Are European firms less competitive than US firms? And is competitiveness more important than competition?
Mario Draghi released a report on European competitiveness on September 9th wherein he suggests ways to make the EU’s economy more competitive. The background to the report is that the EU’s economy has been eclipsed by the US economy in the last decade or so, going from the two being relatively equal in size to a clear advantage for the US. Draghi’s analysis is that the EU needs to be more economically integrated and that it needs to invest more. The Economist recently released data showing how much lower average revenue and return on invested capital is for the EU as compared to the US which support Draghi’s position. Or does it?
The idea that smaller companies offering lower return on capital is a bad thing is intuitive. Surely larger and more profitable companies are good for an economy? Well, it depends on why the companies are large, and the source of their profits. Technology, defence, and pharmaceuticals especially stand out in The Economist’s data for bringing in more revenue in the US than in the EU. And it is easy to see how the US is world leading those areas. But companies compete on more than technology, like price for instance. Economic theory holds that economic profits should be close to zero in cases where competition works well. US tech is a sector where competition demonstrably does not work well, as the several pending anti-trust cases against Google showcase. Similarly, the high revenues generated by pharmaceutical could just as well be explained by the inefficiencies of the American public health systems as by US companies being more efficient.
The point is that a productive economy is one which produces a large amount of useful goods and services, and the measurements we have for gauging that are often proxies and rarely capture what is really going on. Charging a higher price for healthcare is a great thing for GDP as it is the combined price of all things produced in a country according to the price it is sold at, so a higher sticker price means a greater contribution to GDP. Obviously high prices for healthcare is not good for the people living in that economy.
Having big companies is bad not just in terms of how it gives certain companies undue market power, but is also bad from a political economy perspective. Giving a big American capital holder another $10 million is a drop in the bucket meaning that they are more likely to save it rather than to spend it, whereas giving a family owned European restaurant another €10000 is much more likely to be spent which is good for an economy with an established capital base. Rents captured by big American companies accrue to a small number of obscenely wealthy capitalists whereas rents captured by a broad base of small companies go to entrepreneurs and managers who will have a use for the money.
The American economy might be bigger and offer greater returns on invested capital than the European economy, but the question of which system offers a better life is quite disconnected from these numbers. Emulating the American economy is in my view a mistake. The American economy is big, but it is not fair and the increased size is of no use to the average citizen if it is just captured by multi-billionaires like Bezos or Thiel. Europe may not have the same competitiveness as the US, but it seems a lot more competitive.
If you liked this post you can read a previous post about American politics here here or the rest of my writings here. It'd mean a lot to me if you recommended the blog to a friend or coworker. Come back next Monday for a new post!
I've always been interested in politics, economics, and the interplay between. The blog is a place for me to explore different ideas and concepts relating to economics or politics, be that national or international. The goal for the blog is to make you think; to provide new perspectives.
Written by Karl Johansson
Cover photo by RUN 4 FFWPU from Pexels, edited by Karl Johansson
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