Europe at a Crossroads
Measured in dollars, the gap in output per person with the United States has roughly doubled since 2010. Demographics are worse than America's. A continent used to steady prosperity is visibly unsettled.
(versus about $90k in the United States)
(US 3.5%, China 2.6%)
(down from about 67% around 2000 and falling by roughly a fifth of a point a year)
A note on framing. Europe is one of the topics where the headline data is sharper than the political conversation. The continent is not in collapse and is not about to become poor. It is, however, falling behind the United States on most measures of economic vitality, falling behind China on most measures of industrial scale, and grappling with constraints that its political class is only beginning to address.
The widening gap with America
In 2008 the European Union's economy was slightly larger than the United States'. By 2025 the US economy was about 45% larger, measured in current dollars. Per person, the gap is even wider. Measured as output per person, the average American figure is nearly twice the average European one - a productivity comparison rather than a paycheck - with the difference compounding through stock-market gains, lower taxes on capital, and stronger productivity growth. None of this happened suddenly. The gap has widened since the 2008 financial crisis in fits and starts, jumping most in years when the euro fell against the dollar.
Some of this gap reflects exchange rates - a stronger dollar mechanically widens the difference when measured in dollars. Some of it reflects measurement differences in how Europe and the US count things like healthcare. But the underlying gap on productivity and economic dynamism is real and well-documented. American workers have been getting more productive faster than European workers for fifteen years, and American companies and technology have been pulling further ahead in the categories that matter most for the next economy - artificial intelligence, semiconductors, biotechnology, software platforms.
Mario Draghi, the former president of the European Central Bank, was asked by the European Commission in 2023 to write a report on European competitiveness. It appeared in September 2024. Europe, the report found, has fallen behind on every major frontier technology, has been slow to scale its companies to global size, has under-invested in research and innovation, and faces a closing window in which to address these problems. It estimated that meeting its goals - digitizing and decarbonizing the economy and building up defense - would take at least 750 to 800 billion euros a year of extra investment. The report set that against the Marshall Plan and found it larger: 4.4 to 4.7% of EU GDP annually, where the Marshall Plan ran at 1 to 2%.
Why the gap widened
The gap is one number that comes from many smaller decisions. Several stand out as structural rather than cyclical.
Capital markets. The United States has a single deep stock market and a single deep bond market, which together hold about two-fifths of the value of the world's stocks and bonds. Europe has 27 different national capital markets that do not fully integrate, plus the still-incomplete eurozone bond market; EU stock markets are worth less than a quarter as much as America's. A European company that wants to scale globally often has to list in New York to access enough capital. Many of Europe's most promising technology companies of the last decade either moved to the US, sold to US buyers, or stayed small. A capital markets union has been on European agendas for more than a decade and has under-delivered each time; the Commission relaunched it in 2025 as the Savings and Investments Union.
Research and innovation. In 2023 the EU spent about 2.3% of its economy on research and development, the US 3.5% and China 2.6%. The gap is large; the implications are larger. Research spending compounds over decades, and the productivity gap that shows up today is partly the result of underspending in 2005, 2010, and 2015. Most of European research spending also goes to public institutions and large incumbents rather than to the kind of risk-taking startups that drive new industries. There is no clean European equivalent of Silicon Valley, and the conditions that produced one have not been recreated despite many attempts.
Energy. Europe lost cheap Russian gas almost overnight in 2022, and the replacement (mostly liquefied natural gas from the United States and Qatar) is more expensive. Even before 2026, EU companies paid two to three times US prices for electricity and four to five times for gas (Draghi report). The Iran war, which has restricted shipping through the Strait of Hormuz since March 2026, widened the gap: by August European gas cost nearly twice its February price and more than seven times the US price (World Bank). Some heavy-industrial companies have already shifted production to the US for this reason; more are likely to follow over the next decade unless the gap closes. The shock also pushed euro-area inflation to 3.2% in August, and the European Central Bank raised its deposit rate in June and September, to 2.5%.
