The European Union, once considered a global powerhouse, finds itself at a crossroads marked by unprecedented geopolitical challenges and economic vulnerabilities. A comprehensive report by Mario Draghi, former President of the European Central Bank, sheds light on the systemic issues threatening the EU’s competitiveness in the global market. The report, a detailed analysis of the Union’s current economic trajectory, underscores that Europe’s longstanding economic advantages are eroding due to the geopolitical aftermath of its decision to phase out Russian energy and increased competition from global powers such as China.

The implications of Draghi’s report are severe and far-reaching, emphasizing that the EU is losing its foothold in critical sectors that will shape the future global economy. The report outlines that without immediate and profound reforms, the EU risks becoming an increasingly irrelevant player on the world stage, both economically and politically.

Concept	Key Issues	Solutions/Recommendations
Energy Security	Loss of access to Russian energy; rising natural gas and electricity prices; inefficiencies in energy market design.	Reform the EU energy market, diversify energy supply chains, increase use of renewable energy sources, and reduce taxes and market manipulation.
Global Competition & Tech Gap	Increasing competition from China and U.S., especially in clean technology, electric vehicles, and emerging tech sectors (AI, quantum computing).	Invest in research and development, create cohesive industrial strategies, foster innovation, support tech startups, and improve collaboration between government and private sector.
Defense and Security	Overreliance on non-EU defense suppliers, particularly U.S. companies, risking strategic autonomy.	Develop EU-based defense capabilities to ensure strategic autonomy and reduce reliance on non-EU suppliers.
Critical Raw Materials and Supply Chains	Heavy dependence on external suppliers for CRMs used in clean energy technologies (batteries, solar panels).	Diversify supply chains, secure alternative raw materials, and enhance recycling capabilities for sustainability in clean energy sectors.
Industrial Policy & Global Subsidies	Inadequate industrial strategy compared to U.S. and China’s aggressive subsidies, pushing deindustrialization in Europe.	Strengthen Europe’s industrial strategy, increase funding and coordination to support key industries, and offer competitive incentives.
The European Green Deal	Challenges in renewable energy integration, high energy prices, slow infrastructure development, and dependence on raw material imports.	Accelerate infrastructure upgrades, secure raw material supply chains, and attract investments in renewable energy technologies.
Technological Sovereignty	EU lags in AI development compared to the U.S. and China; regulatory hurdles limiting AI innovation.	Boost AI investment, streamline regulations to encourage innovation, and improve Europe’s competitiveness in advanced technologies.
Demographic Challenges	Aging population, declining birth rates, and labor shortages impacting productivity and economic growth.	Reform labor policies, attract skilled immigrants, invest in workforce upskilling, and encourage higher participation from women and older workers.
Inflation and Fiscal Policy	Rising inflation due to energy prices, supply chain issues, and geopolitical instability; uneven fiscal policy across EU member states.	Implement balanced monetary policies and coordinate fiscal responses to manage inflation without stalling economic growth.
Geopolitical Shifts	The U.S. focusing on Pacific Rim (AUKUS) while China grows stronger; EU risks being sidelined.	Increase defense and security autonomy, enhance economic cooperation within Europe, and engage strategically with global powers.

Geopolitical Shifts and the EU’s Loss of Energy Security

One of the most pressing issues highlighted in Draghi’s analysis is the loss of access to Russian fuel. Historically, Russia provided a substantial portion of the EU’s energy needs, creating a sense of security and predictability within the European economy. However, since the onset of Russia’s special military operation in Ukraine and the subsequent geopolitical fallout, the EU’s decision to wean itself off Russian energy has left Europe vulnerable.

Natural gas prices in the EU skyrocketed to 4-5 times higher than those in the United States, reflecting the acute disparity in energy access and affordability. Despite recent declines from the peak prices, the EU continues to face electricity costs that are double or even triple those in the U.S. The gap, as the report elaborates, is a direct consequence of Europe’s limited natural resources and fundamental flaws in its energy market design. The inefficiencies of the EU’s energy market prevent industries and households from fully benefiting from cleaner, renewable energy sources. The report warns that high taxes and market manipulation by financial traders further inflate costs for European consumers and industries, making the energy market one of the most significant impediments to Europe’s economic competitiveness.

This shift in energy policy has had ripple effects throughout the continent’s industrial landscape. Many European industries, already struggling with sluggish growth and increasing global competition, are now burdened with unsustainably high energy costs, putting them at a disadvantage against their global competitors, particularly in the United States and China. The report points out that without a strategic overhaul of the energy market and enhanced cooperation with alternative energy suppliers, the EU’s economic decline may be irreversible.

The Rise of China and the Growing Tech Gap

The Draghi report also underscores the escalating competition between the EU and China, particularly in industries like clean technology and electric vehicles. China’s rise as a global manufacturing and innovation powerhouse, fueled by massive state subsidies, rapid technological advancements, and control over critical raw materials, is making it increasingly difficult for Europe to compete. The Chinese government has implemented sweeping industrial policies that have allowed domestic companies to dominate key global markets, particularly in sectors that are expected to drive future economic growth.

While the EU has made strides in clean energy and electric vehicles, its efforts pale in comparison to China’s continent-wide scale of production and innovation. The report argues that Europe’s lack of a cohesive industrial strategy has allowed China to take the lead in these critical sectors, a trend that, if left unaddressed, could leave Europe behind in the race for future economic leadership.

