Why Europe’s economy is in decline?

Pars Today – Europe has ended 2025 with a bleak and uncertain economic and political outlook.

According to Pars Today, published statistics indicate that declining economic indicators and contracting factory activity—under the pressure of the consequences of the Ukraine war, high energy costs, and political uncertainty—signal further erosion of Europe’s manufacturing engine and a continuation of recession into the new year.

New data show that the Eurozone’s manufacturing Purchasing Managers’ Index (PMI) fell to around 48.8 in December 2025, placing it in a range indicating contraction and reduced activity compared to the previous month. This decline, combined with the first drop in factory output, paints an even darker picture for European industry at year-end. The report also highlighted that Eurozone factories have been cutting employment for the 31st consecutive month.

In fact, Europe’s economy at the close of 2025 presents a challenging and grim image—reflecting not only industrial recession and falling key production indicators but also the gradual erosion of a continental economic engine that had long been a pillar of the global economy. This dark outlook is the result of multiple factors, including rising energy prices and the Ukraine war.

For decades, Europe has relied heavily on energy-intensive and export-oriented industries, with countries like Germany, Italy, and France serving as the manufacturing engines of the Eurozone. Dependence on cheap energy imports from Russia, followed by the reduction or cutoff of energy exports—particularly gas—after European sanctions on Russia, has impacted many factories and industries across Europe. With the Ukraine war ongoing, rising energy costs have not only strained steel and chemical industries in various countries but also pushed smaller production chains to the brink of closure. While European nations have attempted to ease the pressure on industries through energy diversification and green transition programs, this path remains costly and difficult.

The continuation of the Ukraine war has also had a direct and undeniable impact on Europe’s economy. The conflict has disrupted energy supply routes and destabilized the geopolitical environment. Investors and companies are reluctant to invest amid uncertainty over future political and security conditions. As one economic analyst recently warned, Europe is not only grappling with an energy crisis but also facing a crisis of confidence in a future that no longer seems secure.

Rising military expenditures in Europe have further strained the economy, influenced directly by the Ukraine war and political pressures from former U.S. President Donald Trump, who repeatedly urged NATO members to raise defense spending from 2% to 5% of GDP. Additionally, Europe’s share of financing the Ukraine war has increased, significantly impacting European economies.

Weak export orders and declining demand are another key factor in the crisis. Europe has long depended on industrial goods and machinery exports to global markets, but in recent years, fierce competition from China and the U.S. has eroded Europe’s export position. China’s lower production costs and the U.S.’s massive investment in advanced technologies have captured larger shares of global markets. Falling export orders, especially in Germany’s machinery and intermediate goods sectors, reflect this downward trend.

The social and political consequences of the recession cannot be ignored. Declining production and employment have increased social dissatisfaction. Many factories have reduced employment for consecutive months, adding pressure on working- and middle-class populations. Economic inequality is widening, providing fertile ground for the rise of extremist political movements in Europe. In fact, the economic slowdown has directly impacted the political environment and exacerbated social instability. German Chancellor Olaf Scholz officially warned that if Europe fails to control energy costs and restore industrial competitiveness, the economic downturn could escalate into a broader social and political crisis.

Ultimately, the end of 2025 for Europe’s economy was not only a bitter conclusion but also a serious warning for the future. If European leaders fail to address economic and social crises quickly and decisively, the outlook ahead will only grow darker.