Is Europe sleepwalking into economic decline?

The European economy is not in an economic crisis in the conventional sense.  

Many of its companies are major global exporters, household wealth is substantial, and the European Union (EU) remains one of the world's largest and richest markets, made up of 27 countries, with a total GDP at current market prices of nearly €19 trillion according to the latest Eurostat data, and a population of over 450 million. 

However, economic decline rarely results from a sudden, dramatic announcement or event. More often, it happens by stealth: productivity grows a little more slowly over time, investment capital flows elsewhere, promising companies fail to adequately scale up, energy-intensive industries lose market share and living standards gradually slip behind those of competitors. 

Viewed from this perspective, Europe has reasons to be concerned. 

The European Commission expects EU real GDP growth of only 1.1% in 2026 and 1.4% in 2027, with euro-area growth at around 0.9% and 1.2% respectively. More worrying is the productivity picture. Recent OECD (Organisation for Economic Co-operation and Development) evidence shows a substantial gap between productivity performance in Europe and the United States. 

Productivity ultimately determines how much an economy can afford to pay its workers, finance public sector services, invest in defence and sustain its social welfare system, without contributing to rising inflation. Europe's productivity weakness sits at the heart of most of the economic challenge it faces. 

A country – or continent – cannot sustainably redistribute wealth if it is becoming progressively less effective at creating wealth over time. This requires investment. 

European businesses have not stopped investing. The European Investment Bank's (EIB) latest investment survey found that 86% of EU firms continue to invest. European companies are also embracing generative AI at approximately the same rate as their American counterparts. 

But what happens after technologies are adopted? EIB evidence suggests that US companies are more likely to innovate and prioritise expanding capacity.  

Europe does not necessarily have an invention problem. It has a commercialisation, scale and capital-allocation problem.

Europe's greatest economic asset should be its Single Market: over 450 million consumers within one economic bloc. This compares with 340 million consumers in the US. 

Yet beneath this population headline, national barriers remain surprisingly powerful. 

International Monetary Fund (IMF) research has estimated that remaining internal barriers within the EU are equivalent to tariffs of roughly 44% on goods and 110% on services. Bringing such barriers closer to US interstate levels could, over time, boost European productivity significantly. 

The most frustrating feature of Europe's predicament is that it is not short of capital.  

The European Central Bank reports that euro-area households alone held nearly €10 trillion in bank deposits in April 2026. In addition, households also hold equities, investment funds, bonds, pensions, insurance products and other financial assets. Based on 2024 data reported by Eurostat, EU households hold a total of almost €40 trillion in financial assets. The European Commission believes that shifting even part of this household wealth towards productive investment could unlock hundreds of billions of euros of additional investment expenditure each year. 

At the same time, the European Commission’s 2024 Draghi report on European competitiveness estimated that Europe needs an additional €750–€800 billion in investment annually to restore competitiveness while financing its environmental and social ambitions. 

These facts highlight a striking contradiction: Europe has enormous private-sector savings but an enormous investment requirement. The problem is the mechanism connecting the two. 

Fragmented capital markets mean European savings are not efficiently transformed into risk capital for businesses that could become tomorrow's global champions. Europe is very good at creating promising companies. Too often, the US is better at financing them once they become ambitious. 

The immediate crisis following Russia's invasion of Ukraine may have eased, but Europe's structural disadvantage has not disappeared. European Commission evidence suggests that industrial gas and electricity prices remain substantially higher than those faced by many of the EU’s major trading partners. At the same time, Europe's fossil-fuel import bill also remains enormous. 

Europe's transition towards renewable and low-carbon energy could, over a long period of time, become a major competitive advantage. But that transition must ultimately produce abundant, reliable and affordable electricity. Decarbonisation that does not improve competitiveness would be a very expensive victory. 

Europe’s population is ageing. Over the coming decades, fewer workers will increasingly be expected to finance greater spending on pensions, healthcare and social care. At the same time, governments face the need for significant increases in defence expenditure, infrastructure investment, and financing for the energy transition. 

This leaves European governments confronting an uncomfortable fiscal balancing act if, collectively, they simultaneously want to maintain current public-sector welfare systems, boost defence expenditure, and finance the costs of transition to a green economy. 

But without stronger productivity growth, something eventually has to give. There are limits to which higher taxation and more government borrowing are the solution.

But writing Europe's obituary would be a serious mistake.  

The competitiveness debate risks becoming excessively pessimistic. Europe still has a number of formidable strengths, including: 

• world-class universities and research institutions 

• a large pool of highly skilled workers 

• sophisticated infrastructure 

• globally competitive manufacturers 

• strong legal and political institutions 

• enormous pools of private sector savings 

• leadership in several advanced industrial technologies 

• access to one of the world's largest consumer markets. 

European businesses are also adapting.  

Encouraging evidence comes from the EIB Investment Survey (2025), which explored more than 12,000 EU companies and over 800 US companies between April and July 2025: 37% of EU firms were using generative artificial intelligence (AI), compared with 36% of US firms. Policy is also in motion and beginning to respond. The EU has launched initiatives designed to deepen capital markets, support start-ups and scale-ups, lower energy costs and reduce administrative burdens. 

The policy agenda is becoming increasingly clear. Europe needs to: 

• Complete the Single Market, particularly in services, finance, energy and digital markets. 

• Create genuinely integrated capital markets that can direct European savings toward productive investment. 

• Reduce energy costs while accelerating the transition towards secure domestic energy. 

• Make it easier for successful European businesses to scale, rather than forcing entrepreneurs to look for capital elsewhere. 

• Simplify regulation, particularly for SMEs and rapidly growing businesses. 

• Invest aggressively in AI, digital infrastructure, skills and research. 

• Encourage greater labour-force participation as demographic pressures increase. 

• Shift public sector expenditure towards investment and productivity-enhancing infrastructure. 

None of this requires Europe to abandon its social model. But Europe must recognise a basic economic truth: the social model ultimately depends upon the productive capability of an economy that pays for it.  

So, is Europe sleepwalking into economic decline?  

Potentially it is, but the destination is not inevitable.  

Europe remains an enormous market with formidable industrial, technological and human strengths. Investment is the ‘engine of growth’ and investment decisions over the next decade will increasingly depend on whether the EU can convert its inherent strengths into productivity and sustainable, long-term economic growth. 

The economic alarm clock is loudly ringing. Europe now has to decide whether to wake up – or simply press snooze. 

About the author    

Emeritus professor of global economy at Cranfield School of Management, Joe Nellis CBE is one of the UK’s most experienced and well-known economists, with four decades of experience commenting on UK, European and global macro-economic trends.    

Joe is a frequent commentator to national print and broadcast media on issues such as public investment, GDP and growth, tax and the wider economy, as well as data points such as inflation, unemployment and interest rates.   

He has published 19 research and subject-based books and over 200 academic and practitioner journal articles. His research encompasses analysis of business developments in a changing world in terms of the macroeconomy, the role of government, the impact of technology, societal and demographic trends.