Europe’s post-war growth model rested on three mutually reinforcing pillars. Today, all three are weakening as the international environment changes.
The first pillar was expanding global trade.
Europe became one of the world’s most open economies – roughly twice as open to trade as the United States – and benefited greatly from globalisation. But expanding trade can no longer be taken for granted. Last year alone, more than 2,500 trade restrictions were implemented globally.
The second pillar was Europe’s strength in mid-tech manufacturing, supported in part by access to relatively cheap energy.
That advantage is also being eroded. China has been steadily moving up the value chain. The country now competes directly with the euro area in close to 40% of the sectors in which we have a comparative advantage, compared with around 25% in the early 2000s.
And the cheap energy on which European industry once relied – including that from Russian gas – has faded. Last year, EU electricity prices for energy-intensive industries were on average more than twice US levels and around 50% above those in China.
The third pillar was a stable, rules-based global order, underpinned by a US security umbrella. That environment allowed European supply chains to deepen, and enabled firms to organise investment around efficiency rather than resilience.
Today, that global order is under pressure. Geopolitical tensions are bringing critical dependencies and chokepoints into sharper focus, while Europe faces growing security threats on its doorstep.