Carney Never Got The Memo —Europe Is Losing —Not A Real Option To The US For Trade—

Europe Is Losing ! Can Europe Reverse Its Long Slide?

By 

David Luhnow

and 

Tom Fairless

Aug. 22, 2025 at 10:57 am ET

On May 13, Elon Musk’s SpaceX launched 28 satellites into orbit in a single day, one of over 100 successful U.S. orbital launches this year. China has sent more than 40 rockets into space since January. Russia, bogged down by war in Ukraine, has launched 10 rockets.

Europe, by contrast, has launched four. Even that is an improvement: For over a year, the continent relied on SpaceX to launch critical infrastructure.

Falling behind in the space race is just one example of how Europe has lost its way. This extraordinary continent occupies just 4% of the planet’s landmass (not including Russia), yet it has shaped human history, for good and ill, more than any other region in the past 500 years. European nations conquered and administered as much as 80% of the planet, often violently. Their wars killed millions and redrew the global map. Europe was also the birthplace of modern capitalism and the industrial revolution, giving us cars, trains, the telegraph and penicillin. Its art and music still fill museums and concert halls around the world.

But today Europe, particularly Western Europe, finds itself adrift, an aging continent slowly losing economic, military and diplomatic clout. “Europe shaped history, but the risk now is that we are simply bystanders to history going forward,” says Jérémie Gallon, a former French diplomat. The continent’s economies have been largely stagnant for about 15 years, likely the longest such streak since the Industrial Revolution, according to calculations by Deutsche Bank. Germany’s economy is 1% bigger than it was at the end of 2017, while the U.S. economy has grown 19%.

Weak growth in Europe has opened up a big income gap with the U.S.

Europe’s share of global economic output, measured in current dollars, fell from roughly 33% to 23% between 2005 and 2024, according to World Bank data. Much of that relative decline is due to the rise of China and India (and is less drastic using other measures of output), but the U.S. share of global output held up much better. Europe’s proportion of the global economy is now likely the lowest since the Middle Ages, according to the Maddison Project, a database that tracks economic history at the University of Groningen in the Netherlands.

The long stretch of weak European growth has opened up a big gap in incomes between the U.S. and Europe. European household wealth has grown by a third as much as Americans’ since 2009. Per capita GDP in the U.S. is now $86,000 a year, versus $56,000 for Germany and $53,000 for the U.K.

A strong dollar distorts the comparisons somewhat, and Europeans get some key goods such as healthcare far more cheaply than Americans. Europeans live longer, have more leisure time and less income inequality, and often live in stunning cities and towns built over the centuries. 

But increasingly, Americans enjoy a higher standard of living. They have over 50% more living space on average per person. More than four in five Americans have air conditioners and clothes dryers at home, compared with between one-fifth and one-third of Europeans. Executive assistants in New York City earn around the same as specialist doctors in London.

In the absence of economic growth, Europe’s welfare states, which account for half the planet’s welfare spending, will come under growing strain from aging populations. The average European is nearly 45 years old, compared with 39 for the average American, and the continent’s working-age population is predicted to fall by nearly 50 million by 2050, leaving fewer workers to pay for more retirees.

So far, most European governments have dodged spending cuts in favor of higher taxes, hurting economic growth. Without meaningful change, Europe faces a future of fiscal crises and growing political instability as angry voters search for answers.

Jamie Dimon, CEO of JPMorgan Chase, at an event in Dublin, Ireland, where he said of Europe, ‘You’re losing,’ July 10. PHOTO: PATRICK BOLGER/BLOOMBERG NEWS

“Europe needs to wake up, or it’s dead in so many ways,” says Tracy Blackwell, the retiring CEO of Pension Insurance Corporation, a U.K. asset manager. Or as JP Morganchief Jamie Dimon said at a recent speech in Dublin, “You’re losing.”

Bad luck and bad policy

In the past 15 years, a key engine of European growth—manufactured exports—has been hobbled by events beyond its control, including U.S.-led trade wars, China’s mercantilist policies and Russia’s invasion of Ukraine, which sent European energy prices skyrocketing. 

