It is easy to see why people around the world feel a mix of envy and admiration when it comes to the lifestyle of Europeans. Paid annual leave often extends to four or five weeks, and work-life balance has become an assumed basic right. Healthcare is free, university tuition is low or even non-existent, unemployment benefits are comprehensive, and pensions are generous. In terms of welfare and leisure, Europe* truly leads the way. This strong sense of confidence is largely thanks to the feeling that life is safeguarded by the system, which gives Europeans the energy to focus on more "lofty" issues. Whether it's carbon neutrality, green transitions, ESG standards, or topics like gender equality, multiculturalism, and immigration, Europe sees itself as at the forefront of global civilization for the world to follow.
This self-assurance is primarily driven not by moral aspirations, but by a solid material foundation. Europe's fortune was amassed through centuries of global colonialism, where monopolizing trade, plundering resources, and accumulating capital led to the largest concentration of wealth the world had ever seen. The wealth accumulated during this period, as recorded in history, laid the foundation for Europe's current economic landscape.
Technological innovation has been another major contributor of Europe's wealth transition. The two industrial revolutions, from the late 18th century to the 20th century, not only created unprecedented levels of productivity but also solidified Europe's position as a global manufacturing hub, laying the groundwork for its subsequent military, technological, financial, and institutional advantages. The post-World War II "Golden Thirty Years" (Trente Glorieuses) marked another leap in European wealth, establishing the high-welfare system that persists to this day. According to OECD data, between 1950 and 1973, Western Europe's GDP per capita grew at an annual average rate of 4.1% to 4.5%, with the overall GDP growth of industrialized nations stable between 5% and 6%. In just 23 years, living standards doubled. During this period, Germany's GDP per capita grew by about 170%, France by around 140%, and Italy made a remarkable rise from the ruins of war to become the world's fourth-largest industrial nation.
Entering the 21st century, Europe's growth trajectory quietly took a downturn. The global financial crisis of 2008 delivered a major blow, and the subsequent Eurozone debt crisis nearly brought Southern Europe's economies to a halt. Meanwhile, Western and Northern European powers were burdened with heavy financial rescue packages. By the mid-2010s, Europe's potential growth rate had fallen below 1%, productivity growth slowed to nearly zero, and the economy lacked significant momentum. Then, in 2020, the COVID-19 pandemic greatly disrupted the supply chain, while the vulnerabilities in technology, industry, and fiscal systems became painfully evident.
The EU's economic growth rate was just 0.8% in 2024, with a forecast of only 0.9% in 2025, leaving the Eurozone trapped in a "zero growth trap". In contrast, across the Atlantic, the U.S. is still able to maintain a growth rate of over 2.5% despite the high-interest rate environment, while China continues to sustain an economic expansion of around 5% amid the global industrial restructuring. As a result, Europe's economy is clearly living off its past gains, with actual economic development stagnating.
Once the heart of global manufacturing, Europe is now facing the dilemma of industrial hollowing out. The first to feel the impact is Germany, the EU's economic engine, which has shown clear signs of stalling. Since 2022, Germany's manufacturing PMI has remained below 50 for over 30 months, falling to 42.5 by the end of 2024. Industrial output plunged by 4.3% in August 2025, reaching levels last seen in 2005, while the automotive industry saw a dramatic decline of 18.5%. Europe's other economic powerhouse, France, is not faring much better. Its PMI has lingered around 44, with orders in key industries like chemicals, machinery, and automotive plummeting across the board. Attempting to retain businesses, Europe has now resorted to simplifying and weakening ESG regulations, including removing the obligation for companies to establish climate transition plans. Once a global leader in green regulation, the EU now finds itself retreating on this front to safeguard its companies, an ironic "policy surrender" to say the least.
Along with sluggish economic growth comes the growing fiscal pressure of maintaining high welfare benefits. Over the past year, three French prime ministers have resigned or been forced to step down due to crises related to budget plans. The immense pressure from high welfare, social security, and pensions has caused repeated deadlocks in the national budget. The market has expressed deep concern about France's fiscal situation, with French government bond yields rising multiple times due to political instability. Against the backdrop of a struggling pension system, France began pension reform as early as 2023, raising the legal retirement age from 62 to 64 and extending the required contribution period from 42 years to 43 years in order to address an expected pension shortfall of over EUR 13 billion annually by 2030. However, the transition from luxury to austerity proved difficult, and France erupted into nationwide strikes, with large-scale protests lasting for months, and Unions vowed to paralyze the country rather than accept any rollback.
