Insight Investment

Professor Gordon offers a nuanced perspective on the divergence between US and European economic growth. He challenges the common perception that the US holds a significant advantage over Europe. While the US appears to lead in financial metrics, Gordon argues that a holistic analysis reveals a more balanced picture.

Gordon delves into the historical and contemporary factors contributing to this divergence. He highlights that post-World War II, Europe rapidly caught up with the US in productivity. However, since 1995, European output has lagged, with only a few countries maintaining higher productivity levels than the US.

Gordon questions the notion of US productivity leadership by pointing out several factors:

• Europeans typically have more time off work.
• The US faces harsher climates and more natural disasters.
• The US is less energy efficient.
• The US has a significantly higher prison population.
• The US lags in universal health insurance and life expectancy.
• The US has higher income inequality compared to Europe.

He also discusses the relative decline of Europe, attributing it to higher labour costs, the impact of the internet, market fragmentation, regulatory differences, and resource availability.

Despite these challenges, Gordon emphasizes the crucial role of the US financial industry in its economic advantage, with a stock market valued at over 200% of GDP compared to Europe's 50%. He also notes the global impact of China's dominance in manufacturing, which has affected both US and European economies.

To enhance competitiveness, Gordon suggests several steps for European economies:

• Integration and collaboration through a common budget for research, higher education, and defence.
• Moving towards a common language, with English as a strong candidate.
• Focusing on skilled immigrants to offset declining fertility rates.
• Reducing regulatory barriers to foster development.
• Delaying the target date for net zero to reduce economic pressure.