By Greg Ip

"I love Europe," newly inaugurated U.S. president Donald Trump proclaimed to the World Economic Forum in Davos last week. Yet there was also much he did not love, such as that time back in his days as a property developer when he gave up a project in Ireland because, he said, European Union approval would take five or six years. "I'm trying to be constructive," Trump said.

The global elites who swarm the Swiss ski resort every January don't agree with Trump on much, but on one issue, their minds melded: Europe is in deep trouble. It faces "an existential threat," European Central Bank President Christine Lagarde said. BlackRock chief executive Larry Fink called Europe's much-vaunted single market "a beautiful myth."

The CEO of one European insurer marveled over the contrast with the U.S.: "It's almost like they're on drugs. Everybody's talking about growth, growth, growth. And then you come to Europe, and everybody's depressed."

Hand-wringing over Europe's fate is a well-established pastime. For two decades it seems the continent has been either in crisis or on the brink of one: the near-collapse of the euro, a massive influx of refugees, Britain's exit from the EU, Russia's invasion of Ukraine.

But this moment feels different. No single, acute crisis explains the pessimism; it's a complex of pathologies.

Almost everything has gone wrong for Europe in the past few years. It has struggled with Covid, a spike in the cost of energy and the rise of far-right parties who despise the European project. China threatens its markets, Russia threatens its territory, and Trump threatens both.

Since the end of 2019 the EU has grown 5% while the U.S. has expanded 12%. Seven U.S. stocks are worth more than the stock markets of Britain, Germany, France, Italy, Spain and Switzerland, combined.

Trump's arrival has crystallized latent fears. Europeans worry they will fall further behind as deregulation, tax cuts and cheap energy draw investment to the U.S. and tariffs cripple economies (especially Germany's) that lack sufficient demand of their own. They are dismayed by Trump's readiness to attack America's purported allies: He has threatened tariffs and refused to rule out military force against Denmark, a NATO member, to take control of Greenland. "Tariffs against friends and allies is a crazy idea," Finland's foreign minister Elina Valtonen complained.

Still, whatever their frustration with Trump, Europeans see their mess as mostly their own making.

At the founding of the European project in 1958, its overriding purpose was to tear down barriers to competition and trade among members and to create an internal market with the same freedom of movement, scale and efficiency as the U.S. Its executive body, the Brussels-based European Commission, may be the last bastion of neoliberalism -- the doctrine that free trade and free markets best promote prosperity.

But sometime in the last 15 years, the bloc's priorities shifted, from prosperity toward protection -- of privacy, of data, of the climate. A tsunami of regulation on everything from website disclosures to carbon emissions followed.

Those priorities look badly out of step with today's reality. Having pushed so hard to rein in big tech companies, Europeans now lament that they have none of their own.

Some of this, Europeans claim, reflects their more risk-averse culture. "The United States has a culture of confidence; Europe has a culture of modesty," the International Monetary Fund's chief, Bulgarian-born Kristalina Georgieva, told one panel in Davos.

Maybe so, the C-suite responds, but political leaders are making it worse.

When U.S. stocks tanked last week on news of advances by China's DeepSeek AI company, Europe's markets were mostly unaffected -- because Europe is not a player in artificial intelligence.

The only aspect of AI where Europe leads is its regulation, like the AI law passed last year. The AI regulation is "sometimes so contradictory that you don't even know how to fulfill it," said Roland Busch, chief executive of German technology company Siemens.

Corporations once changed their behavior around the world to comply with Brussels's edicts. The risk now is they simply pass Europe by. Apple, Meta and Google all delayed or withheld some AI product features from Europe out of regulatory concerns. At a Wall Street Journal event in Davos, Rachel Reeves, the British chancellor of the exchequer, made a pitch for AI investment in her country since, unlike the EU, "We don't regulate to death."

Meanwhile, the single market remains incomplete. The eurozone lacks truly pan-European banks comparable to America's big four. Siemens must deal with four or five telecom companies in each of the EU's roughly two dozen markets, Busch said. "We don't have one market. When you're a startup and you want to scale, I mean, where do you go? You go to the United States."

Five years ago the European Commission unveiled the "European Green Deal, " an ambitious plan to make the continent carbon neutral by 2050. The costs seemed bearable when the U.S. was headed in the same general direction. But not now. One European official confided that he worried less about tariffs -- which could be offset by a weaker euro -- than about Trump's promise to unleash American energy. He feared it would prove an irresistible lure to European companies laboring under sky-high energy prices and green compliance.

Exxon Mobil has roughly twice the sales but six times the market value of BP. The reason, according to one investment banker: Exxon's shareholders expect it to prioritize oil and gas production while BP's expect it to prioritize renewable energy, which isn't as profitable. That could make BP a takeover target.

In fact, European governments are stalked by fear that companies will simply pull up stakes and move to the U.S. in search of higher valuations, lower regulation and protection from Trump's "America First" agenda.

When Börje Ekholm, chief executive of Swedish telecom equipment giant Ericsson, met with the Journal a year ago at Davos, he was withering in his criticism of European regulators. They have "prioritized shorter-term low consumer prices at the expense of quality infrastructure." When we met this year, he allowed that Europe was starting to wake up, noting last year's report on slumping competitiveness by former ECB president Mario Draghi.

And yet in the past year, the U.S. has grown to account for nearly half of Ericsson's net sales. Ericsson donated $500,000 to Trump's inauguration committee. Asked if Ericsson would move its headquarters to the U.S., Ekholm, who already lives there, responded, "We are Swedish-based. But I think every company in Europe will need to think about this going forward."

Some of the vituperation directed at Brussels is misplaced. Britain has lagged the U.S. just as badly despite removing itself from the EU. Some of the U.S.'s outperformance is simply because it was willing and able to go deeper into debt to address the pandemic. It is running the largest budget deficit as a share of economic output among advanced economies. And it alone has the "exorbitant privilege" (as a former French finance minister put it) of borrowing in the world's reserve currency.

The U.S. is also blessed with vast reserves of oil and gas that became much more valuable when Russia was ostracized. In his competitiveness report, Draghi pointed out that finding alternatives to Russian energy had cost Europe more than a year of growth. At the same time, Trump's race to abandon alternative energy and push fossil fuels may come at a long-run price to the climate, a prospect underscored by costly extreme weather events.

With time, America's fiscal profligacy and Europe's energy woes will cease to be sources of European underperformance.

Indeed, some in Davos argued that the gloom is not entirely justified. The fundamentals for economic recovery are in place, insisted Dutch central bank president Klaas Knot. "We see continual improvement in real income, consumers are sitting on a pile of savings, our labor market is producing full employment, and, on the margin, interest rates are becoming less restrictive. A recovery is postponed, but it is not canceled."

The received wisdom at Davos has often proved to be a contrarian indicator, which suggests that this might be the bottom for Europe. "There's too much pessimism in Europe," BlackRock's Fink told a panel, even "for somebody who's been pessimistic on Europe for, like, 10 years. I believe it's probably time to be investing back into Europe."

In European capitals, a rethink of regulation is already under way. Britain is delaying implementation of the latest bank capital rules. Germany has proposed delaying for two years European green disclosure rules that would have required companies to report at least a thousand data points.

Davos attendees may not be Trump's biggest fans, but more than a few think he is the wake-up call Europe needs.

Europeans are fond of quoting Jean Monnet, one of the EU's founding fathers: "I have always believed that Europe would be built through crises."

Alex Ward, James Mackintosh and Emily Glazer contributed to this article.

(END) Dow Jones Newswires

January 31, 2025 11:46 ET (16:46 GMT)

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