Neither America nor China is worthy of world leadership—but is Europe in a position to step up?

Many yearn for a better future than what the US and Chinese models offer. If we are to achieve a stable, multipolar world in which democratic aspirations remain alive, Europe will have to take the lead.

But Europe has its own weaknesses. Its economic machine is faltering and its democracy is under attack from far-right groups. But its politics has not deteriorated as much as in the US and it still has many strengths, including a social-market model that produces greater equality than the US, as well as an economic base comparable to that of the US when adjusted for purchasing power and with many innovative industries.

The trouble is not only that Europe lacks a vision of what it wants to be, but that it often looks at the wrong models for inspiration. For many of its leaders, the holy grail is the Silicon Valley model of innovation. They point to an ‘innovation gap’ between the US and the EU that the influential Draghi report documented and advocate reforms—such as financial market integration and digital deregulation—that would make Europe more like the US.

This US envy is misplaced. It disregards Europe’s own traditions of inclusion and regulation that have produced more equitable societies with broader access to good middle-class jobs and more reliable safety nets. It also overlooks the disconnect in America between innovation on one hand and productivity and living standards, on the other.

It is true that by almost any metric the US spends more on R&D and produces more innovation. But this yields greater economy-wide productivity and rising living standards for ordinary people only if the benefits diffuse widely. Indeed, US productivity growth since 2000 has been lacklustre, except for a recent uptick.

The tech sector is an island in an economy where many workers need a second job to keep their heads above water. As Ufuk Akcigit of the University of Chicago and Sina Ates of the Federal Reserve Board have shown, the diffusion of innovation has slowed in the US.

A small number of large firms have monopolized knowledge production, while entry barriers and restrictive patents create laggard firms. This concentration of innovative activity means that the US economy produces a skewed income and wealth distribution that no country should emulate.

In manufacturing, it is China that’s the target of European envy. China’s prowess has squeezed traditional areas of European dominance, such as autos and capital goods. For many European industrial leaders, restoring competitiveness requires putting up protectionist barriers against Chinese imports.

But there is no way that Europe can return to its manufacturing glory days. Jobs will not return to factories: even China has lost millions of factory jobs over the past decade. Ensuring good jobs in Europe will require a focus on services, enhancing both productivity and work standards in areas like care and hospitality.

The competitive challenge from China requires a more strategic response than protectionism. An apt remedy would be finely targeted industrial policies that, unlike import tariffs, directly encourage innovation and focus on segments of advanced manufacturing where Europe is most likely to achieve leadership. In autos, for example, Germany should focus on the next generation of electric vehicles rather than on the mass-market EVs that China churns out.

Another problem is that the EU as an institution is ill equipped to develop a bold new vision. Its founders thought economic union would ultimately produce political union. But that has not been realized. The EU acts more like a restraint on economic policy than an enabler: insufficiently integrated for its central institutions to act boldly but integrated enough for national leaders to feel held back.

The EU’s founding logic needs to be inverted. Geopolitical challenges demand that it acts in unison on defence and security, while economic conditions require a relaxation of shackles to permit experimentation. Europe should focus on a common foreign and defence policy. But letting countries do their own thing in economics may help.

Consider the trade agreements that the EU has negotiated with India and South America’s Mercosur bloc—seeming successes that nonetheless underscore the EU’s inability to move beyond its past preoccupations.

Deepening the EU’s cooperation with other parts of the world is a necessity and a requirement of multipolarity. But it is better pursued through political agreements. Trade pacts consume political capital and divert attention from important economic-policy priorities: strengthening the middle class through good jobs, enhancing productivity in mostly non-tradable services and fostering an innovation ecosystem that is consistent with Europe’s social model.

If Europe is to assert itself on the global stage, it needs to restore its self-confidence. The world needs an alternative to the US and Chinese models. And for that, European leaders must develop the courage to chart their own course. ©2025/Project Syndicate

The author is a professor of international political economy at Harvard Kennedy School, and the author of ‘Shared Prosperity in a Fractured World: A New Economics for the Middle Class, the Global Poor, and Our Climate’.