Europe has also fallen behind in emerging technologies such as artificial intelligence, quantum computing, and biotechnology. The report highlights that the productivity gap between the EU and the United States is largely attributable to the tech sector, which has driven significant growth in the U.S. economy. Only four of the world’s top 50 tech companies are European, reflecting the EU’s missed opportunities in the digital revolution. The consequences of this technological lag are profound, as it undermines Europe’s ability to compete in the industries that will define the global economy in the coming decades.

Draghi’s report calls for an urgent and profound refocusing of Europe’s efforts to close the innovation gap with the U.S. and China. This requires significant investment in research and development, fostering a more conducive environment for tech startups, and better collaboration between governments and the private sector. Without such efforts, the EU risks becoming a technological backwater, dependent on foreign innovation and unable to generate the productivity gains necessary for sustainable economic growth.

Defense and Security: The Growing Dependence on Non-EU Suppliers

In addition to economic vulnerabilities, the report also highlights the EU’s growing dependence on non-EU suppliers for defense capabilities. Between mid-2022 and mid-2023, 78% of total procurement spending by EU countries went to non-EU suppliers, with 63% of those purchases directed towards U.S. companies. This overreliance on external defense suppliers poses significant risks to Europe’s strategic autonomy, particularly as the U.S. shifts its focus away from Europe towards the Pacific Rim, where it perceives a greater threat from China.

The EU’s security architecture has long relied on the U.S. as a guarantor of its defense, but recent shifts in U.S. strategic doctrine indicate that Europe can no longer depend on American protection. The creation of AUKUS, a security alliance between the U.S., the UK, and Australia, underscores Washington’s pivot towards countering China’s influence in the Pacific. As the U.S. becomes less willing to act as Europe’s security umbrella, the EU must develop its own defense capabilities to address growing security challenges. However, the report notes that Europe has yet to make significant progress in this area, leaving the continent vulnerable to external threats.

The Struggle for Critical Raw Materials and Supply Chain Security

Another key vulnerability outlined in the report is the EU’s dependence on external suppliers for critical raw materials (CRMs) and advanced technologies. Approximately 40% of Europe’s imports come from a small number of suppliers, many of which are located in countries with which the EU does not have strategic alignment. This dependence has the potential to become a significant liability in the event of geopolitical fragmentation, as access to these vital resources could be restricted.

Europe’s reliance on external suppliers for critical inputs makes its supply chains particularly vulnerable to disruption. This is particularly concerning in industries like clean energy, where the production of batteries, solar panels, and wind turbines depends on a steady supply of rare earth elements and other critical raw materials. The report calls for a concerted effort to diversify Europe’s supply chains and reduce its dependence on a small number of external suppliers. Failure to address this issue could result in supply chain bottlenecks that impede Europe’s ability to compete in the global clean energy market.

Economic Growth and Innovation: The Path Forward

Draghi’s report paints a bleak picture of the EU’s current economic trajectory, but it also offers a roadmap for reversing the decline. The key to Europe’s future competitiveness lies in its ability to innovate and grow, particularly in advanced technologies. The report calls for a new industrial strategy that prioritizes investment in research and development, fosters innovation, and creates a more favorable environment for tech startups. Europe must also reform its energy market to reduce costs for consumers and industries, diversify its supply chains to enhance security, and develop its own defense capabilities to reduce reliance on non-EU suppliers.

Without these reforms, the report warns that the EU may cease to exist as a cohesive economic and political entity. The global economic landscape is changing rapidly, and Europe risks being left behind if it fails to adapt to these new realities. The time for action is now, and the future of the European Union hangs in the balance.

The report by Mario Draghi not only highlights existing vulnerabilities within the European Union but also signals emerging economic trends and geopolitical realignments that demand immediate attention. As 2024 progresses, these trends intensify, deepening Europe’s challenges. New economic and geopolitical dynamics reveal more facets of the EU’s current struggles, calling for comprehensive, targeted responses.

The Increasing Role of Industrial Policy and Subsidies Globally

As global competition accelerates, many of the world’s largest economies, including China and the United States, have shifted toward aggressive industrial policies, marked by substantial subsidies and tax breaks to ensure global competitiveness. China’s “Made in China 2025” strategy continues to place immense pressure on Europe, as Chinese companies benefit from state-funded support to enhance their production capacities in high-tech industries such as semiconductors, 5G technology, and clean energy infrastructure.

The United States is also stepping up its industrial policy efforts through the Inflation Reduction Act (IRA) and the CHIPS and Science Act. Both these legislative packages represent an unprecedented move by the U.S. government to boost its semiconductor production and clean energy industries with large-scale public investment. The IRA, in particular, provides over $369 billion in subsidies, tax incentives, and funding to green energy projects, including solar, wind, and electric vehicles, giving U.S. companies a competitive edge in these fast-growing sectors.

In contrast, Europe’s fragmented and relatively underfunded industrial strategy leaves it ill-equipped to compete on this global stage. While the European Union has put forward its own initiatives—such as the Green Deal Industrial Plan to enhance the production of renewable energy and clean technology—it lacks the scale and coordination of the policies being rolled out by the U.S. and China. This funding gap risks pushing European manufacturers to relocate to countries offering better incentives, exacerbating deindustrialization trends within the EU.

