The plan to fix Europe’s existential crisis – And one sector that may reap the rewards

• Europe's facing existential threats: stagnant productivity, an aging workforce, expensive energy imports, and stifling regulations are eroding its global competitiveness and could drive the region into an economic decline that's hard to reverse.

• Draghi’s plan focuses on three key areas: boosting the tech sector by cutting red tape, slashing Europe’s energy costs by supporting the transition to renewables, and securing critical supply chains to reduce geopolitical vulnerabilities.

• Goldman Sachs sees strong potential for growth in Europe’s chemical industry, with Air Liquide,Novonesis, BASF, and Lanxess well-positioned to benefit from lower energy costs, energy transition projects and bio-based innovation.

After trailing behind the US for over two decades, Europe’s now facing a make-or-break moment. Deep structural issues continue to threaten the region’s economy, social welfare, and independence. There’s no sugarcoating it: without serious reform, Europe risks a decline from which it might not recover. Here’s how Europe can pivot, and where Goldman Sachs sees the most potential.

What’s wrong with Europe?

Europe’s economy is in a slow crawl, and the consequences are hitting home – literally. Since 2020, Europeans have seen their disposable income (adjusted for inflation) grow at half the pace that Americans have seen. But while it’s no secret that Europe’s struggling, the factors driving this economic slowdown have, until recently, been less clear.Mario Draghi – the former Italian prime minister and former European Central Bank president – has just published a report pinpointing the root causes of this troubling trend.

Chief among them is stagnant productivity – that’s particularly true in tech, where Europe lags far behind the US's rapid advances. Compounding limp productivity levels are demographic headwinds, as an aging population is shrinking Europe’s workforce, putting pressure on the economy as a result.Europe's also relies heavily on costly energy imports, rather than producing power within its own borders. Couple that with increasingly tense geopolitical tensions, and the region is left exposed and vulnerable to the will of the wider world, weakening its global competitive stance.

At the same time, over-regulation and fragmented markets have made it far harder for companies to innovate. The gruesome twosome have also ramped up costs and splintered growth opportunities, making it tough for businesses to scale and compete globally. That will make it far harder for Europe to meet its objectives of decarbonisation, digitalization, and increased defense capabilities. Meanwhile, many other countries have been bending the rules, with plenty leaning into protectionism to give their own firms an edge.

So what’s the solution?

Mario Draghi laid out three key solutions in his recommendations to the European Union’s leadership, calling for urgent action.Boost the tech sector: The tech sector is key to closing the productivity gap between Europe and the US, and Draghi’s plan starts by supercharging it. Europe wants to make it easier for businesses to turn ideas into products by cutting through the red tape that holds startups back and upping public investment in promising tech like AI.

To keep talent and innovation within the region, Draghi also calls for better tech infrastructure – think faster internet and more computing power – and more skills training so companies can find necessary talent without heading to the US.Cut Europe’s high energy costs: Europe’s energy bills are up to five times higher than the US. Draghi insists on reforming the energy market to shift away from fossil fuels and ensure businesses benefit from cheaper, renewable power sooner. At the same time, industries like clean tech and EVs should receive more support to fund innovation, helping Europe’s energy-heavy sectors become more competitive on a global scale while meeting climate targets. This approach would help Europe transition to a low-carbon economy without sacrificing economic growth.Make Europe more secure: Geopolitical risks are rising, so Europe needs to reduce its reliance on a few international suppliers for critical raw materials and digital tech. Draghi’s plan pushes for Europe to secure trade deals and invest directly in resource-rich countries, allowing it to build stockpiles of essential materials and form industrial partnerships to shore up key supply chains.

Additionally, Europe’s defense industry needs to consolidate and scale up, with more collaborative spending to strengthen its fragmented system and improve efficiency.The investment needed is huge: around €750 to 800 billion a year (4% to 5% the size of its economy), pushing spending to levels not seen since the 1960s and 70s. To pull that off, Europe will need more than just pooled household savings and more public-sector support: the region’s nations will need to remove borders to cooperate and coordinate policies across the board.

What’s the opportunity?

The plan is bold, but if it works, broad European stock indexes could get a serious boost – especially since they’re trading at cheaper valuations than their US counterparts.But, as with any big plan, expect the scope to shrink and the timeline to stretch. And while it’s designed to prop up Europe as a whole, you may want to be more selective with the areas you back.Goldman Sachs sees strong potential in the European chemical industry. See, lower energy costs – the single most decisive factor in their view – and targeted investments could sharpen the sector’s competitive edge. The focus on clean technologies, regulatory support, and innovation in bio-based solutions also offers a potential turnaround for a sector hit hard by high costs and competition.

Goldman identified two stocks in particular that should benefit from accelerated growth. The first is gas company Air Liquide, primed to capitalize on increased investment in energy transition projects like hydrogen, carbon capture, biofuels, and electronics, aligning perfectly with the renewable energy and decarbonization trends. The second is Novonesis: its strong focus on researching and developing biofuels and bio-based alternatives to petrochemicals means it’s well-placed to tap into the booming green tech and sustainability sectors.The big bank also identified stocks that may benefit from reduced headwinds in industrial sectors. In particular, Goldman sees a potential rebound for diversified European firms – that is, ones that work across a number of industries.

They’ve struggled since the energy crisis pushed up prices, since they guzzle a ton of power, so cheaper energy would free up some cash. BASF could benefit, and not just because it’s a huge energy consumer. Goldman thinks the firm’s broad market reach, with subsidiaries and ventures spanning more than 80 countries and exposure to key sectors like chemicals, plastics, agricultural solutions, and oil and gas put it in prime position to feel positive effects from the proposed plan. Their other top recommendation, Lanxess – primarily a chemical producer – could form a leveraged bet on the effects of supportive industrial policies. The firm has a lot of debt, which could boost shareholders returns, and a lot of exposure to the European industrial sector, positioning it to benefit from Draghi’s plan.