European Central Bank President Christine Lagarde warned Wednesday that Europe’s post-war growth model is eroding as the international environment changes.
Lagarde, speaking during a discussion on the global economic outlook at the World Economic Forum in Geneva, said Europe’s traditional growth model rested on expanding global trade, strength in mid-tech manufacturing and a stable global order underpinned by a US security umbrella.
She said expanding trade could no longer be taken for granted, noting that more than 2,500 trade restrictions were implemented globally from January to October 2025.
China now competes directly with the euro area in close to 40% of sectors where Europe has a comparative advantage, compared with around 25% in the early 2000s, she said.
European industry has also lost its advantage of relatively cheap energy, Lagarde said. EU electricity prices for energy-intensive industries averaged more than twice US levels and around 50% above Chinese levels last year.
Lagarde said the rules-based global order was under pressure from geopolitical tensions, adding that firms invest less when capital is seen as less safe.
Despite these headwinds, Europe retains substantial strengths, including the world’s largest network of trade agreements and an integrated market of 27 member states with 450 million consumers, she said.
The euro area economy grew by 1.5% last year, driven entirely by domestic demand, she said. The economy posted quarter-on-quarter growth of 0.4% in the second quarter of 2026, with domestic demand contributing positively.
Lagarde called on Europe to make better use of the scale of its home market to support investment, innovation and productivity.
“Europe largely missed out on the first digital revolution, as the commercial gains from the spread of information and communication technologies were captured disproportionately elsewhere,” she said.
“We cannot afford to repeat that experience with artificial intelligence, the second digital revolution,” she added.
Survey evidence suggests euro area firms expect to allocate an average of around 9% of their total investment to artificial intelligence this year, Lagarde said.
She identified fragmentation in the EU single market and capital markets as two critical barriers to European firms’ ability to scale.
Some 12% of EU scale-ups have relocated outside the bloc, most notably to the US, she said.
Lagarde highlighted “EU Inc.,” a proposed optional EU-wide corporate legal form that would allow companies to incorporate once and operate under a single set of rules across the bloc.
She also said EU leaders have called for co-legislators to reach an agreement on a market integration package by the end of 2026, moving Europe closer to a genuine single market for capital.