About this Series

This article is part of a multi-part series examining how Europe’s competitiveness compares with China, what structural imbalances have emerged, how these shape geopolitical realities, and what priority agenda Europe must pursue to restore strategic strength. The series concludes by assessing Europe’s actual priorities and policy actions, comparing them with the ideal agenda identified earlier. Each instalment builds on the previous one to form a coherent and comprehensive framework for understanding Europe’s competitive position in the world economy.

What We Learned from Parts 1, 2 and 3

Part 1 established the analytical framework for comparing Europe and China, clarifying the dimensions of competitiveness and the methodological challenges of cross-system comparison. Part 2 applied this framework, revealing a structural imbalance: Europe excels in scientific innovation and specialised advanced industries, while China dominates in industrial scale, cost structure, and clean-technology supply chains. Part 3 demonstrated how these imbalances translate into geopolitical influence, strategic dependency, and constrained policy choices for Europe. Together, these parts show that Europe’s weakening competitiveness is not an isolated economic issue but a systemic challenge affecting its strategic autonomy and long-term resilience.

About This Part

In this fourth part, we examine the root causes of Europe’s competitive weaknesses. These causes are structural and accumulated over decades. They arise from fragmentation, underinvestment, cost disadvantages, regulatory complexity, demographic trends, and erosion of industrial capabilities. Understanding these systemic sources is essential for designing an agenda that can realistically restore Europe’s competitiveness in a world where industrial power and geopolitical leverage increasingly converge.

1. Introduction: Symptoms vs. Structural Causes

Europe’s competitive challenges are often described in terms of visible symptoms—rising energy prices, slow permitting, declining manufacturing shares, or lagging scale-up funding. Yet these symptoms originate from deeper capabilities and capacities that shape Europe’s long-term economic performance.

Capabilities refer to the knowledge, skills, technologies, and institutional competencies Europe possesses.
Capacities refer to Europe’s ability to deploy these capabilities at scale—through investment, infrastructure, talent, regulatory agility, and governance structures.

In many sectors, Europe has the capabilities but increasingly lacks the capacities to transform them into competitive advantage.

2. Fragmentation: The Structural Weakness Beneath All Others

2.1 27 Industrial Strategies vs. One Chinese Strategy

Europe’s institutional design is both its greatest strength and its greatest competitive constraint. While the Single Market offers scale, the reality is that:

industrial policy,
energy policy,
fiscal policy, and
education and skills policy

remain largely national competencies.

This creates fragmented priorities and uneven capacities, making coordinated industrial action significantly more difficult than in China’s centralised system.

2.2 Regulatory and Administrative Divergence

Even within the Single Market, firms face:

different permitting regimes,
varying environmental standards,
inconsistent digital and data rules,
uneven adoption of EU-level reforms.

Fragmentation raises transaction costs, slows investment, and weakens Europe’s ability to mobilise strategic industrial action.

2.3 The Cost of Slow Coordination

China can synchronise national, provincial, and municipal policies to support strategic sectors with speed and scale. Europe’s decision-making processes—based on negotiation, consensus-building, and legal constraints—are slower by design.

This speed gap has become a competitive disadvantage in fast-moving technologies where deployment and scale matter as much as innovation.

3. Underinvestment: The Capital Gap

3.1 Chronic Underinvestment in R&D and Industrial Capacity

Although Europe produces excellent research, its investments in:

R&D as a share of GDP,
capital expenditure on manufacturing,
deep-tech commercialisation infrastructure,

lag behind those of China and the United States [1][2].
This reduces Europe’s ability to capture the value of its intellectual assets.

3.2 The Fragmented Capital Markets Problem

Europe lacks a unified capital market comparable to the US. As a result:

venture capital pools are smaller,
pension funds take fewer risks,
cross-border investment is less fluid,
deep-tech scale-ups often relocate abroad to access growth capital.

This financing structure is ill-suited to the capital intensity of emerging strategic sectors such as semiconductors, AI compute, batteries, and biotech.

3.3 Risk Aversion as an Ingrained Financial Culture

European financial markets display more caution, lower default tolerance, and stricter collateral requirements. These incentives discourage long-term, high-risk industrial investment and favour incremental innovation over transformative technology development.

4. Regulatory Burden and Administrative Complexity

4.1 Europe’s High-Standards Model: Strength and Weakness

Europe excels at creating robust regulations for safety, environment, consumer protection, and competition. This has produced global regulatory influence—the “Brussels Effect” [3].

However, these strengths come with high compliance costs and long approval cycles, which disproportionately affect:

new technologies,
capital-intensive industries,
cross-border infrastructure projects.

