The US has had stronger growth than Europe recently – but its out-performance is easily explainable. Instead of worrying about the US, Europe should focus on itself and avoid repeating past mistakes.
The consensus on Europe’s economy is increasingly morose, with the continent lagging the US growth rate. However, media coverage often suffers from a lack of rigorous thinking about how to compare the two economies. Europe’s economic performance is under-appreciated as a result. Whilst the US has grown considerably faster than the EU since 2010, US out-performance has been fuelled by three factors:
- The US has faster population growth and more favourable demographics.
- The US has become a net exporter of energy while Europe cannot meet all its energy demand with its scarce domestic energy sources, and consequently pays high prices for imports.
- The US has had both greater fiscal space to stimulate its economy and far greater willingness to use it.
Of these three advantages, the first is a structural trend which would take time for Europe to reverse, including by facilitating immigration, a politically sensitive issue. The second is a physical constraint which Europe is addressing by investing in alternatives to fossil fuels, though this too will take time. The third is political and could be remedied, if not fully resolved, if EU countries were willing to do so.
Yet despite these constraints, the European economy has overall performed admirably. Productivity growth has been solid on average, although it has varied widely across the EU.
How to compare economic performance
Using GDP as a measure for economic growth for a single country is straightforward. But it can be misleading to use it to compare economies for two reasons: shifts in exchange rates and differences in inflation between countries. A simple comparison using market exchange rates would indicate that the US economy is now 50 per cent larger than the EU economy, up from near parity in 2010. Yet most of that does not reflect differences in economic growth. Instead, it reflects the fact that in 2010 prices in the EU and the US were at similar levels, while by 2022, US prices were 47 per cent higher than in the EU. This change in price levels was driven by a stronger dollar and to a lesser extent higher US inflation, not by economic growth.
What matters for economic comparison is the real quantity of goods and services an economy can produce, not their price. GDP at purchasing-power parity (PPP) is the best way to compare how much economies produce, because it adjusts for differences in price levels. According to IMF data, by this measure the size of the EU-27 economy was 95.6 per cent of the US economy in 2022, only a small decline from 97.1 per cent in 2010.
Yet this kind of comparison understates US economic performance. Changes in PPP-adjusted GDP between the US and the EU reflect both faster real economic growth in the US and faster price growth in the US relative to Europe. In a PPP-comparison, the latter will to some extent compensate for the former.
PPP comparisons are therefore useful measures of relative economic size at a given point in time but are less useful to compare economic performance over time.
Instead of comparing economic size over time, it is therefore better to focus on differences in real economic growth between the US and the EU. This allows us to focus on underlying performance without the impact of currency fluctuations or the limitations of PPP calculations. As shown on Chart 1, cumulatively, the US has grown 8 per cent more than the EU since 2010. The US engineered stronger recoveries from both the 2008 global financial crisis (GFC) and the Covid pandemic, while the EU lost years of growth to the eurozone fiscal crisis. More than half of the growth gap between the EU and the US opened up between 2011 and 2013.
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About the author
Aslak Berg is a research fellow at the Centre for European Reform focusing on trade policy, international economics, regulatory policy and regional integration.