The future of Europe: Economy challenges for the EU

7 min read

We native Brits have much to be embarrassed about: Andrew Lloyd Webber musicals; corned beef; a Robbie Williams movie with an animated monkey. But there is one global faux pas worse than all in recent memory: Brexit.

Brexit hit so hard that I had to emigrate and start writing copy in American English. Can you imagine? Every time I misspell “manoeuvre” I feel the tremors of Queen Liz turning in her grave. But, generally, I’ve gotten by without much discomfort. That was until the marketing department asked me to go meet Paolo Gentiloni.

Mr. Gentiloni is the Secretary General of the UN, ex-EU diplomat and ex-Prime Minister of Italy. And, IE School of Science, Politics & Economics being the superpower that it is, Mr. Gentiloni paid us a visit this February. I’m being lighthearted but it is a very big deal. Mr. Gentiloni spoke to us about the future of Europe, economy challenges for the EU and how the Trump administration will affect ongoing procedures. So, let’s find out what I learned.

How is the European economy?

The first of Gentiloni’s talks took place at the María de Molina campus. Students enjoyed a casual coffee break to meet the man himself—I hid in the corner— and then we took our seats for the first talk. Gentiloni spoke for an incredible hour-and-a-half without a single note to hand. Topics included the European innovation gap, balancing decarbonization with industrial policy, supply chain resilience, common public funding and the new Robbie Williams movie. (No, not the last one.)

“Right now, growth is very slow in Europe,” said Gentiloni. “The figures for 2023 show growth of less than 1%, and forecasts for 2024 predict slightly more than 1% growth, with possibly a bit more in 2025.” Slow and steady, he acknowledged, but still positive. Gentiloni also pointed out that Europe had done relatively well in the face of global challenges: “After the pandemic, Europe experienced a strong recovery, though it was gradual. In 2022, the EU grew by 3.4%, which was actually stronger than both the US and China that year.”

However, the ongoing war in Ukraine has hindered Europe’s progress compared to its larger economic competitors: “The war has had significant economic consequences, particularly with energy costs, inflation, and broader difficulties across Europe. While the invasion was a global event, its economic effects have been felt more acutely in Europe and the Global South than in regions like the US, China and Japan.” Despite the stagnation seen in 2023, Europe as a whole managed to avoid the recession and energy supply crises that many had feared.

What are the Europe economy strengths?

So, what are the Europe economy strengths and how can we keep flexing those muscles? According to Gentiloni, the EU economy has moved past the pre-pandemic era of low growth, low inflation and low interest rates. While the current situation isn’t necessarily better, it is “definitely different.” On inflation, he pointed out that it is “on a declining path,” with some fluctuations, but “reaching the famous 2% threshold by the end of 2025 is quite possible.” Gentiloni also highlighted the strength of the labor market. The EU has created 8.5 million new jobs over the last few years and wages are outpacing inflation in 2024. This indicates that purchasing power is recovering, with real wages expected to fully recover in 2025.

Public investment is another area of strength. Gentiloni pointed to the Next Generation EU initiative as a major move to boost investment. The EU issued a common debt of around 800 billion euros, which Gentiloni described as necessary to prevent “the risk of fragmentation within the single market.” The European Commission forecasts that public investment will continue to increase until 2026. This is a major shift from the 2008 financial crisis which saw public investment steadily decline.

This PIGS acronym (standing for Portugal, Italy, Greece and Spain) was a derisive term for the EU’s weaker economies. No surprise, it was coined by a British financial analyst. What can I say? But! Gentiloni pointed out that the “PIGS” now outperforming the traditionally stronger northern countries, like Germany and the Netherlands. In the last quarter of 2023, most of Europe saw stagnation with Germany and France experiencing slight contractions. Italy, however, had neutral growth. And Spain stood out with a growth rate of 0.8%. Now the growth map of Europe is seeing the “PIGS” outperforming the traditionally stronger northern countries. Oink.

What is the future of the EU economy?

