Let's go back to the cliche about the long lunches with wine, because I actually think this is, you know, it's a joke, but it's also real. So the diamonds of the world, etc., and they say you got to stop with the long lunches and work hours, and then the Dominik's of the world say no, like we're just as productive or very close to as productive as you. And we enjoy life and we convert that leisure, that productivity into more leisure, which is arguably what the whole point is, etc. But then the counter would be like, let's just cope. And I, yeah, like in the sense that like, yeah, I know people who live a leisure life and stuff in Europe and they take nice long August vacations, etc. But I'm only getting access to an elite slice because I work in media and journalism and finance, and I don't really have a good look into like the broad European middle and lower classes and etc. Is there like in your view, does it diffuse like this thing? I know it from, you know, my elite contacts like you and elsewhere in Europe, but can we substantially say that the broad European middle class does, in fact, have, you know, substantially more leisure and time than their counterparts here?
Yeah, I mean, there are some aspects here. So especially in countries like Spain and Italy, there are a lot of informal hours that are not captured by the headline figures. There are adjusted series for that. But my own crunching the numbers says it doesn't make that much of a difference for the bulk of the European economy, the richer parts of the European economy. So that's Central Europe, the lowlands and Low Countries and Nordic countries that they do work much, much less.
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal and I'm Tracy Alloway. Tracy, I think a comment that you've made a few times over the episodes, it's like, no, no, no, it's not. It's like we have these conversations and then usually or frequently, whether we're talking about trade or AI or anything, there's usually, oh, and it seems like Europe is getting the short end of the stick here, or it seems like it's all going to end up being kind of bad for Europe.
Well, yes, I would say, like I've said this, I'm sure I have in the past. However, what I would say is, if you are bullish on AI and its ability to boost productivity across the board, in my mind you have to be bullish on Europe because there is no region out there, perhaps more motivated than Europe to try to eke out every extra ounce of output per work hour. Like if you want a long lunch in France, if you want to, you know, take a long vacation in August, you should be very, very interested in AI. And if you think those gains are going to be like widely spread through businesses and other countries, you know, think about Europe.
Did you purposely just say this, as did you see the red headline that just hit as you were talking? No, it's so surreal. So we just got a red headline the moment you were saying that: BMW, BMW target shedding a fifth of manager roles with the help of AI. I don't think that could be more perfect because, hey, this is it's the two sides of the coin. So it's like you have a lot of like big industrial behemoths in Europe that in theory, like you're like, I remember we've talked about this for years actually, you know, if there is going to diffuse across the economy suddenly, maybe these companies can be more lean, etc. But then this also gets to two things. Okay, what does that mean about jobs themselves? And then also it's like, okay, maybe they can modestly trim some of their management layers with the help of AI, but can that actually make these European car companies competitive with the Chinese companies? I know that's still, it seems like a tall order of the trajectory, but it's very funny that you said that the second that that headline crossed the terminal, plugged into the zeitgeist, I guess.
Yeah. One other thing I would say, speaking about the Zeitgeist, and since you mentioned China, we are recording this on September 30th, and Europe seems to be gearing up to take some sort of action against China in order to boost their competitiveness against it. We're not entirely sure just yet what that's going to look like, but people are definitely talking about it.
I mean, there's like this very deep concern about all of the industrial behemoths, a lot of the German chemical companies, the German automakers, etc. And like, you know, five, ten years ago, they were like riding high. And then suddenly in a few years, people are talking about potentially existential risk to them and so forth. And it's sort of wild to me. You know, thinking back to how much the mood has changed from, say, the first Trump administration and even the Biden administration when, you know, the idea of like, you know, there was the European anger at the Inflation Reduction Act and so forth. And, you know, just this this concern that the trade issue that was sort of really catalyzed by the U.S. and Trump a decade ago is now just sort of it's becoming just very mainstream.
Well, you used the word diffuse the benefits of AI. Again, I think, you know, the idea of having to compete seriously against China and take actual steps to do so has diffused across many places in the world.
Very well put. All right. Well, I'm very excited to say we do have the perfect guest, someone who's writing admired for a long time and who has interesting takes about all these things, including debates about European economic productivity, whether they're falling behind, etc., nuanced positions on various trade questions. We're going to be speaking with Dominik Leusder, economist, policy analyst, former researcher at LSE and author of The Leusder of Last Resort Substack. So Dominik, thank you so much for coming on Odd Lots.
