This graph is taken from a full page Financial Times article from last week (behind paying subscription wall) entitled “Is the euro forever?” and, as its title suggests, it is not very bullish on the big eurozone economies (Germany, France and Italy).
It reflects expected rates of growth in the coming years, and shows that expectations for the US economy increased strongly around 2000 and have remained strong ever since, whereas expectations for the eurozone sort of increase at the same time but have collapsed after a brief spurt. In short, economists think that the Eurozone is going to stagnate for the foreseeable future.
But let me put things in perspective.
The conclusion of the linked article is as follows:
Irrespective of whether the debate about the sustainability of monetary union is framed in terms of political union, as the Bundesbank used to do, or in terms of economic and institutional factors, one arrives at the same answer. Present policies, institutional arrangements and political attitudes are incompatible with a sustainable economic and monetary union in the long run. Something will have to give.
The full article is too rich and complex to summarise here in an easy way, but the quoted conclusion, together with the above graph, paint the picture of a very ill eurozone economy.
But let’s look at it another way.
This is the above graph, converted by me into an excel version:
Now take a look at this:
This looks like US growth has experienced an upturn in expectations, but a fairly small one. meanwhile, Europe has indeed seen a decline in expecations, but it’s pretty insignificant.
Guess what – it’s the exact same graph as above, only with a different scale.
Now let’s take this a step further:
This is the same graph, with one correction: i have converted the GDP growth numbers into GDP per capita (per person) growth, by using the number available for the 1994-2002 period (source World Bank data: 1% population growth for the USa, and 0.3% for Germany, France and Italy.
So, over the period, GDP growth per person is still expected to be quite similar in the two regions. So while the US economy is getting bigger, individuals are getting richer (on average) at a pretty much similar rate on both sides – simply there are more new people in the USA than the eurozone.
Now let’s take a final piece of data, which was linked to in a recent diary by bonddad:
Total Household debt increased at a compound annual growth rate of 11.81% over the same time period.
And it’s the same with Federal debt. (and meanwhile, eurozone debt has increased only slightly)
So, my conclusion is as follows:
- The European economies are not doing great, but a lot of that is a question of perception, especially the short term comparison with the US economy
- that comparison is flawed because the USA have gone on the wildest debt-fuelled spending binge ever, made possible by “Bubbles” Greenspan decision to open the taps in full, and by Bushco’s decision to spend like a drunken sailor (and with the same kind of results, as in Iraq – a lot of broken stuff and personal suffering).
The current US growth is NOT sustainable, and WILL NOT BE sustained.
And the lesson of these graphs is that the Greenspan bubbles are actually providing pretty value for money, considering the amounts injected into the economy, and the pretty low rates of net income growth for average Americans.
So just take what the financial press says about the eurozone and the US economy with a grain of salt.
I definitely agree. With the current political situation we’re finding our infrastructure eroding and our children’s education is suffering. Combined with the bubbles you mentioned above, I would say they have the same predictive ability as they did right before they predicted the triumphant success of the dot com businesses back in 1999.
Thanks for an interesting analysis as always.
I don’t have the background even to ask a question with much specificity, but from my perspective in the economy’s peanut gallery, an analysis of overall “growth” looks to me to be a report primarily for and about the economy’s leading owners. While they can be entertaining to watch, there are times when I’m interested in factors closer to my world.
Is there a way to discuss the same period looking inside “growth” to a number of factors that affect the general populations?
Some economic factors that interest me as a cog in the wheel include the distribution of wealth, income, opportunity and safety net.
Having seen several of my past occupations subjected to deportation, “opportunity” to me includes not only raw monetary return on work but also the diversity of work available.
Finally as an aging boomer, obvious safety-net factors include health care and retirement, but also (un)employment and workplace injury compensation.
