IT FEELS indelicate to raise it at a time like this, but European business has a bigger problem on its plate than Britain’s decision to leave the European Union. After a decade of stagnation the continent’s firms have suffered an alarming decline in their global clout. Europe’s slide down the corporate rankings has been brutal, even before the market rout in the wake of Brexit. Of the 50 most valuable firms in the world, only seven are European, compared with 17 in 2006. No fewer than 31 are American, and eight are Chinese (few other emerging-market firms are really big yet). It’s past time that Europe’s bosses, investors and governments paid attention.

At the turn of the century it seemed natural that European firms would compete head to head with American ones, dividing the world between them, especially given that Japan’s once-aggressive multinationals were in retreat. In the following years Europe’s weight rose, relative to America’s, measured by the profits and value of listed firms. It peaked before the financial crisis (see chart 1).

How things have changed. The seven European firms that do make the cut are often oddities: three are Swiss, suggesting there really is something special about mountain air and rösti; another, AB InBev, a beer firm, is run by Brazilians who happen to have picked Belgium for their main share listing. The continent’s traditional heavyweight champions have become middleweight journeymen. In Britain BP, HSBC, Vodafone and GSK have all slid to the middle of the global rankings of their respective industries. So too have France’s equivalents: Total, BNP Paribas, Orange and Sanofi-Aventis.

A European firms occupies the top spot in only one out of 24 global sectors (Nestlé in food). European leaders are typically much smaller than their rivals across the Atlantic. Unilever’s market value is three-fifths of Procter & Gamble’s, Airbus is about half as big as Boeing and Siemens is a third of the size of General Electric. Deutsche Bank’s market value is a tenth of JPMorgan Chase’s. Walmart is ten times bigger than Tesco or Carrefour, two of Europe’s largest supermarket chains.

Europe and America have economies of a similar size, but the aggregate market value of the top 500 European firms is half that of the top 500 American firms. Aggregate profits are 50-65% smaller, depending on the measure used. Of these firms, the median American company is worth $18 billion, with net income of $746m in the past year. The median European firm is worth $8 billion and earned only $440m.

It wasn’t meant to turn out like this. In the 1980s corporate Europe was held back by a patchwork of national boundaries, the heavy hand of the state and cross-shareholdings with banks and insurance companies. Starting in the late 1980s new ideas emerged to reinvigorate European business. There was a trend towards privatising industries and making them answerable to investors. There was a push to create pan-European firms that would compete across the EU’s single market using, in most countries, a single currency. And there was a drive to take European firms global, exploiting the historical links of their home countries around the world.

These ideas had an electrifying effect in the 1990s and early 2000s. There were intra-European deals aimed at bulking up that created GlaxoSmithKline, Sanofi-Aventis, TotalFinaElf and Air France-KLM. Other deals aimed for global reach. In Spain, Telefónica, Santander, Repsol and BBVA made huge investments in Latin America, aiming to build a second “home” market. Some went shopping in North America. BP bought Amoco, Vivendi bought Seagram and Unilever purchased Best Foods. Europe even put up a respectable fight against Silicon Valley. As late as 2000 the old continent was dominant in mobile technologies, many of which had been invented there. Nokia, Ericsson and Alcatel were among the most valuable firms in the world.

Relegated from the big league

What went wrong? Slow growth in Europe has not helped, and a strong dollar has made American firms’ domestic operations more valuable. But four other factors also explain the slide. First, Europe picked the wrong businesses. It focused on old industries such as commodities and steel, and on banking, where new rules have caused a depression in cross-border lending. Europe has gone backwards in technology—it hasn’t created any firms of the scale of Facebook or Google. From the early 2000s its tech-and-telecoms incumbents proved to be poor at reinventing themselves, even as American contemporaries, including Cisco and Microsoft, learned how to evolve.

