Economics: why Europe is falling behind the USA
- Between 2010 and 2023, the cumulative GDP growth rate reached 34% in the United States, compared with just 21% in the European Union.
- This gap can be explained by insufficient investment in new technologies in Europe.
- Another reason is the low level of spending on research and development.
- The case of the United States shows that investment in this sector is correlated with an increase in productivity.
- The risk is that this European deficit will have an impact on tax revenues and on Europe's attractiveness to foreign investors.
Between 2010 and 2023, the cumulative growth rate of GDP reached 34% in the United States, compared with just 21% in the European Union and 18% in the eurozone. This measure of GDP in volume does not depend on changes in exchange rates. Over the same period, labour productivity grew by 22% in the United States and 5% in the eurozone. Europe’s gap with the United States has therefore been clear since the early 2010s and cannot be explained by the difference in growth in the working-age population.
Most of this gap is due to the difference in productivity gains. And this gap is still present in the recent period (labour productivity rose by 1.7% in the United States and fell by 0.6% in the eurozone over the four quarters to 2023). Understanding the reasons for this difference between the United States and Europe is an important area of research, on which opinions differ.
For some, the stagnation and then decline in productivity in the eurozone is due to the high level of hiring difficulties, which began to appear in 2017 at the same time as the stagnation in productivity. Hiring difficulties would have encouraged companies not to make redundancies, even if they had an oversupply of staff. However, it is hard to believe this thesis, since the United States has also experienced very significant hiring difficulties, without seeing any stagnation in productivity.
Others believe that the stagnation and then decline in productivity in Europe is due to the rise in the employment rate of the least qualified. This would have caused the average skill level of the working population to fall. But this argument is not convincing, since the employment rate in Europe has risen almost identically at all skill levels, and so the average skill level of those in work has not fallen.
The two relevant and factual explanations for Europe’s falling labour productivity levels are insufficient investment in new technologies (computers, artificial intelligence, software, etc.) and the low level of spending on research and development.
When we compare OECD countries, we see that these two variables have a strong influence on productivity differences between countries. The econometric estimate leads to the following effects: a 1 point increase in the rate of investment in new technologies leads to a 0.8 point increase per year in productivity gains. Similarly, a 1‑point increase in GDP for research and development expenditure leads to a 0.9‑point increase per year in productivity gains.
The fear is that Europe will be drawn into a vicious circle
By 2022, investment in new technologies will represent 5% of GDP in the United States and 2.8% of GDP in the eurozone. Research and development spending in 2022 will amount to 3.5% of GDP in the United States and 2.3% of GDP in the eurozone. What’s more, from 2016–2017 onwards, the investment and R&D effort in the United States increased significantly compared to that of the eurozone. At the same time, productivity began to grow much faster in the United States than in Europe. It is therefore the lag in technological investment and R&D that explains a large part of Europe’s lag behind the United States in terms of labour productivity and GDP.
How can Europe hope to catch up with the United States in terms of productivity and growth? The first step would be to change the nature of business investment. The rate of business investment is virtually the same at the start of 2024 in the United States and the eurozone (13.5% of GDP), but the proportion of this investment in technology is much higher in the United States (5% of GDP compared with 2.8% in the eurozone). We therefore need to correct the fact that business investment in the eurozone is too mundane and not sufficiently high-end.
The second measure is to increase R&D spending and university budgets in the eurozone. The resources available for university and corporate research are much higher in the United States. And, as mentioned earlier, these resources are an important and significant determinant of productivity gains.
It is to be feared that Europe will be drawn into a vicious circle of low investment in new technologies and research and development, and hence low productivity gains and growth. Firstly, these declines could have a negative impact on Europe’s attractiveness to foreign investors. Secondly, they could reduce tax revenues and the ability of European governments to pursue policies to support innovation and boost Europe’s attractiveness.