The European Green Deal and Energy Transformation: Opportunities and Shortcomings

The European Green Deal, introduced with the aim of making Europe the first climate-neutral continent by 2050, represents one of the EU’s boldest policy initiatives in recent history. The ambitious climate and energy targets set out by the Green Deal align with Europe’s long-term vision of sustainability. However, as the report indicates, Europe’s current energy market structure remains a substantial hurdle, especially in light of the 2024 scenario where energy prices continue to impact industrial productivity.

The Green Deal’s success hinges on the EU’s ability to efficiently integrate renewable energy sources such as wind and solar power into its energy grid. However, the slow pace of infrastructure development, particularly the lack of sufficient energy storage systems and modernized grids, continues to hamper the expansion of renewables. By 2024, Europe’s renewable energy production has grown but still faces bottlenecks in transmission capacity and inconsistent regulatory environments across member states. While wind and solar farms have proliferated, inconsistent access to clean energy remains a critical issue for industrial centers, especially in Central and Eastern Europe.

Another concern is the significant investment required to transition to renewable energy. Europe’s renewable energy sector has already attracted substantial investments, but experts project that an additional €1.8 trillion will be needed by 2030 to achieve full decarbonization. The report raises concerns about whether Europe can mobilize this level of capital, particularly when energy prices are already higher than global averages, discouraging private investment. The challenge is compounded by inflationary pressures, rising interest rates, and growing geopolitical risks, which further dampen investment prospects.

Moreover, Europe’s reliance on imports of critical materials for renewable energy technologies, such as lithium, cobalt, and rare earth metals, makes the continent vulnerable to supply chain disruptions. By 2024, this dependency has intensified, particularly as China continues to dominate the global market for these raw materials, which are crucial for battery production and electric vehicles. Without securing alternative sources or establishing a sustainable recycling industry, the EU’s energy transformation could falter.

Technological Sovereignty and the AI Race: Europe’s Lagging Position

One of the most critical areas where Europe risks falling behind is in artificial intelligence (AI). By 2024, AI has evolved into a central force driving global economic competition. Countries with a strong AI foundation are positioned to dominate industries such as healthcare, finance, manufacturing, and defense, with profound implications for productivity and economic growth. However, the EU’s technological sovereignty in AI and other frontier technologies remains limited.

While Europe has strong research institutions and a talented workforce, it lacks the scale of investment seen in the U.S. and China. The United States continues to lead the AI race, with Silicon Valley tech giants pouring billions into AI research and development, while China has ramped up its investments under its AI National Development Plan, seeking to become the world’s leading AI innovation center by 2030. The EU’s total AI investment in 2023 was around €3.2 billion, dwarfed by China’s estimated €12 billion and the U.S.’s €23 billion during the same period.

Europe’s approach to AI is further hampered by regulatory hurdles. While the EU has proposed some of the world’s strictest AI regulations, aimed at protecting privacy and preventing the misuse of AI technologies, the framework has also raised concerns about stifling innovation. Companies in the AI sector often struggle to navigate the EU’s regulatory landscape, which can delay the deployment of new AI tools and discourage investment. As a result, the EU’s share of the global AI market remains stagnant, with the region accounting for less than 10% of global AI patents in 2024.

The report highlights the urgency for Europe to increase its AI investments and streamline regulations to foster a more dynamic AI ecosystem. If Europe fails to act, it risks missing out on the enormous productivity gains that AI offers, further widening the gap between the EU and its competitors. AI-driven advancements, particularly in automation, could revitalize Europe’s aging manufacturing sector, but only if the EU positions itself as a leader in AI innovation and adoption.

Demographic Challenges and Workforce Implications

In 2024, demographic trends continue to exacerbate Europe’s economic challenges. With a rapidly aging population and declining birth rates, many EU countries are grappling with labor shortages that are negatively affecting productivity. This is especially critical in key sectors such as healthcare, manufacturing, and construction, where the workforce gap is becoming increasingly acute.

Germany, the EU’s largest economy, faces a particularly stark demographic challenge. The country’s working-age population is shrinking, and without significant immigration, the country’s economic growth could stall. While automation and AI may help alleviate some labor shortages, many sectors still require human labor, and the shortfall in skilled workers could undermine Europe’s broader economic competitiveness.

The report underscores the need for the EU to reform its labor policies and immigration frameworks to attract skilled talent from non-EU countries. Moreover, the EU must invest in upskilling its existing workforce, particularly in digital literacy and advanced technological skills, to keep pace with the evolving demands of the global economy. In addition, policies promoting higher workforce participation, especially for women and older workers, could mitigate some of the demographic pressures.

Inflation and Fiscal Policy: The 2024 Outlook

In the post-pandemic world, inflationary pressures remain a major concern for the EU in 2024. Rising energy prices, supply chain disruptions, and the geopolitical instability surrounding the Russia-Ukraine conflict have contributed to higher-than-expected inflation rates across Europe. Inflation in the eurozone averaged 6.3% in 2023, and while it is projected to ease slightly in 2024, persistent inflationary pressures are expected to weigh on the region’s economic growth.

The European Central Bank (ECB) has responded with a series of interest rate hikes aimed at curbing inflation, but the tightening of monetary policy has had the side effect of slowing down economic activity. Businesses, particularly small and medium-sized enterprises (SMEs), have found it increasingly difficult to secure affordable financing for investments, stunting growth in key sectors.

Moreover, the report highlights that fiscal policy responses to inflation have been uneven across EU member states. While wealthier countries like Germany and the Netherlands have been able to cushion their economies with expansive fiscal policies, poorer southern and eastern European states have struggled to provide similar support, exacerbating economic disparities within the Union.

