10/03/2024
Europe updates!
London/Frankfurt: The US has expanded its efficiency edge over Europe, prompting concerns in the EU that it confronts a "competitiveness crisis" as policymakers advocate for greater public and private investment.
London/Frankfurt: The US has broadened its productivity advantage over Europe, prompting concerns in the EU that it confronts a "competitiveness crisis" as policymakers call for increased public and private investment.
Recent data, released on Friday, indicated a 1.2 percent decline in eurozone productivity in the fourth quarter compared to a year earlier. In contrast, separate data revealed a 2.6 percent increase in US productivity during the same period. Over the past two decades, labor productivity growth in the US has been more than double that of the eurozone and the UK.
"In the long term, productivity growth in the US is projected to be higher than in Europe," stated Bart van Ark, Managing Director at the UK-based Productivity Institute. "Europe is not showing the same dynamism. That is widening the growth gap between the US and the EU."
While some attribute the faster growth in the US to a younger, more rapidly growing population working longer hours, a significant part of the productivity difference is attributed to higher output per hour worked in the US.
EU policymakers view this trend with deep concern, seeing it as indicative of a longstanding failure to match US levels of private or public sector investment.
Output per hour worked, a standard measure of labor productivity, has surged over 6 percent in the US non-farm business sector since 2019, outpacing the eurozone and the UK, which experienced growth of around 1 percent over the same period.
The recent spike in US productivity follows a substantial fiscal stimulus focused on the green industry, a period of intense rehiring, and a surge in new business formation in telecommuting hubs. In contrast, the eurozone has received less fiscal support, coupled with a more significant increase in energy prices due to Russia's invasion of Ukraine.
The fragmentation of Europe's financial markets, fiscal policy, and regulation also makes it more susceptible to external pressures than the US. Yannis Stournaras, governor of Greece's central bank, noted, "When Europe is hit by a shock, it is fragmented, so it doesn't respond as coherently as the US."
While short-term factors have contributed to the US rebound, some economists suggest there may be deeper structural issues at play. Gilles Moëc, chief economist at the insurer Axa, mentioned, "We have stalled productivity in the eurozone. Since the uptick has been persisting for so long, we need to contemplate the possibility that something structural is happening."
Isabel Schnabel, a member of the European Central Bank's executive board, emphasized the urgency for eurozone leaders to close the productivity gap with the US. She stated that this is necessary to address a "competitiveness crisis," with EU manufacturers facing higher energy prices and more significant workforce challenges than their American or Chinese counterparts.
Schnabel also expressed concerns that falling productivity could raise the risk of persistent inflation by pushing up labor costs for eurozone companies. She urged swifter and more effective implementation of the EU's Next Generation program of public investment to foster competition and enhance productivity.
Mario Draghi, the former ECB president, is expected to report later this year on more ambitious proposals to boost the EU's competitiveness. He has indicated that an "enormous amount of money in a relatively short time" — both public and private — will be required to bring investment up to US levels.
Labor market trends have accentuated the productivity divergence. Ariane Curtis at the consultancy Capital Economics suggested that US employers tend to automate faster when workers are scarce, while Europeans have focused on hiring workers, potentially even if there were skills mismatches.
However, not all economists are convinced that the recent strength in the US is evidence of a structural shift. Some argue that the eurozone's current weakness may be a statistical phenomenon, and productivity could rebound if tight ECB policy eventually leads to worker layoffs.
While US labor productivity numbers look "very attractive," according to Catherine Mann, an external member of the Bank of England's monetary policy committee, they are driven by demand factors, particularly a budget deficit of more than 6 percent. In contrast, demand is more depressed in both the euro area and the UK. Claus Vistesen at Pantheon Macroeconomics expressed optimism about European productivity, stating, "It's too pessimistic to assume that if we are indeed on the cusp of a new technology-driven productivity boom centered around AI and related services, this will pass the eurozone by completely."
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