In an interview with Le Monde on October 28th, Christine Lagarde, President of the European Central Bank, expressed her concern about the fact that the European economy is falling behind other major economies in the world.
The reason, Lagarde explains, is not that Europe is doing something wrong but that the evolution of computer and information technology has benefited the U.S. economy while leaving Europe to the wayside. Therefore, she posits,
the question now is whether the boost that the United States got from the mid-1990s will continue with artificial intelligence, the accumulation of data centres and the exploitation of these data. This is the key issue.
When it comes to solutions to Europe’s laggardly economic progress, Lagarde’s first answer is plain and simplistic:
In Europe we need to roll up our sleeves and make an effort to keep those companies that start out here and then develop themselves elsewhere. We need to try to make them stay.
Already here, Christine Lagarde is wrong, but not about Europe falling behind. That is definitely true, and a point that I have made repeatedly in the past. However, as I have also explained in past articles, the European economic malaise has nothing to do with America’s technological-industry prowess. The explanation hits a lot closer to home than that.
However, before we get to the true reason for Europe’s economic quagmire, let us return to Lagarde’s LeMonde interview. She does make an effort, namely, to go beyond her first, rather shallow explanation. Asked by the three French reporters what the solution is, the ECB president opines:
We need to look at why Europe is falling behind. The energy component is key, especially as regards data centres. Labour is also important, with mobility being much greater in the United States. And regulation is a crucial issue, too.
There is an element of truth to her point about the availability of affordable energy. Since Europe is trying to pioneer the so-called ‘green transition,’ and since this transition is both raising current energy prices and fomenting expectations of even higher prices in the future, it is not very surprising that energy-intensive industries shy away from Europe. With her point about “data centres”—ostensibly she refers to such facilities as large-scale server halls—Lagarde could have connected the dots and explained that Europe’s own energy policy is punishing the very industry whose investments she craves.
In terms of the workforce, Lagarde laments that Europeans are not as ‘mobile’ as Americans are. There is a conventional wisdom among economists and politicians that this mobility is geographic in nature, meaning that Americans are more interested in moving to a new job than Europeans are. The academic literature is inconclusive on this, although data on income-tax filings indicate some mobility from high-tax to low-tax states. This would suggest a general desire to move to find better economic conditions to a degree that is not easily found in Europe.
At the same time, Europe has a substantial migration of low-skill workers. Often discussed as an (illegal) immigration policy issue, it has thus far been excluded from studies on economic mobility in Europe.
With all that said, the geographic mobility of the workforce is not as important a driver of economic growth as the ECB president tries to suggest. A more important growth-generating mobility factor is the vertical one, i.e., career development. It is institutionally easier, culturally more accepted, and economically more favorable to develop one’s career in America than in Europe writ large.
To start with the institutional aspect, America has a neat and very well-developed system of community colleges that offer short-term professional education tracks in a vast array of professions. It takes two years or less to earn a degree or a certificate, which allows Americans to quickly, affordably, and with abundant access add significant professional skills in a short, concentrated period of time.
Community colleges cover a whole range of industries and sectors, including health care, computer technology, business administration, law, industrial production, and mechanics. The programs are often developed in close connection with local businesses, which means that students have a high rate of success in securing a job upon graduation.
In addition to community colleges, America is also home to a large number of private educational and training institutions and businesses that provide similar services.
Europe does have its own versions of these continuous-learning institutions, but they tend to be subject to regulatory oversight that stifles, rather than stimulates, their success. One problem is that in order to obtain some of the certificates that U.S. workers can get at their local community college, Europeans may have to be tied to an unemployment benefit program. Without the intent being exclusionary, the consequence can be that too few spots on these education and training programs are open to the gainfully employed who want to develop their careers.
In short, the U.S. workforce can more easily and more flexibly access higher skill sets and training than their European peers can. This means that businesses in America can more easily fill high-skill jobs—which can be crucial to its growth and evolution over time.
The last point on Christine Lagarde’s list of problems for the European economy has to do with regulations. We could easily fill a book with facts on how Europe is committing economic suicide by drowning itself in regulations, but rather than losing ourselves in such a boring topic, let us listen to Lagarde as she makes a case-in-point comment about Europe’s regulatory nightmare:
In overly simple terms, the United States is developing AI very quickly, and already has a number of major players. In the meantime, not only is Europe lacking such big players, but it has also become a pioneer in AI regulation. This causes players in this sector to say “OK, let’s do this elsewhere. It’ll be easier and we’ll have fewer obstacles and fewer restrictions.”
She adds that it is a lot easier to set up a manufacturing business in America than it is in Europe. This is generally true, but there are a small number of U.S. states that have punished themselves out of major business investments. For the most part, though, the American regulatory environment tends to be less onerous to deal with than what is commonly found in Europe.
All these points by Christine Lagarde are to some degree relevant when it comes to explaining why the U.S. economy grows more quickly and produces a higher rate of jobs than the European economy does. However, until Europe’s leaders decide to address the real elephant in the room, namely the welfare state, they will never be able to put their economy on a trajectory toward U.S. levels of growth and prosperity.