So AI's going to be great for Europe, right? Because then during the working hours, as Tracy said, the workers can get more output and then they can expand their lunch breaks and their vacations in August.
I mean, you know, if you look at how Europe has done in the last, you know, last few decades of the booming tech sector elsewhere, despite never having been the the major innovator itself, maybe very early before the 90s, Europe may have contributed some of the the foundational research that of course American companies are very good at extending and commercializing. It seems that consumers have pocketed the the welfare nonetheless by lower with lower prices for like tech goods and services, and that's despite the fact that US tech companies are, you know, pretty pretty decently entrenched, you know, moats in Europe, legally entrenched ones. But I think with AI, it's going to be much the same. That's my impression, at least. I think it's probably true that Europe will not be able to create a frontier model any time soon. I think it's a good case that it shouldn't try to do so, and that it should instead focus on this issue of sovereignty, of being not being dependent on either the US or China for its tech stack, which are currently is very much and on focusing on whatever actually suits the business needs of most European corporates. My impression talking with people who are in this field who regulate AI at the European level, in their opinion, you know, near frontier models like Mistral, totally fine for the vast majority of business needs of most European firms. And the interesting fact, of course, that the fact that Mistral is launching models with a Chinese chassis, so with basically with the the weights of a Chinese model because you have doesn't have the compute to actually train their own weights, raises all sorts of other dependency issues, I suppose. But so far I'm pretty sanguine on on on Europe when it comes to the the AI race.
So if Europe has gained from a lot of technological developments in recent years, why all the why all the hand-wringing over competitiveness? And when you see something like Draghi's competitiveness report, which I think came out, what, 2022 2023? 24 like 2424? Okay, that shows you how much has happened since then. But when something like that comes out, like, what is the basis for the existential angst, I guess, yeah.
I mean, in a way that was the last sort of it was one strand of a set of arguments that was pretty much that were quite similar. They're all about, you know, in relative terms, Europe is falling behind and it's losing a competitiveness race versus the US. Jamie Dimon has been making these remarks frequently. He's saying he came to to to Europe last year and in a couple events this year as well, said you're losing because, you know, European GDP was 90% of the US ten, 15 years ago. Now it's 70%. This is not good. Now, there are a couple of reasons to assume that it doesn't really matter if that were true, because as I said, you have to it's a it's a very producers centric view of competitiveness and also of welfare, because the debate is kind of relating competitiveness to future welfare, saying if you're going to fall behind on competitiveness and we define competitiveness by, you know, output or output per hour, in other words, labor productivity, your living standards are going to go down in material terms relative to the US. And you're not going to be able to maintain your social model. That's I think the the main part of the Draghi report, my understanding that this is I think there's there's a different case for why Europe may not be doing well economically in its own terms. But even if you accept that this sort of relative decline is relevant, I think there's a problem with the data. So the the Draghi report was published in November 2024, I believe, was commissioned by the European Commission. It's obviously authored by the hero of the euro crisis, former ECB president, president Draghi, who's also a distinguished economist in its own right. It it argues a lot of things that I think I agree with that many other people would agree with, that Europe has to, you know, remove internal barriers to trade and the movement of capital and credits, it has to, you know, try to get capital investment up, but quite it's very very low compared to the US in particular that's falling behind in in the tech sector in particular. So Draghi this is obviously written well into the AI boom. Draghi is emphasizing the tech sector as the main driver of the the American productivity advantage. It's just a question of have a bigger advantage really is. And I think that's the centerpiece of the report is this notion that the productivity ratio so GDP per hour in PPP terms has gone from 90 something percent to 70 or 85%, depending how you measure it. Since 1995, when the rate of the tech boom in the US begins, and that implies a downward trend, a very sharply downward trend, and that it will continue if Europe doesn't do X, Y, and Z. I think that's where the problem lies, because it's I don't think this would be enough evidence to actually suggest that. True. Really. Even if you accept that Europe might have not been off growing as much as the US in recent years.
Well, what do you explain? What you see is the issue with the data then the core disagreement. So okay, total GDP and you know, dollar terms was at 90%. Now it's at 75 or 80%. That sounds like decline. It sounds like quote falling behind unquote. That sounds alarming. I can understand why Draghi wouldn't like to see that trend. Why what's the other spin on the same number? Or why do you think that's not the complete story?
