Sick Men of Europe
It’s now almost too easy to become desensitized to the articles and reports about the mortal decline of European economies. The facts are well known: total factor productivity and overall GDP growth (in dollar terms) have been lagging behind the U.S. for the past 30 years, with a stark divergence in performance since the Great Financial Crisis and especially since the pandemic. European stock exchanges are experiencing a wave of high-profile delistings — in the U.K., the stock exchange that once traded almost 10% of the value of the MSCI World Index (source) now trades a meagre 4%. Meanwhile, the European continent is scrambling to keep up with investment in digital technologies compared to the U.S. — 80% of global AI private capital expenditure in 2025 is projected to be spent by American companies (source).
Making sense of these grim statistics, however, is not trivial. There are several overlapping explanations for why Europe is falling behind. The European population has been in negative net-birth territory since the early 2010s (source) and the overall population decline has been offset only by continued immigration. Others emphasize that the problem lies in underdeveloped capital markets compared to the U.S. Some counter that the issue is not a lack of capital but rather a shortage of investment opportunities, driven by market fragmentation among individual European economies and excessive regulation.
The scope of this article is rather broad. It began as a focused analysis of the reasons behind the lower level of investment funding originating from European economies compared to their American counterpart. However, it soon became clear to me that to understand the lag in European investment, I needed to learn much more about the broader state of European economies. In the end, this evolved into more of a whirlwind tour exploring the continent’s economic landscape.
GDP Growth
Firstly, let’s look at the core macroeconomic statistics. GDP growth has indeed been relatively slower in Europe than in the U.S. over the past 30 years, but that trend becomes apparent only when using GDP growth in dollar terms. The difference almost disappears when measured in PPP terms, where most European countries — both Western and Eastern — have been growing on par with their American counterparts (source). When we control for hours worked on both sides of the Atlantic, the picture looks even more optimistic: hourly GDP output per employee is roughly the same in Germany as in the U.S. (source). Therefore, it seems that most of the nominal GDP gap can be attributed to exchange rate differentials and differences in hours worked. Although a clear GDP growth gap has opened up between the two blocs since the pandemic, it is still too early to make definitive predictions for the coming years — particularly given the uncertainty surrounding the impact of Trump’s policies.
This puts many concerns about the state of the European economy into perspective — there is no apparent, dramatic shattering of the old continent’s growth trajectory. However, some point out that although a significant portion of the population is still able to enjoy a relatively affluent life in Europe, this privilege may begin to fade sooner rather than later.
Population Growth
One of the main arguments points to demographics. The U.S. population has grown from about 250 million to around 340 million over the past 30 years — an increase of roughly 35%. By contrast, most European countries’ population growth rates have fluctuated between 5% and 20% during the same period (source). Net births have been, on average, negative since the Great Financial Crisis (source) and overall population growth has been sustained primarily by a steady stream of migrant workers. The United States’ net birth rate, although continuing to decline, remains the highest among G7 countries. Combined with strong immigration numbers, the United States is poised to lead population dynamics within the developed economies. Stronger demographics do not imply economic success per se, but a relatively larger working-age population will always help ease the social care and healthcare expenditure pressures faced by advanced economies through an expanded tax base.
Digital Economy
The other argument, repeatedly emphasized in the recent influential Draghi report, is that Europe is falling behind in the innovation industries predicted to drive future economic growth. In the domains of the digital economy, quantum computing, and Artificial Intelligence, Europe is seen more as a passenger than a driver. It is difficult to find solid counterarguments to this point. The U.S. has produced nearly all of the significant platform and aggregator companies of the modern internet: Apple and Google in mobile, Meta in social networks, Google in search, Netflix in movie distribution, Amazon in digital shopping, Stripe in digital payments, Uber in ride-hailing, AWS, Google, and Microsoft in cloud computing, and Nvidia in GPU computing — the list goes on. These are all domains with strong network amplification dynamics, where scale further reinforces monopolies (or oligopolies) and incumbents. The same dynamic is emerging in industries just beginning to penetrate the market. In autonomous driving, we have Waymo, Zoox, Tesla, and Rivian — all American companies — aggressively deploying autonomous vehicles in U.S. and European cities (Waymo is expected to begin operating on London streets in 2026). Among the major AI model providers, only Paris-based Mistral AI and Hugging Face might potentially be considered serious competitors to OpenAI, Anthropic, or Google. There are some significant European players in the AI application layer (e.g., Swedish Lovable or German DeepL), but these resemble hobbits in the land of American giants.
