The last few years have brought significant changes to the global economic and geopolitical landscape. The wars in Ukraine and Gaza have reinforced a division in the world reminiscent of the Cold War era: a West-led coalition vs the BRICS+, which is a broad alliance now that it has been enlarged to include Middle East and Global South member countries.
The geopolitical tensions that these two wars highlight are augmented by the technological competition between the United States and China, leading to the reemergence of protectionism and government-led industrial strategies.
Unlike the last Cold War between the United States and the Soviet Union, this one is not about ideology. It is not geared to prove that one political system is superior to the other. Rather, it is driven by economic competition, centered around a race for gaining, in the case of China, or maintaining, in the case of the US, leadership in the development of cutting-edge technology and innovation.
While China and the United States are fighting for the top spot in the world’s economic order, Europe’s position is far more uncertain. Suffering from underinvestment in technology and innovation, a bloated public sector, stifling regulations, a fragmented capital market, high debt levels, and deteriorating demographics, the European Union faces an existential threat. This could trigger the EU’s eventual demise or spark its evolution into a vibrant new Europe, fit for the 21st century and beyond.
Europe enjoys advantages that it must exploit to unlock its growth potential. It has a high-quality education system that produces graduates across all fields, and boasts world class universities and research centers. These are sources of innovation, technology, and leadership in areas where Europe has either the ability or potential to add value, be it in engineering, biotech, aerospace, new materials, or the food industry.
Europe also has democratic, stable institutions that uphold the rule of law. This framework reduces political risk and is an environment that welcomes entrepreneurship, provided businesses are unleashed from overbearing regulations and lengthy judicial processes.
While deteriorating demographics strain labor availability, automation, robotics, and digitalization can help here, allowing Europe to produce high-quality goods at competitive prices.
And whereas all the buzz these days is about technology and the products of the “Magnificent Seven,” the world needs more than simply technology. It needs a range of products that incorporate technology and that are at the same time high quality, safe, healthy, environmentally friendly, and aesthetically pleasing. Europe can be a leader in this.
Europe must focus on forming agile alliances and partnerships
To demonstrate that leadership, Europe must form agile alliances among its states to promote research, innovation, and joint ventures. It needs to focus on industries that will grow the economic resilience of the continent by decreasing reliance on other economic powers, developing skills within its workforce, and weaning itself off imported energy. Small modular nuclear plants can be the answer, drawing on existing expertise in countries like France and the UK.
To shape up for the future, it may be tempting for Europe to embark on a round of large debt issuance. That could be a mistake in the face of tepid growth and high existing debt.
Instead, the first move should be to rationalize spending, decrease waste of public funds, and prioritize projects that can add to Europe’s growth potential. Such targeted projects are more likely to be funded by a group of countries or entities with common interests in their success.
Europe can compete successfully in this, an uncertain world. But there is much to be done, and Europe has to rethink the way it operates. Faced with the technological competition between the world’s two major economies and the ideologically agnostic BRICS+ alliance, this is the time for a new Europe that embraces a business-minded approach to governing.
The writer is head of Pictet Research Institute.