So I think you can definitely make I mean, there's a there's a fundamental difficulty with comparing economies. If you think that's important to to organize your policy efforts around, you might want to have you want to compare yourself to your peer economies, and you can do that statically. So at every given year you can compare yourself or as a ratio. So what is the US? A share of global GDP is Europe's share global GDP. But the specific statements that people make including Jamie Dimon everyone else Draghi you we also quite online. So you know that this is a constant theme online as well. Is there's a trend for the level trend over time. And the trouble is that because economies are very different, because they measure economic activity quite differently, we can't actually say anything about levels over time. So so just to to get to the actual source of the beef, which is the PPP adjustment of the GDP figures. You can't obviously just look at nominal GDP and exchange rate at the end at market exchange rates like Dimon does, for instance, because all you're measuring is how the dollar has fluctuated over time, right? It's nothing to do with real output or anything. So you need to control for these exchange rate fluctuations you control for things like the differences in working hours between the US and Europe, which are institutional, their political choices about how you want to utilize labor inputs, how you want to trade productivity gains for leisure time. The US doesn't have any statutory limitations on working hours, and Europe has consistently decided to work less, but has remained employed at the same rates basically. So this is totally a choice to try to to work less. And if you if you adjust working hours and if you just for the relative price level, which is what purchasing power parity should do. So in other words, what does a French euro how many French euros do you need to buy a dollar worth of of of consumption basically. You you you you these are constructed by the the World Bank, and you have sort of a now you have a comparison that allows you to compare a price levels across time, in theory at least. The problem is with the Draghi's the measure, which is a frighteningly common measure. But I think this is a well documented to be the wrong measure. But it it does so by fixing prices at a given year. So basically it's measured in in in the report in $2,010. So if you express this in international dollars, which is a synthetic currency that has the same purchasing power as the US dollar, and its benchmark to a year in which people have gone around and collected prices in different countries and created these ratios that are consistent with each other. But if you fix the certain if you fixed price to a certain year, you have to use something to extrapolate between these different benchmarks. And the Draghi measure uses the real growth measures that the national accounts produce. So in the US and the European countries, what happens as a result is that you get this upward trend. So that data shows us that a decline over time that you don't see in PPP measures, that don't use the national account real growth rate, but they use relative inflation ratio. So how is the inflation ratio and inflation rates. How what have they compared to the US inflation rates. In Europe. And the problem is that we calculate this real rates differently. So in the US what the BEA does more aggressively than than the European offices for economic analysis is that they adjust prices, particularly in the tech sector. And this is why this is very relevant for Draghi's particular argument, much more aggressively for improvements in quality. So if the the computers I'm currently on a MacBook, for instance, sells are at the same or similar nominal price, even though the specs are much better, that's then that's measured as a as a decline in the quality adjusted price. So the same amount of nominal spending on tech services on goods shows up as more real growth in the US than in the EU, because applying that deflator at more aggressively means the inflation in that picture is lower. So real growth is higher at that point. But we don't know exactly how much that is about bottom on 2.20. 3% annually according to some studies. But over time if you the compounds every year and that creates this wedge between the EU and the US and it's it's that is, at least in theory to a large part due to typically this method method differences rather than actual economic underlying productivity growth. And that's I think the main issue. And then from there on, I think the the the other issue is, well, should we then look at the economy in purchasing power terms at all, or should we look at it purely in real gross terms? And that's a that's a whole different discussion altogether. And that's, I think, where the discussion has been going, between Paul Krugman and some European economists who are sort of trying to argue between each other over whether we should reform it, become a bit more like the US, which would result in, you know, loosening labor regulations, cutting welfare spending, and of course, making it easier for tech startups and so on to to to spend and invest in everything we can.
You say a little bit more about political choices here, because it does strike me when we make these comparisons, that it often feels very apples to oranges. And if, as you say, the US is choosing basically to work more and European countries are choosing to use productivity gains so that they can, you know, go enjoy an extra glass of wine to redeploy that cliche or whatever at lunch time. Then then it might make sense to focus on on real growth and output for the US and something else for Europe. So how do you, I guess, incorporate political economy differences when it comes into the when it comes to these different stats, what the GDP discussion ends up, I think is do you think people are more reliable then than real growth measures for measuring the relative performance over time?
