It’s a common narrative: the United States is surging ahead economically, while Europe lags behind. You’ll often hear claims about the European Union’s struggles – a lack of tech giants, weaker universities, and less private investment. One frequent assertion is that the EU is falling dramatically behind the US in terms of economic growth. However, a closer look reveals a more nuanced picture. In reality, when it comes to output growth, the EU hasn’t significantly trailed the US. In key metrics like per-capita output, output per worker, and especially output per hour worked, the EU has actually converged with the United States.
A superficial glance at raw GDP figures might seem to confirm the narrative of European decline. In 2008, the EU boasted a slightly larger GDP (measured in US dollars) than the US. Fast forward to 2022, and the EU economy appeared a third smaller than its American counterpart. This shift can easily be misinterpreted as a sign of significant economic deterioration in Europe relative to the US. However, this perspective overlooks a critical detail: back in 2000, the EU’s GDP (again, in US dollars) was already a third smaller than the US GDP. Therefore, judging by this metric alone, the period between 2000 and 2008 would have to be considered a “miracle” era for the EU, where it seemingly outpaced the US by adding an equivalent of one-third of the US economy to its own.
But no such “European miracle” occurred between 2000 and 2008, and similarly, no “European disaster” unfolded from 2008 to 2022. The issue lies in the metric itself: GDP in US dollars. While useful for comparing economic output at a specific moment, it’s a poor tool for tracking relative economic trends over time. This is because this metric is heavily distorted by exchange rate fluctuations and influenced by differing price levels across countries.
Consider the euro-dollar exchange rate. In 2000, €1 was worth approximately $0.92. By 2008, the euro had strengthened considerably, reaching a value of $1.47 against the dollar. Since the majority of the EU’s GDP is generated in euros, the appreciation of the euro artificially inflated the dollar value of EU GDP in 2008 compared to 2000. This wasn’t due to extraordinary economic growth, but simply a currency revaluation. Conversely, after 2008, the euro weakened. By 2022, €1 was worth around $1.05. This depreciation against the dollar reduced the dollar-denominated value of the EU’s GDP relative to 2008, irrespective of actual economic performance.
To make accurate international economic comparisons, we need to use Purchasing Power Parity (PPP)-adjusted output. PPP corrects for both exchange rate volatility and differences in price levels between countries, providing a more stable and realistic basis for comparison. Figure 1 illustrates this point, showing the world GDP shares of the EU, US, and China using both current prices and exchange rates (left panel) and PPP (right panel). The left panel shows significant fluctuations in the EU and US shares. However, the right panel, using PPP, reveals a more consistent trend: both the EU and US have been experiencing a gradual, parallel decline in their share of world GDP. While the EU’s decline is slightly more pronounced, the gap between the EU and US is not dramatic. In 2000, the EU27 and the US had roughly the same PPP-adjusted output. By 2022, the EU27 economy was approximately 4 percent smaller. Forecasts from the International Monetary Fund (IMF, 2023) suggest that this gap may widen slightly, projecting the EU27 economy to be about 6 percent smaller than the US economy by 2028.
This shared decline in global output share for both the EU and US is not unexpected. It reflects the rapid economic ascent of China and other emerging economies. When measured using 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 US, China’s share of global output becomes even 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 years to come.