A series of data and events has come together to paint a full picture of Europe's structural decline. What then is really happening in Europe? In short, the key driving factor is that the four major dividends that supported Europe's post-war rise are now disappearing simultaneously, while Europe itself has failed to carry out the necessary structural adjustments and reforms in time.
First, Europe's external security dividend is fading.
During the Cold War, the U.S. shouldered the vast majority of Europe's security costs. Europe's military dependence on the U.S. has become even more pronounced since the outbreak of the Russia-Ukraine war. NATO's 2024 report shows that European allies' ammunition stocks have been "severely depleted", particularly 155mm shells, HIMARS rockets, and air defense system munitions such as IRIS-T and Patriot, with Europe's arms supply now almost entirely reliant on the United States. President Trump repeatedly criticized European allies for "free-riding" on defense spending. This criticism was not without basis. According to NATO's defense spending report, in 2024, U.S. defense expenditure will be approximately USD 968 billion, accounting for 66% of NATO's total defense spending, while Germany and France only reached the NATO target of spending 2% of GDP on defense by 2024. In essence, Europe's "low defense spending—high welfare" structure has been maintained with implicit subsidies from U.S. defense investments. In response, Trump publicly demanded that the 32 NATO countries increase their defense spending from 2% to 5% of GDP, threatening to withdraw U.S. troops or reduce aid to Ukraine if the targets were not met.
As the security environment deteriorates, Europe has no other option but to increase its defense budgets. In 2024, Germany was forced to announce its largest military expenditure expansion since its founding, raising defense spending to 2.1% of GDP. Poland went even further, raising its defense budget to 3.9%, making it the highest in NATO. The issue, however, is that these increased defense expenditures are not coming from economic growth but are instead crowding out already strained fiscal space. This means that budgets originally allocated to healthcare, pensions, education, and welfare systems are being redirected towards defense. For European countries with already bloated spending structures and consistently high fiscal deficits, this makes the matter worse.
The second factor undermining Europe's stability is the loss of its energy dividend.
If the security provided by the U.S. created the foundation for Europe's peace, then Russia's cheap energy was indispensable for Europe's industry and everyday life. Before 2021, Russian pipeline gas accounted for 40%-45% of the EU's total natural gas imports, with an annual supply of over 150 billion cubic meters (bcm), and prices only 60%-70% of those for liquefied natural gas (LNG). After the Russia-Ukraine war, Europe attempted to sever its energy dependence on Russia with a bold political stance, but the reality proved far more complex than political slogans. Following the EU sanctions on Russian pipeline gas, imports of Russian LNG surged, setting a new record in 2024, with further increases expected in the first half of 2025. While the EU banned maritime imports of Russian crude oil, countries like India and Turkey became transit hubs for this instead.
Even so, the sharp rise in energy prices has placed enormous profit pressure on Europe's manufacturing sector, leading many businesses to shut down or relocate. In the first half of 2025, while industrial electricity prices in the eurozone were 30% lower than their peak in 2022, they remained in the "warning zone" at EUR 80-100 per megawatt-hour, far above pre-pandemic levels. This has caused average profit margins to decline by 15-20%. Even if Europe gradually frees itself from Russian energy, something that they certainly aim to achieve, the alternative energy sources available will not be able to replicate the previous model in terms of cost and stability. Therefore, the reshaping of the energy structure means the forced rewriting of the industrial structure, and Europe currently does not have enough time to complete this costly transition.
The third collapsing pillar is the dividend of globalization.
Throughout the entire post-war period, Europe's prosperity was largely built on the globalized division of labor. The General Agreement on Tariffs and Trade (GATT, 1947) and the EU Single Market (1993) shifted Europe's labor-intensive and mid- to low-end manufacturing industries to lower-cost regions in Asia and Eastern Europe, while Europe kept the high value-added segments for itself and enjoyed low inflation and high consumer welfare brought by cheap imports. EU multinational corporations earned huge profits through overseas operations and brought those profits back to Europe, which supported its domestic welfare systems. However, the combined shocks of the pandemic and geopolitics have completely upended this arrangement. Supply-chain security has become a core policy concern, and "de-dependency" and "de-risking" have become the dominant themes of global trade. Europe is now forced to pay a high price for reshoring its industrial chains. More importantly, Europe's past competitiveness in globalization came from its technological and market advantages. Today, these advantages are being caught up with, and in some cases, even surpassed by China and other economies. As a result, Europe can no longer easily regain its own industries and capital.
Finally, Europe is also losing its demographic and labor-force dividend.
