Is Europe falling behind in the global race as the Chancellor claims?

17 January 2014

"Make no mistake, our continent is falling behind."

That was one of Chancellor George Osborne's key messages from his speech on Europe this week, and he made his reasons for saying it clear:

"Over the last six years, the European economy has stalled.

"In the same period, the Indian economy has grown by more than a third.

"The Chinese economy by nearly 70 per cent.

"Over the next 15 years Europe's share of global output is forecast to halve."

Europe doing badly

If we assume the Chancellor is referring to the EU, he's right to point out it has stalled. Between 2006 and 2012 the combined Gross Domestic Products of the 27 EU countries at the time (missing out Croatia who joined in 2013) rose by barely more than 2% after falling sharply during the 2009 recession.

To get an idea of how small that is, if the EU had continued to grow at the pace it set in the few years before the crisis (just under 3% a year), it would be 18% bigger today instead of 2%.

George Osborne goes one step further by comparing Europe to India and China. The latest stats show the gap is even greater than he claims. Between 2006 and 2012 China grew by as much as 78% while India grew by half. That's an average yearly growth of 10% for China and 7% for India compared to a small 0.8% for the EU.

Falling behind in the global race

There's another side to this story and the Chancellor touches upon it in his last claim: Europe isn't just sitting still, it's declining compared to everybody else.

To start with a sense of perspective, in 2012 the world's combined GDP totalled some £41 trillion (or £41,000 billion). The EU was worth about £10 trillion and the UK £1.5 trillion.

So at £10 trillion the EU accounts for about a quarter of the world's combined GDP, slightly down on its share back at the turn of the century.

The Chancellor is suggesting that Europe's share of global output will halve over the next 15 years. GDP forecasts are made by many different organisations and we haven't been able to find one corresponding with Mr Osborne's 15-year timeframe.

As an example the latest forecasts from the OECD project how major countries' growth will fare over the next 50 years. They don't project the EU's share but instead focus on the 15 countries in the old Euro area: that includes large economies such as Germany and France but excludes the UK.

The findings do suggest this set of countries will see their collective share decline - from about 17% now down to 10% by 2060.

That doesn't mean Europe will be producing less then than it does now: the OECD still projects the Euro area's GDP to more than double between now and 2060.

But that won't necessarily count for very much if global prices rise faster. Europe will be producing more but it will be at a competitive disadvantage when it comes to trading its produce with the burgeoning Asian economies.

We'll update our analysis once we hear back from the Treasury on the Chancellor's elusive forecasts.

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