The creeping suicide of a continent through regulations: How the EU is strangling itself with regulatory zeal

From economic engine to open-air museum: The chronicle of Europe's decline

It's a painful diagnosis, but it's long overdue: Europe is in danger of definitively losing its economic footing among the world's leading economies. What was long dismissed as pessimistic doomsaying is now manifesting itself in hard economic data. The recent, incisive analyses by JPMorgan CEO Jamie Dimon act like a wake-up call in a burning house. They reveal that the "Old Continent" is not only suffering from cyclical fluctuations, but is also plagued by profound structural erosion.

Fifteen years ago, the European Union was on par with the USA, but it has entered a dangerous downward spiral. The gap between the American engine of innovation and the European bureaucracy is widening ever further. While technology and productivity are creating trillions of dollars in value across the Atlantic, Europe is suffocating in a thicket of regulation, exploding energy costs, and a disastrous capital flight.

This article takes an unflinching look behind the facade of political rhetoric. We analyze how a toxic mix of bureaucratic self-restraint, geopolitical naiveté, and demographic change is destroying Europe's business model. From the relocation of entire industries to the exodus of "unicorns," this assessment reveals that the European welfare state model, without radical reforms, is heading for financial collapse. It is an attempt to understand why we risk becoming not a shaper of the global economy, but merely its open-air museum—and whether there is still a way out.

Europe on the economic brink: A stark assessment

The diagnosis is brutal, but necessary: ​​Europe is in a state of economic and strategic erosion that can hardly be concealed by fine-sounding political rhetoric anymore. The recent statements by Jamie Dimon, CEO of JPMorgan, seem less like mere external criticism and more like the result of a pathological examination of the open heart of the European patient. When a continent that was once the epicenter of the industrial revolution falls from economic parity with the US to the status of a junior partner in just 15 years, it is not simply bad luck. It is the result of structural errors, misguided priorities, and an unprecedented self-imposed constraint of bureaucracy.

This analysis will dissect the mechanisms of this decline. We look behind the facade of the gross domestic product figures, analyze the toxic mix of energy costs and regulatory zeal, and ask whether the European welfare state model, in its current form, is even viable. It is a painful but unavoidable assessment if we want to understand why Europe is in danger of becoming an open-air museum of world history.

The Great Decoupling: Why Relative Prosperity is Dwindling

The statistical finding cited by Jamie Dimon can hardly be overstated in its significance: the EU's share of global GDP is shrinking, and a gap is opening up in direct comparison with the US that will be difficult to close. In 2008, the Eurozone was still roughly on par with the United States economically – in some cases even slightly ahead, depending on the exchange rate calculation. Today, the EU's GDP is only about 65% of the American level.

In 2024, a significant economic divergence between the US and the EU-27 is evident. While the nominal gross domestic product (GDP) of the US is approximately $28 trillion, it is only around $19 trillion in the EU, indicating a dynamic decoupling in which the US is leading the way. This trend is exacerbated by differing productivity growth rates: in the US, it is high and technology-driven, while in the EU it is stagnating, revealing a structural weakness in the European economy. Particularly striking is the massive capital divergence, reflected in the market capitalization of the top seven technology companies. In the US, their value exceeds $13 trillion, while the corresponding value in the EU is negligible in direct comparison.

One has to look closely at these figures to grasp their full implications. It's too simplistic to attribute this decline solely to currency fluctuations of the euro against the dollar. The core problem lies deeper: it's a productivity crisis. Since the financial crisis, the US has significantly increased its productivity through massive investments in technology, fracking, and digital platforms. Europe, on the other hand, has remained stuck in the status quo of the "old economy.".

While the US created a growth engine with Silicon Valley that now generates trillions in added value, Europe has been preoccupied with managing its existing resources. The bitter truth is that European growth over the last decade has been driven primarily by labor market participation (more people in employment), not by increasing efficiency per hour worked. This is a finite model, especially considering the demographic curve. The US is growing through innovation; Europe is growing—if at all—only through capacity utilization.

Another aspect of this decoupling is consumption. American domestic consumption is a gigantic engine, fueled by higher disposable incomes and a lower savings rate. Europeans save, often out of fear for the future and to provide for a fragile pension system. However, the capital that isn't consumed here doesn't necessarily flow into European companies. It migrates elsewhere. We see a systematic disadvantage in capital allocation: European money finances American prosperity because the expected returns across the Atlantic are simply more realistic.

The architecture of self-restraint: Regulatory zeal as a locational disadvantage

“It takes 27 nations to make a decision.” This statement by Dimon captures the essence of European paralysis. But the problem isn't just the number of decision-makers, but rather the way decisions are transformed into bureaucratic monsters. Europe has chosen—in a kind of tragic overestimation of its own power—to lead the world through regulation rather than innovation (the “Brussels Effect”).

