Opinion & Analysis

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

The EU has outperformed the US on per-capita output growth; in terms of output per hour worked, some EU countries are as productive as the US. 

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 . 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.

Read full article at original publication link.

About the author

Zsolt Darvas, a Hungarian citizen, joined Bruegel as a Visiting Fellow in September 2008 and continued his work at Bruegel as a Research Fellow from January 2009, before being appointed Senior Fellow from September 2013. He is also a Senior Research Fellow at the Corvinus University of Budapest.

Access the original publication here