Europe’s Economic Decline Debate 

In the quote-unquote discourse, it’s generally taken for granted that Europe is in economic decline. It’s not hard to find unflattering charts comparing European and American economic performance, and American politicians occasionally chide their European counterparts for failing to keep up. The US ambassador to the EU, for instance, caused a bit of a furore last year when, in trying to defend Trump’s comments about European leaders being weak, he claimed that Germany had a lower GDP per capita than West Virginia, and that the EU had a lower GDP per capita than Mississippi, the poorest state in the US, but, this isn’t just some transatlantic prejudice.

European policymakers spend much of their time fretting about Europe’s alleged stagnation, and European Commission policy is very much inspired by the famous Draghi report at the moment, which painted a picture of a continent with lagging productivity and a structural over-reliance on legacy industries. However, a recent piece by Nobel Prize-winning economist Paul Krugman, in which he claimed that Europe has actually kept pace with the US, has provoked some debate among economists as to whether this widely held assumption is really true.

Measurement of GDP, Exchange Rate, and the PPP 

So, to understand Krugman’s argument, we need to understand how we usually compare GDP. In short, we usually compare the GDP of different countries by converting everything into US dollars, which is sort of the world’s default currency. So, to compare the GDP of the European Union to that of the US, we take the EU’s GDP, which would originally be measured in euros, and then convert it into US dollars by multiplying it by the euro-to-dollar exchange rate. On this basis, the EU doesn’t look like it’s doing that great. According to World Bank data, for instance, the EU’s GDP per capita has always been a bit lower than the US’s, but since 2010, that gap has been widening dramatically. 

However, some people, including Krugman, don’t like this way of measuring GDP for two main reasons. First, exchange rates can be affected by weird........

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