Up against China’s industrial surge, Europe has strengths but is seeking a strategy

China’s rise is undermining major sectors of European industry. However, as the German economy illustrates most clearly, Europe is shifting, driven by investment cycles in defence, electrification and artificial intelligence. It is redirecting its exports and managing to maintain strong positions, particularly in high value-added services, where exports to China are trending upwards. Yet this repositioning remains fragile and could be hampered by the economic costs of the conflict in the Middle East. To consolidate its positions, Europe must accelerate the unification of its internal market and do more to strengthen its industrial policy. This is the aim of the ‘One Europe, One Market’ agenda.

Germany is once again becoming a driving force

The German economy is gradually moving away from its traditional model. Historically reliant on the automotive and chemical industries – two sectors facing particularly fierce competition from China – it is now shifting its focus towards defence, aerospace, and electronic and electrical equipment. This is confirmed by the figures for new industrial orders (see Chart 1). Now the second-largest contributor to NATO’s budget, Germany is thereby embarking on a historic shift that is already bearing fruit.

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