How Europe Fell Behind

By John Gustavsson

Saturday, November 29, 2025

 

On the American right, the supposed destitution of Europeans — often derided as “Europoors” — has in recent years become something of a meme. But as much as some Europeans try to deny it, a wealth gap between America and the Old Continent does exist — and it’s growing. Since the 2008 financial crisis, almost all the EU’s economic growth has come from its eastern member states, while Western Europe has fallen increasingly behind the U.S. in terms of both GDP and real wages.

 

How big is this gap? Comparing wealth between nations is tricky due to purchasing power (i.e. different price levels) and exchange rate fluctuations. To address this, economists typically compare countries by purchasing power parity–adjusted GDP measured in constant, international dollars.

 

Out of the 15 member states that made up the EU prior to its eastward expansion in 2004, all but Britain are still members. In 2008, these remaining 14 states had an (adjusted, as per above) GDP equivalent to 94 percent of the U.S. GDP.

 

By the end of 2024, this had dropped to a mere 78 percent, constituting a troubling 16-point widening in as many years. Including the United Kingdom, which left the EU in 2020, does not change the story; indeed, when Britain is counted, the gap is actually slightly larger.

 

The difference is not limited to GDP. Medical doctors in the U.S. earn more than 2.5 times their British colleagues. American chemical engineers earn twice their Swedish counterparts, as do American data scientists in California compared to, say, those in Berlin. When accounting for Western European countries’ punishing marginal tax rates, the difference in net pay is even greater. It is arguably only restrictive immigration laws that prevent America from vacuuming Europe of top talent.

 

Why did this happen?

 

Ask anyone on the European left, and they will be quick to blame the continent’s sluggish growth on austerity. Under President Barack Obama, the United States opted for a stimulus program of a size unprecedented since the New Deal. Trillion-dollar deficits became the norm, and terms like “quantitative easing” entered the dictionary.

 

Meanwhile, according to this narrative, the EU opted for austerity. While it did bail out struggling member states such as Greece, Ireland, Portugal, and Spain — saving them from state bankruptcy — it demanded savage cuts to government spending in return. Clearly, if Europe had just followed the United States and ignored common wisdom on spending and deficits, we never would have fallen behind.

 

A closer examination of numbers, however, does not support this notion. Ireland, which was placed under a troika conservatorship and forced into a fiscal crash diet, has been Europe’s fastest-growing economy since the crisis. Meanwhile, Germany and France — which hardly cut spending at all — have become poster boys for a new era of stagnation. While austerity policies were implemented in a few, mostly smaller nations, that was not the story elsewhere.

 

On the other hand, ask anyone on the populist right for the source of Europe’s economic woes, and they will blame immigration. Europe has seen unprecedented rates of immigration over the past several decades, with peaks in 2015 and 2016 — after which the spiraling refugee crisis led EU member states to institute renewed border controls to prevent asylum seekers from traveling north to countries like Sweden and Germany, which offered generous benefits and higher acceptance rates.

 

While criticism of European immigration policies is entirely legitimate, this, too, does not explain the continent’s lack of growth. Growth rates remained depressed throughout the first half of the 2010s, long before the spike. To be sure, unrestrained immigration’s negative effects — high crime rates, strained social safety nets, balkanization — have long-term negative effects on growth, but alone they cannot explain why Europe fell behind so much in such a short time span.

 

What happened, then?

 

The eurozone crisis was never truly resolved.

 

Uniting more than a dozen economies around the same currency was always going to be difficult. After adopting the euro, southern EU members found themselves able to borrow money at rates they could not previously have dreamed of. The outcome was predictable, and the common currency allowed bank failures in countries such as Greece to metastasize and endanger core EU economies like Germany.

 

Yet, the more fundamental issue is the same one that Milton Friedman described while the euro was still in the planning stage: The countries that form the eurozone are not an optimum currency area. Their economies diverge far too widely, making it impossible to set a central bank interest rate that suits all of them well. While one country’s economy may be booming, another may be on the verge of recession.

 

When the crash happened in 2008, the countries that suffered the worst (such as Greece and Ireland) were unable to devalue their currencies, since they were stuck with the euro and with a European Central Bank that was unwilling to allow the needs of peripheral countries to dictate the interest rate of the entire eurozone. Instead, these countries were forced to rely on fiscal policy, at a time when yields on small countries’ bonds were spiking and investors were fleeing to safe havens. The outcome, again, was predictable.

 

These unresolved structural flaws have imposed a lasting risk premium on even the Eurozone’s core economies ever since the crisis exposed them.

 

Much of the OECD’s post-2010 growth has occurred in the tech sector.

 

Booming tech start-ups helped bring the American economy back to life after the crisis. As much as conservatives may lambast Silicon Valley, Europe’s lack of an equivalent tech haven is one of the reasons why “Europoors” are so much worse off than Americans. It is not a coincidence that Europe’s most tech-friendly country — Ireland — is also the country that has seen the most growth during this period.

 

The EU’s approach to tech has, unfortunately, always been one of regulate first and ask questions later. Perhaps the best example of this is the General Data Protection Regulation (GDPR), proposed as a reaction to the Edward Snowden revelations, which resulted in an explosion of time-wasting cookie banners that voters never asked for. Platforms found to be in violation of the burdensome rule have been fined hundreds of millions of dollars.