The continent once benefited from the post-war baby boom and large inflows of immigrants, which provided abundant young workers. Today, however, Europe's native population continues to contract. Although immigration has offset this decline in numerical terms, newcomers are finding it increasingly difficult to integrate into the mainstream labor market. According to Eurostat's 2025 population projections, without immigration the EU's population would fall sharply, from 449 million in 2025 to 409 million in 2050, a drop of 9%. Yet the rapid arrival of new migrants has generated cultural frictions with local societies, and governments have struggled to respond effectively. The result has been social fragmentation, higher crime rates, and the rise of populism. Under mounting controversy, governments have tightened border controls, ultimately undermining the very demographic dividend that immigration was expected to provide.
In addition, labor costs in Europe continue to rise, while generous welfare systems mean that working hours and productivity are significantly lower than in the United States, and this adds to the hidden costs of labor. OECD data show that in 2024, the average weekly working time in the EU was only 34.5 hours, with 33.5 hours in Germany and 34 in France, far below the U.S. average of 38.5 hours. GDP output per hour worked was just USD 67.5 in the EU, compared with more than USD 80 in the United States.
The trend of population aging has also created a fiscal black hole for European countries. As the baby-boom generation retires en masse, Europe's old-age dependency ratio (the population aged 65+ as compared to those aged 15–64) reached roughly 34.5% in 2024, meaning that every three working-age adults now support one retiree, a sharp rise from 25.8% in 2009. As aging accelerates, pension and healthcare systems are becoming fiscally unsustainable, pushing Europe's welfare model toward its breaking point.
When all four major dividends weaken at once, an economy must either undergo fundamental restructuring or drift into decline. Europe has clearly moved toward the latter. It is not that Europe is unaware of its challenges, but the EU's member states have highly diverse economic structures and interests. Their mutual constraints make major reforms exceedingly difficult to implement. The Energy Union remains stalled, fiscal integration progresses only slowly, industrial policy is deeply fragmented, and migration policies swing back and forth. Domestic political cycles further entrench a "reformer loses the next election" dynamic. As a result, on every critical issue, Europe oscillates between two states: delay or compromise. Delay forfeits the window for action; compromise dilutes the force of reform. Over time, the inertia of the system becomes masked by a veneer of stability, until accumulated problems erupt all at once in moments of crisis.
Over the past decade, the U.S. economy, driven by innovation and its capital markets, has continued to expand robustly, while China has been rapidly catching up thanks to the full-chain support of its emerging industries. In contrast, the EU's economic growth has long ranked at the bottom among advanced economies. Today, Germany's manufacturing sector has entered negative growth, France's fiscal deficit remains persistently high, and Europe's overall investment rate is markedly lower than that of the U.S. and East Asia. Its scale of technological innovation and venture capital is insufficient to form a new engine of growth. Europe's relative decline is not a short-term cyclical issue, but a structural and long-term one.
Under such circumstances, Europe's waves of protests, farmers' movements, anti-immigration sentiment, and the rightward shift in politics no longer come as a surprise. High-welfare models can help stabilize society during periods of economic prosperity, but in times of sluggish growth, they often become the fuse that ignites social division. When welfare promises cannot be fulfilled, living costs rise, social mobility stalls, and young people lose confidence in the future, the public naturally begins searching for scapegoats and simple answers. Hence, the political shift to the right across Europe is not something that appears out of the blue, but the inevitable consequence of structural economic decline. According to Ray Dalio's framework on the long-term cycles of great powers, Europe has likely entered a typical downward phase. Europe still possesses a vast market, deep cultural capital, and a high-quality human-capital system, but these strengths are increasingly constrained by structural limitations. Unless Europe undertakes deep restructuring in energy systems, industrial policy, fiscal structure, and technological innovation, its decline will be hard to reverse.
Final analysis conclusion:
The erosion of external security, cheap energy, globalized production chains, and demographic dividends has made it increasingly difficult for Europe to sustain its once-high welfare standards, moral posture, and industrial advantages. According to Ray Dalio's long-cycle theory of the rise and fall of great powers, Europe has already entered a typical downward phase. Viewed in this light, the waves of protests, farmers' movements, anti-immigration sentiment, and the political shift to the right across Europe are no longer surprising. Europe's problems do not lie in the streets but in the economic foundations, which can no longer support its institutional structure.
* Note: In this article, "Europe" refers to the
European Communities, the European Union, and certain Eurozone member states
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Chen Li is an Economic Research Fellow at ANBOUND, an independent think tank.
