Productive investment trends: EU vs. U.S.
Doris Hanzl-Weiss and Robert Stehrer analyze the investment gap between the U.S. and EU countries from 2000-2020, focusing on 2013-2019. They use data on gross fixed capital formation (GFCF) and capital stocks from Eurostat and EU KLEMS to compare investment rates (GFCF as % of value added) and growth rates of GFCF between U.S. and EU. In addition, they examine total GFCF as well as breakdowns by asset types (e.g. ICT equipment, R&D, software) and calculate results using both national price deflators and applying U.S. deflators to EU data
Key Findings:
- The EU has higher overall investment rates than U.S., driven by construction/buildings. But the EU has lower “productive investment” rates (excluding construction) compared to U.S.
- The gap in productive investment widened after 2008 crisis to 2-3 percentage points below the U.S. The main gaps are in ICT equipment, software/databases, and R&D investments.
- Some large EU countries like Germany, France, Italy have bigger gaps vs the U.S.
- The growth rates of productive investment since 2013 are similar between EU and U.S. but the EU is unable to close the gap that opened in 2010-2012 period.
- The results are sensitive to price deflators used – gaps are smaller when applying U.S. deflators to EU data.
- The capital-to-output ratio growth is stronger in the U.S. than EU, indicating less capital deepening in EU.
Dynamics of productive investment and gaps between the United States and EU countries
Authors: Doris Hanzl-Weiss, Robert Stehrer
From: European Investment Bank, The Vienna Institute for International Economic Studies
Europe’s productivity challenge: closing the gap with the U.S.
Erixon, Guinea, and du Roy in this policy brief argue that there are four major factors that contribute to the EU – U.S. gap of productive investments that Hanzl-Weiss and Stehrer discuss above. These factors are:
- Lower EU investment in research and development (R&D) compared to the U.S.
- Slower growth of intangible capital investments in the EU.
- Less business dynamism (creation and destruction) in the EU market.
- Lower levels of Foreign Direct Investment (FDI) in the EU compared to the U.S.
There are important points to make about Europe’s performance. For instance, it thrives on its international openness and high participation in international trade – creating positive channels for productivity. Importantly, there is variation in Europe. Central and Eastern European economies have had impressive rates of growth since their independence and, later, accession to the EU. Europe’s process of relative economic decline is rather focused on two regions: Southern Europe and Western Europe. These regions have not kept up pace with other advanced economies, and in recent decades they have been laggards in technology, innovation and market dynamism – important factors for TFP growth.
To close the EU – U.S. gap in productive investments the brief recommends:
- Increasing R&D spending to 4-5% of GDP by 2040
- Investing more in intangible capital and digital infrastructure
- Revitalizing the EU single market, especially for services
- Fostering greater market dynamism and entrepreneurship
Keeping Up with the US: Why Europe’s Productivity Is Falling Behind
Authors: Fredrik Erixon, Oscar Guinea, Oscar du Roy
From: European Centre for International Political Economy
