The rising fear that Europe really is doomed – and taking Britain down with it
"Cheap imports from China are hurting – but it’s not just that. The bloc’s high energy costs and what founder Ratcliffe has described as “bonkers” rules that threaten to punish the company for going green are also crippling industry.
The dynamism that Crotty recalled at the turn of the century is long gone, and not just in the chemicals sector.
Across investment, company creation, research and development (R&D) and more, Europe is lagging behind the world’s superpowers – China and the US.
Too many of the Continent’s best and brightest are fleeing abroad. In many cases, Brussels is responding to this crisis in the only way it knows how: regulation.
“It has been quite a long time since Europe has been in that world-beater category,” Crotty laments.
It may be too late to stop the rot, with only a full-blown crisis able to shake the bloc out of its slumber. And if Europe’s decline continues, the pain will wash up on Britain’s shores too – even after Brexit...
“When you look at the US, most of their top companies didn’t exist 30 years ago,” says Xavier Niel, a French telecoms billionaire. “When you look at France, all of ours already existed back then.”
He believes the Continent has become stuck, just as others have pulled ahead. A bloc that at its peak drove more than a quarter of world output now drives roughly a sixth...
Once the second-most innovative region behind the US, with 27pc of global patent applications in 2000, the eurozone had slipped back to fourth place by 2021.
“You’ve now got a situation where China is filing more patents than Western Europe and the US put together,” says Crotty. “That’s a massive change over a period of 20 years.”
The EU undoubtedly missed the last great wave of innovation in the rise of the internet. Leaders in Brussels now claim to be looking forward into the industries of the future – AI, robotics, digital services and defence.
But when Mario Draghi, the former prime minister of Italy and ex-head of the European Central Bank, wrote his landmark report on EU competitiveness last year, he painted a bleak picture of the bloc’s prospects in these areas.
“Europe is stuck in a static industrial structure with few new companies rising up to disrupt existing industries or develop new growth engines,” he warned.
Companies in Europe struggled to rival the size of those in the US or China because of a barrage of red tape and sky-high energy prices, his report warned.
Draghi recommended the bloc increase spending by €800bn (£703bn) per year or face being left behind by the US and China.
He called for policymakers to invest in innovation, make European mergers easier, cut red tape and make it easier to do cross-border business, particularly in financial services.
The report draws a telling parallel.
In the past two decades, US spending on R&D – the tinder of innovation and productivity – shifted from the automotive and pharma industries in the 2000s to software and hardware companies in the 2010s, and then to the digital sector in the 2020s.
Yet over all that time, Europe’s spending has remained stuck in the automotive sector – eking out marginal productivity gains instead of chasing high-growth frontiers.
The crown is also slipping from Europe’s pharmaceutical sector. Of the top 10 best-selling biological medicines in Europe in 2022, just two were marketed by EU companies. Six came from US-based companies.
Europe’s drugmakers aren’t spending enough on R&D, and they’re not alone. European companies spend a collective 2.2pc of the bloc’s GDP on R&D. The US figure is 3.5pc, and South Korea is touching 5pc.
But problems run deeper than big businesses resting on their laurels.
The start-up culture is struggling too. No company has been set up in the EU in the past half-century that now has a market capitalisation of more than €100bn. In that period, six US companies have been established that now have a valuation of more than €1tn.
“We don’t have enough entrepreneurs in Europe,” says French billionaire Niel. “The issue isn’t talent – we have plenty. The issue is that not enough European young people wake up one morning thinking, ‘I’m going to build this massive company that’s going to change the world’.”
Nicolai Tangen, boss of the world’s largest sovereign wealth fund in Norway, says American investors have noticed.
“I’ve just come back from the US, I spent a month there. I met with 70 [chief executives], and the overall impression is that there is not so much happening in Europe,” he says.
“Regulation is a big part of it, but it’s a lot of factors: regulation, innovation, competitiveness, all these things.”
Tech companies are grappling with the Digital Services Act, the Digital Markets Act, the AI Act, the Data Act and the Cyber Resilience Act – some of which have evoked sharp hostility from Trump’s White House.
In the tech space alone, the Bruegel Institute has tallied up more than 100 laws and regulations administered by more than 80 different agencies.
“Europe doesn’t have an innovation problem, it has a regulation problem,” Niel says. “If I want to build an AI company today, I’ll go where it’s easier in terms of regulation. And right now, that’s not Europe.
