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Discussions of competitiveness are front and centre in Europe right now. The European Commission’s new Competitiveness Compass, its answer to the Draghi report, calls for the EU to build its own artificial intelligence infrastructure, double down on industrial policy and finish the work of integrating the single market. All good goals, but as an American arriving at Brussels airport last week, all I could think was “why is the passport control line three hours long?”
This isn’t just the anecdotal musing of an outsider (or at least not just that). I lived and worked in Europe for 10 years, just when the single currency was introduced. It was an optimistic time. But since then Europe has lagged the US on pretty much every economic metric, from growth and per capita income to the size of capital markets and the number of high-value technology companies.
The news isn’t all bad. Inflation is coming down now, it’s true, and in Germany and the UK, stock markets have benefited somewhat from Donald Trump’s election, as investors look for ways to diversify. But when the continent is so painfully stuck between America’s tariff threats and China’s electric vehicle dumping, it’s worth looking closely at what — if anything — Europe can do to fundamentally change its economic trajectory.
I can tell you that Wall Street is desperate to find a reason to invest in Europe. US markets have become far too concentrated, and vulnerable to shocks like the one we saw last week, when tech stocks plunged. America is also overdue a recession, which President Trump could easily trigger with his erratic actions. But investors want growth. And eurozone GDP numbers released last week showed regional growth flatlining, led by contractions in both Germany and France.
Investors aren’t the only ones who want to diversify. Europe, for its part, knows it needs more independence from US tech titans — and for reasons both economic and political. At a competitiveness conference I attended last week in Brussels, economist Benoît Cœuré, head of the French competition authority, mused that the weakening of Britain’s CMA, now headed by a former Amazon executive, is “a cautionary tale” about how political influence can thwart national sovereignty.
Trump has let it be known that he views European efforts to regulate large US tech companies as an unfair tax on American innovation. The obvious answer to such bullying is for Europe to jump start its own technology industry. The Compass report proposes “AI Gigafactories” to increase computer capacity, as well as new efforts to bolster biotech, robotics, quantum and space technologies. MEPs and chief executives at the competition conference were arguing that the EU should harmonise regulation and build its own digital infrastructure lest it become a technological “colony”.
Again, these are excellent aims. But they also reminded me of the conversation Europe has been having for two decades about capital market integration, deepening cross-border ties in the services industries and creating a true fiscal union. So far, so 2005.
But there is no time left. After the financial crisis, Europe made a critical mistake in shifting away from its efforts to create more domestic, inter-regional demand, opting to bolster exports instead. Since both China and the US are doubling down on their own manufacturing sectors, Europe is now left in the lurch. Even the most competitive export sectors are beginning to face their own “China shock”.
Production in Germany has been in decline for five years, as noted in a new report by Sander Tordoir, the chief economist of the Centre for European Reform, and American economist Brad Setser. Unfair Chinese industrial practices (including access to below market loans, raw materials and artificially cheap labour) are creating a growth and labour shock like the one Detroit suffered decades ago. Europe is now a prime location for dumping, and given that manufacturing in Germany represents 20 per cent of the economy and 5.5mn jobs, that’s both an economically and politically unsustainable place to be.
What to do? The continent needs more market integration and regulatory harmonisation, but also a fundamentally new trade and growth playbook. It must invest in its own AI infrastructure, but also work with the US and other countries hurt by cheap Chinese exports, like Brazil and Turkey. There are some things, like the problem of Chinese dumping, that everyone should agree on.
There’s low-hanging fruit to be had elsewhere. For example, Europeans should stop using their green subsidy money for things like heat pumps or EVs that are made in China. The EU needs some “Buy Europe” provisions. Those could be organised centrally, which could be the start of a shared approach to industrial strategy.
Germany would stand to benefit most. But in exchange for those subsidies, Germany would have to rethink its own approach to growth and trade. It might, as Setzer and Tordoir advise, back IMF scrutiny of countries with persistent and overly large trade surpluses.
All of this represents a big change to Europe’s status quo. But it no longer has a choice. Greater competitiveness is now part of survival.
rana.foroohar@ft.com