The future of the EU economy is uncertain. “The war in Ukraine and the ongoing conflict in the Middle East have significant consequences for the global and European economies,” said Gentiloni. “If a wave of protectionism takes hold, it would be very negative for the European economy.” Ongoing conflicts make trade wars ever more likely, which would spell bad news for the EU.

“Is Europe losing competitiveness? The answer is undoubtedly yes,” said Gentiloni. A large part of this comes from uncertainty around climate change, but also the tendency for tech startups to scale outside of Europe, with many jumping across the pond to the US. The European Commission has thus set out four main priorities to stay ahead of the curve. First, by closing the innovation gap: “€300 billion in savings leaving Europe each year,” said Gentiloni. “Foreign investors are buying European companies.”

Second, the EU will aim to balance decarbonization with industrial policy. “We can’t let industrial policy undermine our climate transition goals,” Gentiloni stressed, while also noting that “the attempt to change household heating systems in Germany was too ambitious,” highlighting the need for a coordinated approach to climate action.

Third, the EU must improve economic security. “The crises of the past five years—pandemic, war and energy disruptions—have shown us that we can no longer afford to ignore supply chain vulnerabilities,” said Gentiloni. The EU will work to “de-risk” these global supply chains, which means depending less on politically unstable regions.

Fourth, the European Commission will reduce its internal bureaucracy to speed up processes. “The sheer volume of reporting requests is overwhelming, compounded by the overlap between what national governments and the European Commission demand.” By combining all four measures with a focus on boosting private and public investment, the Europe economy hopes to secure its future.

EU and US relations: What’s to come?

Forget PIGS—let’s talk elephants. In this case, the room is being filled by Trump’s giant administration. EU-US relations will be critical to the Europe economy over the coming years. First, there’s the diversion of financial reserves. Gentiloni noted a growing tactical divergence between the Federal Reserve and the European Central Bank, with the US holding steady on interest rates while Europe is expected to make further cuts. This means the US, ECB and Bank of England could follow different paths in the near future.

The exchange of goods between Europe and America adds up to around $1.4 trillion annually. This is the biggest source of trade in the world: “If something serious were to disrupt EU-US relations economically, it would have a ripple effect on the entire planet.” Trump tariffs were accurately predicted by Gentiloni, which came from the US’ dissatisfaction with trade imbalance between the US and the EU. Currently, the US runs a $250 billion annual trade deficit. This is a much larger portion of the European Union‘s GDP than that of the US, making trade tensions more critical for Europe. Gentiloni believes an EU vs US trade war would hurt both economies: “The situation is highly dynamic, and we don’t know where it’s heading.”

EU relations with the rest of the world

In Spain, we have a saying: “Un clavo saca otro clavo.” Since Europe can no longer rely on its trade relations with the US, the EU must strengthen relations with other markets. Key deals like the Comprehensive Economic and Trade Agreement (CETA) with Canada and the potential trade agreement with Mercosur in Latin America help diversify Europe’s economic ties. Europe is also focusing on India and China, with the latter initially seen as a major market for European exports. However, China’s rapid economic growth and self-sufficiency have made it less reliant on European products. According to Gentiloni, the EU is seeking a more reciprocal relationship. This was outlined in the EU-China investment agreement of 2020.

Europe could also capitalize on its geographical proximity to Africa. While Europe is still a major investor in Africa, the lack of a unified European approach has allowed China to gain a stronger foothold. In places like Ethiopia, Chinese investments are more visible, even though European countries contribute individually. To effectively compete with China, Europe needs to use its collective identity to avoid being overshadowed by China’s growing investments.

So, what have we learned?

We’ve learned that the EU economy is going to experience some uncertainty over the years. We’ve learned that there’s a plan in place. And we’ve learned that Paolo Gentiloni is an extremely impressive man.

In fact, I got to interview him myself. He was extremely polite, professional and generous with his time. I even asked him why the “PIGS” are running faster. And he told me that he hates that term, and I swallowed my teeth and said I was just quoting his own words and, just for the record, I voted Remain and I love Mediterranean food.

So we spoke about football instead. Interestingly, he supports Juventus. But we still hope he’ll come back to visit soon.