The Precautionary Principle, enshrined in the EU's DNA, stands in diametrical opposition to the American approach of Permissionless Innovation. In the US, anything is permitted unless explicitly prohibited. In Europe, one often has to prove that an innovation causes no theoretical harm before it can be brought to market. The result is devastating

1. Compliance costs: Medium-sized companies in Germany and Europe are drowning in reporting obligations. Whether it's the Supply Chain Due Diligence Act (LkSG), the Corporate Sustainability Reporting Directive (CSRD), or the Taxonomy Regulation – each of these legal acts may be well-intentioned. However, in total, they tie up thousands of working hours that are not being invested in research and development. A CFO of a German medium-sized company now spends more time on ESG reporting than on strategic investment planning.
2. The fragmented single market: Theoretically, there is a single market, but in practice, there are 27 different tax regimes, insolvency laws, and labor law hurdles. A startup from Delaware can immediately address 330 million Americans as customers. A startup from Munich, however, has to grapple with entirely new legal norms and languages ​​as soon as it wants to expand into France. Economies of scale, which are essential for modern tech growth, are thus stifled from the outset.
3. Technophobia: The AI ​​Act is the latest example. Even before Europe has produced a single significant competitor to OpenAI or Google DeepMind, it has passed the world's strictest regulatory framework for artificial intelligence. It's regulating ghosts it hasn't even summoned. The message to investors is clear: Experiment in California or London; there, you won't be sued before you even make your first profit.

Bureaucracy is not just a cost factor; it's a time factor. In a world where technology cycles are measured in months, approval processes in Europe take years. If a factory expansion waits three years for environmental approval, the technology intended for production there is often already obsolete. This is not hyperbole, but the reality that companies like Tesla in Brandenburg or various chemical companies struggle with daily.

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Capital flight and unicorn exodus: Europe's financial anemia

It's an irony of fate: Europe is rich in savings but poor in investment. Private households in the EU are sitting on trillions of euros in financial assets. But this money isn't working for Europe's future. It sits in interest-free current accounts or flows directly into US capital markets via institutional investors.

Why is this the case? Because Europe lacks a functioning Capital Markets Union (CMU). European financial markets are essentially small, national states. They lack depth and liquidity. This has dramatic consequences for innovation

Young, promising companies (“unicorns”) often still find seed funding in Europe. But as soon as they enter the growth phase and need hundreds of millions of euros (“scale-up”), the market dries up. There are hardly any European pension funds or venture capitalists who can write deals of the size that an American VC can so easily.

The result is a dramatic “brain drain” from companies:

BioNTech

A German gem, but the IPO took place on the Nasdaq.

Spotify

Swedish roots, but listed on the NYSE.

Linden

The most valuable German company left the DAX and moved entirely to the USA.

Birkenstock

IPO in New York.

These companies aren't just going to the US for the higher valuations. They're going because the ecosystem of analysts, specialized investors, and acquisition opportunities exists there. Europe exports its best ideas and then buys them back later as expensive products or services. We've been reduced to an incubator for the American economy.

Around €300 billion of European savings flow abroad annually, primarily to the USA. We are essentially financing the technological lead of our biggest competitor with our own savings. This is economic masochism in its purest form. Without a genuine capital markets union that makes cross-border investments as easy as in the USA, Europe will continue to fall further and further behind technologically.

Deindustrialization in real time: When energy becomes a luxury good

Germany, and thus the industrial heart of Europe, built its prosperity on an implicit business model: cheap energy from Russia, efficient intermediate products from Eastern Europe, and high-priced exports to China. This model has imploded.

The loss of cheap Russian pipeline gas was an exogenous shock, but the reaction to it revealed the full fragility of European energy policy. While the US has stabilized its energy costs at historically low levels through the shale gas revolution (fracking), European industry pays many times more for electricity and gas.

A comparison of indicative industrial energy prices reveals significant differences between the US and Germany/EU. While the price of natural gas in the US is around $2-3 per MMBtu, it is about four times higher in Germany/EU at approximately $10-12 per MMBtu. A similar situation exists with industrial electricity: In the US, a kilowatt-hour costs approximately 6-8 cents, whereas the price in Germany/EU, including grid fees, is roughly two and a half times higher at 16-20 cents per kWh.

An energy price difference of a factor of 2 to 4 is no longer just fierce competition for energy-intensive industries (chemicals, steel, glass, paper, aluminum), but a death sentence. BASF, the world's largest chemical company, is making this painfully clear. The closure of 11 plants at its main site in Ludwigshafen and the simultaneous investment of 10 billion euros in a new integrated production site in Zhanjiang (China) is not an "expansion." It is a relocation.

When Jamie Dimon says Europe has “scared away investment,” that’s exactly what he means. Capital is a skittish deer, and it goes where it’s welcome and where the input factors are right. In the US, the Inflation Reduction Act (IRA) lures investors with massive subsidies and low energy costs. In China, a huge market and government protection are the draw. In Europe, high energy prices, carbon pricing without a global safeguard, and planning uncertainty are the main attractions.

