Why Europe is neither crashing nor waking up – and why that is the greater danger

Not crisis, but paralysis: Why Europe's true decline goes unnoticed

Europe finds itself in one of the most dangerous situations in its recent history – not because it is on fire, but because the flame is slowly dying out without anyone sounding the alarm. Looking at European economic data today, one sees no dramatic collapse, as doomsayers often predict. Instead, a far more insidious phenomenon is revealed: a chronic, creeping erosion of substance, disguised as stability.

While the US is pulling ahead technologically and China is strategically rearming despite its own problems, Europe remains in an institutional paralysis. Growth is stagnating just above zero, the productivity gap with America is wider than it has been in decades, and in crucial future fields – from artificial intelligence to modern defense policy – ​​the continent risks being relegated to the role of mere spectator.

The following analysis exposes the flaws in a political architecture built on consensus, but which has become a shackle in a world of rapid decisions. It demonstrates why the lack of a "big bang" is not Segenbut a curse, preventing necessary radical reforms. From the fragmentation of the defense industry and the missed AI revolution to the return of protectionist US policies, we dissect the uncomfortable truths of a aging superpower that must decide whether to manage its slow decline or painfully reinvent itself.

Europe's silent crisis: Between the illusion of stability and the gradual erosion of economic substance

Europe finds itself in a paradoxical situation. While the media and analysts are dominated by a rhetoric of decline and fear of collapse, the continental economy doesn't appear on the surface to be a catastrophically failing system, but rather one that is chronically underperforming. This is precisely what makes the European situation so dangerous. A dramatic collapse would have already led to fundamental reforms, radical political upheavals, and structural redesigns. However, the creeping paralysis that characterizes Europe's current situation is leading to institutional inertia, cultural complacency, and an inability to recognize the full extent of the danger.

It is true that the European Union is grappling with significant challenges. The security situation following Russia's attack on Ukraine has exposed the continent's strategic vulnerability. Economic fundamentals are weak, with growth rates remaining below one percent in the Eurozone and already slipping into negative territory in Germany. The geopolitical situation is further volatile due to Donald Trump's return to the White House. And yet, occasional pessimists speak of an impending collapse that never materializes, and a certain circularity in the European debate means that every warning is perceived as a boy-who-cried-wolf.

The core problem lies not in a lack of resources or intelligence among European elites. The core problem lies in the political and institutional architecture that fragments those resources and paralyzes that intelligence. At the same time, it is a fundamental misconception to view America or China as harmonious mega-machines functioning without internal contradictions. Both superpowers grapple with significant problems, both experience periods of fragility, and both are prone to shocking setbacks. The difference lies not in the absence of problems, but in the speed with which these are diagnosed, politicized, and addressed. America and China operate within authoritarian or quasi-dictatorial decision-making structures, while Europe is bound by the constraints of consensus and negotiation.

The economic reality between stagnation and structural decline

The European Union's GDP growth in 2024 was 0.9 percent. Forecasts for 2025 are marginally higher, at around 1.1 to 1.3 percent, but these figures mask a deeper malaise. The eurozone countries remain in a state of permanent underutilization. Germany, Europe's economic flagship, shrank by 0.5 percent in 2024 and is projected to grow by only 0.2 percent in 2025. This is not growth in the economic sense; it is stagnation with cosmetic improvements. France, Spain, and Italy show somewhat better momentum, but none of these countries is growing at a pace that meets geopolitical challenges or the demands of increased investment.

The productivity gap between the US and major European economies has become an existential problem. According to calculations by the management consultancy McKinsey, this gap has widened to approximately 33 percentage points. An American worker generates an average of about €83 in added value per hour, while their European counterparts lag behind. This gap is not the result of inertia or incompetence, but rather the manifestation of deep structural differences in capital allocation, technology adoption, and organizational flexibility.

The causes of this gap are well-researched and widely known, but closing it requires measures that fundamentally oppose European policies. The American labor market is flexible. A company in the US can hire and fire employees at a speed that is simply impossible for German companies. German job security, collective bargaining agreements, co-determination rights, and rampant bureaucracy are not easy obstacles to be brushed aside. They are institutional structures deeply embedded in the country's culture and lobbying networks. A company that needs to adapt quickly to new market conditions can act in America; in Germany, it is often paralyzed.

