Europe’s once-mighty industrial base, a backbone of economic growth and employment, is now faltering. As the EU grapples with sluggish internal demand, high energy costs, and fierce competition from China and the US, the question lingers: Is European industry destined for decline? 

In a recent report, former European Central Bank President Mario Draghi warned that Europe faces an “existential challenge.” If unchecked, he predicts, the continent’s economy could fall into “a slow agony,” unable to sustain its social and economic ambitions. Indicators, from GDP to factory output, paint a bleak picture of the present, but there are signs that smart policy adjustments and technology-driven transformations could still stabilize European industry.

Industrial production data from Eurostat confirms a downward trend. Over the past year, output across the eurozone fell by 2.2%, while the broader EU posted a 1.7% decline. The drops are most pronounced in Europe’s economic heavyweights—Germany, France, Italy, and Spain— where production of capital goods and consumer durables has sharply decreased. This downturn echoes The Wall Street Journal’s assessment that Europe’s growth engine may indeed be “broken". 

Energy Costs and Competition

Germany, traditionally Europe’s industrial powerhouse, is struggling. Since its peak in 2017, German industrial production has declined by 14%, placing it at levels last seen in 2006. Volkswagen, the nation’s largest employer, announced plans to shutter three factories and cut jobs—a first in the company’s history. The closures signify more than cost-cutting; they reflect Germany’s difficulties in competing globally while balancing domestic and international demands for greener technology. 

Europe’s competitiveness is weighed down by high energy prices. Natural gas costs are three to five times higher in Europe than in the US, while industrial electricity prices are two to three times higher than in both the US and China. These differences are rooted in Europe’s reliance on a marginal pricing model, where energy costs are set by the most expensive fuel needed to meet demand. While renewable energy sources have grown, they struggle to meet year-round needs, especially in countries that have moved away from nuclear power, such as Germany and Spain. 

The Economist recently highlighted Germany’s energy challenges, noting that its reliance on cheap Russian gas—a core component of its industrial model for decades—has been a double-edged sword. With cheap Russian gas off the table, the German economy must recalibrate, but this transformation has been sluggish and fraught with obstacles. 

The European Commission is attempting to address some of these issues. Recently, it implemented tariffs of up to 35% on Chinese electric vehicles (EVs), a move aimed at protecting European manufacturers from subsidized imports. The automotive sector alone employs 13 million people in Europe, and EVs are a rapidly growing part of that market. However, while tariffs may provide temporary relief, they don’t address underlying issues like high production costs and energy prices, which are challenging Europe’s place in global supply chains.

Missed chances, new prospects

Renewable energy sources provide opportunities, yet Europe’s energy infrastructure struggles to integrate them effectively. A more efficient grid could theoretically drive down costs and improve reliability, but the necessary upgrades are costly and require long-term investments. High energy prices have already led to factory shutdowns and relocations, especially in energy-intensive industries like chemicals, metals, and refining. 

Draghi’s report argues that Europe must address these issues if it hopes to avoid long-term deindustrialization. A focus on green energy and climate goals, while essential, must be balanced with practical solutions that support manufacturing. Europe needs a more flexible energy grid and greater incentives for companies to adopt energy-efficient technologies.

Europe’s current model of industrial production is being further undermined by low productivity growth. Real disposable income per capita has grown nearly twice as fast in the US as in Europe since 2000. Draghi attributes this to Europe’s missed opportunities in the digital revolution. Europe’s tech sector remains underdeveloped compared to its global competitors, and many European entrepreneurs seek funding and growth opportunities in the US market due to more flexible regulations and greater access to venture capital.

However, Europe remains a global leader in certain high-skill, specialized industries. Sectors like mechanical engineering, pharmaceuticals, and aerospace—exemplified by companies like Airbus and Novo Nordisk—continue to thrive and attract significant investment. These industries rely on

Europe’s well-educated workforce and extensive institutional knowledge, which offer a competitive edge despite the continent’s current challenges.

Europe’s aging population is another factor in the continent’s economic challenges. By 2040, Europe’s workforce is projected to shrink by around 2 million people annually. This demographic shift will place further strain on social programs, highlighting the urgent need for productivity improvements and innovations like automation. Germany, for instance, is already a leader in factory automation, a trend that may help mitigate some labour shortages but requires significant upfront investments.

Effects on the MENA region

European deindustrialization, driven by rising energy costs, global competition, and structural economic shifts, has significant ripple effects on the Middle East, including North Africa, the Levant, and the Gulf. As Europe’s manufacturing base shrinks, its demand for industrial inputs and energy diminishes, impacting oil-exporting economies in the Gulf. This reduced demand has pressured countries like Saudi Arabia and the UAE to diversify their economies, focusing on sectors like renewable energy, tourism, and finance to offset declining revenues.

In North Africa, where economies like Morocco, Tunisia, and Egypt are tightly linked to European markets, deindustrialization exacerbates vulnerabilities. Lower European investment and decreased trade weaken these nations’ industrial sectors, increasing unemployment and migration pressures. Simultaneously, the Levant’s economies, already fragile due to regional instability, are affected by decreased remittances and trade from Europe.

However, this shift also creates opportunities for the region to align with emerging economic powerhouses like China and India, which are seeking new trade and energy partners. The Gulf states, for example, are intensifying their integration into China's Belt and Road Initiative to counterbalance the effects of European economic stagnation.

Future of European Industry

Analysts like Nico Palesch of Oxford Economics argue Europe’s decline in industrial output represents a temporary recession rather than long-term deindustrialization. According to Palesch, Europe’s shrinking share of global industrial output is largely due to increased output from Asia rather than a fundamental erosion of competitiveness. He maintains that while certain industries may decline, others will continue to grow, particularly those that require specialized knowledge and advanced technical skills.

The path forward for Europe’s industry may depend on whether it can adapt to a more sustainable growth model, driven by diversified energy sources, technological innovation, and domestic demand. While critics argue Europe’s high energy costs are an impediment to growth, proponents believe that with efficient infrastructure upgrades and a flexible regulatory environment, Europe’s industrial sector can thrive.

Europe’s industrial landscape faces a daunting array of challenges, from energy costs to global competition and demographic shifts. However, Europe’s potential to lead in advanced, high-skill industries—combined with smart policy changes—could ensure that the continent remains an industrial force. The future of European industry may hinge on its ability to balance immediate economic pressures with long-term goals, reimagining its energy model and recalibrating its approach to global competition.