The ECB faces a difficult balancing act: if it tightens monetary policy too much, it risks pushing Europe into a recession, while being too lenient could entrench inflationary expectations. The report calls for greater fiscal coordination between EU member states to ensure that inflation control measures do not disproportionately harm the weaker economies within the bloc.

Europe’s Window for Action

The Draghi report is unequivocal in its assessment: Europe is at a critical juncture, and failure to act swiftly could result in the EU losing its global relevance. The report identifies the key challenges: energy insecurity, technological lag, over-reliance on external defense suppliers, demographic decline, and fiscal imbalances. However, it also offers a clear pathway forward, emphasizing the need for a coordinated and robust industrial policy, energy market reforms, investment in frontier technologies, and proactive labor market strategies.

As 2024 unfolds, the window for action is closing. The global economy is shifting rapidly, and the EU must find a way to reinvigorate its competitiveness or risk becoming a secondary player in a world increasingly dominated by the United States and China. Europe’s leaders have a unique opportunity to shape the future of the Union, but doing so will require bold, forward-thinking policies that prioritize innovation, sustainability, and strategic autonomy over short-term gains.

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In-depth Analysis – The Future of European Competitiveness

Europe’s Existential Economic Crisis: The Need for Radical Transformation

Since the turn of the century, Europe has faced consistent economic stagnation, struggling to match growth rates seen in other parts of the world, particularly in comparison to the United States. Despite various strategies aimed at stimulating growth, the European Union (EU) has fallen behind, particularly in terms of productivity. This failure has resulted in a widening gap between the EU and the US, with European households paying the price through lower living standards. While real disposable income per capita has nearly doubled in the US since 2000, Europe has lagged significantly.

For much of this period, Europe viewed its slowing growth as an inconvenience rather than an existential threat. European exporters thrived by tapping into rapidly growing markets in Asia. Labor force expansion, especially the rising participation of women, helped boost growth. Even after the financial crises of 2008-2012, unemployment fell, reducing inequality and shoring up the EU’s welfare model. However, despite these short-term successes, Europe’s economic foundations were far more fragile than policymakers realized.

The global environment that Europe relied upon has shifted dramatically. The previous era of rapid trade growth and geopolitical stability has ended. The EU’s reliance on Russia for energy has collapsed in the wake of geopolitical tensions, and Europe’s global position is increasingly compromised by deepening dependencies. Technological innovation, an area where the US has surged ahead, continues to leave Europe trailing. The tech sector, central to modern productivity gains, has become a primary driver of economic divergence between the EU and the US, with only four of the world’s top 50 tech firms being European.

As Europe confronts its future, the demographic shift poses a new and pressing challenge. The EU’s workforce is expected to shrink by close to two million workers annually by 2040, meaning future growth must come from productivity improvements rather than labor expansion. Yet, the EU’s current productivity growth is insufficient to maintain stable GDP levels, let alone meet the new investment needs arising from digitalization, decarbonization, and increased defense spending. Without substantial economic reforms, Europe faces a future of stagnation and declining global relevance.

The EU must undergo a radical transformation to avoid this outcome. This requires a concentrated focus on three critical areas: innovation, decarbonization, and security. Failure to address these issues threatens not only economic growth but also Europe’s social model, its global standing, and its fundamental values of prosperity, equity, and freedom.

Innovation: Closing the Gap with the US and China

Europe’s static industrial structure has left it far behind the US and China in terms of technological innovation. The EU has failed to nurture new, disruptive industries, and no European company with a market capitalization over EUR 100 billion has been founded in the past 50 years. In contrast, six American companies with valuations exceeding EUR 1 trillion have emerged during this period, driven by innovation in the tech sector.

This gap is self-perpetuating. European companies are focused on mature industries with limited potential for breakthrough innovation. As a result, they invest significantly less in research and development than their US counterparts. In 2021, European firms invested EUR 270 billion less in R&D than US companies, with the automotive industry dominating Europe’s investment landscape. While this was also true in the US in the early 2000s, the US has since shifted its focus to tech, while Europe remains stagnant.

The issue is not a lack of talent or ambition. Europe is home to many innovative researchers and entrepreneurs. However, Europe consistently fails to translate this innovation into commercial success. European companies seeking to scale are hindered by fragmented regulations and an inconsistent regulatory environment, pushing many entrepreneurs to relocate to the US. Between 2008 and 2021, nearly 30% of Europe’s unicorns—startups valued at over USD 1 billion—moved their headquarters abroad, mostly to the US.

As the world enters an era dominated by artificial intelligence, Europe cannot afford to remain stuck in the industries of the past. The EU must unlock its innovative potential, integrating AI into traditional industries to maintain global competitiveness. This requires not only fostering innovation but also equipping the European workforce with the skills needed to thrive in a tech-driven economy. While the EU should aim to match US innovation levels, it must also surpass the US in ensuring education and lifelong learning opportunities for all its citizens, ensuring that technological progress goes hand in hand with social inclusion.

Decarbonization: Balancing Competitiveness and Climate Goals

Europe’s ambitious climate targets present both an opportunity and a challenge. If the EU can coordinate its decarbonization policies effectively, this transition could be a powerful driver of growth. However, without proper coordination, decarbonization could undermine competitiveness, particularly in industries like manufacturing, which are heavily reliant on energy.