We are not currently experiencing a classic recession followed by a recovery. We are witnessing structural deindustrialization. Value chains are breaking down. If the basic chemicals industry collapses, the refining companies will follow, and ultimately, the automotive industry, which relies on these local clusters, will also be at risk. The loss of industrial know-how that is now taking place is irreversible. A chemical plant that has been dismantled will never be rebuilt in Europe.

The illusion of the peace dividend: Geopolitical impotence

The economic decline correlates directly with the loss of military significance. Dimon's reference to the "drastic reduction" of the military is factually correct and strategically devastating. After the Cold War, Europe reaped the so-called "peace dividend." Savings were made in the Bundeswehr and other armies to expand social welfare systems and mask deficits.

For decades, Europe relied on the American security umbrella. The result: Europe is now barely militarily capable of action. While the US consistently invests over 3% of its GDP in defense (approximately $900 billion), major European nations languished for years at 1.0 to 1.3%. Only the war in Ukraine forced a change of thinking, but the gaps are enormous.

This is not only a security policy problem, but also an economic one. Military research is the biggest driver of technological innovation in the USA. The internet (ARPANET), GPS, the touchscreen, voice control (Siri originated from a DARPA project) – all these basic technologies of the digital age have their origins in the US military-industrial complex.

Europe has dismantled this innovation ecosystem. There is no European DARPA with comparable clout. We often buy off-the-shelf weapons systems from the US (F-35) instead of developing our own technological sovereignty. This drains taxpayer money into US industry instead of fostering domestic high-tech clusters. Geopolitical powerlessness leads to economic dependence. Those who cannot protect their own trade routes and rely on US protection for critical infrastructure are at a disadvantage at the negotiating table for trade agreements.

The demographic winter: When welfare states become unaffordable

Dimon praises the social security systems (“wonderful things”), but his praise is poisoned. He implies that these systems have become a luxury that Europe can no longer afford because its economic foundation is crumbling. The figures bear him out.

Europe is facing a demographic tsunami that makes the current economic downturn seem like a gentle breeze. The old-age dependency ratio is deteriorating dramatically. In Germany, in the 1990s, there were roughly four to five working-age people for every retiree. By 2050, this ratio will fall below two to one. In Southern Europe, the situation is even more dire in some areas.

This means that fewer and fewer working people have to finance an ever-increasing number of pensioners with their taxes and contributions. This automatically leads to one of two scenarios:

1. Exploding non-wage labor costs: Labor in Europe is becoming so expensive that it can no longer compete globally. Germany already has some of the highest labor costs and tax wedges in the world.
2. Collapse of benefits: Pensions and health benefits must be drastically cut, which poses a social threat.

The US is also aging, but more slowly – thanks to historically stronger immigration and a somewhat higher birth rate. Europe has so far failed to manage immigration primarily through economic means. While countries like Canada or Australia select the “best and brightest” (using points systems), in Europe immigration often occurs into social welfare systems, not into the high-tech job market.

If GDP no longer grows (see section 1), but social costs explode due to aging (section 6), state insolvency is a mathematical certainty. The “generational contract” is being broken, not by law, but by reality. Companies that anticipate this will not invest in a country whose tax burden will inevitably have to increase to close the pension gap.

Reform or irrelevance: The last window of opportunity

The analysis is bleak, but fatalism is not a strategy. In his recent report on Europe's competitiveness, Mario Draghi aptly described the situation as a "slow agony" unless a radical change of course is implemented. This realization is slowly sinking in, but political implementation lags years behind.

What would have to happen to disprove Dimon's prophecy?

1. Completion of the single market: especially in services, digital technology, and capital. A European company law (28th regime) could optionally exist alongside national law to enable founders to scale without bureaucracy.
2. Radical deregulation: A rigorous "one-in-two-out" principle for regulations. A moratorium on new reporting requirements for the next 5 years.
3. Energy pragmatism: Ideology must give way to physics. Europe needs competitive energy prices, whether through massive grid expansion, hydrogen imports, or – in countries that want it – modern nuclear power. Stopping deindustrialization takes priority over unilateral national actions.
4. Capital Markets Union now: Tax equality for equity and debt capital and the harmonization of insolvency laws are long overdue in order to mobilize Europe's private capital.
5. Europeanization of defense: Joint procurement, standardization of weapon systems (we don't need 17 different types of tanks in Europe, the USA has one) and the establishment of a genuine European “DARPA” for disruptive innovations.

Time is running out. The world isn't waiting for Europe to coordinate its 27 veto players. Asia is rising, the US is pulling ahead. Jamie Dimon's criticism may sting and be perceived as arrogant ("Americans tell us the world"), but at its core, it's a love letter to a continent that is squandering its potential. If this realization doesn't take hold among politicians, Europe will become what Venice is today: a beautiful place, rich in history and culture, a place people love to visit—but where the future is no longer being written.

It is a choice between painful transformation and comfortable decline. For now, Europe is choosing comfort. But the bill for that will soon come due.

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