Macro & tech

GDP & Tech

Is Europe really sliding into a middle-tier economy? A widely-shared gap between the US and EU27 deserves some unpacking — once you adjust for exchange rates and price levels, the picture changes.

1 · The gap

The gap

Is Europe falling behind, or is the dollar just strong? The headline GDP divergence, how the measurement changes the story — and what actually reaches the median household.

1.1 · The GDP gap

Since 2008, an $11 trillion nominal GDP gap emerged

Gross domestic product, current prices (US$), nominal. The EU27 went from roughly level with the US to trillions behind — but in nominal dollar terms.

United States EU27

1.2 · Three lenses

Comparing EU27 and US economies: nominal, FX-adjusted, and PPP

The same two economies look very different depending on how you measure them. Currency swings and price levels drive most of the headline gap.

United States EU27

01Nominal GDP, current US$

The EU27 line is converted to US$ at a fluctuating exchange rate. Useful for comparing position on the global stage.

02Nominal GDP, constant '08 FX

Using a fixed 2008 exchange rate removes distortions from currency moves, but not price-level differences between countries.

03PPP-adjusted GDP

PPP accounts for cost-of-living differences and is useful for comparing real purchasing power. Healthcare is a big item, for instance.

These three charts aren't three opinions — they're three questions. The nominal chart asks how big Europe is on the global stage, converting EU output to dollars at the market rate. That's why much of the headline gap is really a currency story: the euro was strong in 2008 and has weakened against the dollar since, and dollar GDP swings with the exchange rate rather than the real economy.

The constant-FX chart freezes the rate to remove the swing. But why did the dollar strengthen? Not by accident. Capital has gravitated to the US because that's where the best investment opportunities are — and deeper capital markets. A strong dollar is, in part, the price of the rest of the world wanting to own US assets. The dollar is strong because America is the more dynamic economy, so it's not just an artifact. That said, changes in FX rates (a sentiment machine, voting on a country's long-term outlook) affect economic performance from one year to the next in ways that don't represent what happened fundamentally in that period. So it's still helpful to also look at the FX-adjusted view.

The PPP chart goes further, re-pricing both economies against a common basket to ask what incomes actually buy — and on that measure the gap has been broadly flat, even narrowing, for 25 years. Haters call it cope. As Emma Duncan stingingly wrote, PPP “accounts for the fact that things are cheaper in poorer countries.” But the PPP data shows that American living standards are not pulling away — it does confirm they are significantly higher than in Europe, however.

The reason we show constant-FX in the middle is to make the case that the FX-rate change is doing most of the work here. So we can conclude that on living standards, Europe hasn't been falling behind that much — even regaining ground.

1.3 · Standard of living

Median household income — are Europeans poorer?

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Conversion

2 · What's underneath

What's underneath

Start with the variable the whole debate turns on: productivity — and the market value it compounds into. Then how concentrated the prosperity really is, place by place.

2.1 · Productivity

Productivity — GDP per hour worked

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Prices
Conversion

Krugman / EU KLEMS · 2000-2019

How much of the US productivity lead is “tech”?

Krugman's EU KLEMS read says the US lead is real in the growth accounts, but heavily concentrated in ICT rather than broad-based across the whole economy.

United States EU11
Total ICT Excluding ICT
% annual productivity growth · shared 0–8% scale US lead US − EU11 (pp) ICT premium ICT − ex-ICT (pp)
Total+0.65pp US lead
0.851.50
0.65pp
ICTwhere the lead lives+4.65pp US lead
3.277.92
4.65pp
Excluding ICT+0.38pp US lead
0.741.12
0.38pp
United StatesICT breaks away+6.80pp ICT premium
1.121.507.92
6.80pp
EU11+2.53pp ICT premium
0.740.853.27
2.53pp
Grouped by sector: each row pairs a sector's annual productivity-growth rate for the two economies; the connector is the US lead, spelled out at right (US − EU11, percentage points). Strip out ICT and the reported gap collapses from 0.65 to 0.38pp — almost all of the US lead is tech. Toggle “By region” to flip the grouping.
Grouped by region: each row shows the three sector rates within one economy. The number at right is that region's ICT premium — how much faster ICT productivity grew than the rest of its economy (ICT − ex-ICT). The US premium (6.80pp) dwarfs the EU11's (2.53pp); Total sits right next to Excluding ICT because ICT is only a small slice of each economy. Toggle “By sector” to flip the grouping.

