Why EU economic challenges are reducing its global influence

Bloc struggles with technological stagnation along with declining productivity and geopolitical vulnerabilities

The EU flag flies at the European Parliament in Strasbourg, France. Europe's economic stagnation is rooted in its inability to keep pace with global productivity growth. AP

For decades, the EU was a beacon of economic prosperity, global trade leadership and political stability.

Yet today, it faces an undeniable challenge – its global influence is waning due to systemic economic and geopolitical setbacks. The rapid pace of technological innovation in the US and China’s assertive expansion in trade and infrastructure projects, including the Belt and Road initiative, have left the EU struggling to assert itself.

Despite having a large and skilled workforce, Europe's productivity growth has stagnated, with real income per capita rising at a significantly slower rate than in competing economies. Additionally, the bloc’s reliance on external suppliers for critical technologies and raw materials has deepened its vulnerabilities.

A combination of technological stagnation, industrial fragmentation, energy insecurity and weak geopolitical positioning has left Europe struggling to maintain relevance in an increasingly competitive world, with many industries shifting their high-value operations outside the continent.

The EU must now confront these pressing issues head-on or risk long-term economic and political decline.

Productivity and innovation deficit

Europe's economic stagnation is rooted in its inability to keep pace with global productivity growth. While the US has embraced technological revolutions in artificial intelligence, semiconductors and digital platforms, Europe has failed to produce major tech giants.

Since 2000, real disposable income per capita has increased at nearly double the rate in the US compared with the EU, according to economic assessments. This widening income gap reflects deeper systemic issues, including rigid labour markets, regulatory hurdles and a lack of risk capital for high-growth industries.

The EU’s structural deficiencies extend to its failure to translate research into economic leadership. While European universities and research institutions produce cutting-edge discoveries, the region consistently lags in commercialisation, Mario Draghi, former president of the European Central Bank and former Italian prime minister, said in a recently released report, The Future of European Competitiveness.

Unlike the US, where start-ups are quickly scaled through deep capital markets, European innovators struggle with funding constraints, bureaucratic red tape and fragmented regulatory regimes. As a result, many of Europe’s most promising entrepreneurs relocate to Silicon Valley or China, where they find greater opportunities to expand.

Industrial fragmentation

Another major reason for Europe’s decline is its fragmented industrial landscape. Unlike China, which integrates its industrial policies with trade and state financing, or the US, where federal funding supports strategic industries, Europe operates under a patchwork of national interests.

The lack of a unified industrial strategy has weakened the continent’s ability to compete globally. Mr Draghi’s analysis notes that Europe’s corporate structure is "concentrated in mature industries".

The problem is particularly evident in sectors such as defence, semiconductors and clean energy. While the EU collectively spends as much on defence as some of the world’s largest military powers, inefficiencies abound. European nations maintain separate procurement policies, leading to duplication of efforts and reduced efficiency. For example, European militaries operate 12 different types of battle tanks, whereas the US has standardised production, enabling economies of scale and increased military readiness. The lack of co-ordination in defence procurement weakens Europe’s ability to establish a self-sufficient security framework.

In the semiconductor industry, the EU remains heavily dependent on imports, particularly from Asia, despite its critical role in the digital and AI-driven economy. While efforts like the European Chips Act aim to bolster domestic production, Mr Draghi says its "fragmented market structure and lack of integrated supply chains have hindered its ability to compete with semiconductor leaders like the US, Taiwan and South Korea".

Furthermore, the EU’s clean energy transition, while ambitious, is hindered by its lack of a co-ordinated industrial approach. Unless the EU streamlines its policies and accelerates investment in domestic production, it will remain dependent on foreign suppliers, undermining both economic growth and energy security.

Energy insecurity

Europe’s energy crisis has deep roots in its long-standing dependence on external energy sources, particularly Russian fossil fuels. Historically, the EU imported more than 40 per cent of its natural gas and 30 per cent of its crude oil from Russia, making it highly susceptible to geopolitical disruptions. When tensions with Moscow escalated, European nations were forced to scramble for alternative suppliers, leading to extreme volatility in energy prices. This sudden shift placed an enormous strain on European economies, contributing to inflationary pressures and widening the competitiveness gap with the US and China.

Despite efforts to transition to renewable energy, the EU faces an uphill battle. While the bloc leads in wind and solar capacity, its reliance on Chinese-manufactured components for clean energy infrastructure remains a major weakness. Mr Draghi’s analysis warns that "China controls more than 80 per cent of the global solar panel supply chain and dominates battery production, making Europe vulnerable to trade and geopolitical shocks”.

Additionally, fragmented national policies and slow permitting processes have delayed the expansion of critical energy infrastructure. Without a co-ordinated EU-wide energy policy that ensures both security and affordability, European businesses and consumers will continue to face high costs and uncertainty.

Geopolitical irrelevance

The EU is also struggling to assert itself as a geopolitical power, with the bloc often reacting to crises rather than leading the response. The absence of a coherent foreign economic policy has left Europe vulnerable to trade disruptions, supply chain dependencies and external pressure from geopolitical rivals. The EU’s diplomatic efforts often lack a unified voice, as individual member states prioritise national interests over collective strategy.

Moreover, while the US and China pursue aggressive industrial and military strategies to secure their global influence, Europe remains constrained by political disunity and slow decision-making.

Can Europe reverse the path?

The EU stands at a crossroads, where hesitation is no longer an option. If it seeks to regain its place as a global leader, it must embrace economic reforms, drive innovation and foster unity in industrial and geopolitical strategies. Without decisive action, the continent risks further decline, falling behind competitors.

The EU’s future will not be shaped by rhetoric but by the ability to act swiftly and strategically.

Falah Mousa is a Brussels-based government affairs specialist and researcher