Why Europe Fell Behind the United States

Europe is in Decline Europe is in crisis Europe is falling behind the United States and China you've heard those sentences a thousand times whether it be on the news or on YouTube channels they say that Europe is becoming economically irrelevant and this graph of GDP per capita compared to the US seems to confirm it we see this clear Divergence since 1995. however then come the simplistic explanations like an aging population the absence of tech Giants and supposedly lazy Europeans and those explanations are mostly myths especially when you consider that some European countries have managed to power forward so what are the real explanations for Europe's economic Decline and is Europe actually already close to solving its problem this video was made possible by into Europe's patreon supporters and I want to give a shout out to the Daily upside for partnering with us on this video check out the link in the description to sign up to their free business newsletter to answer these questions we need to understand how we got here because in the 1990s Europe was seen as an Unstoppable economic force with people writing about the coming economic clash between the United States and the European Union the starting point of this is this chart of gross domestic products or GDP which measures economic outputs while Europe's GDP has grown continuously over the past decades other countries grew faster leading to a relative decline for Europe and a fall of Europe's share of global GDP but just looking at this one number won't tell us the full story GDP measures the total income earned in an economy looking at it like this total income can be measured as the number of people that worked how many hours they worked and how productive they have been by breaking it down we can understand why the EU has historically had a lower GDP than the United States the reason for that is that European workers tend to work 15 to 25 percent fewer hours than their American counterparts thus producing less outputs it also allows us to understand why the us over the past Century has grown faster than Europe with more population growth from immigration and higher birth rates the United States had more additional workers to grow its economy yet at the same time Europe compensated for this by being a productivity Champion since that in 1995 if Europeans worked the same amount of hours As Americans several Western and northern European countries would actually have had GPS per capita that are higher than that of the US this choice to work fewer hours is a conscious one by Europeans and their governments which allows for better quality of life at the expense of GDP but let's not stray too far from the topic of this video so back to the GDP difference between Europe and the United States while ours worked and numbers of workers explained most of Europe's relatively smaller GDP compared to the United States up until the 1990s it's not what has both economists and politicians most worried instead their concern is on Europe's lost productivity Edge on the United States before I get into that I want to talk about today's sponsor the daily upside if you have a hard time finding reliable news covering what's unfolding across the global economy the daily upside might be your solution the daily upside is a free business newsletter that was founded by a team of investment bankers Scholars and journalists with the sole purpose of contextualizing the news against the Thematic undercurrents shaping the broader business climates every morning the Delhi upside sends you a morning breathe followed by more detailed stories across Tech Finance and investing it's become something that I read in the morning as it offers concise yet insightful pieces that help me prepare for videos like this one as recording this video last week they published this piece on the world's largest ever four day work week trial that was conducted in the UK it turns out the vast majority of trial subjects favor permanent long weekends with company Revenue remaining effectively unchanged and actually increasing 1.4 percent as someone who looks to deliver analytical insightful and unbiased news I can't recommend the daily upside enough check out the link in the description to sign up to the video upside for free now back to the video to find out what happened in Europe I went to Brussels to interview one of Europe's most prominent economists Rodriguez a foreign minister for Portugal and MEP for the past 25 years she's worked on European competitiveness and she actually wrote the eu's first strategy to deal with its greatest economic challenge back in the 1990s as the EU started to notice some of the changes in the global economy Europe was faced with two potential paths we could either go to reducing wages or to go another way which would be to invest in creativity Innovation education to improve competitiveness and that transformation and understanding was driven by one thing it was fundamentally the digital Revolution I must say in anticipation for this trend position the EU set out the Lisbon strategy in 2000 which aimed to transform Europe into a knowledge economy it aims to raise r d spending to three percent of GDP invest massively in digital infrastructure and train a highly skilled Workforce the success of the countries that fully adopted it pointed to being the right strategy but it and its successor program Europe 2020 failed to be implemented by several European countries when we start launching the strategy we had already a proper of lack of means financial means and the capacity really to to implement a lot of Europe's economic trouble can be explained by its incomplete transition to a knowledge-based economy since 1995. in fact according to this study by the University of honinga the US's impressive increases in productivity between 1995 and 2005 can largely be explained by the development of intellectual property and ite in other words the knowledge economy the thing is Europe started in a relatively bad position to adapt to this transition and after going through a bunch of papers studies and reports I compiled the four main reasons the first is simply that Europe was late to the digital transition which started in Silicon Valley in California this meant that the U.S simply had a head start connecting schools and could then build on that to innovate more with many Business Leaders already being digital natives in the 1990s the second reason that affected Europe's transition was the nature of its labor markets both High youth unemployments over the past two decades and the older population means that new ideas took longer to spread to Europe and its companies than it did in the United States this was compounded by the fact that Europe has less economic competition and then in the United States in part as a result of economic fragmentation this additional competition in the United States means that American firms are generally better managed than the European counterparts as a result of survival of the fittest Dynamics these are forced to deploy new technologies better and faster than European firms leading to more efficient use of resources and a higher productivity this was further worsened by the continued fragmentation of the European market particularly for services in Europe cross-border trade and services is about half the level of European trading Goods as a result of both cross-border regulation and language barriers this offers a competitive advantage to the homogeneous