Fast and Slow

Why is US growth faster than Europe?


In 2008 and 2009, the global economy collapsed, brought down by a credit crunch that started in here but quickly spread around the world. Since then, the US economy, while weak, is moving back towards normal. Europe, on the other hand, looks like it’s about to enter its third recession in six years. Why the difference?

Most casual observers would say it has something to do with the rigidity of their central bank and the fiscal restrictions of the Euro. But in fact, US government spending has contracted more. The key difference has been household spending. In the US, it resumed growing in 2010. In Europe, spending stalled in 2010 and hasn’t recovered.

Source: Bloomberg

Why the difference? In a word, bankruptcy. Bankruptcy laws are far more debtor-friendly over here than over there. Since 2009, millions of American consumers and hundreds of thousands of small businesses have filed, a process that takes several months. But in Europe a bankruptcy proceeding can take years. In Spain, mortgage debt is never discharged. European consumers are locked in debt.

As a result, US households have been able to reduce their debt burden during a period of high unemployment and flat wages. Once the worthless loans have been written off, people are able to start over. And our economy is moving back to normal, even as Europe struggles.

European officials are right to look at reforming their labor laws as a way to get their economies back on track. But if they want to encourage people to spend, it’s time to close the debtor’s prison.

Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
Leave a comment if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd •

Leave a Reply

Your email address will not be published. Required fields are marked *