Good morning, and Happy New Year!
Could 2024 be the year in which the European economy finds its footing again? Perhaps. But an economist at one Brussels-based think tank argues there was never a need for doom and gloom in the first place.
Despite headlines and gut feelings to the contrary, “the EU improved compared to the U.S.,” in the past decade on relevant GDP indicators, Zsolt Darvas, a senior fellow at Bruegel, told me on the first workday of 2024. If you thought that wasn't the case, you were likely looking at the wrong data, he says.
It took me a while to process Darvas’s analysis when I first came across it. But he stuck to his guns in our conversation. The original sin of analysis like the Financial Times’, which showed how spectacularly the EU has fallen behind the U.S. economy in the past decade and a half, is that they express EU output in current U.S. dollars. That, Darvas told me, “is not very useful.”
Here's why: In 2008, the euro was worth almost one and a half dollars. By 2022, it had fallen back to close to parity. As a result, the EU economy, measured in current U.S. dollars, would have declined in dollar terms compared to the U.S.’s even if it had Wirtschaftswunder-like growth rates.
When you weigh other indicators, such as economic output adjusted for purchasing power parity (PPP), per capita GDP, or productivity per hour worked, it’s almost as if a miracle has occurred—or at least, the European economy looks far better.
Adjusted for purchasing power, the EU output fell only 4% behind that of the U.S. over the last 20 years. Looking at GDP per capita, the EU 27 grew faster than the U.S., thanks in great part to Eastern Europe catching up and Western Europe holding steady. The only bad news here is for Italy and the Southern EU: Their GDP per capita kept falling behind.
Even Germany doesn’t look so bad when you examine the right metrics: In GDP per hours worked, at purchasing power standards, Germany surpassed the U.S. in 2022, completing a decade-long comeback story.
Is it all upside heading into 2024 then? Not quite, Darvas concedes. Europe’s lack of Big Tech companies, its reliance on renewable and foreign energy, and its limited availability of venture capital are all hurdles to overcome. And its declining and aging population isn’t a recipe for stellar growth either.
Still, Darvas's expectations are "somewhat more positive than the market consensus,” he told me. Why is he so confident this time around? Europe proved more resilient against the cutoff of Russian gas than expected, the hike-cycle in central bank rates is ending, and, finally, labor markets are “super strong."
How is that for some New Year optimism?
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Peter Vanham
peter.vanham@fortune.com
@petervanham
