- The economic gap between the US and the Eurozone has almost tripled since the foundation of the Euro. In 1999, the year the Euro was introduced, the US economy was 11% larger than the Eurozone in purchasing power parity terms; this gap has since widened to 30%. Even in per capita terms, the US is leaving Europe far behind: As of 2022, the average American enjoyed real income that was 35% higher than that of the average European in purchasing power parity terms, up from 27% just before the 2008 financial crisis.
- Admittedly, some of the driving forces of US dominance are its structural privileges: lower funding costs for the government (relative to growth), lower energy costs, a significant head start in tech and better demographics. With a large and liquid sovereign debt market, the US government can spend its way out of downturns and prevent any scarring effects, while Eurozone countries have much smaller fiscal space, given the risks of sovereign default and redenomination. Power prices are also significantly lower in the US because of the abundance of natural gas resources, especially helpful in the current context of energy and geopolitical uncertainty. And though the US depends on foreign suppliers for certain key critical raw materials, it possesses abundant supplies of coal, copper, lead, iron, timber, bauxite and uranium, all essential for powering the green transition. The US also benefits from being home to the world’s most dominant tech companies, which enjoy better access to early-stage financing and international talent, and is speeding ahead of most European countries when it comes to research & development and patent applications, giving it a larger competitive advantage.
- But Europe is mostly tripping over its own shoelaces: over-regulation and red tape are holding back productivity growth, while fragmented capital markets hinder efficient funding. Rules covering everything from the curvature of cucumbers to the minimum diameter of clams impede innovation and make doing business in the Eurozone harder than in the US. In the World Bank’s Doing Business rankings, EU economies outperform the US on only two indicators – getting electricity and trading across borders – and that too by a small margin. It is especially difficult to get credit in the EU, which hinders start-ups in particular, and companies need to navigate each country’s separate laws and tax rules. At the same time, EU programs to support economic development are too complicated and fragmented, resulting in backlogs (eg. for NGEU funds), and they are not nudging the private sector to ramp up capital expenditure, unlike in the US. Finally, politics and national interests have blocked progress in creating a Capital Markets Union (CMU) that would boost cross-border risk sharing, reduce the reliance on bank financing and improve capital allocation, promoting higher economic growth.
- There is one (green) silver lining: The EU is taking the lead in the green transition. Eurozone economies have significantly lower total and per capita CO2 emissions than the US. The EU has also clearly taken the lead in green goods trade: Germany alone surpasses the US in green exports and 19 out of the 27 EU economies show a comparative advantage in green goods trade. In contrast, the US is slowly losing market share and its comparative advantage for green technologies has deteriorated over time. As the EU aims to accelerate its green transformation and reach net-zero emissions by 2050, the green economy will generate more jobs to compensate for the potential deindustrialization in declining sectors.
- To restore its overall competitive edge against the US, the next European parliament urgently needs to tackle the obstacles to higher productivity growth. After the June EU parliament elections, the top priorities should be: I) reducing red tape and over-regulation, ii) re-igniting efforts to deepen the Capital Markets Union, iii) overcoming issues that hold back the speedy and timely absorption of EU funds and iv) pushing forward for a strengthened European industrial policy to mitigate the race to subsidies among EU countries.
Listen to the Podcast
External IFrame Content
This IFrame contains external resources. The provider may be collecting information about your interaction with this content by using cookies and may use this for targeting their offers. Please accept cookies in order to show the IFrame.
Download
Authors
Ludovic Subran
Allianz SE
Allianz SE
Markus Zimmer
Allianz SE
Allianz SE
Maddalena Martini
Allianz SE Branch Rome
Allianz SE Branch Rome
Björn Griesbach
Allianz SE
Allianz SE
Michaela Grimm
Allianz SE
Allianz SE
Jasmin Gröschl
Allianz SE
Allianz SE