In 2070, the GDP of the euro zone could represent no more than a third of the American GDP

Europe et international

…against half today

February 28, 2023 • François Saint-Cast

Examination of the GDP growth rate of the United States with a sample of EU member countries with comparable economic development shows a superior economic dynamism of the former.

Between 1995 and 2021 growth was:

Source : OCDE

Only Sweden has a growth rate very slightly higher than that of the United States over the period.

To explain this difference three axes are generally put forward: the accumulation of capital, technical progress, the evolution of employment.

With regard to capital accumulation, the management ratios measuring the gross margin (gross operating surplus) and the self-financing capacity (gross savings) are examined in order to see if there are essential differences in the conditions operating non-financial corporations. Indeed, a higher capital accumulation must translate into a higher margin rate and a higher self-financing capacity, making it possible to finance higher investments.

Source : Eurostat, OCDE

On average from 1995 to 2021 the margin rate of the United States is lower than that of all the other selected countries

Source : Eurostat, OCDE

The same observation applies to the self-financing capacity of non-financial corporations. And so, unsurprisingly, gross capital accumulation was lower in the United States than in the other countries in our sample.

Source : Eurostat, OCDE

On the other hand, the consumption of fixed capital, which corresponds to the depreciation undergone by the stock of fixed assets during the period considered as a result of normal wear and tear and foreseeable obsolescence or accidental damage which can be considered as normal, is less important in the United States. As a result, the net accumulation of fixed capital is more favorable

Source : OCDE

To clarify the role of this capital accumulation, the Fixed capital to GDP ratio was calculated from 2000 to 2021 (years available for the entire sample)

The following table shows the averages of these three indicators

Source : Eurostat, OCDE

Capital accumulation therefore very partially explains the better growth performance of the United States and Sweden. The high rate in Spain reflects a phenomenon of the country catching up. The large mature economies of the euro zone (Germany, France, Italy) have a low net investment rate compared to the United States due to higher rotation of fixed assets linked to greater scrapping.

Technical progress results from investments in research and development which allow innovations in economic activity through the introduction of new products, new processes or innovative organisations.

Source : OCDE

The two countries that have experienced the strongest growth, Sweden and the United States, both have the highest spending on research and development. However, Germany, which is at a level very close to the United States, does not experience a comparable level of growth, 38% against 84% over the period, and Spain, which has the lowest expenditure, has higher growth ( 56%). It therefore seems that research and development expenditure is not the main reason for explaining these differences in performance.

There remains the demographic evolution, employment and respective productivities of the countries.

The following table summarizes the changes in these three components:

Source: OECD World Bank

GDP growth is linked on the one hand to the quantity of work, i.e. the increase in employment and the evolution of individual working time, and on the other hand to the increase in labor productivity

The influence of the evolution of individual working time is not negligible on the increase in GDP. If the growth of European countries is recalculated by applying to them the evolution of working time in the United States, the differences with the latter are reduced

Another factor, rarely mentioned, affects the GDP growth performance of countries. This comes from the weight (quantity and price), in production, of intermediate consumption (goods and services transformed or entirely consumed during the production process). Remember that GDP is the sum of the added values ​​created plus taxes less subsidies on products (VAT, customs, etc.) which are generally a percentage of the added value. GDP therefore increases in proportion to the value added. National production is the sum of added value and intermediate consumption. If the share of intermediate consumption increases in the production process then for a given growth in value added (GDP) it will be necessary to produce more than proportionally. Conversely, if this share declines, for a given GDP growth, less output growth will be needed. However, from 1997 to 2021 the share of intermediate consumption has varied in our sample

Source : OCDE

If we then look at the growth rate of production and not that of GDP, we notice that the gap with the United States has narrowed significantly. The effort required in terms of total production for the same gain in GDP is greater in Germany, France and Italy than in the United States, Sweden and Spain. The decrease or increase in the weight of intermediate consumption is explained by the nature of production (industry, services, agri-food, non-market services, outsourcing, etc.) which impacts the nature of purchases by producers (energy, raw materials, intermediate products, services …).

Growth performance can therefore be explained by a combination of phenomena. Demography, the dynamism of employment and individual working time explain a significant part of the growth dynamic, as shown by the performance of Sweden, the United States and Spain compared to other countries. . The other group of influence is made up of the evolution of fixed capital over the period, incorporated technical progress which improves its performance and of which expenditure on research and development is an indicative measure. This is what saves the growth of Germany, to a lesser extent that of France and slows down Spain. The resulting productivity gains explain the performance of the United States and Sweden. Finally, the process and the nature of the productions make the acquisition of GDP growth more or less burdensome in terms of total production effort.

It is certain that this performance gap, if it were to last, would lead to a relative decline in Europe compared to the United States.

For example, the ratio of the GDP of the United States to the French GDP will be 1.5 times higher than that of today in about 40 years and 2 times higher in 70 years.