Can Europe's Economy Gain Momentum?
The European economy has been a byword for sluggishness and a loss of competitiveness for much of the past 15 years, and until recently, there was little indication that the European economy was in a position to shake off this decline. However, 2025 has brought a renewed sense of hope for many European economies, as the chaos unleashed by the Trump Administration in the United States has given some European economies a belief that this is an opportunity for the region’s economy to finally gain some momentum. However, for Europe to take advantage of this opportunity, it will have to take massive steps to improve the region’s economic competitiveness, something that many European leaders have failed to grasp.
What is Happening
- The economy of the European Union expanded by 1.4% on a year-on-year basis (0.3% quarter-on-quarter) in the first quarter of this year. Meanwhile, the Eurozone’s economy grew by 1.2% year-on-year (0.4% quarter-on-quarter). This was a slightly better result than had been expected and stood in contrast to the downturns experienced in other major economies in the first quarter.
- Much of this growth was driven by the EU’s more dynamic peripheral economies, most notably Ireland, whose economy grew by 10.9% in the first quarter. This continued a trend whereby smaller and more dynamic economies in Europe were able to grow significantly faster than the region’s larger economies. This reflects a growing divide in terms of competitiveness between Europe’s larger and smaller economies.
- While many of Europe’s smaller economies have recorded strong growth in recent months, its largest economies have struggled. Germany’s economy contracted by 0.2% on a year-on-year basis in the first quarter, while France’s economy grew by just 0.8% and Italy’s grew by only 0.6%. In contrast, Spain’s economy, which has been the most successful large European economy in recent years, grew by 2.8% in the first quarter of this year.
Implications
To generate higher rates of economic growth, European countries must take three concrete steps.
- First, they need to attract more investment in high-growth sectors of the economy. Most European countries trail far behind the United States and China in those sectors of the economy that will drive economic growth in the years ahead.
- Second, Europe must attract more highly-skilled immigrants due to the fact that birth rates across Europe remain some of the lowest in the world. Moreover, it must make it easier for these immigrants to obtains jobs in Europe, or to start their own businesses in the region.
- Finally, Europe needs a complete overhaul when it comes to regulations. While a certain degree of regulatory stability is welcome, too many European businesses feel overburdened by Europe’s massive amount of regulations. The only way for Europe to compete in the 21st century to is reduce the level of regulation in the region and unleash the capabilities of businesses based in Europe.
Summary
The first quarter of the 21st century has not been kind to the European economy. Not only has the region fallen significantly behind the United States in terms of economic growth, but it has seen its leading position in many traditionally-strong industries in the region overtaken by China and other Asian economies. This has resulted in Europe’s extremely poor economic performance over the past 15-20 years. Now, with the global economy in a period of turmoil and uncertainty, Europe may have another chance to regain some of the economic momentum that it has lost. In fact, this may be Europe’s last chance to avoid falling into a trap of long-term economic decline for which it will find it impossible to escape.