the main thing is in the holidays

At first glance, Europe is moving away from the US a little every day in purely economic terms (total GDP). Given the structural problems affecting the old continent, it now seems normal that the US is growing rapidly year after year. The world’s greatest strength is a dynamic, flexible, entrepreneurial and inventive economy. Meanwhile, in Europe it is taking the lead in creating rules for those American inventions (artificial intelligence, for example). While America invents the technologies that will mark the next revolution, Europe invents the rules, Despite all the above and although it may seem surprising, the EU is managing to agree with the US on some key indicators. What’s more, if Europeans worked the same number of hours as Americans, the EU’s GDP per capita would be equal to that of the US.

The European Union suffers from several weaknesses compared to the United States. The list is endless: absence of tech giants, hardly any innovation, there are ‘lots’ of universities here (in Europe), the labor market is rigid, lack of entrepreneurial spirit, limited availability of private capital. .. All this, combined with an average overall economic performance (in the market of affairs), has developed a kind of ‘black legend’ about the EU economy, a mantra that is constantly repeated and not entirely true. Is: The economic gap between the EU and the US is getting bigger.

Bruegel researcher Zlatan Darvas explains this perfectly in a document published by this institute at the end of last year: “The often heard statement about the US and the EU is wrong: in terms of production growth, “the EU dropped. In fact, it has overtaken the US in terms of output per capita, output per employee and especially output per hour worked.”

The myth or ‘black tale’ of Europe

If the EU has moved closer to the US in these highly relevant indicators, why does it dominate? The ‘dark tale’ about the European economy That has been repeated and has become the great ‘truth’ in recent years? The truth is that total GDP (everything produced by the US and the EU) is far greater when analyzed in US dollars. But this is largely due to the fact that US demographics are much more favorable and the US dollar has significantly outperformed the euro in recent years.

Aslak Berg, a researcher at the Center for European Reform, told in a paper Published in December last year it was found that in 2007, the United States and the European Union had similar demographic burdens: the dependent population in each of them represented about 49% of the working-age population. However, by 2022 this figure had increased to 57% in the European Union and 54% in the United States. “This seemingly small difference means that each worker in the EU would have to increase output by about 2% more to keep per capita GDP at the same level as the United States, assuming all other factors remain the same. Will remain the same.”

the result is A relative demographic dividend in favor of the United States, which will continue to be a major factor as Europe ages rapidly, while the United States continues to benefit from its highest birth rates ever. Each worker in Europe has a larger dependent population to support and the demographic burden is growing faster in Europe than in the United States. Although in the very long term everything indicates that the United States will follow a similar path to Europe, the slow pace of demographic change allows the United States to continue to benefit from more favorable demographics during the coming decades, this expert Is said.

However, when the demographic factor is eliminated (countries whose population grows more heavily tend to see stronger GDP growth), it can be seen how both economies respond to the movements of their currencies in terms of GDP. Reason has experienced cycles of convergence and distance. per person. Official data suggests that from the creation of the euro until 2008 the EU experienced a kind of ‘miracle’ (which it was not). From 2000 to 2008, the EU also managed to overtake the US in per capita GDP (measured in US dollars). However, in 2022 and after several crises, the European economy was once again one third smaller than that of the United States. “It feels like a disaster,” says Darvas. But it turned out that it was not so.

“The truth is that there was no European miracle between 2000 and 2008 No European disasters between 2008 and 2022, The indicator, GDP per capita in US dollars, is useful for measuring economic output at a given point in time, but not for assessing relative time trends. This is because it is significantly affected by exchange rate fluctuations and measures output at current prices, which vary between countries.” In a simple way, it can be said that, the cycles of dollar appreciation During the 1980s, Europe’s economy faces the same problems as the US. However, in cycles in which the Euro strengthens, the EU gains and sometimes even overtakes the US. It’s all noise.

The key is in per capita gross domestic product (PPP).

So how does Europe’s economy compare to America’s? Well, Darvas resorts to an indicator that is sometimes somewhat controversial, but which is the most reliable for this type of situation: GDP and per capita income in purchasing power parity: “the appropriate metric for international comparison of purchasing There is GDP adjusted by power parity (PPP) and GDP per capita is PPP,” says this economist.

