By many conventional measures, the economy of the United States has been outperforming that of Europe for well over a decade.
A simple look at the IMF’s data on GDP growth shows that the US growth has outpaced that of the European Union (EU) in 11 of the last 16 years. Cumulatively, the US economy has grown by almost 46% since the end of 2009, while that of the EU expanded by around 27% over the same time period.
At the end of April, a Wall Street Journal opinion article rather bluntly asked if Europeans understood how poor they are?
European officialdom is clearly spooked by these sort of articles and numbers. A running theme of the Draghi Report, a report of competitiveness prepared for the Commission in 2024 by the former ECB head and Italian Prime Minister, is a fear of slipping behind the United States. As that report put it:
EU economic growth has been persistently slower than in the US over the past two decades, while China has been rapidly catching up. The EU-US gap in the level of GDP at 2015 prices has gradually widened from slightly more than 15% in 2002 to 30% in 2023, while on a purchasing power parity (PPP) basis a gap of 12% has emerged. The gap has widened less on per capita basis as the US has seen faster population growth, but it is still significant: in PPP terms, it has risen from 31% in 2002 to 34% today. The main driver of these diverging developments has been productivity. Around 70% of the gap in per capita GDP with US at PPP is explained by lower productivity in the EU. Slower productivity growth has in turn been associated with slower income growth and weaker domestic demand in Europe: on a per capita basis, real disposable income has grown almost twice as much in the US as in the EU since 2000.
But how real is this gap?
Comparing incomes – let alone living standards – across countries, and especially over time, is far from straightforward.
Paul Krugman has recently provoked an interesting debate amongst economists with a series of Substack posts – summarised in front of the paywall here – arguing that much of the supposed story of European decline is something of a statistical illusion.
The core of his argument is that Europe and the United States produce different combinations of goods and services and that the impact of this is not captured by the usual headline productivity numbers.
Central to Krugman’s argument is the fact that the IT industry is a much larger component of the US economy and that it has enjoyed much higher levels of productivity growth (as usually measured in terms of output per hour) than many other sectors. But crucially, that higher output has mostly resulted in lower prices for the goods produced, which means, as Krugman puts it:
And therefore Europe’s purchasing power, and hence its material standard of living, hasn’t declined relative to the US despite Europe’s slower productivity growth as conventionally measured.
Not everyone is convinced. One response to Krugman, co-authored by European Economic Experts Panel member Luis Garicano of the LSE, argued that:
Europe looks great to Americans because Europe is great for people with American incomes to buy the nicest it has to offer. But the nicest it has to offer is not available to (young) people in Europe today.
Of course, there is a lot more nuance in this debate than often assumed. For a start, ‘Europe’ is far more than just France, Germany, the United Kingdom, and the rest of the Western end of the continent. Much of central and eastern Europe – notably Poland and the Baltic States – have enjoyed much faster rates of growth than the big Western European economies in recent decades. And, in the last five or so years, Southern Europe (especially Spain and Greece) have achieved very solid growth.
And, as most acknowledge, GDP growth is not the same thing as income growth, and income growth does not fully account for ‘living standards’. Europe tends to perform much better on wider metrics such as life expectancy, crime rates, and happiness.
Eight of the top ten countries on the human development index, a quality of living measure, are European – with Australia and Hong Kong making up the full set. A reasonable counterargument can be made that many of the top-scoring countries on this measure are smaller than individual US states and that if US states were considered individually, many of them would score higher than the United States overall.
They were first asked a simple-sounding factual question, whether “over the past 25 years, the income of the median European citizen has declined substantially relative to the income of the median American citizen”? Their answer was not clear-cut, although tilted towards agreement. Weighted by confidence, 17% of respondents strongly agreed, and 33% agreed, whilst around a third disagreed and almost one in five were uncertain.
Much, as many respondents noted, depends on the definition of ‘substantial’, whether one looks at post-tax or pretax income and how one accounts for purchasing power parity adjustments.
There was also a range of views on living standards and the quality of life. Asked whether “the living standards of the median European are not substantially lower than those of the median American”? 6% of respondents – again weighted by confidence – strongly agreed, 41% agreed, 22% were uncertain, 21% disagreed, and 10% strongly agreed.
This, though, is another question that is more complicated than it appears. As Patrick Honohan of Trinity College Dublin noted, there is “too much lifestyle variation across Europe, and different degrees of government provision of welfare services to be sure”.
Taken together, the responses show – with a high level of disagreement – that the panels tilt towards believing that American median income growth has been higher than that of Europe in recent decades but that the quality of life for the median citizen remains similar. In other words, the debate that has been raging amongst economists on European decline and trans-Atlantic living standards looks set to continue.
