The president of the ECB warns that the three pillars of European growth are weakening and calls for more integration of the single market to avoid repeating the mistakes of the first digital revolution.
The president of the European Central Bank (ECB), Christine Lagarde, delivered a stark diagnosis of the European economy on Wednesday in Geneva: the growth model that has sustained the continent since the post-war period is eroding and will not be the same again. In her speech to the International Business Council at the World Economic Forum, Lagarde pointed out that the three pillars upon which this model was built —expanding global trade, medium-tech manufacturing with cheap energy, and a stable world order under the security umbrella of the US— are today weakened.
Trade, which made Europe one of the most open economies in the world —twice as open as the United States— can no longer be taken for granted. According to data cited by Lagarde, more than 2,500 trade restrictions were implemented worldwide last year, a figure that reflects the global protectionist drift.
The second pillar, Europe's advantage in medium-tech manufacturing, is also crumbling. China has climbed positions in the value chain and now competes directly with the eurozone in nearly 40% of the sectors where Europe maintains a comparative advantage, compared to 25% at the beginning of the 2000s. This is compounded by the end of cheap energy: last year, electricity prices for energy-intensive industries in the EU more than tripled those in the US and exceeded those in China by 50%.
The third pillar, the rules-based global order, is under pressure from geopolitical tensions. Lagarde emphasised that when economic dependencies can be used as a weapon or deterrence is perceived as weak, companies invest less, which hampers production and consumption.
Despite the bleak outlook, the ECB president highlighted that Europe retains substantial strengths. The EU maintains the largest network of trade agreements in the world, with recent or advanced deals with India, Indonesia, Australia, Mexico, and Mercosur. Additionally, it has top-tier manufacturing capabilities, such as global leadership in lithography and precision optics, and a highly skilled workforce: in Germany, 35% of graduates are from STEM fields, the highest percentage among OECD countries.
The integrated market of 27 member states and 450 million consumers is, according to Lagarde, the largest among advanced economies and becomes more relevant as sources of growth change. The eurozone economy grew by 1.5% last year, driven entirely by domestic demand, and in the second quarter of 2026 recorded a quarter-on-quarter increase of 0.4% despite the energy shock. Domestic demand will remain the main driver of growth this year, according to ECB projections.
The challenge, she said, is to convert that domestic resilience into sustainable long-term growth. To achieve this, Europe must better leverage the scale of its internal market. When companies can grow across the EU, they invest more efficiently and drive innovation, which increases their productivity. Scale is key in the midst of a technological revolution.
In this area, Europe has an advantage in research: the EU accounts for about 6% of the world's population but 15% of researchers and produces nearly one-fifth of the most cited scientific publications. The problem, according to Lagarde, is converting that knowledge into commercial success and spreading new technologies throughout the economy. Too often, barriers that prevent companies from scaling also hinder that dissemination.
The warning is clear: Europe has already missed the boat on the first digital revolution, and the commercial benefits of information technologies ended up concentrated in other regions. With artificial intelligence, the second digital revolution, we cannot repeat that mistake. There are hopeful signs: eurozone companies expect to allocate an average of around 9% of their total investment to AI this year, according to surveys.
For that investment to spread and scale, Lagarde pointed out two critical barriers. The first is the fragmentation of the single market: companies compete too much within national borders, which weakens the competitive pressure to adopt new technologies. The second, not yet detailed in her speech, points to the need to eliminate regulatory and investment obstacles.
Lagarde's final message is that Europe has the tools to adapt, but it needs political will to further integrate its market and not fall behind in the global technological race.
You may also like
