How is the US economy managing to power ahead of Europe?

Financial Times columnists Valentina Romey in London and Colby Smith in Washington: The US economy is now outpacing Europe’s, and economists predict the transatlantic gap will continue to widen in the coming years. This divergence is due to several factors:

1. stronger stimulus during the pandemic: During the pandemic, both the U.S. and Europe implemented fiscal stimulus measures to address economic difficulties. However, in the U.S., fiscal measures were greater, leading to a strong economic recovery, especially in consumer spending.

2. Consequences of Russia’s conflict with Ukraine: Europe faced the consequences of Russia’s conflict with Ukraine, resulting in a severe energy price shock. High energy prices in Europe compared to the US contributed to higher inflation and economic divergence.

3. The booming US technology sector: The US has a thriving technology sector with companies such as Amazon, Alphabet and Microsoft. Europe lacks similar technology giants, making the US more competitive in technology and innovation. In contrast, Europe specializes in industries that are increasingly threatened by Chinese competition, such as electric vehicles.

4. Investment and access to finance: The US has easier access to venture capital and well-developed debt and equity markets, which allows companies, especially in the technology sector, to raise finance more efficiently. Europe, in contrast, relies heavily on banks, which can discourage risky investments.

5. Demographics: Europe is facing an aging population and slowing growth, which affects its economic outlook. In contrast, the US is experiencing an increase in its working-age population, albeit at a slower pace.

6. Labor Productivity: Factors such as investment, demographics, and innovation have contributed to higher labor productivity in the U.S. compared to Europe.

7. Labor Market: Europe has benefited from higher labor market participation rates, but further improvement is limited.

As a result of these factors, the gap between the US and Europe is likely to widen in the coming years. While Europe may struggle to maintain its growth rate, the US is expected to continue to outperform the Eurozone, even when temporary post-pandemic factors subside. However, the high US budget deficit poses a potential threat to the country’s future growth, which will require tough fiscal decisions.

Thus, differences in fiscal policy, industry structure, access to finance, demographics, and innovation have contributed to the current superiority of the U.S. economy over Europe, and this gap is expected to continue for the foreseeable future.

The entire article can be read at the link https://www.ft.com/content/e0177eb7-8d17-48aa-a6ad-fccd0655f557