How rich is Europe? And how did it get there?

In the recent Freakonomics podcast (Freakonomics is my favorite podcast on economic issues) Yuen Yuen Ang, a professor of political science at the University of Michigan, who grow up in Singapore, is telling a a thought-provoking story: 

I remember the day when I was a six-year-old child and the train station opened up near to my home and my whole family dressed up like we were going to church because it was such an event. And I was so blown away, I was like, “Oh my gosh, this train goes underground and then it comes up again.” And of course, today nobody talks about the subway system, it’s the most boring thing, so what used to be so spectacular has become normalized and that is one attribute of development. You kind of take what you have for granted.

In Europe too, we take prosperity for granted.  

In his book “End of Millennium“, the Spanish sociologist Manuel Castells writes: “The bulk of the population in Western Europe still enjoys the highest living standards in the world, and in the world’s history.” But how did prosperity and wealth in Europe actually come about?

You can probably trace the origins even further back, but mainly the starting point of Europe’s wealth is the Industrial Revolution. This transition period to new manufacturing processes, started in Britain, then spread rapidly across continental Europe, from 1760 to 1840. The transition included going from hand production methods to machines, new chemical manufacturing and iron production processes, the increasing use of steam power and water power, the development of machine tools and the rise of the mechanized factory system.

The Industrial Revolution changed everything. Before the Industrial Revolution, gross domestic product (GDP) per capita was broadly stable. The Industrial Revolution began an era of per-capita economic growth. Most Economic historians agree that the Industrial Revolution is the most important event in the history of humanity since the domestication of animals and plants. 

Then there were two devastating wars. World War II destroyed most of Europe’s industrial centres, and much of the continent’s infrastructure was laid to waste. Following that war, many non-Socialist European governments moved to link their economies, laying the foundation for the European Union. 

The division into east and west was far-reaching. The difference in wealth across Europe can be seen roughly in the former Cold War divide (apart from a few exceptions like Estonia, Slovenia and the Czech Republic). Today, Europe’s largest national economies in terms of their GDP are Germany, United Kingdom, France, Italy, Russia, Spain. 

Not surprisingly, the big countries are ahead here. However, the prosperity between the countries becomes more comparable if one looks at the GDP per capita. Here completely different countries lead, namely Luxembourg, Ireland, Switzerland, Norway, Denmark

Now, a comparison not within Europe, but with Europe. The United States and the European Union are the two largest economies globally. As of 2021, together they share 42.4 per cent of the entire global GDP in nominal terms. By $5,548 billion, the United States has a 1.32 times higher GDP than the European Union. 

The difference has been growing. In the past, most of the time, the USA had a higher GDP. According to estimates by the World Bank from 1966 to 2019, the USA has a higher than Europe GDP for 41 years, and the European Union has a higher than the USA GDP for 12 years. 2011 was the last year when the European Union had a higher GDP than the United States.

The last note is reserved for distribution: Income inequality, that shows how unevenly income is distributed throughout a population, is declining in Europe, as the economists Stefano Filauro and Georg Fischer state in their paper “Income inequality in the EU: General trends and policy implications“. And inequality among EU citizens is significantly lower than among US citizens. 


PS: I recommend the above mentioned episode of Freakonomics not only for Yuen Yuen Ang’s story about her home country but also for her scientific work. That is, among others, comparing democracies with authoritarian governments like China. Yuen Yuen Ang argues that the USA and China for example have more in common than we’d like to admit – for isntance widespread corruption. It only takes place in different ways. But hear for yourself.


Notes: 

https://onlinelibrary.wiley.com/doi/book/10.1002/9781444323436

https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)_per_capita

https://en.wikipedia.org/wiki/Industrial_Revolution

https://worldpopulationreview.com/country-rankings/richest-european-countries

https://tradingeconomics.com/country-list/gdp-per-capita-ppp?continent=europe

https://voxeu.org/article/income-inequality-eu-trends-and-policy-implications

https://en.wikipedia.org/wiki/Economy_of_Europe#cite_ref-7

https://statisticstimes.com/economy/united-states-vs-eu-economy.php

https://lsa.umich.edu/polisci/people/faculty/yuenang.html

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