Europe still seems to view its economic weakness as a temporary headwind, but in reality, this weakness is increasingly becoming structural. While the United States is starting the year with robust growth and Japan is cautiously opening a new optimistic chapter, the European Union is lagging behind a combination of low growth, declining sentiment, and political paralysis. What was once considered a cyclical downturn is increasingly beginning to resemble a long-term lag in the global economic order, says Mark Dowding, CIO at RBC BlueBay Asset Management.
According to Dowding, this decline is largely self-inflicted. "The realization is slowly sinking in that the EU has become a heavily overregulated system, making policy choices that structurally suppress growth and sentiment," he says. High energy prices, complex regulations, and an unfavorable investment climate are particularly putting pressure on the competitiveness of industry. The result is visible: capital is moving to more dynamic economies, while Europe remains stuck at around 1% growth.
It's striking that a year ago, European policymakers still thought they were profiting from geopolitical unrest in the United States. An unpredictable American president would automatically give Europe more weight on the world stage. That expectation has not materialized. "The energy and economic momentum we're seeing elsewhere reveals how Europe is rapidly losing its relevance," says Dowding. Even within the eurozone, limited growth is primarily coming from Southern Europe, while the core countries are lagging behind. The European Central Bank has little leeway in this scenario: interest rate cuts are obvious in the long run, but they won't solve the underlying problems.
Moreover, political uncertainty is increasing. Local elections in France could quickly precipitate a tense run-up to the 2027 presidential election, limiting the scope for further reductions in risk premiums. Dowding warns that investors are too easily ignoring these structural fault lines. Europe may appear stable in the financial markets in the short term, but without a fundamental change of course, that stability risks being primarily a result of low expectations, not regained economic strength.
