Mind the Gap

Most Americans consider the United States far ahead of Europe economically. Over the last 30 years, real per capita income (based on purchasing power parity) has consistently been 30 percent higher in the United States than in the 15 "western" countries of the European Union (the EU15). In the last decade, the U.S. economy has expanded much faster than that of the EU15, and demographic trends suggest that this disparity will continue.

The recent addition of ten eastern European countries (the EU10), however, offers the EU an opportunity to overcome several critical constraints on its economy. Meanwhile, the usually high productivity growth that has driven the U.S. economy over the last decade is not likely to continue at such a torrid rate, while the sluggish rate of productivity gains in the EU15 could rise sharply. If the EU can successfully integrate the EU10, and the United States fails to find new ways to increase productivity, then the economic gap between Europe and the United States will start to narrow for the first time since 1970.

AMERICAN ADVANTAGES

Gross domestic product has grown at an average rate of 3.3 percent a year in the United States over the last decade, compared to 2.1 percent a year in the EU15. Per capita GDP growth, however, has been very similar: 1.8 percent a year in the United States, 1.7 percent in the EU15. The main factor driving higher U.S. economic growth is not greater productivity gains; it is a more rapidly expanding population.

These demographic differences will likely keep GDP growth higher in the United States than in the EU15 over the next few decades. The average fertility rate in the United States is 2.1 children per couple, almost 50 percent higher than in the EU15. This means that the U.S. population will grow from 290 million today to approximately 370 million by 2030, whereas the population of the EU15 will stay roughly flat--at 380 million--in the same period.