From Powerhouse to Stagnation, Europe’s Competitive Crisis

(Analysis) The European Union stands at a critical crossroads. Once a global powerhouse of innovation and economic strength, it now grapples with stagnation and declining competitiveness.

Overregulation and underinvestment have stifled growth. If these trends persist, the EU risks becoming uncompetitive within a few years. Mario Draghi’s recent report underscores this alarming reality, and leaders like French President Emmanuel Macron are sounding the alarm.

On October 3rd, at the Berlin Global Dialogue Conference, Macron expressed profound concern about Europe’s economic future. He observed that the United States and China have surged ahead, leaving Europe behind.

Macron suggested that since these nations no longer strictly adhere to World Trade Organization rules, the EU should reconsider its own compliance. He urged immediate action on Draghi’s recommendations to ensure the EU’s survival.

A Declining Economic Landscape

For years, Europe has been losing ground to its global competitors. China has outpaced Europe in innovation. The U.S. has advanced through reindustrialization and technological breakthroughs.

Meanwhile, Europe remains bogged down by heavy regulations, especially in emerging fields like artificial intelligence. This restrictive approach has hindered Europe’s participation in transformative technologies.

From Powerhouse to Stagnation, Europe’s Competitive Crisis. (Photo Internet reproduction)

Economists highlight Europe’s sluggish growth since the 2008 financial crisis. Over 16 years, Poland achieved an impressive 60% real GDP growth. Other Central and Eastern European countries also showed strong increases.

In stark contrast, major EU economies like Germany and France grew by only 15%. The U.S. economy expanded by 36%, emphasizing Europe’s declining competitiveness.

In 2008, the EU’s GDP surpassed that of the U.S.—€16.3 trillion compared to €14.8 trillion. Since then, the EU has added only €2 trillion, while the U.S. economy has nearly doubled to €27.4 trillion.

Analysts predict that by 2025, China’s economy will overtake the EU’s in nominal terms. The U.S. continues to widen its lead, supported by policies that strengthen domestic industries.

The U.S. Manufacturing Revival

The United States has experienced a remarkable manufacturing resurgence. Investments have more than doubled, signaling robust industrial growth. Both domestic and foreign capital are flowing back, revitalizing America’s industrial base. This stands in sharp contrast to Europe’s stagnation.

In 2000, the EU’s economy was nearly seven times larger than China’s. Within just two decades, China’s economy has caught up and is poised to overtake the EU.

Despite internal challenges like real estate issues and demographic shifts, China’s growth rates are projected to be two to three times higher than Europe’s. China has strategically linked its growth with energy transition technologies, dominating markets in photovoltaics, wind turbines, and electric vehicles.

European companies in these sectors have struggled against Chinese competitors. In battery production, Europe’s presence is minimal. The EU’s ambitious “Green Deal” has inadvertently opened its markets to Chinese firms, exacerbating trade imbalances. In 2022, the EU’s trade deficit with China reached a staggering €297 billion.

The Urgent Need for Action

Europe now trails its major competitors and faces the risk of further decline. An entity designed to foster growth might instead hinder its member states.

Recognizing these dangers, Mario Draghi released a comprehensive report detailing the EU’s economic challenges. Draghi, the former President of the European Central Bank and ex-Prime Minister of Italy, described the situation as an existential threat.

He noted that global trade has decreased, China has become less open, and the EU has lost its main supplier of cheap energy—Russia. Without restoring economic competitiveness, the EU cannot lead in new technologies, champion climate protection, or act independently on the global stage.

