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Donald Trump’s new national security strategy offers a misguided assessment of Europe, long regarded as the US’s most reliable ally. Unrestrained immigration and other policies derided by administration officials as “woke”, it warns, could lead to “civilisational erasure” within a few decades.
That argument rests on a fundamental misreading of Europe’s current predicament. While the EU does face an existential threat, it has little to do with immigration or cultural politics. In fact, the share of foreign-born residents in the US is slightly higher than in Europe.
The real threat facing Europe lies in its own economic and technological backwardness. Between 2008 and 2023, GDP rose by 87% in the US, compared with just 13.5% in the EU. Over the same period, the EU’s GDP per capita fell from 76.5% of the US level to 50%. Even the poorest US state – Mississippi – has a higher per capita income than that of several major European economies, including France, Italy and the EU average.
This widening economic gap cannot be explained by demographics. Instead, it reflects stronger productivity growth in the US, largely owing to technological innovation and higher total factor productivity. Today, roughly half of the world’s 50 largest technology firms are American, while only four are European. Over the past five decades, 241 US firms have grown from startups into companies with market capitalisations of at least $10bn (£7.4bn), compared with just 14 in Europe.
These trends raise a critical question: which countries will lead the industries of the future, and where does Europe fit in? The race for technological leadership now spans a wide range of fields, including AI and machine learning, semiconductor design and production, robotics, quantum computing, fusion energy, fintech and defence technologies. Europe enters this race at a clear disadvantage.
Whether the US or China currently leads the industries of the future remains open to debate, but most observers agree that it’s essentially a two-horse race, with the US still ahead in several key areas. Beyond that, innovation is concentrated in countries such as Japan, Taiwan, South Korea, India and Israel. In Europe, by contrast, innovative activities are largely confined to the UK, Germany, France and Switzerland – two of which are not even EU member states.
It is hardly a surprise, then, that while the US and China dominate global technological rankings, Europe finds itself far from the top. And the outlook is anything but reassuring, given that the next wave of innovation is widely expected to be more disruptive than anything we have seen over the past half century.
The technological gap between the US and Europe can be attributed to several factors. First, the US has a far deeper and more dynamic ecosystem for financing startups, while Europe still lacks a genuine capital markets union, limiting the scale and speed at which new firms can grow.
Second, Europe is hampered by excessive and fragmented regulation. A US startup can launch a product under a single regulatory framework and immediately access a market of more than 330 million consumers. The EU has a population of roughly 450 million but remains divided among 27 national regulatory regimes. An International Monetary Fund analysis shows that internal market barriers in the EU act like a tariff of about 44% for goods and 110% for services – far higher than the tariff levels the US imposes on most imports.
Third, cultural attitudes toward risk-taking differ sharply. Until relatively recently, a failed entrepreneur in some EU countries (such as Italy) could face criminal penalties, while in the US, a tech founder who has never failed is often seen as too risk-averse.
Fourth, the US benefits from a deeply integrated academic-military-industrial complex, while Europe’s chronic underinvestment in defence has weakened its innovation capacity. Technological leaders such as the US, China, Israel and, more recently, Ukraine spend heavily on defence, with military research often producing technologies that have civilian applications.
Despite this, many European political leaders continue to frame higher defence spending as a trade-off between security and social welfare. In reality, free-riding on US defence spending since the end of the second world war has limited the type of innovation that could have generated more of both through higher productivity. Paradoxically, sustaining Europe’s social model will require greater investment in defence, beginning with meeting Nato’s new spending target of 3.5% of GDP.
If Europe allows its technological lag to grow over the coming decades, it risks prolonged stagnation and continued economic decline relative to the US and China. There are, however, reasons for cautious optimism. Increasingly aware that Europe faces an existential challenge, policymakers have begun to advance serious reform proposals. The most notable examples are the two major 2024 reports on EU competitiveness and the single market by the former Italian prime ministers Mario Draghi and Enrico Letta respectively.
Europe also retains considerable strengths, including high-quality human capital, excellent education systems and world-class research institutions. With the right incentives and regulatory reforms, these assets could support much higher levels of commercial innovation. With a better environment for entrepreneurship, Europe’s high per capita income, large internal market and elevated savings rates could help unleash a wave of investment.
Crucially, even if Europe never leads in cutting-edge technologies, it could still significantly boost productivity by adopting and adapting American and Chinese innovations. Many of these technologies are general-purpose in character, benefiting both adopters and pioneers.
All of this leaves Europe at an inflection point. As Ernest Hemingway famously observed, bankruptcy happens “gradually and then suddenly”. So far, Europe’s technological decline has been gradual. But if it fails to confront its structural weaknesses, today’s slow erosion could give way to a sudden and irreversible loss of economic relevance.
Nouriel Roubini is professor emeritus at the Stern school of business and the author of Megathreats: Ten Dangerous Trends that Imperil Our Future and How to Survive Them.
