How the EU faces an existential test as the world’s two superpowers push Europe toward strategic irrelevance
INTRODUCTION: THE END OF THE COMFORTABLE ERA
Europe stands at a defining moment. For decades, the continent thrived on a comfortable formula: deep economic integration, American security guarantees, and access to global markets. That era is over. Today, Europe finds itself squeezed between two incompatible forces—China’s export-driven industrial offensive and America’s increasingly transactional approach to alliances. The result is not just economic pressure but an existential threat to Europe’s prosperity, security, and geopolitical relevance.
As World Bank chief economist Indermit Gill recently warned: “Japan can be stagnating and stable. If Europe stagnates it will not be stable.” This stark assessment captures the unique vulnerability of a continent where economic decline threatens to unravel not just prosperity but social cohesion, democratic institutions, and political stability itself.
The challenge facing Europe is unprecedented in the post-war era. Unlike previous economic downturns or geopolitical tensions, today’s crisis is structural and multifaceted. Europe must simultaneously confront Chinese industrial competition that threatens to hollow out its manufacturing base, an unpredictable American partner that views the continent with growing hostility rather than solidarity, internal political paralysis that prevents decisive action, and mounting defense costs that strain already-stretched public finances. Each challenge alone would be formidable. Together, they represent a potential death spiral for European competitiveness and influence.
PART I: THE CHINA SHOCK 2.0
The Scale of the Industrial Challenge
The first wave of China’s industrial rise centered on textiles, consumer goods, and eventually electronics. Europe, while affected, largely managed the transition by moving up the value chain. The second China shock is fundamentally different—it targets the very sectors Europe considered its industrial crown jewels: automobiles, green technology, and advanced manufacturing.
Chinese overcapacity is not a temporary phenomenon but a structural feature of China’s economic model. Facing domestic demand weakness and a property sector crisis, Beijing has doubled down on manufacturing exports as the path to economic stability. The result is a flood of products hitting European markets at prices that European manufacturers simply cannot match.
The numbers are staggering. Chinese manufacturers can produce battery cells at costs 20-35% lower than European competitors. In electric vehicles, Chinese brands now account for one in four EVs sold in the EU—a dramatic rise from nearly zero in 2019. These vehicles retail at an average of €32,000, compared to much higher prices for European equivalents. The gap reflects not just labor costs but integrated supply chains, massive economies of scale, and substantial state support.
The Automotive Crisis
Europe’s automotive industry, which employs millions and forms the backbone of industrial employment in countries like Germany, Italy, and France, faces an existential crisis. The industry’s challenges stem from what analysts now call a “China shock” rather than an “electric vehicle shock.”
European carmakers pursued “value over volume” strategies, focusing on premium models to protect profit margins. This left the mass market wide open for Chinese competitors. When more affordable European models finally arrived in 2025, sales rebounded—EV registrations rose 30% across the EU in the first eight months of 2025—proving that demand exists when prices fall.
But the damage may already be done. Chinese firms like BYD, Geely, and SAIC have established formidable positions across the entire EV value chain—from raw material extraction and refining to battery production and final assembly. They benefit from decades of industrial policy, integrated supply chains, and a domestic market that provided both scale and intense competition, driving down costs and spurring innovation.
European carmakers face a daunting list of challenges: semiconductor shortages that persisted since COVID-19, soaring energy costs (roughly three times those in the US), Chinese export restrictions on rare earths and permanent magnets, punitive US tariffs under the Trump administration, and the surge of affordable Chinese EVs that consumers increasingly view as comparable to Western rivals.
The Battery Dilemma
The battery sector illustrates Europe’s bind. Since 2017, companies have invested €38 billion in European battery manufacturing facilities. As of September 2025, European factories had capacity to produce 251 gigawatt hours (GWh) of battery cells annually—meeting approximately two-thirds of domestic demand.
This sounds promising until you examine who’s building these factories. Foreign investment, initially from South Korean companies but increasingly from China, has been responsible for most battery investment. Chinese firms like CATL are building massive facilities across Europe, from Hungary to Portugal.
Europe faces a strategic dilemma: it needs this investment to meet its climate goals and maintain an automotive industry, but accepting it means becoming dependent on Chinese companies for critical technology. The alternative—purely European battery champions—has proven difficult. The struggles of Northvolt, once seen as Europe’s great hope for battery independence, symbolize broader challenges. At least 100 GWh of planned EU-led capacity was cancelled or delayed in autumn 2024 alone.
European players are mainly startups facing scaling difficulties, higher costs, and competition from established Asian giants. Meanwhile, Chinese battery makers benefit from integrated supply chains, government backing, and production experience that European firms lack.
