In 2008, the EU and US economies were roughly the same size. Today, US GDP is one-third bigger. This news story has been picked up by several respectable papers in the past year including Financial Times, Foreign Policy and Le Monde often accompanied by gloomy predictions about the future of the European economy.
The numbers aren’t made up. According to the most recent figures by the IMF, US GDP is approx. $28.8 trillion in 2024 while EU GDP is trailing behind at $19 trillion. The per capita gap is almost double.
The papers provide different theories on the root cause of the troubling divergence: Europe’s underdeveloped tech-industry, over-regulation, and the flexible job market are among the contenders.
However, Europeans need not worry as much as these articles would suggest.
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The figures featured in the most scary articles measure GDP in current US dollars. When comparing the GDP of different countries with different currencies, it's important to use Purchasing Power Parity (PPP) to control for fluctuating exchange rates.
According to the IMF, when measured by PPP, the gap between US and EU GDP is significantly narrower. In 2024, the EU's PPP-adjusted GDP was approximately $26.3 trillion, compared to the US's $28.8 trillion.
However, sluggish growth rates in the European Union remain an issue worthy of attention. The US posted a GDP growth rate of 2.5% in 2023, outpacing all other advanced economies “and on track to do so again in 2024.” The Covid pandemic, in particular, highlighted the differences in resilience between the US and EU economies.
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Contrary to a common EU criticism, it is actually the lack of public intervention that is hampering its economic rebound. The US has demonstrated a robust ability to mobilize public investment in response to economic crises. For instance, the Inflation Reduction Act of 2022 was adopted to curb inflation by investing in domestic clean energy production and manufacturing in the aftermath of the pandemic downturn. Similarly, the Infrastructure Investment and Jobs Act allocates $1.2 trillion towards improving the nation’s infrastructure.
These bills have not only cushioned the immediate impacts of a budding recession but have also created numerous jobs and set the foundation for sustained economic growth. In contrast, the EU struggles to match this scale of public investment due to its budgetary constraints and the necessity to achieve consensus among its 27 member states hampering the EU's ability to respond swiftly and effectively to economic challenges.
According to Energy analyst at Steno Research, Ulrik Simmelholt, points to a second major reason behind the current US advantage against the EU:
“Europe has been over-reliant on cheap energy, and when Russia then cuts off its gas that becomes very problematic for us in terms of production capabilities.”
The War in Ukraine became the second major exogenous shock to the world economy in five years, and with the subsequent cut in Russian natural gas, global energy prices were skyrocketing. The EU, which imports 63% of its energy consumption according to Eurostat, is particularly vulnerable to these price hikes.
Across the Atlantic, the US reached its highest level of energy independence in 2022, becoming a net exporter by producing 104% of its domestic consumption needs. The shale gas revolution, in particular, has provided a substantial boost to the US economy by lowering energy prices for businesses and consumers.
It is hard to see a scenario in which the US's growth advantage over the EU diminishes in the near future. These structural differences in how the US is able to invest, and follow economic cycles not only allows it to address immediate economic needs but also pave the way for long-term competitiveness. Coupled with its entrepreneurial culture, easy access to venture capital and innovation ecosystem, the US has created a favorable environment for sustained growth.
Meanwhile, the EU faces structural challenges such as demographic trends, and a less dynamic tech sector. The bigger surprise is really how the economic gap between the EU and US isn’t wider.
