The Ukraine war revived the transatlantic alliance. But the relationship between the US and its European allies has become increasingly uneven.
The US economy is now richer and more dynamic than the EU or the UK – and the gap is widening. This will have implications far beyond relative living standards. Europe’s dependence on the US for technology, energy, capital, and military protection is gradually undermining any aspirations for “strategic autonomy” the EU may have.
In 2008, the EU and US economies were roughly equal in size. But their economic fortunes have diverged dramatically since the global financial crisis. As Jeremy Shapiro and Jana Puglierin of the European Council on Foreign Relations pointed out: “In 2008, the EU’s economy was slightly larger than that of the US: $16.2 trillion vs. $14.7 trillion. By 2022, the US economy would have grown to $25 trillion, while the EU and UK combined would reach $19.8 trillion.” The size of the economy is now almost a third larger. It is more than 50% larger than the EU without the UK.”
The total numbers are staggering. Underpinning them is a picture of Europe falling behind sector by sector.
The European tech scene is dominated by U.S. companies such as Amazon, Microsoft and Apple. The seven largest technology companies in the world by market capitalization are all American. There are only two European companies in the top 20 – ASML and SAP. While China has developed its own domestic tech giants, European champions have often been acquired by American companies. Skype was acquired by Microsoft in 2011; DeepMind was acquired by Google in 2014. The development of artificial intelligence is also likely to be dominated by American and Chinese companies.
The EU lacks top-tier universities that fund U.S. tech startups.this Shanghai and this The rankings of the world’s top universities have only one EU institution in the top 30. (The UK does it better – courtesy of Cambridge, Oxford, Imperial and others.)
In 1990, Europe produced 44% of the world’s semiconductors. That figure is now 9 percent; compared to 12 percent in the United States. Both the EU and the US are rushing to build up their capabilities.However, although the U.S. expected With 14 new semiconductor fabs set to start production by 2025, Europe and the Middle East will add just 10 — compared with 43 new fabs in China and Taiwan.
Both the U.S. and the EU hope to reverse that with ambitious industrial policies that provide public finances and incentives for chipmakers and electric vehicle makers. But the dollar’s status as the world’s reserve currency allows Americans to fund their ambitions without rattling markets. As one European industrialist put it: “They just swipe their credit cards.” By comparison, the EU has a much smaller budget and has only just started issuing common debt.
There is also easier access to private capital in the US. Paul Achleitner, chairman of Deutsche Bank’s global advisory board, said Europe was now “almost completely dependent on US capital markets”. He told me that there are very few large pension funds in Europe that have deep exposure to U.S. capital markets, adding: “If you want to do anything big — whether it’s an acquisition or an IPO — you always go back to U.S. investors.” The EU has repeatedly talked about creating a “capital markets union” that would give Europe some degree of US scale. But progress has been lacklustre.
Unlike Europe, the US also has an abundant and cheap domestic energy supply. The shale revolution means the US is now the world’s largest producer of oil and natural gas. Meanwhile, energy prices in Europe have soared. The war in Ukraine and the loss of cheap Russian gas mean that European industry typically pays three to four times as much for energy as its American rivals. Gloomy European bosses say this has led to the closure of European factories.
Some in the UK might be tempted to see all this as evidence that within the EU, the UK is “chained to a corpse” and that Brexit is a good move. But outside the European single market, the UK is suffering from an exaggerated version of the problems of size that plague the EU itself. As a result, British industry has fallen behind.
So is there really no field in which Europe is leading the world? Some proudly point out that the size of the EU’s single market means companies around the world have to adopt European regulations – the so-called “Brussels effect”. But it is clearly better to lead the world in creating wealth than in regulating it.
Europe really does well in the ‘lifestyle’ sector. Nearly two-thirds of the world’s tourists come to Europe. The luxury market is dominated by European companies. Football is the most popular sport in the world, dominated by European teams – although many of the biggest clubs are now owned by Middle Eastern, American or Asian investors.
Europe’s dominance of the lifestyle industry shows that life on the Old Continent still holds an appeal for many. But maybe that’s part of the problem. Without a greater sense of threat, Europe may never muster the will to reverse its inevitable decline in power, influence and wealth.
gideon.rachman@ft.com