In a recent series of Substack posts, Nobel laureate economist Paul Krugman made a counterintuitive argument to support the view that Europe is not suffering any productivity decline relative to the US. Instead, Krugman argues that Europe’s output per hour relative to America’s has stayed roughly flat for 25 years if we use current purchasing power parity (PPP).
Krugman’s argument lends support to all those who claim that no major change in European growth and innovation policy is required. The problem is that current PPP is being wrongly used to make that case.
PPP is useful for comparing purchasing power across countries at a specific point in time. But a sequence of current-PPP comparisons is not automatically a measure of real growth, because the prices used to value output change from year to year.
Since 1986, The Economist has published its ‘Big Mac’ index, which records the price of a McDonald’s Big Mac hamburger in every country and uses this data to ask whether currencies are expensive or cheap.
A PPP is a form of exchange rate, built from the prices of actual goods rather than from financial markets. It is a comparison across space, frozen at one moment. The Big Mac example works because the product is unusually standardized.
But this is an exception, not the rule. Most products are not so neatly comparable across countries. They differ in quality and in how representative they are of what people actually buy in a particular country.
That is why Nobel laureate economist Angus Deaton famously said in 2010 that “PPP comparisons between widely different countries rest on weak theoretical and empirical foundations.”
You could string together 25 years of Big Mac index data, but you would not be measuring how much more France produces today than in 2000. You would be measuring how the relative price of one standardized product changed across countries. That is moderately useful for comparing economies at a particular moment, but useless as a measure of total output growth over time.
The US sold far more in 2024 than it did in 2000, but some of the larger number is due to inflation, not to higher output. To remove the impact of inflation, a country’s statisticians build a deflator: an index of how domestic prices have moved, year by year, so that higher prices are not mistaken for higher production. The deflator answers a different question from the Big Mac index. It asks how much more the US produced in real terms, after adjusting for price changes.
Krugman cites the finding by the Federal Reserve Bank of Chicago that information technology comprises about 8% of US private-sector output but accounted for about 45% of all US productivity growth since 1988. This is exactly the kind of sector where measurement is difficult. The volume produced has exploded, the price per unit has collapsed, and the quality of the products has changed enormously.
There are two ways this can create a wedge between current PPPs and national growth measures.
The first is a weighting issue. If the US produces more of the goods whose prices fall rapidly, then valuing both economies at today’s prices can make part of the earlier volume gain look smaller.
But there is a second, more structural problem: There may be no single index of products that is simultaneously representative within each country, comparable across countries and stable through time.
Things get even more complicated once we move from standardized products to categories shaped by local tastes. Comparing Brie cheese in Paris with cheddar in Chicago would be meaningless. But comparing only Brie in both countries would also be misleading, because Brie may be representative in France and niche in the US.
Contrary to Krugman’s argument, the US lead in technology and innovation is not helping America and Europe in the same way. It has led to higher US wages and profits, and the gap is widening.
So, Europe’s productivity problem is not an accounting issue. Productivity growth pays for everything Europe wants to keep. It is what allows countries to raise wages, fund a welfare state, re-arm, finance their green transition and support research at the technological frontier. Europeans should not attempt to persuade themselves that they do not have a real problem by confusing productivity levels with growth. Europe has real weaknesses, as Mario Draghi’s report on European competitiveness documented—and as all researchers and international institutions find every time they look.
In our view, these findings are not controversial. The EU’s markets are too fragmented. Europe’s firms remain too small. Its capital markets are insufficiently deep. And its technology, particularly digital tools, diffuse too slowly. And Europe has too few technology companies built to global scale. These are policy choices, not fate, and they can be changed. But Europe will fail to change them if citizens and leaders persuade themselves that the productivity gap is an illusion because one price index makes it look smaller.
PPP is useful. It tells us what money buys in different places. But a sequence of current PPPs changes the valuation benchmark over time and therefore cannot by itself settle a question about real productivity growth. Europe should defend what it does well, but be upfront about why it is falling behind. Otherwise, it won’t cure what ails it.
Luis Garicano contributed to this article.
©2026/Project Syndicate
The authors are, respectively, a 2025 Nobel laureate in economics, professor at the College de France and London School of Economics, and an associate at the Centre for Economic Performance; and professor of economics at HEC Paris.