The Great Divergence: Why America Keeps Pulling Away from Europe

By James Carter

Friday, August 14, 2026

 

Recent growth figures from the European Union’s statistical agency confirm the continent’s economic malaise. The headline touted resilience: Euro-area GDP rose by 0.4 percent, beating expectations. But Germany, France, and Italy — the eurozone’s three largest economies — barely grew. That is not prosperity. It is institutional sclerosis disguised as stability.

 

In 2008, the European Union’s GDP per capita was 76.5 percent of the United States’. By 2023, it had fallen to just 50 percent. France, which in 2000 had GDP per capita comparable to that of the 36th-wealthiest U.S. state, had fallen below Arkansas.

 

Europeans may not appreciate how far their economies have fallen relative to America. Britons dramatically underestimate the gap. Asked where the UK ranks among U.S. states in per-capita income, they guessed seventh. The reality? 51st, below Arkansas and Mississippi. More than a quarter said they were “shocked.”

 

The explanation is not that Europeans work less. The employment rate among working-age adults is nearly identical on both sides of the Atlantic: 76 percent in the European Union and 75 percent in the United States. Among employed workers, Europeans also average longer workweeks — 36 versus 34 hours in the United States. Yet America’s GDP-per-capita advantage has widened. The difference is productivity, or how much economies produce per hour worked.

 

Between 1995 and 2025, American productivity grew by 88 percent while the eurozone’s grew by just 30 percent. The divergence is accelerating: U.S. productivity in market services grew by 12.4 percent from late 2019 to early 2024, while the eurozone’s grew by 3.8 percent.

 

America and Europe made different choices about change. As the former embraced creative destruction, the latter sought to protect against it. Fifty years ago, the Dow Jones Industrial Average included General Motors, IBM, Kodak, Sears, and AT&T. Most have been replaced, unlike the largest firms in Europe over the past five decades. America’s defining companies today were unimaginable then. That is creative destruction at work.

 

Most importantly, America has preserved the freedom to fail. Economists Steven Davis and John Haltiwanger document high rates of firm entry, exit, and job turnover in the U.S. when compared with Europe. In the United States, roughly one in five firms is under five years old. In Germany, one in eight. When firms fail, workers find new jobs and capital shifts to more productive uses.

 

Europe’s largest economies chose differently. They shielded workers through employment laws that make firing expensive and worker councils that give labor substantial influence over corporate decisions. Because firms face higher costs and greater constraints in adjusting their workforce, they are more likely to retain excess labor when demand falls. Such employment protections benefit insiders — permanent workers with secure jobs — while making it harder for outsiders, young workers, and those trying to enter protected labor markets. Europe also embraced precautionary technology regulation that made commercialization more difficult, allowing America to capture markets first. This pattern repeats across emerging technologies: Regulation is imposed before European companies can scale, creating compliance burdens that suppress nascent ventures while solidifying incumbent platforms.

 

The European Commission asked Mario Draghi — the former president of the European Central Bank and prime minister of Italy — to diagnose Europe’s competitiveness crisis. His 2024 report clearly identified the problem: insufficient innovation and dynamism. Yet the political obstacles he identified remain.

 

Some European policymakers understand what must change. Others — like former Internal Market Commissioner Thierry Breton — are doubling down on the very regulations that slow commercialization. The problem is political: Free-market reforms impose concentrated losses on protected groups — unions, incumbent firms, and sheltered workers — while producing diffuse gains over years. Those who bear immediate costs have the power to block change; those who benefit are dispersed and unorganized. Europe’s political institutions predictably reward the former.

 

Prosperity requires continual disruption. Europe’s bet was that it could maximize both prosperity and protection. It couldn’t.

 

America generated extraordinary growth but distributed it unevenly. Europe pursued greater equality through protection—and accepted slower productivity growth as the price. America’s challenge is distributing growth; Europe’s is generating it. Unequal growth creates more prosperity than equal stagnation. For example, U.S. private AI investment reached roughly $286 billion in 2025, whereas no European country managed even $6 billion.

 

Europe increasingly depends on foreign technology, manufacturing, and capital in some of the industries that will define the next generation of growth. The result is more than lost market share. It is strategic dependence.

 

The United States’ advantage is not a fact of nature, however. Our labor markets remain relatively flexible, but the political terrain is shifting. Mandatory worker representation on corporate boards, restrictions on corporate restructuring, and sectoral bargaining that fixes wage standards across industries — ideas once considered fringe — are entering mainstream policy debate.

 

These are not just theoretical proposals. ESG imposed corporatist structures on American companies for years. Today’s restrictions on foreign investment in data centers and infrastructure reflect the same impulse: government deciding which companies deserve capital based on political criteria rather than returns. This is how Europe’s market inflexibility began.

 

American economic strength has historically rested on free markets, private property, and limited government. Rather than abandon those principles now, let’s not make Europe’s mistake our own.