In the five years from 2015 to 2019, the American economy grew cumulatively by 12.4% compared to 9.1% in the Eurozone during the same period. Considering the structural and existential issues faced by the single currency economies, these figures are comparable. In contrast, in the period following the recession caused by the coronavirus, two completely different trajectories emerged in the growth dynamics of the two blocs. The American GDP increased cumulatively by 10.6%, while the Eurozone’s by 3.8%. A first analysis of the causes that led to this divergence identifies factors beyond the obvious output (supply) hit created by the invasion of Ukraine and the subsequent energy crisis. After all, the projection into the future of these trends is what led the European Commission to commission M. Draghi to prepare his report on the competitiveness of the European economy. It is noteworthy that this divergence is not only a result of the slowdown and essentially stagnation of the European economy, but also a product of growth greater than the pre-existing trend for the USA.
First, important factors affected total factor productivity differently between the US and the Eurozone. For example, the US, which experienced declining business dynamism in the previous decade, saw a sharp increase in the rate of new business creation amid the pandemic. This is critical because although a portion of these start-ups fail, another portion that survives grows rapidly, innovates, and contributes to overall productivity. Studies indicate that newer firms are likely to innovate more on average than established ones. The composition of this entrepreneurial wave in the US also shows that a critical mass of these new businesses are active in high-tech sectors where innovation is typically more frequent.
The Eurozone, on the other hand, continues to follow the pre-existing trend of new business formation. This is also one of the key points of Draghi’s report, which points out that the problem for Europe is not a lack of ambitious ideas, but lies in the next stage of commercializing ideas and scaling up businesses. As one of this year’s recipients of the Nobel Economics Prize, N. Atzemoglou, states, the fact that the regional aid provided by the Eurozone ends up in established businesses that have the administrative infrastructure to claim it, can turn against innovation. This happens as the incentive for investment may increase, but at the same time the aid may act as a deterrent to the entry of new and potentially more innovative businesses.
Moreover, as the unemployment rate also demonstrates, during the pandemic the economic policies of the Eurozone have largely achieved the goal of maintaining work for a large part of the population. In contrast, the US unemployment rate, starting from a low point, reached a much higher peak before returning to its previous downward trend. Empirical studies show that reallocation of workers in the US caused a shift to more productive jobs, ultimately favoring overall labor productivity in the economy. Ultimately, although the Draghi report emphasizes the issue of competitiveness, in essence the distance between the US and Europe is a matter of productivity. A country can have low productivity and remain competitive.
But we also observe differences in two other key components of gross domestic product, consumption and investment. In terms of consumption, in the US we had a sharp rise and sustained consumer spending at significantly higher levels than the pre-existing trend. Buoyed by massive stimulus programs, historic highs in the stock market (in the US a significant share of wealth is invested in the stock market) and low savings rates, Americans are spending to boost GDP. Regarding savings in particular, the gap between the US and the Eurozone widened significantly after the pandemic, reflecting, among other things, the feeling of uncertainty among European consumers, which prompts them to save more. With the emergence of the post-Ukraine war scene in the Middle East, this sentiment seems to be intensifying. But even the highest savings in Europe are unable to be channeled into investments due to the incomplete integration of the European capital markets.
After the recession due to the coronavirus, the American GDP grew cumulatively by 10.6%, while that of the Eurozone by 3.8%.
In the field of investment we see an ever widening gap. Catalysts are found in the structure and targeting of investment stimulus programs. When the generous industrial policy subsidizing the installation and development of green and technological investments was established in the USA, Europe already had the Next Generation EU program in place. However, its implementation was delayed. The program is aimed at public investment rather than incentives for private ones, while stagnation in Eurozone industrial production is preventing companies from investing more. Finally, in the US, investments are also favored by the race for the lead in artificial intelligence. As is known, the companies that are at the forefront of developments in this field are American and not European.
Consumption and investment are likely to slow in the short term in the US, given the soft landing due to high interest rates and the end of investment subsidies. Convergence in productivity, however, remains uncertain, even if the Eurozone had already taken measures for this purpose.
*Mr. Stavros Malkidis is a Hayek fellow and an Onassis Foundation scholar at New York University.
