Europe buys the future, America builds it

Jun 18th 2026|5 min read

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Europeans do NOT often holiday in America: too far and, these days, too dear. Except for the World Cup. As fans chase their sides across America this summer, they are discovering country music, ranch dressing and—most striking of all—the mass affluence of America’s suburbs. “DUDE LMAO THIS IS A GAS STATION”, marvelled one German online upon encountering Bu-cee’s, a chain of gobsmackingly large Texan rest stops.

The American wealth enticing holidaymakers troubles European elites. America, once a peer, seems to be racing ahead. Mario Draghi, a revered Italian grandee, calls Europe’s stagnation an “existential challenge”. Hence the high stakes in a wonkish dispute over economic measurements. Captaining one side is Paul Krugman, an American Nobel laureate. Leading out the other are Philippe Aghion, a French one, and Luis Garicano, a Spanish economist. The spat has the feel of an economics World Cup final.

Traditional measures of divergence, favoured by Team Aghion-Garicano, say that France’s GDP per person, as a fraction of America’s, has dropped by about 15 percentage points since 1990. The rest of western Europe looks similar. This “constant PPP” measure converts the output of an economy into a common currency for a chosen “index” year using purchasing-power parity exchange rates, which value currencies according to the goods and services they can buy. It extends that figure through time with a country’s real growth rate. Team Krugman argues a better measure is “current PPP”, which applies a new ppp adjustment to each year’s GDP. Sometimes, as with America and Japan, the results are similar. But Europe’s output measured using current PPP has been flat relative to America’s for decades. Europe is eking out a draw.

The befuddled are in good company. “Let me admit my total confusion,” wrote Olivier Blanchard, a former chief economist of the IMF. Mr Krugman argues that Europe’s respectable current-PPP performance reflects something counterintuitive: in theory a country can grow more slowly than a rival without getting relatively poorer. Assume that America’s technology sector is whizzier than Europe’s (which it is). Tech would then, all else equal, push American growth ahead. But rising tech productivity pushes prices down for everyone, at home and abroad. That boosts European spending power, splitting the productivity windfall.

Under some conditions, the gain could even be divided 50/50, as in the scenario Mr Krugman models. America has grown faster—as shown in its national accounts—but Europe’s spending power has kept up. Current PPP values American tech at those new, lower prices.

But this does not quite secure the win for Team Krugman. His calculation relies on the improbable assumption that America will not capture most of the gain from its productivity growth the usual way—by simply selling much more at those cheaper prices. Other data do not align with Mr Krugman’s story, either. Robert Inklaar, a PPP guru at the University of Groningen, points out that if Europe was picking up ever cheaper American tech exports, the constant-/current-PPP gap would disappear when comparing consumption rather than gdp. That is because in Mr Krugman’s model only one side produces tech, but both consume it and share the benefits of low prices. Since the gap persists when you look at consumption, something else must be afoot.

Team Aghion-Garicano contends that the gap between the two measures is mostly junk. On their side is Antonin Bergeaud of HEC Paris, a business school. He notes that each gauge tackles the same problem—of comparing output across both space and time—but in opposite ways. One converts nominal GDP to shared units first, then casts each country forward with its national figures for real growth. The other tracks GDP over time (using national-accounts figures) and only then converts to shared units.

These approaches yield different results not because of bad data—though these are far from perfect—but because of the thorny maths of converting a wide, shifting list of prices into a clean index. Goods that are representative over time in one country may be useless for another: cheese could mean Morbier in France and Monterey Jack in America. Many French cheeses are unavailable to Americans, and vice versa, or become available in different years. No price index can represent what consumers actually buy and also be comparable across space and time.

Still, this is not back-of-the-net for Team Aghion-Garicano, either. It is true that PPPs do not cope well with comparisons through time. Yet the gap between the two measures might still carry meaning. Perhaps, for instance, high French tech prices have edged closer to cheaper American ones, and by more than has been captured in the national accounts. Then the constant-PPP measure would understate how well France has kept up.

Penalty time

By now all but the most avid GDP-accounting fans will be ready to give up and turn on the football. At least after a World Cup match, everyone can agree who won. In the GDP debate, both sides dig in, often veering from economics into ethnography. Mr Krugman suggests a “walking around test”: if Europe is getting poor, why does it feel so pleasant? Mr Garicano proposes a “driving around test” instead. American suburbia might not have a medieval town’s charm but affluence oozes from the McMansion garages.

Where could the GDP debaters see eye to eye? First, Europe is growing slower than America. Second, that is a problem: even if Europe can free-ride on America’s dynamism, as Team Krugman argues, that is no way to run an economy. Third, the AI era may be less forgiving than the last wave of tech-driven growth. The European fans road-tripping across America, jaws agape at Buc-ee’s, know who they think is ahead. ■

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