Technology is increasingly shaping the prosperity and sovereignty of nations. The development of disruptive technologies such as AI, along with geopolitical events, is creating new arenas of competition, centered on investment in the innovation, production, and adoption of advanced technologies.
However, large European corporations invested €700 billion a year—or €3,000 per capita—less than their US counterparts between 2015 and 2022, particularly in technology, as returns on invested capital (ROIC) for corporate Europe trailed the United States’ by four percentage points. Europe currently competes effectively with the United States and China in only four out of 14 technologies considered critical to the future of the global economy.
These gaps create strategic dependencies for Europe and threaten to leave €2 trillion to €4 trillion on the table through foregone GDP contributions per annum by 2040, an amount that exceeds the continent’s current annual funding needed for net zero, defense, and healthcare combined.
As Europe charts its course to increase economic and technological competitiveness, consensus is emerging on the broad categories of levers required to drive change. Hundreds of concrete proposals have been laid out in recent reports by Mario Draghi, Prime Minister of Italy (2021–2022); Enrico Letta, Prime Minister of Italy (2013–2014); the McKinsey Global Institute; and others. Completion of the single market could overcome current fragmentation. Streamlined regulation could enable a substantial increase in investments.
Yet, real impact remains unrealized. This paper aims to start the journey of turning ideas into action with a sharp focus on impact, both at speed and at scale. It proposes a strategic framework for where to play and how to win; a list of private sector lighthouse initiatives to kick-start momentum; and ten public-sector “grands projets” to unleash European competitiveness and entrepreneurship, aligned with six priority areas for spurring innovation and investment.
Where to play and how to win: Targeted strategy for key technologies
Europe can neither lead across all technologies nor apply the same recipe for them all. This paper identifies tailored strategic choices for 14 significant technologies based on their respective strategic importance, maturity, and Europe’s starting point.
- Where Europe has a lead, it should defend and expand its global scale and leadership positions, for example in private wireless rollout—carefully reconsidering the potential trade-offs between the benefits of global scale and the risks of domestic market concentration.
- Where Europe has strengths in nascent technology areas, it should go all-in on scaling up and commercializing as fast as possible while defending strategic capabilities, such as in quantum sensing.
- Where Europe is trailing, this could involve leapfrogging to the next generation of technology in a nascent area (like optical computing in semiconductors) or focusing on vertical niches of strengths, such as industrial AI.
- Where Europe is far behind in the race, it might be time to reallocate resources from trying to catch up, for example in cloud computing, toward ensuring investment and capability transfer from global front-runners.
Mobilizing action: Private sector–led lighthouse initiatives to create momentum for critically needed change in the investment environment
Private sector–led efforts around a select number of high-impact lighthouse initiatives can help create momentum and lay the foundation for larger-scale progress. Such initiatives could include creating advanced industrial or vertical AI applications and integrated stacks in finance or healthcare or launching an industry-driven semiconductor skills and global exchange program. These initiatives can also pinpoint where the investment environment may need to change to make private business cases positive.
Unleashing investment: Ten public sector grands projets to create a more investment- and innovation-friendly environment
These could rapidly change the investment environment as a prerequisite for success. Among many ideas for public sector initiatives, this paper identifies ten that deserve priority because of their potential to deliver impact at scale fast. Front and center among these is the need to build and implement a uniform set of investment-friendly rules and regulations across Europe. As ongoing efforts for harmonization and simplification remain challenging, European Union (EU) leaders could choose to put in place a “greenfield 28th regime” of unified and radically simple business rules and standards across the EU to move quickly.
Other examples include a greenfield time-bound EU-wide digital permitting and approvals system or the public sector turning into an at-scale anchor customer for radical innovation in healthcare, defense, or energy.
All stakeholders will need to work hand in hand to move from ideas to action. The private sector is well-positioned to identify where and how Europe can best compete and provide an impetus. The public sector is seeking to be bold, as the Letta and Draghi reports show, yet closing the gap may need an audacious mindset, akin to the one that led to the introduction of the euro, focusing energy on achieving an equally lofty ambition despite all the complexities and risks.
This joint World Economic Forum/McKinsey & Company report was first published by the World Economic Forum.
