European Central Bank President Christine Lagarde has issued a stark warning that the post-war growth model that long underpinned the continent's economic expansion is being eroded, urging leaders to avoid repeating the mistakes of the internet era as the artificial intelligence revolution accelerates. Speaking at the World Economic Forum's International Business Council in Geneva on Wednesday, Lagarde argued that the foundation of Europe's economic strategy is cracking and unlikely to return to its former strength.
The growth model she described rested on three pillars: expanding global trade, manufacturing powered by cheap energy, and a rules-based global order anchored by the US security umbrella. Lagarde noted that all three are now weakening, with more than 2,500 trade restrictions introduced globally in the past year alone. Shortly after Donald Trump returned to the White House, a wave of targeted tariffs followed, including a 20% levy on European Union imports, later reduced to 15% following a trade agreement between Washington and Brussels. However, uncertainty persists over the stability of that deal and how certain European goods shipped to the US will be treated.
Lagarde pointed to Washington's retreat from its leadership role in Western security as an additional drag on Europe's economy. The environment that once enabled deep supply chain development, where businesses prioritized efficiency over resilience, has shifted dramatically. The global order is under strain, geopolitical tensions are exposing critical dependencies and bottlenecks, and security threats are mounting closer to Europe's borders, she said.
Trump has long criticized European NATO allies for insufficient defense spending, with his administration repeatedly threatening to withdraw from the military alliance and even suggesting the use of force in disputes involving NATO member territories. Meanwhile, Russian military aircraft incursions into European airspace have increased, and the fallout from conflicts in the Middle East is weighing on the region's economy. Lagarde warned that a deteriorating security environment also puts capital flows into Europe at risk, as risk considerations directly shape economic decisions when dependencies can be weaponized or deterrence credibility fades. When the safety of capital is in doubt, business investment declines, dragging down output and consumption. The cumulative effect is that Europe's post-war growth model is being eroded and will not easily return to its former state.
Looking ahead, Lagarde said Europe still holds considerable advantages, including one of the world's most extensive trade agreement networks, a strong manufacturing base, and the EU's vast single market. However, she cautioned against repeating the mistakes of the internet age in the new digital revolution of artificial intelligence. Europe largely missed out on the first digital revolution, with much of the commercial benefits from ICT adoption captured elsewhere, and it must not make the same error with AI. European tech companies have long been dwarfed by their US counterparts; the 34 largest listed tech firms in Europe have a combined market value of around 1.37 trillion euros, compared to over 23 trillion dollars for the US "Magnificent Seven" tech stocks.
Lagarde acknowledged encouraging signs that European firms are increasing AI investment, but questioned whether the region can create conditions for such investment to be sustained and scaled. She referenced the widely discussed "EU Inc" proposal, a voluntary EU-wide corporate framework allowing companies to register once and operate across all member states under a single set of rules. The EU is also advancing capital market reforms to help domestic companies expand within Europe. She noted that the bloc already has many of the conditions for higher long-term growth, and translating Europe's scale into genuine advantages could help innovative companies grow locally, accelerate technology diffusion, and boost productivity, while also making domestic demand a more durable growth engine.
Marco Forgione, director general of the UK's Institute of Export & International Trade, told CNBC's European Squawk Box that Europe itself has its own protectionist tendencies. The European internal market is free and open, but external goods entering Europe face significant barriers, he said. Europe needs to consider what role it will play in the new world order, and competition from economies like China, which have completed their manufacturing value chain upgrades, is a real challenge. He added that escaping decades of economic stagnation and achieving genuine growth will require deep political and economic transformation across the continent.
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