I've written previously about the growth gap that's been opening up between the US and Europe over the last decades, and particularly Germany's poor economic performance. Digging down into the numbers, there are some more interesting observations to be made. In the following I am using annual GDP data from the OECD. The total GDP numbers are broken down into a few categories, such as private consumption, government consumption, capital formation, imports and exports. As one of the big differences between Europe and the US is the size of government, it might be interesting to look at the impact of government consumption to total GDP growth.

It should be noted that government final consumption expenditure does not cover the total impact of the government on economic growth. As the name says, it's only consumption that's covered. The difference between total expenditure and consumption goes into categories like capital formation. Government consumption as a percentage of GDP has remained fairly constant over the years for most countries, as this graph shows. In other words, the percentage of total GDP that comes from government spending has not changed much. In the US it has declined, while in Japan it has increased. Europe has been more or less constant. France has unsurpringly had the highest share of government consumption to overall GDP.

The actual contribution to GDP growth (in percentage points of overall GDP growth) is plotted in this graph. The high volatility makes it hard to deduce much from the graph itself, but in general, government consumption has had a positive impact on overall GDP growth. It has been growing as the size of the economy has increased.

To see the true impact of government consumption on growth, compare this graph of total cumulative GDP growth with the plot excluding government consumption. In both cases, the US has done best since 1991 (the earliest point for which OECD data are readily available, due to reunification). Japan has done worst, which was to be expected. But taking out government consumptionn shows just how big the impact has been. In the case of Japan, the rest of the components of GDP have contracted by almost 20% since 1991, and it's only been the enormous amounts of cash that the government has pumped into the economy that have prevented an actual contraction. But that has come at the price of running up the national debt to 140% of GDP, so it's all borrowed money that's been spent. Not on invesment, but on consumption, so it's gone.

Looking at the US, the recession of 2001 and 2002 is clearly visible, and the increase in government consumption has only partially offset these losses elsewhere in the economy. But there are some surprises in Europe. Germany and the UK have seen the economy grow to roughly the same cumulative gain since 1991 if government consumption is taken out of the equation. The UK had built up a lead from 1991 to 1998, after which it remained stagnant. (This incidentally coincides with the tenure of the Labour government.) The German economy has managed to grow during that time, but for the very large part that's due to exports. In 2002, exports amounted to 36% of GDP. Taking exports out of the picture, the German economy would have contracted by about 3% cumulatively since 1991 (this still includes government consumption). Over that period, the export contribution grew from 24% of GDP to the above-mentioned 36%. The strong euro is a real headache for the German economy, because it undermines the one sector that has actually been doing well.

Going back to the ex-government consumption numbers, the graph shows that net cumulative economic growth in the Eurozone in the period 1991-2002 was close to zero. In other words, if it had not been for government consumption, the Eurozone economies would not have grown at all in this period. That's a pretty glaring indictment of economic performance.

The total cumulative contribution to GDP growth from final government consumption expenditure is plotted here. It shows that the net contribution in the US has not been very different from that in the Eurozone. The difference in economic performance is largely due to growth (or lack thereof) in the other components of GDP, which will largely be due to private enterprise.

The total cumulative outperformance of the US economy relative to the Eurozone does not change if you take government consumption out. This is a somewhat surprising result, in that one might have expected the gap to widen. But the spending binge by the US government since 1997 has led it to pull even with the Eurozone in this regard. However, the crucial difference is that the US economy has been able to grow in its other GDP sectors too, whereas all the Eurozone growth since 1991 has been due to government consumption growth. That's not a sustainable or healthy position to be, witness the plight of Japan. Moreover, the share of GDP coming out of government consumption in the US has been declining, although the recession has nudged it back up. In th Eurozone, the share has remained constant.

Europe desperately needs to get its real economy going again. But it's facing the headwinds of the strong euro and the suffocating regulatory environment. As the Japanese experience has shown, hoping that government spending will kick-start the economy is not a wise strategy. So it's back to the old mantra: Europe needs economic reforms. But somehow they never quite seem to happen.