“What was the status quo? The Americans provide our security, the Russians provide our energy, and the Chinese provide our export market. Guess what? It’s all gone,” said British historian Niall Ferguson in March. 

But Europe’s lack of economic dynamism has deeper roots, too. Taxes and regulations have risen inexorably; the volume of EU regulations has doubled since 2010. Sprawling rules protect old buildings, incumbent firms and aging consumers, limiting the creation of new infrastructure and industries. As Italy’s prime minister Giorgia Meloni puts it, “America innovates, China imitates, Europe regulates.”

Red tape in Britain is so bad that it took electricity firm Scottish Power 12 years to get permits for a high-voltage transmission line across Scotland. A project to build a new tunnel under the Thames river outside London has so far spent $340 million just on planning permits—documents that total 359,000 pages. Games Workshop, a fast-growing gaming company, is facing delays to build a new parking lot on its headquarters because a single bat lives there.

Mind the Gap Europe has been in the economic doldrums for a decade and a half.

Energy is another problem. In Germany, industrial electricity costs three times as much as in the U.S.; in the U.K., four times as much. Britons now consume less electricity per person than the Chinese, and Germany’s overall electricity consumption is lower than it was before the Berlin Wall fell. Yet Germany has banned nuclear energy, and the U.K. has scrapped new offshore oil and gas exploration. Policymakers across Europe have laid out ambitious renewable energy plans that they say will eventually lower costs, help fight climate change and create green jobs. But the transition is proving painful. 

Huntsman Corp., a Texas-based chemicals manufacturer, used to have its global operational headquarters in Brussels and half its employees in Europe. Now only a third of its business is in Europe, due to high energy costs and red tape. “In many sectors, Europe is uninvestable,” says Peter Huntsman, the CEO. The company said in May that it planned to close a chemicals plant in western Germany and instead serve European customers from plants in Florida and Louisiana.

Ten years ago, four European companies ranked in the global top 10 by revenues. Today, the continent’s biggest company by market value, German software firm SAP, ranks 28th. America’s share of global stock market valuations has held steady at 48% since 2000, but the EU’s has fallen from 18% to 10%, and the U.K.’s from 8.3% to 2.6%, according to Deutsche Bank.

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Europe’s economic slide has been accompanied by shriveling military prowess. The continent’s share of the world’s military power is also at its lowest since the Middle Ages, after decades of focusing on welfare spending instead of defense. Though European leaders are now vowing to take defense more seriously in the face of a revanchist Russia, they are struggling to build up their forces. Britain’s entire army can fit comfortably inside Wembley Stadium.

Europe’s economic slide has been accompanied by shriveling military prowess and diplomatic influence. President Donald Trump leads President Volodymyr Zelensky of Ukraine and European leaders at the White House, Aug. 18. PHOTO: AARON SCHWARTZ/PRESS POOL 

The result is an unmistakable loss of geopolitical clout. European leaders are playing only a supporting role in Ukraine peace talks between the U.S. and Russia, even though the war is on the EU’s doorstep. China has shown little interest in strengthening ties with the continent. And the European Union in July gave in to President Trump’s demands for 15% tariffs on exports to the U.S.—a capitulation that stood in stark contrast to the retaliatory response from China.

A comfortable decline?

In some industries, such as internet platforms or cloud computing, it may be too late for Europe to close the gap. But many economists say the continent has a real chance to catch up in other areas if it can exploit economies of scale and unleash entrepreneurial vigor. Mario Draghi, a former top European central banker, proposed a series of such steps in a landmark EU report last year, including pan-European capital, savings and energy markets; a lower regulatory burden on startups; and a massive public spending program to turbocharge innovation, infrastructure, energy and defense.

But the proposals immediately ran into resistance. Germany balked at Draghi’s call for part of the spending to be funded by shared EU debt; low-debt countries in Northern Europe don’t want to underwrite their more indebted southern neighbors. National trade unions and industrial lobbies often don’t want competition from neighboring European firms and workers, so they block the completion of Europe’s single market. While the EU has harmonized many regulations, national rules vary when it comes to business and professional licenses, taxes, and environmental and health standards. These frictions make it harder for a German consultant or electrician to work in France, for example, or for an Italian food producer to sell goods in Spain.