The investment gap is particularly striking. American companies invest, on average, twice as much capital in machinery, information technology systems, and software as their European counterparts. This directly explains why American workers are more productive. They don't work harder, they don't work smarter, but they work with better and newer technology. A highly qualified German engineer with modern power tools will be more productive than one with outdated equipment, and this phenomenon is reflected in the overall economy.

The European Central Bank's monetary policy has little room to maneuver in addressing this structural problem. The ECB can cut interest rates, it can provide liquidity, but these measures cannot force companies to make risky, capital-intensive investments in new technologies if the regulatory and economic environment fails to incentivize them. Indeed, chronically low growth coupled with policies tied to fiscal consolidation is a recipe for a self-reinforcing downward spiral. Weak growth leads to lower tax revenues, increasing pressure to reduce deficits, which in turn dampens public investment and cools private investment through uncertainty.

The technological gap and the AI ​​moment as a tipping point

If Europe's productivity gap is already alarming, the situation in technological innovation and artificial intelligence is critical. The global market for R&D investment is dominated by the United States, which accounts for roughly 37 percent of the world's R&D spending by the 2,500 largest companies. The European Union accounts for about 27 percent, and China for about 10 percent, but China is expanding in this segment at a pace that should be frightening for Europe. In 2000, European R&D spending was five times that of China. By 2014, the countries were roughly on par. By 2019, China was already investing a third more in research and development than the European Union.

The difference in the composition of these R&D expenditures is also instructive. Of American R&D investments, roughly 78 percent goes to high-tech sectors such as software, computer hardware, pharmaceuticals, and aerospace. For the European Union, this figure is only 39 percent. The remainder is distributed among medium-tech industries such as automotive and mechanical engineering, which, while important, do not offer the dynamics of exponential growth provided by the high-tech sector. Europe's focus on medium-tech industries is historically rooted, economically rational, and produces high-quality products, but in an age where the economic future is driven by software, semiconductors, and artificial intelligence, this focus is a structural handicap.

Artificial intelligence is not a tangential phenomenon here, but a transformative force. While American corporations like Microsoft, OpenAI, Google, and others are investing in AI technologies at a speed and scale that is setting the global agenda, many European companies are still in the pilot phase. This is often interpreted as risk aversion, but it is more a manifestation of the different availability of venture capital, the different pace of deregulation, and the fact that major technological transformations are concentrated in the US.

This is critical because AI is not simply one sector among many, but a general-purpose technology that could potentially transform productivity in almost every economic sector. If America dominates the AI ​​moment and Europe lags behind, the productivity gap will not merely persist, but widen exponentially. A European company that has not implemented AI-powered processes by 2030 will not be competitive against an American company that did so years earlier.

There is also a cultural dimension to this. Europe is perfectionistic in many ways. German quality control, French subtlety, Italian design – these are values ​​that have long defined European industries. But in an AI age, perfectionism can be a hindrance to innovation. In America, the approach is often more pragmatic: You build a product that is 70 or 80 percent correct, launch it quickly, learn from users, and iterate. This tolerance for errors and this rapid iteration are characteristics that promote AI models and AI systems, because AI systems are improved by data from real-world applications, not by theoretical planning in advance.

The security policy dilemma and the fragmentation of the European arms industry

Europe's security situation is directly linked to its economic weakness. Following Russia's invasion of Ukraine in 2022, Europe was forced to recognize that its previously underfunded defense budgets required radical increases. In 2024, total European military spending rose by 17 percent to approximately US$693 billion, an overall increase of 83 percent since 2015. Germany increased its defense budget by 31.5 percent, and Poland by 44.3 percent. These figures are impressive and demonstrate a genuine commitment to security policy.

And yet, the way these resources are deployed is a classic example of European inefficiency. The European defense market remains highly fragmented. Each member state buys its own weapons, finances its own weapons systems, and develops its own industrial capacity. This means that where an integrated European defense industry could exist—with economies of scale, specialization, and optimized capital allocation—we instead have 27 national markets operating, often competing rather than cooperating. A helicopter in Germany will not be equipped with missiles from France, even though this might be technically possible and economically viable. An Italian tank will not be fitted with German optics, even though Germany is a leader in this sector.

