This third and final article in the series continues the examination of Europe's shifting geopolitical and economic position, focusing on the continent's growing dependencies and the urgent need for renewal. It assesses the impact of sanctions on Russia, the erosion of Europe's global standing, and the challenges posed by technological and industrial lag. Beyond diagnosis, it also considers pathways towards recovery, outlining structural reforms and strategic investments that could restore autonomy, competitiveness, and influence. The discussion emphasises that while Europe faces unprecedented challenges, the tools for meaningful reform remain within reach,  provided there is the political will to act decisively and cohesively.

Europe's Diminishing Global Role

8.1 From rule-maker to rule-taker? The perception gap widens

For decades the European Union projected itself as a standards superpower, able to shape global markets via regulation and the sheer weight of its internal market. That image has faded as growth, innovation and strategic heft have lagged the United States and, increasingly, China. In the past fifteen years Europe's relative economic dynamism has been weak; productivity, corporate weight, and household wealth have stagnated compared with the U.S., while China has continued a rapid catch-up. Recent analyses in the Wall Street Journal frame the drift bluntly: Europe is losing ground, in growth, tech, defence capability and geopolitical leverage.

Hard numbers underscore the trend. On IMF measures, the EU's share of world output has slipped while the euro area's real growth hovers around 1%, well below the U.S. and major emerging markets. Even at purchasing-power parity Europe's global share is middling and trending sideways. Meanwhile, R&D momentum tells its own story: OECD data show EU R&D growth at 1.6% in 2023, against 8.7% in China, with Germany's R&D up just 0.8% and France's slightly negative - signals of strain in the very economies that once anchored Europe's technological base.

The innovation and scale-up pipeline remains Europe's soft underbelly. Despite real progress, the bloc still struggles to scale firms to global dominance, especially in digital platforms, AI and advanced semiconductors. The Commission's new "Choose Europe to start and scale" strategy, including a €10bn+ Scaleup Europe Fund, is a tacit admission that late-stage capital and regulatory fragmentation continue to push the continent's best companies abroad or keep them sub-scale. Independent coverage and official briefings emphasise exactly these gaps: fragmented markets, thin late-stage financing and talent bottlenecks.

Even in hard-power adjacencies where Europe has long excelled, space launch and dual-use technologies, capacity has wavered. In 2024 Europe managed just three orbital launch attempts, trailing not only the U.S. and China but also India and Japan; Ariane 6's return is promising (three launches by August 2025), yet the gap in cadence and industrial depth remains. The symbolism matters: launch capacity is a proxy for the health of a high-end industrial-tech base.

Finally, the diplomatic optics have shifted. The EU's acceptance of a U.S. - EU trade arrangement that leaves European exports facing 15% U.S. tariffs has fed a narrative, fair or not, of a partner on the back foot. German leaders now speak openly about diversifying trade away from over-reliance on the U.S., precisely because tariff shocks and policy unpredictability have exposed European vulnerability. This is not just commerce; it is about status. Partners that must absorb asymmetric terms are rarely treated as equals.

Bottom line: On growth, innovation, space-industrial capacity and bargaining power, Europe looks more reactive than agenda-setting, and great powers reward agenda-setters.

8.2 Strategic consequences: when economics erode leverage

Economic under-performance translates directly into strategic dependency:

• Tech & data dependence. The European Investment Bank notes Europe leads in some clean-tech niches but lags the U.S. and China in digital innovation, making it reliant on non-EU platforms and cloud/AI stacks that shape entire value chains. That dependence constrains policy autonomy on privacy, competition, and even security.
• Capital scarcity at scale. Late-stage financing remains thinner in Europe; consequently, promising firms either sell early, list abroad, or stagnate. Brussels' new scale-up plan is intended to plug exactly this hole, but it is catching up rather than leapfrogging.
• Energy and input costs. Structural energy-price disadvantages since 2022 have punished Europe's tradables sector, eroding the export base, especially in Germany's energy-intensive manufacturing complex. That weakens the very tax base that funds welfare and defence.
• Defence import tilt. Rising defence outlays have often flowed toward U.S. systems, reinforcing strategic dependence. Even where Europe decides to spend more, it does not automatically translate into sovereign capability unless procurement consolidates European champions and supply chains.

