Scope Ratings says three major shocks – the euro-area debt, Covid and energy crises – largely explain the difference in output, measured in GDP per capita, between the US and Europe since 1999 but the gap remains relatively modest.

“When we take a long-term view, we find that over the past 25 years, GDP per capita decreased only by seven percentage points versus the US since the euro was introduced, representing a deterioration in relative performance but not a massive one in aggregate,” says Alvise Lennkh-Yunus, head of sovereign and public sector ratings at Scope.

“Europe’s underperformance during the past three shocks was arguably for the right reasons, because European policymakers introduced stricter policies to preserve public health during the pandemic while the fiscal response was more targeted compared with the US,” Lennkh-Yunus says.

Europe’s resilience has grown, but productivity gap remains

In addition, Europe faces a fundamental disadvantage compared to the US in times of energy shocks as a net energy importer whereas the US is a net exporter.

Despite this challenge for the rest of this 25-year period, the euro area has performed just as well if not slightly better than the US on a GDP per capita basis, notably Germany, with Spain even outperforming. However, Italy and France remain the laggards.

“The key question is whether Europe is now better prepared to address similar shocks,” says Lennkh-Yunus.

“The answer is probably yes, notably regarding Europe’s financial architecture, though the work is clearly not yet done as highlighted by the recent Letta and Draghi reports and their extensive recommendations on improving Europe’s competitiveness and productivity.”

European productivity, an important driver of growth, varies widely across the region. Workers in northern and western Europe work fewer hours but as efficiently as their counterparts in the US. Workers in central and eastern Europe (CEE) are catching up. However, productivity growth in countries such as Greece, Italy, Portugal and Spain remains sluggish.

The upshot is that the annual growth potential of the US is running around 2% compared with only 1% to 1.5% for the euro area. Spain’s dynamic economy has become an increasingly important contributor to euro area growth, but Germany’s difficulty in addressing structural economic bottlenecks is proving a drag.

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