Abstract

Since the official launch of the Trump 2.0 era, the Trump administration has been actively pushing for the resolution of the Russia-Ukraine conflict. To this end, representatives of the Trump administration recently held official talks with senior Russian government officials in Saudi Arabia regarding the formal resolution of the Russia-Ukraine conflict. Although the talks did not produce substantive results, and were strongly opposed by senior officials from the European Union and the Ukrainian government, both high-ranking U.S. and Russian officials expressed their willingness to engage in further contacts. Furthermore, both sides stated that they would continue to discuss and arrange for future diplomatic missions of the U.S. and Russia to resume activities on each other's territories. While the specific outlook still faces many challenges and uncertainties, the formal resolution of the Russia-Ukraine conflict has begun to show some initial rays of hope. As a result, discussions regarding post-conflict issues have gained momentum, such as Ukraine's post-war reconstruction, the future of President Zelensky, and the possibility of renewed conflict between Russia and Ukraine. However, one aspect that has been relatively overlooked by commentators is the future reforms and development direction of the European Union. Throughout the prolonged Russia-Ukraine conflict, the entire world has suffered, and the European Union itself has experienced significant impacts. In recent years, the EU has struggled with high inflation, weak economic growth, a gradual lag in high-tech fields compared to China and the U.S., and the gradual surpassing of its consumer goods production sector by China. Along with internal cultural and value rifts, the EU's overall competitiveness and global influence are showing a clear trend of decline. At the beginning of the century, the EU's ambition to become the "third pole" of the world was steadily becoming an increasingly distant goal. Once a formal ceasefire occurs between Russia and Ukraine, regardless of how the situation unfolds afterward, the EU's internal reforms will have to be placed on the agenda. This article aims to provide a basic overview and analysis of the main issues and key causes faced by the EU, make a preliminary prediction of the EU's possible reform direction, and assess the potential opportunities and challenges China may face in this future trend.

Keywords: Russia-Ukraine conflict, resolution, EU, reform

1. Introduction

After the year 2000, the European Union (EU) underwent three rounds of eastward enlargement. In addition to several previous rounds of expansion, the number of EU member states grew from the original 6 to 27, and the EU itself evolved into a vast regional integration organization. Regarding the EU's eastern expansion, prior research has pointed out that through these three rounds of enlargement, the EU greatly enhanced its international influence, extended its reach of interests, strengthened the appeal of its internal single market, and further boosted its economic competitiveness.

However, during the 2014 Crimea crisis, the EU struggled to respond effectively, failing to resolve significant territorial conflicts near its own borders. After the outbreak of the European sovereign debt crisis, the issue of economic imbalance within the EU became increasingly prominent, and the long-term prospects for sustained economic growth within the EU were questioned. Moreover, after the Hungarian Fidesz party's victory in the 2010 elections and the subsequent formation of a government, a series of "democratic backslides" emerged, leading to a strengthening of right-wing populism within the EU. This has led to a decline in the perceived vitality and attractiveness of the EU's liberal democratic system in the eyes of commentators.

In this regard, renowned EU expert and professor at the University of North Carolina, Konrad H. Jarausch, pointed out that although the EU faced significant challenges between 2010 and 2015, it would ultimately be able to effectively overcome these difficulties and continue to prosper and grow. Jarausch emphasized that the EU, as an organization, possesses three key characteristics: liberal democracy, peaceful multilateralism, and social welfare. These three characteristics are at the core of the EU model and represent its key competitive strengths.

Therefore, although the EU is facing a series of challenges, it is still expected to maintain its competitiveness, increase its involvement in international affairs, and strengthen its international influence. At the same time, after the global spread of the U.S. subprime mortgage crisis, Germany, as the economic powerhouse of Europe, quickly overcame the pressures of the economic downturn and achieved relatively strong growth. This serves as an important foundation for the future development of the EU.

However, after the outbreak of the COVID-19 pandemic and the escalation of the Russia- Ukraine conflict, the EU's economic and social difficulties have deepened comprehensively. Economically, the EU's growth rate has remained sluggish for an extended period, with Germany, as the EU's economic driver, seeing its growth rate approach zero in recent years. Additionally, the EU has been plagued by inflation, consistently failing to meet its target of reducing inflation to 2%.

