Europe is finally beginning to reinvent itself for a changing world

Europe is accelerating efforts to strengthen its economy through market integration, industrial support and tougher trade measures, while reducing reliance on US policy under Donald Trump

Europe is shaking itself awake. 

Ten years after Brexit, the European Union is finally, fitfully advancing fundamental changes meant to preserve its wealth and influence.  

As the global order disintegrates and China drives deeper into Europe’s traditional markets, EU leaders say the bloc needs bigger everything to protect itself — bigger banks, bigger tech firms, bigger defence contractors, bigger investments. Startups need access to more money. Companies should merge across borders. Savers must invest across the continent and not at local banks. Countries should buy weapons together. 

In short, Europe needs more Europe. A Bloomberg Economics analysis shows why: Without such steps, the EU could be relegated to a second-tier economy, falling 7 trillion euros ($8.1 trillion) behind US output by 2040 — twice the bloc’s current shortfall. With them, the EU could roughly double its expected growth rate to 2 per cent and keep pace with the US, potentially even closing the gap over time.

If economic power means global power, that’s the difference between setting the world agenda and having it dictated to you. 

“We will be forced to take the least bad option put forward by the superpowers,” said Mārtiņš Kazāks, governor of the Central Bank of Latvia and member of the European Central Bank’s Governing Council board. 

Across the continent, there are signs of action. The EU is revising competition rules to spur consolidation and is loaning billions to juice demand. The EU’s six largest economies have banded together to link the bloc’s markets — unilaterally if necessary. Officials are designing trade measures to combat China. Europe has started shedding its Donald Trump appeasement. 

Banking, telecom, and defence executives are noticing, pursuing mergers that would have once seemed unlikely. European defence firms are going public with record valuations. Countries like France and Spain are touting tens of billions in AI data centre investments.  

But these changes come at a cost and are far from guaranteed. More Europe risks altering the continent’s core identity as a free-trading, budget-balancing, consensus-oriented, defence-averse peace project — and even making it more like a capitalist US or protectionist China. The continent is also weighed down by an aging population and generous pension systems becoming harder to fund. 

“This is not a race to be more Chinese or more American,” said Margrethe Vestager, who policed competition as an EU commissioner from 2014-2024, in an interview with Bloomberg Radio. “This is a race for Europe to be a much better version of herself.”  

The Problem 

For years, Europe has avoided making the type of major decisions that would keep its economy — and militaries — running alongside the US and China. Fragmented markets, mismatched regulations and decentralized financing have all hampered European markets.  

The International Monetary Fund estimated that the EU’s setup effectively creates internal tariffs of 44 per cent for goods and 110 per cent for services — higher than the Trump tariffs the bloc faces. Trading is spread across several dozen stock exchanges — in the US, two dominate. 

“We are standing in our own way,” said Helena Melnikov, managing director of the influential German Chamber of Commerce and Industry (DIHK). “A single market must function smoothly internally in order to have a powerful impact externally.” 

The result is that EU output has now fallen behind China and is losing even more ground to the US. 

Meanwhile, the US and China are racing ahead. 

In the US, firms are simply more productive — they’re larger, have access to more investment cash and enjoy the resulting efficiencies. The difference mostly explains the widening chasm between US and EU economies, according to the Bloomberg analysis. The AI industry, where Europe already lags, could cause that figure to balloon even more.

“There’s already a big productivity gap and it will only worsen,” Portuguese Central Bank Governor Alvaro Santos Pereira said in an interview. 

China presents its own challenge. The country controls 80 per cent of the world’s critical minerals, giving it a stranglehold over the supplies needed for smartphones, weapons, artificial intelligence and climate-friendly energy. It’s also increasingly shunning EU products while flooding Europe with cheap exports, setting up a potential trade clash. 

That’s left leaders speaking with increasing urgency about the need for more Europe to help save Europe.  

Their guiding light is a report from Mario Draghi, a former European Central Bank president and one of the continent’s most respected economic voices. Draghi’s blueprint argues for both market integration and 1.2 trillion euro in annual investments to catch up on digital technologies, keep up on climate-friendly energy and make up for lost time on defence. 

According to the Bloomberg analysis, if Europe finds the money and makes the suggested reforms, it would nearly halve its projected 2040 GDP gap with the US — taking it down to 3.8 trillion euro. 

“What’s at stake is Europe’s ability to remain an economic and geopolitical power,” said Simona Delle Chiaie, the chief euro-area economist at Bloomberg Economics, who prepared the analysis. “Europe is losing ground because of weaker productivity and its inability to scale innovation.” 

Cashing in

Corporations are testing whether this time, the rhetoric is for real.

From Germany to Italy to France, unique mergers are sprouting up as the EU starts considering consider competition from US and China — not just from within Europe — when evaluating corporate tie-ups. 

