Hamish McRae: Europe could bridge the economic gap with the US - but there's no way without the will

The UK is only barely catching up. The rest are not only poorer but becoming even more poor
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Most European countries are still losing ground to the US in economic terms and most of those that are closing the gap are doing so very slowly.

That is the somewhat dispiriting conclusion of the latest report from the Organisation for Economic Co-operation and Development (OECD), Going for Growth, which looks at comparative international performance within the developed world and what might be done to lift the laggards.

The benchmark is the US because it remains almost the richest country in the world in terms of gross domestic product (GDP) per head and has almost the highest productivity per head. Only Luxembourg, which is tiny and has a special position within the EU, and Norway, which has oil, have higher GDP per head.

As for productivity, those two plus the Netherlands, Belgium, France and Ireland, are the only ones that have higher productivity per hour worked. Among those, Belgium and France have high unemployment (thereby excluding their less productive workers from the statistics), the Netherlands has high concealed unemployment and Ireland has benefited from massive high- productivity inward investment.

So the big picture remains that somehow or other the US is more productive than everywhere else. There is a further debate about whether GDP per head should be the principal gauge of economic performance, or whether we should take instead General Well-being or some other measure that takes into account how satisfied people are with their lives. That is a very reasonable point. The UN report this week about the condition of the developed world's children should be a good counter-balance to this emphasis on GDP. It reminds us that the welfare of children in the UK has been neglected and needs to be improved.

Nevertheless GDP per head, for all its flaws, does remain an easily-available measure and labour productivity remains the most important single determinant of GDP per head.

There are further objections to the OECD work. These include the points that they do not take into account environmental costs and that they exclude India and China. The environmental aspects of economic growth are tackled elsewhere, and as for India and China, they are not in the study because they are not members of the OECD - they are not yet fully-fledged developed countries. But there is plenty of meat in the statistics we have to try to improve Europe's performance.

To top graph shows the big picture. It is a simplified version of the OECD's table, showing selected countries, comparing the rest of the developed world to the US. On the vertical axis there is growth - countries above the line have been growing faster than the US over the decade to 2005, those below growing more slowly. On the horizontal axis there is the absolute level of GDP per head, with those on the left poorer than the US, while those on the right are richer.

Most large European countries, with the exception of Spain and the UK, are not only poorer but have been losing ground - the UK is only barely catching up. The rest, including Italy, France and Germany, are not only poorer but becoming even more poor in relative terms.

This has obvious and alarming implications. If, for another generation, Europe falls further and further behind the US, its best and brightest young people are likely to want to emigrate. If the gap in wealth stays at 20-25 per cent or less maybe the social and cultural advantages of Europe are sufficient to retain talent. But if the living standards gap slips to 40 per cent or more, as it will do on present trends for Italy and Germany within a decade, then there will surely be a problem.

So what is to be done?

It is complicated and I don't want to over-simplify. In any case the response from different European countries will be different because the things holding them back are different. For example the UK suffers from an under-qualified workforce, whereas many other European countries suffer from poor regulation. But it is worth noting two particular aspects of competitiveness: application of information and communications technology (ICT) and rate of business start-ups.

You can measure the impact on productivity of investment in a number of ways but one aspect does seem to be important: the ability of companies (and the state sector) to reap the efficiency benefits from ICT investment. The bottom left graph shows the impact of both total investment and ICT investment in selected countries. Most interesting is the gap between the English-speaking world and the non-English speaking countries (Sweden being an honorary member of the Anglophone club). The Anglophone countries seem to have a much higher information technology element in their investment. The other graph shows barriers to entrepreneurs. These are much lower in the English- speaking world (Denmark being the honorary Anglophone country here). British entrepreneurs might be surprised to learn that the UK has fewer administrative barriers than almost any other country but that does still seem to be true.

There are many other aspects of the various European econ-omies that explain the lower performance. These include labour market barriers and education skills. As a very rough rule of thumb, improving the labour market of most continental European countries, so that a higher proportion of the potential workforce was in work, would have a big impact on the gap. On the other hand in the Engish-speaking countries the main task is to raise skills, particularly in secondary education.

The big point here, though, is that much of the gap can be explained. There is no magic ability or skills that Americans have that Europeans do not have. The policies that the OECD suggests to close that gap, however, are rather different from the policies that EU governments have been urged to adopt under the Lisbon Agenda. It may even be that the European establishment does not really want to close the gap. Or at least it feels that the political costs involved do not warrant the advantages that might be gained.

In short, the good news is that this is fixable; the bad news is that in much of Europe at least, it won't be fixed.

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