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
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By |2019-02-20T13:04:46-04:00October 30th, 2014|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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