European economies appear on the mend. French business confidence has reached its highest levels since spring 2001 whilst German business confidence is rising quickly, with GDP growth in Q2 a (for Germany) spirited 2%. Looking over the longer-term there is increasing evidence that Europe?s economic inferiority complex with the US is misplaced.
Of particular interest is a new paper from American economist Robert Gordon, reviewed by Sam Brittan in the FT (subscribers only, I?m afraid), that examines the growth experience of the US and Europe, in particular North-West Europe, over the last 200 or so years.
America has been ahead since the 1870s, an advance Gordon attributes to political unity which fostered large-scale manufacturing and marketing, plus various other factors (such as immigration) that would have meant Europe would have been at a disadvantage even if it had achieved political union. This lead expanded in the first half of the 20th century as the crucial inventions of electricity and the internal combustion engine were deployed widely in the US, while Europe tore itself apart in wars. Only in the Golden Age of 1950-1975 did Europe implement these technologies, the period in which it enjoyed its greatest ?catch-up?.
The 1990s saw the US surge ahead again, partly again due to earlier technological adoption (namely IT) but also due to productive advances in retailing, which Europe due to its constrained space and thus tight planning laws was unable to follow.
Thus today European GDP per capita is only 77% of US GDP per capita.
But to what extent does this matter in terms of living standards?
European output per capita is partly lower because Europeans work less hard. When Europeans do work they are nearly as productive as Americans? with output per hour worked a much higher 93% of the US level.
Insofar as Europeans choose to work less hard then, as Brittan says ?there is nothing to complain about?. You can?t take both leisure and work (at the same time) thus, assuming rationality, if one trades off work for leisure it is welfare-enhancing. But to the extent European?s shorter hours are due to restrictive labour markets it is not welfare enhancing. Gordon estimates that one-third of the difference is due to voluntary decisions, and two-thirds due to bad labour market laws.
Thus advantage still with the US. But Gordon believes other factors may be in Europe?s favour. Brittan notes:
?When Prof Gordon turns from crude GDP to welfare, he is not so sure. He suggests that not all the higher US GDP is welfare-enhancing. Some of it involves fighting the environment: for instance, heating and air conditioning to combat a more extreme climate. Some of it, too, goes on a higher level of home and business security to protect against crime or to maintain 2m people in prison. He speculates that the Europe/US economic gap might well be reversed by a broader welfare measure?
Brittan concludes, interestingly, that:
?My own assessment is that the US and at least north-west Europe have now reached a stage of development where there is little to choose between them in economic performance and where growth is no longer the most sensible policy objective. If the “European social model” is to be criticised, it is because it restricts freedom of choice.?