Built for Stability, Not Scale: Why the EU Struggles in a World of Industrial Superpowers
Dimitrios Zikos
The European Union was designed for a world that no longer exists. Its unique economic model was built around fiscal discipline, strict competition rules, and a cautious approach to state intervention. This worked fine in an era that assumed markets, not governments, would drive industrial development. But COVID-19, the energy crisis, and the U.S. Inflation Reduction Act exposed a fundamental problem: the EU’s architecture delivers stability, yet struggles to deliver scale. While the U.S. and China mobilise hundreds of billions to build strategic industries, Europe relies on fragmented national budgets, slow regulatory processes, and emergency measures that disappear once crises pass. This article asks a simple question with enormous implications: can the EU compete without changing its core design – and if not, how should it change?
Why the EU cannot compete in its current form.
Recent data suggest the European Union is not on pace with global industrial leaders. According to the European Commission’s Spring 2025 forecast, EU GDP growth is expected to be a very modest 1.1% in 2025. Meanwhile, the gap in labour productivity between the EU and comparable economies has been widening: since 2020, productivity per hour worked in the euro area has barely risen (just 3.8% in aggregate) while the US Bureau of Labor Statistics reports U.S. hourly labour productivity rose by 12.4% over the same period. This makes a big difference for ‘strategic’ industries like clean tech and advanced manufacturing. At the same time, global industrial output is shifting rapidly: China now accounts for nearly 30% of world manufacturing output, dwarfing what the EU 27 produce. These trends show that the EU is being visibly overtaken in growth, productivity, and industrial scale.
The European Union’s struggle to match the US and China in terms of ‘federal’ industrial output stems from its institutional design. The EU was built to ensure fair competition, fiscal discipline, and monetary stability – not to run large industrial strategies. This is evidenced by some of the EU’s foundational rules: the Stability and Growth Pact, strict state-aid controls, and the independence of the European Central Bank. The issue lies not with these factors, but with what they do not provide. The EU has no federal treasury, no ability to issue large-scale joint debt on a permanent basis, and no central tax authority capable of funding long-term industrial programmes. Instead, almost all fiscal power remains at the national level, which means 27 governments must agree before the EU can act collectively. That makes fast, large, and unified investment almost impossible. When Germany and Italy follow different budget rules, have different fiscal capacities, and face different domestic politics, they cannot mobilise resources with the speed or consistency of a single federal actor. With the EU budget capped at roughly 1% of GDP and fiscal instruments fragmented across member states, Europe lacks the centralised financial capacity necessary for major strategic investment.
In contrast, both the United States’ and China’s systems can mobilise capital quickly and at scale. The U.S. benefits from a strong federal government able to deploy debt-financed programmes like the CHIPS Act and Inflation Reduction Act. China goes even further: centralised planning, state-directed finance, and large public banks allow Beijing to channel massive investment into targeted sectors and scale industries rapidly. While the models differ, both countries share two advantages the EU lacks: central fiscal power and the political ability to pursue national industrial missions without needing agreement from 27 governments with different economic models, interests, and risk preferences.
The impact of recent crises shows this structural gap clearly. During COVID-19, the EU briefly behaved like a more federal system through NextGenerationEU, showing that joint borrowing and coordinated investment can work, but only when normal rules are relaxed. Once the emergency passed, long-standing divisions over fiscal governance resurfaced, and the EU reverted to its fragmented model. The energy shock in 2022 exposed the same limits, as member states responded unevenly and lacked a central authority capable of protecting energy-intensive industries at scale.
What needs to change?
For the EU to be competitive with the likes of the U.S. and China in strategic industries, its leaders would have to look at two issues: the scale of its fiscal tools on a federal level and the coherence of its regulatory system. These are not easy changes to make, as they would require the EU member states to rethink how much coordination they’re willing to tolerate.
The clearest example of what stronger EU-level fiscal policy looks like is NextGenerationEU (NGEU), the €800 billion COVID-recovery fund. For the first time, the EU borrowed money collectively and distributed it to member states based on need rather than size. This allowed countries with fiscal constraints (Italy, Spain) to invest far more in their recovery than they otherwise could have, while also giving investors and firms a unified signal about the EU’s long-term priorities. In practice, NGEU worked, at least in the context of this dilemma: the EU borrowed cheaply, deployed funds quickly, and showed that joint borrowing can create far more scale and stability than 27 national plans ever could.
A permanent version of this model (often called a “Green Sovereignty Fund”) could give Europe the financial firepower to compete with the U.S. Inflation Reduction Act. It would also help fix one of the EU’s biggest internal problems: subsidy inequality. Today, richer countries like Germany and France can offer far more support to their industries than smaller economies. EU-level financing would level that playing field and give companies a predictable framework, making investments easier.
Of course, this path is not without risks. Fiscally conservative governments worry that permanent joint borrowing could turn into a “transfer union,” where wealthier states end up supporting others indefinitely. Even NGEU barely passed, even though it was temporary, limited, and created during an unprecedented crisis. A permanent version would require a level of trust and integration the EU has historically struggled to reach.
The EU has succeeded with coordinated industrial strategy before. Airbus remains the classic example of a multinational project capable of rivaling a global leader. The ETS reforms also show that Brussels can fix policy design over time and build credibility in markets. These precedents don’t guarantee success, but they prove Europe can act strategically when it commits to a shared goal.
Taken together, stronger EU-level fiscal tools and regulatory coherence could give Europe the scale, speed, and credibility it currently lacks. The question is not whether these changes would work, but whether the EU is politically willing to make them.
Why has the EU not Changed Yet?
Despite growing recognition that Europe’s current model is ill-suited to an era of strategic competition, the EU has been slow to reform its fiscal and industrial framework. The core obstacles are political rather than economic. Any major shift, whether establishing a permanent EU-level fiscal instrument or loosening competition rules, requires unanimous agreement among 27 governments with very different economic philosophies and incentives. For many Northern member states, the existing system is a safeguard against fiscal risk; for others, especially in Southern Europe, deeper integration invites concerns about external oversight. This divide creates structural inertia even as the strategic costs of inaction rise.
Institutional path-dependence adds another barrier. The EU’s rules were built for market integration, not large-scale investment, and changing them means reworking decades of legal precedent and administrative practice. Such reforms imply a long-term transfer of authority to Brussels – an outcome that remains politically sensitive in an age of resurgent nationalism and scepticism toward supranational power. As a result, the EU tends to act ambitiously only under crisis conditions, and even then through temporary instruments designed to expire once normal politics return.
Finally, distributive politics make structural reform difficult. A more federal fiscal architecture would inevitably produce winners and losers: richer countries fear becoming permanent net contributors, while smaller or fiscally weaker states worry that looser rules could entrench the dominance of Europe’s largest economies. These conflicting preferences mean that the tools needed for coordinated industrial policy (joint borrowing, centralised funding, and flexible state-aid rules) are precisely the ones that are the hardest to agree on.
While the extent of the changes required can be debated, if Europe sticks completely to its current model, it risks drifting into strategic irrelevance: innovative but small-scale, environmentally ambitious but dependent on foreign production, and wealthy but exposed to geopolitical shocks.
References:
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2. European Commission — competition and state-aid architecture https://competition-policy.ec.europa.eu/state-aid_en
3. Gentiloni, P. & Panetta, F. (2023). Reforming EU Fiscal Governance. ECB/European Commission. https://economy-finance.ec.europa.eu/system/files/2023-04/pc_reforming_eu_fiscal_governance_en.pdf
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https://commission.europa.eu/strategy-and-policy/eu-budget/how-it-works_en
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