In 2026, the European economy will not perform better than it did in 2025. At 1.2% (IMF estimate), its growth remains half as fast as in the United States. Still, there are more and more signs that Europe is regaining strength. The energy crisis, which has now been ongoing for eight months, would have caused it to halt in other times. Beneath an apparent sluggish activity, productivity is rebounding, while many sectors are picking up steam.
Insufficient growth and innovation, a technological lag, and an excessive dependence on China and the United States: two years ago, the “Draghi” report painted a troubling picture of Europe and laid the groundwork for a massive effort to revive the economy. Almost immediately afterwards, the European Union (EU) adopted a “competitiveness compass,” with the primary aim of strengthening its strategic autonomy.
A 3D Outlook: Defence, Digitalisation, Decarbonisation
Unsurprisingly given the geopolitical context, the most significant initiatives focused on defence: since March 2025, the SAFE (Security Action for Europe) instrument has enabled the Commission to raise funds on the markets (up to EUR 150 billion) to support member states in implementing the “Readiness 2030” rearmament programme[1]. Here, the planning stage has long been surpassed, and disbursements for the acquisition of military equipment are accelerating. According to the EDA (European Defense Agency), European defence spending is projected to reach EUR 454 billion in 2026, already 30% more than in 2024.
The EU-27 have also set out to catch up in the field of artificial intelligence (AI), committing up to EUR 200 billion in investments through public-private partnerships. From fostering a culture of AI to promoting and retaining talents, supporting startups, and sharing experiences and data, the initiative is designed to be comprehensive. Its cornerstone is a dedicated EUR 20 billion fund, co-financed by the Commission and the European Investment Bank, which aims to establish five “giga-factories” across Europe capable of hosting and training the most powerful AI models.
The EU is also leading the counteroffensive on other fronts, such as the supply of critical metals, which it is seeking to secure through trade agreements (most recently with Australia and South Africa)[2], and the accelerated decarbonisation of the economy (with specific support provided to energy-intensive sectors). Its “Clean Industry Pact” is expected to receive up to EUR 100 billion in funding from the Innovation Fund or the European Union Emissions Trading System.
Beneath the surface winds, supportive currents
In a report dated June 2026, the Institut Montaigne estimated that nearly one-third of the recommendations in the “Draghi” report had been implemented. Even before taking up the report, the EU had already launched a significant investment effort through its NextGenerationEU (NGEU) program: EUR 573 billion distributed via the Recovery and Resilience Facility (RRF) between 2020 and 2026, with a focus on energy infrastructure (particularly renewables), railway, digital & connectivity[3]. According to the Commission, two-thirds of the 6,000 “milestones and targets” assigned to governments have already been linked to the RRF[4].
What are the results on the ground? An analysis based solely on GDP trends would not be conclusive: after a rebound in 2025, European growth is projected to slow slightly in 2026. The International Monetary Fund (IMF) estimates it at 1.2%, a rate nearly half that expected in the United States.
In fact, the EU is showing remarkable resilience in the face of another major energy shock that, in other times, might have pushed it into recession. The German economy, one of the most exposed, is even gaining momentum despite headwinds, a sign that, beneath the surface, certain trends are gaining traction.
To assess the conflicting forces that have been shaping the European economy since the publication of the “Draghi” report, a sectoral breakdown may prove useful[5]. In particular, it allows to quantify the ongoing transformation of the automotive industry, where a 150-year-old technology — the internal combustion engine — is gradually giving way to electric power.
European Industry: Penalised by the Automotive Sector, Driven by Defence, the Energy Transition, and Artificial Intelligence
Transformation of the Automotive Sector
Year in and year out, European automakers are continuing their transformation. After a lull in 2023-24 due to a decline in government subsidies, European production of electric vehicles is picking up again (+30% in 2025). In 2026, based on figures from the battery sector (production up 25% y/y in July), this momentum continues. However, the volumes involved (3.2 million electric vehicles assembled annually in Europe compared to nearly 17 million in China, representing 75% of the global market[6]) remain too low to offset the decline in sales in the traditional internal combustion engine sector.
Compared to its pre-COVID average (2015-19), total European automobile production has thus fallen by 30% in volume — a historic slump. In 2026, against a backdrop of soaring fuel prices, the trend remains negative (down 9.6% y/y in July, according to Eurostat). Upstream in the supply chain, automotive suppliers, machine tool manufacturers, and metal manufacturers are struggling (see Chart 1).
The Rise of AI
As an example of “creative destruction,” artificial intelligence is becoming, alongside the energy transition, a driving force for the European economy, as evidenced by the boom in related industries. In Germany, the difficulties of the automotive sector stand in stark contrast to the strong momentum in orders for electrical and electronic equipment. In Europe, the production of IT equipment (computers, peripherals, etc.) is growing at a rate of 40% per year — a level not seen since the rapid digitalisation that accompanied the 2020-21 health crisis. Generally speaking, most sectors involved in generating or transmitting electricity (generators, transformers, cables, etc.) are currently outperforming the average. This is also true of the rail industry (locomotives and other rolling stock), driven by “green” investment efforts undertaken as part of the NGEU program.
Defence Efforts
If there is one area where actions finally match commitments, it is defence. Fighting vehicles, weapons and ammunition, as well as telecommunications and optical equipment — which are ubiquitous in drone systems — are all sectors where production volumes are breaking records and growth rates range from 20% to 50% annually.
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Far from the image of stagnation it often projects, the EU has, for several years now, been making a significant effort to modernise and strengthen the foundations of its economy. Although close to its end, the NGEU programme will continue to support investment, while initiatives taken in the wake of the “Draghi” report are generating further momentum. Sectoral analysis also shows that Europe is catching up with the AI wave — admittedly belatedly, but with increasing momentum.
The first signs of a recovery in productivity in Europe
Whether by coincidence or as a result, its hourly productivity has rebounded significantly over the past few quarters, returning to the 1% annual growth rate it had before the pandemic (see Chart 2). Finally, contrary to a fairly widespread belief, European companies have largely managed to maintain their competitiveness. Aside from the very specific case of China, their trade in manufactured goods outside the EU has tended to strengthen in recent years[7].