Although energy prices have decreased since their peak, European companies still face electricity costs that are two to three times higher than in the US, and natural gas prices four to five times higher. This discrepancy is partly due to Europe’s lack of natural resources and inefficiencies in the common energy market. Current market rules prevent industries and households from fully benefiting from clean energy, and high taxes and speculative financial trading further inflate energy prices.

While decarbonization will eventually lead to lower-cost, secure energy sources, fossil fuels will continue to play a central role in determining energy prices throughout the 2020s. Without a comprehensive plan to transfer the benefits of decarbonization to end-users, high energy prices will continue to drag on economic growth.

At the same time, global decarbonization represents a significant growth opportunity for European industry. The EU is a world leader in clean technologies, with more than 20% of global sustainable technology innovation originating from Europe. However, Chinese competition, particularly in areas like clean tech and electric vehicles, is intensifying. China’s aggressive industrial policy, rapid innovation, and control of raw materials pose a serious threat to Europe’s clean technology leadership.

The EU faces a critical decision. Increasing reliance on China may offer the most cost-effective path to meeting decarbonization targets, but it also risks hollowing out Europe’s own clean tech industries. Decarbonization must happen to protect the planet, but for it to become a source of growth for Europe, the EU must develop a coordinated plan that supports both energy production and the industries that will enable decarbonization.

Security: Reducing Vulnerabilities and Enhancing Resilience

As geopolitical risks rise, security has become a prerequisite for sustainable economic growth. Europe’s dependence on a few key suppliers for critical raw materials—particularly China—has left it vulnerable, especially as global demand for these materials surges due to the clean energy transition. Europe is also heavily reliant on imports of digital technology, with 75-90% of global chip production capacity located in Asia.

These dependencies are a two-way street—China also relies on the EU to absorb its industrial overcapacity—but major economies like the US are already working to disentangle their supply chains from China. If the EU fails to act, it risks being left vulnerable to geopolitical coercion.

In this context, Europe needs a cohesive “foreign economic policy” that strengthens its global position. This involves securing supply chains for critical technologies, negotiating preferential trade agreements with resource-rich nations, and building strategic partnerships with key industries. Only through coordinated action can Europe build the leverage needed to secure its economic independence.

Physical security threats are also on the rise. Although the EU is the world’s second-largest military spender, its defense industry is fragmented and inefficient, with multiple countries operating different types of equipment, reducing Europe’s ability to act as a unified force. This fragmentation not only weakens Europe’s defense capabilities but also limits its ability to produce at scale, reducing the competitiveness of its defense industry.

Overcoming Obstacles: The Path Forward

Europe’s economic challenges are not insurmountable, but they require urgent and coordinated action. The EU’s slow, fragmented decision-making process has hindered its ability to respond to global shifts. While individual member states have implemented industrial policies, the EU as a whole has failed to act with the necessary focus and coordination.

Europe’s regulatory environment is one of the key barriers to progress. While the EU claims to support innovation, it continues to impose heavy regulatory burdens on businesses, particularly small and medium-sized enterprises (SMEs). More than half of Europe’s SMEs cite regulatory obstacles as their biggest challenge.

The EU also underutilizes its collective resources. Despite its significant spending power, Europe’s defense and innovation investments remain fragmented, diluting their impact. In the defense sector, less than 20% of procurement spending in 2022 was collaborative, and the majority of contracts were awarded to non-EU suppliers, particularly from the US. In innovation, public investment is spread thin across multiple national and EU instruments, limiting its effectiveness.

To regain its competitive edge, Europe must adopt a more strategic approach to economic policy. This means streamlining decision-making processes, aligning national and EU policies behind common goals, and ensuring that public resources are used efficiently to support key sectors.

Financing the Future

The investments needed to transform Europe’s economy are enormous, particularly in areas like defense, digitalization, and decarbonization. The private sector alone cannot bear this burden; public sector support will be essential. However, the EU’s ability to finance these investments depends on its willingness to implement productivity-enhancing reforms.

Increasing productivity will not only generate the fiscal space needed to support public investment but also enhance Europe’s economic resilience. Joint funding mechanisms for key European public goods, such as breakthrough innovation and cross-border infrastructure, will be necessary to achieve these goals.

Europe’s economic future is at a crossroads. Without decisive action, the continent risks losing its global standing and compromising its core values of prosperity, equity, and freedom. But with the right reforms, Europe can overcome these challenges and emerge stronger, more competitive, and more resilient. The time for action is now—Europe’s survival depends on it.

A new landscape for Europe

Europe stands at a pivotal moment in its economic history, facing a rapidly shifting global landscape. The foundations of the European economy, built on a model that integrates openness, market competition, and a strong legal framework to redistribute wealth, have long positioned the EU as a formidable economic power. The EU has managed to combine high levels of human development with relatively low inequality, creating a Single Market of 440 million consumers and 23 million companies that together account for approximately 17% of global GDP. This economic structure has been underpinned by progressive social policies, a high level of education and health standards, and a strong commitment to environmental protection. In many ways, Europe has led the world in governance, sustainability, and social welfare, outperforming the US and China in metrics such as income inequality, life expectancy, and environmental standards.

However, Europe’s economic growth has stagnated over the past two decades, largely due to sluggish productivity. Despite these strong foundations, the gap in GDP between the EU and the US has widened significantly, with the US economy growing at a faster pace. The EU’s per capita real disposable income, an indicator of individual economic well-being, has also lagged, growing at nearly half the rate of the US since 2000. In purchasing power parity (PPP) terms, the EU-US GDP gap has expanded from 15% in 2002 to 30% in 2023, while the per capita GDP gap widened from 31% to 34%. These figures reflect a deeper issue within Europe’s economic structure: a significant lag in productivity growth.