As these dependencies accumulate, bargaining power in Washington, Beijing, and other capitals diminishes. Power respects growth, scale, technology and credible coercive capacity; Europe's imbalances on these dimensions are showing.

8.3 Germany's social-spending reforms: what Berlin is signalling

Europe's largest economy is now openly re-examining the affordability of its welfare state amid recessionary pressures, debt-rule debates, higher defence commitments and a worsening demographic profile.

The message from the top. Chancellor Friedrich Merz has said in recent days that Germany's welfare state is no longer financially sustainable without reform, calling for a fundamental overhaul to restore economic competitiveness and to keep pensions and healthcare solvent. He couples this with a push to diversify trade and rebuild growth capacity at home.

Policy strands already on the table:

• Pensions culture shift. Berlin is promoting private capital-market saving, including a modest €10 per month "early-start" investment stipend for children to build equity exposure over time, an attempt to change a long-standing aversion to stock ownership and ease future pension burdens. This is symbolic in size but significant in cultural intent.
• Corporate tax relief and pro-investment signals. A €46 billion (2025-2029) corporate tax relief package has passed the upper house, intended to revive capex and productivity. It sits alongside a broader growth agenda (deregulation, faster depreciation, and incentives for electrification) to re-ignite animal spirits.
• Housing affordability & construction push. Berlin has advanced rent-control extensions and permitting reforms to accelerate building, acknowledging housing costs as a core social-cohesion risk.
• Targeted welfare tightening. A draft law would move newly arriving Ukrainian refugees from the Citizen's Allowance (Bürgergeld) to the Asylum Seekers' Benefits Act, which pays lower rates. This is a clear instance of containment in social spending growth for certain groups. Meanwhile, debate continues over broader changes to Bürgergeld itself; the CDU/CSU programme has explicitly proposed abolishing Bürgergeld and replacing it with more conditional support.
• Structural reform signalling. German ministers and economic agencies keep emphasising labour-market flexibility, reductions in non-wage labour costs, and less red tape, supply-side measures that are designed to complement any welfare recalibration. Economists, however, warn that pension-cost containment remains the missing big move; without it, consolidation pressures will resurface.

This is not a single austerity package; it is an emerging mix of

1.      modest pro-growth tax relief,

2.      selective tightening at the margins of welfare expansion,

3.      housing market intervention to blunt social pain, and

4.      rhetorical positioning for deeper sustainability reforms in pensions and healthcare.

8.4 Why Berlin's Turn Matters for the Rest of Europe

What Germany decides rarely stays in Germany:

• Fiscal signalling across the bloc. Germany's approach sets a reference for the European Semester and national consolidation debates: you can boost defence, court investment, and still tighten parts of the social budget, provided it's framed as sustainability rather than austerity. Governments with similar demographic pressures (Italy, Spain, Portugal) will watch closely, as will the "frugal" north where debt rules and fiscal prudence carry weight.
• Policy contagion through EU frameworks. If Berlin pushes harder on capital-market pensions and activation policies, expect Commission initiatives to support cross-border retail investment and portable pension products, mobilising European savings into productive assets, already a theme of Scaleup Europe and the broader Savings and Investments Union agenda.
• Labour-market recalibration. Measures such as tax-free overtime, incentives for retirees to keep working, and targeted migration frameworks to offset shortages are already noted in Germany's coalition plans; similar activation-first templates could spread as the EU's working-age population declines.
• Distributional politics. Selective tightening (e.g., reduced benefits for specific newcomer groups) may ease fiscal pressure but risks political backlash and fragmentation across member states with different migration exposures, straining solidarity unless burden-sharing is updated.
• Competitiveness vs. cohesion trade-off. Germany is betting that pro-investment tax relief and regulatory streamlining will lift growth quickly enough to protect the social core. If growth disappoints, others may copy the tightening without compensating gains, deepening inequality and fuelling populism, the cycle analysts already warn about in Europe.

In short, Berlin is normalising a vocabulary of "sustainability" over "expansion" in social policy, and because Germany is the EU's industrial and fiscal anchor, that vocabulary tends to travel.

8.5 The status question: will reforms restore parity-or entrench second-tier status?

Could this evolving model, leaner welfare growth, sharper supply-side reform, targeted industrial policy and a push for scale-ups, restore Europe's place among the great powers?

