(BOE Report) – We all know people who seem to attract all the bad luck in life. Europe, facing both internal and external challenges, is starting to look like that unfortunate person. What the region needs now is clarity of purpose and a bold plan to achieve it. Some of the challenges Europe faces come from without, such as fraying Transatlantic ties with the U.S. and competitive pressures from China. Other difficulties stem from its own past policies and priorities – most notably over-regulation and an ill-conceived energy strategy – which are not in sync with the objective of maximising economic growth and overall prosperity.
But either way, the economic impact is clear.
Europe has fallen far behind the U.S. since the Global Financial Crisis. In 2010, the dollar per capita GDP of Europe and the U.S. were similar. Fast forward to today, and the U.S.’s per capita GDP is around 50% higher than that of Europe, and the gap is still widening. Europe’s “core” economic growth rate, which adjusts for exceptional short-term defence spending and unsustainable fiscal transfers to peripheral countries, is only 0.9%, by my estimate, compared with 2.5-3.0% for the U.S. Europe’s potential growth rate is low partly because its productivity growth rate is low. Between 2010 and 2019, labour productivity in Europe grew by only 0.7%. It then fell by 0.7% in 2023 and rose just 0.2% in 2024. This compares with a 2.0% long-run average in the U.S., and a shocking 4.5% average in the last two quarters. Low productivity growth ultimately reflects several issues, including the low cadence of innovations, burdensome regulations, large welfare programmes, and high public debt that crowds out private investment. In addition, Europe’s energy policy is inconsistent with economic prosperity. Energy prices in Europe are currently 54% higher than the average levels seen between 2016-2020 – roughly double the 26% increase in general inflation between that period and today. Part of the energy shock was due to Russia, but part was self-inflicted, such as Germany’s decision to phase out nuclear power. Evidently, there can be contradictions between doing good and doing well.
True, Europe’s peripheral countries – including Greece, Ireland, Italy and Portugal – have seen above-trend growth since 2020, but much of that was due to unsustainable fiscal largesse from Brussels. Over the past five years, these countries have each received fiscal transfers and long-dated loans from the European Union representing 10-20% of GDP, including the 800-billion-euro Recovery and Resilience Facility (RRF). But the RRF will be exhausted in 2026. What’s next?
FALLING BEHIND
Europe – perhaps because of the historical scars from two world wars – has in recent decades pursued an ever-larger union of disparate nations rather than allowing the major powers in Europe to thrive unimpeded.
In other words, to prevent any major European power from feeling sufficiently confident to wage war on its neighbours, the EU’s emphasis has been on harmonisation and integration. The Nobel Peace Prize was awarded to the EU in 2012 at the height of the European Debt Crisis. The message was not lost on the world.
But even if this strategy made sense decades ago, the world has changed. For starters, China’s bilateral trade surplus with Europe is becoming a problem, having almost doubled between 2019 and 2024 to $335 billion. That’s partly in response to U.S. tariffs and non-tariff measures. China’s bilateral trade surplus with America has receded by more than half, as a percentage of U.S. GDP, since 2018. What China could not directly export to the U.S. has been rerouted through third countries or pushed to other regions, including Europe.
If 2025 trends continue, the bilateral trade imbalance between China and Europe could reach as much as $450 billion this year – a roughly 35% increase since 2024.
Importantly, the problem is about more than U.S. tariffs.
China has simply become too competitive.
The government’s “Made in China 2025” plan – originally announced in 2015 – achieved most of the country’s ambitious goals for moving up the value chain in advanced manufacturing and other strategic sectors.
Consequently, the range of products in which Europe maintains competitive quality or price advantages has narrowed significantly.
In the 2000s, Italy – with its lower-value-added manufacturing compared with Germany – was crowded out by China. Now it is Germany’s turn.
WHAT’S THE OBJECTIVE?
To begin to address these issues, Europe must first clarify its primary objective. Is it a cleaner environment, greater income equality, or harmonising Europe so that the strong don’t become too strong?
Or is it maximising Europe’s economic potential and prosperity so that it can remain competitive in the future, even at the expense of the environment and income equality? I suspect Europe’s current objective – whatever it may be – is outdated, reflecting neither the rise of U.S. President Donald Trump nor “Made in China 2025.”
While Europe has made some moves over the past year to reposition itself globally, such as the shift toward greater defence spending, the bloc is ultimately still hamstrung by the awkward nature of the union itself. Member states are not permitted to pursue their own strategies, while Brussels is constrained by the need for consensus among 27 disparate countries. Moving forward, Europe’s challenge is to avoid being a bystander. Even if it tries to defend the global order of the past, it will need a robust economy to pursue these goals. Defensive actions by Europe would only buy time and most likely won’t form an effective strategy capable of meeting tomorrow’s challenges.
What Europe urgently needs is an economic and technological renaissance.
(The views expressed here are those of Stephen Jen, the CEO and co-CIO of Eurizon SLJ asset management.)
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(Writing by Stephen Jen; Editing by Anna Szymanski)
