In recent years, the European Union (EU) has found itself at a critical juncture, facing significant threats to its long-term viability. While optimism once surrounded the creation and expansion of the Union, recent developments have painted a much bleaker picture for its economic future. This sentiment was echoed by both French President Emmanuel Macron and Mario Draghi, former President of the European Central Bank, as they delivered warnings of impending economic stagnation and global marginalization. Their comments have sparked a growing debate: can the EU survive the next decade without fundamental reform?
The Global Context: Falling Behind the US and China
At the heart of the EU’s current struggles is a widening economic gap with its two major competitors, the United States and China. While the EU once rivaled these powers economically, its share of global growth has drastically diminished. Macron, speaking at the Berlin Global Dialogue Conference in October 2024, warned that Europe has been left in the dust in critical areas like technological innovation and industrial development. He pointed out that while both the US and China have adopted protectionist policies and aggressive industrial strategies, Europe continues to prioritize regulation over investment, choking the growth of its own industries.
The gap between the EU and the US is particularly stark when you consider real GDP growth. According to a study shared by Oxford Economics, while countries like Poland and Romania have shown impressive growth rates over the past 16 years, the majority of EU nations, including core members like Germany and France, have seen meager progress. This lag in growth is even more glaring when compared to the United States, whose economy has expanded by over 36% during the same period. The gap is even more pronounced when we look at nominal growth. As of 2025, the EU’s economy is set to be officially smaller than China’s for the first time in history.
A Wake-Up Call: Draghi’s Report on the European Economy
Recognizing the severity of Europe’s economic challenges, Mario Draghi published a detailed report in September 2024, outlining the existential threat posed by the EU’s current trajectory. Draghi’s analysis is clear: without significant reforms, Europe will continue to lose ground in key industries, fall further behind in technological innovation, and risk becoming irrelevant on the global stage.
His report identifies several major issues facing the Union:
- Technological Backwardness: Europe has failed to capitalize on the digital revolution, which is now giving birth to artificial intelligence and other disruptive technologies. While the US and China are fostering these innovations, Europe is stuck in over-regulation, preventing industries from flourishing. Draghi highlighted that only 3 of the world’s top 50 technology companies are based in the EU, a stark contrast to the dominance of US and Chinese firms.
- Underinvestment in Innovation: European companies are investing significantly less in research and development compared to their American counterparts. This lack of funding has led many promising European startups to relocate to the US, where venture capital is more readily available.
- A Demographic Time Bomb: Europe’s population is aging rapidly, with its workforce shrinking by nearly 2 million workers per year. Without improvements in labor productivity, Europe’s economic growth will stall even further, leaving it unable to compete with more dynamic economies.
- Energy Dependence: Despite progress in renewable energy, European companies still face significantly higher energy costs than their US counterparts. This disparity is partly due to Europe’s reliance on imported energy and slow transition to secure low-cost alternatives. Energy costs have become a massive burden for European industries, further eroding their competitiveness.
Draghi’s report paints a sobering picture of a continent at risk of falling into economic irrelevance unless drastic actions are taken.
Internal Fractures: Competing Interests within the Union
One of the most troubling aspects of the EU’s predicament is its internal division. The EU is, after all, a collection of 27 countries with different priorities and economic needs. As Draghi’s report subtly points out, there is a growing tension between the “old” and “new” EU members. Countries like Poland and Romania have managed to outperform their Western counterparts in terms of growth, yet they remain largely excluded from key decision-making processes.
This internal divide was evident in the recent debate over tariffs on Chinese electric vehicles. While France, Poland, and several other countries supported the introduction of protective tariffs, Germany stood in firm opposition. Germany, whose economy has benefited greatly from free trade with China, feared the consequences of a trade war. In the end, the European Commission moved forward with the tariffs, but the episode underscored a larger problem: Europe lacks a unified economic vision. Without consensus, the Union’s response to external challenges remains fragmented and ineffective.
The EU’s Struggle with Innovation
One of the most alarming aspects of the EU’s economic decline is its inability to keep pace with the innovation-driven growth of the US and China. While the US has fostered a vibrant ecosystem for technology startups, resulting in the dominance of companies like Apple, Google, and Tesla, Europe has failed to produce comparable success stories. The regulatory landscape in Europe is particularly hostile to high-growth startups. Investors are reluctant to pour capital into disruptive ventures, and those that do succeed often relocate to the US, where the financial environment is more conducive to growth.
The case of Tesla serves as a stark example. In the US, Elon Musk’s company grew from a small startup to the world’s most valuable car manufacturer, thanks to generous government subsidies, a supportive regulatory environment, and patient investors. Europe, on the other hand, has seen its car manufacturers struggle to compete with new electric vehicle players from both the US and China. Volkswagen and other legacy automakers have been slow to innovate, and their future remains uncertain as they face mounting competition and stringent EU regulations.
What’s Next for the EU?
With the challenges facing the EU now clearly laid out, the question remains: what can be done to reverse its decline? Draghi’s report offers several recommendations, though each comes with its own set of complications. He calls for:
- Increased Investment in Innovation: Europe must close the gap with the US and China in terms of research and development spending. This requires more than just public investment; the private sector must also be encouraged to take risks and fund disruptive technologies.
- Reforming Energy Policy: While Europe’s commitment to decarbonization is commendable, the energy transition must be managed in a way that doesn’t undermine industrial competitiveness. Lowering energy costs is essential to keeping European manufacturers afloat.
- Addressing the Demographic Crisis: Labor shortages will become increasingly problematic as Europe’s population ages. The EU must find ways to increase productivity, possibly through AI and automation, while also implementing policies to attract and retain talent from outside its borders.
- Fostering a Unified Economic Strategy: Europe’s fragmented internal market is one of its biggest weaknesses. Member states need to work together to create a more integrated economic system, particularly when it comes to capital markets and labor mobility.
Conclusion: The EU’s Last Stand?
The European Union is at a crossroads. Without immediate action, the economic gap between Europe and its global competitors will continue to widen. The warnings issued by Macron and Draghi are not mere alarmism—they reflect the reality of a continent that risks being left behind. Yet, all is not lost. Europe still has tremendous potential, both in terms of its technological capabilities and its wealth of human capital. The challenge now is to unleash this potential before it’s too late. Whether the EU will rise to meet this challenge remains to be seen.
FAQs
What is the main cause of the EU’s economic decline?
The EU’s economic decline can be attributed to several factors, including underinvestment in innovation, high energy costs, and a rapidly aging workforce. Additionally, the EU has struggled to keep up with the US and China in key industries like technology and manufacturing.
How does the EU compare to the US and China in terms of innovation?
The EU lags significantly behind both the US and China in terms of technological innovation. Only a small fraction of the world’s top technology companies are based in Europe, while the US and China dominate industries like artificial intelligence, electric vehicles, and renewable energy technologies.
What are the recommendations of Mario Draghi’s report?
Mario Draghi’s report recommends several measures to reverse the EU’s economic decline, including increased investment in innovation, energy policy reforms, addressing the demographic crisis, and fostering a more unified internal market.
How can the EU address its labor shortages?
The EU’s labor shortages can be addressed through increased productivity, possibly via AI and automation. The EU also needs to attract skilled workers from outside its borders and create policies that encourage higher birth rates.
What impact does energy policy have on the EU’s economy?
Energy policy plays a significant role in the EU’s economic competitiveness. While Europe is leading the charge in the transition to renewable energy, high energy costs continue to hurt its industries, making them less competitive on the global stage.