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Shkruar nga Martin Wolf
Comparing two economies is more difficult than it seems...
The general view, not only in the US, is that the contemporary European economy is a dying duck. As Nobel laureate Paul Krugman notes; “there is… a widespread perception that Europe is living on its past glories, that it is falling behind America and China in ways that will undermine its ability to maintain its economic position in the world”. Indeed, it is precisely this fear that inspires the reports recently produced in Europe, notably the highly influential analysis by Mario Draghi, which was published in 2024.
Making such comparisons is difficult. There is no doubt, for example, that the US has long been in a different league when it comes to advanced digital technologies and, especially today, artificial intelligence. Again, being a single state gives the US an insurmountable advantage when it comes to creating and exercising the instruments of national power.
At the same time, we should remember those bold words about “life, liberty, and the pursuit of happiness” in the Declaration of Independence. Life expectancy for American men was 76.5 years in 2024, compared to an average of 80.5 years in comparable high-income countries. For women, it was 81.4 years, compared to 84.8 years. This despite spending a much higher share of their GDP on health. The US homicide rate was 5.9 per 100,000 in 2023, compared to 1.3 in France and 0.9 in Germany. Its prison population was 542 prisoners per 100,000 inhabitants in 2023, compared to 130 in France and 69 in Germany. So if one takes a broader view of human well-being, the US is far from superior. In fact, it's probably the opposite if you measure it against the goals of its founders.
However, what happens if we view the economy only through its ability to produce goods and services, that is, through Gross Domestic Product (GDP)?
Economist Paul Krugman argues that an interesting paradox emerges here, challenging the widespread idea that the European economy has lagged behind the American one. According to him, economic performance can be measured in two ways: by looking at how much GDP per capita has grown over time, and by comparing the level of GDP per capita at a given point in time.
At first glance, the US appears to have performed much better. Since 2000, the US economy has grown faster than that of the Eurozone. But when comparing the level of GDP per capita, the result is different: the Eurozone has not lost ground to the US, on the contrary, it has narrowed the gap.
How can an economy grow faster but not become proportionately richer? The answer lies in how economic growth is measured. Statistical methods are not always straightforward and can yield different results, depending on the indicator used.
One of the main reasons is related to the technology sector. Although it only accounts for 9.2% of the US economy, compared to 5.4% in the European Union, this sector explains more than half of the difference in productivity growth between the two economies. This means that a large part of the US advantage in economic growth stems precisely from technology.
Another factor is the way productivity is measured in this sector. In the US, so-called "hedonic" adjustments are used, which take into account the improvement in the quality of products. For example, a computer today costs the same or even less than a model from a few years ago, but is much more powerful. US statistics count this improvement as an increase in productivity.
However, these calculations are not entirely objective. They are based on estimates and can be interpreted in different ways. This does not mean that the US statistics are inaccurate, but that part of the reported advantage depends on the method of measurement. Meanwhile, in other sectors of the economy, which account for the bulk of economic activity, the rates of productivity growth in the US and Europe are much more similar.
Even comparing the standard of living between countries has its own difficulties. For this reason, the indicator of GDP per capita according to purchasing power parity (PPP), which takes into account changes in prices and the cost of living, is used. This method, used for decades by the World Bank, is considered the most reliable way to compare the economic well-being of countries.
Krugman also notes that per capita consumption in Europe has grown more slowly than in the US, but here too part of the difference is related to the way technological improvements are measured. When comparing real per capita consumption, the result follows the same trend as GDP per capita.
Ultimately, Krugman concludes that the American technology sector functions as a provider of a “global public good.” Innovations created in the United States are used around the world, increasing productivity and living standards in other countries as well. This means that while American companies benefit financially from these technologies, their benefits are largely distributed outside the United States.
The conclusion is that Europe does not suffer from any disadvantage in relative well-being compared to the US. But, a crucial “but”, it is indeed much weaker. No less important, its ability to exploit the technological advances made in the US depends on access to American supplies. The major threats facing Europe are not strictly economic. They are security and defence ones. It must meet them. /Adapted from “Pamphlet” by “Financial Times”
As ka te krahasuar. Europa eshte sociale e njerezit me te lumtur. Europa ka me shume sherbime.