5.1. THE NON COMPETITIVENESS OF THE EUROPEAN UNION


Introduction

Today, one mentions frequently the failure of the Lisbon Agenda, that is the European Union Prime Ministers meeting in Lisbon (2000), which “decided” to make of Europe the most competitive world region, within ten years.

We shall divide the numbers of such failure into three categories:
- the result (gross domestic product per capita)
- the immediate causes; and
- the initial/original causes (the causes of the causes).


 The result

Figure one presents the Gross Domestic Product (GDP) per capita of the three major economic blocks: U.S.A.; E.U.; and Japan.

While the world average is 14845 dollars, the Japan average is almost 2 times (191%) that value; EU-15 is 210% and the USA is 286% (2,9 times).






Thus, as figure two shows, the EU per capita is 26,5% below the USA level and Japan is 33,4% below. So Europe is per capita 6,9% better off than Japan.

There are further bad news for Europe: at the rates of growth of the last 36 years (1980-2016), they will never reach the USA average.




So, not only are Europe and Japan poorer than the USA, but also they are not converging and will never catch up USA.

Why? To find the causes, let’s first look into the immediate causes.

The (immediate) causes


The Gross Domestic Product (GDP) per capita is the product of four variables:

1 – The GDP per hour (productivity per hour); multiplied by
2 – The number of hours worked; multiplied by
3 – How many people are in the labour market (either working or looking for a job: the active population); and multiplied by
4 – The rate of employment (100% minus the rate of unemployment).

What happens is that the USA are better off than Europe, regarding three variables. Indeed, Americans:
1 – Produce more per hour;
2 – Work longer hours; and enjoy
3 - Lower rates of unemployment.

And so, it is the joint effect of the variables that make americans enjoy a standard of life 36% superior to europeans.

Indeed, in terms of productivity per hour (figure three), europeans are 15% less productive than americans and Japanese are 38% below.




Then, not only do americans produce more per hour, but also they work longer hours (figure four): 1752 per year against 1571 in the EU, less 10% in average.






But, then the USA presents a smaller % of working force: 49,8% against 50% in Europe. The champion here is Japan (53,6%): figure five.





And finally (figure six) the rate of unemployment is lower in the USA (4,9%=100%-95,1%), than in Europe (9,1%=100%-90,9%). Again, it is minimal in Japan: 3,2%.






So, when we ask ourselves: why are the USA so much better off than Europe, the answer must be: because America
1st – Is more productive per hour;
2nd – Works more hours; and
3rd – Has more people working (due to a lower % of unemployment).

Here arises a new question. Why is it so? Does this happen by accident, or are there some root (initial) causes? And in such a case, which are they? The answer respects to the initial causes.

The initial (original) causes

No, it is no accident that the USA works better and more than Europeans. The reasons are immersed in US society and can be found in the fabrics of its population and culture.

Let us concentrate in just a few.

First: Americans are younger than Europeans. The median average is 37,8 years against 41,9 years in Europe and 46,5 years in Japan.

Second: a larger % of women are in the active (working) population in the USA than in Europe or Japan (46,9% against 46,2% and 43,3%). That is important. It happens that women are different (not better, not worse) from men. So they bring to the working place different attitudes and qualities. And diversity is a source of wealth.

Third: then, the American mind is… different. That is what Alexis de Tocqueville in the 19th century called: the American excepcionalism.

Americans are more motivated. When asked (by the Pew Research Centre): are you very proud of your nationality? 56,1% of Americans answer yes.

The Dutch? Only 20,7%. Japanese? 25,1%. Germans? 23,7% (approximately one in five). This is obviously important. It is harder to be motivated, when you believe you were born in the wrong place.

Fourth: Americans believe in themselves. They have self-confidence. When asked (again, by the Pew Research Centre): does your success depend upon yourself?, 57% of Americans answer yes. But in Europe only 42% agree (57% say it all has to do with forces “outside” their control). So, Americans are inner directed. Europeans are outer directed.

Fifth: the USA enjoys more freedom. Commercial freedom. Fiscal freedom (lower taxes). Investment freedom (openness to foreign investment). Market freedom (lower regulation and lower black market). Property freedom (stronger property laws). Banking and prices freedom.

And freedom is at the root of economic development. The Heritage Foundation (in Washington) prepares a ranking of the countries with more and less economic freedom.

The IMD (in Switzerland) has another ranking, this time of the more and less economically competitive countries.

How both rankings compare? Not surprisingly the countries which top one list, also top the other: Singapore; Hong Kong and of course the USA; also countries at the bottom in the both the economic freedom list and the competitiveness list tend to be the same. The statistical correlation is +0,67 (significant at a 0% level), indicating that beyond any doubt: freedom works.

As it happens, some European Union countries are well placed in both lists (Luxembourg; Denmark; Holland. But then others destroy the average: France, Italy, and of course, Greece and Portugal).

Also Europe is worse off in yearly migration (% of immigration minus emigration in the total population): 2,2% in Europe, against 3,9% in the USA and 0% in Japan.

In short, it is (among other variables) the conjunction of A) youth; B) diversity (higher in women but lower in migration); C) motivation; D) self-reliance; and E) freedom, which explains that Americans are nearly 20% more productive than Europeans (the GDP per capita is 36% above – figures two and three before).

Conclusion

The creation of the Euro currency raised the expectations regarding the Competitiveness of the European Union. That was further enhanced by the Lisbon Summit in 2000 when the Prime Ministers of all EU-15 countries announced their aim of making of Europe, within 10 years, the world most competitive region.

Reality however is far different from, either the citizens expectations, or the governments announcements.

Indeed, not only is Europe far from the USA, in terms of competitiveness, but also (what is far more serious for Europe), it is not closing the gap (figure two).

And so, if the past (1980-2016) is prologue, EU 15 will never reach the GDP per capita of the USA.

What that means? Basically that more of the same is not the solution for Europe. And so, structural reforms are necessary. Even because, the best guarantee of a strong social protection system, are high levels of productivity