In terms of technological innovation, the EU has gradually fallen behind the U.S. in cutting-edge technologies and has also started to lag behind China. In the production of ordinary consumer goods, the EU is facing increasing pressure from China in sectors like automobiles and other industries. Socially and culturally, the influence of right-wing populism has continued to grow, while left-wing positions have become increasingly entrenched. The cultural divide and cultural rifts within the EU are deepening.

On the global stage, more recently, in discussions about Ukraine, the U.S. sidelined the EU in its engagement with Russia. This move has severely undermined the EU's international influence.

Over the past three years, the prolonged and unresolved Russia-Ukraine conflict has fully exposed a series of deep-rooted issues within the EU. However, it has also significantly diverted the EU's attention and energy, leaving little room for the EU to deeply consider necessary reform measures. Although the specific outlook remains unclear, the Russia-Ukraine conflict does seem likely to reach a conclusion, or at least a pause. This means that the EU will finally be able to free up its attention to directly confront its own problems and undertake the necessary reforms, as this is crucial for its future development and even survival. As things stand, the EU's reform direction will also have a significant impact on China's economic, trade, and financial cooperation with Europe.

2. The Basic Manifestations of the EU's Predicament

(I) Weakening of Economic Growth

After the gradual lifting of pandemic restrictions in the U.S. and Europe, the EU experienced a moment of high growth in 2021, with an annual GDP growth rate of over 6%. However, the EU's GDP growth rate quickly declined afterward. In 2023 and 2024, the EU's GDP growth rate was less than 1%, while the U.S. was able to maintain a growth rate of over 2%. At the same time, the economic decline of the EU's core economies is particularly pronounced. For Germany, the EU's economic powerhouse, the growth rate for 2023-2024 improved slightly from -0.3% to -0.2%, continuing its trend of negative growth. According to related analysis, Germany's GDP growth rate is expected to recover to 0.2% in 2025, but growth will remain weak. Germany's underperformance directly dragged down the entire EU's economic performance. As for another core country, France, the situation is also not optimistic. In 2023, France's GDP growth rate was about 0.9%, and in 2024, it is expected to be around 1.1%. The economic weakness of both the French and German economies has led to a steady decline in the overall economic growth of the EU.

Furthermore, a longer-term observation reveals that the economic gap between the EU and the U.S. has been steadily widening. Statistical data shows that between 2007 and 2011, the overall economic size of the EU was larger than that of the U.S., with an advantage of around 4%. However, after 2011, the gap between the U.S. and the EU continued to expand. By 2022, the GDP grew to USD 25 trillion, while the combined GDP of the EU and the UK was only USD 19.8 trillion. From 2010 to 2023, the GDP of the U.S. grew by 34%, while the EU's growth during the same period was only 21%, and the Eurozone's growth was even lower at 18%. Since the outbreak of the COVID-19 pandemic, particularly following the escalation of the Ukraine crisis, the economic disparity between the U.S. and Europe has become even more pronounced. From the fourth quarter of 2019 to the fourth quarter of 2023, the U.S. real GDP grew by 8%, while the Eurozone's growth was only about 3%.

(II) Growing Technological Gap with the U.S.

In terms of market capitalization, the total market value of the seven largest U.S. tech companies, namely Apple, Google, Microsoft, Amazon, Meta, Nvidia, and Tesla, is 20 times greater than the combined market value of the seven largest European companies. Over the past decade, the annual average revenue growth rate of major U.S. tech companies has been 27%, while Europe's growth rate has only been 10%. In the past 12 months, the revenue of the seven major U.S. tech companies totaled USD 1.72 trillion, while the revenue of the seven largest European companies was only USD 133 billion. In June 2000, the market capitalization of Finland's Nokia reached EUR 300 billion, which was 15 times larger than Apple's market cap of €20 billion; by December 2023, Apple's market capitalization reached USD 3 trillion, which was 175 times larger than Nokia's market cap. Europe's digital market is essentially monopolized by U.S. high-tech companies. Although the EU has its own tech companies, such as ASML, EU tech companies have been significantly outpaced by the U.S. in terms of economic strength and technological capabilities.

Since 2016, U.S. investment in R&D has grown significantly faster than in the Eurozone. By 2022, U.S. investment in new technologies accounted for 5% of its GDP, while in the Eurozone, it was only 2.8%. In 2022, U.S. R&D spending accounted for 3.5% of its GDP, while the Eurozone's was just 2.3%. At the same time, U.S. labor productivity has grown faster than that of the Eurozone. From 2010 to 2023, U.S. labor productivity grew by 22%, while the Eurozone's only grew by 5%. In 2023, U.S. labor productivity grew by 1.7%, while the Eurozone's declined by 0.6%.

