The conflict in Ukraine has sparked a renewed sense of unity within the transatlantic alliance. However, there is a growing disparity between the United States and its European allies.
The US economy is now significantly more prosperous and innovative than that of the EU or Britain, and this gap is only widening. This divide will have far-reaching consequences beyond just living standards. Europe’s reliance on the US for technology, energy, capital, and military protection is eroding any hopes of achieving “strategic autonomy” within the EU.
In 2008, the EU and the US had similarly sized economies. But since the global financial crisis, their economic trajectories have drastically diverged. As Jeremy Shapiro and Jana Puglierin from the European Council on Foreign Relations highlight, “In 2008, the EU’s economy was slightly larger than America’s: $16.2tn versus $14.7tn. By 2022, the US economy had grown to $25tn, while the EU and the UK combined had only reached $19.8tn. The US economy is now almost one-third larger, exceeding the EU’s size without the UK by over 50%.”
The cumulative figures are staggering, portraying a Europe that has fallen behind in various sectors.
US-based companies such as Amazon, Microsoft, and Apple dominate the European tech landscape. The seven largest tech firms globally, in terms of market capitalization, are all American. In contrast, there are only two European companies in the top 20: ASML and SAP. Rather than nurturing its own tech giants, Europe often sees them being acquired by American corporations. Microsoft purchased Skype in 2011, and Google bought DeepMind in 2014. American and Chinese firms are also expected to dominate the development of artificial intelligence.
The leading universities in the US that fuel the development of tech start-ups are lacking in the EU. Only one EU institution ranks within the top 30 of both the Shanghai and THE (Times Higher Education) university rankings. However, the UK performs relatively better, thanks to institutions like Cambridge, Oxford, and Imperial.
In 1990, Europe produced 44% of the world’s semiconductors. Today, that number has dwindled to 9%, compared to America’s 12%. While both the EU and the US are striving to enhance their capabilities, the US is expected to have 14 new semiconductor plants by 2025, while Europe and the Middle East will only add 10. In contrast, China and Taiwan are set to establish 43 new facilities.
To reverse this situation, both the US and the EU are implementing ambitious industrial policies that offer public financing and incentives to chip manufacturers and electric vehicle producers. The US’s status as the world’s reserve currency also provides them with the freedom to finance their ambitions without alarming the markets. As a European industrialist remarks, “They can just swipe the credit card.” In contrast, the EU has a smaller budget and has only recently begun issuing shared debt.
Access to private capital is more readily available in the US as well. Europe is now heavily reliant on US capital markets, according to Paul Achleitner, chair of the global advisory board at Deutsche Bank. He points out that Europe lacks the extensive pension funds that contribute depth to US capital markets, ultimately stating, “If you want to accomplish something significant, whether it’s an acquisition or an IPO, you always turn to American investors.” The EU has discussed establishing a “capital markets union” to achieve a scale similar to the US, but progress has been slow.
In contrast to Europe, the US possesses abundant and affordable domestic energy resources. The shale revolution has made the US the world’s largest producer of oil and gas, while energy prices in Europe have skyrocketed. The conflict in Ukraine and the loss of inexpensive Russian gas mean that European industries typically pay three to four times the amount their American competitors do for energy. Consequently, European business leaders express concerns that this disparity has already led to factory closures in Europe.
Some in Britain may interpret these circumstances as evidence that being part of the EU meant being tied to a failing entity and consider Brexit as a wise decision. However, outside the European single market, Britain faces an exacerbated version of the scaling issues hampering the EU. As a result, British industry is already falling behind.
Are there no areas in which Europe retains global leadership? Some proudly point to the fact that companies worldwide must comply with European regulations due to the size of the EU single market—a phenomenon known as the “Brussels effect.” However, it would undeniably be preferable for Europe to lead in generating wealth rather than solely regulating it.
Europe does excel in “lifestyle” industries. Nearly two-thirds of the world’s tourist arrivals are in Europe, while European companies dominate the luxury goods market. Additionally, European teams dominate football, the world’s most popular sport, although many major clubs are now owned by investors from the Middle East, America, or Asia.
Europe’s dominance in lifestyle industries underscores the continent’s appeal to many. Nevertheless, it may be part of the problem that Europe lacks a greater sense of threat motivating it to reverse its steady decline in power, influence, and wealth.
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