Since the global financial crisis, and particularly after the Covid-19 pandemic, the United States’ steadily rising prosperity level appears significantly higher than that of Europe. Some Western countries have surpassed the U.S. in terms of real per capita income; Switzerland is one such example. However, in larger and higher-income economies, real GDP per capita generally remains below the U.S. average. In the 21st century, these countries have relatively fallen behind.
It is evident that U.S. growth has outpaced Europe in the 21st century. At the beginning of the 2000s, per capita GDP adjusted for purchasing power parity was roughly equal in the U.S., Germany, France, Italy, and Spain, but today this gap has widened. For instance, in 2023, Germany’s real GDP per capita was equivalent to 84% of the U.S. level, down from a high of 92% in 2000. In the UK, this figure stood at 73% of the U.S. level in 2023, compared to 82% in 2000. This relative decline is particularly noteworthy given the size and diversity of the U.S. economy. Over the past 25 years, the per capita income of these European countries has dropped to levels approximately 20% lower than that of the U.S.
The reasons for Europe’s economic weaknesses include low business investments, limited cross-border activities, and lower productivity compared to the U.S. The productivity gap is especially pronounced in the technology sector. While labor productivity in Europe’s tech sector has remained nearly stagnant since 2005, it has increased by 40% in the U.S. The IMF points to Europe’s lack of business dynamism, exemplified by its venture capital market, which is only a quarter the size of the U.S.’s, as one contributing factor. Furthermore, the proportion of new businesses in Europe with a lifespan of five years or less is half that of the U.S. These figures align with what Draghi has noted: European companies, particularly tech startups, are virtually nonexistent among the world’s largest technology firms. This absence of European players among top tech companies can be seen as a fundamental reason for the growing economic divergence between the U.S. and Europe.
According to recent IMF statements, the GDP gap between Europe and the U.S. is expected to widen further by the end of this decade. The continent’s economy is said to suffer from a severe “lack of business dynamism” compared to the U.S. and Asian countries. The IMF’s latest economic forecast for Europe suggests that an aging workforce and low productivity growth will reduce Europe’s annual GDP growth rate to 1.45% over the 10-year period leading up to 2029. In contrast, the U.S. growth rate during the same period is projected at 2.29%. In other words, the already existing income gap is set to expand further over the next decade.
The U.S. economy continues to be far more innovative than other large, high-income economies, a fact clearly reflected in its leading companies. These companies are not only significantly more valuable than their European counterparts but also more deeply integrated into the digital economy. The total value of young, fast-growing startups in the U.S. far exceeds that of their European equivalents. The combined value of new U.S. ventures (those worth $10 billion or more) approaches nearly $30 trillion, while the figure in Europe remains markedly lower. This underscores the strength of the U.S.’s economic dynamism and innovation.
Explanations for why Europe has fallen so far behind can be grouped into four main categories. First, compared to the U.S., excessive bureaucracy and slow processes are seen as significant barriers. Second, as mentioned earlier, Europe lags considerably in the digital economy. This is evident in labor productivity figures, which have shown no increase since 2000, while the U.S. has seen substantial gains in this area. Alongside rising bureaucracy, misguided incentive policies are also considered a cause of low growth rates. Finally, flawed regulatory frameworks have negatively impacted both the digital economy and competitive markets, inflicting serious economic harm. Without reforms in these areas, Europe’s decline in the global power struggle appears inevitable. After all, without economic strength, maintaining influence in global politics becomes exceedingly difficult.