(III) Gradual Decline of Financial Influence

The euro is an important symbol of the European Union's financial power. It was created to promote deeper European integration and was once highly anticipated. Since the euro's introduction in 1999, its international status steadily rose, but since the outbreak of the European sovereign debt crisis in 2010, the euro's international position relative to the dollar began to decline. From the perspective of reserve currencies, in 1999, the U.S. dollar accounted for 71% of global foreign exchange reserves, while the euro accounted for only 17.9%. In 2009, a year before the EU's sovereign debt crisis, the euro reached its peak. That year, the U.S. dollar's share of global foreign exchange reserves dropped to 62.15%, while the euro rose to 27.7%. Following this, due to the ongoing trend of deglobalization and the increasing demand for settlement in national currencies, the U.S. dollar's share of global foreign exchange reserves began to decline. By the end of 2023, it had dropped to 59%, but during the same period, the euro's share also fell to 19.58%. Meanwhile, the euro continued to depreciate against the dollar.

In terms of international trade and financial transactions, the euro's position relative to the U.S. dollar has also been continuously declining in recent years. According to data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), on April 30, 2011, the euro accounted for 38.9% of global payments, higher than the U.S. dollar's 35.3%. However, by July 31, 2023, the euro's share had decreased to 24.4%, while the dollar's share had increased to 46.5%. Furthermore, industry analysts pointed out that, due to the high proportion of intra-EU trade settlements, the international usage of the euro is likely overestimated, which means the actual international usage of the euro is much lower.

(IV) Internal Political Divisions Continue to Intensify

Compared to the establishment faction represented by the U.S. Democratic Party, the EU was an early adopter of so-called "political correctness" and has been more expansive in its approach. It has been more determined, and at times even more extreme, in areas such as environmental protection and the advocacy of minority rights. Analysis suggests that the primary cause of this situation stems from the EU's political integration process after World War II. European elites, reflecting on the tragedy of the war, believed it was necessary to tame the forces of nationalism and focus Europe's values of identity on "neutral" aspects such as democratic rights and democratic procedures. After the war, in the process of European integration, EU elites gradually abandoned the importance of religious identity and shifted toward more abstract universal human rights and minority rights. In the view of EU elites, this shift was both key to EU identity and a crucial weapon in the EU's competition with the U.S. for global ideological influence. As a result, the EU has often gone further than the U.S. in many areas. For instance, in abolishing the death penalty, the EU not only mandates its member states to comply with this requirement but also demands that countries establishing aid partnerships with the EU must advance the abolition of the death penalty.

The EU's ideological demands, which were manageable when integration was still limited to Western Europe, quickly led to a series of political backlashes when integration expanded to Central and Eastern Europe, regions with histories and social realities quite different from Western Europe. Hungary in Central Europe, for example, has been governed for over a decade by the right-wing populist government of the Fidesz party, and Poland has followed a similar path. These two countries have long had intense confrontations with the EU center over specific social policies.

The long-standing radical ideological demands have already sparked significant backlash in the eastern periphery. In recent years, this backlash has spread further into the EU's core regions, with the rise of right-wing forces in France and Germany serving as clear evidence. It is important to note that the EU establishment has a very stubborn stance on a series of values that are foundational to its identity, which suggests that the political divisions within the EU are likely to continue intensifying.

(V) Gap in the Military Field with the U.S. Continues to Widen

After the end of the Cold War, with the easing of Europe's security situation, the EU continuously weakened its efforts to build autonomous defense capabilities and became increasingly reliant on the U.S. for security protection. From the 2014 Crimea crisis to the 2022 Russia-Ukraine conflict, the EU has consistently found itself in a situation of "talking more, doing less" when it comes to defense spending.

From 2008 to 2021, U.S. military spending increased from USD 656 billion to USD 801 billion, while the combined defense spending of the EU's 27 member states and the UK only increased from USD 303 billion to USD 325 billion. A more significant difference lies in the fact that the U.S. investment in new weaponry and equipment technology is more than seven times the combined total of all EU member states. Since the outbreak of the Ukraine crisis in 2022, European countries have once again declared they will increase military spending, but they have still set their defense spending target at only 2% of the GDP. Within the EU, only a few Eastern border countries, like Poland, have met or exceeded this target. The overall defense spending of the EU is expected to remain at just 1.9% of the GDP in 2024, with the poor performance of core countries being the main reason.

