Christine Lagarde: Panel remarks about the European economy during a discussion on the global economic outlook at the World Economic Forum

Europe’s historical growth relied on three pillars: trade openness, mid-tech manufacturing, and a stable global order. However, the European Central Bank notes these foundations are eroding. Global trade restrictions surged last year, exceeding 2,500, while China’s industrial rise challenges Europe’s mid-tech dominance. Energy costs for EU industries now average twice those in the US and 50% higher than in China, further straining competitiveness.

The third pillar, a stable global order, is also under pressure. Geopolitical tensions and security threats are exposing vulnerabilities in supply chains and economic dependencies. The ECB states that when economic risks rise or deterrence weakens, firms reduce investment, directly impacting output and consumption. These shifts indicate Europe’s post-war growth model is unlikely to return to its former strength.

Despite these challenges, the ECB highlights Europe’s strengths, including the world’s largest trade agreement network, expanding with partners like India and Mercosur. The EU retains leadership in advanced manufacturing sectors such as lithography and precision optics, supported by a highly skilled workforce, with Germany leading in STEM graduates among OECD countries.

The ECB emphasizes the importance of Europe’s integrated single market of 27 member states and 450 million consumers. Domestic demand has driven recent growth, with the euro area expanding by 1.5% last year and projected to maintain positive quarterly growth. To sustain long-term growth, Europe must leverage its market scale to boost firm productivity, particularly in emerging technologies like AI, where investment is rising but risks fragmentation within the Single Market.