• Best-case path. If tax relief and regulatory streamlining unlock investment, if the EU's scale-up agenda crowds in late-stage capital, and if defence spending builds European capacity (rather than imports), Europe can raise its growth ceiling, rebuild tech sovereignty and regain bargaining power. The early signs in Berlin, on corporate tax relief, permitting, and capital-market nudges, fit that template.
• Risk case. If social-spending restraint outpaces growth gains, Europe may end up leaner but weaker: less cohesive domestically, still dependent on foreign tech stacks and weapon systems, and more vulnerable to external economic shocks (tariffs, energy). At that point, Washington, Moscoe and Beijing will continue treating Europe as a secondary centre, important, but not decisive.

Real parity demands credible growth, scale in critical technologies, and cohesion at home. Germany's pivot is consequential precisely because it will influence whether Europe chooses strategic investment plus social resilience, or slips into austerity without autonomy.

. Why This Trajectory Could Have Been Avoided

• Structural Rigidities: High taxes, regulatory complexity, fragmented single market, Europe has choked its own growth.
• Unequal Trade Concessions: Accepting the 15% tariffs under pressure was a self-inflicted wound.
• Militarisation Without Sovereignty: Heavy defence spending funded by cuts to welfare and procurement of U.S. hardware strengthens U.S. strategic interests, not European autonomy.
• Austerity's Legacy: Long-standing cuts have hollowed social stability and made Europe more brittle.
• Energy Miscalculation: Underinvestment in renewables left Europe exposed.
• Diplomatic Complacency: Europe failed to craft a cohesive and independent strategic identity, becoming reactive rather than proactive.

10. How to Rebuild Sovereignty, Stability and Global Weight

10.1 Rebalancing Trade Strategy

• Promote reciprocity in trade by ensuring that the WTO effectively serves Europe's strategic interests; if it fails to deliver, pursue alternative frameworks to safeguard those interests.
• Advance plurilateral accords and pursue modular integration with like-minded economies.

10.2 Defence with Autonomy

• Prioritise developing a European defence industrial base over off-the-shelf U.S. systems.
• Economise armament strategies by focusing on multinational projects.
• Protect welfare systems while streamlining defence budgeting.
• Consider structures like a "rearmament bank" to pool risk and reduce national burden.

10.3 Reasserting the Social Contract

• Invest in education, families, health and pensions to revitalise cohesion.
• Reform welfare systems for sustainability, addressing demographic pressures. Scandinavia (e.g., Sweden) shows that adjusted welfare with growth-friendly taxation can succeed.

10.4 Strategic Energy Independence

• Accelerate renewable deployment.
• Diversify sources and invest in domestic energy resilience.
• Insulate from future geopolitical supply shocks.

10.5 Political Courage and Institutional Reform

• Finish the single market, unlock capital markets, and curb sectoral protectionism.
• Support immigration of high-skilled workers to offset demographic decline.
• Recalibrate governance structures for agility and strategic clarity, embracing reform rather than stagnation.

Conclusion:
Europe today stands at a crossroads, caught between the inertia of structural decline and the urgent need for strategic renewal. Its growing dependence on external powers for defence, technology, and energy underscores the fragility of its current position, while its inability to drive growth, foster innovation, and maintain internal cohesion further diminishes its leverage in an increasingly multipolar world.

Yet this trajectory is not irreversible. Europe retains significant assets: a skilled workforce, deep pools of capital, advanced industrial capabilities, and strong institutional frameworks. What it lacks is coordinated strategic vision and the political will to undertake the deep reforms required to translate these strengths into renewed global influence. The pathway to recovery is clear, complete the single market, cultivate technological sovereignty, diversify energy sources, and reinvest in the social foundations that sustain cohesion and legitimacy.

Failure to act decisively will consign Europe to a reactive and subordinate role, dependent on others for its security and prosperity. Conversely, bold action,  guided by unity, pragmatism, and strategic clarity, offers the prospect of a revitalised Europe capable of shaping, rather than merely adapting to, the global order. The choices made in the coming years will determine not only Europe's position in the world but also the stability and integrity of the European project itself.

This is the third and last article of a series on the subject. The first two articles were published on 21 and 28 September.

Professor David Zammit serves as both a lecturer and the Rector of Pro Deo International University in Italy. He has been actively engaged in the field of education for the past 35 years. Throughout his career, he has delivered lectures in various countries and has participated as a speaker at numerous symposia.