The productivity gap explains about 70% of the difference in per capita GDP between the EU and the US. Lower productivity growth has translated into weaker income growth and subdued domestic demand, exacerbating Europe’s economic challenges. As the global economic environment becomes more complex, Europe’s ability to maintain its position as a global economic leader depends on its capacity to reignite productivity growth and adapt to new geopolitical and economic realities.

The End of Post-Cold War Conditions: A New Geopolitical and Economic Reality

The favorable conditions that bolstered Europe’s economic growth in the post-Cold War period have deteriorated. Three key factors—trade openness, cheap energy, and geopolitical stability—have begun to unravel, posing significant challenges for the EU.

First, international trade played a pivotal role in supporting European growth, particularly after the year 2000. As global trade flourished, the EU benefitted from its export-driven economy, specializing in manufactured goods while importing essential raw materials and advanced technologies. Between 2000 and 2019, international trade as a share of GDP rose from 30% to 43% in the EU, outpacing the US, where trade’s share of GDP increased only marginally from 25% to 26%. This openness enabled Europe to maintain its competitive edge in a globalized economy. However, the multilateral trading system that Europe relied upon is now in crisis, with the era of rapid trade growth likely behind us. The IMF projects global trade to grow at just 3.2% over the medium term, significantly below the 4.9% annual growth seen from 2000 to 2019. Trade, once a key driver of growth, is now stagnating, and the EU must find new engines to power its economy.

Second, Europe’s reliance on Russian energy has been abruptly and dramatically curtailed. In 2021, Russia supplied around 45% of the EU’s natural gas, providing a relatively cheap and abundant source of energy. The EU’s energy policy was predicated on this stable supply of energy, but the geopolitical fallout from Russia’s invasion of Ukraine has shattered this arrangement. The loss of Russian gas has forced Europe to pivot to alternative, more expensive sources of energy, particularly liquefied natural gas (LNG), which has had a profound impact on European economies. The cost of this energy transition has been enormous, with the EU losing more than a year’s worth of GDP growth and redirecting massive fiscal resources toward energy subsidies and new infrastructure.

Finally, the geopolitical stability that characterized much of the post-Cold War era has deteriorated. Europe’s economic policies were largely insulated from security concerns for decades, as the EU benefitted from the so-called “peace dividend” that came from reduced defense spending and US global hegemony. However, the geopolitical landscape has shifted dramatically with Russia’s aggression in Ukraine, the escalating rivalry between the US and China, and rising instability in Africa—a key source of critical commodities for the global economy. These developments have forced Europe to reexamine the intersection of economic policy and security, as the EU must now balance growth with the need to ensure its security and autonomy in a multipolar world.

The Path to Competitiveness: A New Economic Agenda

To address these challenges, Europe must adopt a modern competitiveness agenda that focuses on reigniting productivity growth. Competitiveness, in this context, should not be narrowly defined as an effort to boost trade surpluses or protect national industries. Instead, it should focus on raising long-term productivity, which is the single most important driver of economic growth and rising living standards. This requires an emphasis on the development of knowledge, skills, and innovation across the workforce, as well as a recognition that modern competitiveness is less about cutting labor costs and more about investing in human capital.

However, some sectors of Europe’s economy face unfair competition from abroad, particularly in industries where foreign governments provide large subsidies or impose asymmetrical regulations. In such cases, leveling the playing field is necessary to ensure that Europe’s companies can compete on an equal footing, which will, in turn, support productivity growth across the continent. Moreover, Europe’s competitiveness strategy must integrate security considerations, as the stability of supply chains and access to critical materials is a precondition for sustainable growth.

Reigniting Productivity to Sustain Growth

The EU’s slowing productivity growth is at the heart of its economic struggles. Productivity, defined as the amount of output produced per unit of input, is the key driver of economic expansion over the long term. Europe’s failure to close its productivity gap with the US has significant implications for income growth, domestic demand, and overall economic competitiveness.

One of the main factors behind Europe’s productivity lag is its slower adoption of new technologies. While the US has led the world in the digital revolution, Europe has been slower to integrate advanced technologies such as artificial intelligence (AI), cloud computing, and data analytics into its economy. This technological lag has hindered productivity growth in key sectors and limited Europe’s ability to compete globally in high-tech industries.

To close the productivity gap, Europe must prioritize innovation and investment in technology. This includes creating an environment that fosters research and development (R&D) and encourages the commercialization of new technologies. Europe has no shortage of talent or ideas, but its regulatory environment and fragmented markets have made it difficult for new companies to scale up and compete globally. Addressing these barriers will be crucial to unlocking Europe’s innovative potential and boosting productivity across the economy.

The Role of Education and Skills in Driving Competitiveness

Competitiveness in the modern world is increasingly determined by the skills and knowledge of the workforce. Europe’s education and training systems are among the best in the world, with a third of adults having completed higher education. However, Europe’s labor force is not fully equipped to meet the demands of the digital economy. Many workers lack the skills needed to work with new technologies, and lifelong learning opportunities remain limited in many parts of the EU.

To address this, Europe must invest in education and skills development at all levels. This includes not only traditional education but also vocational training and adult learning programs that enable workers to reskill and upskill throughout their careers. Ensuring that all Europeans have access to the education and training they need to thrive in the digital economy will be critical to driving long-term productivity growth and maintaining Europe’s competitiveness on the global stage.

