Europe’s economic model, long seen as a steady if unremarkable engine of prosperity, is now clashing with the acute headwinds of fierce global competition. Nowhere is this more evident than in the assertions of Mario Draghi – former president of the European Central Bank and Italian prime minister – who has been the acerbic canary in the coal mine, proclaiming that Europe’s competitiveness is “on the retreat” due to policy inaction and complacency. One year after delivering 383 recommendations to reinvigorate the EU economy, Draghi lamented that only a “fraction of them have been implemented”, with the rest “mired in political disagreement and bureaucratic wrangling”. The consequences of delay risk eroding the continent’s ability to control its own destiny against other countries’ industrial and technological might.

Let us begin with three core areas that have led us to this point or are exacerbating its current situation: Europe’s diminishing global competitiveness; its technocratic governance that stifles agility; and an unappealing economic environment for investors. As the global landscape shifts to a “sovereignty-first” paradigm, in which nations jealously guard strategic industries, Europe’s lack of foresight and unity has left it painfully exposed. The EU now faces a stark choice: undertake radical reforms, or watch its economic relevance and strategic autonomy ebb away.

For decades, Europe could afford to believe that incremental improvements and the strength of its Single Market would keep it firmly in the top tier of the global economy. Instead hard data shows how the US economy grew eight times faster than the EU’s in the second quarter of 2025. Since the global financial crisis in 2008, the divergence has widened. Where EU and US output were once roughly on par, “today the US economy is nearly one-third larger than those of the EU and the UK combined,” remarked Draghi in his report. Europe’s relative decline is not just cyclical, but established, structural and cumulative.

In the industries of the future, Europe risks becoming an also-ran, a fact highlighted by Draghi that only four of the world’s 50 largest tech companies are European. “There is no EU company with a market capitalisation over €100 billion that has been set up from scratch in the last 50 years,” he noted, whereas all six of America’s $1 trillion+ tech giants were created in that period. The Continent that birthed the telecom revolution (think Nokia or Alcatel) and fuelled the automobile’s rise has no equivalent to Google, Apple, or Alibaba. Europe’s corporate heavyweights still dominate in luxury goods and heavy industry, but the digital and platform economies tilt decisively toward the US and Asia.

Part of the problem is that Europe allowed itself to become “the most exposed” major economy in a changing world according to Draghi’s report. The starkest example of this soft underbelly was illustrated with energy. The dramatic spike in gas prices after Russia’s invasion of Ukraine – a result of Europe’s over-reliance on a single supplier – underscored this vulnerability.

Another factor is Europe’s military and technological dependencies. Even as war rages on the EU’s borders, and 10 of 27 member states still fail to meet NATO’s 2% GDP defence spending target , Europe is still reliant on US security guarantees and foreign arms. In cutting-edge tech like AI and advanced microchips, Europe lags and must rely on imports, which is a sobering reality for a bloc that prides itself on regulatory sovereignty but lacks the digital kind. French President Emmanuel Macron captured the existential angst, warning that “our Europe is mortal. It can die”. If it cannot adapt, it will lead to a new era of state-led capitalism to emerge while Europe clings to outdated orthodoxies. The global free-trade consensus that underpinned EU prosperity is giving way to protectionism and strategic nationalism.

The European Union is often derided as a bureaucratic behemoth, where technocratic governance and the quest for consensus can slide into paralysis. Consider the fate of Draghi’s own competitiveness blueprint; the European Commission swiftly “adopted” his 383 recommendations but, by September 2025, only 11% of his ideas had been implemented.

EU insiders point out that 2024–25 has been a distracting period, what with fighting off a transatlantic trade spat, managing a war next door, and navigating precarious relations with China, but these excuses wear thin when Europe’s long-term competitiveness is at stake.

The EU’s competition and industrial policies illustrate this tension between process and purpose. Europe has prided itself on rigorous antitrust enforcement to protect consumers, but against the titans of foreign competitors, rigid application of competition rules can backfire. One example was Brussels’ 2019 veto of a Siemens-Alstom rail merger that aimed to create a European train-manufacturing champion. The deal’s collapse prompted even pro-EU politicians in Paris and Berlin to call for overhauling EU competition policy “to better meet global challenges”, arguing that preventing European mega-mergers could leave Europe unable to compete with state-backed behemoths from China or the US.

At the time, the European Commission waved off concerns about China’s looming industrial threat – “We don’t see the Chinese coming. The Chinese are nowhere…not at all in Europe,” said the competition commissioner in 2019 – a statement that aged poorly as Chinese rail and electric vehicle makers now aggressively enter the European market. In other words, Europe’s own red tape and divided leadership are deterring the very investments needed to revive growth.

Then there is the political division and the reality of state resistance that hampers Draghi’s bold measures: vastly expanded common investment; EU-level funding for innovation; jointly financing Europe’s future (up to €800 billion per year in strategic investments 4–5% of EU GDP). Yet fiscally conservative governments in Northern Europe are wary of anything resembling debt mutualisation or big spending.

This governance malaise fuels what Draghi calls Europe’s “painful” habit of following a technocratic and consensus-driven system that, for all its merits, has so far proven incapable of responding with the speed and scale required by the new global economic reality.

