4 ways to build a strong, sovereign Europe in a shifting world

The global world order is shifting. Geopolitical flashpoints, including the Ukraine war and the new situation in Syria, are changing the political stability of nations and entire regions. In response, many countries are seeking new allies and forging alliances such as the recently expanded BRICS. China is striving for a global leadership role, aiming to shape a multipolar world that aligns with its interests. Meanwhile, the West is increasingly responding with industrial policy measures that fundamentally change global value chains.

The recalibration of global trade is particularly evident in sectors like electronics and machinery, especially in the dynamics between China, the US and "friendshoring" nations such as Vietnam and Mexico. As the US seeks greater independence from China, its trade deficit is increasingly shifting towards these countries.

The trade dispute between the US and China is being fought particularly in the realm of technology, particularly in semiconductors and AI, and is expected to further intensify under President Donald Trump. But what do these developments imply for Europe?

Europe is closely interconnected with both China and the US. What is more, global value chains connect goods of European or US design to Chinese production sites and Western sales markets. This model has provided solid economic growth, especially for Germany. A renewed trade war under Donald Trump – likely to include higher tariffs and trade restrictions – would be a substantial setback for the EU economy. Projected across a four-year period, a 10% decline in EU exports to the US could result in an economic loss of up to $408 billion for Europe, according to Roland Berger calculations.

These developments come at a bad time for the continent, which has been grappling with structural growth weaknesses for years. Over the past three decades, the American economy has grown almost twice as fast as the European economy. Most recently, value added per hour in the eurozone stood at $60, compared to $74 in the US. An ageing population further exacerbates the urgency of productivity growth; projections from the European Central Bank (ECB) indicate that the working population in the eurozone could shrink by approximately 6% by 2040.

Digital technologies represent a decisive lever for boosting productivity growth. However, Europe's economy remains influenced by the "old economy" that is currently struggling with the dual transformation of decarbonization and digitalization. Among the world's top 50 tech companies, only four are based in Europe.

One thing is clear: 2025 will be a year of heavy transformation for the European economy. In order to maintain its place in the geo-economic showdown, Europe must step out of its comfort zone and prioritize its own interests.

This imperative encompasses four key areas of action:

Europe must take proactive steps to establish free trade agreements with regions such as India and ASEAN states. The recent breakthrough in the Mercosur agreement offers a significant growth stimulus for the European economy and sends a strong message in favor of free, rules-based trade. What matters now is rapid implementation. This is especially critical for export-oriented European industries, including automotive, pharmaceuticals and industrial goods. Additionally, forming new raw material alliances is essential to ensure a stable supply of critical resources necessary for Europe's transformation. The EU's current indecisiveness is costing it growth, prosperity and geopolitical influence.

Europe needs to launch a strategic investment offensive for targeted funding of key technologies such as AI and quantum computing. Infrastructure investments for digital and green transformations are equally vital. Both efforts must go beyond ongoing programs like the Green Deal Industrial Plan that is only slowly yielding impact. The encouraging news is that while the EU's gross public debt stands at 82% of GDP, it remains significantly lower than in the US, for example, at 123%. Notably, Germany, with a debt-to-GDP ratio of 64%, has the financial leeway to spearhead necessary future investments. At the same time, a strict cap on ongoing spending, such as social welfare expenditure, is necessary to ensure monetary stability.

The transformative changes that Europe seeks also necessitate a more effective mobilization of private capital. Thus, Europe must prioritize advancing the Capital Markets Union to provide companies with broader access to European capital sources and achieve greater economic sovereignty in an increasingly fragmented global economy. Investors require stability and predictability, particularly in sectors demanding long-term investments.

Finally, the density and complexity of regulation must be reduced so that projects can be implemented more quickly. For instance, adopting a "one in, two out" rule for new laws, where each new regulation requires the removal of at least two existing standards, could significantly enhance efficiency. Additionally, only one-third of retiring civil servants in the EU should be reappointed. The necessary efficiency gains for doing so can be achieved by reducing regulation, bureaucracy and enhancing digitalization in a radical way.

Ultimately, Europe's future geopolitical relevance hinges on a strong economy. This will require massive investments and deregulation, as previously discussed. Europe must enhance its decision-making speed, making majority decisions in critical areas a key priority on the agenda.

Simultaneously, it requires more and closer European collaboration, not less. A strong, united Europe is essential to effectively defend Europe's interests in the evolving global arena. No single member state possesses the negotiating power necessary to compete in the new world. Europe must seize this critical moment to forge a stronger, more independent continent – which is not contradictory but necessary for a transatlantic partnership of equals.