The resilience of the United States economy continues to outpace Europe even as geopolitical tensions in the Persian Gulf ease. Equity markets signal confidence in American economic strength, while analysts warn that any disruption to energy flows through the Strait of Hormuz would hurt European economies more severely than their American or Chinese counterparts.
The competitiveness gap
The European Union commands a population of 450 million, larger than the United States at 324 million, and its citizens are on average wealthier than those in China. Yet Chinese and American firms together generate 40 per cent of global output. In fast-growing sectors such as artificial intelligence, Europe lags further behind, hampered by research and development spending that stands at roughly half the level of its two main rivals.
The absence of pan-European champion firms capable of inventing and deploying new technology at scale is the fundamental cause of this competitiveness deficit, economists argue, not welfare costs, union density, export surpluses or energy prices.
Productivity stagnation
Some relative decline is inevitable as China and other emerging economies expand their share of global GDP. But long-term prosperity in advanced economies depends on productivity growth, producing more with less through technological innovation, rather than population growth alone.
Between late 2019 and 2024, labour productivity per hour in the eurozone grew by just 0.9 per cent. In the United States, the same measure rose nearly 7 per cent.
How breakthrough innovation happens
Since the Industrial Revolution, transformational technological leaps, not incremental competition among many small firms, have driven productivity. The economist Joseph Schumpeter described this as "creative destruction": a process of industrial mutation that incessantly revolutionises the economic structure from within.
The capitalist achievement does not typically consist in providing more silk stockings for queens, but in bringing them within reach of factory girls.
Laptops did not evolve from typewriters through gradual market competition; they drew on technologies originally developed by the US government and large firms such as IBM. Nylon stockings emerged from corporate chemistry labs and mass-production factories. The next breakthrough will not come from a college dropout in a garage but from deep-pocketed giants, governments and vast venture-capital pools.
Labour-market churn and the cost of preservation
A dynamic economy must allow failing businesses to close and workers to move painlessly into growing sectors. During the Covid recession, three times as many American as European workers changed jobs, according to the US Federal Reserve, despite comparable workforce sizes.
While the European social model offers lessons in social insurance and sectoral bargaining, the drive to preserve specific jobs often preserves specific companies and industries, a reactionary preservationism that exacts a price during technological paradigm shifts.
Darwinian diffusion versus state-led support
Innovation spreads either through a brutal Darwinian method, early adopters wipe out less innovative rivals, or through government diffusion to smaller firms lacking R&D capacity. The United States favours the former; France and other European nations historically resist firm failure.
An official involved in a French attempt to replicate Silicon Valley once acknowledged: "In France, no institution can ever be allowed to die."
Gentler approaches have succeeded in niches. Land-grant universities in America diffused agricultural breakthroughs to family farmers. Germany's Fraunhofer Institute provides R&D support to small and medium enterprises. Yet the Darwinian, winner-take-all method remains the quickest route to economy-wide technological upgrading.
Scale, markets and national champions
Sectors with increasing returns to scale, manufacturing, software, telecommunications, naturally concentrate into a few dominant firms. Populous countries dominate global corporate rankings just as they do the Olympics. Japan and Germany, the two most populous democratic industrial nations after the United States, punch above their weight in global trade.
China backs national champions such as Huawei, Xiaomi, the Aviation Industry Corporation of China and electric-vehicle maker BYD to reduce reliance on foreign technology. The United States counters with giants including Microsoft, Apple, Alphabet, Meta, IBM, Nvidia, Anthropic and OpenAI.
Europe has only Airbus as a true pan-European techno-industrial giant. National champions exist, France's Dassault Rafale in defence, Germany's BMW and Volkswagen in autos, but the continent is, in one observer's words, "a graveyard of failed pan-European national champions", from Concorde to the computer consortium Unidata and the search engine Quaero.
Competition policy as obstacle
Post-war Britain attempted to create colossal national champions, British Steel, British Leyland, International Computers Limited, through mergers and industrial policy. The execution failed but the strategy was sound, as Chinese and American successes show.
Today, European competition policy blocks the scaling needed for global competitiveness. In 2019, the European Commission vetoed a merger between Germany's Siemens and France's Alstom, the two largest rail-signalling and rolling-stock firms, despite the combined entity's potential to dominate global markets.
Competitiveness within a single market translates into external competitiveness.
That view, expressed by former EU competition chief Margrethe Vestager, is contested by those who point to China and the United States: dominance of a large home market translates into global competitiveness, and such dominance cannot be achieved if governments mechanically break up successful firms or block mergers to keep companies small.
Political resistance and multi-speed integration
Recognition is growing. French President Emmanuel Macron has proposed allowing consolidation and lowering barriers to a truly integrated single market in strategic sectors. In 2019, German Economy Minister Peter Altmaier advocated an industrial policy to create European champions.
Yet national sovereigntism remains potent. The attempt to create a single European labour market fuelled Brexit. Nationalism likely dooms projects for genuine single markets in services, banking and energy.
A compromise may lie in a "multi-speed Europe" where larger members such as Germany and France integrate deeply in strategic sectors without requiring unanimity from smaller states. The eurozone and Schengen Agreement already operate on this principle. The success of Airbus should outweigh the memory of Concorde.
In today's global economy, Europe needs its own young, vigorous dinosaurs to avoid extinction.