The Origins of Europe’s Economic Malaise

There are ways the European Union could revive its stalling economy: It could develop new supply chains for critical metals, for example. It could match the largesse of the IRA to protect an industrial base around renewable energies. But what will be far harder to change in the medium term is Europe’s position in the global energy market. As International Energy Agency director Fatih Birol told the Financial Times in early April, Europe is reeling from “two historic monumental mistakes”: prematurely weaning off nuclear power (especially in industrial states like Germany) and becoming dependent on Russian gas.

The doomsday scenario of winters without power have not panned out, thanks in part to increased liquified natural gas imports from the United States. But it has come at a cost: Europe has been priced into a structural disadvantage, what Matthieu Auzanneau, president of the environmental policy think tank the Shift Project, likens to an additional subsidy helping to drive the US investment boom. Although the 2022 peak has receded, average megawatt-per-hour prices paid by European firms still hover between twice and three times the cost paid by American competitors, which are riding Washington’s decision to double down on shale-gas extraction.

The shale revolution offered “a late boon to American power,” Auzanneau said. “Western Europe is inexorably in a position of weakness when it comes to its access to energy and is increasingly dependent on the United States, whose shale exports have become indispensable. Relatively high energy prices are here to stay.”

Hoping to ride an anti-environmentalist backlash, the far right is campaigning on the idea that EU rules have burdened Europeans with regulations that China and the United States will never impose on their own businesses. When farmers across Europe launched tractor caravan protests this winter, for example, the far right saw them as signs of popular rejection of the environmental regulations forced on them from Brussels.

But the pressure to restore “competitiveness” is not coming just from the far right. Macron has called for a “regulatory pause” on the standards adopted in Europe’s Green Deal, the package of norms and environmental standards that the EU has adopted since 2020 and that are designed to bring the bloc to carbon neutrality by 2050. Last year, when the European Parliament adopted a plan to phase out new combustion engine cars by 2035, Germany and its powerful industrial lobby torpedoed the regulation, fearing that European automakers would be unable to resist Chinese imports in a sector that has long been a bedrock of Europe’s industrial base.

This pushback exposes the weaknesses of Europe’s climate strategy. Europe’s Green Deal and newer initiatives like the Net-Zero Industry Act “are essentially about legal norms and regulations,” explained Clara Léonard, an economist with the Institute Avant-Garde. “There’s no global investment strategy like what we’re seeing in the United States.” The onus for fiscal stimulus and subsidies has largely been left up to individual nation states, with widely varying degrees of fiscal maneuverability.

Faced with the scale of investments needed for the renewable transition, fiscally conservative states like Germany and its northern European partners still resist calls for common, EU-level borrowing. The EU’s budget remains about 1 percent of the bloc’s GDP, which leaves matters of industrial and economic policy largely to individual member nations.

Checks on member-state deficit spending, however, were reinstated this winter, and they risk widening the gulf between nations with the financial leeway to invest and those without. “Europe’s budget rules create an imbalance because we have, on the one hand, objectives for debt sustainability, and on the other hand, objectives for reducing emissions,” Léonard said. “But because there are only budgetary rules, and not climate rules with sanctions and oversight, that leads to an implicit hierarchy in favor of financial sustainability over environmental sustainability.”

These taboos could cement the EU’s investment gap relative to the United States. All things told, it points to a replay of the post-2008 scenario when the United States was more flexible than Europe in pursuing deficit-spending and fiscal stimulus, reaping the benefits of the dollar’s position as global reserve currency.

Without a comprehensive industrial deal, the main thrust for shoring up European “competiveness” is on trade policy and market integration. Former Italian prime ministers Enrico Letta and Mario Draghi have been tapped to draft reports that are expected to influence the next European Commission, led since 2019 by Ursula von der Leyen. Letta’s report was released in April, while Draghi, who presided over the European Central Bank between 2011 and 2019, gave a preliminary speech on April 16 outlining his conclusions, which are expected to be released in June.

They both argue that Europe’s common market has failed to live up to its original promise to become an integrated economic zone. While China and the United States boast enormous domestic markets in everything from basic goods and services up to capital investment, Europe’s remain fragmented. This means that outside of legacy conglomerates in sectors like heavy industry or luxury goods, the EU has struggled to foster business “champions”—to use the lingo common in Brussels. For example, Letta and Draghi ogle a US telecommunications market dominated by three firms, and they urge the EU to force a series of mergers between the EU’s more than 34 telecom companies. They call for similar concentration in the energy, financial, and defense industries in order to form commercial heavyweights with the scale to compete internationally.

These suggestions are symptomatic of a debate that is driven by anxieties about geopolitics and hard economic power. And while there may be nodes in the market in which concentration is “natural,” Max von Thun, Europe director of the anti-monopoly Open Markets Institute, rejects the prevailing assumption that scale equals security. “Creating single points of failure is very dangerous,” von Thun said. “Look at what happened during the Covid chip shortage because so much production was concentrated in Taiwan, which became a single point of failure. If we were to just say, ‘OK, let’s just produce all these chips in Germany,’ then we’d be creating another type of dependency, just closer to home.”

Viewed from a different angle, Europe’s weaknesses are in many ways its strengths. While avoiding the levels of corporate concentration seen in the United States, the European Union boasts standards of living that are among the highest in the world. An increasing number of people fall through the cracks of what EU leaders still like to call the “social market economy.” But the European “way of life” buttressed by strong social welfare systems and labor protections—or what remains of them—is still the envy of many.

Overzealous comparison with the United States brushes aside many of the social and cultural factors that undergird Europe’s economic model. “It’s the wrong path to go down to basically define and make all your policy decisions based on what you think other countries are doing or not doing,” said von Thun. “Europe has a more democratic and diverse economy than the US.… there’s an in-built acceptance for Europeans that markets are not magically self-correcting. They are a useful tool, but you have to direct them to certain ends.”

Fawning over the US’s supposed economic miracle also ignores the degree to which a great many Americans are priced out of their country’s boom. According to Zsolt Darvas, an economist at the Bruegel Institute in Brussels, if you take into account shifting exchange rates and cost of living, for example, using GDP per capita by purchasing power parity, Europe’s alleged fall off relative to the United States is far less dramatic. “If you compare economic output per hour worked, then Europe looks even better,” Darvas continued. “There’s a good reason for that: Europeans consider leisure time to be very important.”

Another element is bizarrely absent from European fears of economic decline: The European Union emits roughly half as much CO₂ as the United States, a figure that, in the 2020s, is surely as meaningful a measure of economic health as any other. “I haven’t seen any credible US projections of arriving at net zero emissions with the Inflation Reduction Act,” Auzanneau said. “Where is the long-term strategy? At the end of the day, they don’t really claim to have one, besides throwing as much money at the problem as possible in the hope that, perhaps, something will stick.”

Concerns like these are being brushed aside—and so is another important question with implications for the future of Europe: What are the real economic lessons to draw from a society that seems ready to reelect Donald Trump?