Shadows (and some light) in Europe’s industrial decline

This approach risks import substitution leading to costlier inputs and a further erosion of competitiveness, without addressing structural deficiencies in investment, scale, and positioning in value chains for the dual green and digital transition.1 The shocks accumulated since 2020 – COVID-19, the war in Ukraine, energy and trade tensions – have intensified the loss of European industrial dynamism, but they do not fully explain it. In this context, the solution does not lie in setting numerical thresholds, but in creating the financial, legal and market conditions necessary to reverse the trends that have led to the decline of European industry.2

Since the global financial crisis, European industry has shown weakness and a high exposure to successive shocks. In 2025, production volumes were just 5% above 2007 levels, resulting from an average annual growth rate below 0.3% (see first chart). This general pattern is found across the sector, although different dynamics are observed depending on the industrial activity. The poorest performance is found in manufacturing with a low or low-medium technological content, where output has recorded a cumulative decline of between 15% and 20%. Given the greater importance of production costs as a competitive element in most of these industries (clothing, footwear and furniture, among others), their weakness points to a structural adjustment driven by intensified competition from Asia, led by China since its entry into the WTO in 2001. In other cases, such as metallurgy, the loss of international competitiveness has been exacerbated by state aid, a more lenient legal framework and better access to raw materials in competitor countries.3

The automotive industry – one of the worst-performing industrial sectors in recent years – reveals one of the clearest territorial divides within European industry. The overall decline in production between 2019 and 2025 has not been uniform: several Eastern European countries show relatively more favourable patterns, while the large industrial economies such as Germany and Italy have recorded sharper declines (see third chart). This pattern reflects a highly pronounced production specialisation in countries such as Poland and the Czech Republic, as well as their deep integration into Central European value chains, where the automotive industry continues to play a significant role. The core countries, in contrast, have been more sharply affected by the loss of competitiveness and the adjustments resulting from the technological transition and regulatory changes associated with decarbonisation.4

Unlike the automotive sector, the pattern in high-tech manufacturing shows less geographical divergence. Production growth has been relatively widespread across different countries, consistent with its strong aggregate performance over the past 20 years (see fourth chart). Nevertheless, the intensity of this growth is uneven, with the strongest performance found in segments such as pharmaceuticals, which has driven economies like Ireland and Denmark.5 In contrast, leading EU countries like Germany and France have recorded more modest progress, and electronic equipment manufacturing has experienced a widespread loss of momentum, precisely in the midst of the AI boom.6

The breakdown of the EU’s final demand by origin of manufacturing value added, based on the OECD’s TiVA (Trade in Value-Added) database, provides a snapshot of European industry’s external dependencies. Although this information is published with a certain time lag (the most recent available year is 2022), the patterns that emerge are clearly structural.7 The comparison with 2016 – the midpoint of the 2013-2019 period – confirms that most manufacturing activities, including those with a high technological content, already incorporated a very high share of value added from outside the EU, with China as the main source. Moreover, in many cases these percentages had increased by 2022 (see fifth chart). This dependency is observed in all the major EU economies (especially in production chains centred in Germany) and is more intense in highly globalised industries. For instance, electronics and optical equipment, as well as textiles and clothing, have a particularly high external dependency: in both segments, around 60% of the value added in the EU’s final demand is contributed by non-EU suppliers (with China contributing approximately 20 and 30 points, respectively).