The general view, not just in the US, is that the contemporary European economy is a dying duck. As the Nobel laureate Paul Krugman notes in a recent Substack on this question, which builds in turn on important earlier work by Seth Ackerman, “there is ... a widespread perception that Europe is living off its past glories, that it is lagging behind America and China in ways that will undermine its ability to maintain its economic standing in the world”.
Indeed, just this fear animates reports recently produced in Europe, notably the highly influential analysis by Mario Draghi, which was published in 2024.
Making such comparisons is difficult. There is no doubt, for example, that the US has long been in another league when it comes to advanced digital technologies and, today in particular, to artificial intelligence.
Again, being a single state gives the US an insuperable advantage when it comes to creating and exercising instruments of national power.
At the same time, we should remember those bold words about “life, liberty and the pursuit of happiness” in the Declaration of Independence. Life expectancy for US men was 76.5 in 2024, against an average of 80.5 in comparable high-income countries.
For women, it was 81.4 against 84.8. That is despite spending a far higher proportion of its gross domestic product (GDP) on health. The US homicide rate was 5.9 per 100,000 in 2023, against 1.3 in France and 0.9 in Germany.
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Its prison population was 542 per 100,000 in 2023, against 130 in France and 69 in Germany. Thus, if one takes a wider view of human welfare, the US is very far from superior. Indeed, it is arguably the reverse if one measures it against the aims of its founders.
Yet, what about the economy more narrowly defined as the ability to produce the goods and services that are measured in GDP?
Here, Krugman argues, we find a fascinating paradox, which also confounds the conventional wisdom of European economic failure.
He suggests there are two ways of comparing GDP performance: growth in real GDP per head over a period; and the relative level of GDP per head in any given year. It turns out that if one compares the US with the euro zone on growth since 2000, its performance is hugely superior.
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But if one compares relative GDP per head, this is not true: euro zone GDP per head has risen relative to the US’s.
How is it possible for one economy to grow faster than another and not end up relatively richer than at the start? To understand that one has to address the differences between what is being measured and how. These differences show the complexity of all such accounting.
What explains the discrepancy in growth in GDP per head? Strikingly, even though the tech sector was only 9.2 per cent of US GDP, against 5.4 per cent of the EU’s, almost half of the difference in productivity growth between the two economies was explained by differences in the relative size of this one sector.
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Moreover, productivity growth in the EU’s (relatively small) tech sector was also measured as being lower than in the US one. So, overall, the tech sector alone accounts for well over half of the overall difference in growth of GDP per head.
A related explanation for the difference is problems in measuring growth. The extraordinarily rapid reported productivity growth in US tech depends on making “hedonic” adjustments in the prices of products.
This involves working out the value of increased processing power to consumers. But such measures are inherently highly uncertain.
For this reason, the higher growth of productivity in the US tech sector (and so of US GDP per head) is questionable, not because it is wrong, but because this is a matter of judgment.
Note, crucially, that productivity growth of sectors other than tech, in the two economies, which make up the vast bulk of both economies, is quite similar.
The problem of comparing GDP per head at purchasing power parity across countries at any point in time is also tricky, but simpler.
One does not have to compare today’s car with one of two decades ago, but one in the US and Europe in any given year and then value both at the same price.
This has been done in the World Bank’s International Comparison Program for more than half a century. It is the only sensible way to compare standards of living across countries: money GDP per head is too volatile and, above all, grossly distorts comparisons of non-tradeables. Between two relatively similar economies, such as the US and Europe, these measures will be reasonably robust.
There are also some complexities introduced by the fact that European real consumption per hour has grown more slowly than in the US. But this too may partly be explained by differences in hedonic adjustments.
Moreover, Krugman notes, the direct comparisons of consumption per head show the same pattern over time as for GDP per head.
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So, what fundamentally explains the paradox? The answer, a simple model explains, is that the US tech sector is a provider of a global public good: the most advanced technology.
This benefits the non-tech world equally, at home and abroad, and so sustains relative standards of living. Of course, owners of US tech benefit from its profitability. But they can (and do) live anywhere.
The conclusion is that Europe does not suffer any disadvantage in relative welfare vis-a-vis the US. But – a crucial but – it is indeed far weaker.
Not least, its ability to exploit the technological advances made in the US depends on access to US supplies. The big threats Europe confronts are not narrowly economic ones. They are those of security and defence. It must meet them. – Copyright The Financial Times Limited 2026