This week, France’s second-largest telecommunications firm, SFR, agreed to sell to rival phone carriers, potentially taking the country down to three major telecoms carriers — one below regulators’ traditional threshold to suppress consumer bills. Leonardo SpA, the Italian defence contractor, has also said it expects regulatory approval for a pan-European space project with Airbus SE and Thales SA to help take on Elon Musk’s SpaceX juggernaut.  

In banking, UniCredit, Italy’s second-largest bank, is closing in on a hostile takeover of Germany’s Commerzbank — a bid that would create the type of cross-border lender the EU wants but threaten a German institution. Berlin is vocally opposed, but market forces are taking over. Consolidation is triumphing over historic political wariness. 

Within Italy, Banca Monte dei Paschi di Siena SpA also got two suitors in this week, including a bid from Intesa Sanpaolo SpA that would create one of Europe’s most valuable banks.  

“If we don’t create European banks, it is going to be almost impossible to have a European capital market,” said Angel Ubide, an economist and European policy expert at the financial firm Citadel, in an interview with Bloomberg Radio. 

While Europe’s banks and telecom firms seize the merger-friendly moment, defence contractors are seizing on governments wanting to buy more, together.

The EU is handing out 150 billion euro in loans to promote joint military purchases. And a 90 billion euro loan to Ukraine will be steered toward European firms. 

“What I saw was that if you put up just a bit of incentive, you know, a small pile of money that maybe will cover the cost of coordinating and getting things in place, then you see members saying, ‘OK, if that’s the name of the game, we will actually buy a lot of stuff together,’” said Vestager, the former EU commissioner.   

Growing pains remain. Germany and France finally killed a joint fighter-jet project this week, conceding that their aspirations for unity couldn’t overcome years of cross-border disputes, cost overruns and delays. 

Still, companies are reaping the rewards of swelling budgets.  In January, weaponsmaker CSG NV scored the world’s largest-ever initial public offering by a defence firm, Tankmaker KNDS NV could soon join with an IPO at roughly the same level. More niche firms are likely to follow.  

“I definitely want us to be a long-term, recognized, and reliable NATO supplier to European armies,” CSG Chief Executive Officer Michal Strnad said in an interview. “This is our home market, and we will keep building on it.” 

Fights Ahead

Europe’s big powers say they’re committed to seeing these changes through after years of false starts. They’re even willing to try taboo-breaking tactics. 

Invigorated by Trump’s threats to take Greenland, the bloc’s six largest economies have formed a unified front to push reforms and break Europe from Washington’s whims — proclaiming that European integration should eclipse national squabbles in this critical moment. 

“There is no lack of insight in Europe; there is a lack of implementation,” German Finance Minister Lars Klingbeil said in an interview. 

But the route from rhetoric to reform is littered with roadblocks. 

The six countries’ first priority is unifying Europe’s capital markets — a way to make investment funds more available across Europe and centralize oversight. They’re pushing for the EU to reach a deal by the year’s end, an aggressive timeline. Some countries remain wary, particularly of giving EU regulators more authority. 

Then there’s the funding component. If the EU is going to find Draghi’s desired 1.2 trillion euro, governments will need money they don’t have.  

Countries like France, with Draghi’s backing, want the EU to use billions in joint debt, or eurobonds, to get cash now at attractive interest rates. Without eurobonds, said Citadel’s Ubide, the European economy will be held “hostage to a foreign denominated asset.” 

Historically, though, the EU has eschewed debt-fueled spending. Germany also remains opposed. By later this year, the debate will become an identity-bending, anger-inducing fight as the EU negotiates its long-term budget for 2028 to 2034.  

Artificial intelligence remains the wild card in all this. Thus far, Big Tech — which is amassing the wealth and influence to compete with nation states — is largely ignoring Europe. In 2025, the US drew roughly three quarters of the world’s AI venture capital funding. The EU got 6 per cent.  

“Europe is nowhere near the US — or China — when it comes to AI technology,” said Pereira, the Portuguese central banker. “I don’t find this acceptable.”

Yet the EU is starting to gain a toehold. In France, SoftBank Group Corp. has pledged 75 billion euro for for data centres. In Spain,  Amazon.com Inc., Microsoft Corp. and others have committed more than 80 billion euro.

The EU is adding to that small-but-growing pile. A recently proposed AI package includes a 120 billion euro public-private project for semiconductors, and a jointly funded 30 billion euro AI chip foundry.

That’s not US-level funding, but it’s not nothing. 

It’s all part of an attempt to preserve the economic heft needed to steer a new alliance of democracies — one based on rules instead of might and personal grievance. One that that works with the US and China, but doesn’t rely on them. 

“The world order is being reshaped, new dynamics are emerging and we are forming new partnerships,” Klingbeil said.