The European economic model that underpinned post-war prosperity rests on three mutually reinforcing pillars, all of which are weakening as the international environment shifts, Christine Lagarde said. The pillars are expanding global trade, Europe's strength in mid-tech manufacturing supported by cheap energy, and a stable, rules-based global order backed by US security guarantees.
Trade restrictions are mounting globally, with more than 2,500 implemented in the past year alone. China has moved steadily up the value chain and now competes directly with the euro area in close to 40% of sectors where Europe has a comparative advantage, compared with around 25% in the early 2000s. Meanwhile, cheap energy has disappeared: EU electricity prices for energy-intensive industries were more than twice US levels and around 50% above China's last year.
The stable global order is under pressure from geopolitical tensions that bring critical dependencies into focus and weaken perceptions of deterrence. When economic dependencies can be weaponised, concerns about resilience enter economic decisions directly, Lagarde said, reducing capital investment.
Europe retains substantial strengths, however. The EU has the world's largest network of trade agreements, which is expanding with India, Indonesia, Australia, Mexico and Mercosur. The bloc maintains world-class manufacturing capabilities in areas such as lithography and precision optics, and an integrated market of 27 member states and 450 million consumers — the largest among advanced economies.
Domestic demand drove euro area growth of 1.5% last year and is projected to remain the main source of growth this year. The task now is to turn domestic resilience into durable long-term growth by removing fragmentation in the single market and capital markets, Lagarde said, barriers that prevent firms from scaling and adopting new technologies such as artificial intelligence.