Demographics. Europe's working-age share peaked earlier than the US and is falling faster. The eurozone has a smaller share of working-age people now than the United States, and the gap will widen through 2050. A smaller share of working people means more people the public budget needs to support and fewer people producing the economic output. The pension and healthcare math becomes much harder, especially in countries (Italy, Germany) that are already at developed-world extremes of aging.
Regulation and fragmentation. Doing business across Europe means complying with 27 different national regulatory regimes layered on top of EU rules. The complexity is much higher than running a business across the 50 US states. The European answer has been to harmonize rules at the EU level - which has produced the world's strongest data-privacy and antitrust frameworks but has not, by itself, delivered the kind of single-market scale that helps companies grow.
The politics that would have to carry it
Everything above is a diagnosis. Acting on it - the capital-markets union, the research spending, the energy costs, the retirement age - requires governments able to impose concentrated costs now for diffuse benefits later. That is the hardest thing any democracy does, and the European political landscape has been moving away from the conditions that make it possible. This is the part of the picture the economic framing tends to skip, and it is why the same reform list has been on the agenda for two decades without being enacted.
The clearest change is the strength of national-populist parties, which campaign chiefly to cut immigration and take powers back from the EU, and which are now a governing or near-governing force in most large member states rather than a protest vote. In Germany, Alternative für Deutschland, second in the February 2025 election with 20.8% of the vote, came first in two eastern state elections in September 2026, with 43.8% in Saxony-Anhalt and 38.2% in Mecklenburg-Western Pomerania, where Chancellor Friedrich Merz's Christian Democrats fell below the 5% needed for seats. Nationally it leads the polls at 27-30%. In France, the National Rally's likely presidential candidates, Marine Le Pen and Jordan Bardella, poll 32-37% for the first round in 2027. Le Pen was convicted in 2025 of misusing European Parliament funds and barred from office; in July 2026 an appeal court upheld the conviction but shortened the ban enough to let her stand. In Italy, Giorgia Meloni has governed since 2022. Similar parties also sit in government in Finland and, since December 2025, the Czech Republic.
Reading that as a straight-line takeover would be wrong, and the evidence against it is recent. In Hungary, Viktor Orbán lost power in April 2026 after sixteen years, to Péter Magyar's center-right Tisza party. In Sweden, the Sweden Democrats, the government's outside backers, lost ground as the center-left opposition won the September 2026 election. Meloni lost a constitutional referendum on judicial reform in March 2026, with about 54% voting against her flagship measure. French municipal elections in March 2026 went to left-wing candidates in Paris, Lyon and Marseille, the last of which the National Rally had targeted directly. The pattern across several countries is that these parties poll strongly, win a share of power, and then run into the ordinary constraints of coalitions, courts and second-order elections. What has changed more reliably than the seat counts is the position of the mainstream parties, several of which have moved toward restrictive migration policies that they opposed a decade ago. The EU's new migration pact, which adds border screening and a mandatory border procedure for some asylum seekers, has applied since June 2026; irregular crossings into the EU fell by about a third in the first eight months of the year (Frontex). The influence shows up in policy adopted by others at least as much as in offices held.
Fragmented parliaments produce coalitions assembled around what their members can agree not to do. France has cycled through governments since the inconclusive 2024 snap election. Germany's coalition governs with a large opposition bloc to its right that gains from every unpopular measure. In Poland, President Karol Nawrocki, allied with the opposition Law and Justice party, had vetoed a record 37 bills by June 2026, including one to take up €44 billion of EU defense loans. In Britain, the governing Labour Party replaced Keir Starmer with Andy Burnham as prime minister in July 2026, after losing ground to Reform UK in local elections. The reforms the Draghi report identifies are precisely the kind that impose visible costs on identifiable groups - pensioners, protected professions, incumbent national champions - in exchange for growth that arrives later and cannot be attributed to anyone. The politics and the economics are not separate problems. The second is difficult largely because of the first.