The graph obscures the very significant differences within the Eurozone. At the extremes you have countries like Spain and Italy. The former with high growth and a real estate bubble fueled by low interest rates. Italy on the other hand is barely limping along and could only dream of the US fiscal outlook. Then you have Germany where neither the current account deficit nor consumer debt is a problem. On the other hand growth is anemic and the long term budget picture is scary due to the demographic trends. The mishandling of reunification also didn’t help. FAZ had a long detailed dossier on the subject earlier this year. Die Zeit has a less systematic one. Both are still up and available for non-subscribers so if anyone here reads German but hasn’t seen them I’d be happy to provide a link. (short summary Germany has been having kids about 2/3 the rate of the US, it has also had a much lower immigration rate – result that demographic time bomb that people like to warn Americans about – much exaggerated in the US, real in Germany)
Thank you for posting this, Jerome. As you know I think that the events in Europe over the past couple of months are incredibly important. There are so many things I want to hear your view on…
Of course I also completely disagree with you on your theory about the Euro. Despite your fiddling with the charts, the fact remains that the Euro is in big, big trouble. Besides stupid press and political posturing by Stern and those dopey Italian guys, there are several structural problems that need serious attention.
The basic problem is that you have 25 countries, each with its own economy, all trying to run under the same interest rate regime. This is madness, because as is currently being discussed all over the press, Italy and Germany need completely opposite interest rate movements.
And there is the problem of the failure of the agreement about fiscal responsibility. Now that several countries have abandoned their agreement to limit their deficits, how are the countries who worked so hard to keep their deficits under control to react?
Also there is the big upcoming argument about the British rebate versus the CAP. Handouts on either side are not helpful, and with Blair’s recent electoral victory and Chirac and Schroeder’s recent electoral fiascos, it seems likely that Chirac at least will stand on this point–and perhaps tear the UK out of the EU once and for all.
On top of all this is the constitutional treaty ratification problem. Europe is in a very, very big political mess right now.
Frankly I think that Europe is heading back into its bad old habits of senseless nationalism and protectionism. I would love to hear how this is not the case.
ASDF sez: “The basic problem is that you have 25 countries, each with its own economy, all trying to run under the same interest rate regime. This is madness, because as is currently being discussed all over the press, Italy and Germany need completely opposite interest rate movements.”
Seems like you’re assuming that under the pre-Euro regime, each country could do whatever it wanted with rate regulation and policy. But global markets severely limit national autonomy in such matters no matter what groupings a nation belongs to.
Further, the US has dozens or hundreds of economic zones, all trying to run under the same interest rate regime. Boston and Boise would benefit from quite different interest rate movements.
Whether Europe retreats from its flirtation from federalism is anybody’s guess. Given how well the US federal system is working these days, they certainly have an object lesson in not starting anything they’ll wish they hadn’t.
“a report primarily for and about the economy’s leading owners”
yep, ditto to gooserock’s comment… as an “aging boomer” myself who watched in horror as my sum total of retirement assets were rendered worthless by a senior officer group focused solely on their own portfolios and who has been struggling since my 9/11 layoff, whatever “sustained growth” the u.s. has been experiencing that may turn “unsustainable” at some unspecified time, has not trickled down to me…
If you compare GDP per capita between the US and the EU countries, you notice a significant disparity.
US–$40,100 per capita
http://www.cia.gov/cia/publications/factbook/geos/us.html
UK–$29,600 per capita
http://www.cia.gov/cia/publications/factbook/geos/uk.html
France–$28,700 per capita
http://www.cia.gov/cia/publications/factbook/geos/fr.html
Germany–$28,700 per capita
http://www.cia.gov/cia/publications/factbook/geos/gm.html
Those are the wealthy EU countries. If you compare the US per capita GDP with some of the poorer EU countries, the difference is more pronounced. When I look at your last chart (the trend in per capita GDP), that is a worrying trend. Given the income disparities already existing between the EU and the US, they should be converging and not diverging (as the chart illustrates).
The United States has its share of problems. We have an incompetent administration that will hopefully be replaced soon. We are in the midst of a housing bubble. We are consuming too much and saving too little. A correction to the housing market will likely be coming in the next few years.
That said, the United States has a lot of strengths as well. Its workers work harder than any other industrialized economy I am aware of, and they work significantly harder than EU countries on average. It has a culture that rewards innovation and risk-taking. It has some of the most competitive companies in the world, and New York remains the world’s finance capital (with London a not-so-distant second). Its population, while getting greyer, is still growing.
When I look at Europe, particularly continental Europe, I don’t see a lot of hope for economic growth to flourish. An aging population. Voters who don’t appear willing to adjust to the times in the sense that they want to keep working 35-hour weeks and keep their generous pensions and other social benefits. You point to the US economic model as being unsustainable, but I think you need to turn the magnifying glass to Europe (particularly continental Europe). I don’t see anything but stagnation in France and Germany if changes are not to be made.
