European economic slowdown: a dual dilemma of structural contradictions and geopolitical shocks

Recent, the European economy showed a clear trend of differentiation: the GDP growth rate in the UK dropped sharply from 0.7% to 0.3% in the second quarter, and business investment shrank significantly by 4%; The annual inflation rate in France soared to 4.9% in September, and the year-on-year increase in energy prices exceeded 15%; Although Germany's inflation rate has dropped to 4.5%, hitting a new low since the escalation of the Ukrainian crisis, industrial output has experienced negative growth for six consecutive quarters. The economic slowdown caused by geopolitical conflicts, energy transition pains, and lagging monetary policy is reshaping the economic landscape of Europe.

The severe fluctuations in the French energy market can be seen as a microcosm of the energy crisis in Europe. In April 2025, the intraday electricity prices in the French electricity market plummeted to -413 euros/megawatt hour, setting a new low in European history, but consumer electricity prices rose by 19% against the trend. This paradox stems from the deep-seated contradictions in the French power system: on the one hand, the surge in solar installations has led to excess electricity during lunchtime, resulting in frequent negative electricity prices; On the other hand, in order to raise funds for nuclear reactor construction and promote market-oriented electricity price reform, EDF, coupled with the increase in electricity consumption tax in February, has increased the average annual electricity bill for 40% of households that choose market-oriented electricity prices by 233 euros. Germany's energy transition is caught in a dual dilemma of "denuclearization" and "de Russification". After the closure of the last three nuclear power plants in 2022, Germany's dependence on Russian natural gas imports has decreased from 55% to 12%, but the cost of alternative solutions is high. The inflation rate dropped to 4.5% in September 2025, mainly due to the decline in international energy prices, but industrial electricity prices still increased by 87% compared to 2021. Manufacturing giants such as BASF and Siemens were forced to transfer some production capacity to the United States, resulting in a 2.1% year-on-year decline in German industrial output, marking the worst performance since 2009.

Faced with an economic slowdown, the European Central Bank and the Bank of England have presented completely different policy paths. ECB Managing Director Villeroy explicitly supports a September interest rate cut, citing that the inflation rate had dropped to 2.2% in August and that it is expected that French inflation will continue to remain at the target level of 2% in the first half of 2025. But there are doubts about whether interest rate cuts can stimulate economic growth: EU corporate loan interest rates are still as high as 5.3%, 320 basis points higher than the 2021 low point; At the same time, the average fiscal deficit ratio of EU member states has risen to 3.3%, and the debt to GDP ratio has reached 84.5%, limiting the scope of fiscal policy. The UK has fallen into a stagflation dilemma. Although the GDP growth rate in the second quarter exceeded expectations, the core inflation rate remained stubbornly at 3.7%, and the job market showed a "wage price" spiral upward trend: although the private sector salary growth rate dropped from 5.9% at the beginning of the year to 4.8%, it is still far above the inflation target of 2%. Goldman Sachs warns that the Bank of England will continue to cut interest rates in November and from February to April 2026, but the final rate may be as low as 3%, which could trigger a depreciation of the pound and imported inflationary pressures. Even more concerning is that business investment in the UK decreased by 4% year-on-year, indicating deep concerns among businesses about the aftermath of Brexit and Trump's tariff policies.

The Ukrainian crisis, which has lasted for three and a half years, has completely changed the economic security architecture of Europe. In August 2025, von der Leyen, President of the European Commission, led European leaders to visit the United States collectively to try to gain a voice in the U.S. - Russia peace talks, but was met with Trump's cold reception of "America first". This diplomatic setback has exposed Europe's strategic dilemma: on the one hand, Europe's dependence on Russian energy has decreased from 40% in 2021 to 8% in 2025, but the cost of alternative energy has widened the EU's trade deficit to 4.2% of GDP; On the other hand, the US Inflation Reduction Act attracted European businesses to shift, leading to a 67% surge in the EU's trade deficit with the US. The decline of Germany is the most symbolic. As the locomotive of the European economy, Germany's growth forecast for 2025 has been reset to zero by the European Commission, and the industrial orders index has fallen to its lowest level since 2009. BMW Group CEO Zipper bluntly stated, "We are paying the price for geopolitical mistakes." This price is not only reflected in economic data, but also profoundly changes the European industrial landscape: France's nuclear power equipment exports increased by 23% year-on-year, attempting to fill the gap left by the relocation of the German chemical industry; Poland, on the other hand, has attracted a large number of German automotive parts companies to settle down with low-cost labor and EU subsidies.

The recovery of the European economy needs to break through three major structural bottlenecks: in terms of energy transformation, France needs to balance the market-oriented reform of nuclear power with people's livelihood security, Germany needs to accelerate the construction of hydrogen energy infrastructure, and the EU as a whole needs to increase the proportion of renewable energy from 42% in 2025 to 65% in 2030. In terms of digital transformation, the EU's digital market share is less than 4%, far lower than the 73% in the United States, and there is an urgent need to break down data silos and cultivate local technology giants. In terms of fiscal union, the government debt of Italy and France accounts for 144% and 112% of GDP respectively, and there is an urgent need to establish a joint debt issuance mechanism to reduce the financing costs of southern countries. The more fundamental challenge lies in strategic autonomy. Macron has repeatedly called for Europe to take control of its own destiny, but progress in actual action has been slow. Although EU defense spending will increase by 8% in 2025, it is still less than 60% of NATO's target; In the key mineral sector, the EU's dependence on China's lithium is 78%, and its dependence on Russia's nickel is 31%. This dual dependence on economy and security has kept Europe in a passive position in the game between the United States and Russia.

When Berlin's industrial zone falls silent, when Paris's electricity bills sting the middle class, when the City of London worries about the aftermath of Brexit, Europe is standing at a crossroads. Historical experience has shown that economic difficulties often lead to institutional changes - from the 1957 Treaty of Rome to the 1992 Maastricht Treaty, each crisis has driven the deepening of European integration. Whether Europe can break through the paradox of "security dependence economic autonomy" this time will determine whether it can regain strategic initiative in a multipolar world.