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November 4th 2005

Why have the US and EU economies diverged?

Over the last decade, the US economy has grown on average by 3% per year. Over the same period, the economies of the EU have collectively grown by 2%. In a new research paper, two prominent economists have attempted to make sense of this disparity. There theory is multifold, taking into account differences in government, education, and monetary policy. It is a combination of these three structures, they argue, that has driven the US economy to outperform that of the EU, and by extension, the perennial strength of the USD.

First, the US government is largely laissez-faire, meaning it attempts to allow capitalism and free markets to flourish, whenever possible. EU governments, in contrast, have attempted to implement socialist policies within a capitalist framework, including protectionist economic policies and jobs protections, which detract from economic growth. Next, the US government spends more money on education than their EU counterparts, and relatively more Americans have advanced degrees than Europeans. Finally, American policy makers have attempted to use monetary and fiscal policy to smooth business cycles (dampen the highs and raise the lows), whereas EU governments have turned to such tools of economic policy only when their economies need stimulating. The moral of the story is that the US has done a much better job than the EU over the last decade in facilitating economic growth. At the same time, this paper has outlined steps for EU governments to improve their respective economies.

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Posted by Adam Kritzer | in Economic Indicators, Euro, US Dollar | 2 Comments »

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2 Comments of “Why have the US and EU economies diverged?”

  1. marc Says:

    maybe economic growth wasnt’t the only purpose of european governments…

  2. dave Says:

    Marc… you’re right, lest we forget the other huge purposes of EU govs – namely bloated beaurocracy and massive unemployment.

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