Beyond Automotive: The Broader Industrial Threat
The China challenge extends far beyond cars and batteries. Chinese manufacturers hold dominant positions in solar panels, wind turbines, heat pumps, and other green technologies essential for Europe’s energy transition. In each sector, the pattern is similar: Chinese companies leveraged massive domestic markets, integrated supply chains, and state support to achieve cost advantages that European competitors struggle to match.
Simulations by the European Central Bank suggest that if Chinese subsidies in EVs follow a trajectory similar to the solar PV industry, EU domestic production would decline by 70% and European producers’ global market share would fall by 30%. The solar precedent is sobering—Europe once led in solar technology but now imports most of its panels from China, with domestic production nearly extinct.
This matters beyond economics. As Europe loses industrial capacity in critical sectors, it loses technological know-how, skilled workforces, and the ability to innovate. The risk is not just becoming an importer but being locked into low-value segments of global supply chains—a client market rather than an industrial power.
PART II: THE AMERICAN SQUEEZE
From Alliance to Transaction
If China represents an external industrial threat, America under Donald Trump represents something perhaps more psychologically difficult for Europeans to process: the transformation of their most important ally into an unpredictable, often hostile actor.
The Trump administration views Europe not as a valued partner but as a competitor and, in some cases, adversary. This manifests in multiple ways: pressure campaigns aimed at undermining EU institutions, support for far-right parties that oppose European integration, demands that Europe dismantle digital regulations that affect American tech companies, and threats of massive tariffs on European goods.
The defense dimension adds another layer of pressure. At the June 2025 NATO Summit in The Hague, allies agreed to increase defense spending to 5% of GDP by 2035—including 3.5% on traditional defense items and 1.5% on defense-related infrastructure and resilience measures. This represents a massive increase from the 2% target that most European nations only recently achieved.
In 2024, defense expenditure reached 1.9% of EU member states’ GDP, up from 1.6% in 2023, with 2025 expected to reach 2.1%. For the first time, all NATO allies are expected to meet or exceed the 2% threshold. But Trump’s demands go further. His administration has explicitly threatened to reduce American security commitments unless Europe dramatically increases spending and purchases more American weapons.
The Economic Cost of Defense
The defense spending increases, while addressing legitimate security concerns following Russia’s invasion of Ukraine, create enormous fiscal pressures. European Commission simulations show that meeting the new NATO targets will require an additional fiscal effort of 0.4 percentage points of GDP on average for the 2029-2033 planning period.
This comes atop existing spending pressures from an aging population, the digital transition, and climate investments. The national escape clause of the EU’s Stability and Growth Pact provides temporary flexibility, but over the medium term, public finances will need rebalancing to absorb expanded defense expenditure.
The challenge is not just the quantity of spending but ensuring it translates into actual capability. Europe currently maintains 178 different defense systems compared to only 30 in the United States. There are 12 European types of battle tanks versus one American type. This fragmentation represents massive inefficiency—but fixing it requires political coordination that Europe has consistently failed to achieve.
Some argue well-designed defense spending could stimulate growth, particularly if focused on research and development and dual-use infrastructure with civilian applications. However, realizing these benefits requires producing military goods in Europe rather than importing them—and here Europe faces a problem. Over 30% of European defense equipment procurement comes from imports, much of it from the United States.
The Trump administration’s pressure thus creates a double bind: Europe must spend vastly more on defense, but much of that spending will benefit American rather than European industry, further undermining European industrial capacity while failing to build genuine strategic autonomy.
The Trade War Threat
Beyond defense, Trump’s threatened tariffs represent a direct assault on European economic interests. European exports to the United States, particularly in automobiles and machinery, face potential duties that would devastate key industries already reeling from Chinese competition.
The unpredictability is itself destabilizing. European companies face impossible planning challenges when they cannot know whether their products will face 10%, 25%, or higher tariffs, or whether tariffs will be imposed, withdrawn, and reimposed based on presidential whim rather than consistent policy.
This uncertainty compounds Europe’s investment climate challenges. Why would a company invest in new European capacity when it might face both Chinese price competition and American tariff barriers? The rational response is to hedge—perhaps moving production to markets with more stable access to both regions. But this “rational” response accelerates European deindustrialization.
PART III: INTERNAL PARALYSIS AND STRUCTURAL WEAKNESS
The Diagnosis Without the Cure
Europe’s predicament is well-diagnosed. Mario Draghi’s September 2024 competitiveness report laid out the challenges with clarity: fragmented markets, overregulation, underinvestment in innovation, energy cost disadvantages, and demographic decline. The Letta report on the single market reached similar conclusions.
