Why Is Europe Always Lagging Behind the US?

the Industrial Revolution started in Europe in 1760 and kicked off the transition to the modern global economy we have today with mass production that utilizes machinery and technology in addition to land and manpower to provide goods and services at a scale it was once thought impossible Europe with its dense population and internal competition between different countries was at the Forefront of technological and economic advancements before that as well they were pioneers of truly global trade and the Dutch even created the corporation as a way to fund risky Ventures global trade industrialization and modern corporations would have made our world today thousands of times wealthier than it was two centuries ago the world has produced more economic value in the last 40 years than it has in every other year since humans crawled out of their caves combined but the birthplace of the initial developments that made this all possible has started to fall behind Europe has had stagnant economic growth for more than a decade now and that's why the rest of the world has been doing pretty well as a all even ignoring the growth of countries like China which has been an outlier over this time period Europe as a whole has been doing a lot worse than their most obvious point of comparison the USA these are both large economic regions with a lot of Natural Resources very skilled populations good functioning democratic governments and modern infrastructure to make them globally competitive in a range of Industries but Europe has lagged behind and for a while now not just the last decade of course there are the headline issues brexit the Eurozone crisis youth unemployment and ongoing social issues over aging populations and retirement but it's important to dig deeper and ask why this is happening and keep asking that question until we get to the foundational issues holding Europe back with so many advantages and such a head start understanding the underlying reason why Europe has faced so many challenges and setbacks to its economic growth is going to be crucial to make sure that it doesn't happen everywhere else and also potentially to get Europe back on track so what caused Europe to start lagging behind the US should economists expect this kind of slow down everywhere and finally why might this be a blessing in disguise for Europe's economic future this episode of Economics explained was brought to you by guardio today we spent 415 minutes surfing the internet potentially exposing critical information such as private messages passwords and banking information a lot of people also some famous YouTubers believe a 2fa keeps their accounts 100 secure however a hacker will most likely easily bypass all 2fas and gain access to all of the information you intend to protect even our team at ee has also recently experienced some hacking incidents that led to sleepless nights and we continue to receive phishing emails in our inbox every day God I O is a browser 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remove those threats and enable real-time protection you'll also get 20 off their monthly subscription that covers five users now before we get into it I want to quickly give the big disclaimer that this video will look at some future projections but nobody can predict the future least of all economists I also want to quickly mention that once we put this video together we noticed that a small Creator made a video just over a month ago on the same topic we mostly cover different points here but his video was very well made so we wanted to give it a mention but with that out of the way there is the general expectation amongst economists that countries just naturally follow a predictable pattern of growth undeveloped economy start off relying on basic Agriculture and informal markets and then they become developing economies as they either create industrial Machinery from scratch like during the Industrial Revolution or they get given it through foreign investments as has been the case with most developing economies recently building it from scratch is obviously the slower process that's why Europe took nearly 200 years to go from agriculture to industry but a country like South Korea was able to do the same thing in two decades being an industrializing economy means that output is rapidly growing as more tools are used to leverage existing resources after an economy becomes fully industrialized it gets to the hard part which is transitioning from becoming an economy that just makes stuff to an economy that adds value in other ways like providing services and getting directly involved in markets abroad the modern Corporation with shareholders first advised by the Dutch is the most efficient way to do this advanced economies have got there by upgrading their ability from Simply being able to make things to being able to get everybody else to make things that might sound like advanced economies are taking advantage of poor countries to do a lot of their work for them and sometimes that happens but more often than not this can be a mutually beneficial Arrangement it's better for a developing country to be given the opportunity to manufacture something like a car rather than a hammer both of these products need to be manufactured but the car is a lot more technical so the developing country would be dependent on an advanced economy to give them the designs and tooling needed to manufacture it whereas a hammer well they could probably figure that out for themselves the advanced economy benefits from this Arrangement because they get to use a low-cost labor force to manufacture their cars which means that they can offer them to the Global Market at a more competitive price and bring more profits home to the advanced country the developing economy also benefits because building a car from scratch adds a lot more value to the raw materials than building a hammer if a labor cost is a lower portion of the total cost of a good or service then there is more room for movement