Forget about Donald Trump for a moment and consider why the US economy – at – is so much stronger than Europe’s. Most agencies earmark growth of 2.5-3 per cent for the US economy this year against 1 per cent in Europe.
And that 1 per cent looks shaky. It may also be revised down if US tariffs against the EU materialise.
[ Trump tariffs threaten Ireland’s service economy too ]
Without a significant boost in investment – particularly in infrastructure and green technologies – Europe risks falling further behind the US and the global economy, the International Monetary Fund (IMF) is warning.
There are several reasons for Europe’s flagging performance and the US’s better-than-expected one. Europe has been more impacted by the energy crisis for one (higher energy costs have dented manufacturing output in Europe’s largest economy Germany, which has also been impacted by weaker Chinese demand).
The prospect of tax cuts and less regulation in the US appears to be having an equal and opposite effect on the other side of Atlantic.
But these potentially short-term trends aside, there is an endemic productivity gap between the US and Europe. Productivity is one of those glaze-over economic phenomena, but it underpins performance and explains better than any other the reason why the US leads much of the world when it comes to technology.
At the World Economic Forum in Davos, Switzerland, last month, the head of the IMF, Kristalina Georgieva, gave perhaps the most cogent explanation for the productivity gap between the US and Europe.
“The US is marching ahead with high productivity because capital markets allocate money to dynamic firms ... because technology turns into business investment and grows into companies fast and because the US has an abundance of cheap energy,” she said.
Her point was echoed by Larry Fink, chief executive of investment giant BlackRock. “Any entrepreneur, any small company, any large company can find capital and that foundation of capital – raising allows much more entrepreneurialism, much more creativity,” he said.
The strength of the US’s capital markets allows the US to modify, rebuild itself, change direction faster than any other economy, he said.
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