What Everyone Gets Wrong About the Economic Problems in Europe

Europe’s economic problem is real, but it is not simply that the continent has become poorer than the United States or missed out on frontier AI. The Draghi competitiveness report, released in late 2024, warns that productivity and competitiveness underpin future living standards and Europe’s ability to sustain its social model. Europe has work to do on investment, technology and barriers to trade and capital movement. But comparisons claiming that European GDP has fallen from about 90% of the US level 10–15 years ago to 70% now depend on contested measurement choices.

A speaker argued that nominal GDP comparisons are distorted by exchange-rate changes, while the Draghi report’s purchasing-power comparison fixes prices at 2010 levels and extrapolates national growth rates. That approach shows a relative decline unlike measures using relative inflation; differences in how national statistical offices calculate real growth add further uncertainty. The US Bureau of Economic Analysis adjusts technology prices for quality improvements more aggressively than European offices. Studies cited put the resulting annual measurement effect at about 2.2% or 3%, potentially accounting for much of the measured growth gap without proving a comparable difference in underlying productivity.

For 2024, a current-price purchasing-power comparison put US GDP per hour only slightly above the Western European aggregate, and the speaker said that advantage disappears when the top 10% of US incomes are excluded. They described the US bottom half as worse off than the population of every European country except Portugal, and Western Europe as potentially wealthier in aggregate than the US despite its relative decline over roughly six to seven years. Actual individual consumption, including publicly provided health care, was presented as a better measure of material well-being than income. The US spends at least five percentage points more of GDP on health care than most European countries; one model estimates spending per person is about 50% above the level expected for advanced economies at US income, or roughly $1.7 trillion to $1.9 trillion annually in excess. The speaker attributed the gap to high prices and rent extraction, while citing poor utilization, generally worse outcomes on some measures, 27 million uninsured people, and substantial out-of-pocket costs even for some people with employer coverage.

Europeans in richer parts of the continent, including Central Europe and the Low Countries, work substantially fewer hours than Americans, while employment rates have remained broadly similar. The speaker cautioned that shorter hours are not, by themselves, evidence of a dysfunctional labor market: leisure has value, and productivity and working hours can move in opposite directions. Adjusting for informal work in Spain and Italy was said not to materially change the comparison. The same speaker attributed Europe’s weak performance over the past 10 to 15 years especially to policy choices, including macroeconomic policy, where the US did comparatively well. Italy’s economy has stagnated for 20 years and its South has declined in absolute terms, though national and regional averages can conceal internal differences. Adopting the US model may not be politically acceptable to most Europeans.

AI could help Europe raise output per work hour, and Tracy Allaway said its incentive to increase productivity makes broad gains potentially valuable. BMW was reportedly targeting a 20% reduction in manager roles using AI, though Joe Wiesenthal doubted that leaner European companies would thereby catch Chinese automakers. Dominic Loyster argued that Europe should prioritize technology sovereignty and business needs over trying to build a frontier model soon. People he consults consider near-frontier models such as Mistral adequate for most European businesses, although Mistral’s use of a Chinese model’s weights highlights dependence and Europe’s shortage of compute. He called fears that Europe is “renting the future” by missing frontier generative AI overstated and said he saw no distinct AI competitive race. The broader strategic question is whether security concerns, resource chokepoints, reindustrialization and defense needs will make growth and technology development more urgent.

China is a more immediate challenge for European manufacturing, a major source of the bloc’s value added. German manufacturers initially benefited from Chinese demand, but China’s move up the value chain has reversed the dynamic. Weak domestic demand after the housing-bubble burst, subsidies and export-price deflation have increased China’s reliance on net exports; Brad Setser’s work suggests exports may account for more than half of Chinese GDP growth. One speaker’s work found that Germany had lost more than one million manufacturing jobs since 2021, with industrial employment in apparent disorderly decline. Labor hoarding and difficulty finding qualified workers may have obscured the pressure, including in chemicals. Chemical export values have fallen sharply in both countries, but Chinese volumes rose while German volumes fell, a pattern also seen in other sectors. The decline coincides with an energy crisis that the speaker said has further damaged European prospects.

Europe’s response remains uncertain and constrained by internal divisions. The proposed Industrial Accelerator Act is the core effort to counter Chinese trade, but little has happened so far. Dominic Loyster said its “Buy Europe” provisions could have teeth and appear to restrict imports in ways that mainly clear hurdles for China; a measure was under review and might be implemented as early as mid-next year. France is more protectionist, while Germany is more skeptical partly because of exporter interests, and German unions are divided.