One can quantify this gap in multiple ways. The American tech-heavy Nasdaq has delivered over a 630% return since 2015, while its European equivalents have gained only 250% over the same period. Annual VC financing in the EU averaged 0.2% of GDP in 2013–23, a fraction of the U.S. average of 0.7% of GDP (source). Finally, this article began with the statistic documenting the vast gap between European and U.S. capex in AI investments. There is no way to sugarcoat this: Europe has a significant amount of catching up to do in terms of its digital transformation.
Investment Resources
Adjacent to the previous point is the claim that Europe faces a significant challenge in mobilizing the resources needed to invest in frontier technologies. European leaders have been discussing almost continuously the need to unify capital markets, create a savings union across the continent, and prepare investment packages to boost the level of capital available to European companies.
There is undoubtedly some potential in all of these measures. The European Union remains deeply fragmented with regard to company lifecycles, taxation, and securities regulations. In contrast, the United States has a single set of laws for the first and last areas (taxation is more complex as corporate taxes can also vary at the state level).
Additionally, a significant portion of the resources for American investment vehicles (VC, PE, hedge funds, etc.) comes directly or indirectly from U.S. citizens through their pension system. U.S. citizens hold assets in pension funds equivalent to approximately 150% of GDP. This figure contrasts sharply with major European economies, such as France or Germany, where pension fund assets represent less than 20% of GDP. Nordic countries perform much better in this regard: Denmark and the Netherlands surpass the U.S., with Denmark approaching 200% of GDP (source).
A starker difference emerges when we examine the composition of household wealth. In the U.S., household wealth is estimated at around $190 trillion (including liabilities). Approximately one-third is attributable to non-financial assets (primarily real estate), one-tenth to current and savings accounts, and more than 60% is distributed across various financial instruments, from directly owning equities and bonds to holding them via a financial intermediary (e.g., pension funds) (source). In the EU, total wealth (including liabilities) is around €72 trillion, of which roughly 15% is in currency and deposits, 55% in housing wealth, and only 25% is invested directly or indirectly in equities and bonds (source). While these numbers conceal significant individual differences across the continent (some Northern European countries perform much better), the overall level and composition of the investment gap are undeniable. Europeans have a much lower overall level of net wealth, and compositionally, they hold far more value in real estate than in financial investments.
Some commentators might argue that this difference is, in fact, welcome (source). The high level of financial instrument ownership by American households is inevitably the result of decades of privatization in their healthcare and social security sectors. Although the U.S. now has a social safety net (Medicare, Medicaid, ACA, among others), its scope is significantly narrower compared with core European countries such as Germany and France. An extensive social safety net, guaranteed by European states, is therefore a communal good. However, one should not forget that, even though it might seem like a strictly better outcome for citizens (and an ethically preferable one), such a system can have far-reaching repercussions, affecting long-term growth rates (and therefore wealth) as well as the fiscal position of the state. Furthermore, though I may appear biased toward the Nordic economic model, privatized pensions do not necessarily lead to the degradation of the social state, as the cases of Denmark and the Netherlands clearly demonstrate.
Fiscal Layer
The state of the pension system is a major determinant of the long-term fiscal position of a country, particularly in the context of slow or declining demographic growth. U.S. government spending currently accounts for around 40% of GDP, with social protection at 8% and healthcare at 10%. European countries, by contrast, spend an average of nearly 50% of GDP, with social protection at 20% and healthcare at 7% (source). Tax revenues as a percentage of GDP have remained relatively stable over the past 20 years, with the U.S. hovering around 26% and most European countries exceeding 40%. The gap between revenues and expenditures has contributed to a surge in U.S. government debt since the Great Financial Crisis, reaching more than 100% of GDP, while most European countries (with some exceptions, such as the U.K. and certain southern European states) remain in a much stronger fiscal position (here and here). This weaker fiscal position is reflected in bond yields, with U.S. 10-year Treasury yields significantly higher than their European counterparts (>4% vs >3%) (source).