4.2 Slow Permitting as a Competitive Bottleneck

Permitting times for industrial facilities, energy projects, and infrastructure can reach five to ten years in some jurisdictions. This is incompatible with sectors where China can deploy industrial capacity in months, not years.

4.3 Complexity of Funding Applications

EU-level funding is often subject to heavy administrative requirements. Firms—especially SMEs—face long delays, high consultancy costs, and substantial uncertainties in securing project support. This undermines Europe’s ability to translate policy ambition into execution.

5. Demographic Pressures and Skills Constraints

5.1 Europe’s Ageing Workforce

Europe faces declining working-age populations across most member states. This reduces labour market dynamism, slows productivity growth, and increases fiscal pressure on welfare systems [4].

5.2 Skills Mismatch in Strategic Sectors

While Europe produces many graduates, shortages persist in:

engineering,
computer science,
AI and data disciplines,
semiconductor manufacturing,
clean-tech and industrial technicians.

This mismatch creates bottlenecks even when capital and policy are available.

5.3 Talent Attraction Challenges

Europe’s immigration frameworks vary widely and often favour stability over strategic talent attraction. Competing with the US, Canada, and China for global high-tech talent remains difficult without more unified and ambitious mobility policies.

6. Energy and Infrastructure: Structural Cost Disadvantages

6.1 High Energy Costs as a Competitive Burden

Since the early 2000s—and dramatically since 2021—Europe has faced higher industrial energy prices than both the US and China [5]. This affects:

chemicals,
aluminium,
steel,
fertilisers,
data centres and AI compute.

These sectors form the backbone of many downstream industries.

6.2 Infrastructure Gaps

While Europe has excellent transportation networks, it faces shortages in:

modernised electricity grids,
energy storage capacity,
hydrogen infrastructure,
semiconductor fabrication capacity,
large-scale industrial zones.

Infrastructure delays compound regulatory delays, slowing Europe’s ability to compete in time-sensitive technology cycles.

7. Erosion of Manufacturing Capability

7.1 Offshoring Legacy and Loss of Mid-Tier Suppliers

Since the 1990s, Europe offshored significant segments of electronics, solar, and lower-tier manufacturing to Asia. As a result:

supplier ecosystems have thinned,
industrial clusters have weakened,
Europe is vulnerable in upstream technologies.

7.2 Hollowing Out of Key Sectors

Energy-intensive industries have downsized or relocated due to cost pressures. The solar PV industry largely collapsed under pressure from Chinese competition in the 2010s. Europe risks similar patterns in batteries and EVs without decisive policy action.

7.3 The Difficulty of Rebuilding Industrial Depth

Rebuilding requires:

workforce development,
supply-chain re-integration,
large-scale private investment,
long-term policy certainty.

These conditions are challenging under Europe’s current structural constraints.

8. Governance and Execution Capacity

8.1 The Ambition–Execution Gap

Europe produces high-quality strategies—on green industry, critical raw materials, digital transformation, and industrial innovation. Yet the execution gap remains persistent due to:

multi-level governance,
state-aid divergences,
political fragmentation,
differing national priorities [6].

8.2 Consensus Dependency

Many EU decisions require unanimity or qualified majorities across heterogeneous political economies. This slows responses to external shocks and reduces Europe’s agility relative to China’s centralised command structure.

8.3 Strategic Inertia

Incrementalism dominates European policymaking. Transformative industrial moves—comparable to China’s sectoral bets—are rare without a major crisis to force action.

Conclusion

Europe’s competitive weaknesses are deeply structural. They do not stem from a lack of talent, ideas, or technological sophistication, but from fragmentation, underinvestment, regulatory drag, demographic headwinds, energy costs, and weakened industrial depth. These weaknesses limit Europe’s capacity to respond to geopolitical challenges, seize new technological opportunities, and shape global standards.

Understanding these root causes is essential before formulating solutions. Thus, in Part 5, we outline the Priority Agenda Europe needs—a strategic program designed to rebuild competitiveness across capabilities and capacities. This normative agenda forms the benchmark against which Part 6 will later assess Europe’s actual actions.

References

European Commission. European Competitiveness Report.
OECD. Science, Technology and Industry Outlook.
Bradford, A. (2020). The Brussels Effect.
Eurostat. Demographic Projections for the EU Population.
IEA. Energy Prices and Industrial Competitiveness.
European Court of Auditors. Reports on Strategic Dependencies and Industrial Policy Execution.

Sunday, December 7, 2025

Europe vs China: Competitiveness in a Changing World — Part 4: The Sources of Europe’s Weaknesses