on wages while still remaining competitive Advanced High income countries that still manufacture a lot of things themselves but the goods that they do produce are always highly valuating it doesn't matter if it takes a team of Engineers thousands of hours to put together a jet engine in the USA or the UK because the end price of that good is tens of millions of dollars and the labor cost even though they are higher on a per hour basis are still only a tiny fraction of the end cost developing economies normally don't have the kind of facilities or expertise to build these world-class products and since advanced economies can produce them domestically with no major loss in price competitiveness there is no motivation for them to give developing economies the investment and training they would need to be able to do it for themselves even if the goods would be slightly cheaper it's not worth the risk for the companies based out of advanced economies to share their world-leading designs with factories across the world because there's a good chance that they will just get stolen and it's very hard to get those design secrets back once they're out there also while it may be slightly cheaper it could end up as a less competitive good overall because there will be less demand whether they would admit it or not people would prefer to fly across the Pacific Ocean with jet engines made in the USA rather than say China this means developing economies normally grow by starting with really basic items and then they start building slightly more advanced items over time but eventually they run into a problem eventually they go from making very basic items for not very much money to semi-advanced goods for a decent amount of money and then their people get used to this higher income and get out competed by other developing economies coming up behind them the only way to avoid the middle income trap as this is known is to either continuously suppress people's wages which is obviously not a very politically popular choice or to develop Advanced Industries like the rich economies which is not very easy especially these days when those advanced economies have had such a head start it does happen Israel is an example that we explored last month that went from being a barely developing economy to an advanced economy within two decades but it's rare a lot of developing economies are hitting a brick wall right now with the economic shocks that have slowed their transition again we have made an entire video on that recently as well so I don't want to repeat too much here the reason this is all important is that Europe is primarily comprised of economies that are already advanced but most of them became Advanced a long time ago especially in Western Europe Europe does have its own International companies operating in advanced Industries but not as many collectively it has about as many Global 2000 companies as Japan but with a much larger population it also falls well behind the USA that has roughly twice as many major global companies as all of Europe combined a lot of these companies also only exist to service their home countries orange is one of the largest telecommunications companies in the world and the 31st largest company in all of Europe but if you don't live in Europe you probably would never have heard of it companies can still do well by servicing just the European market because it's made up of wealthy advanced economies but they only became Advanced because they built out these modern Industries before anybody else and today they lack the Innovative global companies to compete with the USA and even the new players coming from Asia in a way they're kind of living off their Advanced country inheritance while the USA is at the prime of its career of course before the comments start listing European companies with global operations there are exceptions to this Germany in particular is home to a lot of world-leading companies in a range of high-tech Industries and even France is the global epicenter of fashion which is a very lucrative and surprisingly large industry exceptions exist but in aggregate the continent is just underrepresented in global corporations and whether we like to admit it or not these corporations are the conduits through which advanced economies become advanced economies the correlation between Global 2000 companies per capita and GDP per capita is very strong but Europe falls behind now people might point out that there are lots of very small economies around the world that are Advanced but are not home to Major Global corporations a lot in Europe for that matter places like Luxembourg have the highest GDP per capita of any non-micro nation in the world and while they cheat a little bit to get that figure they have a very prosperous economy in its own right but these smaller countries get there by providing services to larger countries that do have Global wealth generators Singapore Ireland Hong Kong Luxembourg and even Switzerland to a lesser extent have all become advanced economies by providing Financial Services to other larger advanced economies okay Point made to become an advanced economy a country needs to have advanced industries that are not highly dependent on worker wages or industries that they can operate exclusively across the world to bring profits back home Europe had an early lead because it was the first continent to properly industrialize but now it's falling behind the USA and Asia especially in Tech which is one of the easiest Industries to operate across the globe the surface level issues that make headlines have all been accelerated by this under concentration of global operations but we can go deeper again and ask the next obvious question why doesn't Europe have more global companies it's difficult to directly compare the underlying characteristics of the USA with Europe because the US is one country and while it's a very large and diverse country it's still not nearly as diverse as Europe which is made up of dozens of countries that speak dozens of different