“Europe always over-regulates, while in China regulation is virtually non-existent and the US is trying to lighten theirs. Innovation is unpredictable by nature. If we regulate too soon, we risk slowing everything down.”
Some of the EU’s tech laws are now being reconsidered or wound back, as businesses chafe under requirements not imposed on companies elsewhere.
But the damage is already done. Between 2008 and 2021, almost one third of the “unicorns” founded in Europe – start-ups that went on to be valued at over $1bn – relocated abroad, mostly to the US.
It’s not just technology either. The EU has been busily padding out its rulebook elsewhere too – with directives aimed at enforcing environmental, social and governance (ESG) norms on companies.
The Corporate Sustainability Due Diligence Directive, the Regulation on Deforestation-Free Products, the Corporate Sustainability Reporting Directive and the Forced Labour Regulation have all landed since mid-2023.
Claudio Irigoyen, global chief economist at Bank of America, says this regulation-first attitude has put Europe on the path of secular decline.
“The AI revolution is happening in the US and China under completely different regimes. It is not happening in Europe,” he says.
“There is no development, but they are already discussing how they will regulate it. This mindset needs to change.”
Europe’s canary in the coal mine came from one of its most modern, future-facing industries: solar power.
At the turn of the century, Germany was a world leader in both developing and making the photovoltaic (PV) cells that turn sunlight into electricity.
The German government passed a renewable energy law in 2000 that encouraged investment, spawning an industry that quickly employed 150,000 people.
But the EU managed to squander its lead. How? The answer lies not in Brussels, but Beijing.
Communist central planning – backed by a bazooka of state subsidies – built a whole PV supply chain in less than a decade...
Chinese giant BYD and its heavily subsidised peers have tightened their grip on their domestic market, and are pushing harder into the wider world at extremely competitive prices.
You could argue that the EU was a helpless victim in all this. But China’s ability to seize the initiative in the car market in part reflects the weakness of European car makers that have failed to keep innovating.
Chinese customers, who largely value passenger over driver experiences, have shunned European models that have shorter wheel bases and a lack of entertainment.
As a result, the EU became a net importer of cars from China for the first time last year. Chinese brands sold almost twice as many vehicles in Europe in the year to September – even after Brussels hit them with tariffs of up to 45pc.
Legally binding net zero targets that enshrine into law a pledge to eliminate carbon emissions from supply chains have also hobbled industry.
Crotty at Ineos says Europe is shooting itself in the foot with these policies.
“A huge proportion of our energy costs in Europe are self-inflicted because they are a combination of levies and tariffs on power and power transmission, plus CO2 taxation that does not exist anywhere else in the world.
“Trump has eliminated CO2 taxation in the US. There is no CO2 taxation in China. There is no CO2 taxation in the Middle East. But we’ve got it in Europe. And why is it there? It’s supposed to be there to eliminate emissions. Does it do that? No, it doesn’t. Because all it does is it means you kill your European industry.
“So the product that industry was making is now supplied from China at much higher rates of CO2 emissions, not only because it has to be transported halfway across the world, but because they’re using dirtier processes that emit a lot more CO2.
“So the whole purpose of these CO2 taxes, which was to reduce CO2, has had the opposite impact. It’s lost jobs and it’s increased CO2.”
China’s wrecking ball won’t stop at solar panels, chemicals and cars. Europe still dominates China across a range of key exports including commercial vehicle engines, tractors valves and vacuum pumps. But once again, Beijing is catching up.
Analysis by Goldman Sachs of 32 capital goods where Europe still leads China in terms of exports shows the Continent’s share has declined from 56pc of all global volumes in 2005 to 44pc today.
China, meanwhile, has increased its market share in these categories – which also includes bearings and escalators.
Very little is safe from Chinese competition. The pandemic and Ukraine war created a tectonic shift in energy costs, with China one of the main beneficiaries of cheap Russian oil while Europe’s energy costs soar.
“Comparing 2024 to 2019, China has gained share in most of the product categories while at the same time Europe has been losing,” the analysts noted.
There is one category where Europe’s market share has increased over the past five years: toilets. At least not everything is going down the pan.
Can anything break Europe out of this malaise?
The Continent loves a good crisis. Jean Monnet, the man dubbed “the father of Europe”, famously declared the bloc would be “forged in crisis, and will be the sum of the solutions adopted for those crises”.
