Euros, their economy has grown significantly since 2008.
From all that, the US has still outperformed the European nations by wide margins, as seen in the chart below from the Financial Times. I credit the Financial Times for basing each nation’s real GDP numbers on their national currencies, not the USD.
The Financial Times article credits the US’s economic outperformance since the coronavirus pandemic on continued population growth, being far away from the Russia-Ukraine conflict, no sovereign debt crisis since 2008, and large-scale stimulus.
Through it all, some of us still see the economic miracle that Europe is today.
The Cinderella Story
If there’s someone who perfectly describes the European economic miracle, it’s Zslot Darvas, a senior fellow at Bruegel, a Brussels-based economic think tank. In his research, we can learn more about the European economic miracle.
The main indicators Darvas uses to show why Europe’s economy looks better than the US economy are economic output adjusted for purchasing power parity (PPP), per capita GDP, and productivity per hour worked.
Let’s start by discussing PPP. This metric measures the purchasing power of a country’s currency. While both the US and the EU have seen declines in their PPP, the EU output fell only 4% behind the US over the last two decades.
Now, let’s look at GDP per capita at PPP. In the article, Darvas notes, “The EU has, in fact, come closer to the US in terms of GDP per capita, from 67 percent in 1995 (the first year for which EU27 data is available) to 72 percent in 2022 (Figure 2, Panel A).” As seen below, you will find that while the Northern and Western European Union has held steady in GDP per capita, the Eastern European Union is fast rising while the Southern European Union is seeing declines. Altogether, one will find that because the EU has come closer to the US in terms of GDP per capita, Europe has grown faster than the US mainly because of Eastern Europe.
Finally, the part everyone is eager to learn more about: productivity per hours worked. Europeans are known for working fewer hours than Americans as they get more paid holidays, shorter work weeks, and a greater share of part-time workers. This is all happening while the employment rate is higher in the EU than in the US. To account for the difference in employment rate, Darvas uses the output per number of workers and output per hour worked to compare the US to Europe.
In the first chart above, which compares the EU 27 GDP/employee and GDP/hours worked to Germany’s GDP/employee and GDP/hours worked metrics, we find that Germany has made progress in GDP/hours worked while stagnating in terms of GDP/employee. Darvas compares Germany to the EU 27 because Germany is known for being both Europe’s largest economy and having the lowest number of working hours per person employed. As the article notes, “In 2022, a German employee produced 20 percent less than a US employee, but in terms of output per hour, a German working hour was 1 percent more productive than a US working hour (Figure 3).”
When comparing the different regions of Europe, both Western and Northern European nations valued leisure time and preferred to work fewer hours, lowering their incomes. Meanwhile, Southern and Eastern European workers were found to work more hours than American workers.
Conclusion
In conclusion, the common idea of Europe's economy being stuck in the past has been debunked. While it's true the United States has outperformed Europe in some ways, the data tells a different story when you look closer. By examining measures like purchasing power, income per person, and worker productivity, we can see that Europe has made a lot of progress. In fact, the gap between Europe and America has been steadily closing, especially in Eastern European countries that are growing rapidly. Additionally, the European approach of giving workers more leisure time and shorter hours has not hurt productivity - in some cases, European workers are actually more efficient per hour than Americans.
So while the U.S. economy may still be ahead, the essay paints a picture of Europe as a "Cinderella story," quietly becoming more prosperous over time, despite the gloomy headlines. The data shows there is more to the European economic story than meets the eye.
Source: Unsplash