2.2 · The value creation gap

The value creation gap: US public markets have pulled away

Combined market cap in $ trillions. The S&P 500 split shows the Mag 7 and the rest of the index; STOXX Europe 600 is shown on the same basis.

View

2.3 · Within-country disparity

Within countries, metro productivity gaps are large

National productivity averages can hide how much output is concentrated in a small number of metropolitan economies.

Each row is a country. Horizontal position = GDP per worker. Bubble size = employment.

2.4 · US states vs Europe

US states are pulling away from Europe

Years
GDP per capita

3 · Government levers

Government levers

The levers governments can pull on everything above: how much the state spends and borrows, the demographic base it works with, the talent it attracts — and whether Europe can keep paying for the model it wants to defend.

3.1 · Government spending

The rise of government — spending as % of GDP

3.2 · GDP & debt

Nominal GDP and government debt, current rates

GDP (solid) versus general-government gross debt (dashed) in current US$. The shaded area is the gap between output and debt — for several large economies, debt has caught up with, or overtaken, annual GDP.

GDP Government debt

3.3 · Population

Population trend since 2008 — total and working age

Indexed to 2008 = 100. Total population (solid) versus the working-age cohort, ages 15–64 (dashed). Europe's working-age population has been shrinking even as its headcount holds roughly flat.

Total population Working age (15–64)

3.4 · Skilled migration

The race for talent — who attracts the world's skilled migrants?

Frontier industries go where the people are. The pipeline isn't the problem: Europe produces 24% of the world's unicorn founders — second only to the US at 38%. But nearly half of European unicorn founders have started in the US.

Founder flows

01Degree-holders among recent arrivals

Share of recent migrants holding a university degree. Europe's intake has upskilled fast — from 25% a decade earlier (tick mark) to 39% — but it still recruits below the rich-world average, while roughly half of America's newcomers arrive with a degree.

Tick mark: the EU figure a decade earlier (25%) — the fastest improvement of the three, from the lowest base.

02Flagship skilled-worker visas, 2024

New admissions under each bloc's flagship high-skill scheme. The H-1B approved 1.8× as many new skilled workers as the EU Blue Card — before counting renewals — and nearly three-quarters of all Blue Cards were issued by a single member state.

Faded extension: 258,196 H-1B renewals approved on top (399,402 total). Tick mark: Germany alone issued 56,252 Blue Cards — 72% of the EU total; the 2023 record was 89,055.

3.5 · Share of world GDP

Europe's shrinking share of the world economy

3.6 · Can Europe afford it?

Can Europe afford its model?

The competitiveness question, in one frame: Europe is a small share of the world's people and output, yet an outsized share of its welfare spending and a small share of its defence. The historian Stephen Kotkin's shorthand captures it.

Stephen Kotkin
“Europe has about 7% of the world's population, roughly 17–19% of global GDP, and nearly 50% of global social spending.”
— Stephen Kotkin, historian, Stanford / Hoover Institution
World population
Global GDP (nom.)
Welfare spending
Military spending

Europe represents a shrinking share of global GDP but still aspires to maintain a distinctive social model, environmental leadership, and strategic independence. Draghi's warning is that these goals are not free. Without greater competitiveness, Europe may no longer have the economic strength required to sustain the values it wants to defend.

A · Appendix

Appendix

The supporting material: evidence on social mobility, the mean-vs-median income question, the debate these charts sparked, and how the page is built.

A.1 · Upward mobility

Upward mobility — where can a poor child actually rise?

The probability that a child born to parents in the bottom 20% of the income distribution reaches the top 20% as an adult — measured reality versus what each country's citizens believe.

A.2 · Mean vs median

Mean vs median: how much of the US lead is its top tail?

A standard pushback on GDP-per-capita comparisons: America's average is pulled up by its richest, so the typical American may not be as far ahead as the headline number suggests. The test: express each country three ways against the same-year US figure — GDP per person, then the mean, then the median equivalised disposable household income, all PPP-adjusted.

Where the typical household stands — % of the US, 2023
…and how fast the typical household is gaining — real median income growth, 2013→2023

On levels, the hypothesis is largely right. Switching from GDP per person to the median household closes a real chunk of the gap everywhere on the continent: Spain jumps from 63% of the US to 81%, France from 75% to 86%, Germany from 86% to 92%, and the Dutch median lands within three points of parity. The mechanism is the shape of the US distribution — the American mean sits 25% above the American median, the widest wedge in this set, so averages flatter the top tail. The exception proves the rule: the UK is almost exactly as unequal (1.24×), and gains nothing at the median.

