Europe’s Economic Decline: Diverging from the United States and China
Fifteen years ago, Europe’s economy was 10% larger than the United States'. By 2022, it had fallen to 23% smaller. While the EU’s GDP (including the UK pre-Brexit) grew by just 21% over this period, the US expanded by 72% and China soared by 290%. Europe’s inability to keep pace stems from its failure to lead in critical sectors like technology, energy, and defence, combined with an excessive regulatory burden that stifles growth.
Losing the Race in Technology
Europe’s lag in the tech sector is stark. None of the world’s leading tech companies are European, while the US and China dominate across the board—from semiconductors and AI to e-commerce. In 2022, European AI firms attracted just $5 billion in venture funding compared to $47 billion in the US, leaving Europe’s start-ups hobbled by fragmented markets and red tape.
Regulatory hurdles, such as the EU’s Digital Services Act and AI Act, exacerbate the issue. While intended to set global standards, these frameworks often overwhelm smaller businesses, making compliance costly and time-consuming. What should encourage innovation instead fosters stagnation.
Energy Dependency and Mismanagement
Europe’s reliance on cheap gas from Russia has been a critical misstep, leaving it vulnerable to geopolitical shocks and soaring energy prices. The invasion of Ukraine underscored this weakness, plunging the continent into an energy crisis that hit households and businesses alike.
By contrast, the US achieved energy independence through fracking, which kept prices low and insulated its economy from external shocks. Europe’s refusal to embrace fracking has come at a high economic cost. While renewables offer hope, they are not yet sufficient to replace imported energy on the scale required.Defence and Strategic Weakness
Europe’s dependence on NATO, and thus the US, for security underscores its geopolitical fragility. Years of underinvestment in defence have left the EU ill-prepared for crises like the war in Ukraine. While European nations are now increasing defence spending, this late action highlights a broader failure to develop self-reliance in military capabilities.
The US, by contrast, maintains a robust military-industrial complex, reinforcing its global influence. Europe’s reliance on American defence limits its ability to act independently and undermines its standing on the world stage.
The Cost of Over-Regulation
One of Europe’s biggest obstacles to growth is its regulatory framework. Between 2019 and 2024, the EU introduced nearly 14,000 legal acts, compared to just 3,725 in the US. While many of these rules aim to promote sustainability and fairness, they often impose excessive costs on businesses, particularly SMEs.
Stefan Borgas, CEO of RHI Magnesita, called EU reporting requirements a “massive monster” that slows decision-making and deters investment. Strict banking regulations, meanwhile, limit liquidity, further restricting the ability of European businesses to grow and innovate.
The US, on the other hand, is moving towards deregulation. The incoming Trump administration has pledged to slash regulatory barriers, creating a more dynamic business environment. The contrast could not be sharper: while Europe tightens its grip, the US is poised to capitalise on its flexibility.
A Pivotal Moment
European Commission President Ursula von der Leyen has promised reforms to cut red tape and simplify the regulatory landscape, with a new “omnibus” bill expected in 2024. However, Europe must act decisively if it hopes to regain its footing.
The stakes are high. Without bold reforms, Europe risks falling further behind the US and China in global competitiveness. Striking a balance between sustainability and flexibility is essential if the continent is to remain a global economic force.
The time for incremental change has passed. Europe must adapt—or risk irrelevance on the world stage.