 

The EU has also feuded with Elon Musk over free speech on X, and its draconian rules on platforms disseminating political disinformation have led to all the major social media platforms banning political, electoral, and social issue advertisements in the union as of last month. And if this was not enough, the union has introduced an AI act that has been widely panned as anti-innovation (though, fortunately, it looks like EU regulators may be forced to delay the act’s implementation).

 

Instead of tech growth, the EU opted to pursue green growth — but it never materialized.

 

While zero percent interest rates were able to keep many green companies afloat for a while, they were unable to replace the employment potential and productivity of sectors that have been squeezed by green policies — manufacturing, most importantly. Putting further pressure on manufacturing, the EU has enacted a ban on internal combustion engine vehicles that will take effect in 2035, and carbon pricing on fuel is set to be implemented as early as 2027.

 

While these green regulations have led to a boom in electric vehicles, this boom has mostly occurred outside Europe: The United States has the tech talent necessary to make state-of-the-art EVs. China doesn’t, but it does have the inexpensive labor necessary to make EVs that are cheap. Europe? It has neither.

 

The same problem presents itself in virtually every “green” market, including markets for solar panels and batteries: The U.S. has the talent and the firms that can offer top salaries, China and India can compete on price, and Europe is left in the dust. Harsh regulations against fracking and opposition to nuclear power also meant Europe never enjoyed the cheap energy boom Americans enjoyed during the 2010s.

 

To mitigate environmental regulation-induced outsourcing, the EU will implement its carbon border adjustment mechanism (CBAM) — commonly known as “climate tariffs” — beginning in January 2026. Under the new rules, importers will have to purchase carbon credits on the EU’s cap-and-trade market to compensate for the emissions caused by the manufacturing of imported goods. But as with all tariffs, the cost will ultimately be borne by the consumer.

 

The focus on coercing firms to remain — rather than fostering a genuinely competitive and business-friendly environment that will make staying attractive — goes a long way toward explaining how Europe fell behind. And, of course, the “climate tariffs” do nothing to change the fact that Europe is struggling to compete even in the domain of green technology.

 

European labor markets are slower to adapt.

 

The norm of at-will employment has been heavily criticized. Yet the comparative lack of job security that Americans have also helps the labor market more quickly adapt after a recession by shifting labor toward promising new sectors. Businesses can rapidly shed “dead weight,” survive, and move on. Insufficiently productive employees are pushed out and forced to find new places of employment where they can be more productive — increasing the economy’s overall productivity.

 

This flexibility is especially crucial during periods of post-bubble recovery in which resources — including workers — are misallocated in sectors that lack sustainable demand.

 

Lack of job security also encourages workers to retrain, creating a natural channel of supply to fill the demand for skilled workers in new sectors. Although European countries offer free college tuition, making retraining cheaper, few people wish to put their lives on hold and go (back) to college if they feel their jobs are secure.

 

During the financial crisis of 2008, unemployment in the U.S. rose faster and peaked at a higher point than in major European economies such as Germany and France. But what at first appeared to be a sign of resilience was instead a harbinger of doom: Europe’s sclerotic, over-regulated labor markets trapped workers in dying industries and prevented the mass reallocation toward tech and other booming sectors that fueled the subsequent decade of growth.

 

It is, once again, not a coincidence that Ireland — a country that enjoys some of the freest, most “American style” labor markets in Europe — staged a faster recovery than its fellow Western European countries.

 

Demographics have played a significant role.

 

While the liberal immigration policies pursued by so many European countries have certainly been reckless, open borders came about partially as a response to a genuine problem: Europe is aging.

 

This is also true for the United States, but to a lesser extent: The working age population of the U.S. has continued to grow, increasing by just over 8 percent since 2008. In contrast, the EU’s original 15 member states have seen shrinking working-age populations, even with the inflow of millions of working-age migrants. The policies that progressives promote to improve birthrates — paid parental and paternity leave, free or subsidized childcare, and free college tuition — have long since been implemented in all Western European countries, but to little effect.

 

While the U.S. will soon have to confront its own entitlement spending problem, several European countries (including major countries such as France and Britain) are already at or near their breaking points. Making this all the more politically difficult is the fact that immigration was sold as a way to replace “missing” workers so that cuts to old-age benefits and welfare in general could be avoided. Now, politicians are forced to tell the same voters who reluctantly accepted high levels of immigration that the cuts are coming anyway. It is going down just as well as one might expect.

 

The conditions that led to European decline are not a mystery; Europe’s fate today is the predictable outcome of surrendering monetary sovereignty to an unaccountable central bank, smothering innovation under regulatory blankets, rigging labor markets against adaptation, and pursuing climate piety at the expense of competitiveness. Brussels regulated first and asked questions never.

 

An entire generation of European workers was told their jobs were safe, right up to the moment their industries became uncompetitive museums. But Americans who feel a sense of schadenfreude should take heed that the voices who speak of “protecting American workers and industries” can and will harm America in much the same way. Indeed, if Americans don’t take away some lessons from failures on the other side of the Atlantic, the next viral meme about decline may not come at the expense of Europeans.