The region’s economy is contracting.
The news broke recently that after 15 months of growth, Europe’s economy has “unexpectedly contracted,” despite being forecast to remain the same, or even grow.
According to Politico, “S&P Global’s composite purchasing managers index (PMI) fell to 48.6 in April from 50.7 in March. Analysts had expected it to stay above the key 50-point mark, below which activity is considered to be contracting.”
And this is only the beginning. Chris Williamson, Chief Economist at S&P Global, says, “Increasingly widespread supply shortages meanwhile threaten to dampen growth further while adding upward pressure to prices in the coming weeks.”
It was thought by some analysts that the economic lessons of the invasion of Ukraine had been learned, and that Europe had taken steps to ensure that it would not be held hostage again to an energy shock caused by events beyond its control. The main lesson, however, of structural vulnerability appears to have been ignored.
Europe’s current situation cannot be attributed entirely to events in the Middle East, either: while these have acted as a catalyst, they have exposed underlying problems with the European Union’s energy policies, and the disjointed nature of the member nations’ own energy sectors. The green transition, spearheaded by the European Green Deal and pursued with regulatory intensity and considerable haste, systematically dismantled the continent’s baseload capacity for energy provision and production long before replacement infrastructure was ready.
Coal plants have been shuttered on political schedules rather than economic ones. Nuclear programs, despite being reliable and domestically-controlled, were wound down in Germany and elsewhere on the presumption that alternatives would be available—a presumption that now looks like fantastical hope rather than prudential policymaking, especially as Bagger 288 quite literally rips the country apart. What remained in the absence of Germany’s renewable energy industry was a grid increasingly dependent on weather and global interconnection.
Atop the national problem, the regulatory layer has become a compounding factor: European energy markets are among the most regulated in the world, with carbon pricing mechanisms, emission trading schemes, and capacity market rules, all of which might be reasonable in the abstract, but collectively and in reality produce a cost structure that inevitably gets passed downstream. Germany’s BASF, one of the largest chemical manufacturers in the world, has raised prices as high as 30%.
Germany has become a case study in the dangerous effects of both leaving your energy economy exposed to global shocks and failing to invest in reliable energy creation industries that actually work. The decision to leave nuclear behind removed roughly 12% of its generating capacity, while becoming dangerously dependent on imported gas. Berlin has halved its economic growth forecast for 2026 from 1% to 0.5%, and for 2027 from 1.3% to 0.9% (though even these look optimistic). Some forecasts are putting the chances of Germany entering a recession in Q2 2026 at 33%.
It’s no surprise, then, that the PMI data confirmed what the indicators were showing. Services which carried the Eurozone through the Ukraine war and were “the engine of the bloc’s 2025 recovery” are now at the point of weakness—and while manufacturing has ticked up gently, this is actually due to stockpiling ahead of expected shortages rather than genuine demand.
But the key point is that input costs have risen drastically, to the point where there is a genuine fear of stagflation, as rising prices alongside declining economic activity have led to a doom spiral. Energy costs in Europe are astronomical: they are typically twice those in the United States on average, and nearly 50% above those in China. The cost of natural gas for Europeans is five times the cost for Americans.
And as it becomes more expensive to make things, those costs are passed downstream. First, it will be the energy sector itself as gas rises, but then it will be manufactured goods, then fertilizer, and eventually food. But it won’t matter if people can’t afford to buy things, if they won’t have a job anyway: there is a clear, established, positive correlation between electricity prices and unemployment.
The private sector is finally paying the price for the vulnerability of the bloc’s energy policies. This is not a sudden shock that can be waited out; it is a structural problem that is being compounded by political decisions rather than economic logic. Europe is regulating itself to be cold, hungry, and poor—while America and China pull ahead.
