Europe’s economy is under attack from all sides

A decade ago Xi Jinping was welcomed to Duisburg in Germany’s Ruhr valley. He praised the region as a hub for Chinese investment; greeted a train that had spent a fortnight travelling from Chongqing, via Russia, to Europe’s industrial belt; and enjoyed an orchestral performance of traditional mining songs. More recently, another Chinese arrival in Germany received a frostier reception. In February a ship called BYD Explorer No. 1 unloaded 3,000 or so electric cars made by BYD , a Chinese electric-vehicle ( EV ) firm. As the ship’s name suggests, it is likely to be the first of many. Little surprise it has prompted worries about the future of Germany’s hallowed carmakers.China is churning out cars, as its leaders funnel cash and loans to high-tech industry in an attempt to revive the country’s moribund economy. Its manufacturing trade surplus has risen to a record high, and is set to rise higher still. As a consequence European leaders are fearful of an influx of advanced, cheap Chinese goods. On March 5th the European Commission decided it had sufficient evidence to declare that China had unfairly subsidised its EV makers, paving the way for the introduction of tariffs. Ursula von der Leyen, the commission’s president, has warned China not to “race to the bottom” on green tech. Britain has begun a probe into the country’s excavators. Emmanuel Macron, France’s president, will host Mr Xi in May. He will, according to diplomats, deliver “firm messages” on trade.Chart: The EconomistCountries from Brazil to India are moving to block China’s exports. They represent a particular threat to Europe, however, because of the continent’s growth model, which has long had trade at its heart. According to the IMF , Europe is the region of the world that is most open to trade and investment (see chart 1). In the EU trade in goods and services runs to 44% of GDP , almost twice as much as in America. As a rules-based bloc, the EU is reluctant to violate trade rules too blatantly by erecting protectionist barriers. So is Britain, which has a history of support for free trade.The new China shock arrives at a terrible time. European industry is still dealing with an energy shock caused by Vladimir Putin’s invasion of Ukraine, which began just as national leaders were attempting to accelerate the green transition. Gas prices—usually around €20 ($22) per megawatt hour—spiked to more than €300 in 2022, sending electricity prices soaring

(see chart 2). A post-covid rebound turned into inflation and an energy crisis. The European Central Bank ( ECB ) was forced to raise rates to 4%, hitting demand in an already weakened economy.Chart: The EconomistFiscal largesse during the pandemic and energy crisis has since given way to retrenchment. Germany’s tight deficit limits have forced the country to cut back this year, with more cuts to come in 2025. France has just announced that its deficit in 2023 was 5.5% of gdp , well above forecasts. It had already pulled what Bruno Le Maire, its finance minister, calls an “emergency brake”, cutting €10bn of spending in order to bring fiscal policy back on track.Chart: The EconomistThe EU ’s gdp has grown by just 4% in real terms since 2019, which is half the pace America has enjoyed. In Britain and Germany GDP per person has actually fallen (see chart 3). Official forecasts for the eu and Britain project dismal growth of less than 1% this year; beyond that, things are uncertain. Whereas American productivity seems to have received another boost during the pandemic, Europe’s is limping along. The ECB , national leaders, think-tanks and two former Italian prime ministers, Enrico Letta and Mario Draghi, are trying to work out why exactly Europe has lost “competitiveness”. At the same time, another threat looms: if Donald Trump wins America’s presidential election in November, European exporters could be subject to tariffs on sales to one of their most lucrative markets.Shock horrorSo as the continent’s economy reels from the Russia shock of 2022, how will it adapt to a new one from China and maybe a third from America? The first China shock came in 2001, when the country entered the WTO and benefited from lower trade barriers as a result, posing a challenge to Western manufacturers. In America, some regions and sectors were hit hard. Europe got off more lightly, in part because the shock coincided with the accession of central and eastern European countries to the EU . The fast development of the EU ’s newest members supported the bloc’s productivity growth and created demand for Western goods.This time will be different. Although China is moving towards high-tech manufacturing in response to its economic struggles, Mr Xi is also keen to wean the country from reliance on Western industry. He wants to build technological leadership in sectors he sees as necessary for national strength, such as industrial robots and rail