There’s a general agreement that Europe still has reservoirs of talent, capital and entrepreneurship that could underpin a renaissance of growth and productivity.
Europeans have some of the highest savings rates in the world – almost 40pc of household wealth is languishing in bank deposits. This locks up capital that could be funding growth...
Lord O’Neill warns that leaders are often more fixated on the idea of Europe than with pushing through policies that could return the bloc to its status as an economic powerhouse.
The pace of reform in France is “staggeringly laughable”, he says.
“The way Europe behaves is that it takes really crisis events to force change.”
Bank of America’s Irigoyen, who worked at Argentina’s central bank in the wake of the country’s largest ever default, says the bloc needs shock therapy of the kind being pursued today by Javier Milei in Buenos Aires.
There is precedent. Spain and Greece are now among the bloc’s fastest growing members after taking some tough medicine when both ran out of cash.
Unfortunately, voters across Europe are unlikely to swallow such tough medicine.
“When you have 3pc inflation, you’re not going to [get the same reaction],” he says. “So politicians don’t get rewarded by doing the right thing to avoid problems in the future.
“That means unfortunately, Europe needs to see more pain in order for politicians to perceive that they have a mandate to do what needs to be done.”
O’Neill says Draghi has already written the blueprint for change. Politicians just need the mettle to follow through.
“I know some people of my generation who sit in the middle of all of this in Europe, and they pray there’s going to be a crisis so they can do it all.”...
Kevin O’Marah, of Zero100, a supply chain consultancy, is no fan of Brexit but acknowledges it may have opened up opportunities to forge a different path to the bloc.
He reckons the UK could potentially redefine itself as a “middleman” economy, a convenor of capital, services and ideas.
“I don’t blame Britain for saying to the EU, ‘Listen, you guys are just like sitting on your hands over there, you’re not doing anything’. There’s a governance problem in the European Union that is so severe that Britain quit,” he says.
But he’s unsure the Starmer Government is taking the right tack. The potential of Brexit won’t be realised, he warns, if “you tax the profits of those businesses so heavily that they say, ‘Forget it, I’m not going to bother.’”
“You’ve got a bit of a problem right now in the UK with a tax regime and an attitude to intellectual-property-based wealth creation that is causing people to say: ‘Why bother?’ You’ve got to let businesses thrive.”"
Time for more regulation, degrowth, renewables and "refugees"
This is why Canada needs carbon taxes - to be competitive in the EU (who cares about the rest of the world? The important thing is to spite Donald Trump)
It’s been a strange year in Britain. Downing Street is occupied by a cabal of human rights lawyers, obsessed with the attempt to shift human nature a degree or two closer to the Fabian ideal; the result has been a steady ratcheting of the rhetorical commitment to the grand theories of liberty and democracy, and an equally steady squeeze on the actual liberties that allow that democracy to function.
In the last few days, the Electoral Commission has come out to criticise the Government for delaying local elections, stating that the official rationale is not “legitimate”. Downing Street has retreated further into itself, cutting traditional media sessions that offer an opening for press scrutiny. And the internet regulator Ofcom is drawing up plans to prevent social media users seeing posts with “potentially illegal” inflammatory material until they’ve been approved by censors.
There are no prizes for guessing which issues might be deemed “potentially illegal”, or how companies facing swingeing fines will respond when asked to work out where the line should be.
There are also no prizes for guessing why Sir Keir is behaving in such an anti-democratic fashion. “If there is a Conservative government, I can sleep at night,” he said. “If there was a Right-wing government in the United Kingdom, that would be a different proposition.” He couldn’t have summarised the phenomenon of the uniparty any better if he’d tried.
Labour and the Conservatives, in this conception, are competitors: Reform is an enemy: an existential threat to a consensus both parties have played their role in promoting.
Nor could Starmer have given much more indication as to how he will approach this challenge.
There are a few flickers of light – like the news that Orwellian “non-crime hate incidents” may be scrapped. But the overall picture is clear: as in Europe, if liberal means cannot deliver the desired end, then illiberal ones must do to save democracy from the voters.
When Reform is on track to win the local elections, picking up a swathe of seats and a boost to momentum, the elections are postponed.
When it receives a major cash infusion, giving it the resources necessary to compete with older, established rivals, ministers in the Commons welcome suggestions for restricting donations amid complaints that democracy should not be bought, and quietly ignoring the larger donation made to the Conservatives the year before.