Security as a Pillar of Economic Strategy

As geopolitical risks rise, security has become an essential component of Europe’s economic strategy. The EU’s reliance on external suppliers for critical raw materials and technologies has made it vulnerable to supply chain disruptions and geopolitical coercion. For example, Europe depends heavily on China for rare earth metals and other materials that are essential for the production of clean technologies and advanced electronics.

To mitigate these risks, Europe must develop a more strategic approach to securing access to critical resources and technologies. This includes diversifying supply chains, building strategic partnerships with resource-rich nations, and investing in domestic production capacity where feasible. Security must also extend to Europe’s digital infrastructure, as cybersecurity threats pose a growing risk to economic stability.

Europe’s economic future depends on its ability to adapt to a rapidly changing global landscape. The EU must confront its productivity challenges head-on, invest in innovation and skills, and adopt a more strategic approach to security and competitiveness. By doing so, Europe can not only reignite growth but also ensure that it remains a global economic leader in the 21st century.

Innovation: Restoring Competitiveness Amid Global Pressures

The first transformation involves the urgent need for Europe to accelerate innovation and discover new engines of growth. The European Union’s (EU) competitiveness is under significant pressure from two directions. On one hand, foreign demand, particularly from China, is weakening. On the other, competitive pressures from Chinese companies are mounting rapidly. The European Central Bank (ECB) has reported that nearly 40% of sectors in which euro-area exporters are active are now facing direct competition from China, a substantial increase from 25% in 2002. This intensifying competition is one of the factors behind the EU’s declining share in world trade, which has particularly worsened since the onset of the COVID-19 pandemic.

Additionally, Europe’s share in the advanced technologies that will shape future growth has shrunk considerably. Between 2013 and 2023, Europe’s portion of global tech revenues fell from 22% to 18%, while the US’s share rose from 30% to 38%. Only four of the world’s top 50 tech companies are European, signaling a deepening innovation deficit. As a result, Europe risks losing its leadership in both manufacturing and technological advancements unless it finds ways to innovate faster and more effectively. The spread of artificial intelligence (AI) presents an opportunity to bridge this gap, but Europe must move quickly to seize the moment.

Accelerating innovation would boost productivity growth, leading to higher household incomes and stronger domestic demand. Although the EU has consistently lagged behind the US in productivity growth, the next wave of technological advancements—centered around AI, digitalization, and clean technologies—offers Europe a second chance to restore its competitive edge. By fostering innovation and improving productivity, Europe could not only maintain its manufacturing leadership but also pave the way for new, globally competitive industries.

Energy Transition: Balancing Costs, Decarbonization, and Competitiveness

The second major transformation concerns Europe’s energy landscape, which has been fundamentally altered by the Russian invasion of Ukraine. The loss of access to Russian pipeline gas, which previously supplied around 45% of the EU’s natural gas, has forced Europe to source more expensive liquefied natural gas (LNG) and other energy alternatives. Although energy prices have declined from their peaks, European companies still face electricity costs that are 2-3 times higher than those in the United States, while natural gas prices are 4-5 times higher. These persistent price differences continue to burden European industries, particularly energy-intensive sectors.

Decarbonization presents a significant opportunity for Europe, not only in terms of reducing reliance on fossil fuels but also in positioning itself as a leader in clean technologies. The EU has the potential to dominate in sectors like renewable energy, circular economy solutions, and sustainable industrial processes. Europe is well endowed with renewable energy resources and has the potential to shift its power generation toward secure, low-cost clean energy sources, which could provide long-term energy stability and competitiveness.

However, achieving this transition will require all policies to align with the EU’s decarbonization goals. The energy transition will be gradual, and fossil fuels will continue to influence energy pricing throughout the decade, leading to potential price volatility for consumers and industries alike. EU industries that are heavily reliant on energy face higher investment costs compared to global competitors as they strive to meet decarbonization targets. At the same time, Chinese competition is intensifying in sectors critical to the energy transition, such as electric vehicles and clean technologies. China’s aggressive industrial policy, control over raw materials, and scale of production threaten Europe’s ability to capitalize on decarbonization.

To succeed, Europe needs a coherent and comprehensive strategy that links its energy transition, industrial policy, and trade policy. This will involve fostering innovation in clean technologies, ensuring energy security, and creating a regulatory environment that supports decarbonization while maintaining the competitiveness of European industries. The energy transition should be seen not just as an environmental imperative but as an economic opportunity that, if managed correctly, could enhance Europe’s industrial leadership.

Security and Geopolitical Stability: Managing Dependencies and Strengthening Defense

The third transformation centers around security in an increasingly unstable geopolitical environment. For decades, globalization fostered a high degree of “strategic interdependence” between major economies. Europe, in particular, developed deep dependencies on external suppliers for critical raw materials and technologies. This interdependence has raised the costs of any rapid disentanglement, as seen in the EU’s reliance on China for critical minerals and the reliance of China on Europe to absorb its industrial overcapacity.

However, the global balance is shifting, with major economies actively working to reduce their dependencies and increase their autonomy. The United States, for instance, is investing heavily in domestic capacity for semiconductor and clean technology production, while re-routing critical supply chains through its allies. Meanwhile, China is pursuing technological self-sufficiency and vertical integration of its supply chains, controlling everything from raw materials extraction to manufacturing and shipping. Although there is little concrete evidence that these actions are leading to widespread de-globalization, trade policy interventions are on the rise.

