The European Union’s remarkable growth performance relative to the United States

The European Union suffers from numerous weaknesses compared to the United States, including the lack of European tech giants, weaker university rankings and limited private capital availability. But one frequently cited claim is wrong: in terms of output growth, the EU has not fallen significantly behind the US. In fact it has converged to the US in terms of per-capita output, per-worker output and, especially, output per hours worked.

A simplistic interpretation would have it that the EU is lagging badly. It had a slightly higher GDP (measured in US dollars) than the United States in 2008, but by 2022, the EU economy was a third smaller than the US ¹ See for example Gideon Rachman, ‘Europe has fallen behind America and the gap is growing’, Financial Times, 19 June 2023, https://www.ft.com/content/80ace07f-3acb-40cb-9960-8bb4a44fd8d9, which relies on Shapiro and Puglierin (2023). . This sounds like a disaster. But it overlooks the fact that EU GDP (measured again in US dollars) was one-third smaller than US GDP in 2000. So, according to this metric, before declining, the EU achieved a miracle from 2000 to 2008 by gaining one-third more output than the US.

Yet there was no European miracle from 2000 to 2008 and no European disaster from 2008 to 2022. The indicator, GDP in US dollars, is useful for measuring economic output at a point in time, but not for evaluating relative time trends. This is because it is strongly influenced by exchange-rate fluctuations, and it measures output in current prices, which differ across nations.

In 2000, €1 was worth $0.92. By 2008, the euro’s exchange rate strengthened considerably, and €1 was worth $1.47. The EU’s GDP is mostly generated in euros, and thus it was worth many more dollars in 2008 than in 2000 because of the currency appreciation. But this was just a temporary rise in the value of the euro and not a reflection of skyrocketing economic growth in the EU. After 2008, the opposite happened. By 2022, €1 was worth $1.05, so compared to 2008, the euro’s significant depreciation relative to the dollar reduced the dollar value of EU GDP.

The right metric for international comparisons is purchasing power parity (PPP)-adjusted output. This corrects for exchange rate fluctuations and differences in various national prices. Figure 1 shows both indicators by plotting the EU, US and for comparison Chinese shares of world GDP. There is considerable variation in the EU and US shares at current prices and exchange rates (left panel of Figure 1). But measured at purchasing power parity (right panel of Figure 1), the shares of the two economic giants can be seen to be declining tandem. The EU is losing slightly more, but the gap with the US is not dramatic: the EU27 and the US had the same PPP-adjusted output in 2000, while in 2022, the EU27 economy was 4 percent smaller. The International Monetary Fund (IMF, 2023) forecast that the EU27 economy will be 6 percent smaller than the US economy in 2028.

The declining shares of world output of the EU and US are unsurprising given the rapid growth of China and some other emerging countries. At current prices and exchange rates, the EU and China are expected to have practically the same level of output in the 2020s (note that in IMF forecasts, exchange rates are assumed to be unchanged). However, since domestic prices are lower in China than in the EU and the US, China’s share of global output is larger when measured at PPP: China became the largest economy in the world in 2017 and is expected to become even more dominant in the future.

Population and per capita incomes

It is also important to relate GDP to the population sizes and dynamics. Per-capita GDP at PPP is the most frequently used metric for cross-country development comparisons. The US population has grown faster than the EU population over the past decades and is expected to continue to grow faster. 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). China’s convergence has been impressive, from a mere 2 percent of the US GDP per capita in 1980, to 28 percent of the US in 2022. The IMF expects that China will reach 33 percent of the US level by 2028.  

The EU is composed of countries at diverse levels of economic development. Western EU countries diverged from the US from 1980 to 2004 (from 88 percent to 80 percent in terms of GDP per capita), but since then, per-capita income has fluctuated at about the same level (Panel B of Figure 2). The gap between Northern EU countries and the US has more or less been the same since 1980. Eastern EU countries have converged impressively, from 32 percent of US GDP per capita in 1995 to 55 percent in 2022; IMF projections suggest continued convergence to 60 percent by 2028, nearing the development level of Southern EU countries. Only the southern part of the EU is lagging. Per-capita GDP in the south was 73 percent of the US level in the early 2000s, but had fallen to 61 percent by the pandemic, though at least the IMF does not foresee continued relative declines in the years to come.