The overall picture thus appears more promising for European economies than for the U.S. giant. European countries have greater room to implement large fiscal measures without necessarily increasing tax revenues or destabilizing their debt positions.
Manufacturing Base
The original founding states of the European Union have historically been, and continue to be, strongly manufacturing- and export-oriented economies. Overall, capital intensity in Europe is higher than in the United States. Manufacturing as a share of GDP is almost 30% higher on the old continent than in the U.S. (soruce). Together with a higher level of fiscal involvement by the state, this contributes to the overall suppression of private consumption (source). Thus, even though GDP PPP per capita may not differ significantly between these two economic blocs, private consumption in Europe is constrained as a result of these factors.
This does not necessarily mean, however, that the bloc should prioritize the latter. Capital-intensive industries do provide a multitude of benefits, the most obvious being greater bloc independence (which is more a geopolitical than strictly economic argument) and the creation of numerous high-quality, well-paying jobs (see The Technology Trap: Capital, Labor, and Power in the Age of Automation by Carl Benedikt Frey for an in-depth discussion). The current dependence of global semiconductor supply chains on a few European stellar companies — ASML for EUV lithography and Carl Zeiss SMT GmbH for high-precision optics used in EUV machines — illustrates this point.
Regulatory environment
In the eyes of many foreign observers, the European Union is almost synonymous with regulation. From GDPR to the AI Act, Union politicians are often seen as eager to propose strict governance rules on everything that can be regulated. This view is not without merit but misses a crucial point: the regulatory problems of the European Union do not necessarily stem from Brussels, but rather from a proliferation of national rules and the inability to consolidate them fully under a single Union competency center.
Every European state regulates its own corporate and VAT taxation, as well as company formation and bankruptcy laws. Listing and accounting requirements also fall entirely within the scope of individual nations. For investors, the challenges are as pronounced as for companies. Capital gains and dividends are taxed differently, financial supervision is fragmented across states, and stock exchanges remain heavily nation-focused. On top of that, language and cultural barriers make European markets highly non-uniform, effectively offsetting the advantages of scale offered by this enormous domestic market.
The unification of this regulatory fragmentation by central European institutions can thus be seen as a positive forcing function. The problem is that the frameworks introduced are often half-baked and do not replace national rules, merely complementing them. The Capital Markets Union introduced the so-called Pan-European Personal Pension Product, intended to give Europeans a single pension plan. The downside is that, unless the tax treatment of pension contributions is unified, the advantages of investing in this plan for retail investors are more patriotic than practical. European Long-Term Investment Funds, which created a pan-European investment vehicle for private asset investments, may see better uptake but still have a long way to go. The Savings and Investment Union is receiving renewed attention from European policymakers (source). One of the key tenets of the proposal is to replace much of the coverage of national securities regulators with a single Pan-European Securities and Markets Authority. This idea is gaining traction even among more skeptical member states (source), but the process is still in its early stages, and some member states (e.g., Ireland and Luxembourg) have interests directly opposed to these measures.
Regulatory complexity and diversity are a definitive problem for the bloc. Addressing this challenge has most recently been highlighted by Draghi as one of the core requirements for unlocking European growth.
Conclusions
The economic condition of the European bloc, as we have seen, is not catastrophic but certainly does not inspire the same level of optimism as the American economy (at least as it did until January 2025). The most significant problems, in line with the conclusions reported in the aforementioned Draghi report, are regulatory complexity arising from the interlocking of national and bloc-level legislation, and the relatively conservative investment behavior of European households. Weak population projections may also remind observers more of a Japanese-style decline than of a “tiger economy” with robust human capital growth.
However, there is still much to be proud of. The quality of industrial production on the continent remains relatively competitive and is undeniably at the forefront of even the newest technological developments. The health of state balance sheets is likewise in much better condition than that of American public debt.
Reading Draghi’s proposal for reinvigorating the chronically underperforming segments of the economy is, however, rather chilling. As everywhere, the solution heavily depends on major political reforms within the decision-making bodies of the Union and on accelerating overall European integration. The political impasse, which is a daily reality even in the most trivial bloc negotiations, suggests that major structural changes leading to closer integration of the European market are not currently within reach.