Why is Europe falling behind?

The year 2024 was not exactly kind to Europe. While the United States grew by 2.7%, the European Union (EU) economy barely advanced by 0.9%. Germany, the traditional driving force of many financial and industrial indices, closed the year in recession and France suffered significant political turbulence that even led to the fall of the government. In the markets, the difference was even greater: the Eurostoxx 600 appreciated by just 5.4%, while the American S&P 500 soared by more than 23%.

According to the European Central Bank's macroeconomic projections (the latest, from December 2024, before the geopolitical scenario of this February) inflation will fluctuate around the ECB's target of 2% from the second quarter of 2025. As I said, a complicated year, to say the least. And marked by factors that have not changed. The European economy faces significant challenges to regain a path of prosperity.

Difficulties in the European economy

Europe's growth has stagnated, with Germany and France being prime examples of economies in crisis. Since 2021, for example, German industrial production has fallen by 16%, and corporate investment is stagnating, not least because future prospects are bleak. And this is not an exception, but the dominant pattern in most EU economies.

The combination of relatively high taxes compared to other jurisdictions, extensive bureaucracy and regulations that may be holding back the competitiveness and growth of European companies are some of the factors most pointed out by experts as the cause of this bad moment.

This is in addition to two recent threats: fierce competition from China, which is displacing European companies in key sectors, and rising energy prices following the war in Ukraine. Energy costs in Europe are far higher than in the United States and China, a major blow to European industry.

The result of all these elements is not only a combination of poor results and poor prospects, but also problems that have contributed to reinforcing another of the great historical deficiencies of the productive fabric of old Europe: the lack of investment in innovation.

Technology, decisive

According to the ECB's forecasts from just two months ago, economic activity in the euro area should gradually recover in a context of considerable uncertainty about the turbulent situation in international relations and economic policies. It should be supported by rising household incomes, the resilience of the labour market and some easing of financing conditions.

For the moment, according to the data, Europe remains a major industrial power, but in the technological sector (the great shaker of the 21st century) it has visibly fallen behind. This has a lot to do with the fact that European companies invest in R&D almost half as much as their rivals on the other side of the Atlantic.

The result? While tech giants such as Apple, Microsoft and Nvidia have emerged in the US, Europe has not seen a single company worth more than $100 billion in the past five decades, which may be worrying.

However, it's not all bad news, particularly when it comes to the markets. Europe remains one of the world's three largest economic blocs and now seems to have realised its major shortcomings. If things start to get better, we could be looking at a very significant turnaround. In this latest video from If I Had Known, all the details are told.