The problem is not understanding what’s wrong but mobilizing the political will to fix it. The proposed responses have been timid relative to the scale of the challenge. The EU competitiveness fund amounts to only 0.2% of EU GDP split among 27 countries over seven years. This is not a Marshall Plan—it’s barely a rounding error in the overall European economy.
Why the paralysis? Several factors contribute:
First, the fundamental tension in European governance: the EU can identify continent-wide challenges but lacks the fiscal capacity and political authority to respond at the necessary scale. Member states retain control over taxation, spending, and key industrial policy decisions, making coordinated action difficult.
Second, the political fragmentation within member states. Many European countries face coalition governments or minority governments with limited ability to push through significant reforms. Populist parties, often funded or supported by external actors, successfully mobilize opposition to European-level solutions.
Third, the legacy of austerity. The eurozone crisis and subsequent fiscal consolidation created deep political scars. Proposing significant joint borrowing or fiscal expansion triggers opposition from creditor countries that see such measures as backdoor transfers.
Fourth, different national interests. Germany’s export-oriented model makes it wary of measures that might provoke Chinese retaliation. Countries hosting Chinese investment, like Hungary, actively resist coordinated responses. Southern European countries focused on tourism and services see industrial policy differently than manufacturing-heavy northern countries.
The Energy Cost Problem
Europe’s energy costs represent a structural disadvantage that won’t be easily resolved. After cutting ties with cheap Russian gas, Europe now pays roughly three times what American manufacturers pay for energy. Liquefied natural gas imports, while providing energy security, come at premium prices.
The push for renewable energy, while environmentally necessary, creates transition challenges. Intermittent power requires backup capacity and grid investments. Industrial users need reliable, affordable power—and currently, Europe struggles to provide both.
This energy disadvantage alone makes certain types of manufacturing uncompetitive in Europe. Energy-intensive industries—steel, chemicals, aluminum—face impossible cost structures. Some have already relocated or shut down. The result is not just lost production but lost technological capabilities that will be difficult to rebuild.
The Demographic Time Bomb
Unlike China’s industrial challenge or America’s political pressure, Europe’s demographic decline operates on a slower timeline—but may ultimately prove most consequential. Europe’s working-age population is shrinking while its retired population grows rapidly.
This creates multiple problems: fewer workers to support more retirees, straining pension and healthcare systems; reduced innovation and entrepreneurship associated with younger populations; and smaller domestic markets making it harder to achieve scale economies.
Immigration could theoretically address demographic decline, but it remains politically explosive. Far-right parties have gained ground across Europe partly by opposing immigration. Mainstream parties, fearful of losing voters, have adopted increasingly restrictive positions. The result is that Europe fails to attract the talent it needs while simultaneously creating social tensions around immigration.
The Fragmentation Problem
Perhaps Europe’s deepest challenge is fragmentation—the inability to act as a unified market and political entity despite formal integration. This manifests in multiple ways:
In industrial policy, member states pursue competing strategies, offering subsidies to attract the same Chinese investments, creating a race to the bottom rather than a coherent European approach. The Hungarian example, where Budapest offered major subsidies to BYD for an electric vehicle plant with minimal EU-level coordination, illustrates the problem.
In fiscal policy, the absence of significant joint borrowing capacity means European-level responses to crises remain inadequate. The EU’s post-COVID recovery fund represented progress but remains an exception rather than the norm.
In regulation, while Europe prides itself on the Brussels effect—its ability to set global standards—regulations are often poorly implemented and inconsistently enforced across member states. Companies face 27 different administrative systems, languages, and business cultures, negating the supposed advantages of a single market.
In defense, as noted earlier, Europe maintains redundant systems, incompatible equipment, and separate command structures. Talk of “strategic autonomy” remains mostly talk because the political will to pool sovereignty in defense matters remains weak.
PART IV: EUROPE’S STRATEGIC OPTIONS
The Uncomfortable Truth
Europe faces difficult choices, each with significant drawbacks. There is no painless path forward, and the political difficulty of explaining this to European publics partially explains the inadequate policy responses.
Option 1: Managed Decline and Accommodation
One option, perhaps the path of least resistance, is to accept reduced global influence and adapt to a bipolar world. In this scenario, Europe focuses on preserving social welfare systems, maintaining quality of life for its population, and managing decline as gracefully as possible.
This might involve accepting Chinese dominance in certain industrial sectors while focusing on niche high-value segments where European companies can compete. It would mean accepting American security guarantees on Washington’s terms. It would prioritize consumption over investment, welfare over competitiveness.
