Under construction: Europe’s economic repositioning in a fragmented international order

In fact, the situation is getting tougher for the EU as fiscal room is scarce, and energy costs have been rising. In addition, huge investments are needed in the EU’s defense industry to supply Ukraine with weapons, while investment needs in the digital and energy transitions are also huge. Moreover, the EU, whose economic model is based on free trade is now confronted with increased protectionism from its main trade partners, with tariffs, export controls, market access restrictions… which divert trade flows and restructure value chains. In the past years, the EU has been responding through various strategies, policies and instruments largely focused on increasing the EU’s resilience and reducing one-sided dependencies, thereby reflecting the growing nexus between economy and security. 

Geopolitical shocks must serve as opportunity for Europe

There seems now to be an understanding of a sense of urgency. The time has come for middle powers to unite, as Canada’s Prime Minister Mark Carney suggested at the World Economic Forum in January 2026. This was echoed by the President of the European Commission, Ursula von der Leyen, in her speech in Davos. The moment has come to be clear-eyed: “Geopolitical shocks can and must serve as opportunity for Europe”. An “independent Europe” is now emerging, one that takes action on securing energy, critical raw material and defense and speeding up efforts in the digital realm; one that choses “partnership instead of isolation” through free-trade agreements; one that would strive toward the deepening of the internal market so that companies can benefit from the extent of an area gathering 450 million people.

The French President, Emmanuel Macron, in February this year, warned that Europe is facing a “geopolitical and geo-economic state of emergency” and risks being “swept aside” if staying passive to evolutions in the US and China. Europe must reckon the gravity of the stakes and take action. In line with Ursula von der Leyen, Emmanuel Macron insisted on the EU’s assets, such as a predictable regulatory environment where the rule of law applies.

The EU’s economic outlook: between a rock and a hard place?

The EU’s economic outlook is sobering. This is obvious when looking at the EU’s biggest economy and manufacturing power – Germany. According to Peter Leibinger, the president of the Federation of German Industries (BDI), Germany is facing the “deepest crisis since the founding of the Federal Republic”. The chemical industry, the machine tool and steel as well as the automotive industries are facing “a structural decline” and the fear of deindustrialization is looming. In Germany bad news hit the media everyday between crumbling infrastructures, soaring energy prices, layoffs, skills shortage… Since 2019, the German automotive industry was hit by 110,000 job losses. The transition from the internal combustion engine toward the electric vehicle (EV), where Chinese car makers are more competitive than their European counterparts, risks driving these figures up even more while German car makers are also considering moving part of their production from Germany to the US to circumvent tariffs put into place by Donald Trump.

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Article summary: 

Geopolitical and economic pressures have forced Europe to move beyond its traditional economic model of open markets and rules-based globalization. This article examines how the EU is adapting to strategic competition and economic coercion while also seeking to boost competitiveness, reduce dependencies, and strengthen its ability to act in an increasingly fragmented world.

Marie Krpata is a researcher at the Study Committee on Franco-German Relations (Cerfa) at Ifri, the French Institute of International Relations.

This article was published in the journal Reflections, the Magazine of the Austrian Institute for International Affairs – oiip. (P. 28-31).