On growth, the FT's point survives the check. The claim usually attributed to the FT's John Burn-Murdoch — that even median income is now rising faster in the US than in Europe — holds in the OECD data: real median income grew +25% in the US over 2013–23, ahead of Germany (+12%), the Netherlands (+11%), Sweden (+9%), the UK and Italy (+7%), with only Spain (+25%) keeping pace and France flat since its series began in 2020. Notably, the US median also grew slightly faster than the US mean over the window — the typical American household kept up with the average one. Burn-Murdoch's 2022 essay argued the US looks like “a poor society with some very rich people” at the bottom decile; Noah Smith's rebuttal — that the US median is near the top of the world — is what this data shows, and the growth series settles the direction of travel. The standard-of-living chart above has the full year-by-year median series with a PPP/market-FX toggle.

The honest summary: measured at the typical household, Europe is up to 18 points closer to the US than GDP per capita implies — but behind everywhere, and the gap is compounding, not closing.

A.3 · The debate board

Pick a question — three economists answer

The data above isn't really in dispute — what it means is. In 2026 a sharp public argument broke out over exactly these charts: Krugman, the Garicanos and Noah Smith read the same numbers and land in three different places. Choose a flashpoint: each gives their take, with the numbers they lean on inside the bubble — and Dealroom's own cross-check below where we have one.

Is Europe really falling behind?

Three verdicts from the same dataset — where each economist ultimately lands.

Krugmannot in decline

The “productivity gap” mostly measures the volume of a tech sector the US happens to host — not how people actually live.

At PPP, Europe has held ~90% of US output per hour for 25 years, and tech's gains diffuse worldwide as cheaper products. Europe : US :: Texas : California. The real risk is geopolitical, not GDP.

~90%EU output/hour vs US, held for 25 years (PPP)
Paul Krugman Paul KrugmanNobel laureate · Substack
Garicanostagnation is real

Tech genuinely makes America richer — and the gap is widening.

It bids up local wages, earns fat margins (Apple ~40%, Anthropic ~70%) that stay as US profit, and concentrates in self-reinforcing clusters that push Europe out of the next frontier. The median American is materially ahead.

+30%US median income vs the Netherlands
+52%vs France
Luis Garicano Luis Garicanowith Pieter Garicano · Silicon Continent
Noah Smithpoorer — and it matters

America is clearly richer.

Europe roughly kept pace on living standards but stagnated on productivity — itself a failure, since rich economies should converge. And the benchmark that matters isn't the US. It's China.

Noah Smith Noah SmithNoahpinion

How do you even measure “falling behind”?

Has Europe's standard of living actually slipped against America since 2000 — or only its “real GDP” on one particular accounting convention?

Krugmanuse current-price PPP

To compare living standards at a point in time, use PPP at current prices — and Europe has barely moved.

Euro-area output per hour was ~90% of the US level in 2001 and ~90% in 2024; France was 74% of US GDP per capita in 2001 and 73% in 2024. The constant-price “divergence” is real arithmetic, but it measures the rising volume of tech output, not welfare.

74% → 73%France vs US GDP/capita, PPP, 2001→2024
~90%EU output/hour vs US, both years (PPP)
Paul Krugman Paul KrugmanNobel laureate · Substack
Garicanouse constant prices

For growth over time, constant prices are the right tool — and they show America genuinely pulling away.

Current-price comparisons go blind precisely where productivity surges and prices fall (software). Choosing the PPP snapshot that shows “no gap” is choosing the metric that cannot see the gap.

+37%US real GDP/capita, 2001–24
+24% / +18%Germany / France, same window
Luis Garicano Luis Garicanowith Pieter Garicano · Silicon Continent
Noah Smithsat this one out

Doesn't argue the yardstick — his rebuttal's title says where he lands: “Yes, Europeans are poorer than Americans.”

Noah Smith Noah SmithNoahpinion

Dealroom fact-check: this is exactly the toggle on the Productivity chart (2.1) above — Real (constant prices) shows the gap widening; the PPP snapshot Krugman prefers shows it roughly flat.

Is it “just tech” — and do the gains spill over to everyone?

