Europe’s Stagnation Is a Warning for the United States
Regulatory accumulation, high spending, and burdensome taxes weigh on growth.
When Americans talk about fiscal dysfunction, we usually start at home. Trillion-dollar deficits, unsustainable entitlement programs, and a political system that seems to only know how to make things worse.
Compared to Europe, at least on some margins, the United States still looks like a relative bright spot. That’s not because our fiscal problems are any more manageable. It’s because Europe’s fiscal problems are paired with an economic model that makes reform even harder.
In a new piece for Geopolitical Intelligence Services, I highlight just how wide the transatlantic economic gap has become. Europe has drifted into a combination of high spending and heavy regulation that acts like a closing vice on the productive economy. The uncomfortable part is how familiar that trajectory is starting to look on this side of the Atlantic.
The piece begins by highlighting the economic divergence between the US and the European Union. The US real GDP level in 2024 was approximately 24 percent higher than its three-decade pre-pandemic trend, while the eurozone’s output remains 20 percent below trend.
One structural reason Europe is falling behind is regulatory accumulation, which acts as a brake on innovation and competitiveness.
Between 2019 and 2024, the EU adopted over 13,000 legislative acts, compared to just 3,500 at the U.S. federal level. By this crude measure, Europe is passing almost four times as many new rules annually as the U.S. The EU also has a higher prevalence of non-tariff barriers than the U.S., suggesting much more extensive use of regulatory management of the economy.
Sustainability reporting is particularly burdensome. Most EU-based companies must comply with a web of overlapping rules. Small and medium-sized enterprises (SMEs) in Europe report high compliance costs, with almost a third dedicating more than 10 percent of their staff to compliance. … Two-thirds of EU companies view regulation as a barrier to long-term investment. In the U.S., comparable surveys report that only 20 percent of firms consider regulation a major barrier.
The piece closes with three scenarios. Without bold leadership, the most likely outcome is drift and stagnation: continued regulatory accumulation, higher spending, new taxes, and steadily weaker growth. Crisis-driven austerity is also always lurking, especially when debt levels are high and interest rates are rising.
The better path is economic renewal. Though politically difficult, a return to spending restraint and deregulation could restore fiscal space, strengthen productivity, and revive long-term growth. That outcome is still within reach, but only if policymakers choose reform over drift.
Read the full piece here: Regulation and Fiscal Drift Threaten Western Prosperity