The problem with this approach is that, as Indermit Gill noted, Europe cannot stagnate stably. Economic decline will fuel political extremism, undermine social cohesion, and potentially unravel European integration itself. A weak, divided Europe becomes a playground for external powers rather than a partner. Strategic irrelevance might be tolerable for a united, wealthy Europe. For a fragmenting, declining one, it’s a recipe for crisis.
Option 2: Trade Barriers and Protectionism
Europe could erect higher barriers against Chinese imports, particularly in strategic sectors like automotive and batteries. The EU has already imposed tariffs on Chinese EVs, though these remain lower than what would be needed to fully protect European producers—some estimates suggest duties of 40-50% would be necessary to make Chinese EVs uncompetitive.
More aggressive protectionism would buy time for European industry but comes with costs. It would increase consumer prices, potentially triggering Chinese retaliation against European exports, slow Europe’s climate transition by raising costs of green technology, and risk locking Europe into technological backwardness if Chinese firms continue innovating while European firms are sheltered from competition.
There’s also the political economy problem: protectionism tends to benefit concentrated producer interests while imposing dispersed costs on consumers and downstream industries. It often creates complacent, inefficient industries rather than dynamic, competitive ones. Europe’s historical experience with industrial protection is mixed at best.
Option 3: Industrial Policy and Massive Investment
A more ambitious approach would involve European-level industrial policy backed by significant joint financing. This would mean: large-scale investment in key technologies through genuine European champions, not just national ones; coordination of member state policies to prevent competitive subsidization; serious investment in infrastructure, particularly energy and digital; reform of the single market to make it genuinely unified; and potentially joint debt issuance on the scale of hundreds of billions of euros.
The Draghi report pointed in this direction, though its recommendations have been largely ignored. This approach requires political courage because it means: wealthier member states accepting fiscal transfers, all member states accepting more EU-level authority over industrial policy, and painful restructuring of uncompetitive sectors rather than just subsidizing them.
The challenges are immense, but the logic is clear: Europe cannot compete with China’s scale or America’s market size as 27 separate economies. Only by genuinely pooling resources and acting as a single market can Europe achieve the scale economies necessary for industrial competitiveness.
Option 4: Strategic Hedging and Selective Partnerships
A fourth approach involves strategic hedging—building partnerships beyond traditional allies while selectively engaging with both China and America. This might include:
Deepening ties with other democracies: Japan, South Korea, Australia, India. Diversifying supply chains through friend-shoring arrangements. Maintaining economic engagement with China in non-strategic sectors while protecting critical ones. And negotiating with America from a position of greater independence rather than dependence.
This approach requires Europe to develop capabilities it currently lacks: significant defense capacity independent of America, economic heft to offer attractive partnership terms, and political unity to speak with one voice internationally.
The appeal of hedging is that it avoids picking sides in a new Cold War. The problem is that both Washington and Beijing increasingly demand that partners choose. Hedging only works if Europe has leverage—and Europe’s current weakness limits its bargaining power.
Option 5: The Comprehensive Response
Realistically, Europe needs elements of all these approaches. A genuinely effective strategy would combine:
Selective protection of truly strategic sectors while maintaining openness in others; massive investment in competitiveness funded by joint European borrowing; reform of the single market to make it genuinely unified; significant defense investments in European rather than American equipment; streamlined regulation that maintains high standards while reducing bureaucratic burden; energy policies that balance security, cost, and climate goals; immigration policies that attract global talent; and diplomatic efforts to build partnerships beyond America and China.
This comprehensive approach requires political leadership willing to explain difficult tradeoffs to European publics. It requires wealthier member states to accept fiscal burden-sharing. It requires all member states to accept meaningful pooling of sovereignty. Most fundamentally, it requires a sense of urgency that current European politics largely lacks.
PART V: THE RACE AGAINST TIME
What’s At Stake
If Europe fails to meet this moment, the consequences extend far beyond economics. A weak Europe cannot be a force for liberal democracy globally. It cannot provide a counter-model to Chinese authoritarianism or American dysfunction. It becomes a place where great powers compete rather than a great power itself.
For European citizens, failure means declining living standards, particularly relative to other developed countries. It means reduced opportunities for younger generations. It means increased migration pressures as economic stagnation combines with climate change to make Europe relatively less attractive. It means social tensions as the middle class shrinks and populist movements grow stronger.
For the world, European weakness creates a vacuum. Europe’s unique combination—market economy with social welfare, liberal democracy with strong institutions, multilateralism with rule-based order—represents an important alternative model. If this model fails, it strengthens arguments for alternative systems, whether Chinese state capitalism or American-style capitalism with minimal social protection.
Signs of Hope?
