Between Scylla and Charybdis: Europe’s Structural Vulnerability

Executive Summary

Europe’s openness has become its weakness. A Germany-centred, export-led model has produced deep asymmetries in demand, technology, and industrial capability. Overreliance on foreign markets and imported inputs — particularly from China and the US — has eroded the EU’s productive base and trapped peripheral economies in low-value segments.

The problem is structural, not cyclical. For two decades, the EU’s fiscal rules and wage restraint suppressed domestic demand, weakening both innovation and investment. The result is a one-way system in which the core exports surpluses while the periphery bears the cost of stagnation and technological dependence.

Europe’s vulnerabilities span demand, supply, technology, and resources. The Union is highly exposed to external shocks: its export concentration on China, its dependence on imported intermediate goods and digital technologies, and its near-total reliance on Chinese rare earths and critical minerals. These interlinked dependencies reinforce one another, turning temporary disruptions into persistent divergence.

Policy reform has begun, but at insufficient scale. New EU initiatives — from the Chips Act to the Green Deal Industrial Plan — signal a long-overdue turn toward industrial policy. Yet their logic remains largely horizontal, reliant on private incentives and national resources. Without common funding, selective coordination, and public procurement at EU level, they risk deepening divergence rather than correcting it.

Rebuilding resilience requires reshaping Europe’s growth model. Strategic autonomy must mean demand-driven investment and shared capacity-building, not isolation. Only an integrated industrial and fiscal framework — linking demand, innovation, and cohesion — can reverse the vicious circle of low demand, weak supply, and widening gaps.

Policy recommendations

1. Anchor EU industrial policy in demand growth, using public investment and procurement to stimulate technological upgrading.
2. Reform fiscal rules to enable counter-cyclical and capability-building investment across all member states.
3. Create a permanent EU investment instrument to finance strategic technologies, energy infrastructure, and regional diversification.
4. Integrate resilience monitoring into EU economic governance, tracking dependencies across value chains.
5. Ensure cohesion by pairing diversification and reindustrialisation strategies with regional capacity-building.