The news for Europe just keeps getting worse. The French government collapses, plunging the EU's second largest economy into turmoil. France's political upheaval in December offered another glimpse at fractious European affairs.

Germany is under pressure and Volkswagen workers are striking hard. In my view, we are already in a crisis mood.

Our former model is over. If we follow our classical agenda, we will be out of the market, I have no doubt. The EU's economy is now fighting for survival and struggling to keep pace with the US and China.

Had the European economy grown as fast as the American economy over the past couple of decades, we'd be generating three trillion euros of extra income every year.

That's roughly the equivalent to the total GDP of France being routinely added into the economy.

Europe needs to have a digital era economy with companies that challenge those from China and from the US. Without that, the region is at risk of being unable to afford to protect itself in a world where security is no longer guaranteed.

It's just a very tense moment for the world and Europe's at the center of it.

This is one of the most consequential figures in global economics, and in September he sounded an alarm. Fortive is weak, was very weak.

Mario Draghi will this morning deliver his long-awaited report on what Europe must do to regain its competitiveness. Mario Draghi is a highly respected economist.

He's former president of the European Central Bank during one of Europe's most difficult times and also led Italy through another challenging period.

He's become a figure that you look to in times of trouble. His report warned that the US and China were innovating so expeditiously, Europe needed to invest hundreds of billions of euros extra every year to compete, possibly to survive.

The Draghi plan got the conversation started.

And then, of course, there's Trump, and then, of course, there's China, and then there's a war in Ukraine and a war in the Middle East. The conclusion was Europe has been stuck in a rut, and if nothing changes and the current trajectory is maintained, then Europe will probably account for less than a tenth of global GDP by 2050, which points to Europe having a much diminished role in the global economy in years to come.

Increasing productivity is one of the solutions to this. It doesn't mean making people work harder. It means for the same amount of work, a person creates more value.

To appreciate the challenge, let's quickly examine one of Europe's most iconic traditional industries: Italy's olive business. It's worth billions of Euros.

Prime Minister Giorgia Meloni's government wants the industry to grow and help the country reduce its mammoth debt burden. It's why olive millers receive tens of millions of Euros in post-pandemic EU aid granted to Italy.

Some farms spent their share upgrading their machinery.

Productivity is one of the best ways to grow an economy because it means for the same amount of work, a person creates more value.

And as important as olives are, cultivating them isn't as productive as developing semiconductors or solar panels, two things the US and China prioritized years ago.

We haven't taken frontier technologies and dispersed them through our economy in the way that would raise incomes and raise our efficiency.

So by being left behind, we are now poorer, and we're just not keeping pace with American productivity, which is what led to the estimate that the EU economy is 18% smaller than it may otherwise have been, and that's equal to a shortfall of about 3 trillion euros.

And why? One reason is the EU's dearth of massive investments in transformative tech products. We don't translate technologies at the cutting edge into new businesses, and we don't have hugely successful technology companies in anything like the way that the US does or even China to some extent.

One reason is we don't have great venture capital markets here. Most of the world's really big companies have been funded via this actually quite tiny asset class.

In Europe, that sort of didn't happen. Part of it also is regulation. Europe really believes in regulation.

That's not a bad thing, as I'm always told when I'm, you know, in Brussels, is what we're doing is a blueprint for everyone else.

But if you put it all together, you have a situation where you're not encouraging growth. We are behind everywhere else in the world.

When people talk about billions, they sound like large numbers, but now we're talking about trillions in terms of the valuation of tech companies. Just take the biggest US ones over the last couple of years.

If their combined value was a country, it would have the third biggest GDP in the world after the US and China.

I think people are waking up to the fact that Europe really is in trouble because not only does it not have the tech platforms, but the digital era is eating into everything, as we're seeing what's happening in Germany with the car industry, for example, that electric cars are fundamentally digital era products.

Volkswagen is at the center of this difficult transition. It's still Europe's biggest carmaker and one of the EU's industrial engines, but it didn't prepare for an electric vehicle revolution or that it would be led by an American startup called Tesla and later rivaled by China.

VW became emblematic of Germany's struggle. What VW is trying to do is close up to three factories. We're talking about tens of thousands potentially of job cuts.

Meanwhile, Germany's neighbor is politically and financially deadlocked. France has a number of problems. High debt is one of them.

The deficit is very wide, so that's the gap between what the government spends and what it brings in in tax revenue. That's huge and it's proving very difficult to tackle.