us which could quickly build Tech Champions at home that would then dominate The Globe this fragmentation and diminished competition means that European companies are much smaller than their American counterparts and I'm not talking about gaffa-like tech bmoths small European firms make 60 of total employment versus 20 in the United States these firms are usually less productive and less able to invest in new technologies like digitalization and finally perhaps one of the most important reasons for the past decade is the aftermath of both the 2008 financial crisis and the 2015 Eurovision crisis during this period we really miss the the means that's where Europe really start lagging behind clearly government slash r d and education budgets and decreased overall investment as part of panic-driven austerity this sunk innovation in Tech created a bad investment climate for European companies in fact it took 11 years for investment in Europe to recover to pre-financial crisis levels the absence of investment for new emerging sectors meant that Europe continued to focus on more historical economic sectors which had less room for revolutionary change or growth so to summarize Europe is a continent with a fragmented economy and an aging Workforce that lagged behind on digitalization and Innovation due to austerity for the past two decades it's actually possible to distinguish between four different categories of countries in Europe and because I know you're dying to see how your country is done here's a beautiful chart looking into the labor productivity and productivity growth over the past 20 years first are the countries that are doing well with Denmark Sweden Switzerland and Ireland which are close to being on par with the United States when it comes to productivity growth then there is a low productivity low productivity growth category which is made up solely of Greece which saw productivity collapse after a decade of intense austerity most of Europe over the past decades has belonged to the stagnating high productivity low productivity growth category this includes countries like France Spain or Italy but also countries which as first sight are performing well like the Netherlands or Finland and to a lesser extent Germany then there are the countries with low productivity and high growth like Poland or the Czech Republic and other post-communist countries that have been catching up economically with the rest of Europe since they joined the European Union so now we know why Europe underperformed and that this underperformance affected Europe much more broadly than we could have thought so where does that leave Europe and can it catch up with the United States well while most European countries fall under high productivity low growth dividing Europe geographically makes more sense if we're to look at the future of Europe and these lines correspond roughly to northern southern and Central and Eastern Europe and our special snowflake category France first let's focus on the countries that face the biggest challenges southern Europe southern Europe although a bit behind was mostly keeping up with northern Europe until 2008. when the financial crisis came then these differences between member states came much larger as a result of bad demographics with some of the lowest birth rates in Europe and exodus amongst young people and massive deaths as a result of the financial crisis these countries particularly Italy and Greece will struggle to invest and improve their productivity in the future then they're essential in Eastern Europe which started from a low productivity base and saw record productivity growth over the past two decades as they caught up with the rest of Europe while they don't share the debt problem of southern Europe terrible demographics mostly due to immigration to Western and Northern Europe will put constraints on their prospects in the coming decades then there is Northern Europe which adopted relatively well to the knowledge-based economy and experienced little austerity during the financial crisis they were able to keep investing in education Tech and digitalization and these countries were also able to compensate somewhat for their bad demographics thanks to immigration from the rest of Europe but also other parts of the world and due to steady growth in the 2000s and 2010s they have only limited debt meaning they can invest more into the future as a result they're relatively well positioned and the last category is made up solely of France as a Frenchman I'm hesitant to stroke the egos of the French further by giving them their own category but they fit somewhere in between the poor performance of southern Europe and the relatively good performance of northern European countries France has far healthier demographics than the average European country owing to a higher birth rate but their debt being much higher than northern Europe means they have more limited room for investment to correct course in the future as you've noticed there's one European country that I have not mentioned and that is the United Kingdom which despite having a solid tech industry has had little productivity growth and little investment over the past three decades in fact as a result of brexit some have put the country in the southern Europe category economically speaking so while Europe is down there's actually some encouraging developments during covid Europe learned from its mistakes and didn't go for austerity once again instead of opting to invest billions into its economy for southern Europe the coveted recovery package Next Generation EU is actually a Lisbon strategy package in Disguise but this time with the budget that could put them on track to catch up with northern Europe and the coveted pandemic provided shock therapy levels of digitalization to the lives of many Europeans even in tech there are some good news for Europe with the continent's startup ecosystem maturing along with funding opportunities for European companies potentially opening the door to New Economic sectors and revive productivity growth yet despite reasons for cautious optimism on the financing front Europe faces several big challenges it will face difficulty keeping its aging population skills up to level and increase welfare and pension spending for an aging population will stretch already thinned out government budgets particularly in southern Europe where high levels of debt make it harder to invest its tamed version of capitalism as opposed to the Cutthroat capitalism in the U.S leads to less well-managed and thus less profitable and productive firms than in the United States and more important still the tendency to open the subsidy tab every time it feels it's falling behind means it isn't pushing for the structural reforms to its Market or business culture that may guarantee its success in the future but these are topics for other videos but what do you think can your performance economy will Eastern and Central Europe continue enjoying sky-high productivity growth and are you interested in more stories about Europe's economic fortunes that let me know in the comments down below this video took quite some research and time to make it involved a trip to Brussels and in the future I'd like to make more videos like this one where I talk about the future and the challenges facing Europe so if you feel more like you want to support this Channel and go check out the interior patreon to make sure I can produce more high quality explainer videos like this one into the future

