Political Economics: Is Europe Awakening at Last to Its Economic Peril?

“Maybe there's hope for Europe, after all. Emphasis, as always, on that "maybe."

 

Members of the European Parliament on Nov. 13 passed a tranche of climate regulations after they were watered down from their original form. Lawmakers greatly reduced the number of European companies that would face onerous new reporting requirements by increasing the company-size thresholds at which the rules kick in.

 

The following week, the European Commission (the European Union's bureaucratic arm) proposed a weakening of Europe's digital regulations. The goal is to make the Continent safe-ish for artificial intelligence -- and for American tech companies. Ursula von der Leyen, the Commission president, wants to ease the way for tech companies to access and use data, while adopting a more permissive approach to regulating new AI technology.

 

Let's not get ahead of ourselves. Europe still intends to impose onerous climate regulations on its most successful companies. Its tech regulations remain, well, European. Don't expect a new Silicon Valley to pop up on the Rhine, the Seine or the Thames any time soon. Still, Ms. von der Leyen and other leaders are starting to demonstrate a capacity for self-reflection and reform that had seemed all but lost in Brussels. Credit a confluence of several economic and political forces.

 

On the economic front, Europe's political class is trapped in a permanent panic attack. The steady productivity convergence with the U.S. that marked the decades after 1945 stopped around 1990 when European output per capita was 80% of America's. Since then Europe has been drifting backward in relative terms, with per-capita output these days around 70% of the U.S. This creates immense fiscal pressures as Europe's generous welfare states become ever less affordable.

 

The Continent today is careening into a second wrenching fiscal crisis, after the 2010 disaster. This time the culprits aren't relatively small peripheral economies such as Greece and Portugal. This crisis is engulfing France and the U.K. (no longer part of the EU but inextricably linked to it).

 

Germany's public finances look healthier for now, but that illusion won't long survive the sanctions on Russia and stupid politicking-induced highest in developed world energy prices together with eager green-policy hollowing-out of its industrial base [1].

 

Taxes across the Continent are far too high to be consistent with investment and job creation. Economic growth is the only way out of the tar pit.

 

This reality is prompting new curiosity about why, exactly, Europe's economic performance is so underwhelming. Ms. von der Leyen last year commissioned a report from Mario Draghi, former central banker and Italian prime minister, to solve the riddle. The result was an impassioned plea for a looser regulatory approach to new technologies, less hostility to successful companies and financial reforms to let Europe funnel more capital toward its own entrepreneurs.

 

Astonishingly, people appear to have actually read the thing. The latest Brussels moves on tech regulation echo Mr. Draghi's warning that if Europe does not deregulate, it will not prosper. What's fading is the "Brussels effect," the old theory -- don't laugh -- that the EU could give European companies a global competitive edge by crafting stringent regulations for the European market that only EU firms could navigate.

 

A changing political environment lends a sense of urgency. This month's moves in the European Parliament were prompted by voters' cry of exasperation in last year's Continent-wide election for that body. The result was a majority for parties of the political right and a meltdown among the centrists and leftists who thought of the EU as "their" project. Ms. von der Leyen, herself a German Christian Democrat and member of the center-right bloc that won a plurality of parliamentary seats, initially tried to govern the EU in cooperation with center-left parties in order to freeze out the far right.

 

The ensuing machinations would bore you to tears, but after only a year political gravity has reasserted itself. Ms. von der Leyen's deregulations of the past month have passed with support from the right-leaning parliamentarians whose parties scored well in the election, and over the objections of politicians whose parties lost support. A growing number of EU leaders are starting to admit that their legitimacy depends on responding effectively to electoral impulses. Quel surprise.

 

Recognize that if Europe is going to fix itself -- again, a big "if" -- we're witnessing only the beginning of the beginning. An economic renaissance requires a more profound attitude shift than the tinkering around the edges on display this month. For instance, Europeans will have to abandon the safetyism that created their regulatory morass and the magical thinking that spawned their net-zero climate policies. Evidence that this is happening remains thin on the ground for now.

 

Still, better to begin a beginning than to remain stuck in a ditch. Never overestimate Europe's ability to fix its own problems. But perhaps after this month don't underestimate Europe, either.” [2]

 

1. Energy Prices and Policy: Germany continues to face some of Europe's highest energy prices, a situation linked to its energy transition (e.g., nuclear power phase-out, coal phase-out plans) and the disruption of Russian gas supplies.

 

The government has introduced support measures, such as an industrial electricity price program expected in early 2026, to alleviate pressure on manufacturers.

 

However, experts note that the popular view that a rapid switch to renewables will immediately make electricity cheaper is likely unfounded due to intermittency issues requiring investment in a diversified energy mix.

 

Industrial Base and Exports: The manufacturing-heavy, export-oriented economic model is under threat from global trade tensions (notably US tariffs), increased competition from China, and a loss of price competitiveness. Exports are projected to weigh on growth for a third consecutive year.

 

2. Political Economics: Is Europe Awakening at Last to Its Economic Peril? Sternberg, Joseph C.  Wall Street Journal, Eastern edition; New York, N.Y.. 28 Nov 2025: A15.