It is a real pleasure fo me to welcome you all at this sixth IDEA matinale. Today, we will discuss a really big issue: the huge and unfortunately widening economic gap between the euro zone and the United States. This issue is mentioned quite frequently in the public debate, but few observers have provided – so far – a systematic and down-to-earth analysis of this problem, its proximate and underlying causes, and the potential remedies against this “European disease”.
We will try to fill this gap today, with the decisive help of today’s speaker, the distinguished Prof. Vasconcellos e Sá.
So let me fist introduce to you Prof. Jorge Vasconcellos e Sá:
- He has an extremely strong academic background: Prof. Vasconcellos e Sá holds a master’s degree from the Peter F. Drucker Graduate School of Management in California and a PhD in Business Administration from Columbia University in New York, where he was a student as well as a research and teaching assistant. He also holds a degree in Economics, one in Business Administration and a graduate degree in Macroeconomics. He is currently a professor at SBS Swiss Business School in Zurich and at AESE Business school in Portugal. He also addressed many conferences and seminars, in a large variety of countries.
- Our guest has a strong international recognition: he was awarded the Jean Monnet Chair by the Jean Monnet Foundation in Brussels and several distinctions, including the Fulbright fellowship.
- He wrote many books, translated into eleven languages. Several issues were addressed, inter alia strategy and management. You will find several copies in this room.
- Let me finally mention two prominent hobbies of Prof. Vasconcellos e Sá: history and football. The Prof. even holds a degree as a professional football coach. So at least a field where Europe does a better job than the United States (I’m talking about football as in soccer, of course)…
Before I leave the floor to Prof. Vasconcellos e Sá, I would like to give to you some insights from a recent study made by IDEA, also focused on this economic and competitiveness gap between the euro zone and the United States. You can find this study on your desk (Idée du mois number eight).
Let me mention the following main insights of our study:
- We made a growth decomposition exercise over a long period of time (we therefore constructed a “proxy” of the euro zone prior to the advent of EMU in 1999). This exercise clearly shows that the economic gap is not a recent, short term phenomenon at all: the gap is fully structural. GDP growth has been much higher in the U.S. since the eighties, in spite of a stronger GDP per capita in the U.S. before the eighties (so the starting point was higher). This higher GDP growth in the U.S. is partly the reflection of much higher population growth (thanks to higher migration flows). But GDP per head and productivity were also significantly more dynamic across the Atlantic.
- Another striking comparison: in 1980, total employment reached 102 million persons in the U.S. and 122 in euro area countries, respectively – it was therefore much higher in these countries. In 2015, total employment was the same, with 151 million persons on both sides of the Atlantic. In addition from 2007 to 2015, the U.S. created 2.7 million new jobs (net creation). The corresponding figure was minus8 million in the euro area. Hardly the evidence of a “European social paradise”…
- Several arguments are routinely mentioned against the “American model”: the U.S. performance is said to be a bubble caused by the Federal Reserve monetary policy, it is supposed to be due to the dollar (its alleged structural weakness, the “Déficit sans larmes”), to the more accommodating U.S. fiscal policy, to the shale gas revolution, etc. In addition, Americans would, according to their critics, be too dedicated to “hard work” and therefore not able to “enjoy the quality of life”. Finally, inequalities are growing strongly in the U.S. since the eighties. However, on closer inspection, all these arguments appear quite misleading or require further qualification (the growing inequalities in particular). Most of these counter-arguments could in addition not explain the structural character (since the eighties) of the economic gap between the U.S. and Europe (impact of recent fiscal or monetary policies for instance).
Many causes could underlie the structural economic gap between the euro area and the U.S. and the diagnosis is not an easy exercise. Four aspects seem especially striking, however:
- Based on the World Economic Forum (WEF) “Global Competitiveness Index” database, we made a systematic comparison between the euro area, the United States (and also Luxembourg) for various dimensions of “competitiveness”. To this end, we constructed our own euro area indicators (by weighting the national indicators according to the respective GDPs). For all dimensions (labour market, taxation, legal aspects, capacity to attract, use or retain talents, venture capital and innovation, access to finance, days to start a business, etc.), the U.S. scores better than the euro zone. There is only one exception, and not the least: the business costs of terrorism…
- Although national account data should be qualified (definition of public expenditure for instance), general government expenditure represented 39% of GDP in the U.S. in 2013. The corresponding figure was 49% in the euro area. The way higher education and health expenditure are financed partly explains this discrepancy. But certainly not the entire expenditure gap. The tax burden represents 26 and 40% of GDP in the U.S. and in the euro area, respectively.
- Innovation is much more prominent in the U.S., as illustrated for instance by the emergence of the “GAFA” (Google, Amazon, Facebook and Apple) and other Internet heavyweights. Another illustration: in the international ranking of universities made by Leyden University, the “top 15” is entirely American… The first non U.S. university is Cambridge (18th). No euro area university is in Leyden’s top 25 (only the U.S., the U.K., Switzerland and Israel). In addition, the U.S. academic world cooperates closely with private companies and the research activity of U.S. universities is outstanding. The access to finance (also for small companies) is also strikingly different: just consider the extent of venture capital in the U.S. or the NASDAQ. Finally, a unified defense and the space sector also act as catalysts of innovation on the other side of the Great Pond.
- The stronger demography observed in the U.S. is also a precondition and a complement for economic dynamism and innovation, as well as a flexible labour market and mobile citizens (it is therefore easier to accommodate asymmetric economic shocks in the U.S.).
We drew, from the evidence collected in our contribution, 10 recommendations for the euro area. I will simply mention them quickly (we will come back to this later on):
- Conduct a dynamic immigration – integration policy (otherwise the euro area population will decline in a dramatic way by 2050). This is of course a challenge in the current context…
- Promote higher population mobility in the euro area: 30% of U.S. citizens were born in a State different from the one where they currently live. The corresponding figure is 1.5% in the euro zone. We should promote foreign languages and remove all impediments to mobility (real estate, taxation, social security, etc.).
- Ensuring more targeted public expenditure and less distorting tax systems in Europe.
- Reform the labour market. Close the poverty and unemployment gaps, alleviate the mismatch between labour supply and demand, improve the skills of the labour force, and the like.
- Improve the access of companies (esp. SMEs) to credit and to securities markets.
- Stimulate innovation: for a “quantum leap” (nexus between universities and companies, education, formation, promote business angels, etc.).
- Promote a more entrepreneurial culture in Europe.
- Adapt product market regulations and deepen the Single Market (services, Digital Single Market).
- Go for a more integrated energy market (energies are currently much more expensive for companies in the euro zone than in the U.S.).
- Improve economic policy coordination, a less procyclical and complex governance framework.
I hope these insights and proposals will help fuel our debate.
In the meantime, I leave the floor to Prof. Vasconcellos e Sá.