Europe faces a profound existential threat, but it is not the one outlined in Donald Trump's recent national security strategy, argues economist Nouriel Roubini. The continent's real crisis stems not from immigration or so-called 'woke' policies, but from a deepening economic and technological backwardness that risks consigning it to global irrelevance.
The Stark Reality of the Transatlantic Gap
The data reveals a startling divergence. Between 2008 and 2023, US GDP surged by 87%, while the European Union's grew by a mere 13.5%. Over the same period, EU GDP per capita plummeted from 76.5% of the US level to just 50%. To put this in perspective, even Mississippi, the poorest US state, now boasts a higher per capita income than major European economies like France and Italy, as well as the EU average itself.
This chasm is driven by superior US productivity growth, fuelled by technological innovation. Today, America is home to roughly half of the world's 50 largest tech firms; Europe claims only four. More tellingly, over the past fifty years, 241 American startups have grown into companies valued at over $10 billion, compared to just 14 in Europe. The race for leadership in future-defining fields—from AI and quantum computing to fintech and defence tech—is increasingly a contest between the US and China, with Europe lagging far behind.
The Structural Barriers Holding Europe Back
Roubini identifies four key structural weaknesses crippling European innovation. First is a fragmented financial ecosystem. The US benefits from a deep, dynamic venture capital landscape, while Europe still lacks a genuine capital markets union, stifling the scale-up of new firms.
Second, and critically, is excessive and fragmented regulation. A US startup can launch a product under one federal framework to access a market of 330 million. The EU, with 450 million people, is splintered across 27 national regimes. An IMF analysis suggests internal EU market barriers act like a tariff of 44% on goods and a staggering 110% on services.
Third, cultural attitudes towards risk differ sharply. Failure in entrepreneurship has historically been stigmatised, even penalised in some EU nations, whereas in Silicon Valley it is often seen as a valuable learning experience.
Fourth, Europe's chronic underinvestment in defence has severed a vital innovation pipeline. The US's integrated academic-military-industrial complex frequently spins off civilian technologies. By free-riding on US security, Europe has limited the type of breakthrough innovations that could have bolstered both its security and its social welfare model through higher productivity.
A Path Forward from the Brink
Despite the grim diagnosis, Roubini sees reasons for cautious optimism. Policymakers are awakening to the crisis, evidenced by major 2024 competitiveness reports from former Italian prime ministers Mario Draghi and Enrico Letta. Europe retains formidable strengths: high-quality human capital, elite education, and world-class research.
The prescription involves bold reforms: creating a true single market for capital, streamlining regulation, fostering a culture that embraces risk, and significantly boosting defence spending to meet NATO's new 3.5% of GDP target. Even if Europe never leads in creating cutting-edge tech, it could dramatically boost productivity by adeptly adopting innovations from elsewhere.
The continent stands at an inflection point. As Roubini warns, citing Ernest Hemingway, decline happens "gradually and then suddenly." Europe's technological slide has been gradual for decades. Without confronting its structural weaknesses head-on, today's slow erosion could swiftly become an irreversible loss of global economic relevance.
