THE CREATION of the single European currency was accompanied with high hopes of many Europeans for a brighter economic future. This might have caused an illusion in Europe, especially among countries sharing the common European currency, that they would replace the US as the top economic global powerhouse. But structural differences among regions in the eurozone have remained unchanged and looser fiscal discipline meant that prosperity and the advantages of low interest rates turned out to be short-lived.
The differences between the two giant economies on both sides of the Atlantic remain huge, no matter which economic indicator is taken into consideration. Although gross domestic product cannot really be used as a basic measure of one’s happiness or life satisfaction, it is generally considered to be the best overall indicator of economic performance. Comparisons of national wealth are traditionally made on the basis of purchasing power parity (PPP) or purchasing power standard (PPS) to adjust for differences in the cost of living in different countries.
Figures from Eurostat, the European Union’s official statistics bureau, for 2010 show that the US gross domestic product (GDP) per capita in purchasing power standard exceeded that of the eurozone average by 38.3 percent. Data for 2011 are not yet available but economic developments during the last year are not likely to show any improvement for the countries of the eurozone.
Fourth quarter 2011 GDP grew by 3.0 percent on an annualised basis in the US compared to a 0.7-percent growth rate in the countries of the eurozone. The difference is striking. It is partly due to the methodology of computing the growth rate figures – but using the same methodology does not make a significant difference in favour of the eurozone. The average quarterly growth rate in GDP during the last four quarters up to September 2011 was 1.8 percent in the eurozone while it was 2.1 percent in the US. The US economy was definitely growing faster than the economies of countries sharing the common European currency during 2011, and this is why the gap between these two giants will not be closed any time soon.
In making a way out of the crisis in 2009, the US appears to be the winner. The average real GDP growth rate in the US reached 2.4 percent for 2010 and 2011 while it was 1.7 percent in the eurozone.
One of the most commonly-used arguments to describe the differences between the two economies is that of contrasting job-creating approaches. The US is often perceived as a winner due to its ‘flexible’ labour market compared to the sclerotic state of the labour market in countries of the eurozone, where unemployment has been persistently high. Students of economics are often taught that because labour is supplied at an artificially high wage rate, equilibrium employment in the eurozone as well as in all of the European Union is lower and the unemployment rate is higher. This generalisation, however, is only partially true and the difference, as always, is in the details.
Analysis of the structure of the labour market shows that while people in the prime of their economic activity (aged 25-55) are employed at similar rates in the US and the eurozone, data show a higher employment rate for youth (15-24), and a much higher employment rate for pre-retirement (55-64) and post-retirement (65 and over) groups in the US. What the average employment and unemployment figures generally tend to hide is this age-related nature of the ‘European problem’.
But even the overall unemployment rate remains elevated in countries of the eurozone, at 10.7 percent in January 2012 compared to 8.3 percent in the US.
The European sovereign debt crisis has been the number one topic in the media during 2011. Talking about Greece’s debt troubles has been a hot topic in the financial markets for more than two years. But the debt worries have become a real problem for Europe because of the huge sums involved to overcome it.
Given the reluctant nature of the European Central Bank (ECB) and its top officials toward direct financing of heavily-indebted eurozone member states, more creative measures have been used to support market confidence. With interest rates as a main monetary policy tool being effectively close to zero for several years in the US, the ECB slashed the policy rate by 50 basis points under the new leadership of Italian Mario Draghi. Cutting interest rates as a tool of monetary policy, however, is less effective in supporting economic activity and the financial markets are really waiting for some kind of ‘quantitative easing‘ or printing of money.
Therefore, new measures to support banking sector liquidity have been applied. Starting in December last year, two long-term refinancing operations were conducted by the ECB in which some 800 banks borrowed more than one trillion euro for a period of three years. While such a repo operation is technically a different form of quantitative easing, in substance it does the same since it floods the banking sector with money in a belief that it will be further provided.
Financial markets have cheered the action from the ECB since it at least does something compared to the “stoned” kind of inaction from European politicians. That is why the equity markets have rallied worldwide since the beginning of 2012. The return of confidence in these markets might signal an upturn in economic confidence that is moving up only in the US while falling in the eurozone. While 46% of all economic indicators published in the eurozone from the beginning of 2012 indicate a worsening compared to their previous periods, this was true of only 19% of the indicators in the US. The economic growth forecast for the US remains positive for 2012 while a mild recession is now expected for the eurozone.
The economic gap between these two giants will therefore widen further and it is likely that the US will come out of the crisis faster and stronger, as it always does.
The author is WBP Online Chief Analyst