Two areas run against that pattern, and both are worth noting because they show what European politics can still do at speed when the threat is legible. Defense is the first. At the summit in The Hague in June 2025 NATO members agreed a target of 5% of GDP by 2035, split between 3.5% for core defense and 1.5% for infrastructure and resilience. European NATO members raised military spending in 2025 faster than in any year since 1953 (Stockholm International Peace Research Institute), and the EU set up €150 billion in defense loans. Germany amended its constitutional debt brake to exempt defense spending above 1% of GDP; its defense budget, €108 billion in 2026 including a special fund, rises to about €140 billion in the 2027 draft. Whether the rest of the continent can follow is constrained less by will than by existing debt levels, which vary enormously between member states.
Enlargement is the second, and it is the harder one. Ukraine has been a candidate since June 2022 and opened its first two negotiating clusters in June and July 2026. Moldova is moving in step, and Montenegro and Albania are further along. Admitting Ukraine would make it one of the largest member states by population and among the poorest by income, with agricultural and budgetary consequences that existing members have not yet argued out in public. Chancellor Merz floated an associate membership in May 2026 - a seat at EU meetings without a vote - which Kyiv rejected as unfair. The enlargement question is where European politics, the budget, the farm lobby and the security argument all meet, and it will be a defining fight of the next decade whatever happens on the battlefield.
How Europe compares
Europe is not one economy; it is many, with very different positions. Some pieces of the continent are doing remarkably well; some are stuck. The figures below are GDP per person in 2025, in current dollars (World Bank).
The takeaway: Europe contains some of the richest countries in the world (Switzerland, Norway, Luxembourg) and some that have stagnated for decades (Italy, Greece). The northern and central core of the EU is doing roughly as well as the United States in per-person terms when measured carefully. The south is materially poorer, and the east is converging upward; the relationship across these layers is the actual engine of European politics.
The paths from here
Dated September 2026, with the Iran war's energy shock pushing euro-area inflation back above 3% and national-populist parties leading the polls in Germany and France. Europe has an unusually clear set of options laid out by its own analysts. The Draghi Report, the Letta Report on the single market, and a serious wave of academic work have mapped out what each path requires. The political will to actually execute is the bottleneck.
Continued slow drift
Europe muddles through, the gap with the US keeps widening at roughly the current pace, the gap with China keeps widening on the manufacturing side, and the continent settles into a more comfortable but smaller global role. By 2040 the EU resembles Japan today: rich and stable, but a shrinking share of the world economy.
Will it happen? This is the base case if no major reform succeeds. It is the path of least political resistance and the one consistent with the last fifteen years of data. The latest forecasts fit it: the IMF expects the euro area to grow 0.9% in 2026, against 2.3% for the United States. It is also the path that ends with Europe as a follower rather than a peer in most global decisions, which is uncomfortable for European political identity even when materially survivable.
Draghi-style reform succeeds
The EU implements the major recommendations of the Draghi Report: a real capital markets union, joint borrowing for strategic investments, harmonized innovation policy, and aggressive industrial scale-up in clean energy, defense, and AI. Productivity growth picks up, the gap with the US stops widening, and Europe stabilizes as a credible third pole in the global economy.
Will it happen? Possible but hard. Each major reform requires unanimous or near-unanimous agreement among 27 countries with different priorities. The political moment for reform usually arrives only during or after a crisis. Two years on, the record is mixed: the Commission said in 2025 it had delivered over half the initiatives it drew from the report, while a tracker run by the Joint European Disruptive Initiative rated none of the report's 30 key recommendations fully implemented by September 2026. Some progress (the joint pandemic borrowing in 2020, the rapid energy decoupling from Russia in 2022) suggests Europe can move faster than usual under pressure. Whether it can sustain that speed under today's strains is the open question.
Geopolitical urgency forces reform
An external shock - a more confrontational US administration, a serious Russia threat, a Taiwan crisis, an energy disruption - forces Europe to invest in defense, energy independence, and industrial policy at a speed that would otherwise be politically impossible. The reform happens by necessity rather than choice.
