Europe Is Almost Out of Time to Defend Its Place in a Brutal World

(Bloomberg) — The European project is approaching a tipping point. 

A combination of political paralysis, external threats and economic malaise is threatening to end the European Union’s ambitions to become a global force in its own right — pushing member states toward defending their own interests instead.

After decades of warnings and sub-par growth, the region’s leaders are suddenly confronting a barrage of evidence that decline is becoming unstoppable. 

France’s europhile president has surrendered veto power over his government to the far right; Germany’s biggest carmaker is talking about shuttering factories at home for the first time ever; US tech giants are turning their backs on the European market because of its new restrictions on artificial intelligence.

Those developments all underpin the EU’s failure to act as a cohesive and dynamic economic bloc, eroding its status and degrading its capacity to respond to a wide range of threats from Chinese industrial policy to Russian military aggression, or even a future antagonistic administration in the US.

Recent apathy or pushback by governments after former Italian premier Mario Draghi’s wake-up call for more investment and common bonds to combat feeble productivity growth underscore how the region has all but given up trying.

“If you wanted to be a geopolitical power, then economic might is the key ingredient,” says Guntram Wolff, a professor at the Free University in Brussels and senior fellow at the Bruegel think tank. “Productivity growth has just been a disaster. Europe is still rich, but these differentials over 20 years have massive implications.”

The fundamental problem is that the world is experiencing the dramatic shifts of climate breakdown, demographic change and the move to a post-industrial economy — all phenomena where Europe’s ability and willingness to respond are lagging.

The region’s geopolitical rivals are seeking to exploit those transformations, whereas too many of the EU’s biggest members are saddled with economic models that have failed to deliver for too long — and restless voters who won’t embrace alternatives.

“Something is changing very, very dramatically and very, very deeply in this world,” former Polish President Aleksander Kwasniewski said in an interview. “We can’t react correctly, because we are too slow.”

Of course, China is battling its own economic slowdown, and the US is heading toward a potentially disruptive election with its public finances on an unsustainable footing. But both those nations have systems that centralize decision making to a large extent, and generate vast amounts of private or public capital for defense and investment in cutting-edge technology. 

Europe has none of those advantages — and that’s increasingly evident.

To be sure, living standards in its wealthy economies aren’t on the verge of collapse. Some countries might well benefit from investment or trade deals with the US, China or Russia. But the longer the current trends persist, the greater Europe’s vulnerability to dramatic shocks will become.

“I really believe we are at risk,” French President Emmanuel Macron said earlier this month on a panel in Berlin. “In the two to three years to come, if we follow our classic agenda, we will be out of the market. I have no doubt.”

Those risks are starting to crystallize for the EU already, as the bloc’s dependence on the Chinese economy increases even despite a growing number of disputes with Beijing.

Macron argues that the loss of cheap Russian fossil fuels since the invasion of Ukraine in 2022, and the advent of US President Joe Biden’s aggressive subsidy-intense industrial policy, mark a rupture with the old model that allowed Europe’s export-based economies to flourish. 

That adds to pre-existing challenges posed by the rise of China and its own vast manufacturing machine, and the global leap forward in technology innovation that has largely bypassed the region. 

“Europe is in danger,” says David Galbraith, a tech entrepreneur and investor who has spent his career working on both sides of the Atlantic and perceives the world economy to be in the midst of a transformation akin to the industrial revolution.

“Look at what happened to countries that failed to industrialize,” he said. “They didn’t do very well.”  

The result threatens to cause damage that goes beyond simply lagging in investment and productivity: the region’s leaders are losing faith in the European project.

It’s not just euroskeptics like Hungary’s Viktor Orban, a perennial thorn in the bloc’s side. Officials in core European countries are starting to view the EU as an obstacle they need to get around — rather than the source of prosperity and protection it has represented until now.

French officials talk about forging deeper integration with a smaller group of countries outside of the bloc’s framework because of Germany’s longstanding opposition. Polish officials cite similar initiatives on defense. The prime minister of Spain, traditionally one of the most pro-EU states, is undermining its trade policy to court Chinese investment. 

“The geopolitics of division is really working,” says Jamie Rush, chief European economist at Bloomberg Economics. “China is directing Spanish policy to the EU by throwing around a little bit of money. Orban is acting with impunity. All of this undermines faith in the wider project — not just for politicians, but also for investors.”

EU Productivity Gap Allowed US to Surge Ahead 

Executives and investors are starting to show similar doubts about Europe too, most prominently with recent decisions by Apple Inc. and Meta Platforms Inc. to withhold their latest AI products from the EU market — denting the bloc’s claim to be the benchmark for global standards. 

Previously, most global corporations judged the single market as too large and lucrative to forgo, despite burdensome regulation. The US tech giants instead decided the EU’s AI rules were just too restrictive.

With that global political and corporate backdrop festering, Draghi — the former European Central Bank president — set out a blueprint for reviving the bloc in September, while chronicling in minute detail the danger of the region’s decay as an economic force.

The EU’s relative decline has been unceasing over the quarter century since monetary union. An analysis by Bloomberg Economics shows that the bloc’s economy would be about €3 trillion ($3.3 trillion) bigger if it had kept pace with the US — enough to boost the income of the average worker by about €13,000 a year.

“The foundations on which we built are now being shaken,” Draghi said in the introduction to his report. “This is an existential challenge.”

His key recommendations for harnessing the EU’s financial power with more joint debt issuance were dismissed out of hand by the Germans, leery of pooling more risk with other member states. Other priorities, such as the creation of a joint capital market, have yet to gain momentum.

The report has largely fallen on deaf ears for now, leaving some policymakers worrying that the region’s window to act is closing fast.

“It’s obvious that Europe is falling behind it’s main trading partners, the US and China,” Greek Finance Minister Kostis Hatzidakis said in a Sept. 24 interview. “If it doesn’t take immediate action, the decline will eventually become non reversible.” 

–With assistance from Natalia Ojewska, Sylvia Klimaki, Zoe Schneeweiss and Ania Nussbaum.

©2024 Bloomberg L.P.