Europe is running out of workers while debating how long to preserve machines that burn imported fuel, a strange starting point for a competitiveness strategy. Europe’s biggest economic problem is not expensive electricity; it is weak productivity combined with a demographic trajectory that makes productivity increasingly important. If I were ranking the continent’s structural challenges, I would put productivity and the failure to scale new industries first, demographics second, the associated investment and fiscal burden third, and expensive energy around fourth.
Yet electricity moves much higher up the list when the question changes from what is Europe’s biggest problem? to what can Europe do about several of its biggest problems at once? Abundant, competitively priced electricity can improve industrial competitiveness, reduce exposure to imported fossil fuels, increase energy productivity, enable automation and digitalization, and create large markets for technologies in which European firms need to scale.
Mario Draghi’s Future of European Competitiveness provides the necessary corrective to anyone tempted to make energy the explanation for everything. Europe has excellent universities, researchers, engineers, patents, savings and established corporations, but it has been much less successful than the United States at turning those ingredients into large companies in emerging sectors. Only four of the world’s 50 largest technology companies are European, and much of the long-term EU-US productivity divergence is associated with digital technology. Cheap megawatt-hours will not create a European Nvidia, complete the capital-markets union or remove the regulatory barriers that fragment a nominal single market of roughly 450 million people. IMF work estimates that reducing intra-EU trade barriers toward the levels seen between US states could increase European productivity by almost 7% in the long term. That dwarfs any plausible economy-wide gain from electricity prices alone.
Draghi’s demographic point makes the productivity problem urgent. By 2040, the EU workforce is projected to be shrinking by close to two million workers a year. Europe therefore cannot rely on adding more people to produce more output, while ageing simultaneously increases the claims on that output through pensions, healthcare and care services. Economic growth increasingly has to come from producing more value from each worker and each euro of capital. That makes technologies and infrastructure that reduce recurring inputs, simplify operations and enable automation more economically valuable than they would be in a rapidly expanding labour force. Electricity enters the story here not as an alternative to single-market reform, digital innovation or deeper capital markets, but as infrastructure that can reinforce all of them.
China has just provided an unusually revealing demonstration of what that can mean under stress. Lauri Myllyvirta’s September 2026 Carbon Brief analysis of China’s second-quarter emissions found that Chinese CO₂ emissions fell 1% year-on-year even though coal use for electricity increased. The striking change was oil. Chinese oil consumption fell about 9% in the quarter and transport oil use about 16% amid the Strait of Hormuz crisis, yet most surface transportation activity kept growing. Cross-regional passenger trips edged up, urban passenger trips rose 2.9%, commercial freight tonnage increased 2.4% and first-half rail passenger traffic rose 5%. China used dramatically less transport petroleum without suffering anything resembling a 16% collapse in useful transportation.
Electrification did not cause that entire decline, and overstating the result would obscure what makes it interesting. Oil inventories were drawn down, high prices changed behaviour, construction was weak, public transportation gained traffic and air travel did decline sharply during part of the quarter. China’s emissions were also still marginally higher across the first half of 2026 as a whole. But the existing electric capital stock gave consumers and businesses an adjustment mechanism that a petroleum-dominated transportation system does not have. China’s EV fleet was about a third larger than a year before while charging volumes jumped 60%, meaning the vehicles already on the road were being driven much more. Electric heavy trucks were above 45% of new heavy-truck sales by June. Carbon Brief estimates that EVs displaced 36 million tonnes of oil equivalent in the first half of 2026, exceeding the United Kingdom’s entire oil consumption over a comparable six-month period. The increase in EV displacement explains only about a third of the year-on-year fall in Chinese oil consumption, but that leads to the more defensible and more important conclusion: electrification did not cause the entire oil-demand decline; it helped make a very large oil-demand decline economically tolerable.
Europe has already experienced the other side of that experiment. Ting Lan, Manasa Patnam, Frederik Toscani and Claire Li’s IMF paper A Silver Lining? The European Energy Crisis through the Lens of Directed Technical Change estimates that the 2022 energy shock leaves euro-area potential GDP about 0.8% below the no-shock counterfactual by 2027. Firms responded rationally to expensive energy by investing more heavily in energy efficiency, raising modeled energy productivity by roughly 3% and cushioning the damage substantially. But capital, management attention and innovation capacity are finite. Resources directed toward using less expensive energy were no longer available for increasing non-energy capital and labour productivity. The gas crisis therefore did more than produce frightening utility bills and sharply reduce output in energy-intensive industries. It changed what European businesses invested in and left an economic scar after wholesale energy prices retreated.
That vulnerability was visible before Russia invaded Ukraine. In October 2021, during the first major European gas-price surge, I argued that Europe’s energy crisis was predictable and had been predicted. Europe had treated a period of unusually cheap and stable natural gas as if it were a permanent feature of the economy, when the more durable strategy was fuel switching to electricity, renewable generation, transmission and storage. After the invasion of Ukraine made the geopolitical dimension impossible to ignore, I argued in 2022 that energy independence was the wrong goal and strategic energy interdependence the better one. The principle was that diverse European energy resources become continental assets when countries are strongly interconnected and electricity can move among them. Today that portfolio includes French nuclear generation, Scandinavian hydro, Iberian renewables, North Sea wind, storage and flexible demand. The acute crisis proved shorter than the bleakest predictions of 2022, but Lan and colleagues now quantify something my headline understated: the price crisis can end while its productivity consequences persist.