This fragmentation is not only inefficient, it is also strategically disadvantageous. While America operates an integrated defense industry with enormous economies of scale—the United States spends approximately $997 billion annually on defense and can thus develop weapons systems that no other nation can imitate—Europe's significantly smaller defense budget is fragmented across 27 national programs. China invests approximately $314 billion in defense, but can allocate these funds centrally to pursue strategic objectives.

Europe's institutions for defense issues are also weak. There is no centralized European arms commission that could set priorities. Decisions on arms purchases are made at the national level, where parochial interests—preserving jobs in the domestic arms industry, national pride—often prevail over economic rationality. Germany wants to buy German tanks, even though French tanks might be better. France wants French fighter jets, even though European cooperation would be more cost-effective. The result is enormous waste.

This is not a new problem. It has been documented and analyzed ever since European defense cooperation began. However, the current security crisis has given the problem a new urgency. Ukraine needs enormous quantities of ammunition and weapons. Europe's ability to supply these is chronically limited, not because Europe is not wealthy enough, but because its defense industry is not organized to deliver with the speed required for an intensive defense campaign.

And yet, even in this critical hour, Europe has struggled to develop a coherent European defense policy. The European Commission has proposed a “ReArm Europe” program, but disagreements over debt targets and coordination between the EU and NATO are hindering its implementation. Countries like Hungary have attempted to block European sanctions against Russia. The institutional inertia plaguing Europe’s economic structure is resurfacing in security policy.

The challenges posed by Trump and the new trade dynamics

Donald Trump's re-election as US president has introduced a new dimension of uncertainty into European-American relations. Trump has announced plans to impose import tariffs of up to 20 percent on European goods; some scenarios even suggest tariffs of up to 60 percent on certain items. According to calculations by Bloomberg Economics, a disproportionate tariff of 20 percent on European goods would reduce EU exports to the US by approximately 50 percent.

This poses an existential threat to parts of European industry. Germany is an export-driven economy heavily reliant on the US market. French and Italian companies are less export-dependent, but they too would suffer under American protectionism. The uncertainty itself, not even the tariffs, would dampen growth. If a European entrepreneur doesn't know whether tariffs will be imposed, they will postpone major investments, and this will further stifle European growth.

It is instructive that Trump does this not for ideological reasons, but from a mercantilist and transactional logic. His administrations are trying to reduce the bilateral trade deficit. America imports more from Europe than it exports, and Trump sees tariffs as a mechanism to correct this imbalance. This is economically questionable—trade tariffs typically do more harm than good—but it is politically logical in a system where industrial jobs in the US are considered an indicator of national strength.

For Europe, the implication is clear: The “Security Action for Europe” initiative, with its €150 billion defense loan program, may be necessary, but it will not suffice if access to the US market is simultaneously restricted and European companies face American tariffs. Europe must simultaneously increase its defense spending, reorganize its arms industry, secure its energy supply, and keep its market open in the face of American protectionism.

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China's problems and the illusion of its unstoppable rise

While European analysis often treats China as an undifferentiated mega-machine that expands and consolidates relentlessly, the actual situation in the People's Republic is considerably more complex. China faces significant structural problems that will slow its growth in the coming years.

The first issue is the real estate crisis. For decades, the Chinese real estate market was fueled by the assumption that property prices would rise indefinitely. Provincial governments, dependent on real estate sales revenue, pushed through massive construction projects. Developers like Evergrande and Country Garden expanded into giants. But at some point, the foundation became too thin. There were more apartments than buyers, prices stagnated, then fell. A developer who financed a real estate project based on the assumption of rising prices is suddenly underwater. Lending stops, and further projects are not completed. This is a classic case of an asset bubble bursting.

The second issue is demographic decline. China's population is aging rapidly. The birth rate is significantly lower than the replacement rate. This means that in a few decades, China's working-age population will shrink. A country with a shrinking workforce will generate less growth unless per capita productivity increases dramatically. China cannot compensate for this demographic malaise through immigration—the cultural and political barriers are too high.

The third factor is debt. China's provincial governments are heavily indebted because they have invested in infrastructure and construction projects. This debt was manageable during the economic boom, but with declining growth, it is becoming a burden. A country with high public debt relative to income has less fiscal leeway to absorb economic shocks.