The second explanation is that Europe focused on the wrong parts of the world. The continent’s firms are skewed towards emerging markets, which generate 31% of their revenues, according to Morgan Stanley, a bank. For American firms the figure is 17%. As the developing world has slowed, it has hit corporate Europe disproportionately hard, from banks to cognac distillers and makers of luxury handbags.

Third, Europe stopped doing deals even as the rest of the world continued to consolidate. The share of global deals by European acquirers fell from a third before the financial crisis to a fifth after it (see chart 2). Meanwhile, American firms have continued to bulk up at home, seeking to dominate their huge domestic market.

Last, European managers’ less aggressive attitude towards shareholder value may account for the difference in market values between Europe and America. European firms generate a lower return on equity and return less cash to shareholders through dividends and buy-backs. That may explain why for every dollar of expected profits and of capital invested, European firms are awarded a lower valuation. One response to all of this is that raw size is not the same thing as global heft. Several of America’s most valuable firms, including AT&T and Berkshire Hathaway, are largely domestic. Many others are huge as a result of their businesses at home, but weaker abroad. P&G may be far bigger than Unilever, but its emerging-market business is smaller than that of its Anglo-Dutch rival. Germany’s medium-sized engineering firms dominate specialised product categories without having multi-billion-dollar market capitalisations. Yet corporate Europe’s waning scale is still a concern. Investment in research and development (R&D) tends to be disproportionately done by multinational firms. Of the world’s top 50 R&D spenders only 13 are European (down from 19 in 2006) while 26 are American. A lack of scale may also make firms vulnerable as takeover targets. GE’s purchase in 2014 of most of Alstom, a symbol of French engineering prowess, is a case in point. Of the firms in Britain’s FTSE 100 index, about a fifth have received bids in the past three years or are viewed as possible targets, among them AstraZeneca, a drugs firm, BP and IHG, a hotel group. Moreover, American companies have a strong incentive to buy overseas because of tax rules that encourage them to stash cash abroad.

Free-traders may be relaxed about this but foreign ownership could become a political problem. Europe will attract more controversial Chinese deals. Pirelli, an Italian tyre company, was bought by ChemChina in 2015, which is now buying Syngenta, a Swiss seeds firms. A bid for Kuka, a German robot maker, by a Chinese firm has caused a political stink. Europe’s fights with Google, over the right to be forgotten, antitrust and tax, are a sign that the continent’s emerging status as an American technology colony will not be pain-free.

An obvious response is a renewed push for consolidation within Europe. But such deals are often a nightmare because nationalist emotions boil over. The attempted takeover of BAE Systems, a British defence firm, by Airbus in 2012 collapsed after political arguments; the proposed takeover of the London Stock Exchange by Deutsche Börse could be cancelled after the Brexit vote. The union last year of Lafarge and Holcim, a French cement firm and a Swiss rival, has been mired in rows.

The difficulty of pushing through recent transactions echoes the past. Many careers have been wrecked by pan-European deals. Of the 50 biggest such transactions attempted in the past 20 years, about a third have failed to materialise. The rest have often been bruising to implement.

There are some signs of a new wave of European deals. Shell, now the continent’s most powerful energy company, bought BG, a rival, in 2015. A few tycoons are reinvigorating the 1990s idea of European empires. Vincent Bolloré, who controls Vivendi, a French conglomerate, is now investing in Italy and wants to create a European media giant to take on the empires of the Murdoch clan and Netflix.

But if it wants to create giants, Europe may have to restrain more than its nationalist instincts—it may have to temper its tougher approach to antitrust, too. The secret of some big American firms is that they have created oligopolies at home. For example, America has allowed broadband provision to be dominated by a few firms, and profits are high. Europe has scores of operators and its regulators have pushed prices and margins lower.

By allowing companies to merge, Europe might be entering a Faustian pact. Helping its firms re-establish global clout could be bad for consumers if competition is diminished. But there is an even worse possible outcome: that Europe’s corporate weakness will eventually lead to a defensive protectionism and the continent will close itself off from the outside world.