What Happens When Europeans Find Out How Poor They Are?
The Continent trails far behind U.S. economic output. Politics is bound to catch up sooner or later.
Do Europeans understand how poor they are? And what will happen when they find out? Those are the Continent’s big political-economy questions for the next few years—perhaps decades.
The widening gap between American and European prosperity is among the most important facts of the global economy. The clearest manifestation is the chasm in per capita gross domestic product: $94,400 in the U.S., according to the International Monetary Fund, compared with $65,300 in Germany, $61,000 in the U.K. and $52,000 in France.
While America’s prosperity advantage isn’t new, today’s scale is. From a fairly narrow edge throughout the 1980s, the gap widened a bit in the 1990s. Since 2007, however, European per capita incomes have more or less stagnated while the U.S. has enjoyed another growth spurt.
I know what you’re going to say, and it’s no excuse. The U.S. per capita figure is flattered by a small cohort of fabulously successful companies, which create a cohort of fabulously wealthy entrepreneurs. But those companies could just as easily plant their headquarters in Europe (some are even European by birth) and skew the per capita data there instead. Switzerland amps up its per-capita GDP to $126,000 by attracting finance and pharma.
This is another indictment of European shortcomings. The wealth skewing American per capita economic data is a result of innovation and entrepreneurship. Europe lacks America’s per capita output not because it lacks American tech companies and billionaires but because it lacks American-style productivity growth capable of creating tech companies and billionaires in Europe.
Serious economists understand all too well how far behind Europe is falling. The U.S.-vs.-Europe income gap was at the core of a major investigation of European competitiveness produced in 2024 by Mario Draghi, a former president of the European Central Bank.
Yet voters so far remain unaware. Consider a recent report from the Institute of Economic Affairs, a London-based think tank that advocates free markets. The main conclusion: British voters don’t know how far behind they’ve fallen.
Respondents to a January poll commissioned by the think tank were asked to guess how the British economy compares with the U.S. On average, respondents thought that if the U.K. were a state, it would be the seventh-richest in terms of per-capita GDP, behind the likes of New York and California. The reality is that Britain is toward the bottom of the table, roughly on the level of Mississippi.
Why doesn’t anyone do anything? Economically, the divergence isn’t always noticeable on the ground. So far this column has relied on nominal GDP data. Europe looks better if one uses purchasing-power-parity figures to correct for differences in price levels to understand how much households can consume with a given income. Using the PPP metric, U.S. GDP per capita is $94,400, Germany’s is $76,800, Britain’s is $67,600, and France’s is $68,600.
That means, broadly, that a nominal per capita income of $61,000 in the U.K. allows a Briton to consume the same amount of goods and services that would cost $67,600 in America. But that’s merely a different way of stating Europe’s problem. Europe’s economies look healthier in PPP terms to the extent a lower price level allows households to stretch their euros and pounds further. Those lower prices reflect Europe’s lower productivity. Meanwhile nominal GDP expresses Europe’s ability to consume global resources, which is lagging.
Politically, bliss is ignorance. European welfare states, by creating relatively comfortable lives for voters, conceal the full extent of Europe’s prosperity gap.
A common refrain in Britain, for instance, is “But we have the National Health Service, and in America everyone has to pay huge sums for medical care.” The people who say it don’t understand how enlightening the observation is. The NHS launders money the indebted government doesn’t have into terrible health outcomes. This feels like a benefit because it conceals from patients the true cost of their care, while its shortcomings relative to other countries are noticeable only to policy nerds. That’s how most of Europe’s welfare states work.
Aligning voters’ perceptions with reality is the central political challenge for reformers. The IEA report argues, optimistically, that better voter education might help. Participants in its focus groups expressed shock and anger when informed of how (relatively) poor they truly are. Yet many seemed hazy regarding what to do about it.
A collision with reality may be required. The bliss will run out when the funding for welfare does. Voters then will have to confront their failure to generate enough growth to pay for social benefits. Rising demands for defense spending are another stressor. Europe can use social welfare to hide from its economic failures, but it can’t run from them forever.
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