As Europe decides how to defend itself against American tariffs, lowering interest rates last week to fight the possibility of recession, a deeper question is driving debate. What does Europe need to do to be competitive in this new world?
The continent is one of the richest on the planet. Yet over the past two decades, growth has been sluggish, with most of the gains in the digital and technological spheres centered in the United States.
The announcement of President Donald Trump’s 20% tariffs on European imports, now on a 90-day hold, gave fresh urgency to the dilemma. As EU policymakers prepare to negotiate or retaliate, they must also equip their own economies to compete in an era of intensifying economic nationalism.
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The European Union is the largest single market in the world, even larger than the United States. Yet it is not seeing close to the economic growth that the U.S. is, especially in technology fields. Why isn’t the EU competitive?
If Europe cannot keep up, its security will not be the only core issue on the line, policymakers are saying with increasing urgency. They worry Europe will lose some of its global influence rooted in the values it champions, from social welfare and climate action at home to democracy and human rights abroad.
What is happening with Europe’s economy?
European markets and the euro saw a boost following Mr. Trump’s “Liberation Day” tariffs, as confidence in the American market tanked. But many European economies rely heavily on exports, and a trade war would be bad news for those producers.
Underlying these issues is a concern that has been brewing since the turn of the century: The home of the industrial revolution is no longer seen as a place where innovation thrives, especially in the technological sector.
Only four of the top 50 tech companies are European. Startups that make it big often relocate to Silicon Valley or go public on the New York Stock Exchange instead of at home.
While not everything comes down to tech, this points to a deeper concern, says Rebecca Christie, a senior fellow at Bruegel, an economic think tank in Brussels.
“Europe does not have a risk culture, and it’s a big problem,” she says. “The biggest thing holding Europe back is growth.”
Since the mid-1990s, productivity has grown nearly twice as fast in the U.S. as in Europe. (The difference is minimal when tech is excluded.) The U.S. enjoys a gross domestic product that is double the per capita average in Europe, which has lagged in key sectors, including artificial intelligence, semiconductors, and cloud computing.
It is not clear how Europe’s workforce will continue to support those in retirement without a significant increase in immigration. By 2070, there are expected to be more Europeans over the age of 65 than those of working age.
Economist Mario Draghi called the economic situation nothing less than an “existential challenge” in his seminal report on European competitiveness last fall.
If the trend continues, Europe will become “less prosperous, less equal, less secure, and, as a result, less free to choose our destiny,” Dr. Draghi told the European Parliament.
The European Commission underscored Dr. Draghi’s argument in a “competitiveness compass” document it released earlier this year. “In this world, Europe’s competitiveness and what Europe stands for are inseparable,” the document said. “Our freedom, security and autonomy will depend more than ever on our ability to innovate, compete and grow.”
Why has growth been so difficult?
Part of the problem is Europe’s difficulty in scaling startups into the sort of global giants coming out of the U.S.
European “scale-ups,” highly productive fast-growing companies, raise 50% less capital than their Silicon Valley peers in their first 10 years. The top 10 American companies invest three times as much in research and development – key to continued growth – as their European counterparts.
Companies that do take off often move elsewhere. Close to a third of the private startups founded in Europe and that reached a valuation of $1 billion relocated abroad between 2008 and 2021, the majority across the Atlantic.
The EU raises 5% of the world’s venture capital funds, compared with 52% in the U.S. and 40% in China. (The United Kingdom raises 3%.) And while American startups have immediate access to a market of 340 million consumers, European firms must navigate dozens of distinct legal systems.
A punch line highlights Europe’s predicament: “The U.S. innovates, China replicates, and Europe regulates.” Over half of small and medium businesses name regulations and administrative burden as their top challenges. It is the second-biggest concern for startups.
Beyond the tech sector, European industries have struggled for other reasons. Last year, industrial electricity prices were two and a half times higher than in the U.S., and gas prices over four times higher.
What is being done about it?
The European Commission’s “competitiveness compass” laid out the goal of making it easier for businesses to grow. The strategy includes plans to harmonize regulations across borders and raise spending on research and development to 3% of Europe’s economic output.
Another proposal is to create a savings and investment union that would encourage Europeans to invest in one centralized capital market, rather than holding savings in banks, as is common in Europe. And the commission is raising €20 billion ($22 billion) to build massive “AI gigafactories” for artificial intelligence computing and development.
In Germany, whose sluggish growth has caused particular concern in recent years, some sectors are seeing progress. Known as “Silicon Saxony,” the region around Dresden has established itself as Europe’s leading microelectronics hub, producing a third of the continent’s chips – which power nearly all modern technologies, from smartphones to electric vehicles.
French President Emmanuel Macron announced €109 billion ($124 billion) in private investment in the country’s burgeoning AI ecosystem. France is home to Europe’s largest and most valuable AI startup, Mistral AI.
Amid concerns about the climate crisis and an economy that encourages overconsumption, some have argued that Europe must learn to live with a smaller pie, including calls for a “degrowth” model that would prioritize social and ecological needs.
But Ms. Christie, from Bruegel, disagrees. “The idea that somehow we should just content ourselves with less and become smaller, that’s not going to help,” she says.
“Europe needs to be ambitious,” she adds. “If Europe can grow, then it can support itself and its people and quality of life.”