The fourth factor is weak consumer demand. Chinese consumers are saving too much and consuming too little. This is partly a manifestation of widespread uncertainty about pension security and the quality of the healthcare system, but it also means that the Chinese economy cannot grow on domestic demand and remains dependent on exports. With weak global demand and American tariffs, this export model is becoming fragile.

All of this manifests itself in deflationary tendencies. While most industrialized countries struggled with inflation problems, China was experiencing a period of falling prices. Deflation is insidious because it leads to reduced consumption – consumers postpone purchases in the hope that prices will fall further. This dampens consumption and deepens economic weakness.

The official forecast for China's growth in 2024 was five percent, and this was just barely achieved, albeit with significant statistical concessions. Many independent analysts believe that actual growth was considerably lower—possibly between 2.4 and 2.8 percent. For 2025, most forecasts predict growth of around 4.4 percent, well below the official target of five percent. The outlook for 2026 is even bleaker.

This is not to say that China will collapse. Scenarios of a dramatic collapse are exaggerated. But it does mean that China's era of high single-digit growth rates is over. The country will enter a phase of slower, structural adjustment. This will be politically difficult, because the Communist Party has partly built its legitimacy on the promise of rapid economic progress.

America's vitality and the limits of its strength

The United States currently presents itself as the world's dominant economic power. The US boasts high growth rates—well over two percent per year—a dynamic venture capital landscape, a leading position in technology and software, and flexible labor markets. The Biden administration and now the Trump administration have implemented aggressive industrial policies, with the Inflation Reduction Act and other programs, aimed at bringing manufacturing back to America and reducing technological dependencies.

The US accounts for roughly 37 percent of global R&D spending and dominates the high-tech sectors. Cryptocurrencies, artificial intelligence, biotechnology – these are areas where the US sets the agenda. Silicon Valley, Singularity narratives, and a pure belief in disruption and technology-driven growth shape American economic culture.

But America also has its problems. The fiscal situation is problematic. The American budget deficit is colossal, and the national debt ratio is rising relentlessly. A hypothetical Trump administration that cuts taxes and increases spending could exacerbate these problems. Private debt is also high. An increase in interest rates beyond current levels could lead to debt servicing problems for businesses and households.

The infrastructure is aging. America is not investing enough in its physical infrastructure, and this will stifle productivity in the medium term. Geographic inequality within the US is acute, with devastated industrial cities in the Midwest and Northeast alongside thriving tech hubs on the coast. These internal tensions are politically explosive.

The geopolitical situation is also complicated. While China poses a threat, the Trump administration damaged the transatlantic alliance by distancing itself from NATO commitments and being hesitant in supporting Ukraine. This is strategically questionable, because America has a long-term interest in a stable, prosperous European region not dominated by authoritarian forces.

American exceptionalism—the assumption that the US will inevitably remain the dominant power and that disruptive innovation automatically leads to American dominance—is also not entirely guaranteed. There is no historical rule stating that economic superpowers are stable. Rome was dominant, then it was not. The British Empire was hegemonic, then it was not.

The institutional paralysis of Europe and the cost of unanimity

Europe's central problem is institutional and political, not primarily economic. Europe has wealth, skills, technology, and a highly educated population. What Europe lacks is an effective institutional structure for rapid, coherent policy development and implementation. This is the legacy of the European integration project, which is based on the assumption that national sovereignty must be respected and that decisions should be made by consensus.

The logic during the post-war era and the Cold War was rational: economic integration would make war between European nations impossible. Supranational institutions would build trust between nations. This model proved successful. There was peace in Western Europe, there was increasing prosperity, and there was significant economic transfer to poorer regions.

However, the consensus model has also revealed systemic weaknesses, especially in a rapidly changing world. If 27 member states require unanimity, then every member state effectively has a veto right. This allows for blocking coalitions. Hungary can block European sanctions against Russia. A country can block European arms policy if its national interests differ. A country can sabotage climate policy.

European institutions attempt to circumvent these veto games through unanimity requirements, but this leads to an inflation of administrative processes and significant delays. A simple law that could be passed in a national parliament in a few months takes years in Brussels. This is not just a loss of efficiency; it is a loss of strategic capability. In today's fast-paced world, rapid decision-making capacity is an asset, not a waste.