US growth is concentrated in a tiny IT sector. Does that lead diffuse to Europe through cheaper technology — or does America keep most of the winnings?

Krugmanit diffuses

IT is the engine, but competition passes its gains to consumers everywhere as lower prices.

IT is only ~8% of US value added yet nearly half of US productivity growth. Europeans buy the same iPhones at the same world prices, so the US lead shows up as faster measured growth, not a real divergence in living standards. California's tech-driven boom dwarfs Texas's — yet no one says Texans are left behind.

8%IT share of US value added
of US productivity growth
+44% vs +33%CA vs TX real GDP/cap, since 2007
Paul Krugman Paul KrugmanNobel laureate · Substack
GaricanoAmerica keeps it

Three holes in the diffusion story — each makes America genuinely richer.

Non-tradables: housing, healthcare, services are priced in local labour markets; US tech bids those wages up, Europe gets no such lift. Margins: tech isn't sold at marginal cost (Apple ~40%, Anthropic ~70%), so gains stay as profit and equity, mostly US-owned. Agglomeration: clusters self-reinforce, pushing Europe out of the next frontier too.

$21TSix US big-tech firms > all EU public markets
40% / 70%Apple / Anthropic margins
$388kMeta's median pay, 2025
Luis Garicano Luis Garicanowith Pieter Garicano · Silicon Continent
Noah Smithsat this one out

Sits out the plumbing argument — for him the productivity stagnation itself is the failure, wherever the gains flow.

Noah Smith Noah SmithNoahpinion

Does US inequality mean the typical American isn't ahead?

America's average is inflated by the rich. Strip that out — is the median American household actually better off than the median European one?

Krugmana real, unmeasured drag

High US inequality “arithmetically” pulls down what GDP/capita implies for most Americans — an important correction.

But he declines to put a number on it, “simply asserting” the effect is important but unquantified.

Paul Krugman Paul KrugmanNobel laureate · Substack
Garicanomostly a distraction

On median disposable income — after taxes and transfers, size- and PPP-adjusted — Americans are clearly ahead.

The US also redistributes more than the cliché suggests, off a higher base; and the fastest divergence is recent, so 2021 figures understate the gap if anything.

+30%US median vs Netherlands
+31%vs Germany
+52%vs France (OECD, 2021)
Luis Garicano Luis Garicanowith Pieter Garicano · Silicon Continent
Noah Smithclearly richer

America is clearly richer — his essay's title is the answer: “Yes, Europeans are poorer than Americans.”

Europe roughly kept pace on living standards — but the typical American still comes out ahead.

Noah Smith Noah SmithNoahpinion

Dealroom fact-check: our standardised comparison — the median-income chart (1.3) above (OECD median equivalised income at consumption-PPP) — puts the US lead smaller: roughly +18% over the Netherlands and +30% over France in 2021, versus the +30%/+52% the Garicanos cite. The gap between the two numbers is Krugman's point: how far ahead the median American looks depends heavily on the method.

Is the gap just Europeans choosing leisure?

Americans work more. Adjust for hours and the gap nearly vanishes — so isn't lower European GDP a lifestyle choice, not a decline?

Krugmana choice, not a problem

Productivity per hour is close; most of the GDP/capita gap is simply hours worked.

German output per hour is ~97% of the US level — the productivity gap explains only about a fifth of Germany's GDP gap. Europeans take their gains as August and shorter weeks. A different choice, not poverty.

~97%German output/hour vs US
<⅓of France's GDP gap is productivity
Paul Krugman Paul KrugmanNobel laureate · Substack
Garicanothe timing kills it

For hours to explain the divergence since 2000, Americans would have to work more relative to Europeans now than then. The opposite happened.

A 2026 NBER paper finds about half the 1990s hours gap has reversed — Americans work fewer hours per person than in 2000, Europeans more — so post-2000 US growth can't be a “more hours” story.

of the 1990s hours gap, reversed
+6.7% vs +0.9%US vs euro-area output/hour, 2019–24 (ECB)
Luis Garicano Luis Garicanowith Pieter Garicano · Silicon Continent
Noah Smithsat this one out

No quarrel over hours — his point is the destination: Europe stagnated on productivity, and rich economies should converge.

Noah Smith Noah SmithNoahpinion

France plainly doesn't look as poor as Mississippi

Walk around Paris and Alabama: surely the gut check tells you the GDP numbers are missing something?

Krugmanthe gut check counts

Europe isn't poor the way Alabama is poor.

