How to start fixing Europe’s economy

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Europe has long looked across the Atlantic at the US economy with a mixture of horror and awe. The EU population would not accept the health and social inequalities in America, but it wishes it could be as rich as the US. That tension was amplified in 2023 when the US economy grew 3.1 per cent in the year to the fourth quarter, dwarfing the 0.2 per cent the EU managed. As Americans revel in unexpected economic strength, France feels forced to cut back public spending and Germany frets about recession.

Over a longer period, European performance is both better and worse than people tend to think. It is not correct to say, as the European Council on Foreign Relations did last year, that the US economy is now more than 50 per cent larger than the EU’s economy, having been smaller in 2008. Those figures rely almost entirely on exchange rate movements. But it is true and fair to highlight 2008 as something of a turning point. Before then, the EU (excluding the UK) had a larger economy, and now it is about 10 per cent smaller.

But the reasons for this change are nuanced. Much of the difference before and since has come from a more rapidly rising US population. Real gross domestic product per head grew 53 per cent between 1995 and 2022 in the US, compared with 47 per cent in the EU.

Break this down further and demographics clearly plays an even more decisive role. Partly because Europe has an older population and partly because its people don’t die as early, GDP growth per person of working age has been broadly the same on both sides of the Atlantic since 1995. The European growth rate just eclipses that of the US, growing 56 per cent compared with 54 per cent. For sure, European levels of GDP per person of working age are lower, but this reflects choices to have longer holidays, retire earlier and work fewer hours.