There are two dominant global economic powers: the United States and China. In contrast, the countries of the European Union and the United Kingdom are struggling. Over the past two decades, the U.S. has maintained its leading position in the world economy, at around 26% of global GDP. China continues to grow its share of the world’s economic pie. By contrast, Europe has lost significant market share. Bluntly, Europe is no longer a credible major power.

That matters in part because in the next few weeks, the U.S. is set to raise tariffs on the exports of EU countries into the U.S. The U.K. has already reached a trade agreement with the Trump administration. The EU’s problem here is that it is fractured politically and does not have the power to negotiate from a position of strength.

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That begs the question: What happened to cause Europe to become globally impotent?

The reasons are many, but a few stand out. Government and bureaucracy are too large and powerful in Europe. The private sector has been largely neutered by European governments. Taxes are too high in Europe. Business and workers respond positively to incentives. They also respond negatively to disincentives. In the U.S., taxes take about 27% of GDP. In Europe, taxes confiscate more than 40% of GDP. And in some European countries, the tax burden on the private sector exceeds 50%. After a certain point, the larger the tax burden, the smaller the economy. It is not a coincidence that the people of France, the U.K., and Spain are poorer than the residents of Mississippi, the poorest state in the U.S.. In each of these countries, the government takes well over 40% of the production that the private sector generates.

Another structural impediment for economic growth in Europe is demographics. Europe is aging rapidly. Population growth is slowing below the rate of replacement. In many countries of Europe, population is declining. Fewer workers are supporting more retirees. The tax burden on workers keeps rising because too few politicians have the courage to recognize wholesale entitlement reform is needed if future economic prospects are to be bolstered. Again, labor responds positively to the incentives of lower taxes. By contrast, workers react poorly to higher taxes, especially when marginal tax rates are above 50%. Research by Nobel laureate James Mirrlees demonstrates that efficient tax policy requires lower marginal tax rates on the most productive. Society needs more of what the most productive do.

Excessive regulation is the third major explanation for why Europe is rapidly sliding into economic irrelevance on the global stage. The bureaucracy of Europe suffocates entrepreneurism. Advanced technology is the high ground of economic growth. The U.S. and China are vying for technological superiority. Both countries are allocating hundreds of billions of dollars each year toward investment in technology, especially the technology surrounding artificial intelligence and quantum computing. Both the U.S. and China have many technology companies that are global leaders. Arguably, there are only two cutting-edge technology champions in Europe, Arm Holdings of the U.K. and ASML Holdings of the Netherlands. ARM designs semiconductors. ASML manufactures the world’s most technologically sophisticated lithography machines, which are necessary for the fabrication of the most advanced chips.

A major policy blunder of the EU was the 2018 Global Data Protection Regulation. The capital costs to comply with this law are significant. America’s technology giants have the scale to spread the cost of compliance across hundreds of billions of revenues. There are no advanced technology companies in Europe with the scale to efficiently absorb the costs of the GDPR legislation. This act froze investment in high technology in Europe.

Europe does not invest sufficient funds in research and development. Moreover, each European country allocates R&D spending according to its national economic and political interests and needs. No individual European country can match the capital investment for AI and advanced technology that the technology giants of the U.S. make year after year. Size and scale matter.

One anecdote is telling. The cost of cellular services is lower in Europe than in the U.S. The U.S. has three major cellular carriers. Europe has over 40. But European cellular companies do not have sufficient funds to invest in the most advanced cellular technologies. Prices are not the only factor in determining economic performance.

For another window into Europe’s economic malaise, we should turn to the continent’s largest economy.

Until recently, Germany was the economic engine of the European economy. Now it has stalled. GDP growth in Germany has been flat for five years. It is losing its status as an industrial powerhouse. Its export-dependent economic model is falling in the face of the second Chinese manufacturing revolution. China must export, or its economy will atrophy. China is taking global market share from Germany. China, at this moment, is destroying the vaunted German car industry. Trump’s tariffs are also undermining the foundations of the German manufacturing sector.

It gets worse for Berlin.

Germany’s labor costs are too high. Germany’s pivot to green energy was a major policy mistake. Green energy is not competitive with 24/7 fossil fuels or nuclear power. Germany’s industrial giants are reallocating capital to the U.S. and other geographies. With the decline of Germany, Europe no longer has a powerful economic engine.

There are two other important factors in the economic decline of Europe. First, as a general matter, the countries of Europe do not embrace capitalism and creative destruction. Europe does not trust the profit motive. The countries resist new technologies and productivity advances that cause unemployment in certain sectors of the economy. It is difficult to let labor go in Europe. Innovation is difficult. Productivity growth slows. The few benefit, but the many lose out because economic growth stalls. It is a fact that a rising economic tide lifts all households. A falling economic tide, which is the case in Europe, harms everyone.

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Furthermore, too many Europeans just don’t want to work. Germany is the sick leave champion of Europe. In the U.K., the number of people on unemployment relief because of alleged disabilities is soaring. Disability benefits are a major cause of the British fiscal deficit. In Spain, the overall unemployment rate exceeds 10%. The number of people working is a critical factor in overall economic growth. Now, France is trying to reduce its fiscal deficit by eliminating two national holidays. Powerful French labor unions are pushing back. Hours worked in Europe are dwarfed by labor output in the U.S.. Free riders are making Europe poor.

Remember all this next time you hear an academic or media personality telling you that Europe remains the promised land.

James Rogan is a former U.S. foreign service officer who has worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be followed on X here and reached at [email protected].