Meanwhile, backbench Labour MPs suggest improving the quality of the Commons by barring candidates from standing if they can’t pass an enhanced DBS check. Leaving aside the quaint idea that the public should be entitled to choose who they want to represent them, it’s a proposal all but designed to punish people who veer from the status quo.
One of the many flaws in the concept of the non-crime hate incident is that it can cause candidates to fail these checks even when they are completely unaware that such an accusation has ever been levelled against them, even when the accusation was completely spurious. Now tell me, what sort of political views might lead to an accusation of “hatred” by an over-zealous HR drone, or by an opportunistic Labour acolyte?
It’s an approach that sits nicely with the attempt to clamp down on the national conversation, and reduce potentially “inflammatory” discussions about migration and its consequences. Demanding that social media users provide ID to access sensitive material ensures that the details of the latest outrage are hidden by many by default, and that those who choose to comment on it are easily identifiable; charging companies with the sort of censorship discussed above will ensure that fewer controversial posts slip through the net to be seen by those users still online.
The proposals to abolish jury trials for speech offences, meanwhile, would resolve the problem whereby juries keep letting people brought up on charges of wrongthink off, allowing judges with the right views to determine what is a legitimate expression of political opinion, and what is a remark gravely beyond the acceptable boundaries of discourse.
And they will be called upon to make those judgments. The “National Security and Online Information Team” has been tasked with monitoring anti-migrant sentiment on social media; the Research, Information and Communications Unit with producing “counter-narratives”. As the Government’s anti-terror tsar Jonathan Hall puts it, Britain needs to stand up to “free speech absolutists” to preserve democracy: controlling what people can say, and which issues they can discuss, in the name of the public good.
Liberal illiberalism, the blob, the immune system of the post-war consensus; call it what you will. Whenever a party threatens to actually alter the facts on the ground – to address migration and integration beyond offering the usual platitudes and easily broken promises – factions which were previously at each other’s throats unite to cast it out.
Liberal democracy in the conception of its advocates has a specific meaning that places greater weight on the first word than the second, and within a narrow framework. The purpose of the post-1945 order – the ties to international law, the checks on state power, the endless quagmire of human rights – is to avoid a repeat of the events before year zero.
Without this understanding, it can be hard to grasp why freedom of speech and association are weak and qualified, while the freedom to move across borders based on even the flimsiest claim appears absolute and ironclad. If the intention is avoiding the tyranny of the majority, then the state must be constructed in such a way as to avoid ever conceding on these fundamental principles.
When Starmer says the alternative to Labour or the Conservatives is an end to Britain as “the tolerant, diverse country that we are”, this is what he means: preserving the results of a project that was imposed without democratic consent.
Across Western Europe, politicians marinated in the cultural outputs of the United States, raised in a bloc that slowly put human rights and international law to the centre of its governance, drawn from internationally mobile graduates with ties across the world have used their dominance as a class to impose the policies that suit them best.
The result is that the average European parliamentarian is far more culturally liberal than the average voter, and Britain is no exception to this rule: the average Conservative MP in 2020 was roughly where the average Labour voter was on social issues. That people from outside this system want to change it is a threat to the dominance of those who inhabit it, a threat to their prestige, and a threat to their ability to extract “rents” from their control over the country.
While its proponents might wish to conceal the fact, liberal democracy is a system like any other, with taboos and rules guided towards its preservation rather than representing immutable truths reached through philosophical reflection. Its defenders are just as keen to conserve it as the old Right was its predecessor: hence the prevalence of liberal authoritarianism in populations around the world.
Our regime has a soft centre. The Starmtroopers aren’t always kicking down the door, but that doesn’t mean there isn’t pressure on dissidents to conform. As Adrian Vermuele has written, “coercion is a spectrum” and resorting to the violence that lies at the base of state power is “a confession that the use of the other tools was insufficiently artful”.
In Britain, the public is rejecting the result of a decades-long project in immigration without integration, and liberalism without meaningful democracy. If the backlash against it looks like a conspiracy of elites, as Richard Hermer derided “populists” for describing it, it’s because it is one, with more in common with Russian “managed democracy” than any of those involved would like to admit.
The coordinated attacks from Left and Right are signs that the system is working as intended: it will reject Farage as a foreign body until he is either expelled, or triumphs. And if he wins, it could spell the end for the vision of Britain our ruling class worked so hard to construct. No wonder Starmer feels unease at night.