The structural advantage of electrification is that fossil economies continually repurchase much of their energy. Oil and gas are extracted, processed, transported, often transported again and then burned once, after which another shipment is required. Electrification moves a larger share of economic expenditure toward durable productive capital: generation, transmission, batteries, vehicles, motors, heat pumps and power electronics. None of those things is free, and they still require materials, financing, maintenance and eventual replacement, but tomorrow’s wind and sunlight do not require Europe to make another payment to a fuel exporter. A wind farm or transmission line continues producing economic services after its capital cost has been incurred in a way that a cargo of LNG does not.
Electrification also gets more useful work out of energy. Electric motors turn a much larger share of delivered energy into motion than combustion engines, heat pumps deliver several units of useful heat for each unit of electricity, and electric industrial systems can eliminate combustion stages, exhaust handling, fuel supply and mechanical complexity. That is energy productivity, and its physical basis is straightforward. The connection to labour productivity is less automatic but still important for an ageing Europe. Electrified systems frequently have fewer moving parts and lower routine maintenance requirements, while motors, batteries and power electronics integrate naturally with sensors, software, remote monitoring and automation. Electrification does not magically increase GDP per worker, but it creates multiple pathways toward lower operating labour and more automated production. Those pathways become more valuable as workers become scarcer.
This is also where Mariana Mazzucato’s work on the entrepreneurial state becomes relevant. Her useful insight is not the caricature that governments fund basic science and private markets do everything else. States have repeatedly absorbed early risks, built infrastructure, provided patient capital, shaped markets and created demand as technologies developed. Europe’s transition policies should be understood partly through that lens. A durable electric-vehicle target does more than reduce emissions: it tells battery manufacturers, automakers, charging providers, power-electronics firms and investors that a continental market will exist for their products. Heat-pump policies, grid programmes and industrial-electrification requirements perform similar market-creation functions.
That makes parts of Europe’s current industrial response self-defeating. The European Commission’s December 2025 legislative proposal would replace the post-2035 100% tailpipe-reduction requirement with a 90% target, with the remainder compensated through mechanisms including low-carbon steel and qualifying fuels. There may be reasonable details in the proposal, but the strategic contradiction remains. Europe correctly complains that its companies struggle to scale in emerging technologies and then considers weakening one of the clearest continental-scale demand signals available to its battery, electric-drive and charging industries. Protecting the utilization of existing combustion-engine factories for longer is not the same thing as having an industrial strategy for a world in which China is rapidly building expertise, supply chains and scale around batteries, motors, power electronics and electrified transportation.
China also demonstrates why simply building renewable generation is insufficient. Its coal generation rose during the first half of 2026 despite enormous additions of wind and solar. Poor wind conditions played a role, but so did renewable curtailment, continuing coal additions and a power system that still does not consistently reward flexible operation of coal plants, hydropower and interprovincial transmission. The lesson for Europe is straightforward: cheap generation is only economically valuable when it becomes cheap delivered electricity. Transmission, interconnection, storage, flexible demand and electricity-market design determine whether low-cost generation can actually reach consumers when they need it. China is simultaneously showing how rapidly electrification can displace petroleum and how much value can be lost when grids and markets lag generation.
Europe’s electricity-price problem is therefore real even though it is not the root cause of Europe’s economic malaise. The IEA reports in its Electricity 2026 analysis that electricity prices for large energy-intensive EU industries in 2025 remained more than twice US levels and nearly 50% above Chinese levels. For aluminium, chemicals, fertiliser, steel, glass, pulp and paper and other genuinely energy-intensive industries, that difference can overwhelm many other considerations. For banks, software companies and most professional services it plainly does not. Europe should not respond by subsidizing every historically significant industrial facility forever, and some electricity-intensive activity will rationally migrate within Europe toward areas with structurally better renewable resources. A genuine single market should care more about retaining efficient industrial value chains somewhere in Europe than about freezing the industrial geography produced by twentieth-century coal and gas supplies.
The policy objective should be to reduce the structural cost, volatility and fossil-fuel exposure of delivered electricity. Europe needs more renewable generation on its lands and waters, much stronger national transmission systems, substantially more cross-border interconnection, storage and flexible demand. It needs regulated asset bases, contracts for difference and other financing structures suited to infrastructure with multidecade economic lives, and it needs to build strategic transmission ahead of demand rather than waiting until every factory, charging depot or data centre is already stranded in an interconnection queue. Taxes, levies and network charges need to reinforce rather than obstruct the transition from fossil fuels to electricity. Advanced manufacturing and strategically important compute add another reason to get this right, but they do not require a separate argument: they are additional growth sectors whose economics increasingly depend on large supplies of reliable electricity.
Strategic electrical interdependence should sit at the centre of that model. A gas pipeline creates dependence on a continuous stream of one combustible commodity, frequently from a concentrated group of suppliers. A bidirectional transmission line connects portfolios of generation, storage and demand at both ends, and every additional connection expands that portfolio. Europe will not become literally energy independent, nor should it try. It can become far less exposed to the price and geopolitical volatility of continuously imported fossil fuels by converting more of its energy system into durable electrical infrastructure shared among countries with aligned economic and security interests.
The case for cheap electricity is strongest when electricity is not asked to explain everything. Europe still has to complete its single market, deepen its capital markets, improve commercialization, enable successful firms to scale and close a technology gap that cheap power alone cannot fix. But Europe is also running out of workers while importing much of the fuel that operates its economy. China’s experience in 2026 offers a glimpse of the alternative: when an external oil shock arrived, a large installed base of electric transportation allowed petroleum consumption to fall much faster than useful surface mobility. Europe’s own gas crisis demonstrated the inverse, with fossil dependence diverting capital and leaving a lasting productivity cost.
Europe is running out of workers, not ideas. It should stop treating electrification principally as a climate cost imposed on the economy and recognize the productive capital it creates. Cheap, abundant electricity is not the whole European productivity strategy. It should be one of its foundations.
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