Europe is confronting a convergence of internal weaknesses and external pressures that have left it increasingly adrift in the global economy. Once broadly comparable to the United States in income and growth, the region has steadily fallen behind over the past decade and a half. As geopolitical tensions rise and global competition intensifies, Europe faces an urgent need to clarify its purpose and reset its economic strategy.
The challenge is no longer just about managing crises, but about defining what Europe wants to be in a world shaped by U.S. power politics and China’s industrial ascent.
A Widening Economic Gap
Europe’s economic underperformance relative to the United States has become stark. In 2010, per capita GDP levels in dollar terms were similar on both sides of the Atlantic. Today, U.S. per capita GDP is roughly 50% higher than Europe’s, and the gap continues to widen.
Europe’s underlying growth rate is weak. Adjusting for temporary boosts from defence spending and fiscal transfers to peripheral economies, Europe’s core growth rate stands at around 0.9%, far below the United States’ 2.5–3.0%. This reflects deeper structural problems that have limited Europe’s ability to generate sustained prosperity.
Productivity at the Heart of the Problem
Low productivity growth is a central factor dragging down Europe’s potential. Between 2010 and 2019, labour productivity grew by just 0.7%. It then fell in 2023 and showed only a marginal rebound in 2024. By contrast, the United States has maintained a long-run productivity growth average of around 2.0%, with a striking acceleration in recent quarters.
This stagnation reflects a combination of slow innovation, heavy regulation, expansive welfare systems, and high public debt that crowds out private investment. Together, these factors have dampened Europe’s ability to adapt and compete in a fast-changing global economy.
Energy Policy and Economic Costs
Europe’s energy strategy has further undermined growth. Current energy prices are more than 50% higher than average levels seen between 2016 and 2020, far outpacing general inflation over the same period. While Russia’s actions contributed to the energy shock, policy decisions within Europe, such as Germany’s phase-out of nuclear power, have compounded the problem.
The result is a structural mismatch between environmental ambitions and economic competitiveness. While the goal of sustainability is laudable, the costs have weighed heavily on industry and households, highlighting the tension between doing good and doing well.
Temporary Growth in the Periphery
Some peripheral European economies, including Greece, Ireland, Italy, and Portugal, have experienced above-trend growth since 2020. However, much of this expansion has been driven by extraordinary fiscal support from the European Union rather than by durable improvements in competitiveness.
Over the past five years, EU transfers and long-term loans to these countries have amounted to 10–20% of GDP, including funding from the 800-billion-euro Recovery and Resilience Facility. With this programme set to expire in 2026, questions loom over how these economies will sustain growth once the fiscal support fades.
A Union Built for Peace, Not Competition
Europe’s current structure reflects lessons drawn from a turbulent history marked by two world wars. Over recent decades, the emphasis has been on integration and harmonisation, aimed at preventing any single power from becoming dominant enough to threaten its neighbours. This approach earned the European Union the Nobel Peace Prize in 2012, even amid the debt crisis.
Yet the global environment has changed. The priorities of peace-building and internal balance now clash with the demands of global economic competition, particularly as Europe faces mounting pressure from China.
China’s Rising Competitive Challenge
China’s trade surplus with Europe has nearly doubled since 2019, reaching $335 billion in 2024, and could climb much higher if current trends continue. While U.S. tariffs have diverted some Chinese exports away from America, the deeper issue is China’s growing competitiveness.
Beijing’s “Made in China 2025” strategy has succeeded in moving Chinese firms up the value chain, narrowing the range of products where Europe retains clear advantages. In earlier decades, lower-value manufacturing in countries like Italy was squeezed by Chinese competition. Today, even Germany’s industrial strengths are under threat.
Europe’s Unclear Objective
At the core of Europe’s difficulties lies a lack of strategic clarity. It is no longer clear whether the bloc’s primary goal is environmental leadership, income equality, internal harmonisation, or maximising economic growth and prosperity.
Europe’s current objectives appear outdated, shaped by a world that existed before the return of Donald Trump to the U.S. presidency and before China completed its industrial transformation. While recent moves, such as increased defence spending, suggest some repositioning, the EU remains constrained by its institutional structure. Individual states are limited in pursuing independent strategies, while Brussels is hampered by the need for consensus among 27 members.
Avoiding Strategic Irrelevance
Without a clear economic and technological vision, Europe risks becoming a passive observer in global affairs. Defensive measures may buy time, but they are unlikely to provide a lasting solution. Even preserving elements of the old global order requires economic strength, which Europe currently lacks.
The central challenge is not simply to defend the past, but to build the capacity to compete in the future.
Analysis
This argument lays bare a fundamental tension at the heart of the European project. The institutions and policies that once delivered stability and peace now appear ill-suited to an era defined by technological rivalry and hard-edged economic competition. Europe’s struggle is not merely about growth rates or trade balances, but about identity and purpose.
Without a clear prioritisation of economic vitality and innovation, Europe risks being squeezed between a dynamic United States and an increasingly dominant China. A genuine renaissance would require difficult trade-offs, including revisiting regulatory frameworks, energy choices, and the balance between cohesion and competitiveness. The longer Europe delays this reckoning, the more costly the adjustment is likely to be.
With information from Reuters.