Will it happen? Already partly happening, and 2026 has supplied two such shocks: US tariff threats against European countries over Greenland in January, later withdrawn, and the Iran war's energy disruption. Under the 2025 trade framework the EU approved scrapping its tariffs on most US industrial goods in June 2026; most EU goods now face a 10% US tariff, or the normal rate if higher. EU members' military spending roughly doubled in real terms between 2014 and 2025, and energy infrastructure has shifted dramatically since 2022. The risk is that crisis-driven reform comes with worse decisions and lower coordination than reform that has been carefully prepared, but the alternative of no reform under any condition has its own costs.
Deeper integration moves forward
Beyond the Draghi-style reforms, the EU moves toward a more federal model: shared debt, shared defense procurement, shared industrial policy, eventually shared social-insurance components. This is the Hamilton-meets-Madison version of Europe that European federalists have wanted for decades.
Will it happen? Slowly. Each step requires giving up a piece of national sovereignty, and the political appetite for that varies dramatically by country. The 2020 pandemic borrowing was the clearest single step in this direction in decades. Joint borrowing has since returned, for €150 billion of defense loans and a €90 billion loan to Ukraine for 2026-27. Whether the next steps follow depends on whether the cost of not integrating becomes more visible than the cost of integrating, which is a political calculation that does not always go the federalist way.
Internal fragmentation slows or reverses integration
One or more member states leaves the EU or the eurozone. National populist movements gain enough power to roll back specific EU policies. Trust between member states erodes around tense issues (migration, energy, fiscal transfers). The EU shrinks in scope and ambition over a decade.
Will it happen? Lower probability than it appeared during the Brexit period but not zero. The EU has weathered repeated nationalist surges since 2010 without losing additional members, and Hungary's 2026 election showed that such governments can also be voted out. The deeper risk is not formal exit but quiet hollowing-out: an EU that exists on paper but cannot deliver the coordinated action its scale would require.
The base case is slow drift, with crisis-driven bursts of reform. The Draghi-scale reform package is unlikely to happen in full but elements will get through. The continent will probably stabilize at a smaller relative weight than it had in 2010 but materially better off than it is today. For now the east and the south are growing faster than the old core, and whether that convergence lasts will shape the Union's politics. Whether Europe ends the 2030s as a credible third pole or as a junior partner depends on choices that are still open.
Where serious analysts disagree
Europe is one of the topics where the careful disagreement is mostly between European analysts who agree about the data and disagree about what it means.
The competitive gap is the central problem
Europe's loss of relative position is not a minor adjustment but a serious structural problem that will compound over decades unless it is actively reversed. The continent is missing a generation of frontier technology and is on track to lose another generation if it does not change course. This is not pessimism - it is what the data shows.
Held by: Mario Draghi (former president of the European Central Bank), Enrico Letta (author of the 2024 report on the single market), and many competitiveness analysts in Brussels. The data on per-person GDP, productivity, and frontier-technology share supports their diagnosis; the open question is the political possibility of action at the scale required.
European living standards are the wrong measure
The "Europe is falling behind" framing assumes per-person GDP and stock-market value are the right metrics for human flourishing. Europe has higher life expectancy, less inequality, more social mobility, lower violent crime, broader healthcare access, more leisure time, and better walkable cities than the United States. By those measures, the continent is doing fine and the headlines are exporting an American frame onto a society that has chosen different priorities.
Held by: many European center-left economists, environmental thinkers, and quality-of-life researchers. Critics call the position defensive, since slower growth also squeezes spending on pensions, healthcare and defense; supporters answer that the trade-off is clearer to Europeans who live it than to observers who see only the income gap.
The institutional bottleneck is the deeper issue
Europe's underlying problem is not innovation, capital, or research spending - it is institutional. The treaty structure, the unanimity requirements, the slow consensus-driven decision making, and the absence of a single political authority for the eurozone make Europe permanently slower than its competitors. Without institutional reform, every other piece of policy fails to scale.
Held by: Daniel Gros (Centre for European Policy Studies), Jean Pisani-Ferry (Bruegel), and a long tradition of European institutional reformers. The argument is uncomfortable for member states that prize their autonomy. Supporters see it as the clearest reading of why so many reform efforts have under-delivered; skeptics note that changing the treaties needs the very unanimity it would curb.