3. The Future of the EU's Reform

As of now, the EU remains one of the most developed and affluent regions in the world, with highly advanced socio-economic development and welfare levels. However, facing a series of dilemmas, its global position and influence are experiencing a sharp decline, moving further away from the goal set at the turn of the millennium to establish itself as "the other pole of the world". Hence, reforms are now increasingly urgent. In this regard, several points should be made clear.

(I) The Reform Process Will Be Exceptionally Difficult

When it comes to the EU's development, the series of favorable factors that previously existed have now largely disappeared. The period from 2000 to 2015 was a relatively smooth development stage. During this phase, several external factors were the crucial contributors to this: Russia's cheap energy, U.S. military protection, and China's vast market. U.S. military protection significantly reduced the EU's defense spending, Russia's cheap energy greatly lowered the EU's economic costs, and China's large market provided substantial economic benefits

However, these factors have now undergone a reversal. The EU has shifted to more expensive American energy; the Trump administration will continue to pressure the EU to increase defense spending in the coming years; China's economic slowdown means it is unlikely to provide sufficient returns for EU businesses, while the rise of domestic Chinese companies in general manufacturing poses strong competition for EU firms. The disappearance of favorable conditions, compounded by the current economic difficulties, means that EU reforms will have to take place under very unfavorable conditions, making the process inevitably difficult.

Second, in terms of finance, the EU faces even more restrictions. In 2024, the EU has reinstated the Stability and Growth Pact, and most countries are under pressure to consolidate their finances. They need to keep their fiscal deficits below 3% and government debt ratios below 60%. Currently, 21 out of the 27 EU member states have submitted fiscal consolidation measures to the European Commission, planning to reduce public debt and deficits over the next 4 to 7 years. Unlike the U.S., the EU does not possess the hegemonic power of the euro and cannot "tax" the world by printing more money. Since 2019, the U.S. has increased its public debt by USD 10 trillion. In 2023, the U.S. government spent USD 1.7 trillion more than its revenue. In contrast, the EU cannot do this, either in terms of mechanisms, laws, or in practice. In simple terms, the EU cannot match the US in fiscal terms.

Furthermore, the fragmentation of the internal market within the EU has always been a significant flaw. Former European Central Bank President Mario Draghi previously pointed out that the fragmentation of the EU's internal market has become a major obstacle to its future development. While the EU, as a whole, can still compete with China and the U.S. in terms of specific scientific research achievements, the overly fragmented internal market of the EU makes it difficult to provide sufficient space for the commercialization of research results to help businesses grow and strengthen. In terms of capital markets, as it does not have a unified capital market and lacks large-scale investment funds such as pension funds, any large-scale mergers and acquisitions or initial public offerings (IPOs) almost always rely on American investors and financing institutions. Capital and market factors have become prominent obstacles to the growth of EU tech companies. Moreover, it lacks its own operating system, search tools, and social software. In short, it relies on the U.S. for all of these.

Fourth, the EU's defense autonomy at the European level is fraught with numerous obstacles. This is essentially a byproduct of the fragmentation of the EU's internal market. Fragmentation limits the defense industry's scale, which is essential in capital-intensive sectors with long investment cycles. Moreover, if EU member states greatly increase their defense spending, it could lead to an oversupply, with member states competing against each other in the limited European defense equipment market. Fragmentation also leads to issues with the standardization and interoperability of equipment, problems that were starkly revealed in the EU's support for Ukraine. To cite an example, when it comes to 155mm howitzers, EU member states have provided Ukraine with ten different models of artillery from their inventories, causing significant logistical challenges for the Ukrainian armed forces. In other product areas, such as main battle tanks, EU member states operate twelve different models, while the U.S. only produces one model.

Fifth, the determination and will to persist in reforms are hard to come by. A senior researcher at ANBOUND pointed out that under the operation of the EU establishment faction, the EU has increasingly leaned toward left-wing radicalism ideologically, amplifying the so-called "political correctness". In terms of economic management, the EU's long-standing adherence to high welfare policies, strict regulations, and stringent environmental requirements has severely harmed economic vitality. Given that the EU establishment faction's commitment to its own demands is far stronger than that of its American counterpart, driving and sustaining meaningful reform will likely be a complex and bumpy process. Moreover, regarding defense and aid to Ukraine, after Trump's presidency, European and EU leaders, including those from the UK, have repeatedly expressed their commitment to advancing European defense autonomy and maintaining aid to Ukraine. However, on the most critical issues, they continue to stress that U.S. involvement remains indispensable, with strategic determination still wavering.

