by Josep Soler-Albertí, Executive director EFPA Spain, Board member FECIF and EFPA Europe
Anyone who has had the opportunity to recently travel around the United States will have easily noticed a widespread increase in prices, particularly perceived by those whose reference currency is the Euro. Is it just the logical effect of the continued revaluation of the Dollar over the Euro, from 0.70 Euros to one Dollar at the most virulent outbreak of the 2008 crisis, to the current 0.95?
The exchange rate alone does not fully explain the current price disparity between Europe and the United States, and it is necessary to analyse the overall behaviour of the two major economies since the crisis and, in particular, in recent pandemic and post-pandemic years. In fact, it is not just the verification of the gap in relative prices but the general and more relevant perception that economic activity and living standards have shifted enormously in favour of Americans.
GDP figures do not deceive and if they do (anticipating the perennial mistrust of a territory’s main economic activity indicator) they are equally imprecise on one side or the other of the Atlantic. The truth is that in 2008 the GDPs of the Eurozone and the United States were equivalent at current prices and at around 14.5 trillion Dollars each. Currently, the GDP of the Eurozone is around 15 trillion (18 trillion if we add the United Kingdom) while the GDP of the United States is today almost 27 trillion. In summary, two-thirds of the gap generated is caused by the revaluation of the Dollar (in any case equally significant) and the other third entirely due to the much more dynamic behaviour of the American economy.
As an example of what it has represented in the value of the economy (in this case of the largest listed public companies), in the same period of fifteen years (2008-2023), and therefore for the wealth of those that in the United States or from Europe have invested in one or another continent, it is interesting to note that the American stock market represented by the S&P 500 index has gone from 970 points to 4,400, an increase of 350%, while the Euro Stoxx 50 of European shares has gone from 2,600 to the current 4,200 points, a much smaller gain of only 60%.
Have we, as financial advisors, and in our recommendations to customers during these 15 years, have been sufficiently aware of this permanent dominance of the American economy in relation to the secular tendency of Europe towards relative irrelevance? I do not think so, and that, unfortunately, has often highly affected their wealth accumulation.
What has been the reason for this immense superiority of the behaviour of the American economic over the European one, and especially since the crisis? The reasons are multiple, some more permanent, and structural, and others more recent and conjunctural, such as the most powerful fiscal incentives introduced in the US. Straddling between both types we find energy, in which the autonomy and availability of the Americans contrasts with our European foreign dependence, which has greatly worsened in the last two years. Cheaper energy is itself a huge competitive advantage. Secondly, and increasingly accentuated, the American technological dominance over Europe has been very relevant to the gap we are describing. American tech giants have dominated the economic landscape for the last few years and are coming out with a big advantage in the race for artificial intelligence that we have just started. As a footnote, 25 years ago Europe produced 40% of the world’s semiconductors. Now it does not even reach 10%.
The industrial and technological dominance of the US is generated by many structural reasons. We will mention those that we think are most important: financing, ageing, knowledge, and the market.
Business financing is a major handicap for the European economy. The differences in dynamism, alternatives, predisposition to risk and the existence of powerful private channels are overwhelming in favour of the American corporate network and it determines a large share of the European deficit in productivity and competitiveness. CMU and RIS are just now trying to limit it in the EU.
European ageing has generated and will continue to generate an inefficient labour, and consequently consumer, market. In recent decades, the incorporation of women into the labour market and the support that Eastern Europe’s rise has meant, as labour contribution to the West, have curbed the perverse effects of the terrible European demographics. These favourable winds are now over, and the situation will get worse while American society remains younger and therefore more productive.
If American universities were already dominant after the Second World War, this favourable gap in knowledge (especially in applied knowledge) has grown since the crisis, probably also due to the European inability to regenerate or import the university population.
Finally, the market issue. Europe, despite the progress of the single market, remains fragmented and, in many sectors (perhaps banking is the clearest example), it is impossible to compete with the United States which, despite States’ differences, enjoys a larger and more homogeneous market, with the capacity to create internationally dominant companies, especially in sectors where research is vital.
Of course, we could always have the old reference to European quality of life as an alibi. It is not clear that, if it really exists, we can maintain it, given this impoverishing trend.
Josep Soler-Albertí, Executive director EFPA Spain, Board member FECIF and EFPA Europe