European Central Bank President Christine Lagarde warned that Europe’s postwar growth model is weakening as trade becomes more restricted, energy costs remain uncertain and security risks rise. Speaking at the World Economic Forum’s International Business Council in Geneva on Wednesday, she said Europe should not expect the conditions behind decades of growth to return unchanged.
Three Pillars Of Europe’s Growth
Europe’s postwar expansion rested on three conditions, Lagarde said: expanding global trade, affordable energy for manufacturers and U.S. security guarantees supporting a rules-based international order. “Taken together, these shifts suggest that Europe’s post-war growth model is eroding,” she said. “And it is unlikely to return to the form we once knew.”
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More than 2,500 trade restrictions were introduced worldwide last year, according to Lagarde. U.S. tariff policy has added to the uncertainty, with a 20% tariff on EU goods later reduced to 15% under a trade agreement. Uncertainty remains around some European exports, including steel and automobiles.
Security Risks Are Changing Business Decisions
Europe is also facing a different security environment as the U.S. moves away from its traditional role as the continent’s main security provider. Geopolitical tensions are forcing companies to focus more on resilience and potential supply disruptions.
“Geopolitical tensions are bringing critical dependencies and chokepoints into sharper focus, while Europe faces growing security threats on its doorstep,” Lagarde said. U.S. pressure on European allies to increase defense spending, Russian incursions into European airspace and conflicts in the Middle East have added to geopolitical uncertainty.
“When economic dependencies can be weaponized or when perceptions of deterrence weaken, concerns about resilience enter economic decisions directly,” Lagarde said. “Firms invest less when capital is seen as less safe, weighing on output and consumption.”
Europe’s AI Challenge
Lagarde warned that Europe must avoid repeating its experience with the first digital revolution as artificial intelligence becomes a major source of investment and productivity growth. “Europe largely missed out on the first digital revolution, as the commercial gains from the spread of information and communication technologies were captured disproportionately elsewhere,” she said. “We cannot afford to repeat that experience with artificial intelligence, the second digital revolution.”
European technology companies remain much smaller than leading U.S. firms by market value. Lagarde said European companies are investing in AI, but the challenge is helping them scale across the bloc. One proposal is “EU Inc.,” a legal framework that would allow companies to incorporate once and operate under common rules across the European Union.
Deeper capital markets reforms could improve access to financing and support expansion, Lagarde said. “Turning European size into European scale would help innovative firms grow at home, allow new technologies to spread faster and boost productivity.”
Europe Faces Pressure To Remove Trade Barriers
Europe’s challenges are not limited to external pressures. Marco Forgione, director general of the Chartered Institute of Export and International Trade, said the bloc also needs to address barriers within its trading system.
Speaking to CNBC, Forgione said Europe’s internal market is open, but companies seeking to trade into Europe still face difficulties. He said those barriers could make it harder for European businesses to compete as China moves further into higher-value manufacturing.
“Fundamental changes, both political and economic, are required if Europe is going to break free from the sort of stasis that it’s been in for decades and really start to see growth in its economy,” Forgione said.
