US Versus EU: The Race Is On

Many Americans, me included, have been oblivious of the economic powerhouse forming in Europe. The European Union (EU) has been slowly and steadily gaining strength and momentum and has today become a major financial challenger to the U.S.

This article will look at the EU from its origins to its present-day status.

Of late, most of our economic focus has been on China, due to the enormous current-account deficit that the U.S. has created with that country. We are simply importing too many Chinese products while exporting too few of our products to them.

Distraction from China

In a late April article, With Textile Quotas Lifted, China Comes Out Roaring, I talked about the threat that we are facing from China. It’s obvious to me that we have to quickly address our trade relations with that country.

What has not been so obvious is the simultaneous threat from our long-time allies, the Europeans. Having just returned from a three-week business/pleasure trip to Europe, I have become acutely aware of a new economic challenge.

A European friend let me borrow the book, The United States of Europe by T.R. Reid. As I read it during my stay, I had ample opportunity to speak with European and American businesspeople to get their impression of how serious this economic challenge is for us. In my opinion, it is a considerable concern.

Birth of the EU

Shortly after World War II, the Europeans had become so disillusioned with war that they started to focus on ways by which they could work together to avoid future conflict. At that time, Winston Churchill brought up the concept of a United States of Europe. He felt that the continent would be better served if the various countries could join together to work in unison to secure their long-term economic future and security.

Thus, the seeds of a new union, the European Union, were planted.

Growth of the Powerhouse

In time, it became increasingly obvious to the Europeans that they could accomplish much more as one political body. As you now know, they have forged a political and economic dynamo.

Look at Europe today. It now has its own currency, the Euro, and its own central bank.

The EU also has some strict guidelines for its member nations as to how they must conduct their fiscal business. Put another way, the Union will not tolerate runaway budget deficits by its members. Annual deficits are strictly limited.

As you can imagine, the U.S. would fail some of the EU’s fiscal tests.

Source of the EU’s Strength

Why am I so emphatic about Europe’s strengths? Well, consider this:

The EU has about 450 million citizens in 25 member nations. It dwarfs the U.S. in the size of its population. The combined Gross Domestic Product (GDP) of the member countries exceeds that of the U.S.

Given its sheer size in both population and combined economies, Europe is truly a formidable competitor. And, it is clearly aware of the fact that it is in an economic contest with the United States.

Some EU Weaknesses

The picture is certainly not totally negative for the United States. Let’s look at some of Europe’s problems.

As I see it, there are two gnawing concerns for the EU. First of all, Europe has essentially a socialistic economy. This is so because of the enormously liberal benefit packages bestowed upon most of Europe’s citizens.

To begin with, a new employee of a European country is guaranteed at least one month’s vacation, far in excess of what we have in the United States. Also, EU citizens have liberal health care benefits.

These benefits greatly increase the built-in cost of European products, escalating the challenge for European countries when competing with their U.S. counterparts.

The second major concern is that both France and the Netherlands have recently voted against adopting the current EU constitution. It is difficult to say what effect this will have on the long-term future of the EU. My guess is that Europe will somehow overcome this hurdle, band together and continue to move forward.

How the US Can Compete

In order for us to meet this economic challenge, we must do several things. First of all, we have to get our own economic house in order. This means that Washington must somehow create balanced budgets.

Also, we must address our current account deficits. Simply stated, we have to somehow achieve a level of exports that approaches the amount we are importing.

Finally, we must continually improve our economic efficiency. In other words, our unit cost of production must be kept as low as possible in order for us to make our exports attractive.

The United States has traditionally met and overcome its economic challenges. There’s no doubt in my mind that we can continue to do so.

But the first thing that we must do is be aware, at all levels, that Europe is rapidly becoming a major economic threat to us. Perhaps we’ve been focusing a little too much attention on China, and we have to redirect some of that to Europe.

I’m sure that we can. And good luck!

Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which deals in bringing small-cap companies public. He also is a frequent speaker on the subject of financial advice for small businesses as well as the IPO process. He can be contacted at [email protected].

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