We’ve got problems. There’s no doubt about that. But America seems like a breakout economy compared with the woes our European counterparts are dealing with.
The euro zone, which comprises the 18 countries that use the euro as their currency, just reported GDP growth of 0% for the second quarter. That comes after 0.2% growth in the first quarter. The U.S. economy had a terrible first quarter, too, with output falling by 2.1%. But that was followed by robust second-quarter growth of 4% and lots of other evidence of an economy getting stronger, not weaker.
Europe is in the midst of a looooong slump and, once again, things may get worse before they get better. The U.S. and Europe typically struggle and prosper in tandem, but that connection seems to have been severed. Here’s how the two economies stack up:
GDP. These two charts tell the story:
U.S. real GDP:
Euro zone real GDP:
The U.S. and euro zone economies both felt the 2007-09 recession about the same. The U.S. economy has grown at a slow but fairly consistent pace since then. Europe, by contrast, endured a double-dip recession in 2012. Italy has now entered a rare triple-dip recession, with a chance Europe as a whole could follow. Even powerhouse Germany suffered a drop in real GDP in the second quarter, probably because of declining exports to more-troubled European countries such as Italy and Spain.
Unemployment. The U.S. unemployment rate is 6.2%. In the euro zone, it’s 11.5%. Greece, at 27.2%, and Spain, at 24.5%, suffer from depression-level unemployment. Youth unemployment in these countries has been higher than 50% in 2014; in the U.S., it hovers around 13%. Keep in mind, it’s generally harder to fire workers in Europe, which means the euro zone rates might be higher still if U.S.-style layoffs were common there.
Inflation. In the United States, it’s about 2%, which is close to the sweet spot that allows workers to earn raises that keep them ahead of modest increases in prices (though that’s not happening yet). In Europe, inflation is 0.4%, which is dangerously close to deflation -- which is usually worse than inflation. In an economy with deflation, future money is worth less, which means debt costs more and more to pay off over time. And people often put off purchases when they believe prices will fall, which can torpedo growth and hiring.
Central-bank stimulus. The Federal Reserve is winding down the extraordinary policy known as quantitative easing, and by next year will probably begin to raise interest rates, barring any shocks to the economy. That’s what the Fed is supposed to do as the economy heats up. The European Central Bank, by contrast, is still considering whether it should begin quantitative easing, which the Fed kicked off in 2008. Again, Europe seems years behind the United States.
Stocks. The Dow Jones Industrial Average and its European counterpart, the Dow Europe, are both within a few points of flat so far this year. But during the past five years, the DJIA has soared by 79% while the Dow Europe has ticked up just 25%. That performance gap reflects the much stronger U.S. economy and the head start America has on recovery, along with the Federal Reserve's highly accommodative monetary policy.
Banks. The U.S. banking sector is nearly healthy again, after the excesses of the early 2000s led to the 2008 financial meltdown, the extraordinary TARP bailouts and a slew of lawsuits and new regulations. Europe, however, is still dealing with bank failures and bailouts, such as the recent collapse of Banco Espirito Santo in Portugal. And European lenders are still unwinding billions of euros’ worth of risky debt. The upshot is that credit — the lifeblood of the economy — is slowly getting back to normal in the United States, while Europe lags far behind.
Geopolitical pressure. The conflict in Ukraine barely touches the U.S. economy, but it’s already causing pain in Europe, and this seems likely to worsen. “Sanctions targeting Russia’s financial, military and energy industries will eventually take a toll on European Union industrial production,” Moody’s Analytics wrote recently. A Russian ban on European food imports will force many farmers to find other markets for their food, possibly selling more in Europe, which would drive prices down and worsen the risk of deflation. And Europe stands to suffer if Moscow decides to curtail energy shipments, since it would have to find other sources of gas and oil — a problem the United States no longer has, thanks to a boom in domestic drilling.
Europeans, for their part, have plenty of legitimate gripes with America: We have a clown Congress, guns are everywhere, and more Americans have TVs than healthcare. Economically, however, America remains a much better place to be right now. Pass the freedom fries.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
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