This indicator corrects exchange rate fluctuations and differences in different national prices. GDP per capita in PPP is the most commonly used metric to compare development between countries, as it eliminates distortions arising from demographic growth. The US population has grown faster than the EU population in recent decades and this trend is expected to continue. This means that although the level of development in the US and the EU is moving at a similar pace, US GDP will grow more due to demographic factors

one of two.

What would happen if GDP per capita in PPP was used to buy from Europe and the US? What is happening is that, to the surprise of many, the EU has become closer to the United States in terms of per capita GDP: in 1995 the EU’s per capita GDP was 67% of US GDP ( The first year for that data is available from the EU27), While in 2022 it already represents 72%, Still, Darvas points out that, unfortunately, there are different stories within the EU. Although competition with the US has generally declined, there are still countries that have done very badly and others that have done very well.

“The EU is made up of countries with different levels of economic development. Western EU countries moved away from the US between 1980 and 2004 (from 88% to 80% in terms of GDP per capita), but since then, “Per capita income has fluctuated around the same level,” says Darvas.

The gap between Northern European Union countries and the United States has remained more or less the same since the 1980s. However, it is the countries of the Eastern European Union that have united most impressively: 32% of GDP per capita in 1995, more than that of the United States. Inching closer, reaching 55% in 2022. Ultimately, per capita GDP in the South was 73% of the United States level in the early 2000s, but fell to 61% after the harsh effects of the pandemic. However, this gap may narrow in 2022, 2023 and the coming years.

Holidays ‘problem’

To eliminate this ‘shake’ of the data, it would be interesting to include the factor of hours worked. There is a lot of literature on this issue. For very diverse reasons, Europeans work far fewer hours per year than Americans, Although there are countries in Europe that work the same number of hours as the United States, the truth is that the average is much lower. Economies like Germany or Denmark don’t even reach 1,400 hours per year, while the US averages more than 1,800 hours per employee. Darvas explains that this is because We have a lot of paid holidays in the EU, holidays and, above all, shorter working days. Working fewer hours per year means lower levels of output, unless your productivity is very high.

Regarding paid holidays, the minimum holidays in most countries in Europe range from 20 days in Poland to 28 days in the United Kingdom. To that we have to add holidays (public holidays, There is more uniformity in this parameter, because according to the OECD, in the US they have ten days, while in European countries there is considerable diversity, but it can be said that the average in the US is slightly above those 10.

And what would happen if Europeans worked the same hours as Americans? To see what would happen in terms of the same number of hours worked, it is more useful to compare output per number of workers and output per hour worked. since 2005, The EU-27 is tied with the US in both metrics, “Convergence was faster in terms of hours worked than in terms of number of employees, indicating that labor productivity in the EU is closing the gap with the United States,” says Darvas.

Hungarian economists point out that Germany, the EU’s largest economy, has the lowest number of working hours per employed person. This is related to greater rights for German workers and the stronger presence of voluntary part-time work (people who work part-time because they prefer to work fewer hours). In 2022, a German worker will produce 20% less than an American worker, simply because they prefer to work less. In terms of output per hour, a German hour of work was 1% more productive than an American hour of work,” says Darvas. That is, if Germans decided to employ the same number of people as Americans, they would be richer.

Productivity, measured as output per hour, even exceeded the US value in Luxembourg, Ireland, Belgium and Denmark. In the Netherlands, it was the same as in the US, while it was slightly lower in Austria (1%), France (2%) and Sweden (5% less).

Importance of time and leisure

The issue is that European countries value free time more and prefer to work fewer hours, thus earning less monetary income, But achieving quality of life is, perhaps, more or less stressful., It is difficult to measure, because there is no accurate metric that can indicate the stress or happiness levels of a German, a Spaniard or a Dane compared to an American. However, there is an indicator that attempts to measure happiness on a global scale and it turns out that the first three countries are from the European Union.

In short, when the economy is analyzed in terms of per capita purchasing power parity, the EU has narrowed the gap with the United States over the past two decades. The EU’s convergence with the United States has been even faster in terms of output per hour worked. What’s more, “Some Western and Northern European Union countries are at least as productive as the United States in terms of output per hour of work, but Europeans prefer free time to money. Thus, the statement that “The EU is far behind the US and the conditions of production are wrong. The key question is why the EU economy is performing so well despite its many well-known weaknesses.”