The US and Europe have long been deemed the twin pillars driving prosperity in the Western world. Recent trends, however, suggest the center of gravity is shifting toward the US, according to a report released by the Bank of Korea.
In the report titled “Background and Implications of Differential Growth Trends in the US and Europe," the BOK analyzes the key factors that resulted in different paces of growth in the two economic heavyweights, and offers takeaway points for a Korea that has faced a protracted phase of sluggish growth.
The report says the economic scale of the US and the eurozone were similar as recently as 1995. But the gap between the two has widened over the past three decades: The US economy has nearly doubled, while eurozone economies have shown growth of only around 50 percent over the same period. As a result, the economic scale of the eurozone is now about 80 percent of that of the US.
The two major economic powerhouses also diverged on gross domestic product. In a 2021 report that compared per capita GDP, the European Center for International Political Economy, a think tank, showed that the average European nation was found to be economically poorer than all US states except Idaho and Mississippi.
In the aftermath of the COVID-19 pandemic, the growth gap has widened further. Last year, the US growth rate logged 2.5 percent, while the eurozone’s growth stagnated at a lower-than-expected 0.5 percent. The International Monetary Fund projects that the growth rates for the US and the eurozone would be 2.1 percent and 0.9 percent, respectively -- more than a twofold difference.
The BOK says the widening growth gap between the two economic zones since the pandemic appears to reflect different levels of three impacts, namely fiscal policies, energy price shocks and trade downturns.
The gap might narrow a bit this year, as the three short-term factors are expected to fade. But the economic growth rate of the US is expected to outpace that of the eurozone in the foreseeable future thanks to the two structural differences -- productivity and labor force.
As far as productivity is concerned, the US maintains an edge in technological innovation and attracting highly skilled talents, aided by efficient venture capital firms and advanced capital market infrastructure. This is why the US keeps producing “unicorn” companies, or startups that achieve a valuation of $1 billion, in technology sectors such as artificial intelligence and autonomous driving.
The central bank suggests that the US holds a competitive advantage in these cutting-edge fields that fuel productivity gains. Equally important is that immigrants continue to help boost productivity through knowledge spillover and increased dynamism.
In contrast, the eurozone is slower in technological advances because it relies heavily on tourism and traditional manufacturing. European policymakers tend to be slow in nurturing technology industries. In addition, many new immigrants to Europe are low-skilled, contributing little to innovation and productivity enhancement.
Another key factor behind the growth disparity is the rapid aging in the eurozone, a serious issue that is also relevant for policymakers of Korea. The median age in the eurozone rose from 33 years in 1990 to 42 years in 2021. Over the same period, the median age in the US increased at a slower pace -- from 32 to 38 years.
The eurozone working-age population -- considered to be 15-64 years old -- posted an annual decline of 0.1 percent from 2010 to 2019, while the US working-age population grew 0.5 percent a year during the same period.
The eurozone’s slow growth, linked to lower productivity and an aging population, is a case that deserves the attention of Korean policymakers. After all, Korea is similarly struggling with productivity and labor problems, demonstrated in the extended periods of slow growth, the rapidly aging population and a low birth rate.