People power

There's been a striking change of mood in global financial markets since I left for my summer break: now it's the US that everyone is gloomy about, and views of the eurozone's recovery are more upbeat.
But there are two reasons to think that the smart money will sooner or later return to the US.
The first reason is simple - and fairly immediate. As this chart, from Capital Economics, suggests, the business cycle in the eurozone often operates a few steps behind the US.

Source: Capital Economics

Add that historical pattern to the slightly more disappointing business surveys and other data coming out from the Continental economies in recent weeks, and you can see why some think the clouds which hung over the US in the summer will be crossing the Atlantic pretty soon.
That seems all the more likely, when you consider that the eurozone economies have depended on the rest of the world for much of their growth. Of the 1.7% rise in eurozone GDP since the trough of the recession in 2009, as much as 0.8 percentage points is due to net trade. Whereas trade has played a negative role in America's recovery so far.
The less polite way to put that would be that the US, thanks to its continuing appetite for imports, has once again been acting as a locomotive for global growth - albeit one with less horsepower than in the past.
Most of the eurozone economies have been growing at the rest of the world's expense: taking more demand from the rest of the world economy than they put in.
The only exception is France: it has grown more slowly than Germany this year, but more of its growth has come from domestic demand: in the second quarter, imports grew by 4.2% versus 2.7% growth in exports.
So, where the US economy goes, you can probably expect the eurozone to follow. But there's another, more fundamental reason to be less hopeful about Europe's long-term prospects than America's, which European politicians are only too familiar with.
It all comes down to demographics - or people power. Put simply: America is going to have plenty of people to help grow its economy over the next few decades; the eurozone, not so much.
Michael Saunders, economist at Citi, put together the numbers in a recent report. It's not exactly a revelation that Europe's population is aging, and its labour force is growing more slowly than America's.
That's been true for a while: indeed, Germany's working age population has been falling for some time. But, as he shows, the demographics in certain countries are about to got a lot worse. The news is especially bad for Spain, which you might think had troubles enough.
As we know, the Spanish economy took off after joining the eurozone, growing by 3.7% a year, on average, between 1999 and 2007. We now know that a lot of that growth was built on an unsustainable credit and property boom.
What you may not know is that the growth was also fuelled by rising labour force, itself due to massive immigration. Total GDP may have grown by 3.7 %, but GDP per head only grew by 2.4%.
Mr Saunders reckons that the rise in the labour force pushed up growth by about 1% a year over this period, with greater participation in the labour market by existing workers adding another 1% a year. Both factors are likely to go into reverse in the future. With a dearth of jobs, the migrant workers are going home, and labour force participation is going down.
As recently as 2008, the Spanish government was expecting the working age population to rise by 5% between 2008 and 2018. Now it thinks it will fall by more than 2% over that time, and many think that's optimistic.
There's been a similar dynamic operating in Ireland, which saw even more dramatic growth in its labour force before the crisis. Unlike France, Germany and Italy, Ireland's working age population is going to carry on growing in the next few years, but much slower than before.

Other things equal, the research suggests that declining "labour input" - also known as a declining number of willing workers - is going to cut Spain's potential growth rate by about 1.5% a year between now and 2020, and cut Ireland's trend rate of growth by about 1% a year.
Italy is also going to suffer, whereas France and Germany will continue to get none of their growth from rising labour inputs.
The net result, across the eurozone, could be to knock 0.25-0.50% off the eurozone's long run trend rate of growth. That might not sound like much, but when you're looking at growth of less than 2% a year, every little helps.
As the chart shows, the story is very different indeed in the US. There, as ever, sheer people power is going to be adding to the country's potential growth, almost regardless of what happens to the rest of the economy.

Faster labour force growth can't solve all of America's problems, and it certainly can't guarantee a higher national standard of living. GDP per head might stagnate, even as overall GDP continues to rise. But by making nominal GDP grow faster relative to government borrowing, it makes the long-term debt dynamics for the US a lot easier than Europe's.
In the short term, it also makes it easier to shoulder the cost of all those baby boomers growing old. And, of course, it adds to the impression that the US is still a young country, whereas most of Europe is growing old.
Demographics aren't everything. There are plenty of other reasons why one country may grow father than another. But their very different demographic fortunes do provide another reason why investors may end up choosing America over Europe.