Europe is a global success story. It is a world leader in sustainability and social inclusion, two of the world’s most important issues. On inclusion, the top ten countries in the World Economic Forum’s Global Social Mobility Index 2020 are all in Europe, and the continent sets the global pace on matters like gender equality, social progress, and life expectancy. It has also managed to keep growing economically since 2000, even as it has reduced greenhouse-gas emissions—something that few other regions have done.
But when it comes to economic competitiveness, the picture is not as bright. The per capita GDP in Europe—defined here as the 27 members of the European Union plus Norway, Switzerland, and the United Kingdom—is 30 percent lower than that of the United States. In terms of corporate performance, from 2014 to 2019, European companies with more than €1 billion in revenue were 20 percent less profitable, grew revenue 40 percent more slowly, and spent 40 percent less on R&D than their US peers. In next-generation technologies, Europe generates far fewer patents, and it is home to only 14 percent of global unicorns; the United States has half.
It is imperative that Europe become more innovative and more competitive—quickly and at scale. If it does not meet this challenge, future growth, the energy transition, quality of life, and even its strategic autonomy could suffer.
Europe’s corporate underperformance is largely to be found in technology-creating industries. In the past, two reasons were given for this technology gap: strategic choices about where to specialize, and the leadership of a handful of tech giants. There is merit to these arguments, but in a sense, they are beside the point: winner-takes-most effects are increasing, and key technologies are spreading throughout every sector.
In 2022, McKinsey identified ten transformational technologies likely to drive the global economy. Europe trails China and the United States on eight of them, whether on innovation, production, or adoption. It does well in clean tech and next-gen materials but is far behind in next-gen computing, distributed infrastructure, and applied artificial intelligence.
If Europe is not successful in competing in these technologies, it could lose its strongholds even in industries where it has traditionally led the pack. For example, Europe has long been a leader in the automotive industry, but the technology gap could make it a laggard in autonomous driving.
On the matter of artificial intelligence, the issue is urgent. According to McKinsey research, 63 generative AI (GenAI) use cases could drive global productivity gains valued at $2.6 trillion to $4.4 trillion annually. With its unique blend of cultures, an emerging regulatory environment, and exceptional talent pool, Europe could be a world leader in GenAI. But it isn’t. To do better, Europe must address its weaknesses.
For a start, there is the matter of capital. Historically, Europe has lagged global peers in technology investments. For example, from 2015 to 2020, European venture capital firms invested $1 billion in robotics, less than a fifth of that of China and the United States. Its later-stage funding is just a tenth of the US level.
Just as important is closing the skills gap. GenAI’s current capabilities, together with other technologies, have the potential to automate work activities that absorb 60 percent to 70 percent of employees’ time today. When automation takes over dull or unpleasant tasks, workers can be redeployed to focus on higher-value activities. But to fully realize the productivity dividends possible, companies must build their technical capabilities and bring their workforce along. There is an opportunity for companies to rethink hiring to focus on prioritizing skills over degrees, and to make significant investments in reskilling and upskilling. If done well, this could fill the skills gap and help counter factors impeding Europe’s productivity, such as its low population growth.
To address Europe’s market fragmentation, one possibility is moving to more joint regional procurement in innovation-related areas. Today, Europe pools less than 1 percent of its total public procurement, compared to 45 percent at the US federal level.
Leaders should also ask how the regulatory environment could be more supportive of disruption and innovation. Is the regulatory system too slow, complex, and cautious for an environment where technology is changing so fast? Developing fast-track regulatory approval and decision-making processes would be helpful.
The private sector needs to step up, too. In addition to greater capital investment and training, business leaders must also take more risks and raise competitiveness by, for instance, setting ambitious long-term targets, adjusting incentives, and using programmatic M&A and alliances to build scale and capabilities.
Most importantly, government and industry must work together. Such collaborations have worked before. For instance, with government encouragement, European aircraft companies united to create Airbus. Now, we’re seeing the emergence of green hydrogen and carbon capture initiatives, as well as industrial consortiums like the Pact for Skills, which, among other ambitions, aspires to upskill 5 percent of Europe’s automotive workforce each year.
Competitiveness underpins the next phase of Europe’s economic and social ambitions. By creating more and better jobs, growth drives economic empowerment. Growth is also crucial for creating the capacity to finance the transition to net zero. And what we know is this: what got Europe to this point will not get it to the future it wants.
Improving the lives of Europeans requires excelling at three things: environmental sustainability, social inclusion, and economic growth. Europe is a leader on the first two. By building on its strengths, including first-rate education, a sophisticated industrial base, and a high degree of openness and connectivity, Europe can bolster its position on the third.
When Europe works, it works well—but it could work better.
