Europe Has Fallen Behind the U.S. and China. Can It Catch Up?

Europe’s share of the global economy is shrinking, and fears are deepening that the continent can no longer keep up with the United States and China.

“We are too small,” said Enrico Letta, a former Italian prime minister who recently delivered a report on the future of the single market to the European Union.

“We are not very ambitious,” Nicolai Tangen, head of Norway’s sovereign wealth fund, the world’s largest, told The Financial Times. “Americans just work harder.”

“European businesses need to regain self-confidence,” Europe’s association of chambers of commerce declared.

The list of reasons for what has been called the “competitiveness crisis” goes on: The European Union has too many regulations, and its leadership in Brussels has too little power. Financial markets are too fragmented; public and private investments are too low; companies are too small to compete on a global scale.

“Our organization, decision-making and financing are designed for ‘the world of yesterday’ — pre-Covid, pre-Ukraine, pre-conflagration in the Middle East, pre-return of great power rivalry,” said Mario Draghi, a former president of the European Central Bank who is heading a study of Europe’s competitiveness.

Cheap energy from Russia, cheap exports from China and a bedrock reliance on military protection by the United States can no longer be taken for granted.

At the same time, Beijing and Washington are funneling hundreds of billions of dollars into expanding their own semiconductor, alternative energy and electric car industries, and upending the world’s free trade regime.

Private investment lags as well. Large corporations, for example, invested 60 percent less in 2022 than their American counterparts, and grew at two-thirds the pace, according to a report by the McKinsey Global Institute. As for per-capita income, it is on average 27 percent lower than in the United States. And productivity growth is slower than other major economies, while energy prices are much higher.

Mr. Draghi’s report will not be released until after voters across the European Union’s 27 states go to the polls this week to elect their parliamentary representatives.

But he has already declared that “radical change” is necessary. In his view, that means an enormous increase in joint spending, an overhaul of Europe’s higgledy-piggledy financing and regulations, and a consolidation of smaller companies.

The built-in challenges of getting more than two dozen countries to act as a single unit have sharpened in the face of rapid technological advancement, growing international conflicts and the increased use of national policies to steer business. Imagine if every state in America had national sovereignty and there were only limited federal power to raise money to fund things like the military.

Europe has already taken some steps to keep up. Last year, the European Union passed a Green Deal Industrial Plan to speed the energy transition, and this spring it proposed for the first time an industrial defense policy. But these efforts have been dwarfed by resources that the United States and China are employing.

The bloc “is set to fall far behind its ambitious energy transition targets for renewable energy, clean technology capacity and domestic supply chain investments,” the research firm Rystad Energy said in an analysis this week.

In Mr. Draghi’s view, public and private investment in the European Union needs to rise by an additional half a trillion euros a year ($542 billion) on the digital and green transitions alone to keep pace.

Both his report and Mr. Letta’s were ordered by the European Commission, the executive body of the European Union, to help guide policymakers when they meet in the fall to draw up the bloc’s next five-year strategic plan.

There is still a sizable contingent in Europe — and elsewhere — that prefers open markets and is suspicious of government interventions. But many of Europe’s top officials, political mandarins and business leaders are increasingly talking about the need for more aggressive collective action.

Without pooling public financing and creating a single capital market, they argue, Europe will not be able to make the kind of investments in defense, energy, supercomputing and more that are required to compete effectively.

And without consolidating smaller companies, it cannot match the economies of scale available to mammoth foreign firms that are better positioned to gulp up market share and profits.

Europe, for example, has at least 34 major mobile networks, Mr. Draghi said, whereas China has four and the United States three.

Mr. Letta said he experienced firsthand Europe’s peculiar competitive deficiencies when he spent six months visiting 65 European cities to research his report. It was impossible to travel “by high-speed train between European capitals,” he said. “This is a profound contradiction, emblematic of the problems of the Single Market.”

The proposed solutions, though, can rub against the political grain. Many leaders and voters across the continent are profoundly concerned about jobs, living standards and purchasing power.

But they are wary of giving Brussels more control and financial muscle. And they are often reluctant to watch national brands merged with rivals or familiar business practices and administrative rules disappear. Creating a new morass of red tape is another worry.

Angry farmers in France and Belgium blocked roadways and dumped truckloads of manure this year to protest the proliferation of E.U. environmental regulations that rule their use of pesticides and fertilizers, planting schedules, zoning and much more.

Blaming Brussels is also a convenient tactic for far-right political parties looking to exploit economic anxieties. The anti-immigrant National Rally party in France has called the European Union the “enemy of the people.”

At the moment, polls are showing that right-wing parties are expected to win more seats in the European Parliament, leaving the legislative body even more fractured.

On the national level, government leaders can be protective of their prerogatives. For the past decade, the European Union has tried to create a single capital market to make it easier to invest across borders.

But many smaller nations, including Ireland, Romania and Sweden, have opposed ceding power to Brussels or changing their laws, worried about putting their national financial industries at a disadvantage.

Civil society organizations are also concerned about the concentration of power. Last month, 13 groups in Europe wrote an open letter warning that greater market consolidation would harm consumers, workers and small businesses and give corporate giants too much influence, causing prices to rise. And they worry that other economic, social and environmental priorities would be sidelined.

For more than a decade, Europe has been falling behind on several measures of competitiveness, including capital investments, research and development, and productivity growth. But it is a world leader in reducing emissions, limiting income inequality and expanding social mobility, according to McKinsey.

And some of the economic disparities with the United States are a result of choice. Half the gap in per-capita gross domestic product between Europe and the United States is a result of Europeans’ opting to work fewer hours, on average, over a lifetime.

Such choices may be a luxury Europeans no longer have if they want to maintain their standards of living, others warn. Policies governing energy, markets and banking are too disparate, said Simone Tagliapietra, a senior fellow at Bruegel, a research organization in Brussels.

“If we continue to have 27 markets that are not well integrated,” he said, “we cannot be competing with the Chinese or the Americans.”