European economy faces structural shifts amid global challenges

Christine Lagarde, President of the European Central Bank, highlighted the weakening of Europe’s post-war growth model during a discussion at the World Economic Forum. She identified three key pillars of growth: expanding global trade, Europe’s strength in mid-tech manufacturing supported by energy, and a stable global order.

Europe’s trade openness has been challenged by over 2,500 new trade restrictions globally last year. The country’s manufacturing advantage is eroding as China advances up the value chain and energy prices for industry remain high, over twice US levels and 50% above China.

The global order’s stability is under pressure due to geopolitical tensions, affecting supply chains and investment decisions. These shifts threaten Europe’s long-term growth prospects.

Despite these challenges, Europe maintains strengths such as the largest network of trade agreements, world-class manufacturing capabilities, and a highly skilled workforce. The euro area economy grew by 1.5% last year, driven by domestic demand, which is expected to remain the main growth driver in 2026.

To sustain growth, Europe needs to better utilize its internal market scale, promote technological adoption, and address barriers like market fragmentation and capital market disintegration. Initiatives such as the proposed ‘EU Inc.’ legal form and efforts to integrate capital markets aim to enhance competitiveness and innovation diffusion across Europe.

These measures are intended to transform European size into scale, fostering innovation, productivity, and more durable domestic demand growth.