France's life expectancy is 4.7 years above the US (9 above Alabama); literacy is higher; tech access is comparable. Alabama is poor from low productivity; Europe is “poorer” mostly from fewer hours by choice.

+4.7 yrsFrench life expectancy vs US
+9 yrsvs Alabama
Paul Krugman Paul KrugmanNobel laureate · Substack
Garicanodo a driving-around test

Tourists self-select into Europe's prettiest old cores; American wealth hides in the suburbs.

Drive the edge of any US city — huge new homes, downtown towers in Austin and Nashville. And it's generational: housing often costs more in Europe, and the nice cores are out of reach for the young. “Europe is great for people with American incomes.”

$57k → $75kEntry police pay: London → DC
~$33k → $63kEntry Deloitte: Madrid → Charlotte
Luis Garicano Luis Garicanowith Pieter Garicano · Silicon Continent
Noah Smithsat this one out

Doesn't do the walking tour — but grants that Europe “roughly kept pace on living standards” while productivity stalled.

Noah Smith Noah SmithNoahpinion

So what should Europe worry about?

Here the three converge more than they admit — they just disagree about which threat is largest.

Krugmangeopolitics, not GDP

The real danger is being cut off from strategically vital technology while the US turns unreliable and China rises.

Europe is one of three economic superpowers, and the only democratic one. Its problem is political timidity, not poverty.

Paul Krugman Paul KrugmanNobel laureate · Substack
Garicanodenial disarms reform

The divergence is the single strongest argument for reform.

Explain it away and you hand the opponents of change their alibi — that Europe is already at the frontier. “Something America is doing is working,” and Europe needs to find out what.

Luis Garicano Luis Garicanowith Pieter Garicano · Silicon Continent
Noah Smiththe benchmark is China

The benchmark that matters isn't America. It's China.

Europe stagnated on productivity — itself a failure, since rich economies should converge. “Europe can no longer afford to be the shabby, comfortable aristocrat of the world economy.”

Noah Smith Noah SmithNoahpinion

A.4 · How this is built

How this is built

  • The mean-vs-median appendix reads a committed snapshot: scripts/build-mean-median-income.mjs pulls OECD IDD mean & median equivalised disposable income, converts at AIC PPPs, and deflates growth by each country's own CPI — values are baked into the page and saved to data/mean-median-income.json.
  • Every live chart is pulled from a public API (no manual updates — each refreshes as the source revises): GDP gap via /api/worldbank-gdp, median income via /api/oecd-disposable-income, productivity via /api/oecd-productivity, value creation gap via /api/value-creation-gap, GDP vs debt via /api/imf-gdp-debt, population via /api/worldbank-population, share of world GDP via /api/worldbank-gdp-share.
  • Skilled migration and upward mobility are static, hand-sourced figures (no live API exists for either): recent-arrival education mix from OECD/EC Settling In 2023 and MPI's ACS analysis; visa counts from USCIS annual H-1B reports and Eurostat Blue Card statistics; mobility from Alesina–Stantcheva–Teso (AER 2018). Each cites its sources in place.
  • Nominal & PPP GDP: NY.GDP.MKTP.CD and NY.GDP.MKTP.PP.CD; Euro-area FX: PA.NUS.FCRF.
  • Value creation gap: published Google Sheet "Indices", Main tab — S&P 500, S&P 500 excluding Mag 7, Mag 7, and STOXX Europe 600 combined market-cap series.
  • Constant-'08-FX EU27 = nominal US$ × fx(year) ÷ fx(2008) — the same real series, held at one exchange rate.
  • GDP vs debt: IMF WEO NGDPD and GGXWDG_NGDP; debt US$ = GDP × debt-to-GDP ÷ 100. Population: World Bank SP.POP.TOTL and SP.POP.1564.TO, indexed to 2008 = 100.
  • Productivity: OECD Productivity database GDPHRS (GDP per hour worked) in USD_PPP_Hconstant prices (chain-linked volume, TRANSFORMATION=N levels), US$ at PPP — the real-volume series, so trends reflect productivity growth rather than inflation or PPP revaluation.
  • Krugman / EU KLEMS decomposition: static 2000-2019 sectoral-productivity read from Krugman's Substack analysis of EU KLEMS data; it stops at 2019 because the compatible KLEMS sector cut avoids COVID distortions and has no newer comparable years in that analysis.

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