Europe's Economies: A Continent of Contrasts

A tour of Europe's varied economies, what they share, and why Europe's growth has lagged behind the United States in recent decades.

Europe is home to some of the richest and most equal societies in the world. Its economies range from industrial Germany and financial Britain to agricultural and tourism-based economies in the south and fast-growing economies in the east.

Shared features

Many European economies share characteristics:

High living standards, with long life expectancy and strong public services.
Large welfare states, with public health care, generous pensions and unemployment support.
Lower inequality than the United States, especially after taxes and transfers.
Strong worker protections and influential trade unions in many countries.
Deep integration through the European Union, its single market and, for many, the euro.

Germany’s post-war model is often called the social market economy: competitive markets combined with a strong social safety net and cooperation between employers and workers.

The growth gap

Over the past few decades, Europe’s economy has grown more slowly than that of the United States. In the mid-1990s, income per person in the EU was well below the U.S. level, and the gap has widened since. Much of the difference comes from productivity growth, especially in technology industries, where the U.S. has produced most of the world’s largest companies.

Different choices

Part of the gap reflects choices. Europeans on average work fewer hours per year and take more holidays. Some economists argue Europe converts part of its productivity into leisure, rather than income. Others stress weaknesses such as fragmented capital markets, slower adoption of new technologies and heavier regulation.

Output per hour versus per person

Output per hour worked in some European countries, such as France and Germany, is not far below the U.S. level. But because people work fewer hours, output per person is lower. Whether this is a problem depends partly on whether shorter working time is a choice people value or a constraint.

Thinking Europe is one economy

Europe includes very different economies, from high-tech Nordic countries to tourism-dependent islands and industrial eastern regions. Averages hide large differences in growth, unemployment and income.

Key takeaways

Europe has high living standards, large welfare states and relatively low inequality.
Germany's model is known as the social market economy.
Europe's growth and productivity have lagged the United States, especially in technology.
Shorter working hours explain part of the gap in output per person.