how did europe get left behind?
If the United Kingdom or France joined the United States, they would become the poorest state in the country with a GDP per capita lower than even Mississippi. Germany would be the second poorest.
How did Europe Get Left Behind?
I learned an interesting statistic recently:
If the United Kingdom or France joined the United States, they would become the poorest state in the country with a GDP per capita lower than even Mississippi. Germany would be the second poorest. Why?
But before we get into today’s article, answer me this: is the world getting better, worse, or staying the same?
You probably said worse, that's at least what 92% of Americans say. However, this video might just change your mind. I'm convinced the world is getting A LOT better, but no one is talking about it. And I have the charts and data to prove it.
Anyways, so what happened to Europe?
For most of the second half of the 20th century, Europe and the U.S. rivaled each other in GDP. In 2008, the EU and U.S. had a GDP of $14.2 trillion and $14.8 trillion, respectively. Closing 2023, the EU has seen little growth with a GDP of around $15 trillion, while the U.S. has marched ahead to a GDP of $27 trillion.
The EU GDP growth clocked in at 0.1% for 2023’s last quarter, a small fraction of the U.S.’s 3.4% during the same period. The UK had fallen into recession in the back half of last year, while the French economy looks to an optimistic forecast of 0.9% growth for 2024 to put six months of stagflation in the rearview mirror. While inflation has come down to just above 3%, similar to the U.S., the European Central Bank’s rate hikes have taken a larger toll on the nation-states.
Here is one reason why Europe has fallen behind.
The Great American Privilege: Over-Spending
After the 2008 Great Financial Crisis (GFC), which originated in the U.S. real estate debt and loaning markets in 2007 and triggered a recession in Europe in the second quarter of 2008, both the U.S. and Europe increased stimulus spending and access to liquidity. This increased the debt-to-GDP percent in the U.S. from 61.8 percent in 2007 to 82.0 percent in 2009, and from around 60% to 73% for the average EU government in the same period.
Because the U.S. benefits from the dollar’s reserve currency status, it can comfortably borrow large amounts at relatively low rates due to the high demand and liquidity of the U.S. treasury market. Europeans could not take advantage of the same privilege, thus seeing a growing debt crisis in the years following the GFC in countries like Ireland, Greece, Portugal, and Spain, which were having trouble paying the debt their governments had borrowed. The crisis peaked in 2010 when Greece’s sovereign debt was downgraded to junk by rating agencies. Numerous European countries required bailouts from the IMF and EU and instituted new austerity policies that limited public spending.
Such austerity policies became handicaps in dealing with future crises: during the COVID pandemic, the U.S. distributed $5 trillion in stimulus, while the U.K. and Germany spent $500 billion, France spent $235 billion, and Italy $216 billion, as per Moody’s. Though controversial at the time, and a contributor to the steep inflation that followed, the cash cascade likely helped the U.S. spend itself out of a recession. Household savings were at dramatic highs following the pandemic, which allowed consumer spending — which contributes to 70% of the U.S. GDP — to be strong through the Federal Reserve rate hikes. Post-pandemic, the U.S. has continued its public investment streak with the Infrastructure Investment and Jobs Act, CHIPS Act, and Inflation Reduction Act contributing another $2 trillion to its manufacturing and construction sectors, and far exceeding EU contributions.
The U.S. privileged ability to spend through the dollar’s global reserve status, though amounting to a national debt of unprecedented size, has allowed it to run circles around Europe in public-spending and crisis-time stimulus while subverting debt crises.
And a Variety of Other Factors
The explanation of why the U.S. economy has outpaced Europe cannot be reduced to just one reason. There are also broad structural differences at play: the U.S. enjoys a large single free trade zone, where capital and labor can unquestionably cross state boundaries without additional tax, tariff, or currency conversion costs. The EU has had its free trade zone tested by Brexit, along with many other hurdles. The U.S. is also unusually entrepreneurial: more start-ups are founded in the U.S. than in the European Union, while the U.S. leads the world in VC funding. Eight of the ten largest companies globally by market cap are American, none are European. The U.S. is also the globe’s most attractive place for investment, making the New York Stock Exchange larger than every European stock exchange combined (and that is just one of the U.S.’s equity exchanges).
Recent events also serve as obstacles: energy embargos on Russia have been far more taxing on Europe, with the cost of electricity far higher than in the U.S. and not yet returning to pre-sanction levels.
Complacency
In a textbook spanning all of human history, you would not have to turn many pages to find European empires enjoying the luxuries of economic hegemony that the U.S. does today. The Dutch in the 15th and 16th centuries, and the British shortly after.
There are countless published works and working papers trying to explain American economic exceptionalism, and there will never be a clear answer. However, what constantly arises as a theme when economists and historians look to past superpowers to understand what caused their greatness is this: History is full of victors who all felt their country’s superiority would be unstoppable. Far worse, it is full of victors who all took it for granted.
America enjoys a remarkable economy that has cut inflation quickly from a near double-digit peak without falling into recession while having low unemployment, steady growth, and continued innovation. It seems everyone can notice how lucky we are except for us — over half of Americans describe the economy as doing “poorly.” Soon, we’ll be heading to the voting booths to prescribe fixes to an economy that isn’t as broken as we think it is. Hopefully, we can keep doing more of whatever it is that is working and don’t get in our own way.
Knock on wood.
food for thought,
shreyas sinha