Olan McEvoy
Research expert covering the European Union for society, economy, and politics.
Get in touch with us nowEurope’s collective share of global GDP, that is, the annual production of the entire globe, has consistently shrank in recent decades, although this is a result of the continent’s historically outsized role in the global economy, where it represented a much larger share of GDP than it did of world population. As other regions develop and grow their economies, Europe’s relative share is set to decline further, however, its importance as a base for high-quality manufacturing, the green economy, and digital & financial services will help it to retain its central role in global economic governance. Whether European countries can overcome their struggles with inflation, unemployment, and debt, while making the transition towards a greener and more sustainable economy, is the key issue for Europe in the 2020s.
The state of the European economy in the 2020s
Many European countries have highly developed economies, with both large, competitive private sector companies, as well as strong public institutions with which to regulate the economy. Nevertheless, Europe has experienced a period of economic turmoil since the global financial crisis, with countries in southern Europe in particular being stuck in a state of relatively high unemployment, low aggregate GDP growth, and unsustainable public debt burdens. Greece, Italy, Spain, and Portugal have seen many of their most talented workers leave for countries such as Germany and the United Kingdom, while their economic problems have translated into unstable and polarized politics.The largest economies of western and northern Europe have also struggled in the aftermath of the COVID-19 pandemic, as inflation rates have risen to levels not seen since the 1970s, while Russia’s war of aggression against Ukraine has meant that some countries, notably Germany, have had to find alternative ways to supply themselves with energy. While this may paint a troubling picture of the European economy in the 2020s, there may also be some reasons for optimism. Post-communist countries in central and eastern Europe, particularly Poland and Czechia, continue to grow and converge towards western European standards, a remarkable turnaround considering the sorry state of their economies before joining the EU in 2004. Some smaller European states have also managed to find a niche for themselves in the global economy, with Ireland, Norway, and Luxembourg having the highest GDP’s per capita anywhere in the world.
Europe’s global companies
Europe is home to some of the largest companies worldwide, with different countries specializing in specific industries. Germany, the largest economy on the continent, is famous for its highly advanced manufacturing sector, with car brands such as Volkswagen, Mercedes Benz, and BMW, as well as other industrial giants such as Siemens, Bosch, and Bayer, making it both a regional and global economic power. France and Italy, on the other hand, are home to the world’s largest luxury brands, with France being home to Chanel, LVMH (Louis Vuitton Moët Hennessy), and Hermès, while Italy holds claim to Gucci, Prada, and Versace. The United Kingdom is the financial center of Europe, with the City of London hosting key subsidiaries of all the big names of global finance, such as HSBC, JP Morgan, and BlackRock.Russia is the country in Europe with the greatest reserves of natural resources and the country’s energy giants such as Gazprom have up until recently supplied much of the continent with gas, oil and other critical fuels and materials, although in light of the sanctions enforced in the aftermath of the country’s war of aggression against Ukraine, most European countries have stopped importing from Russia. While large companies such as those previously mentioned are vital for Europe, the continent’s economy also relies on the plethora of small and medium sized companies (SMEs), of which there are approximately 23 million in the EU, generating a collective value of 4 billion Euros annually and employing around 85 million people.
Europe’s economic challenges in the 21st century
The main challenge which the European economy is facing in the twenty-first century is the transition to green and sustainable energy and material sources. With climate change set to intensify over the coming decades, particularly if the average global temperature rises in excess of the 1.5 degrees Celsius target set out in the UN Paris Agreement, European countries need to decarbonize at an increasing pace. The European Union has stepped up to the plate with its Green Deal, which seeks to achieve a carbon neutral economy by the year 2050 through funding renewable energy projects, decarbonizing the transportation sector, and other measures which would decouple European economic growth from resource use. Nonetheless, Europe is often viewed as a laggard in the development of green energy and critical technologies when compared with China and the United States, particularly in light of the U.S.’ large stimulus packages under the Biden administration.Europe’s digital services and technology sectors are also relatively underdeveloped compared to the United States and China, with Spotify, the Swedish music streaming platform, being perhaps the continent’s most well-known start-up success story. This may be beginning to change, as the number of start-ups in the European economy has rapidly increased in the early 2020s, with cities such as London, Paris and Berlin leading the way as tech-hubs, and as European governments have begun to invest heavily in digital infrastructure in order to increase competitiveness. Finally, Europe currently finds itself in the crossfire of the escalating geopolitical tensions between its two largest external trading partners, the United States and China, which could have massive impacts on its economy. Already with the economic decoupling of the EU, UK and Switzerland from Russia due to the Russian invasion of Ukraine, we can see the impact of this trend. The ability of European countries to maintain trade with China, while not damaging relations with the United States is therefore a key economic policy issue during the next decade.