The energy and demographics constraints are decisive
Whatever Europe does on competition policy, capital union, and innovation, the underlying constraints of expensive energy and aging populations will dominate the next twenty years. Without cheap reliable energy and a working-age population growing rather than shrinking, no productivity reform will be enough. The fight is real but the framing should be about adjusting to constraints, not about catching up to America.
Held by: European industrial economists and parts of the German-speaking academic establishment. The implication is that Europe's most important policy moves are about energy security, migration policy, and adapting the social model to slower growth - not chiefly about innovation.
Europe's regulatory leadership will compound over time
Europe is the world's largest single regulator and has led on data privacy (the General Data Protection Regulation), antitrust, AI safety, environmental standards, and product safety. Each of these standards shapes how global companies operate. Over decades, the "Brussels effect" of these regulations is at least as consequential for the world economy as any policy out of Washington or Beijing - and it costs Europe much less than the trillion-euro investments competitiveness reform would require.
Held by: Anu Bradford (Columbia) and a number of regulatory-policy scholars. Their argument complements rather than contradicts the competitiveness one: Europe can lead through standards even if it does not lead through innovation. Skeptics note that the EU itself began delaying and trimming rules in 2025-26, including parts of the AI Act.
What the available evidence actually supports: Europe faces real and well-documented challenges, and it is materially better off than its political mood suggests. The gap with the United States on raw economic measures is real and likely to widen further before it stabilizes. Many of the differences in how Europeans live reflect deliberate choices as well as constraints. And the continent's policy effectiveness over the next decade will be shaped at least as much by institutional reform as by any specific economic measure.
What this means for you
Europe's choices show up in everyday life through energy prices, the value of European stocks and currencies, the location of high-skilled jobs, and the structure of European politics that touches every reader who lives there. A few practical observations:
If you live in Europe
Your living standards are higher than the political mood suggests. The local quality-of-life advantages over the United States (healthcare, walkable cities, lower violent crime, longer life expectancy) are real even if they do not show up in GDP-per-person comparisons. The harder reality is that future career-ceiling, investment growth, and entrepreneurial scale will probably be lower than your American counterparts'. If you are early in your career and aiming for global tech, finance, or research scale, weighing time abroad - or moving permanently - against staying in Europe is a more important calculation than it would have been twenty years ago.
If you invest
European stocks under-performed US stocks for most of the fifteen years to 2024, then beat them in 2025, helped by a weaker dollar. The structural reasons for the long gap have not clearly gone away. A diversified portfolio with significant US weight is not a coincidence; it is a reasonable response to where the growth has been. Some careful investors are now overweighting Europe on the basis that valuations have gotten attractive enough to compensate for the structural drag, but the case requires assumptions about reform that have not yet been confirmed by results.
If you do business with Europe
The European single market is real but more friction-rich than the US market, and the regulatory complexity is higher. Companies that take Europe seriously usually pick a few national markets to focus on rather than treating "Europe" as one thing. The reward for doing it well is access to about $21 trillion in collective economic activity with relatively predictable rules; the cost is the operational overhead of doing it right.
If you live in the United States
The European story is the cautionary tale your political establishment likes to point at. Some of the warnings are valid (the cost of slow capital markets, the cost of aging without immigration), and some are projections of American debates that do not actually map onto how Europe runs. The most useful posture is to take the European warnings seriously where they are based on data the US is also subject to - aging, fragmented capital, regulatory complexity at the state level - and to be skeptical of using them as ideological ammunition for unrelated debates.
If you're thinking globally
Europe is going to be a smaller piece of the world economy in 2040 than it is today. The continent's regulatory weight, however, is likely to remain disproportionate to its economic weight. Treating Europe as either a peer of the US or as a fading footnote misses the actual picture. The realistic position is the third major pole of a multi-pole world - smaller than the United States and China, larger and more coherent than its critics suggest, and well placed to set rules that companies elsewhere often have to follow.
The mechanics behind this
Europe's situation sits on top of three deeper mechanisms covered elsewhere on this site. If the analysis above depends on ideas you want to understand first, these fundamentals make the conversation more legible:
