Europe is in a better economic position than is said. For now.

The argument about the lagging European economy compared to the USA is based on misleading statistics. Today's Western European prosperity with accessible healthcare and education supported by a strong social state is still enviable from the perspective of the overwhelming majority of the world. Nevertheless, concerns about the future of the European economy are justified.

The problem is that Europe, due to its fragmentation and inability to invest in the future, cannot scale its potential.

Lenka Zlámalová, an icon of Czech independent neoliberalism, in her series "Zlámalová explains" analyzes the causes of Europe's lag behind the American economy. Her "analysis" is typical in many ways for this genre. Zlámalová takes Europe's lag as a fact without discussion of relevant data and concepts. The culprits of Europe's decline are also traditional: Green Deal, excessive bureaucracy, high taxes… The main commentator of the media house owned by Daniel Křetínský and Patrik Tkáč uses the narrative of decline (based on irrelevant data) to delegitimize Europe's climate policy. After all, she is not alone in this field.

Nobel laureate: Europe is doing as well as the USA

Without realizing it, Zlámalová's analysis was responded to by Paul Krugman. The columnist of The New York Times and Nobel laureate in economics discusses in his Substack why many commentators in Europe and the USA rely on inappropriate metrics. Below is a graph that Zlámalová shows in her video. According to her, in 2008, the US and EU economies were roughly at the same level, and by 2024, the American economy was about 50 percent larger.

The graph shows gross domestic product "in dollars at current prices," which accounts for the decline of the euro against the US dollar during this period. When converted to dollars, the euro's depreciation makes the GDP of European countries appear "smaller" on the graph—even if the actual production of goods and services in Europe remains the same.

A more appropriate metric is the comparison of GDP growth in constant prices (in our case, in 2015 prices), which adjusts the result for currency exchange movements and compares the volume of goods and services produced in both economies. Even in this graph, the US economy is significantly larger than the European one, though only by about 20 percent. Still, this does not mean that the US economy is performing significantly better than the European one.

The next graph shows that the development of both economies is almost identical. It compares GDP in constant prices adjusted for purchasing power, using the same prices for goods and services in both economies. Without this adjustment, the US economy appears larger simply because things are generally more expensive in the US than in the EU. In the US and EU, living standards have grown similarly.

Advertising

But how is it possible that the real growth on paper was higher in the US than in Europe at the same time? The answer lies in what GDP actually measures. Real GDP is calculated in prices from a certain base year—and when American tech companies double productivity, the output of the tech sector in these base prices jumps up. However, the calculation of GDP in constant prices neglects the fact that the price of technologies falls by half. US GDP thus grows faster, but purchasing power—what people can actually buy with their income—remains comparable on both sides of the Atlantic. America is growing faster on paper, but both Americans and Europeans benefit more from American technological progress. Until American companies manage to capture a larger share of European household income (by increasing prices for technological services), there will be no significant difference in living standards.

Nevertheless, Europe's lag in digital technologies poses a serious risk in the form of EU dependence on American or Chinese technologies, including critical infrastructure. Falling behind in digital technology development today mainly presents a geopolitical risk and, in the future, an economic one if American and Chinese corporations succeed in capturing a larger share of European household income.

Krugman also adds that the rapid development of digital giants may not only be a victory— it also brings a class of billionaires from Silicon Valley who increasingly influence politics. Europe's technological lag can paradoxically have its bright side as well.

The problem is a fragmented market, not the green transition

Zlámalová is right to sound the alarm. However, her identification of the problem is entirely wrong. The decline of the fossil fuel industry is not so much an EU problem, but primarily the issue of the media house owner where Zlámalová works. The real problem for the EU— from the mainstream perspective—is that it is unable to reach the forefront of technological development and build digital companies capable of competing on the global market.

Mario Draghi, former Italian Prime Minister and Governor of the European Central Bank, in his report on European competitiveness shows why. His analysis and proposals are not some leftist manifesto that Zlámalová would have to fear terribly. Draghi is inclined towards business and free markets. According to Draghi, Europe has the innovative talent but cannot keep it at home. More than a third of European tech startups leave for abroad, mainly to the USA. Draghi identifies two key problems.

The first is regulatory fragmentation. Any company wishing to operate in the EU must overcome 27 different legal environments. Draghi points out that the EU currently has about a hundred technology laws and more than 270 regulators active in the digital sector across member states. This regulatory fragmentation is especially unfavorable for developing startups. In the USA, one legal environment suffices, where even European tech companies are relocating.

The second problem is the untapped potential of European household savings combined with low European investment levels. Europeans save more than Americans, yet their savings do not fund investment projects in Europe but flow into American stock markets.

Draghi's report also offers solutions—completion of the single market, development of the capital markets union, etc. Thomas Piketty appreciated especially that the report rejects "austerity policies" and calls for European public investments in developing key technologies. The answer is not less regulation or less state, but more Europe and public investments. The problem is not the European social state or green policies, which should protect society and nature from the worst effects of capitalism. The problem is that Europe, due to its fragmentation and inability to invest in the future, cannot scale its potential.

The author is an economist.