The facts are stark. In 2008, the United States and the euro-zone economies were roughly the same size. Today, the American economy is nearly twice the size of the euro zone. And it’s not just one measure. Average European income is now 27 percent lower than in the United States, and average wages are 37 percent lower. When the British left the European Union, they fantasized about forging a close relationship with the United States, almost becoming the 51st state. Were that to happen, it is surely sobering to Britons to realize that they would find themselves in the 51st poorest state in the union, with a per capita gross domestic product below that of Mississippi.
The U.S. economy towers above Europe’s these days. The United States’ technology companies dominate the continent. U.S. banks are far more profitable than European ones. U.S. energy production has created a boom in manufacturing which is luring many European companies to the United States. As one German CEO said to me. “America is an easier place to do business, has fewer regulations, and now has much lower energy costs. How do I rationally invest in Europe?” Two of Europe’s largest oil companies, Shell and TotalEnergies, have mused about fleeing Europe and floating their shares on the New York Stock Exchange.
European leaders understand the problem and have proposed a series of solutions. Two former Italian prime ministers, Enrico Letta and Mario Draghi, have been tasked with producing reports with policy ideas to counter the slide. Letta’s is out and many people who have spoken to Draghi have a sense of his proposals as well. They center on the central issue: Europe is too divided.
Technology is a good prism through which to understand the challenge. To create powerful digital companies, you need three factors — great engineering talent, easy access to capital and a large market into which you can quickly deploy the new products (scale). The United States has all three, as does China. Europe has some of the world’s most talented engineers. It has access to capital. But it is not a single market despite often being described as such. Tech entrepreneurs struggle to navigate 27 different markets with different regulations, authorities, standards and requirements. This is why, as the Letta report notes, Europe is home to 33 trillion euros of private savings but every year 300 billion euros is diverted to overseas markets to find superior investments, most of them in the United States.
These economic challenges are mirrored in the geopolitical arena. Europe remains a conglomeration of countries that pretend to have a unified defense and foreign policy. Defense spending is rising, but remains too low, having gone down to a new normal since the end of the Cold War. Germany is the best example. In the 1980s, West Germany had more than 500,000 soldiers in its army, on high alert to take on a Soviet invasion through the Fulda Gap. Today, a unified Germany has fewer than 200,000 troops under arms and readiness levels are not nearly as high. The British navy that once ruled the seas is now smaller than it was in the 17th century and though efforts are underway to boost spending, two of its warships were recently decommissioned because there simply weren’t enough sailors to man them.
European countries need to spend more but they spend a considerable amount even now. Alas, much of it is wasted because there is little coordination and no grand strategy that animates it. Many West European countries still spend money on territorial defense — who is going to invade Belgium? — when they should focus on the capacity to move troops and equipment to defend the eastern frontiers of Europe, which is where the threat comes from. Again, because European producers do not have continent-wide scale, much of Europe’s defense spending goes to U.S. companies.
The solution to Europe’s woes can be summarized in one line — a deeper, more united, more strategic Europe. But that solution means, inevitably, more power to the European Union, which feeds the populist backlash that was so evident in last week’s elections. A European politician explained to me the continent’s dilemma. “We know what to do,” he said. “We just don’t know how to win an election after we do it!”
Perhaps the best rejoinder would be to quote another European, Jean Monnet, one of the founders of the European Union: “Europe will be forged in crisis, and will be the sum of the solutions adopted for those crises.”
We have the crisis. Let’s hope it leads to solutions.