Sixth, the rise of right-wing forces across Europe is an undeniable trend. These forces are better equipped to confront the EU's current reality and more effectively represent the actual demands of EU citizens, making them more capable of directly addressing the challenges the EU faces. However, the further expansion of right-wing forces across Europe could also have a negative impact.

Right-wing forces are largely based on nationalist demands, which could revive historical disputes in Europe. After the end of the Cold War, Hungary's new government quickly displayed a strong "Greater Hungary" stance. This position re-emerged in 2010 when the Fidesz party came to power. Tensions arose between Hungary and neighboring countries like Romania over the rights of Hungarian communities in other nations and territorial claims. At right-wing rallies, conflicts between Polish and German right-wing factions also frequently occurred due to historical and territorial issues. Without effective mechanisms to integrate and coordinate these forces, the further rise of right-wing movements across Europe could reignite long-dormant ethnic, religious, and territorial conflicts, deepening divisions within the EU.

(II) Specific Directions for Future EU Reforms

There has already been an abundance of discussions concerning this in both academia and public discourse. EU leaders and member state heads have repeatedly stated their intentions to further promote defense autonomy, increase investment in technology, and enhance the vitality of the internal market. However, a senior researcher at ANBOUND noted that these statements are too vague and somewhat unrealistic. The direction of future EU reforms should be grounded in reality, taking meaningful first steps with actual significance.

Based on an assessment of the EU's development trends, researchers at ANBOUND predict that the most realistically feasible reform option for the EU is to shrink rather than expand, aligning with the trend of de-globalization. Under this reform, the EU would retain integration in "foreign affairs" and finance, i.e., the euro, while leaving everything else to individual member states. Clearly, such a reform would be a painful choice for Europe, but this correction has become an inevitable trend. It is a more viable option than complete disintegration, which would inevitably result in widespread negative effects to all.

Continuing to maintain and advance financial integration can further strengthen the unity of the EU's internal capital markets, help unleash the vitality of the EU's capital, and promote the formation of a unified internal capital market. This would provide more effective financing support for EU businesses, particularly tech companies, which is crucial for the growth and success of European tech enterprises.

In terms of diplomatic integration, the EU has already established a relatively smooth operational mechanism at this level, enabling effective coordination both internally and externally. Moreover, this aspect is one of the most important manifestations of the EU's position on the international stage. Maintaining diplomatic integration and further strengthening coordination within the EU can effectively alleviate potential conflicts between different political forces, particularly right-wing factions, thereby safeguarding the stability of the EU.

It is worth noting that after "downsizing", the EU could significantly reduce regulation, eliminating much of the classic bureaucratic constraints. This in turn would greatly enhance business efficiency. In areas such as social and cultural policies, economic policies, and defense, both the individual positions of member states and their direct cooperation can be given sufficient autonomy, allowing each member state to develop in a way that suits its own realities. This approach would not hinder the EU's unity, while simultaneously adding more internal vitality to it.

4. Conclusion

The EU has recently lowered the specific requirements for the Carbon Border Adjustment Mechanism, while the UK and Germany have started defense cooperation talks, meanwhile Poland and Slovakia have taken similar steps. These developments can be seen as positive, but the critical challenge lies in whether the EU can sustain these efforts over time. Regarding the future trajectory of the EU, the views of Professor Konrad H. Jarausch from the University of North Carolina are both flawed and outdated. The EU is not an admirable or replicable model of effective cooperation. Its business efficiency is poor, bureaucratic practices are rampant, and it prioritizes welfare over economic growth. Additionally, the EU's heavy reliance on taxation has severely impacted both businesses and consumption. The mass exodus of companies from the EU and the issues exposed by the war in Ukraine further highlight these problems.

Due to the European cultural tradition, the EU is unlikely to undergo significant changes in the near future. This will result in an increasing ideological separation between Europe and the U.S., potentially leading to a clear ideological confrontation, which could fundamentally alter transatlantic relations and global dynamics. The U.S. will become increasingly balanced, while Europe grows more radical. In this process, the relationship between China and the EU should not be equated with that between China and individual European countries, and it will be crucial to treat them separately, maintaining a balanced space.

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Zhou Chao is a Research Fellow for Geopolitical Strategy programme at ANBOUND, an independent think tank.