languages and have different governments and even on an economic level have wildly different productivity Ukraine and Kosovo have a GDP per capita of one-tenth out of Luxembourg an island so the differences within Europe are arguably larger than the differences between Europe as a whole and the USA generally though European countries are seen as more egalitarian placing a stronger emphasis on comfortable working conditions and social protections to make sure that everybody lives comfortably at the expense of higher taxes for higher income earners that relaxed attitude in contrast to the USA's Cutthroat growth at all cost economic attitude in theory goes a long way to explaining this divide but a lot of countries in Europe especially the ones that are famous for their strong social policies actually have higher rates of involvement with new business we saw this recently in our video on Germany that people are more likely to start a business or work in a risky new startup if they have a strong social safety net to support them if the business doesn't work out Europeans also work Less hours preferring a comfortable work-life balance when compared to their U.S counterparts and the data does back this up in Germany and France the two largest economies in Mainland Europe employed people work for 1400 hours and just over 1500 hours a year respectively yes the supposedly lazy French work more than the industrious Germans I'm sure my German researchers are going to love that statistic but both of them fall well behind the USA where the average employed person works almost 1800 hours these working hours are down significantly in the USA about 25 from their peak in the 1950s and 10 from 2000 but they are down a lot more in major European centers France and Germany both used to work a lot more than the USA but now they work Less in Germany those hours are down by close to 50 percent so yes growth in Europe has been slower but a lot of that has been major economies trading off higher output for better working conditions and yes that does cause problems especially when a lot of our economic systems are built around stable growth but I'm sure a lot of people would happily trade those problems for an extra 200 hours a year economics is a study of how people interact with things of value and there's not much more valuable than people's time so it's hard to call this an economic failure on Europe's part it's more of a decision that like all economic decisions has trade-offs it's just that these trade-offs make for better headlines now this is not the only Factor workers in the USA work a lot less than a lot of other workers from less prosperous countries around the world the other big factor is worker productivity or how much value a worker produces in a given hour of work to make workers more productive they can either be better educated so that they can work in more skilled roles or they can be given better tools to work more efficiently between the USA and Europe education is roughly on par with Europe doing slightly better overall but the USA being more attractive to school migration so overall very similar the USA though just has much better Capital with the average business investing a lot more into their workers than the same businesses in Europe the reason they do this is because they can the USA is a very attractive destination for investors it uses the world's Reserve currency it has a strong legal system a strong culture of innovation it's English speaking and it's a One-Stop shop for investors in the USA it's not really worth investing anywhere else and for foreign investors the USA is the first logical place to start investing abroad compare that to investing in even Europe's major markets where investors would have to navigate through multiple legal systems and tax codes in multiple languages or to get access to markets that have historically underperformed the us having access to this investment to build capital is how multinational corporations are built even if Europe does have more new companies with better ideas in the USA if the US companies are the ones that get the capital to rapidly expand across the world then they are always going to win and that Trend makes it even more attractive to investors and something of a self-fulfilling economic prophecy the only other question left is will this trend last obviously nobody can predict the future least of all economists but the lead that the USA has been able to build through the advantage it has with its massive global companies especially tech companies is probably not going to be as strong in the future big Tech Giants have had free reign of the entire planet for a long time and since the USA was a large English-speaking country with lots of access to investment most large tech companies originated from there before spreading around the world but now laws are catching up with this new technology and that's coming at the same time as a shift away from globalization and towards domestic Industries run within economies or with their close neighbors Europe may not have benefited As Much from the modern globalized economy but it won't suffer as much from its contraction either because it already has the European Union which is built around the idea of close trade between close neighbors even if Europe never catches up gross output is really only one aspect of economic success and Europe is just as far ahead of the USA in many economic metrics as the USA is ahead in all of the others a big part of the success of the European economies will be dependent on how well the EU fulfills its objectives to learn more about that watch the video linked on screen now about whether the EU will fail or if you prefer to listen to these videos we make all of them available as well as full interviews with world-class economists up on our Spotify page thanks for watching mate bye

Channel: Economics Explained

Views: 824,026

Keywords: economics, economics explained, economy explained

Id: tsahMxXdW30

Length: 17min 10sec (1030 seconds)

Published: Wed Jun 21 2023