Channel: Into Europe

Views: 270,706

Keywords: Europe, European News, EU, EU News, European Union

Id: ViM_GHOK1yU

Length: 13min 55sec (835 seconds)

Published: Fri Apr 14 2023

Reddit Comments

[u/yyytobyyy]

People are forgetting that there is a full fledged war on our borders, that affects the energy prices and these days everything stands on the prices of energy and resources.

We don't have much gas or oil, not much rare metals, higher urbanization than the USA, which leads to higher property prices.

Considering all of this...we are doing good.

[u/trisul-108]

"Hero", "Zero"? Really?!?

The EU is the most democratic and successful union of sovereign nations in the history of mankind, it is one of the three comparably largest economies on the planet with no. 4 trailing way, way behind.

The US, on the other hand is a divided nation that narrowly avoided a coup that would have dismantled the Republic. The US was unable to do a peaceful transfer of power at the last election and the second largest party is working with enemies of the US in an attempt to bring down the Republic. Some "hero".

Yes, it is true that the US holds the global reserve currency and has thus been able to leverage this into a mountain of federal debt ... more than twice the EU collective debt.

The EU and US are allies in what is turning into a war between democracies and autocracies for control over the planet. They need to work together in common interest and not engage in this type of pissing contest. The only reason I wrote the above is to illustrate how easy it is.

[u/lawrotzr]

In my view, the EU is a much happier place to live in according to almost every non-economic measurement I can think of. Safer, healthier, more affordable, fairer, more culturally diverse, more interesting, more sophisticated, more sustainable, the list goes on. Partially, we must thank our policymakers for this.

Economically though, the EU clearly lacks decisiveness, mandate and successful policies. It is (eg.) a shame that the EU’s 3rd largest economy hasn’t grown for the past decades (Italy), that no significant tech company is of European origin, that access to capital for start-ups is extremely fragmented and difficult in Europe, that most countries are ridiculously bureaucratic in their own national ways, that we fail to keep successful scale-ups in Europe as business valuation in the US is increasingly superior, and Europe hasn’t found its own sustainable and scalable source of energy yet. Our reflex is either to announce big government-led investment plans or increase regulation. I think this not the right direction, the EU should take its investment climate and business environment way more serious and look at it holistically. And yes, that is difficult because it means acknowledging that you should do a better job in some ways.

What is positive, is that some countries in Eastern Europe seem to be an economic success story. These countries catching up, also means a transfer of capital from Western to Eastern Europe. If you now look at the Baltic States or Poland, their development and economic growth is incredible given that only 35 years ago they were under the Soviet-led Warsaw Pact.

So it’s not black and white. Still, the EU (and even more so national governments) should put more effort in facilitating business, especially in innovative sectors. We should be able to grow at the same pace as the US economically, given that everything else here is superior. (Or at least, that’s my opinion)

[u/Annual_Nature7675]

I'd like to think of this more long-term. The US has been outpacing Europe for some time now. If we choose to ignore, for the sake of simpler analysis the Cold War and World Wars we come to a simple conclusion. Europe has been and is a continent of competing nations who at best have unnecessary layers of bureaucracy or at worse sabotage one another till some other outsiders rises to take over both sides turfs. The United States has nearly since inception been more unitary and united than the EU is now. They've had all the advantages that make the EU so good for all involved since nearly day one. Even so. Standards of living and political unity in the United States is abysmal.

Even with this huge disadvantage in the end Europe is the better place to live on basically every metric. We've done well for ourselves. The greatest danger we face is complacency or being content with second best.