The Mismeasure of Europe’s Economy

Sami Mahroum, Founder of Spark X, previously held posts at INSEAD, the OECD, and Nesta.

The debate over European competitiveness has long focused on the widening gap with the United States. But that is the wrong question. What matters is not whether the gap is widening, but the fundamentally different mechanisms through which each economy creates wealth: Europe derives much of its wealth from accumulated assets; the US relies on the continual creation of new ones.

This distinction is at the heart of the debate over how to measure the US-EU productivity gap. Paul Krugman argues that, in terms of purchasing power parity, Europe’s relative position has remained broadly stable. Fellow Nobel laureate Philippe Aghion and his co-authors, for their part, contend that at constant prices, Europe has steadily lost ground since the 1990s. Both, however, are measuring the gap; neither explains what drives it.

Europe is indeed less productive than the US, and the gap has widened by constant-price measures. But Europe is also richer than it was a decade ago: output per capita has risen, and the European Union’s employment rate reached a record 76.1% in 2025. Moreover, Europe does not feel poorer, since much of its wealth is embodied in its cities, institutions, and reputation.

What has slowed, then, is not wealth accumulation itself but the rate at which it is renewed. Slower renewal, rather than decline, is the defining feature of what might be called a “stock economy,” in contrast to America’s “flow economy.”

“Stock” and “flow” are ideal types of wealth creation, not accounting categories. A stock economy generates steady returns from assets accumulated over time: historic cities, supplier networks, legacy brands, regulatory credibility, technical know-how, and the trust that lowers transaction costs. A flow economy must continually create new wealth through frontier innovation, entrepreneurship, and rapid scaling. Europe relies heavily on inherited coordination, whereas America depends on perpetual renewal.

To be sure, Europe’s stock is far from passive. Dense supplier networks, reputational capital, and institutional credibility generate genuine productive efficiencies. Once such assets are in place, however, some of the value they generate takes the form of economic rents instead of rewards for productive investment. Landowners in prime locations, incumbents sustained by legacy brands, and protected sectors capture that surplus by controlling inherited assets. The same stock that creates efficiency also fosters entrenchment.

Milan’s fashion ecosystem illustrates how accumulated cultural resources translate into what economists call “amenity value.” As Leïla Kebir and Olivier Crevoisier’s work on the cultural geography of Swiss watchmaking shows, such inherited cultural resources continue to shape contemporary production. Simply by carrying a Milan address, a new fashion label can command an instant premium, as the location itself signals heritage, taste, and authenticity.

The distinction between stock and flow economies has significant implications for the productivity-measurement debate. Because national accounts record both actual and imputed rents as output, part of what both Krugman and Aghion treat as productivity gains reflects returns on inherited assets rather than newly created wealth.

The productivity gap, in other words, reflects not only varying levels of dynamism but also the extent to which output comes from inherited assets rather than new wealth creation. A study of the economic impact of UNESCO World Heritage designations in Italy found that listed localities experienced faster growth in both resident populations and the share of high-income taxpayers, fueling demand for luxury housing. Strip away those passive legacy rents, and Europe’s dynamic core might look thinner than either Krugman or Aghion acknowledges. Viewed this way, Europe is less an economy in decline than one living comfortably off a remarkable inheritance while struggling to convert it into new growth.

Nowhere is the distinction clearer than in each economy’s signature industries. Europe’s defining global industry is luxury: a stock-based sector in which heritage and reputation become more valuable with time. America’s economic flagships are software and, increasingly, AI, where value depends on pushing the technological frontier.

The limits of the stock economy become apparent when firms try to scale. While Europe is home to more than 35,000 startups and many world-class companies, scaling is fundamentally a flow process. Europe’s capital is abundant but rooted, its talent is embedded in existing institutions, and its markets remain fragmented.

As a result, European savings are largely invested abroad. According to the European Parliament, roughly €300 billion ($343 billion) in savings leave the EU each year, much of it funding American innovation. In his 2024 report on European competitiveness, former Italian Prime Minister Mario Draghi reached a similar conclusion: Europe struggles to translate its scientific excellence, vast savings, and industrial depth into rapidly scaling firms.

Yet Europe has several institutional mechanisms for turning stock into flow. The first is the corporate spin-off, which allows incumbents to serve as incubators. ASML, the Dutch maker of the advanced lithography machines essential to semiconductor manufacturing, emerged as a joint venture between Philips and ASM International before becoming an independent company. NXP and Signify were spun off from Philips, and Infineon from Siemens. Each converted accumulated capabilities into firms built for a new technological cycle.

The second mechanism is the joint venture, which pools established capabilities into a new industrial champion. Airbus, created by combining Europe’s national aerospace champions, became Boeing’s only serious rival. The creation of STMicroelectronics through the merger of French and Italian semiconductor firms followed the same logic.

Last but not least is the recycling of accumulated wealth into patient capital. The Novo Nordisk Foundation, for example, channels the returns from one generation’s success into the next generation of research and firms.

These mechanisms are not European versions of the Silicon Valley playbook. They represent Europe’s own way of turning inherited assets into new growth engines. Europe’s mistake over the past few decades has been trying to graft a venture-capital‑driven flow economy onto a stock‑based socioeconomic architecture built around powerful incumbents, stable rents, and incremental change. The result has been a series of sporadic VC booms that failed to transform the broader economy.

Rather than imitating Silicon Valley wholesale, Europe’s challenge is to build institutions capable of unlocking trapped resources: incumbents that spin off new firms, national champions that pool capabilities, and foundations and family capital that support startups as they scale.

Seen through this lens, the Krugman-Aghion debate is less about choosing the right productivity metric than about what those metrics leave out. Although they do a good job of measuring productivity at the technological frontier, they do not capture how much of Europe’s apparent performance rests on inherited assets whose productive potential remains unrealized.

Copyright: Project Syndicate, 2026.
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