The European economy is not merely experiencing a recession or a slow growth cycle. It is undergoing an existential transition. For three decades after the Cold War, Europe built a growth model based on three external assumptions: U.S. military protection, cheap Russian energy, and open markets in China and the East. All three of these assumptions collapsed simultaneously. Europe is now called upon to rebuild its economy in an environment where the U.S. behaves like a predator, Russia like a threat, and China like a competitor. This transition is painful, non-negotiable, and deeply geopolitical.
A NEW GEOGRAPHY OF DEVELOPMENT
The economic geography of Europe has been turned upside down. For years, the North—Germany, France, and the Netherlands—was the continent’s driving force. Today, the South is growing faster. Spain, Portugal, and Greece are posting growth rates that significantly exceed the European average, while Germany is barely edging out of stagnation. This reversal is not a temporary phenomenon. It is the result of two asymmetric shocks.
The first is energy. The industrial economies of the North, particularly Germany, had relied on Russian natural gas for decades. The rift with Moscow following the invasion of Ukraine sent energy costs skyrocketing, undermining the competitiveness of entire sectors—from the chemical industry to the automotive industry. The South, with a different energy mix and a smaller industrial base, was less affected.
The second shock is competitive. China is no longer just a factory for assembling cheap products. It has evolved into a high-tech powerhouse, competing directly with Germany in automobiles, machinery, and chemicals. When Beijing invests in electric vehicles and green energy, it is not merely expanding the global market—it is replacing German industry. In contrast, the economies of the South, which have a lower degree of technological convergence with China, do not face the same pressure.
The EU’s eastward expansion has exacerbated internal imbalances. The countries of Central and Eastern Europe have a similar industrial profile to that of the South: they can absorb manufacturing and services. However, they have lower labor and land costs, higher efficiency, and strong incentives to attract investment. They have functioned as a «structural substitute» for Southern Europe, displacing it from supply chains. This shift is one of the root causes of the debt crisis.
The result is a two-speed Europe, no longer defined by the North and the South as we once knew it, but by exposure to energy and industrial threats. Germany, which was once the pillar of European integration, has now become the weak link.
INSTITUTIONAL WEAKNESS: A CURRENCY WITHOUT A STATE
Behind these discrepancies lies a deeper structural flaw: Europe has a common currency but no common borrowing, no common budget, and no common economic governance. This asymmetry is not a technical detail. It is the root cause of nearly every economic crisis of the past decade. The result is a persistent divergence in competitiveness.
When a southern country faces fiscal pressure, it can neither devalue its currency—it does not have its own—nor borrow on favorable terms. The European Central Bank does not act as a lender of last resort for member states. The result is that countries like Greece or Italy remain trapped with high borrowing rates, while Germany, despite its low growth, borrows at negative real interest rates. The currency is shared, but trust is not.
Germany, as a core economy, benefited from the «relative devaluation» that the euro offered it compared to a hypothetical mark. Its export engine was strengthened. In contrast, the economies of Southern Europe saw their real exchange rates appreciate, weakening their exports. Unable to devalue their currencies, countries such as Greece and Italy became «locked in» to low-value-added sectors—tourism, agricultural products—and were unable to secure financing on international markets in their own currency. The currency’s «original sin» became apparent during the debt crisis of 2010–2012.
The current situation is partially overturning this picture. Southern Europe is showing stronger growth than the North in 2023–2025. There are three reasons for this: first, less dependence on Russian gas and energy-intensive industries; second, the post-pandemic boom in tourism; third, the €750 billion Recovery Fund, which was disproportionately directed toward the South. This recovery, however, remains cyclical, not structural. Germany, despite stagnation, is moving toward fiscal expansion: a special €500 billion fund for infrastructure through 2036 and a loosening of the «debt brake.» In the short term, this will boost GDP, but starting in 2028, the country will face the dual burden of repaying pandemic-related and defense-related debts. Sustainability remains uncertain.
The second major contradiction concerns the digital economy. Europe has not developed its own platforms on the scale of Google, Amazon, Tencent, or Alibaba. This is not a matter of technological backwardness. It is a matter of policy architecture. The lack of fiscal integration has prevented the creation of a single digital market with common subsidies, regulations, and public procurement that would allow European «giants» to grow.