The lack of institutional reform is not an accidental omission. It is the result of significant national actors – France, Germany, Poland – wanting to preserve their national power. France does not want Brussels dictating foreign policy. Germany does not want Brussels dictating fiscal policy. Poland does not want Brussels dictating judicial systems. This is understandable from a national perspective, but it is also fundamentally paralyzing at the European level.

The European Central Bank is an example of an institution that functions because it has been given a relatively clear mandate and because there is consensus on its objectives. However, even the ECB is limited by its institutional structures. It can conduct monetary policy, but it cannot enforce structural reforms. It cannot create a European fiscal union. It cannot solve energy problems.

The European Commission attempts to compensate for this through regulatory power. The GDPR – the European General Data Protection Regulation – is an example of how European regulatory power can be enforced globally. Directives on the green energy transition are also examples of European regulatory power. However, this regulatory power also has a downside: it makes entrepreneurship more difficult, reduces the flexibility of capital allocation, and can stifle innovation.

A European entrepreneur wanting to test a new business model must grapple with European data protection laws, European occupational safety laws, and European environmental laws. This isn't inherently wrong – these laws often serve important purposes – but it also means that the costs of entrepreneurship are higher than in America, where the regulatory environment is less restrictive.

What the future holds if dramatic action is not taken

The scenarios for the next five to ten years are not dramatic. Europe will not collapse. It will not become a peripheral player. It will not be militarily dominated. But it could develop into a state of slowly shrinking wealth. A rich, stable, but not dynamic continent, relentlessly losing weight and influence to technologically more dynamic and strategically more aggressive powers.

Germany will continue to export high-quality products, but it will lose market share to the US and China. France will maintain high standards, but it will continue to struggle against national resistance in a fragmented manner. Italy will continue to produce designs admired worldwide, but it will grapple with chronic fiscal problems. Spain will remain more stable than other southern European countries, but it will lack the dynamic growth necessary to overcome demographic challenges.

At the same time, the US and China will strengthen their relative positions. America will continue to dominate in AI and biotechnology. It will continue to attract venture capital and entrepreneurship. If Trump's industrial policies take effect, America could even experience a decline in production in certain sectors—not because this is economically rational, but because it is politically necessary to maintain hegemony.

Despite its current problems, China will try to ramp up its technological efforts. With massive state investment in semiconductors, AI, and quantum computing, China will attempt to reduce its technological dependence on America. It will be expensive, it won't be efficient, but it can work.

There are also several wildcard scenarios. A war over Taiwan would change everything. An uncontrolled collapse of China would destabilize the global order. A dramatic American fiscal collapse is unlikely, but not impossible. A major European security war—triggered by a Russian adventure against a NATO member—would force dramatic changes.

But in a “baseline” scenario, where these extreme events do not occur, the future for Europe does not look like a disaster, but like a chronic, self-reinforcing relative decline.

Overcoming paralysis: The uncomfortable truths

Europe's problems are not insurmountable. However, they require dramatic action, and dramatic action is politically difficult. Europe needs to implement institutional reforms. This means introducing qualified majority voting in foreign policy, limiting the veto power of individual countries, and enabling faster decision-making.

Europe needs to consolidate and integrate its defense industry. This will entail difficult national debates about industrial locations and jobs. It means that French, German, and Spanish companies will have to cooperate or consolidate. This is politically challenging.

Europe would need to make massive investments in R&D, especially in AI and semiconductors. This costs money and requires fiscal cooperation. It requires fiscally conservative countries like Germany to be willing to accept joint European borrowing. This is politically controversial.

Europe needs to make its labor market more flexible. This means reducing job security, decreasing collective bargaining coverage, and cutting red tape. This would meet with resistance from workers, unions, and left-wing parties. It's a deep political battle.

Europe needs to transform its energy infrastructure. This means massive investments in renewable energies, storage technologies, and hydrogen infrastructure. This is expensive and will take decades.

These things are not impossible. They are not technically unfeasible. But they require a level of political will that European democracies currently do not seem to be able to mobilize.

That is the real problem in Europe. It is not that the solution is unknown. It is that the costs of the solution are high and that they would fall on groups who have the political power to block it.

And so Europe remains trapped in its current situation. Not in collapse, not in crisis, but in chronic underperformance, driven by structural paralysis and institutional inefficiencies that are difficult to resolve. This is precisely the danger that is harder to recognize than dramatic decline.

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