It’s not all bleak. Some European countries show elements of the necessary response. Poland has dramatically increased defense spending while maintaining economic growth. The Baltic states take security seriously. Denmark combines openness with strong social safety nets. Ireland attracted massive foreign investment while maintaining European values.
At the EU level, the Next Generation EU recovery fund demonstrated that joint borrowing is possible when the crisis is acute enough. The recent agreement on semiconductor investments shows Europe can coordinate when it chooses to. The EU’s regulatory power, while sometimes overused, does force global companies to meet European standards.
Germany’s announced shift toward expansionary fiscal policy, if implemented, could provide stimulus across the continent. France continues to punch above its weight diplomatically. The EU’s ability to impose tariffs and use its market power to shape corporate behavior shows it’s not entirely toothless.
But these positive signs need to accelerate and scale dramatically. The window for effective action is narrowing. Chinese industrial capacity keeps growing. American patience with Europe keeps declining. Europe’s demographic challenges keep intensifying. The longer Europe waits to act decisively, the fewer options it will have.
The Political Challenge
Ultimately, Europe’s challenge is political more than economic or technical. The continent has resources, human capital, technological capabilities, and institutional foundations to remain globally competitive. What it lacks is the political will to use these assets effectively.
This requires leaders willing to explain uncomfortable truths: that maintaining current living standards requires painful changes; that preserving European values requires paying for European defense; that competing with China requires accepting some Chinese investment while blocking other forms; that the single market needs completion even if that disrupts protected national champions; that climate goals and industrial competitiveness must be balanced rather than treated as identical; and that European solidarity requires rich countries to help poorer ones rather than just lecturing them.
European politics makes these conversations difficult. Coalition governments, proportional representation systems, and consensus-oriented political cultures all have advantages—but they make rapid, decisive action hard. The EU’s requirement for unanimity on key decisions gives small countries veto power over necessary reforms.
Changing this requires either constitutional reform—politically near-impossible—or creative use of existing mechanisms. Enhanced cooperation, where subsets of member states move forward on issues, offers one path. Making more decisions by qualified majority rather than unanimity offers another. Building coalitions of willing member states on specific issues offers a third.
CONCLUSION: CAN EUROPE ESCAPE THE SQUEEZE?
Europe can escape the Sino-American squeeze, but only if it acts with urgency and unity that have so far been absent. The comfortable post-Cold War era is definitively over. Europe must adapt to a world where economic competition is fierce, security is uncertain, and neither traditional ally America nor emerging power China has Europe’s best interests at heart.
The path forward requires confronting uncomfortable realities. Europe cannot compete with China’s scale or America’s market size as 27 separate economies pursuing competing strategies. It cannot defend itself while maintaining only marginal military capabilities and fragmenting defense spending across incompatible systems. It cannot attract global talent while making immigration politically toxic. It cannot transition to clean energy while keeping energy costs far above competitors’. It cannot regulate everything while wondering why innovation happens elsewhere.
But Europe also has unique advantages worth preserving: social cohesion that America lacks; democratic legitimacy that China lacks; quality of life that draws global talent; strong institutions with international credibility; technological capabilities in key sectors; and a model of development that balances economic dynamism, social protection, and environmental sustainability.
The question is whether Europe will mobilize these advantages before it’s too late. History suggests that Europe often acts decisively only when crisis becomes acute—the euro crisis eventually prompted institutional reforms; the migration crisis eventually led to better border management; COVID-19 led to joint borrowing. Perhaps the current triple squeeze—China’s industrial offensive, America’s transactional turn, and internal economic stagnation—will finally prompt the comprehensive response Europe needs.
But history also shows that delayed responses often come too late. By the time Europe built its defense capabilities after World War I, another war was coming. By the time Europe addressed its competitiveness issues after the oil shocks, its global market share had permanently declined. By the time Europe reformed its banking system after 2008, immense economic damage had occurred.
Europe stands at a crossroads. One path leads to managed decline, strategic irrelevance, and potentially political disintegration. The other leads to renewal—but only through painful reforms, significant investments, and genuine pooling of sovereignty that current European politics resists.
The next few years will determine which path Europe takes. The decisions made—or not made—by European leaders today will shape the continent’s trajectory for decades. The comfortable era is over. The question is whether the Europe that emerges from the current squeeze will be stronger and more united, or weaker and more divided. The answer depends on choices European leaders and citizens make now, not on external forces they cannot control.
Europe has been counted out before and surprised skeptics. Perhaps it will do so again. But this time, the margin for error is smaller, the challenges more fundamental, and the time to act shorter than ever before. Can Europe escape the Sino-American squeeze? The capability exists. Whether the will follows remains to be seen.