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AB 2000 studies

Alain Boublil Blog


Europe-United-States : The big gap

The publication of the figures regarding 2023 growth and the forecasts for 2024 shows the growing gap which has been established between Europe and the Unites States. On the other side of the Atlantic growth has been 2.5% in 2023 and it is forecasted 2.7% in 2024. Inside the eurozone, it has been 0.5% in 2023. A figure inferior to 1% is forecasted for 2024. The U.S. have a full employment situation and financial markets are worrying at each publication of the jobs creation about the consequences that would have on wages and so on prices. The Federal Reserve then could postpone the expected reduction of its interest rates.

In Europe, the employment situation is very varied. If full employment is near to be reached in Germany due to demography and to the large share of part-time jobs, in France the unemployment rate is superior to 7% and doesn’t fall anymore and it is even higher in Italy and in Spain. But that has not until now incited the European Central Bank to soften its monetary policy adopted since 2023.

The first reason put forward to explain this growth gap is the high rise of the production of shale oil and gas which has allowed the U.S. to exporting to Europe the fossil fuels energies it cannot anymore import from Russia after the sanctions decided after the invasion of Ukraine. The country so became again the first oil producer in the world. These new resources had first allowed to accelerating the replacement of coal by natural gas in the power mix which had generated a significant reduction of the CO2 emissions.

The new energetic context provoked by the war in Ukraine grants it a second advantage with prices much more favorable than in Europe. The enterprises which are big electricity consumers as the German chemical industry, are heavily penalized and even consider to close some plants and the States have had to put into place costly measures for the public finances, especially in France, to protect purchasing power and production costs. The new energy environment so weights on growth, generating precautionary attitudes among household and wait-and-see among enterprises which hesitate to invest.

The Central Banks on both sides of the Atlantic have put into operation through high interest rates rises restrictive policies in order to bring back inflation to a level inferior but near 2%, in line with their explicit or non-explicit mandates. Basis ECB rates rebounded above 3% after having been negative or nil for several years and Federal Reserve ones are around 5% The 10-years bonds rates are now at 4.60% in the U.S., 3% in France and 2.50% in Germany. But these tightening monetary policies have hardly affected American growth when, despite much lower rates, they have contributed to a harsh slowdown of the main eurozone economies.

Budgetary policies have been, to the contrary, quite different if not opposite. In the U.S., the public deficits and indebtedness reduction constitutes neither an obligation nor even an objective. The American deficit has been 7.5% of the GDP and as we enter into an electoral period, it is out of question to assign objectives or to adopt measures as expenditures reductions or taxes increases. After the taxes reductions decided by the Trump administration, the current policy is inspired by Keynesian thinking with the creation of Funds dedicated to the modernization of the infrastructures and to the re-localization on the American territory of the industrial production as for instance, chips. The U.S. did not impose to themselves rules as these which are in the Maastricht Treaty.

It exists, to the contrary, a permanent pressure in Europe to stigmatize public deficits when the eurozone has no problem to finance them on the international markets and its current account balance has a surplus to the difference of the U.S. which have a deficit which has been above 3% of the GDP.

Another explanation of this gap comes from productivity. That one has strongly progressed on the other side of the Atlantic and the spread is not stopping to grow with the European economies. The success of the new stars of the digital economy is not without connection with that but it has not impeached this new paradox according to which the eurozone has a high trade surplus when the U.S. have a heavy deficit. It is the transmission of these technological progresses to the services sector which explains the American advantage in this domain.

But the essential point is not probably there. Washington has not made the protection of the environment and the fight against climate warming essential elements of the American policy to the opposite of Brussels under the pressure of ecologist political movements. That has generated a bureaucratization of the economy with the coming of norms and organisms in charge of their control which have heavily weighted on activity, on costs and so on productivity. The hundreds of thousands of civil servants which have been recruited do not produce but frequently slow production.

Important investments, but there too non profitable, must be realized to “de-carbonate” the economy at a time when, to the contrary, in the U.S. they are investing to produce more oil and gas, whose Europe is happy about because it still needs these resources. When in Brussels it is decided that will be the end of thermal engines in 2035, the first victim will be the European industry because the undisputed leader is today the American Tesla and tomorrow the Chinses carmakers will occupy a major share of the market to the detriment of their European competitors. The consequences on employment and on activity will be very heavy.

The gap which is becoming deeper between the two economies, to the profit of the American one, is the consequence of the different choices made by the countries. The U.S. have implicitly chosen growth as a priority. Despite huge internal and external deficits, they have not adopted measures which were risking to weight on activity. To the opposite, Europe, which has a public finance situation much stronger and which has current accounts surplus hesitates to support activity and is at the eve of dictating to the State-members rigorous measures. Regarding the European Central Bank, it stalls to unlock the interest rates restrain which weights on the construction sector and on enterprises investments.

The ecologist ideology which inspires several European governments and influences Brussels administration, doesn’t make, quite the opposite, growth as a priority. It is so logical that the economic behavior of economic agents adapts itself to this new context, that the enterprises, when they invest, do it outside of Europe and that worried household save. If a turnaround of the political choices doesn’t occur, it is sure that Europe will come into a long stagnation period, and so, with an astonishing contradiction.

On one side, people are marveled at the American economy achievements when they result from choices in favor of the fossil fuels production, from a laxist management of the public finances and from very modest preoccupations regarding environment. And in the same time, the European Union along with its main State-Members persist to preach in favor of decarbonation, of the respect of the Maastricht criteria and of the adoption of measures in favor of the environment which dissuade the economic agents to believe in the progress.