Draghi’s Call: €800 Billion to Revive Economy or Risk Europe’s Decline

Key Weaknesses Highlighted in the Draghi Report

The report identifies several critical weaknesses:

1. Insufficient Competitive Companies: Only three of the world’s top 50 technology firms are European. U.S. companies dominate, reflecting Europe’s missed opportunities in the digital revolution and resulting productivity gains.
2. Demographic Challenges: The working-age population is expected to shrink by nearly two million people per year until 2040. To sustain growth, productivity must increase. Yet Europe’s productivity index is negative compared to the U.S.
3. Underinvestment in Innovation: Major European companies focus on mature technologies with limited growth potential. They invest €270 billion less in research and development than their U.S. counterparts.
4. Capital and Talent Flight: European entrepreneurs often seek funding from U.S. venture capitalists. This leads to a brain drain and businesses relocating abroad
5. Overregulation: The EU emphasizes regulating emerging markets, such as artificial intelligence, instead of fostering an environment conducive to innovation and growth.
6.  High Energy Costs: European companies pay two to three times more for electricity than U.S. firms. Natural gas prices are even higher, undermining competitiveness and burdening citizens.
7. Dependence on Imports: Europe relies heavily on imported fossil fuels and rare earth metals essential for high-tech products. It lacks significant production capabilities in critical areas like semiconductors.

The Decarbonization Dilemma

The EU faces a critical choice: should it prioritize combating climate change or focus on economic development? The push for decarbonization doesn’t align with enhancing competitiveness in the short term. While the report views decarbonization as a future opportunity, it acknowledges that current high energy costs hinder growth.

Draghi’s report warns of escalating geopolitical tensions. Wars and conflicts deter long-term investments, stifle trade, and disrupt supply chains. Europe’s scarcity of resources makes it particularly vulnerable.

Investing in access to strategic raw materials and developing military capabilities requires enormous expenditure. This poses a dilemma: should the EU prioritize development or security?

Initiatives like the Lisbon Strategy aimed to make the EU the world’s most competitive knowledge-based economy by 2010. Instead, the EU fell further behind in innovation. Patent applications stagnated, and Europe’s economy became significantly less innovative than its major competitors.

Subsequent strategies, such as “Europe 2020” and the “European Green Deal,” set ambitious goals but lacked effective execution. The emphasis on climate policy overshadowed the need for competitiveness and innovation. Excessive bureaucracy hindered progress, echoing Britain’s overregulation in the past.

Current Challenges and Possible Solutions

The EU’s automotive industry, vital to its economy, faces severe challenges. European automakers warn they cannot meet new CO₂ reduction targets financially.

Producing combustion-engine vehicles may become unprofitable. Looming job cuts and plant closures threaten massive unemployment and social unrest.

Chinese companies dominate sectors like electric vehicles and renewable energy technologies. The EU has become a market for Chinese expansion, worsening trade deficits. Successful European startups often relocate to the U.S., seeking better funding opportunities. This exacerbates the innovation gap.

Draghi’s report stresses the need to boost competitiveness and innovation. However, implementing solutions faces obstacles. Proposals for a unified capital market are hindered by national interests.

There’s disagreement over adopting protectionist measures versus maintaining free trade. Internal divisions within the EU hinder coordinated action.

Debate Over Trade Policies

Germany resists protectionist actions like imposing tariffs on Chinese electric vehicles. Berlin fears such measures could trigger retaliation and harm its export-dependent economy.

Despite this, in October 2024, the European Commission, backed by France and other nations, overcame Germany’s opposition. They agreed to impose tariffs to protect the European automotive industry.

This decision aligns with one of Draghi’s recommendations. However, it’s a modest step considering the scale of the challenges. The absence of large European companies built on disruptive technologies remains a significant concern.

The EU’s regulatory environment makes it difficult to replicate success stories like Tesla or OpenAI within its borders.

Tech Gap Widens: Europe’s €8 Trillion Wake-Up Call

Conclusion: Navigating an Uncertain Future

The European Union stands at a pivotal moment. Without decisive action, it risks economic decline and potential fragmentation. Addressing fundamental issues like overregulation, underinvestment, and internal divisions is crucial. The challenges are immense, but so are the stakes.

To secure its economic future, the EU must confront these realities head-on. It needs to foster innovation, embrace new technologies, and create a more business-friendly environment. The question remains: can the EU unite and act swiftly enough to reverse these negative trends?