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Capital concerns: What’s the matter with Europe?

The United States has had a much stronger economic recovery than Europe — more than can be accounted for by differences in population growth.

Capital concerns: What’s the matter with Europe?

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NEW YORK: It seems worth asking what problems Europe really has — that is, problems that are different from our own. In discussing Europe-US comparisons, I find it helpful to distinguish between developments before the Covid pandemic and developments since, as we have followed quite different policies in response to that upheaval.

So, how did Europe and America compare economically in 2019? Overall, they were surprisingly similar. I fairly often encounter people who believe that Europe suffers from mass unemployment and has lagged far behind the United States technologically. But this view is decades out of date. At this point adults in their prime working years are actually somewhat more likely to be employed in major European nations than in America. Europeans also know all about information technology, and productivity — gross domestic product per hour worked — is virtually the same in Europe as it is here.

It’s true that real GDP per capita is generally lower in Europe, but that’s mainly because Europeans take much more vacation time than Americans — which is a choice, not a problem. Oh, and it should count for something that there’s a growing gap between European and US life expectancy, since the quality of life is generally higher if you aren’t dead.

Just to be clear, Europe isn’t utopia. There are many real problems, even in nations with social safety nets that American progressives can only dream of. Sweden has a problem with gang violence. Denmark is one of the happiest nations on the planet, but there are nonetheless a significant number of melancholy Danes, and the country has experienced a rise in right-wing populism. Nonetheless, Europe is in astonishingly good shape, economically and socially, compared with almost any other part of the world. All that being said, most people have the sense that Europe is in relative decline and that its economy has grown more slowly than America’s over the past few decades. And this sense is correct.

In real terms, the US economy grew a lot more over 1999-2019 — 53 percent versus 31 percent. But almost all of that difference is explained by the fact that the US working-age population (conventionally, if somewhat unfortunately, defined as adults 15 to 64) grew a lot, while Europe’s hardly grew at all (and has been declining in recent years). Real GDP per working-age adult rose 31 percent in the US and 29 percent — basically inside the margin of error — in the euro area.

The United States has had a much stronger economic recovery than Europe — more than can be accounted for by differences in population growth. And this probably does in part reflect Biden policies: America did much more to stimulate recovery with government spending.

Furthermore, while inflation has been plunging in Europe in much the same way it has in the United States, officials at the European Central Bank at least sound much more reluctant than their US counterparts to reverse recent rate hikes, so Europe is running a much bigger risk of recession.

So what’s the matter with Europe? No, the continent hasn’t been overrun by immigrants. No, strong welfare states haven’t stifled the incentives to work and innovate. But Europe does suffer from policymakers who are excessively conservative, not in the left-right political sense, but in the sense of being too worried about inflation and debt, and too hesitant about promoting economic recovery.

Paul Krugman
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