Foreword

Economic competitiveness and environmental sustainability, though often regarded as separate issues, are increasingly interdependent. Long-term prosperity relies on the maintenance of natural and social capital, as environmental degradation and resource insecurity eventually return as constraints on productivity and resilience. Europe’s future competitiveness depends on maintaining the conditions that make prosperity possible by managing the relationships between decarbonisation, ecosystem restoration, and strategic autonomy.

Acknowledgements

The European Environment Agency (EEA) acknowledges the contributions of its partners from the European Environment Information and Observation Network (Eionet), the Scientific Committee, and several directorates-general of the European Commission. Key input was also provided by the European Topic Centre on Sustainability Transitions, the European Environment Bureau, the Ecologic Institute, and the Cambridge Institute for Sustainability Leadership.

Key messages

European competitiveness is being reshaped by geopolitical fragmentation, technological change, and intensifying competition for resources. Long-term prosperity depends on maintaining natural and institutional foundations. The report identifies six no-regret options, including scaling circular economy approaches, investing in resilient infrastructure, and developing European capabilities in computing and AI. The strategic challenge is to connect and scale up existing policy efforts while maintaining a long-term perspective.

Executive summary

The decades leading to the mid-21st century are likely to be characterised by rapid technological transformation and intensifying environmental pressures, which could result in a cascading polycrisis. Europe’s socio-economic model faces new tests of resilience, where sustainability must be treated as an integral economic foundation rather than a separate policy objective. In 2026, extreme heat is estimated to have cost the EU 1% of its GDP, effectively nullifying growth for that year. While Europe has positioned itself as a leader in regulation, it remains vulnerable due to its dependence on global supply chains for critical raw materials (CRMs).

Introduction

Europe is in a period of profound uncertainty where the future is unlikely to be a simple continuation of past trajectories. Conventional linear projections of economic performance must be complemented by strategic foresight that accounts for ecological constraints and systemic interdependencies. The concept of being ‘competitive by nature’ describes a direction in which Europe creates economic value while strengthening the natural systems, social cohesion, and institutional foundations on which future prosperity depends.

Rethinking EU competitiveness through the lens of sustainability

The conditions supporting European economic growth are weakening. EU labour productivity fell from approximately 95% of the US level in 1995 to below 80% in 2022. Demographic changes, such as a shrinking working-age population and rising old-age dependency ratios, are placing increased pressure on public finances. Economic security has become a vital condition for competitiveness, particularly as competition with China intensifies in areas like clean technologies and CRMs. In 2025, the EU material footprint stood at 14.3 tonnes per capita, a level considered environmentally unsustainable.

Contextual factors shaping Europe’s competitiveness to 2040

Eight contextual factors will influence Europe’s future, including geopolitical dynamics, international security, and AI. Geopolitical shifts may lead to a more polarised or genuinely multipolar world. AI and deep learning are expected to be major drivers of change, though they will significantly increase demand for energy, water, and CRMs. Trust in public institutions is essential for managing structural reforms. Additionally, the availability of CRMs is a strategic vulnerability; for instance, EU demand for lithium is projected to increase 21-fold by 2050 compared to 2020 levels.

‘No-regret options’ for Europe’s sustainable competitiveness towards 2040

The report identifies six strategic directions that are potentially robust across various futures. Scaling up the circular economy can reduce material and energy dependencies. Investment in climate adaptation and nature-based solutions is crucial to protect productive capacity; current funding of EUR 15-16 billion per year is well below the estimated EUR 53-137 billion required annually. Developing European capabilities in AI and biotechnology is necessary to reduce strategic technological dependencies. Strengthening skills, education, and social cohesion ensures the workforce can navigate structural change. Finally, maintaining an active role in international standard-setting allows the EU to shape global rules and diversify relationships.

Conclusions

Europe’s socio-economic model is at a pivotal moment. Sustainability and competitiveness can no longer be treated as separate objectives. Investment in circularity, resilient infrastructure, and institutional capacity expands Europe’s room for manoeuvre and its ability to respond to changing circumstances. Competitiveness is an ongoing capacity for renewal: the capacity to innovate, govern structural change, and maintain the foundations for future prosperity within finite ecological resources.