*Mr. Stylianos Foundas is a professor at the Department of Economics at the University of Macedonia.
2024-10-30 21:58:00
Time.news Interview: Navigating Economic Divergence Between the U.S. and Eurozone
Editor: Welcome to Time.news. Today, we’re exploring a crucial topic: the economic divergence between the United States and the Eurozone, especially in light of recent developments. Joining us is Dr. Elias Papadopoulos, an economist specializing in European and American economic trends. Welcome, Dr. Papadopoulos.
Dr. Papadopoulos: Thank you for having me. It’s great to be here.
Editor: To start, your recent research has highlighted the significant difference in economic growth trajectories between the U.S. and Eurozone since the pandemic. Can you summarize what’s been driving this divergence?
Dr. Papadopoulos: Certainly. Between 2015 and 2019, we saw a relatively strong performance from both economies. However, post-pandemic, U.S. GDP increased by 10.6%, while the Eurozone saw just a 3.8% increase. While the Ukraine invasion and ensuing energy crisis amplified the economic challenges in Europe, deeper issues at play include stark differences in productivity growth and business dynamics.
Editor: Interesting. You mentioned that the U.S. experienced a surge in new business creation during the pandemic. How has that shaped productivity in comparison to Europe?
Dr. Papadopoulos: The pandemic acted as a catalyst for innovation in the U.S. Many individuals seized the opportunity to start new businesses, especially in high-tech sectors. While not all new ventures succeed, the ones that do often innovate at a much higher rate than established businesses. In contrast, Europe, as noted in Mario Draghi’s report, struggles with the commercialization of ideas and scaling new ventures. The region tends to support established firms more than fostering new, potentially innovative start-ups.
Editor: That seems crucial. Speaking of support, you touched on regional aid in Europe. Can you elaborate on how this affects innovation?
Dr. Papadopoulos: Yes, the structure of aid can inadvertently discourage innovation. When regional support flows predominantly to established firms—those equipped to navigate bureaucratic processes for claims—new entrants may find it harder to access essential resources. This reliance on established firms can inadvertently stifle the very innovation the economy needs, and as Nobel Laureate Daron Acemoglu pointed out, this can create a barrier for novel ideas to come to fruition.
Editor: It sounds like productivity is at the heart of this issue. How does employment play into the economic dynamics you’ve discussed?
Dr. Papadopoulos: Absolutely. In the Eurozone, employment policies were successful in retaining jobs during the pandemic, resulting in a somewhat lower unemployment rate. However, the U.S. saw a more volatile unemployment trajectory, which ultimately allowed for a reallocation of labor toward more productive sectors. Though painful, this shift can enhance overall productivity as workers move into roles that match their skills and the demands of a changing economy.
Editor: Let’s discuss consumer behavior. You indicated that American consumer spending has rebounded sharply since the pandemic. What’s behind this rise, and how does it contrast with the Eurozone?
Dr. Papadopoulos: Yes, U.S. consumer spending has been buoyed by massive stimulus programs, soaring stock market values, and low savings rates—factors that have encouraged Americans to spend. In contrast, Eurozone consumers are more risk-averse, increasingly saving due to a feeling of uncertainty, especially following the Ukraine invasion. This gap in consumer behavior is reflected in overall economic performance, as those savings in Europe are not translating into investments due to incomplete financial market integration.
Editor: This disparity in economic responses is striking. as we look ahead, what are the implications for policymakers in both regions?
Dr. Papadopoulos: Policymakers need to closely examine these dynamics. In the U.S., fostering entrepreneurship and supporting start-ups could sustain productivity gains. For Europe, focusing on enhancing the business environment for new entrants and ensuring that regional aid promotes innovation rather than entrenching established firms will be critical. The goal should be to create an ecosystem that encourages both scalability and innovation, crucial for long-term competitiveness.
Editor: Thank you, Dr. Papadopoulos, for providing such insightful analysis into the diverging paths of these two economies. It’s a complex but essential issue that will undoubtedly shape the global economic landscape in the years to come.
Dr. Papadopoulos: Thank you for having me. I look forward to seeing how these trends continue to evolve.
Editor: And thank you to our readers for tuning in. Stay with Time.news for more in-depth discussions on the critical issues shaping our world today.