It's also over what the EU even allows, which is this 3% of GDP. France was well past that this year and is forecast to be for some time, and it makes investors more apprehensive about buying French debt.

That's what this line shows. The higher the line, the riskier France is judged to be relative to the traditionally very safe Germany.

And in December, that risk was the highest it had been since 2012, when Europe was in the midst of a debt crisis, which is just compounding the fiscal difficulties that it faces.

So until there is a political resolution, it's hard to see the French economy turning around.

People are waking up to the fact that France is facing a potential debt crisis, and Germany on the other hand is facing a potential employment crisis, where it won't have the same number of workers producing the types of thing that Germany has made itself famous for.

And that impacts the whole of the European Union. I really don't think Europe can do anything without France and Germany agreeing and doing well.

You need those two economies to push everyone else, and everyone else trades with them. So we have no options, we need them to do well. Put together, this is the state of Europe that Mario Draghi rang the alarm about: the bloc is too reliant on traditional industry, too unproductive, too uncoordinated, and too averse to risk.

This fractured political landscape, in which countries look to protect their own interests over those of the Union, makes change difficult. So what's next?

Where do we look for warning signs or silver linings? The euro against the dollar is a good diagnostic for where Europe is being left behind.

It's trended downward and traded at equal value only a handful of times. But to command geopolitical weight, you need a big economy in dollar terms.

So crossing that parity threshold is a worrisome indicator for economists and politicians. A fall to par could embolden populist politicians who oppose the currency, raising the remote but real threat of another Brexit-like event.

Germany's right-wing AfD party said it's planning an election campaign advocating this.

But experts, including Draghi, have stressed that change, however difficult, is possible. Cars, machines, robots, this kind of precision engineering required to create this kind of hardware is something Europe is traditionally very, very good at.

Particularly Northern Italy, Southern Germany, Switzerland, these places that are very, very good at making things very well may play a pivotal role in where we produce high-quality technological goods going forward.

Europe's Missing Trillions

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Bloomberg Originals

Europe's Economic Crisis and the Need for Change

French government collapse and German worker strikes indicate a worsening economic situation in Europe.

The EU's economy is struggling to compete with the US and China, resulting in a significant loss of potential income.

Europe needs a digital-era economy with companies capable of challenging US and Chinese competitors to ensure its security and economic stability.

Europe is facing a tense moment, with its economic weakness placing it at the center of global concerns.

Draghi's Report and Europe's Competitiveness

Mario Draghi's report highlights Europe's weakness and the need for substantial investment to regain competitiveness.

The report emphasizes the need for hundreds of billions of euros in additional yearly investment to compete with the rapid innovation of the US and China.

Factors such as the war in Ukraine and existing economic challenges contribute to Europe's stagnation.

If current trends continue, Europe's global GDP share could fall to less than 10% by 2050.

Increasing productivity, meaning creating more value with the same amount of work, is crucial for economic growth.

Italy's olive industry serves as an example, showing how EU aid helped some farms upgrade their machinery, but also highlighting the limitations of traditional industries compared to high-tech sectors.

Cultivating olives is less productive than developing semiconductors or solar panels, areas where the US and China have prioritized investment.

Europe's lagging adoption of frontier technologies has resulted in lower incomes and efficiency compared to the US.

Lack of Investment in Tech and its Consequences

The EU's economy is significantly smaller than it could be due to insufficient investment in transformative startups and a lack of successful tech companies.

Limited venture capital markets and regulations hinder growth in the tech sector.

The vast valuations of US tech companies highlight Europe's lagging position in the global tech market.

Europe's lack of tech platforms and the digital transformation impacting various industries, such as the car industry, further exacerbate the situation.

Case Study: Volkswagen and Germany's Challenges

Volkswagen's struggles with the electric vehicle revolution exemplify Germany's challenges in adapting to the digital era.

Volkswagen's potential factory closures and job cuts highlight the impact of the transition on employment.

France faces political and financial difficulties, including high debt and a large deficit.

The increasing risk associated with French debt compared to German debt indicates investor apprehension.

Interdependence of France and Germany and Future Outlook

The economic well-being of France and Germany is crucial for the entire European Union.

Mario Draghi's alarm highlights Europe's reliance on traditional industry, low productivity, lack of coordination, and risk aversion.

The fractured political landscape hinders necessary changes.

The Euro's decline against the dollar and the potential for a Brexit-like event pose further risks.

Europe's traditional strengths in precision engineering could play a crucial role in producing high-quality technological goods.

Europe's Missing Trillions

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