A Turning Point for European Competitiveness

The European Union (EU) faces a moment of deep uncertainty around its economic and political future. Slow economic growth, rising energy costs, demographic shifts and increased global competition are putting pressure on the bloc's competitiveness. At the same time, the green and digital transitions demand unprecedented levels of investment and innovation to secure Europe's leadership position on the global stage.

To unpack this complex scenario, Dr. Jan Mládek, Director of the Czech Institute of Applied Economics, former Minister of Industry and Trade and former Minister of Agriculture of the Czech Republic, and a GFCC Distinguished Fellow, provided an in-depth analysis of competitiveness policies and strategies in the world's largest and most prominent trade bloc at the GFCC February Monthly Call.

An Existential Growth Crisis

After a period of economic recession due to the global pandemic, followed by a sharp recovery in 2021, the EU started to show slow growth (around 2% of GDP). The two biggest economies in the bloc, France and Germany, have grown less than 1% year in 2025. In parallel, mounting domestic debt way above the bloc's agreed threshold of 60% of GDP in some countries, and particularly in France, worries analysts.

The economist Mario Draghi, former European Central Bank President and former Prime Minister of Italy, warned of "an existing growth crisis" threatening the very existence of the European bloc.

In what became a landmark study about European competitiveness known as the Draghi Report, Mario Draghi identified three key strategic pillars that must be tackled to turn the EU into a competitive global player in the future: a) closing the innovation gap; b) a joint decarbonization and competitiveness plan; c) increasing security and reducing dependencies.

The report highlights that EU has largely "missed out on the digital revolution". It lacks assets from the fourth industrial revolution, and it is still weak in emerging technologies. Closing the innovation gap is a number one priority.

In relation to the green transition, although Europe has advanced on its decarbonization plan, high energy prices still threaten productivity. Additionally, with most clean technologies coming from China with lower costs, it is not clear whether Europe will be able to seize the decarbonization opportunity to drive growth.

Finally, the EU must reduce its dependency from foreign resources, including the same clean technologies from China but also raw materials, including natural gas, to better manage geopolitical risks.

To tackle these challenges, the Draghi report suggests €750–800 billion in additional investment yearly (up to 5% of the EU GDP) to finance new strategic projects to boost innovation, accelerate decarbonization and unify the bloc.

These investments could potentially be supported by joint debt instruments, such as the one created during the pandemic.

A Declining Automobile Industry

The car industry is a core piece in this economic transition. This industry vertical, which was born in Europe with pioneers such as Karl Benz, is showing a sharp production decline. One of the reasons is loss of market share in Europe and abroad to China, which has become the world’s largest car producer in recent years.

In parallel, the industry is not ready to meet Europe's decarbonization plans, which include a complete phase-out of new combustion engine vehicles by 2035, while sustaining current sales and car production number.

Europe still lags behind in electric vehicles and self-driving technologies, while Chinese manufacturers have rapidly scaled up, controlling much of the automotive value chain, from battery production to vehicle assembly.

The consequences of potentially losing this entire industry vertical to China are significant: rising unemployment risks, weakened industrial capacity, and downward pressure on long-term economic growth.

What is next?

The European Union stands at a historic crossroad. From this inflection point, Dr. Mládek has mapped out three possible outcomes.

One includes the proposal for deeper political and fiscal integration. The idea would be to boost the creation of the European Federation, which some have called the “United States of Europe”, capable of aligning industrial policy, defense, capital markets, and innovation strategy under a coherent federal framework. Up until now this option that has found weak political commitment.

A second idea hangs on the possibility of complete disintegration of the bloc and the unraveling of common institutions. But the common currency brings a significant challenge.

The third possibility, and arguably most probable according to Dr. Mládek and other analysts, is prolonged stagnation. For Mládek, this outcome will only be possible if the external political and economic conditions around Europe are relatively stable, which might not be the case in the next few years.

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