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News : EU Economy Last Updated: Jan 15, 2014 - 7:03 AM

Eurozone living standards could fall to 60% of US levels by 2023 - a mid-1960s ratio
By Michael Hennigan, Finfacts founder and editor
Jan 14, 2014 - 7:34 AM

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The European Commission has warned in its latest quarterly economics report on the Eurozone that per capita living standards could fall to 60% of US levels by 2023, which would be a ratio comparable with the mid-1960s.

United States GDP (gross domestic product) grew an average inflation-adjusted 3.4% in the period 1960-2007 and is forecast to grow by 2.5% over the decade to 2023, similar to the years before the crisis.

The Commission's report says "that not only has the US's growth performance been relatively less affected by the financial crisis but also that the US is expected to emerge from the crisis in a stronger position compared with the euro area. Following the inevitable rebalancing / restructuring of their respective economies in the immediate post-crisis period (i.e. 2008-2013), the US is expected to achieve average potential and per capita income growth rates over the period 2014-2023 which are broadly comparable with the pre-crisis decade, whereas the euro area's equivalent growth rates are expected to be halved."

In the half decade before the outbreak of the crisis after the recovery from the tech bubble burst, the US economy did not return to creating jobs at levels seen in the 1980s and 1990s.

The best jobs year was 2005 when an average 208,000 jobs were added monthly as the workforce naturally grew by about 90,000. In 1994, the average monthly jobs gain was 320,000.

Nevertheless, the Eurozone absent reforms, performs poorly relative to a period that wasn't a stellar one for the US.

In coming years, the United States also has an advantage that the Eurozone lacks.

US crude oil production rose to the highest level in 25-years last month, boosted by the shale fracking boom with annual growth forecast to average 0.8m barrels per day (MMbbl/d) through 2016, when domestic production comes close to the historical high of 9.6 MMbbl/d achieved in 1970. Even though domestic crude oil production is projected to level off and then slowly decline after 2020 according to a US Energy Information Administration forecast, natural gas production grows steadily, with a 56% increase between 2012 and 2040, when production reaches 37.6tn cubic feet (Tcf).

The Commission report notes the catching up in terms of productivity between the countries in the single currency with the US from the mid-1960s until 1995 while countries that would join the zone from 1999 were showing increasing divergences between each other.

In 1995, hourly labour productivity was almost 90% of the US level (the US population was growing faster); the gap widened a further 10% by 2013 and will widen to 73% by 2023 while "the euro area is forecast to end up in 2023 with living standards relative to the US which would be lower than in the mid-1960's. If this was to materialise, euro area living standards (potential GDP per capita) would be at only around 60% of US levels in 2023, with close to 2/3 of the gap in living standards due to lower labour productivity levels, and with the remaining 1/3 due to differences in the utilisation of labour (i.e. differences in hours worked per worker and the employment rate)."

The report says:

This issue of the need to boost euro area growth  prospects was forcefully highlighted at the launch of the Lisbon Strategy back in 2000, when EU potential growth rates were at a healthier 2 ½% annual rate. It is necessary to highlight this issue again, more than a full decade later, with the case for reform now being manifestly more pressing. As demonstrated by the wide variation in the past and current growth performances of individual euro area countries, policies matter greatly in determining medium to long run growth and income outcomes. Over the last years, Europe has reinforced its economic governance. In order to bring the growth potential of all euro area countries up to that of the best performers, structural reforms must be continued and further advanced in line with the priorities identified in the European Semester and the 'Europe 2020' programme."

Quarterly report on euro area, December 2013

Finfacts: The end of western affluence?

Finfacts: Why should Europe expect ever rising standards of living?

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