The Decline of Europe

In today's Paul Krugman blog, he refers to an essay by Jim Manzi in National Affairs.  Basically, Manzi argues that the choice Europe made to be socially democratic (highly socialized) has led to an economic decline of Europe.  Krugman attempts to refute Manzi's argument with his prototypical condescending commentary.  He suggests that Mr. Manzi has misread the data.  Mr. Manzi suggested that the data showed that Europe began the 1970s at around 40% of world GDP and ended 2009 with less than 30%, a rather dramatic decline.  Mr. Krugman replied that Mr. Manzi was reading the wrong data because he included the old Soviet bloc.  In fact, Mr. Manzi did read across numbers, using data from all of Europe (including the Soviet bloc) in the beginning, and ending with the EU-15 data (excluding the old Soviet bloc countries).  But, that is where Mr. Krugman's correct analysis ends.  Below is a chart from the data used in their exchange, but I have focused on the EU-27 (which includes all the new EU countries from the former Soviet bloc; focusing on the original EU countries would yield similar results, but just lower overall percentages).  The chart is presented below.

Note that the EUs share of world GDP does not start out quite as high as 40%, but does end below 30%.  Now that the data are consistent, we can focus on the original question...has the EU lost competitiveness with its social democratic policies?

One might be tempted to say that over time, the developing world is over-taking the developed countries by virtue of their more rapid growth.  But, the graph reveals that the U.S. started out at about 25% of world GDP and ended at about 25% of world GDP.  Europe, on the other had, had a substantial decline.  To be sure, China and other developing countries gained in relative economic size, but it was at the expense of Europe, not the U.S.

This, of course, is not definitive proof that European social policy resulted in this decline, but it is clear evidence that a decline in competitiveness has occurred despite what Paul Krugman believes.