Europe lags behind America and the gap is widening

The Ukraine war has revived the transatlantic alliance. But relations between the US and its European allies are becoming increasingly unbalanced.

The US economy is now vastly richer and more dynamic than that of the EU or the UK – and the gap is widening. This will have a much better impact than the relative standard of living. Europe’s dependence on the US for technology, energy, capital and military security is steadily undermining any aspirations for “strategic autonomy” of the EU.

In 2008, the EU and US economies were approximately the same size. But since the global financial crisis, their economic future has changed dramatically. As Jeremy Shapiro and Jana Pugliarin of the European Council on Foreign Relations to signal: “In 2008 the EU economy was slightly larger than the US: $16.2tn vs $14.7tn. By 2022, the US economy is set to grow to $25 trillion, while the European Union and the UK together could only reach $19.8 trillion. America’s economy is now about a third as large. It is more than 50 per cent larger than the EU without the UK.

The overall figures are shocking. Underpinning them is a picture of a Europe that has fallen behind – region by region.

The European technology landscape is dominated by American firms such as Amazon, Microsoft and Apple. The world’s seven biggest tech firms by market capitalization are all American. There are only two European companies in the top 20 – ASML and SAP. While China has developed its own domestic tech giants, European champions are often acquired by American companies. Skype was bought by Microsoft in 2011; DeepMind was bought by Google in 2014. American and Chinese firms are also likely to dominate the development of AI.

The European Union lacks major universities feeding the pipeline of tech start-ups in the US. Shanghai And There is only one EU institution in the top 30 in the ranking of the world’s top universities. (Britain does better – courtesy of Cambridge, Oxford, Imperial and others.)

In 1990, Europe made 44 percent of the world’s semiconductors. This figure is now 9 percent; compared to 12 percent for the US. Both the EU and the US are racing to build up their capabilities. But while the U.S. expected Europe and the Middle East will see 14 new semiconductor plants by 2025, compared to 43 new facilities in China and Taiwan, adding just 10.

Both the US and the EU are trying to change this situation with ambitious industrial policies that provide public finance and incentives for chip makers and producers of electric vehicles. But the dollar’s status as the world’s reserve currency gives Americans the ability to finance their ambitions without spooking the markets. As one European industrialist says: “They can just swipe a credit card.” In contrast, the European Union has a much smaller budget and has just started issuing common debt.

Private capital is also much more readily available in the US. Paul Acklitner, chairman of the global advisory board at Deutsche Bank, says Europe is now “almost entirely dependent on US capital markets”. He tells me that there are very few large pension funds in Europe that give the depth to US capital markets, adding: “If you want to do anything big – whether it’s an acquisition or an IPO – you always go back to the US. Go investors. The EU has talked a lot about creating a “capital markets union” to give Europe some scale of the US. But progress has been weak.

Unlike Europe, the US also has a plentiful and cheap domestic supply of energy. The shale revolution means that the US is now the world’s largest oil and gas producer. Meanwhile, energy prices have soared in Europe. The damage caused by the Ukraine war and cheap Russian gas means that European industry typically pays three or four times more for energy than its US competitors. Depressed European bosses say it is already causing factory closures in Europe.

Some in Britain may be tempted to see all this as evidence that, inside the EU, Britain was “clogged to a corpse” and that Brexit was a good move. But, outside the European single market, Britain suffers from an exaggerated version of the massive problems plaguing the EU itself. As a result, British industry is already lagging behind.

So are there really no areas where Europe is a world leader? Some proudly point to the fact that the size of the EU single market has meant that companies around the world have had to adopt European regulations – the so-called “Brussels effect”. But it would clearly be better off leading the world in creating the asset rather than regulating it.

Europe tends to do better in “lifestyle” industries. About two-thirds of the world’s tourists come to Europe. European companies dominate the luxury goods market. Football, the world’s most popular sport, is dominated by European teams – although many of the biggest clubs are now owned by Middle Eastern, American or Asian investors.

Europe’s dominance of the lifestyle industries underscores that life on the old continent is still attractive to many. But maybe that’s part of the problem. Without a greater understanding of the danger, Europe may never summon the will to reverse its drastic decline in power, influence and wealth.

gideon.rachman@ft.com