Working habits  

A further twist to the EU/US comparison is an adjustment to working time. In Europe, employees tend to work fewer hours than in the US, partly because there are more paid holidays, the typical working week of a full-time employee is shorter and there is a larger share of part-time workers than in the US. At the same time, the employment rate (the share of working-age people employed) is higher in the EU than in the US. Thus, it is useful to compare output per number of workers and output per hours worked (Figure 3).  

Since 2005, the EU27 has converged to the US according to both metrics (Figure 3). Convergence was faster in terms of hours worked than in terms of the number of employees, suggesting that labour productivity in the EU is closing the gap with the US. The temporary setback in 2020-2021 is related to different labour-market adjustments during the pandemic: there were large-scale layoffs of workers in the US, while this effect was mitigated by worker retention schemes in the EU.

Germany, the EU’s largest economy, has the EU’s lowest number of working hours per person employed (Figure 4). This is related to widespread part-time work. 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). 

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, and it was just slightly lower in Austria (1 percent lower), France (2 percent lower) and Sweden (5 percent lower). 

Some western and northern European nations seem to value leisure time and prefer to work fewer hours, thereby earning lower incomes, even if in many of these countries, workers produce the same or higher amounts in an hour than workers in the US. In contrast, southern and eastern EU workers tend to work more hours a year than US workers (Figure 4).  

Consumption compared

Finally, a comparison of consumption levels is also useful. Since the EU economy is more capital intensive than the US economy – that is, the capital stock/output ratio is higher in the EU than in the US (2.9 vs 2.3 in 2022, according to European Commission calculations ² According to the AMECO dataset, which is the annual macro-economic database published by the European Commission’s Directorate General for Economic and Financial Affairs (European Commission, 2023). ) – more investment is needed in the EU to maintain the level of the capital stock and output, implying that less income is available for consumption.

Consequently, the EU’s consumption per capita measured at purchasing power standards (PPS) relative to the US (Figure 5) is lower than the EU’s GDP per capita relative to the US (Figure 2) – 58 percent (consumption) versus 72 percent (GDP) in 2022. The good news for the EU, however, is that it has also narrowed the gap with the US in terms of consumption per capita. While there was an initial decline from 54 percent of the US level in 1995 to 51 percent in 2005, the EU has steadily increased its relative position since, to 58 percent of the US level in 2019. The pandemic caused a temporary setback, and the recovery of consumption has been slower in the EU than in the US, yet the EU’s relative position returned to 58 percent in 2022, and the Commission’s forecast suggests the same level in 2024 (European Commission, 2023).

It is also useful to keep in mind that since disposable income inequality is lower in the EU than in the US, the EU-US gap is likely smaller for those at low- and middle-income levels than the average for the whole population reported in Figure 5. 

To sum up, measured in terms of purchasing power parity, which is the right metric for international output comparisons, total EU output is just slightly falling behind US output. But in terms of per-capita income, the EU has narrowed the gap with the US over the past two decades. EU convergence with the US has been even faster in terms of output per hours worked. Some western and northern EU countries are at least as productive as the US in terms of output per hours worked, but Europeans seem to prefer leisure time to income. Thus, the narrative about the EU significantly falling behind the US in terms of output is wrong. The crucial question is why the EU economy performs so well despite its many well-known weaknesses.

References

European Commission (2023) AMECO database, available at https://economy-finance.ec.europa.eu/economic-research-and-databases/economic-databases/ameco-database_en

IMF (2023) World Economic Outlook database, International Monetary Fund, October, available at https://www.imf.org/en/Publications/WEO/weo-database/2023/October

Shapiro, J. and J. Puglierin (2023) ‘The art of vassalisation: How Russia’s war on Ukraine has transformed transatlantic relations’, Policy Brief, April, European Council on Foreign Relations, available at https://ecfr.eu/publication/the-art-of-vassalisation-how-russias-war-on-ukraine-has-transformed-transatlantic-relations/