Europe's post-war growth model rested on three mutually reinforcing pillars that are weakening today as the international environment changes, Christine Lagarde said during a discussion on global economic prospects at the World Economic Forum.
The first pillar was the expansion of global trade. Europe became one of the world's most open economies, roughly twice as open to trade as the United States, and benefited enormously from globalisation. However, this commercial expansion can no longer be taken for granted. Last year alone, more than 2,500 trade restrictions were implemented globally.
The second pillar was Europe's strength in mid-level technology manufacturing, sustained in part by access to relatively cheap energy. That advantage is also eroding. China has steadily advanced up the value chain and now competes directly with the euro area in almost 40% of the sectors in which Europe has a comparative advantage, compared to 25% in the early 2000s. Moreover, the cheap energy on which European industry once relied, including Russian gas, has disappeared. Last year, EU electricity prices for energy-intensive industries averaged more than double United States levels and around 50% higher than China's.
The third pillar was a stable, rules-based global order, backed by a US security umbrella. That environment allowed European supply chains to deepen and companies to organise investment around efficiency rather than resilience. Today that global order is under pressure. Geopolitical tensions bring critical dependencies and weak points into focus, while Europe faces mounting security threats on its doorstep. When economic dependencies can be used as weapons or when perceptions of deterrence weaken, concerns about resilience enter directly into economic decisions, affecting investment and consumption.
Despite these challenges, Europe retains substantial strengths. Even in the face of trade barriers, the EU has the world's largest network of trade agreements, a network that is expanding with recently concluded or advanced agreements with partners such as India, Indonesia, Australia, Mexico and Mercosur. Europe maintains world-class manufacturing capabilities, including global leadership in lithography and precision optics, as well as a highly skilled workforce. Additionally, it has an integrated market of 27 member states and 450 million consumers, the largest among advanced economies.
The task now is to turn that domestic resilience into a more durable source of long-term growth. This requires Europe to make better use of the scale of its internal market. When companies can grow across the EU, they can invest more efficiently and drive innovation further, making them more productive. Lagarde stressed that this is particularly important as new technologies reshape the sources of productivity growth.
Europe has a world-class research and knowledge base. The EU represents around 6% of the world's population but approximately 15% of its researchers, and produces almost one-fifth of the world's most-cited scientific publications. The challenge lies in converting that knowledge into commercial success and ensuring that new technologies spread throughout the economy. Europe must not repeat the error of the first digital cycle, in which it won commercial advantage elsewhere, and cannot afford the same outcome with artificial intelligence.
There are already encouraging signs that European companies are investing in artificial intelligence. Survey evidence suggests that euro area companies expect to allocate on average around 9% of their total investment to AI this year. However, the question is whether Europe can create the conditions for that investment to spread and scale. Two obstacles are especially critical: fragmentation in the Single Market, where companies still compete too much within national borders, weakening competitive pressure to adopt new technologies, and fragmentation in capital markets, which may incentivise young and innovative companies to relocate outside the EU.