January 07, 2012
Adam Davidson tells us in the NYT Magazine that Europe is losing its ability to compete in the world economy. This is a bit hard to see.
First, the most simple measure of competitiveness is the market test. Is Europe able to sell goods and services successfully in the world economy? On this score the continent is doing much better than the United States. Over the last decade it generally had near balanced trade. Some years the European Union had small trade surpluses and in others it had small deficits. Of course the picture differs by country. Spain and Greece had large trade deficits while Germany had large trade surpluses, but the continent as a whole had pretty much balanced trade.
This contrasts with the United States, which ran large trade deficits over most of the decade, with a peak of nearly 6.0 percent of GDP in 2006. In short, by this market test it is the United States, not Europe, that has difficulty competing.
The second issue is whether productivity is growing at a decent pace. After all, this is the main long-run determinant of living standards. If we compare productivity growth in Europe with the United States it is hard to see the case for the imminent collapse of Europe.
Source: OECD.
U.S. productivity growth over this period is better than growth in Spain and Italy, but worse than Norway and Sweden. Productivity growth in the U.S. is virtually the same as in Germany and only slightly faster than in France. (The reason for showing 2007 and 2010 as separate endpoints is that many European countries have aggressively promoted policies to keep people at work during the downturn. This lowers unemployment — the unemployment rate in Germany is just 5.5 percent — but it also reduces productivity.) Productivity is difficult to measure and international comparisons should always be viewed with caution, but it is hard to make the case here for a European continent that faced serious economic problems before the economic crisis.
There is the more subjective view of competitiveness involving items like successful tech companies and relative importance in the new economy. Even here the case is not clear. After all, one of the key developers of Linux was Linus Torvalds, a Finn. Nokia has lost market share recently but had been the world’s leading cell phone manufacturer. The Swedish company, Ericsson was another leading cell producer.
On measures of connectivity there is considerable variability across Europe. Northern European countries like Norway and Denmark tend to rank higher than the U.S. on areas like broadband penetration, Germany and France are comparable, and the southern European countries rank lower. On educational outcomes, by most measures, most of Europe does better.
In short, it would be difficult to find a generally accepted measure of competitiveness where Europe does poorly compared to the United States. The European Central Bank may be able to inflict enough damage so that in a few years this is no longer the case, but for now Europe’s fundamentals still seem solid.
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