The economic landscape often sparks debates about global leadership, and for years, a narrative has persisted suggesting that Europe is significantly lagging behind the United States. Claims of lacking tech giants, weaker universities, and limited capital availability in Europe are frequently cited. However, when we delve into the data and look at output growth, particularly when comparing the United States Compared To Europe, a different picture emerges. The assertion that the EU has dramatically fallen behind the US in economic growth is not entirely accurate. In fact, in several key metrics, the EU has shown convergence with the US.
A superficial glance at GDP figures might initially reinforce the idea of European economic decline relative to the United States. In 2008, the European Union, measured in US dollars, had a slightly larger GDP than the US. Fast forward to 2022, and the EU economy appeared to be considerably smaller, roughly a third less than that of the United States.1 This shift seems to paint a grim picture of Europe’s economic trajectory. However, this perspective overlooks a crucial detail: back in 2000, the EU’s GDP, again in US dollars, was already about one-third smaller than the US GDP. This historical context suggests that the apparent “disaster” from 2008 to 2022 might be an illusion created by the metric used.
The flaw in using GDP measured in current US dollars for time-trend comparisons lies in its susceptibility to exchange rate fluctuations and price level differences between nations. While useful for a snapshot of economic output at a specific point in time, it distorts the understanding of relative economic changes over time.
Consider the euro-dollar exchange rate. In 2000, €1 was valued at approximately $0.92. By 2008, the euro had strengthened significantly, reaching $1.47 per euro. Since a large portion of the EU’s GDP is generated in euros, this currency appreciation artificially inflated the dollar value of EU GDP in 2008 compared to 2000, regardless of actual economic growth. This was a temporary valuation effect, not a genuine surge in European economic performance. Conversely, after 2008, the euro weakened against the dollar. By 2022, €1 was worth around $1.05. This depreciation reduced the dollar-denominated value of EU GDP, again masking the underlying economic trends when making a United States compared to Europe assessment using this metric.
To accurately compare economic performance across countries and over time, economists utilize Purchasing Power Parity (PPP)-adjusted output. This metric corrects for both exchange rate volatility and variations in price levels across different economies, providing a more realistic basis for international economic comparisons. Figure 1 illustrates the shares of world GDP for the EU, US, and China, using both current prices and exchange rates, and PPP adjustment. The left panel, depicting current prices and exchange rates, shows considerable volatility in the EU and US shares. However, the right panel, based on PPP-adjusted GDP, reveals a different trend. It demonstrates that the shares of both the EU and US in global GDP have been declining in tandem. While the EU’s decline is slightly more pronounced, the gap between the United States compared to Europe is not as dramatic as often portrayed. In 2000, the EU27 and the US had virtually identical PPP-adjusted output. By 2022, the EU27 economy was approximately 4 percent smaller than the US economy. Projections from the International Monetary Fund (IMF, 2023) suggest this gap might widen slightly, with the EU27 economy potentially being 6 percent smaller than the US economy by 2028.
The decreasing global GDP shares of both the EU and the US are primarily attributable to the rapid economic ascent of China and other emerging economies. When considering current prices and exchange rates, the EU and China are projected to have roughly equivalent levels of economic output in the 2020s. However, due to lower domestic prices in China compared to the EU and the US, China’s share of global output is significantly larger when measured using PPP. In fact, China surpassed the US to become the world’s largest economy in 2017 based on PPP, and this dominance is expected to grow in the coming years.
In conclusion, while narratives of a significant European economic decline compared to the United States persist, a closer examination using appropriate metrics like PPP-adjusted GDP reveals a more nuanced reality. The EU has not fallen dramatically behind the US in output growth. Both economic powerhouses are experiencing a relative decline in their share of the global economy, primarily due to the rise of China and emerging markets. Therefore, when considering the United States compared to Europe economically, it’s crucial to move beyond simplistic metrics and consider the broader global economic shifts and the most accurate measures of economic performance.
Footnotes:
[1] See for example Gideon Rachman, ‘Europe has fallen behind America and the gap is growing’, Financial Times, 19 June 2023, https://www.ft.com/content/80ace07f-3acb-40cb-9960-8bb4a44fd8d9, which relies on Shapiro and Puglierin (2023).
(Please replace image-url-figure1.png with the actual URL of Figure 1 and update the alt text accordingly if needed. If the image is not available, you can use a placeholder URL and keep the alt text as descriptive as possible based on the figure description.)
Alt text for image-url-figure1.png: Line graph comparing the share of world GDP for the EU, United States, and China from 2000 to 2022, displayed in two panels. The left panel shows shares calculated using current prices and exchange rates, exhibiting fluctuating lines for EU and US. The right panel shows shares calculated using Purchasing Power Parity (PPP), presenting a smoother downward trend for both EU and US, with EU slightly below US and China showing a steep upward trend, illustrating global economic shifts when comparing United States compared to Europe and China.
