Europe Must Do Better: How the Continent Becomes a Shaper Again

Summary

Peter A. Fischer analyzes in this commentary the economic and geopolitical weakness of Europe and advocates for strengthening it through greater integration and less bureaucracy. The old continent has become defensive – pressured by Vladimir Putin and Donald Trump – and urgently needs to close its productivity gap relative to the USA. This can only be achieved through a more liberal internal market, increased defense spending, and a more innovative approach to artificial intelligence.

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Detailed Summary

Europe's Defensive Position

Europe is in a critical situation. While international stocks performed strongly in 2025 – particularly the Nasdaq with a gain of 20.5 percent – the European continent has become defensive. Vladimir Putin relentlessly bombs Ukraine, while Donald Trump has made clear that he prefers a weakened Europe to a strong, independent EU with geopolitical clout. Liberal European democracies thus face both external and internal threats.

Self-Inflicted Weakness

Fischer argues that Europe is largely responsible for its own weakness. While European NATO states collectively spend two and a half times as much on defense as Russia, these expenditures are deployed extremely inefficiently, as each state protects its own defense industry. Particularly alarming is that large European countries such as France, the United Kingdom, Italy, and Spain have already severely overextended their fiscal room for maneuver, while at the same time demographic aging is causing social costs to rise considerably.

The Productivity Gap

The core problem lies in a massive productivity gap: the USA achieves per capita gross domestic product one-third higher than the EU. Not only do Americans work more – their productivity is about one-quarter higher for the same effort. This was not always the case: after World War II, European countries caught up and nearly closed the gap by 1995. Since then, however, America has pulled ahead.

Two major developments are responsible for this. First, the costs of overcoming geographic distance have decreased considerably, so efficiency advantages of international specialization and economies of scale from concentrated production have become increasingly important. Superstar firms – in the USA tech companies, in Switzerland pharmaceutical companies and Nestlé – make above-average contributions to productivity. Second, the IT revolution has created digital platforms like Google, Microsoft, and Meta, where network effects are decisive.

Regulation Instead of Innovation

A critical problem: excessive national regulations and bureaucratic hurdles prevent innovative startup firms in Europe from growing quickly. ECB Director Isabel Schnabel concluded that the productivity of Italian industry could be 15 percent higher if its firms were as large as the global benchmark.

A particularly striking example: the International Monetary Fund estimates trade barriers in intra-EU goods trade at a tariff equivalent of 44 percent – three times as much as between US states and more than American tariffs. For services trade, economists calculated an intra-EU tariff rate of even 110 percent.

Solutions: More Internal Market, Less Nationalism

Fischer advocates for a two-pronged approach: on the one hand, more subsidiarity is needed – Brussels should not regulate everywhere when it works better locally. On the other hand, more integration is needed where it generates more competition and prosperity: in the electricity market, in the production of goods and services, in talent management, and in the venture capital market.

A new internal market program that lowers trade barriers to the level between US states could already eliminate half the productivity gap. If labor mobility were also to rise to US levels, European productivity could increase by 20.2 percent.

Artificial Intelligence as an Opportunity

In the coming AI era, Europe should not fall behind again. While major AI developers come primarily from the USA and China, European firms can increase their competitiveness through rapid and efficient application of AI. Innovation will come not only from superstar firms, but also from many startups.

Security Policy and Defense

In the defense sector, Fischer advocates for a European-coordinated, competition-oriented research policy modeled on the American example. This would not only lead to more efficient defense investments, but also promote innovation in the civilian sector.

Key Messages

• Europe has become defensive and must become a shaper again – this succeeds only with more economic growth and integration, not with less

• The productivity gap with the USA is massive (one-third higher per capita GDP), although Europe had nearly caught up by 1995

• Excessive national regulations and trade barriers (44% tariff equivalent in goods trade) prevent rapid growth of European startups and innovation

• An ambitious new internal market program could already close 50% of the productivity gap; higher labor mobility could increase productivity by 20.2 percent

• Europe must accept less nationalism in defense and research and instead invest in new technologies in a coordinated manner

• Switzerland needs a mutually regulated relationship with the EU for its integration, including freedom of movement for persons and new bilateral treaties

• In 2026, Europe should again demonstrate performance incentives, openness to structural change, risk-taking, and entrepreneurship

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