What you say sounds correct from a certain perspective. But is per capita income a good comparison tool? Does the US figure average in all the gazillion dollar salaries of CEOs, etc? Are European CEO’s paid less in comparison? I don’t know this, I am just assuming it. Also Europeans, because they have such great social services, might not need to spend so much to have a comfortable life.
govt. spending is part of gdp. Note also that those are PPP figures. However, you’re right that the US has greater income disparity. Also, while greater govt. social spending doesn’t mean that the Europeans are better off in strictly material terms, there is the significant intangible benefit of greater economic security. Not worrying about a lack of health care doesn’t affect your income but it is good for your peace of mind. Finally, working less hours as the Europeans tend to do on average means lower per capita GDP but does give you the non-monetary benefit of greater leisure time.
What does this mean?
PPP relates to currency exchange rates that are corrected to take into account the fact that similar things may cost different prices in various countries
In effect, it is an attempt to put a more realistic price to currencies to reflect that it can buy a similarly defined basket of goods and services with such value.
The most famous PPP index is the Big Mac index, done by the Economist newspaper, which compares the prices of Big Macs in many countries to determine a fait conversion rate (considering that Big Macs require similar quantities of local goods and services in each country, and are thus a good proxy for purchasing power)
For the past 30 years or so, GDP per capita indicate a fairly constant difference in GDP per capita, with some period slightly more favorable to one side or the other (currently, the difference is growing slightly).
Does that reflect an inability by Europe to catch up, or a societal choice to value some things differently, or just unsatisfactory statistical instruments?
Burning oil and building (and destroying) military hardware creates GDP but it’s nor obvious that it creates more wealth. spending a lot on healthcare would obviously be “wealth” is the actual health indicators showed any of the same. Finally, you also have the repartition of that wealth across classes. most numbers show that under republican administrations, growth profited almost exclusively to the richest, which pulled the average numbers up but not the median situation of Americans.
But that’s the politically important point: not everything of value is measured in stock market capitalisation or even in money.
I recently read “Countdown to a Meltdown” by James Fallows in ‘The Atlantic Monthly’. There’s a lot in this piece (and most is over my head) — but basically it confirms your belief that growth is not sustainable. According to Fallows, our debt is being financed by Asian countries (like China), as a way of keeping their own economies in check. But any unanticipated major event, like an oil crisis (a country, like Venezuela deciding to cut us off), or continued wars in the mideast (massive spending) — could easily bring the house of cards we built to finally topple. It’s scary. We have nothing to fall back on.
I remember back when the Euro was being formed, the great student of cities Jane Jacobs predicted that it would fail. She did not believe that European nation-states would give up sufficient sovereignty to coordinate their economies and their fiscal policies closely. And in the absence of that coordination, a common monetary policy would always produce winners and losers. She thought the strain of conflicting interests would eventually tear the Euro apart.
She went on to suggest that the US would benefit from a break-up of the dollar, using the same principle. Regional economic disparities, she believed, would in theory be reduced by having a variety of dollars which would float against each other. An interesting idea, though I think it ignored the vast reservoir of incompetence in governance we suffer from here. Several dollars, all managed as poorly as the current one–or worse–would not be an improvement, to say the least. I’d hope the European nations would do a better job with their currencies.
Well, the “optimal monetary area” specialists have been trashing this question for a long time. We certainly are at the point when the lack of coordination of the eurozone fiscal and economic policies is coming into sharp focus and the “non”/”nee” will not encourage such coordination, as each country starts focusing on its (narrowly defined) “national interests”.
We’ll see.
I suspect there’s no right answer to this question, just a set of choices. The basic alternatives, it seems to me, include the following:
Each choice has its consequences, and creates a policy environment to manage those consequences. The success or failure of each model depends on how it’s managed.
Actually, I’d invert 2 and 3 for the US and Europe. The problem of Europe is precisely that there are not enough transfers (social, inter-generational, infrasturcture investment, etc) between regions (the EU budget is just about 1% of EU GDP, whereas the US Federal budget is 18% of GDP)
There are much bigger regional disparities in the eurozone than in the US.
