Perhaps we in Europe choose to be poorer than Americans...

Behind a contrast in monetary policy lies a cultural divide between continents – and we are in the middle

The contrast in monetary policy between Europe and the US is a result of the contrast in economic outcomes (Getty)

It looks to be quite on the cards that Mario Draghi will try to pump things up just at the same time as Janet Yellen starts to try to damp things down. Last week, the President of the European Central Bank dropped a strong hint that he will seek to bring in some boost to the QE programme before the end of the year. That will be just about when the Federal Reserve is expected to make its long-awaited increase in interest rates, though it is perfectly possible that yet again something will crop up that makes it chicken out.

Behind this contrast in monetary policy is a contrast in economic outcomes. That is, after all, why policy is so different on the two sides of the Atlantic – with, on this particular issue, the UK being closer to the American East Coast than it is to the Continent. This divergence has become so accepted as normal that we hardly think about it, yet if you stand back it is extraordinary. Two parts of the developed world, continental Europe and North America, have similar education levels, broadly similar access to technology, and similar financial and commercial systems. Yet they differ both in cyclical performance and long-term structural growth.

North America pulled slowly but reasonably steadily out of the great recession. Europe, or at least the eurozone, had a second recession of its own. Looking forward, the US and Canada are generally estimated to have an underlying growth rate of roughly double that of the Continent: a little less than 3 per cent a year against 1 to 1.5 per cent. Why?

Demography explains quite a lot. North America has a rising population, which is projected to climb further, whereas continental Europe has currently a stable one, but one that is expected to shrink. If you look at the working-age populations, the contrast is greater. For example, the UN projects that in the US this will climb by about 18 per cent between now and 2050, whereas the German working population will fall by 25 per cent.

These are just projections and may be changed by shifts in the birth rate or large-scale migration. Fertility rates on the Continent are among the lowest in the world, with German and Italian mothers having an average of some 1.3 babies per mother and Polish mums are even lower. Of the large nations, only France approaches a replacement rate of 2.1 babies per mother. This may change a bit and there are indeed signs that fertility rates may be climbing a little. But it is hard to see enough of a change taking place to transform the outlook.

Migration might be a game-changer. If Germany were to accept a million migrants a year for the next 20 years, that would indeed transform its demographic outlook. However, in the short term it would be less positive, given the need to train and apply effectively the growing workforce, and educate and support their families.

Lower birth rates, however, cannot explain all the divergence – quite aside from the question as to why Europeans should chose to have smaller families than Americans. One important difference, it was thought, was that the US market had larger economies of scale. Part of the rationale that underpins the entire European project has been that in developing a single marketplace – first in goods and then in labour and services – Europe could achieve these economies of scale. Results have been disappointing. In the early years of the project, Europe did indeed seem to be closing the gap in GDP per head. But, for the past 15 years or so, continental Europe seems to have slipped back.

Maybe Europeans are simply choosing to be poorer than Americans, but work shorter hours and have more settled lives

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As yet I don’t think there has been any complete explanation for this failure. Part of it is almost certainly poor policy choices. Partly it may be a failure to integrate. For all the lip-service about the single market, many services face cultural and regulatory barriers when they try to enter another EU state. Some countries have hobbled their labour markets with legislation that protects those already in jobs but has the effect of excluding people, mostly the young, trying to get work. It is contentious to say so, but it may be that the rigidities imposed by the common currency have more than offset the benefits that the euro was supposed to bring. Certainly European underperformance has become even more marked since the euro.

There are other explanations trotted out. These include higher European taxation, disincentives to work created by the better welfare systems, onerous EU regulation and so on. The trouble with these is that actually the US and Canada are not so different from Europe as is often made out. So, maybe the unexplained element is down to that mushy word “culture”. Maybe Europeans are simply choosing to be poorer than Americans, but work shorter hours and have more settled lives. And Britons, as always, are somewhere in the middle.