While America is rolling out the red carpet with subsidies for industry and China is famed for its rapid execution, many investors see Europe as a thicket of high costs, heavy regulation and strategic uncertainty. Capital and talent to seek opportunities elsewhere, further undermining Europe’s competitiveness.

One factor of this is its energy costs are a glaring disadvantage and recent events turned that gap into a chasm. By Draghi’s calculation, European firms pay 2–3 times more for electricity than US competitors, and 4–5 times more for natural gas on average. Despite some progress in expanding renewables, fossil fuels still often set the marginal price of power in Europe. This means that energy-intensive industries – from chemicals to metalworks – now find Europe a difficult base for operations.

High prices, paired with Europe’s ambitious climate regulations, have inadvertently spurred talk of “deindustrialisation” in industrial heartlands such as Germany’s Ruhr Valley. A recent analysis noted that “EU companies face electricity prices that are two to three times those in America… [and] unless this changes, energy prices will continue to dampen growth”. It is no surprise, then, that some European manufacturing giants are voting with their feet. Germany’s BASF, one of the world’s largest chemical firms, has poured €10 billion into a new chemicals complex in China – its biggest investment ever – at the same time as it scales back operations at home.

The pattern is widespread, and it’s not just heavyweights that suffer. SMEs across Germany, France and other EU states have been hit so hard by rising costs and supply disruptions that many once-profitable businesses have become loss-making. These firms, often world-class niche exporters, face a brutal squeeze from higher energy and raw material bills, lingering supply chain bottlenecks, and in some sectors, labour shortages due to aging workforces. This slow erosion of Europe’s industrial middle is more concerning, because it undercuts the supplier networks and incremental innovations that sustain larger industries.

Beyond costs, Europe’s regulatory climate has often been criticised as burdensome and fragmented. Companies still have to navigate 27 different tax regimes, myriad national regulations, and sometimes inconsistent EU-wide rules. This fragmentation affects high-growth tech start-ups and scale-ups. Unlike a Silicon Valley firm, a European tech entrepreneur must patch together access to each EU country, coping with different languages, rules, and often protectionist local practices.

Furthermore, the EU’s penchant for over-regulation – however well-intentioned – can dissuade investment in new industries. It is telling that in 2022–23, as the US rolled out green-tech subsidies, Europe’s own green companies such as Northvolt (a Swedish battery champion) reportedly considered moving expansion to America, where the incentives and electricity prices are more attractive. Investors go where the conditions promise a return and, unless Europe can fix its fundamentals, it risks becoming a capital exporter, funding growth elsewhere while stagnating at home.

Beyond the continent’s problem, Europe still retains notable strengths and has launched positive initiatives to provoke growth. The EU remains a manufacturing powerhouse in certain sectors (luxury goods, precision engineering, aerospace via Airbus, pharmaceuticals) and has a highly skilled workforce and strong research institutions. The bloc’s response to the COVID crisis – the €750 billion NextGenerationEU recovery fund – showed that when pushed, Europe can “go big” and jointly finance strategic investments (in that case, digital and green transitions). There are ongoing efforts to reclaim ground in critical industries: the European Chips Act aims to mobilize €43 billion to double Europe’s share of global semiconductor production (from 10% to 20% by 2030) and reduce reliance on Asian chip imports.

Likewise, the European Battery Alliance has spurred plans for dozens of gigafactories to ensure electric vehicle supply chains take root in EU soil. Initiatives on critical raw materials are intended to secure lithium, rare earths and other inputs essential for high-tech manufacturing, so Europe is not beholden to a single foreign supplier. And Europe continues to lead in green tech deployment (for example, offshore wind capacity) thanks to forward-looking climate policies.

These steps still remain piecemeal. For every Northvolt gigafactory being built in Sweden, there is a Tesla megaplant in Germany and or a CATL [Chinese battery maker] plant in Hungary – reminders that Europe’s market is attractive to outsiders but its own firms must also compete against well-supported foreign rivals on European turf. In short, Europe has not yet marshalled a response commensurate with the scale of the competitiveness challenge it faces.

Reversing Europe’s fortunes will require a comprehensive strategy as bold as the challenges are immediate. To create an environment where businesses can thrive in Europe, several key shifts are required:

Europe’s economic malaise is not just about fewer jobs or lower incomes, but how it cannot hope to project its values or protect its interests in a world of assertive great powers. The bloc still has immense strengths: a large collective economy, a talented population, innovative companies, and a proven capacity to adapt when push comes to shove. The EU has navigated existential trials before – from past recessions to the euro debt crisis – often emerging stronger.

The rest of the world will not wait, however. In an age of “America First” and “China Dream”, Europe must craft its own revival that rallies its nations around a common and resounding sense of economic purpose. The EU’s founding ideal was that together, European nations are stronger, but its competitive fire needs to be refuelled, its governance streamlined, and it should speak with one voice on strategic priorities to reclaim its place in the global economy. If not, Draghi’s warning of lost sovereignty will become a caution no more. “Inaction is complacency” as the saying goes, and Europe can no longer afford either.