Is Europe really that sclerotic: Lessons from recent IMF data

The general perception about the relative merits of the US economy on the one hand and the continental European economies on the other hand is simple: The US is a very dynamic economy which has been growing briskly over the past decade while Europe is sclerotic and always lagging behind. While markets in the US are free to allow for a swift process of innovation and growth, overregulation and a large government sector in Europe keeps growth down.

Against these stereotypes, the latest statistics from the International Monetary Fund’s latest World Economic Outlook are highly interesting (see the whole publication here or the tables referred to in this post here): After a number of downward revisions of the US GDP data over the past years by the Bureau of Economic Analysis, the data just does not support this impression anymore. If it comes to growth in real GDP per capita, arguably the single most important indicator if one wants to measure how well an economic systems manages to improve the welfare of its citizens, the US has been growing more slowly than the Eurozone economy over the past decade.

According to the IMF figures (table B1), the US economy has produced a real per capita GDP growth of an average of 1.6 percent per year over the period 1999 to 2008 while the Euro economy has produced a real per capita GDP growth of an average of 1.8 percent per year. Interestingly, even Germany which hovered around stagnation for several years at the beginning of the decade, has reached a per-capita-growth rate of 1.5 percent per year, only slightly below that of the US.


But where do these surprising figures come from? Did not the US economy outperform the European one in most of the years in question? The first reason is that European population is growing much slower than the American one. German population is stagnating, so a headline economic growth of 2 percent at once translates into a per-capita-growth rate of 2 percent. The US population is growing, so part of the economic growth is just needed to keep per-capita incomes from falling.

A second reason is that American statisticians tend to overestimate growth in their first estimations while European (and especially German) statisticians have a clear tendency to underestimate growth in the first publications of GDP data. The later revisions are often not given as much coverage in the news as the first publications.

But the data holds a wider lesson as well: Obviously, capitalism is a much more resilient system than some of the critics of the European economies implicitly suggest. Even with distortions, regulations and frictions as they exist in Europe, a free-market system can still produce decent rates of growth. And, yes, there seem to be different varieties of capitalism that work. Not everyone has to chose the same variety, and it might not be as clear as some people think which variety suits a country best.

9 Responses to "Is Europe really that sclerotic: Lessons from recent IMF data"

  1. Guest   October 26, 2007 at 9:11 am

    Interesting observations. But why is population growth in the Euro area much slower than in the US. Is it a matter of (long term) confidence in the economy? Is it lower immigration rates? A slower population growth implies a lower potential growth rate for the economy. I am not sure that a higher per capita GDP due to lower population growth is a way to give a positive spin to the rather sluggish European performance.

  2. Guest   October 26, 2007 at 10:04 am

    1999-2008? So 2007 and 2008 must be forecasts. What if we use 1999-2006 i.e. actual data? Growth in the EU may slow down in the near future…but so could in the US.

  3. Guest   October 26, 2007 at 10:31 am

    Excluding 2007 and 2008 – where the IMF estimates much stronger per capita growth in the Euro zone – the US averages (simple not compound average) 1.8% in the 1999-2006 period while the Euro zone is at 1.6%. The Euro zone average was dragged down by four very mediocre growth years: 2002-2005. It is still to be seen if the Euro zone recovery in 2006 proves resilient!

  4. Anonymous   October 26, 2007 at 10:51 am

    One also should not forget, that bigger portion of US growth is “credit based” than in Europe. USA take on more risk and until now received more rewards, where Europe played it (more) safe. One could argue that:1) USA could take more risk due to its geopolitical position.2) Europe is much more risk averse due to its past negative experiences what happens when “once in a lifetime” disaster struck.Or combination of those.Jozo

  5. BJ   October 26, 2007 at 11:00 am

    It’s actually funny that all the big 3 EU countries supposed to corroborate the point grew more slowly than the U.S… the real problem lies there, not with average EuroArea growth.

  6. bsetser   October 26, 2007 at 1:02 pm

    Sebastian– very interesting set of observations; ones that I basically agree with. I am not sure that the tiny difference between French and German growth and US growth per capita over the last ten years (1.5 v 1.6%) is really all that relevant. Yes, 07/08 are forecasts, but they are likely to be relatively accurate. Rapid credit-fueled US growth a few years back is being “paid” back —

  7. Nouriel Roubini   October 26, 2007 at 1:35 pm

    Since European workers work less hours than the American ones and since the labor force participation rate is much lower in Europe than in the US the similarity btw the per capita GDP growth of US and Euro zone suggests that the average European worker has had much faster productivity growth than the American one. If that is the case it is good news and bad news for Europe: good news as those who work are highly productive and experience fast productivity growth; bad as Europeans work less hours and less Europeans work (participation rate) and thus the per capita growth rate is barely close to the US one in spite of faster productivity growth. Or if you like to see the half full part of the glass you can argue that European prefer more leisure than American workers…

  8. eparisi   October 26, 2007 at 3:47 pm

    remember the U.S. “Puritan Grinds” versus Europe’s “Ambitionless Cafe Dwellers” debate? for those who are interested, you can find the relevant readings here:

  9. Jozo   October 27, 2007 at 6:24 pm

    In the interesting paper if you check pages 34 and 38 it seems that in prime age labour force participations are the same for USA and Europe (even France!). The difference is that USA teenagers and young people enter labour force more quickly and elderly stay in labor force on average longer, this increases USA averages.