Why Europe stagnates as the US economy roars

The economies of Western Europe are likely doomed to economic stagnation. In turn, the people of the continent are destined for declining standards of living. The United Kingdom and most European Union member states are becoming a backwater for the global economy.
The most recent economic data and projections for Western Europe make for grim reading.
The U.K. economy is not growing. In the latest calendar quarter, economic growth was negligible. Since Q4 2019, just before the COVID-19 pandemic, the British economy has expanded by a total of 3%. By contrast, over the same period, pre Covid-19 to today, the economy of the United States has grown by 15%. In plain numbers, the U.K. economy has added about $100 billion to its economic output. While the U.S. output has expanded by $4.5 trillion. That additional $4.5 trillion means the U.S. has the resources to improve the standard of living for every American and keep the nation safe.
The economies of Germany and France, the dominant powers of the EU, are little different from that of the U.K. Stagnant growth and relative falling standards of living are now the inevitable outlook for Paris and Berlin. Germany and France will be resource constrained as they try to keep providing generous social services, including healthcare, to their aging populations. Equally important, both countries will be stretched to find the necessary resources to deter Russian aggression.
What is going wrong in Europe?
Just about everything. A key problem is that populations are aging. That places a greater burden on the ever smaller working population. Resources for investment are crowded out by spending on the elderly. For the U.K. and Germany, the pivot to green economies was premature. High energy costs weigh heavily on both households and businesses in Europe. In contrast, France’s embrace of nuclear energy insulates its people and industries from the high costs of green energy.
Still, Europe’s major problem is that government is just too big in the U.K., Germany, and, especially, in France. That matters because after a certain point, as the size of government grows, to perhaps 30% of GDP, economic growth slows. Government crowds out innovation and investment. Big government believes that it is omniscient on economic growth. But government is often wrong. Free market capitalism allocates resources efficiently. Government does not.
Capitalism is democratic. Every business and consumer votes by their purchasing decisions. In contrast, government allocates capital according to the whims of a few and government favors powerful small constituencies that have political power such as labor unions or climate activists. Government destroys capital. Government also resists creative destruction which is necessary for a growing dynamic economy. Today, government in Europe resists the productivity enhancing effects of the Artificial Intelligence Revolution.
The U.S. under the incoming administration of President-elect Donald Trump will fully support and embrace AI. Economists say U.S. economic growth will accelerate and growth in Europe will continue to stagnate. Western Europe is almost completely absent from the rapidly growing high technology market. Europe has only two preeminent advanced technology companies: ASML of the Netherlands and ARM Holdings of the U.K.
To illustrate the divergence between Europe and the U.S., consider that the stock market capitalization of the U.S.’s so called Magnificent 7 technology companies is $16 trillion. The combined gross domestic product of Germany, the U.K., and France, the three largest economies in Europe, is around $12 trillion.
In the global economic contest, Europe is a lame horse, hobbled by government and high taxes, while the U.S. is a thoroughbred.
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James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be reached at [email protected]