Fareed’s take: Europe is unable to keep pace with America

Here's my take. An American in Europe these days might find himself in a strange situation. Or at least that was my experience, having recently spent a week there travelling from Germany to Norway to Spain. In the United States, we talk about our economic problems in Europe. The talk is all about how Europe has been unable to keep up with the American powerhouse. The facts are stark. In 2008, the United States and the eurozone economies were roughly the same size. Today, the American economy is nearly twice the size of the eurozone. And it's not just one measure. Average European income is now 27% lower than in the US and average wages 37% lower. When the British left the European Union, they fantasized about forging a close relationship with the United States, almost becoming the 51st state. Were that to happen, it is surely sobering to Britain's to realize that it would be the 51st poorest state in the Union, with a per capita GDP below that of Mississippi. The American economy towers above Europe's these days. America's technology companies dominate the continent. American banks are far more profitable than European ones. American energy production has created a boom in manufacturing, which is luring many European companies to the US. As one German CEO said to me, America is an easier place to do business, has fewer regulations, and now has much lower energy costs. How do I rationally invest in Europe? Two of Europe's largest oil companies, Shell and Total Energies, have mused about fleeing Europe and floating their shares on the New York Stock Exchange. European leaders understand the problem and have proposed a series of solutions. Two former Italian prime ministers, Enrico Letta and Mario Draghi, have been tasked with producing reports with policy ideas to counter the slide. Letters is out, and many people who have spoken to Draghi have a sense of his proposals as well. They centre on the central issue. Europe is too divided. Technology is a good prism through which to understand the challenge. To create powerful digital companies these days, you need three factors great engineering talent, easy access to capital, and a large market into which you can quickly deploy the new products scale. America has all three, as does China. Europe has some of the world's most talented engineers. It has access to capital, but it does not have a single market. Despite often being described as such, tech entrepreneurs struggle to navigate 27 different markets with different regulations, authorities, standards and requirements. This is why, as the letter report notes, Europe is home to €33 trillion of savings, but every year, €300 billion of European money is diverted to overseas markets to find superior investments, most of them in the United States. These economic challenges are mirrored in the geopolitical arena. Europe remains a conglomeration of countries that pretend to have a unified defense and foreign policy. Defense spending is now rising but remains too low, having gone down to a new normal since the end of the Cold War. Germany is the best example. In the 1980s, West Germany had over 500,000 soldiers in its army on high alert to take on a Soviet invasion through the folder gap. Today, a unified Germany has fewer than 200,000 troops under arms, and readiness levels are not nearly as high. The British Navy that once ruled the waves is now smaller than it was in the 17th century. And while efforts are underway to boost spending, two of its warships were recently decommissioned because they simply weren't enough sailors to man them. European countries need to spend more, but they spend a considerable amount already. Alas, much of it is wasted because there is little coordination and no grand strategy that animates it. Many W European countries still spend money on territorial defense. Who is going to invade Belgium when they should focus on the capacity to move troops and equipment to defend the eastern frontiers of Europe, which is where the threat comes from. Again, because European producers do not have continent wide scale, much of Europe's defense spending goes to American companies. The solution to Europe's woes can be summarized in one line, a deeper, more united, more strategic Europe. But that solution means, inevitably, more power to the European Union, which feeds the populist backlash that was so evident in last week's elections. A European politician explained to me the continent's dilemma. We know what to do, he said. We just don't know how to win an election after we do it. Perhaps the best rejoinder would be to quote another European Jean Monet, one of the founders of the European Union. Europe will be forged in crisis and will be the some of the solutions adopted for those crises.