“You say no to public debt, you say no to the single market, you say no to creating the capital market union. You can’t say no to everything,” a clearly frustrated Draghi said in a speech to European lawmakers in February. “So when you ask me, ‘What is best to do now?’ I say, ‘I have no idea. But do something!’”

One reason economic reform is difficult in Europe is that most Europeans will continue to enjoy a comfortable lifestyle for decades to come.

One reason change is difficult is that most Europeans will continue to enjoy a comfortable lifestyle for decades to come. “In global terms, relative decline is inevitable, but it may still be a very nice place, right?” says Sander Tordoir, an economist at the Center for European Reform. 

Many European voters might consider the relative decline in economic power to be a price worth paying for spending less time at work than Americans and living with less inequality, a more generous social safety net and higher environmental standards. 

Tordoir is less pessimistic about Europe’s prospects since German Chancellor Friedrich Merz ditched the country’s debt restrictions in March, allowing it to use massive borrowing to raise consumption and invest in defense and infrastructure. Tordoir says much of Europe’s torpor in recent years was due to a stagnant Germany.

Yet Germany’s roughly $1 trillion sugar rush of new spending won’t change the underlying dynamics of a manufacturing sector struggling with sky-high energy prices, greater competition from China and too much red tape. “You will get some splashy highways, but it’s not the treatment that will fix what’s wrong with the German economy,” said Robin Brooks, an economist at the Brookings Institution.

Without more economic growth, European governments will have to choose between ever-higher taxes and massive cuts to welfare. That is because an aging population means much higher healthcare and pension costs, paid for by a working-age population projected to shrink by some 2 million a year on average through 2050, according to the Bruegel think tank in Brussels. 

One possible solution is for European countries to encourage the immigration of younger workers. But so far the continent has been better at allowing in low-skilled asylum seekers and their families than high-skilled engineers and doctors. A political backlash to immigration is building across the continent, with far-right or anti-immigration parties entering government in Italy, Finland and the Netherlands, among others, and leading the polls for the first time in the U.K., France and Germany. 

Meanwhile, the current strategy of financing welfare spending with taxes and debt is running out of road. Tax revenue as a share of economic output is already around 38% in Germany, 43% in Italy and 44% in France, compared with 25% in the U.S., according to OECD data. The U.K.’s annual debt interest bill stands at nearly $150 billion, twice as much as defense. Borrowing costs have already risen in the U.K. as debt approaches 100% of yearly economic output.

Germany recently ditched debt restrictions, allowing the government to borrow to invest in defense and infrastructure. 

“We’ve got this horrible situation: low levels of growth…quite high levels of debt, quite high interest rates and a tax burden the highest it’s ever been,” says Paul Johnson, a fiscal expert and the head of Queen’s College at Oxford University. “Everything just looks harder.”

There are exceptions. Sweden has quietly spurred economic growth by cutting back its welfare state—tightening government spending, revamping the pension system and slashing corporate and personal tax rates. Per capita incomes are now climbing, and the country has seen a burst of entrepreneurship. Sweden even moved ahead of the U.S. in the number of billionaires per capita, thanks to a thriving tech startup scene and a video-game industry that has produced hits such as Minecraft and Candy Crush.

But in most of Europe, such reforms are proving to be a big ask. Europeans consistently vote for politicians who protect the status quo and expand the welfare state. In France, which hasn’t balanced its national budget in more than 50 years, government spending is around 57% of GDP, compared with 36% for the U.S. The state subsidizes everything from vacations to back-to-school equipment for children, and cities from Dunkirk to Montpellier have made public transit free for residents.

Attempts to cut spending often lead to mass protests. In May, French taxi drivers gathered for a strike in Paris after a proposal to cut the amount they are paid by the state for ferrying patients to and from medical appointments.

British historian Andrew Roberts gives Europe a one in five chance of acting to head off a crisis. “Things were pretty rotten in the 1970s, and then we got Reagan and Thatcher and things turned around,” he said. “But it requires will and guts and the ability to tell people they can’t have free stuff, and there’s not anyone saying much of that at the moment.”

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Appeared in the August 23, 2025, print edition as ‘Europe Is Losing Can Europe