A central reason for this has been fiscal policy: whereas the United States has been spending money with seeming impunity, European countries have been constrained.

Government spending in Europe moderated after COVID-19, but the U.S. kept on going.  Congress passed the CHIPS Act, the Infrastructure Bill, and the Inflation Reduction Act (which had more to do with energy transition than the price level).  Together, these initiatives will cost more than $2 trillion, spread over several years.  The issuance of new Treasury securities has been immense.

By contrast, annual deficits in both the United Kingdom and the euro area are capped by formal guidelines and investor appetite for sovereign debt.  With rising interest rates increasing the costs of debt service, room in national budgets for expansive investments has diminished.

Europe could probably use a fiscal boost.  Britain’s economy is growing only marginally, and several euro area economies (including Ireland and Germany, which have traditionally been leaders) are contracting. Monetary policy across Europe remains restrictive.  But officials in the region have been reluctant to propose stimulus.

An interim budget released by the Chancellor of the Exchequer (equivalent to the U.S. Treasury Secretary) offered little in the way of growth initiatives. In late 2022, an ambitious budget proposal roiled Britain’s government bond market; policymakers fear a similar reaction if too much fiscal expansion is suggested in the run-up to the U.K. election later this year.

Europe is being similarly cautious, having just adopted updated debt and deficit rules last year.  The continent is struggling to find space for additional spending on security, energy transition and digital transformation.

Clients I met with expressed wonderment over how the U.S. Treasury can continue to issue so much debt without apparent consequence.  Europeans also struggle to understand how America can be almost halfway through its fiscal year without a complete budget, and why markets haven’t punished the periodic threats of government shutdowns or technical defaults.  I had to admit that I shared their concerns, and pointed them to the article decrying the sad state of U.S. finance we wrote last fall.

For now, the lack of fiscal discipline in the United States is paying economic dividends.  But Europe’s experience suggests that those who fail to be sufficiently austere will have austerity thrust upon them.  Washington would do well to heed that lesson. 

Europe has also lagged the U.S. in productivity growth.  Gross domestic product (GDP) per capita has expanded more rapidly in America for more than two decades, and the gap has widened since the pandemic.

Some have posited that America’s headlong rush into artificial intelligence is at play.  The top U.S. stocks, known as the “Magnificent Seven,” are dominated by drivers of the new technology.  (By contrast, Europe’s top stocks are known as the “GRANOLAs,” a composite of first letters that is dominated by pharma companies producing path-breaking weight loss drugs.)

But the impact of AI is largely ahead of us.  Structural factors that foster more innovation have favored the U.S., providing hope for inflation, market performance, and debt sustainability.

Housing shortages are chronic across Europe.  Construction has not kept up with the flow of newcomers, keeping substantial upward pressure on rents and property prices.  Europe does not include the costs of shelter in its inflation measures to the same degree that the U.S. does; if American conventions were used, European inflation would be worse than is currently stated.