Is the US economy pulling ahead of Europe?
Yes. Twenty years ago, the US economy and Europe's were broadly comparable in terms of size and share of global GDP, and in 2008, the economy of the EU was in fact slightly larger when measured in current US dollars. Since the global financial crisis, however, a substantial gap has emerged. By 2024, US GDP had reached about $29.2 trillion (or around 27.5% of global GDP), while the euro area stood at about $16.4 trillion (14.7%) and the UK at $4 trillion. US outperformance is not an illusion – and has gathered pace this decade since the Covid pandemic.
What’s happening in Europe?
The boss of ABB, one of Europe's biggest engineering groups, with headquarters in Switzerland and a market capitalisation of around $200 billion, this week warned that Europe is heading towards a “mass unemployment” crisis unless politicians take urgent action aimed at boosting competitiveness. CEO Morten Wierod attacked policymakers in Brussels and national capitals for their lack of urgency in implementing the reforms recommended by Mario Draghi almost two years ago. Draghi's landmark report on European productivity and competitiveness highlighted the widening gap with the US economy. But only 10% of his 383 proposals have so far been acted upon. Other business leaders have made similar pleas in recent months.
Where does the US economy stand now?
America's outperformance began decades ago, and in the 2020s it has become “vast” and sustained, says The Economist. Recent IMF forecasts show US growth continuing to outstrip other big Western economies to 2030 and beyond. That's despite strong headwinds. Under Donald Trump, the US has become less attractive to high-skilled migrants who boost its dynamism; more vulnerable to a bond-market crisis as its debts mount and more tolerant of corruption. The Economist suggests that overall the self-harming “MAGA tax” – high tariffs, zero net migration and all-encompassing uncertainty over policy – shaved around three-quarters of a percentage point off the rise in GDP in 2025. It was closer to 2% than 3% – yet still far higher than the EU or UK.
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What did the US do right?
The explanation lies in a range of natural advantages and long-run trends. The US has both continental scale and one single market and language, vast natural resources and the fiscal space that comes from issuing the world's reserve currency. While Europe's fragmented federalism holds it back, America's system means that businesses faced with unfriendly policies in one state can up sticks for another far more easily. America's shale revolution and liquefied natural-gas exports have reshaped global energy markets and driven US outperformance. Meanwhile, Europe has been hit harder by successive shocks – the financial crisis, the pandemic, the energy crisis. It struggles with its incomplete single market and remains fragmented by multiple languages, competing national interests, and different tax and legal systems.
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Comparing the US and European economies
Underpinning the EU-European divergence is the growing difference between the two economies in terms of their industrial composition. The booming US technology sector has no European equivalent, and the gap is likely to widen in the age of AI. By contrast, Europe is strong in industries that have increasingly faced tough Chinese competition. The US has benefited from higher productivity, more business-friendly policies and deeper capital markets.
Is Europe really so far behind?
Economists have debated for years whether the US lead is unduly flattered by the ways in which it is measured. For example, in the mid-2000s, the US dollar was dramatically overvalued against the euro and has since fallen back, meaning that when measured in constant current dollars, the divergence appears greater than it “really” is. Others point to America's growing population and the fact that it's getting younger compared with Europe. The latest iteration of these debates is a friendly but pointed exchange of blogs and papers in recent weeks between US Nobel laureate Paul Krugman and three European economists, including the French 2025 Nobel laureate Philippe Aghion and the LSE's Luis Garciano. Krugman, drawing on recent analysis and charts by Seth Ackerman, argues that using headline GDP figures to measure the divergence is misleading and that Europe is doing better than most economists think.
Why is Europe struggling?
Broadly, Krugman's point is that when measured using GDP at purchasing power parity (PPP) – that is, correcting for domestic inflation and relative price differences – the two blocs are pretty much where they were 20 years ago (and Europe has pulled ahead when it comes to all kinds of social indicators, including life expectancy). Yes, the US dominates in rapid technological progress, but this progress is passed on to everyone in the form of lower prices and doesn't just raise US GDP. The three European economists counter that Krugman is being far too kind to Europe – and therefore unhelpful, by diminishing the need for radical reform. PPP is useful for comparing purchasing power across countries at a specific point in time, but a sequence of current-PPP comparisons does not make a credible measure of real growth.
Can Europe catch up?
The US lead in technology and innovation is “not helping America and Europe in the same way: it has led to higher US wages and profits, and the gap is widening each year”, say Aghion and his colleagues on Project Syndicate. It should not be controversial, they say, to agree that Europe is falling behind, and to obscure this reality means failing to address the causes. In short, Europe might not be so far behind as some think. But nor will it catch up unless it tackles its economic failings.
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