What can Europe learn from America in terms of economics?

Current issues related to economy, (responsible) investment, pension and income: every week, an expert from APG gives a clear answer to the question of the week. This time, macro-economist and expert strategist Charles Kalshoven talks about the question of what Europe can learn from America in terms of economics.

European economic growth is half that of the United States, Frank Heemskerk (secretary general of the European Round Table of Industrialists) noted recently in an interview with BNR. When you look at sales growth and profitability of companies, we are very much behind American companies.” What could Europe learn from the superpower on the other side of the Atlantic in terms of economics

Wealthier
“Over the past 30 years, the US experienced an average economic growth rate of 2.5 percent a year,” Kalshoven tells us “In the Eurozone, it was 1.5 percent. They are obviously doing something right in America. However, population growth there - mainly thanks to immigration - was higher than here: 0.9 to 0.3 percent. And when the population grows faster, it is easier to grow economically as well. Indeed, if your economy didn’t keep up with population growth, people would get poorer.” However, productivity per hour in the U.S. is comparable to Germany, the Netherlands and France. “They are wealthier in America because they make more hours there, almost 1,800 per year. In those three European countries, that number is between 1,400 and 1,500. That makes a difference of more than 20 percent a year. The fact that Americans work more is partly cultural. In Europe we value leisure more.”

One of the things America does well is create a breeding ground on which companies can quickly grow into leading companies. “Google is less than 25 years old and in the early years hardly anyone knew that company. Then there is also Amazon, Apple and Meta: all American companies, even if they are sometimes led by non-Americans, like Tesla. There is a whole ecosystem in the U.S. within which early-stage companies easily flourish. For example, American medium-sized companies can issue bonds much more easily than here. That is one of the reasons why there is more capital available there than in Europe. Here, those kinds of companies are mostly dependent on banks. It would be good if European capital markets deepened and the banking landscape became less fragmented.”

Risk
What also plays a role in the higher economic growth in the U.S. is that Americans are generally willing to take more risk. “And if things go wrong once, as an entrepreneur you are not immediately out of the game and you can try again afterwards.” The U.S. is also good at attracting talent, Kalshoven continued. “That is probably partly a money issue, but may also have to do with the extensive opportunities to develop yourself. A lot of new technology comes from America, such as artificial intelligence. In that sense, America and especially Silicon Valley, is the place where it is all happening and where you want to be as a talent.” The development of new technology also manifests itself in the large number of patents registered in the U.S., another component in which they surpass Europe.

Turkish-American economist Daron Acemoğlu argued in his 2012 paper “Can’t We All Be More Like Scandinavians?” that not every country can have the same economic model. Kalshoven: “The Scandinavian countries - but also the Netherlands - have a high degree of leveling and a relatively limited risk appetite. In America, there is more risk appetite and inequality, but perhaps that also delivers something: namely, people there try harder to invent something new. After all, in America you are richly rewarded for that. And we benefit from that here too, because those (technological) inventions often also lead to higher productivity in our country. That is the source of higher wages and profits. Earning more that way is more pleasant than working more and more hours. Nor is that a sustainable source of economic growth - there are only 24 hours in a day. In principle, there is no limit to technological progress. No matter how much we know, there will always be new ideas. If this also allows us to use resources more sparingly, we will not run into limits there either. And so, according to Acemoğlu, we largely owe this technological progress to the American cutthroat society.”

Ghost towns
Another thing Europe can learn from its great ally is high labor mobility between different regions. “If California is doing well economically, that state becomes more attractive to move to. Sectors that are doing well, such as the tech sector, can thus continue to grow. An additional benefit is that unemployment falls in regions where the economy is not doing as well, as people move there. At the same time, this can also create ghost towns. Just think of Detroit, where residents left en masse when employment in the auto industry dried up there. That is certainly a drawback, but in general, economists see high labor mobility as something positive. When we talk about the European internal market, we tend to talk about goods. In that respect, the internal market works well, but there is still room for improvement, including the free movement of labor and capital. Frank Heemskerk compares the EU’s internal market to an overflowing mailbox. That makes sense to me. You have to keep working on it.”