Saturday, June 12, 2021

Eurosclerosis update


All pre-covid. European GDP per capita fell in the decade following the financial crisis. US growth was nothing to write home about, but things could be worse. The we-should-be-more-like-Europe crowd has some explaining to do. (The Word Bank's software misplaced the UK label; it is the red line on the top of the European group.) From the World Bank, HT Marginal Revolution.

The graph is in dollars, so part of the effect is that the dollar got more valuable relative to the euro. (Thanks to the commenters who noticed that I misread the graph caption. Blog post now fixed to reflect that.) 


A correspondent sends along the following graph from IMF data. IMF data uses PPP adjustments, not straight conversion to dollars. So the exchange rate really is an issue in comparing US to EU growth.  

Relative inflation has not been that different between the two countries. 

At least by these measures, EU inflation has been only very slightly less than US inflation 

So indeed, the exchange rate is the major part of the difference between the two graphs. Whether PPP or actual exchange rates are "right" for this purpose I leave for another day. Certainly the average American's ability to buy European goods has risen relative to the average European's ability to buy American goods. Why exchange rates diverge so long from PPP measures remains, I think, a central puzzle. But thanks to blog readers for quickly pointing out that the Marginal Revolution graph isn't as immediately relevant as it seemed. 


  1. The dollar strengthened against the Euro. 50k USD at 1.5 is 33k EUR. But then 33k EUR at 1.1 is only 37k USD.

    Not sure if that changes the underlying impact (presumably these are real $), but that last sentence is wrong.

  2. The dollar went to 1.5 dollars buy one euro to 1.1 dollars buy one euro. So yes, this stagnation is mostly exchange rates. Now, one can make the case that Europe lack of economic dynamism means their currency became less valuable. Similar to Japan since the 90s.

  3. John, minor note: the FX graph here is USD per Euro (the reverse of the typical FX quoting), so the USD appreciated.

  4. I love the graph and the name but some will argue that the social insurance and wealth distribution is more fair in these countries than in the US. I also note you omitted Germany...

  5. Exchange rate converted? Why even report these?

    At PPP it looks different. I added Germany.

  6. John,

    I think you are reading the graph backwords.
    The graph is in dollars per euro (not euros per dollar).

    From 2008 to 2017, the dollar rose (not fell) from about 1.6 dollars per euro to about 1.1 dollars per euro and has given back some of those gains.

  7. Is the St. Louis fed chart in nominal GDP and the IMF chart in Real GDP?

    I suspect so. Just looking at France you can see the difference:

    GDP Per Capita - France:

    Real (Constant) GDP Per Capita - France:

  8. Hi John, doesn't the exchange rate graph show the dollar rising in value relative to the euro over the period? i.e one euro bought 1.5 dollars in 2008 but only buys 1.1 dollars in 2020. This would explain the difference in results, I think...?

  9. "Why exchange rates diverge so long from PPP measures remains, I think, a central puzzle."

    Different paths of non-traded goods prices -- changes in wages, regulation, whatever.

    It's not a mystery. Why and how in every year and every country we don't need to know for these purposes: We have the prices! :-)

  10. "Certainly the average American's ability to buy European goods has risen relative to the average European's ability to buy American goods."

    Yeah, but you gotta get there first! :-)

  11. John: The PPP chart is an index measuring percent change while the nominal chart is in dollars. Indexing the nominal chart finds that US per capita GDP has grown 300% (20 to 60) while UK's GDP has grown roughly 400% (10 to 40) which I think means that the cost of living has been falling in the US relative to Europe, which is why their higher nominal rates of growth don't lead to higher PPP rates of growth. But I could be wrong. It's been many years since I studied economics at Chicago.

  12. To determine whether Europe's inflation rate is only a little different from the US inflation rate, or not, you would have use quadrature to measure the cumulative difference say from 1998 to the present day. Just looking at by eye, my impression is that Europe's inflation has been less than the US, perhaps significantly different.

  13. There seems to be a contradiction in the statement 'dollars can buy more European goods' and the last graph being drawn using PPP. More likely, the graph just plots what it says, Real gdp per capita.

  14. I'm late - but I disagree with your final point that "At least by these measures, EU inflation has been only very slightly less than US inflation"

    The trend looks similar in CPI rates, but the area under those curves is hugely important. Using CPI from Eurostat and CPI from the BLS, consumer prices are 24% higher in the US today than in Jan 2010. In Europe, prices are only 17% higher. Big difference.

  15. "The we-should-be-more-like-Europe crowd has some explaining to do."

    That is dead wrong. No one has any explaining to do because academia is not about explaining for understanding any more, particularly outside of science and engineering. You can see this from the CRT crowd that currently dominates the national conversation. We've been engaged in racial justice mania for over a year now and the first order result has been more than 2,000 extra dead blacks, almost all killed by other blacks. If anyone was interested in "explaining" anything, we'd have come to a full stop on this rubbish by now.

    Get over this idea that any of these people are pursuing knowledge or truth. It's obvious they aren't.

  16. Update on Eurobashing (sorry Eurosclerosis) Update
    Being grumpy on Europe is not enough and not helpful. Esp. when you again and again fudge the numbers by selecting the worst ones amongst 28 (or now 27) and it is not clear what numbers you are actually using.
    My Dataset is the Eurostat Data Explorer:

    My measure of economic progress is gdp per capita based on pps and aic per capita on pps!
    Earliest available data are from 1995.
    Based on this if you pick volume indices for the 27 EU countries as 100 (2007) the comparable US value declined from 158% in 1995 to 151% in 2007 to 135% in 2020.
    The corresponding numbers for aic are 163% in 1995 163% in 2007 and 152% in 2020.
    In a nutshell: the gap didn’t disappear but it shrank.
    Ok you might argue EU 27 includes all the former communist Eastern European countries, better to compare with former Western Europe:
    The gdp per capita (pps) numbers are for EU 15
    136% in 1995, 135% in 2007 and 127% in 2020. So same picture
    And for aic it is 141% (1995), 147% (2007) and 143%(2020), so this looks rather like a stagnation.
    You may argue why is the gap still that big. Fair point.
    No doubt Italy and Greece performed terrible, they pay the price for 20 years of Berlusconiism or other corrupt politicians in the past. But this overlooks the success stories as the Nordics, Baltics, Ireland, Netherlands, Austria and last not least to a lesser extent Germany.
    My point: Economic success is still mostly in the hands of individual member states and not the EU. And what shall we conclude from all your EU whining? What should we do better?

    1. I appreciate better numbers. To be clear about prejudices, I am a big fan of Europe and European Union. I lament that Europe has not caught up to US as it should, and that EU did not, as you note, provide the sharp uptick in growth I and its boosters hoped for it.


Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.