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Opinion

Europe gets to grips with the work ethic

The productivity gap between the US and Europe is not as wide as is commonly believed. And eurozone productivity is growing, with more of that gain accruing  to investors than to workers.

The accepted wisdom is that the eurozone is the graveyard of productivity and enterprise, afflicted with a rigid and inefficient labour market that creates a huge productivity gap with the US.

Yet net equity outflows from the US to the eurozone have rocketed to $8 billion a year in the past year, reversing the huge inflow into the US recorded since 1997.

The reality is that the productivity gap between the US and Europe is much smaller than the consensus would allow. And it will narrow further. Much of the gap was created by superior GDP growth in the US. That is set to wane as the credit and asset bubbles that sustain it deflate. Also, it was abundant capital investment in the US that drove up its labour productivity, but not the productivity of each capital unit invested. And capital investment is now moving towards eurozone levels.

Productivity gains in Europe are more likely to accrue to profits than is the case in the US, and a strong euro will also hold down inflation and drive reform.

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