The economies of the Euro area and the US often move in tandem due to their similar structures and deep economic connections. However, divergences occur, notably during asymmetric shocks like the Euro crisis of 2011-2013.
When one of the two economies is affected by a development that does not or hardly affects the other economy, the business cycle in both blocks diverges. Economists then speak of asymmetric shocks. The euro crisis in 2011-2013 was an example of such an a-symmetric shock. The eurozone economy experienced a recession, while the US did not.
GPP growth
Currently, economic growth is once again diverging. While the US economy accelerated in 2023, our economy has just completely lost growth momentum. The question is why.
There are several possible causes for this divergence. First, it should be noted that the US federal budget deficit widened very sharply between mid-2022 and mid-2023. With that, US fiscal policy, intended or not, was extremely expansionary. On the contrary, the eurozone economy has been hit by exceptionally high gas prices over the past 18 months. Although the price of gas on our continent has since fallen sharply, it is still about three times higher than the US gas price. In general, energy prices for European companies, partly due to taxes, are much higher than those of competitors in the rest of the world.
There is another notable difference between economic development in the US and Europe. Anyone who has listened to ECB President Lagarde and Fed Chairman Powell’s press conferences over the past two weeks knows that labour productivity is currently rising sharply in the US, while it is falling in Europe. Take our own country. In the third quarter of 2023, GDP by volume was 0.4 per cent lower than in the third quarter of 2022. But that lower GDP was produced by 1.9 per cent more people.
Elsewhere in the eurozone, the trend was similar. I do know that you have to be careful when interpreting productivity figures in the short term, but this is not good. Although wage growth is moderating slightly, our unit labour costs are developing downright unfavourably, unlike in the US.
Wage costs per product unit
During the pandemic, US and European governments opted for completely different approaches in terms of providing financial support. In Europe, jobs were maintained as much as possible with subsidies, such as the NOW scheme in our country. Registered unemployment did rise, but the increase was limited. In the Netherlands, unemployment rose from 2.9 per cent in March 2020 to 4.6 per cent in August 2020. Of course, this is not to say that everyone was productively employed.
In the US, instead of trying to protect jobs with all its might, it chose to increase unemployment benefits and make them more accessible. There, unemployment rose from 3.5 per cent in February 2020 to 14.9 per cent in April. Needless to say, this brought a huge shock to the labour market. As the recovery took hold, US companies had to look for staff, while many European companies simply let their stay-at-home staff return.
Whether these different approaches during the pandemic now result in a much less dynamic labour market and a much weaker business cycle in the eurozone is not easy to determine. Encroaching regulations, bureaucracy, problems with the availability of electricity et cetera could all also play a role.
Future economic historians will have to shed their light on it. What we can already do now, though, is to look at our economy with more urgency. What is happening now may fit nicely into the mold of the popular de-growth movement. However, I would argue that increasing social tension and polarisation are fuelled by the lack of economic growth. Let it be a lesson.
Han de Jong is a former chief economist at ABN Amro. He writes weekly for Investment Officer on economics and markets. You can read more about his views at Crystal Clear Economics.