This is exactly what is so frustrating about the USA. We live in a homogeneous society where a strip mall in California looks exactly like a strip mall in Nebraska or in South Carolina. We all watch the same TV shows, speak the same language, and go to the same stores. On the one hand this helps our economy, because people can move from one area to another pretty easily. On the other hand, regional differences are being reduced.
Can you imagine a Europe where the main streets in Paris, Bridlington, and Ljubljana are indistinguishable?
The economics cult is dedicated to their dogma that growth is the ultimate and only measure of economic success. They choose to ignore what doesn’t fit their faith, especially the fact of limited resources here on Earth. I’ve done some looking, and have never seen a believable explanation about how growth can be sustained despite resource depletion, ecosystem destruction, and corruption of the air, water, and soil on which our physical lives depend. They just vaguely wave their hands and mumble about “technology” coming to the rescue. Tech has and will prolong the time we have to face reality, but there’s no scenario short of interplanetary colonization that offers a way to maintain current economic orthodoxy.
At a lower level, GDP is a near-useless measurement, since it includes government spending. The more wars, terrorism, hurricanes, and earthquakes we have, the better the GDP gets. The more houses Bill Gates buys, the better the GDP gets. It has barely anything to do with what life is like for most of a nation’s people.
I think both the US and Europe have hard times ahead. The big difference will not be between them, but between them together vs Asia, maybe South America, and others. Our economy is running on cheap imports and inbetweeners grabbing absurd shares of the profits ($2 Nikes selling for $120). How long are the companies that make this stuff going to settle for what trickles down? Not long, I’d say.
As we see with the outsourcing we’ve already experienced, wealth is no longer a matter of natural resources and massive capital. Intellectual property and tech development can’t be confined within national or continental borders. I think we’re quickly coming to a time when we’ll either have to focus on economic distribution instead of eternal growth or slowly sink to international insignificance.
Damn, I missed this and I generally make a point to look for it. Good catch!
For the non-statistics-fan: Always look at the bottom of the vertical scale of every graph you see and check to make sure it is zero. If it is not then the author is trying to emphasize small differences between large numbers.
Sometimes that emphasis is an honest attempt to show important details concerning small differences. Very often, however, the author is trying to mislead, as is probably the case here.
Of course it may instead be that the person making the graph forgot to turn off the “autoscale” option on the vertical axis in the graphing software!
What happens if you further adjust the graph to measure the economies in the same currency?
And what happens if one figures some way to adjust for “balance of payments” and “federal deficit”? Does not the reported US GDP “growth” come out looking rather, uh, hollow?
this article in today’s Le Monde?
Les pays d’Europe continentale sont tombés dans “la trappe des réformes”
I like Eric Le Boucher’s Saturday column on the economy because he at least understands economy (as opposed, it seems, to most French people and a number of journalists) and he is able to look at the big picture.
His opinion on Chirac is spot on – he has done nothing in the past 10 years. The overall theme that “reforms” have not been done and our countries are drifting is mostly right, although, like I do in my story above, a lot of that is linked to relative perceptions, shaped by the miraculous growth of the US throughout the dotcom boom and now the housing bubble, which will not last. It’s unsustainable, but it HAS shaped perceptions.
Tonight, he’s splashing out the champagne bottles at the club and is the most popular guy. Next month, he’ll be in debtor prison, but he did get “successful” in the meantime. Living in the short term as we seem to be these days, we’re in the “successful” phase now.
…is that income inequality is growing rapidly in the United States.
The “Eurozone” economies, on the other hand, manage a more or less fair redistribution of wealth.
What good does it do to have more wealth, and to have a faster-growing economy, if the new wealth falls into the laps of a tiny number of individuals?
Economic growth doesn’t benefit the middle class nor the poor in America, or at least doesn’t benefit them as much as it ought to–and that’s the real story. What growth the Europeans do experience will be distributed reasonably and equitably. The new wealth in America goes to the top 5% of the income brackets, and the bottom 80%–which is 4 out of 5 families–get left holding an empty bag.
Basically what I was asking is if there exist, if anyone has done, a breakout of this time period for the factors that affect the majority population.
We all agree in prose text about the U.S. trend of wealth and income distribution, but I’d like to see the recent past and the projected future show the numeric details for this, health care, opportunity, etc.