ECB Chief Warns U.S. Retreat Is Making It Harder to Compete, Says Europe’s Post-War Economic Model Is ‘Eroding’

Europe's decades-old economic model is coming under pressure as the United States retreats from the global order that helped underpin the continent's prosperity, European Central Bank President Christine Lagarde warned Wednesday.

Speaking at the World Economic Forum's International Business Council in Geneva, Lagarde said the different foundations that powered European growth after World War II are weakening simultaneously, forcing the region to rethink how it competes in an increasingly fragmented global economy.

"Taken together, these shifts suggest that Europe's post-war growth model is eroding. And it is unlikely to return to the form we once knew," Lagarde said. According to the ECB chief, Europe's economic success rested on expanding international trade, a manufacturing sector benefiting from relatively cheap energy, and "a stable, rules-based global order, underpinned by a U.S. security umbrella." All three are now under strain.

Global trade barriers have multiplied, with more than 2,500 trade restrictions introduced last year alone, Lagarde noted. Europe has also faced renewed uncertainty over access to the U.S. market since President Donald Trump returned to the White House.

Trump initially imposed a 20% baseline tariff on European Union goods before the two sides reached an agreement reducing the rate to 15%. Questions remain, however, about the durability of the arrangement and the treatment of key European exports, including steel. Lagarde argued that Washington's retreat from its traditional leadership role in European security is changing the economic calculations facing businesses and investors.

The previous security environment "allowed European supply chains to deepen, and enabled firms to organize investment around efficiency rather than resilience," she said. "Today, that global order is under pressure. Geopolitical tensions are bringing critical dependencies and chokepoints into sharper focus, while Europe faces growing security threats on its doorstep."

Trump has repeatedly criticized European NATO members over defense spending, while his administration has raised the possibility of reducing the U.S. commitment to the alliance. Europe is simultaneously confronting Russian security threats and economic fallout from the U.S.-Iran war.

For Lagarde, that instability has direct consequences for investment. "When economic dependencies can be weaponized or when perceptions of deterrence weaken, concerns about resilience enter economic decisions directly," she said. "Firms invest less when capital is seen as less safe, weighing on output and consumption."

Yet Lagarde also pointed to artificial intelligence as another potential threat to European competitiveness. Europe largely failed to capture the commercial benefits of the first digital revolution, she said, and cannot afford another lost technological cycle. "We cannot afford to repeat that experience with artificial intelligence, the second digital revolution," Lagarde said.

The gap is already enormous. Europe's 34 most valuable publicly traded technology companies have a combined market capitalization of roughly €1.37 trillion, or $1.59 trillion. The seven U.S. technology giants commonly known as the Magnificent Seven are collectively worth more than $23 trillion.

Lagarde said European companies are showing encouraging signs of investing in artificial intelligence, but the larger challenge is creating an environment where those investments can expand across borders.

One proposal is "EU Inc.," an optional corporate structure that could allow businesses to incorporate once and operate across the European Union under a common set of rules. Capital-market reforms could similarly make it easier for promising companies to raise money and expand without leaving Europe.

"Turning European size into European scale would help innovative firms grow at home, allow new technologies to spread faster and boost productivity," Lagarde said. Marco Forgione, director general of the Chartered Institute of Export and International Trade, argued that Europe must also confront its own protectionist tendencies and growing competition from China.

"Fundamental changes, both political and economic, are required if Europe is going to break free from the sort of stasis that it's been in for decades and really start to see growth in its economy," Forgione told CNBC.