Europe’s decision not to protect its domestic markets—in contrast to China’s strategy—left the field open to American platforms. The result today is a loss of digital sovereignty. The U.S. controls the distribution of information and the public sphere in Europe. This is not merely an economic issue. It has direct security and political implications. When the shaping of public opinion is mediated by algorithms based in California, Europe’s ability to chart an autonomous foreign policy is limited. This dependence extends to the cognitive and cultural spheres.
Strict European regulations, such as the GDPR and the Digital Markets Act, while protecting privacy, also act as a brake on innovation. The political reality makes it difficult to relax these regulations: the further development of artificial intelligence threatens white-collar jobs, which are held by the middle class—the electoral base of centrist parties. Maintaining strict rules is, in this sense, a politically rational choice, even if it comes at the cost of competitiveness.
THE SHIFT TOWARD DEFENSE
The biggest geopolitical shift concerns defense. For years, Europe lived under the American military umbrella, spending a fraction of its GDP on military equipment and directing its resources toward social benefits and consumption. That era is over. The United States is no longer a reliable protector. It is not even neutral. Under the Trump presidency and the new Republican line, Washington views Europe either as a source of exploitation—through tariffs and trade pressures—or as a geopolitical rival on issues such as energy and technology. Statements by U.S. officials in Munich, where the European Commission was accused of censoring the Right, indicate that Washington no longer respects even European institutions.
The European response is costly and painful. To achieve strategic autonomy, Europe must rebuild its defense industry from scratch. This means more money for weapons and less for social spending. Germany has already launched a 500-billion package for infrastructure and defense. The European Union has created the European Security Action, with 150 billion in joint bonds for defense procurement programs. The ReArm Europe plan, also known as «Readiness 2030,» is projected to reach 800 billion. There is even discussion of establishing a multilateral bank dedicated exclusively to defense.
The question is whether Europe can financially withstand such a shift. The northern countries, with low public debt (Denmark, Germany), have some leeway. Southern countries, with debt exceeding 100% or even 130% of GDP (Italy), find themselves at an impasse. Unless there is a permanent redistribution mechanism within the EU—something that does not currently exist—defensive measures will exacerbate inequalities. Europe may become safer externally, but more fragile internally.
THE POLITICAL SHIFT
Economic pressure and geopolitical uncertainty have already transformed the European political landscape. The traditional Left-Right divide has been partially replaced by a new fault line: progressives, who support globalization and immigration, versus conservatives, who prioritize national sovereignty and cultural affinity. The rise of the Right is not a marginal phenomenon. Governments such as Italy’s under Meloni have demonstrated that conservative governance can be stable, realistic, and effective.
This political shift has economic consequences. A more conservative Europe means less free trade, stricter border controls, less labor mobility, and a greater emphasis on domestic production. It also means a tougher stance toward third countries, whether China or the U.S. The Europe that is emerging will not be the naive, open continent of the 2000s. It will be a Europe that sacrifices part of its prosperity in exchange for security—both internal and external.
The improvement in Sino-European relations today is mainly due to the strain in Euro-Atlantic relations. The «pivot to China» is largely a passive choice, the result of U.S. pressure. For it to become a strategic choice, three conditions must be met.
First, Europe’s relative defense self-sufficiency. As long as the continent depends on the United States and NATO for 70% of its military equipment, it cannot chart an independent course. Second, digital sovereignty. Without its own mobile internet ecosystem, Europe remains vulnerable to American «cognitive penetration.» Third, managing the trade deficit with China. Europe views China as a «significant threat» due to industrial competition. China possesses enormous production capacity, advanced technology, and low costs. A win-win relationship requires that Beijing ease the pressure: either through a controlled appreciation of its currency or through mechanisms that finance European markets for green Chinese products, thereby supporting the European energy transition.
CONCLUSION
Europe is currently facing the toughest test of its postwar history. The three pillars of its growth—U.S. protection, Russian energy, and the Chinese market—have either weakened or been reversed. The European economic model is no longer sustainable in its previous form. The transition requires investment in defense, digital sovereignty, and internal cohesion. It also requires difficult political choices—between guns and butter, between solidarity and national protection, between open trade and strategic autonomy.
The question is not whether Europe will change. It is already changing. The question is whether it will change quickly enough and whether it will change in a way that preserves its unity. Geopolitical coming of age is always painful.
