Challenging the Narrative of European Decline: Revised, Free Repost
Paul Krugman
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Challenging the Narrative of European Decline: Revised, Free Repost<br>I do not think that word “productivity” means what people think it means
Paul Krugman<br>May 21, 2026
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A number of people have asked me to put some of my recent writing on European economic performance outside the paywall. Here is the central argument, revised to include data I think is slightly more informative.<br>I’m still in Europe, where one of the luxuries I’m experiencing is not having to think about Donald Trump and the nightmarish state of U.S. politics 100% of the time — more like 90%, but still. And by way of luxuriating in the slight emotional distance, I’ll postpone my next primer on healthcare for another week and talk more this week about European economic performance.<br>Last week I wrote about the question of whether Europe is really falling behind the United States economically. I argued that the conventional narrative of clear relative decline is wrong. And I followed up with a small formal model of the underlying logic of the situation as I see it.<br>I’m gratified to have started a wider discussion, with smart observers like Noah Smith and Luis Garicano weighing in. Judging from the conversation so far, however, I need to do more to explain my central point — which is that widely used comparisons of productivity growth can’t be used to judge European versus U.S. economic success.<br>In today’s post, then, I’ll try to offer more explanation, backed by some additional data and what I hope are useful analogies.<br>Below I will address the following:<br>1. Comparing Europe with America<br>2. The US-Europe paradox: Slow European growth, but without a growing gap<br>3. Explaining the paradox<br>4. What Europe should and shouldn’t worry about<br>Comparing Europe with America<br>When we compare the European, or at least northern European, economy with that of the United States some points should be indisputable. Both are wealthy economies that make extensive use of modern technology, with no obvious winner in terms of sophistication — the days when Jacques Chirac lamented that the internet was an “Anglo-Saxon network” are long past. Americans, however, have more stuff, that is, material goods: Our houses and cars, in particular, are much bigger. Europeans, on the other hand, have more time, working shorter hours and taking more vacations, and have the security and longer lifespans that come with more extensive social programs such as guaranteed healthcare, and sane gun regulations.<br>Which side of the Atlantic lives better? Your kilometerage may vary. As an American progressive who favors strong social safety nets — basically what Europeans would call a social democrat — I find a lot to admire in the European way. And even the Draghi report, with its call to arms over what it portrays as a loss of European competitiveness, starts by praising Europe’s economic and social achievements.<br>However, while the question of which continent offers a better life is obviously important politically, it’s somewhat separate from the question of which way the US-Europe comparison is trending. Mario Draghi, like many observers, concedes that Europe is a good place to live now, but warns that it is falling behind, above all suffering from low productivity growth compared with the United States. Noah concludes his response by saying that<br>you have to reckon with the uncomfortable fact that America’s output per hour has soared while West Europe’s has grown only slowly.
But is that a fact? Or at any rate is it the relevant fact? The main point of what I’ve been trying to say is that I do not think that output per hour, i.e., productivity, means what many people think it means.<br>So let me try to further explain that point using somewhat different data and a different presentation approach than I did last week.<br>The apparent US-Europe paradox<br>Gross domestic product (GDP) is the total value of goods and services produced by an economy over a given period, usually a year. On its own, GDP in a given year isn’t that informative a number (although people would have a better perspective on many issues if more of them knew just how big U.S. GDP is — currently running at an annual rate of more than $30 trillion.) Normally, we want to compare GDP over time and space — GDP in two different years or two different countries.<br>Such comparisons require making some adjustments. To compare GDP over time, economists normally look not at raw GDP but at “real GDP” — GDP at constant prices, that is, measured in the prices of a base year, currently 2017 in most U.S. data but 2021 in the World Bank data I use below.<br>To compare GDP between countries, economists could and sometimes do just use dollar values. But such comparisons jump around when currencies fluctuate, so economists often use “purchasing power parity” (PPP) -- GDP in different countries adjusted for difference in countries’...