Europe’s high level of trade openness makes it particularly vulnerable to disruptions in global supply chains. The EU must therefore respond to the changing security landscape by reducing its vulnerabilities and strengthening its strategic independence. In addition to economic dependencies, Europe faces new security challenges, especially in light of Russia’s aggression in Ukraine and growing instability in regions critical to global trade, such as Africa.

The EU’s defense spending, currently one-third of US levels, reflects decades of underinvestment and neglect. To achieve genuine strategic independence and bolster its global geopolitical influence, Europe must ramp up its defense investments and modernize its defense industries. This will require a more coordinated approach among EU member states, particularly in areas like procurement and research. By strengthening its defense capabilities, Europe can better safeguard its economic and security interests in an increasingly multipolar world.

Overcoming Fragmentation: The Need for Policy Coordination

Although Europe is beginning to respond to these challenges with more assertive policies, its efforts are fragmented and often lack coordination. The rise of industrial policy interventions across advanced economies is a sign of governments’ growing recognition of the need to protect and promote domestic industries. However, in Europe, these policies are often implemented at the national level, leading to duplication, incompatible standards, and inefficient use of resources.

One of the biggest obstacles to Europe’s competitiveness is the lack of coordination between member states, particularly in industrial policy and defense. Larger countries with greater fiscal space can afford to offer more generous support to their industries, distorting competition within the Single Market. At the same time, the EU’s financing instruments are fragmented across national and EU levels, which hampers the creation of large capital pools necessary for breakthrough innovation. This fragmentation not only limits Europe’s capacity for innovation but also creates unnecessary complexity for private sector actors navigating multiple regulatory and financing frameworks.

Europe must also improve coordination across its various policy areas—fiscal, trade, industrial, and foreign policy. In the United States and China, industrial policy is often linked to trade and security policy, allowing governments to pursue a cohesive strategy that supports domestic production while mitigating external risks. In Europe, by contrast, the slow and disjointed policymaking process hampers the EU’s ability to respond to global challenges with the same speed and efficacy.

To overcome these challenges, Europe needs to streamline its decision-making processes, align its national and EU-level policies, and ensure that public resources are deployed effectively. Only through coordinated action can Europe address its innovation gap, manage its energy transition, and strengthen its security in a rapidly changing world.

Seizing the Moment for Transformation

Europe’s future hinges on its ability to navigate the three major transformations of innovation, energy, and security. The global landscape has changed, and Europe must adapt if it is to remain a leading economic and geopolitical force. This will require a new level of coordination, both within the EU and between the EU and its global partners. By accelerating innovation, managing its energy transition, and strengthening its security, Europe can seize the opportunities presented by these transformations and secure its place in the future global order.

The time for action is now, and Europe must act decisively to ensure that it is not left behind in the next phase of global economic and geopolitical development.

Goals for Europe’s Industrial Strategy

The first and foremost goal is to close the innovation gap that has slowed Europe’s productivity growth. This requires accelerating technological and scientific advancements, ensuring that innovations move efficiently from research to commercialization, removing regulatory barriers that prevent the growth of innovative companies, and addressing the skills gaps across the EU. Europe needs to build a robust ecosystem where startups and tech companies can thrive, attract finance, and compete globally.

Secondly, Europe must develop a joint plan for decarbonization and competitiveness. The energy transition, driven by the imperative to reduce carbon emissions and adapt to a greener economy, is both a challenge and an opportunity for European industries. The goal is to align the decarbonization effort with industrial competitiveness, ensuring that energy prices are brought down and that European companies lead in the development of clean technologies. Industries that are energy-intensive or hard to decarbonize must be supported in making the transition without losing their competitive edge, while at the same time promoting innovation in key sectors like clean tech and electric vehicles, where competition from China is intensifying.

Thirdly, Europe needs to reduce its dependencies and increase its security. As a highly open trading bloc, the EU depends on imports for raw materials, advanced technologies, and other critical resources. This makes the EU vulnerable to disruptions in global supply chains and geopolitical risks. Europe must therefore develop a cohesive “foreign economic policy” that secures strategic resources through trade agreements and investments, builds stockpiles where necessary, and creates industrial partnerships to strengthen supply chains. Simultaneously, Europe must increase its defense capabilities, ensuring that its defense industries are well-funded and technologically advanced to meet the growing demand for military assets and equipment.

Building Blocks for Europe’s Industrial Strategy

The new industrial strategy for Europe will be built on several key pillars:

• Full Implementation of the Single Market: The Single Market is vital for enabling economies of scale for innovative companies, creating a strong energy market, facilitating the transition to clean technologies, and building resilient supply chains. Despite its achievements, trade frictions remain within the EU, leaving significant untapped potential. Completing the Single Market is essential for unlocking economic growth and investment, particularly in key sectors like energy and transportation.
• Aligned Industrial, Competition, and Trade Policies: Industrial policies need to be carefully crafted to avoid past mistakes, such as favoring incumbents or engaging in protectionism. The focus should be on sectors, not individual companies, and any public support should be regularly assessed for its effectiveness. Competition policy must be flexible to support innovation, especially in the tech sector, where rapid change demands large budgets and the ability to scale. The EU’s trade policies must align with its industrial strategy, ensuring that trade agreements support innovation, decarbonization, and security goals. Important Projects of Common Interest (IPCEIs) should be expanded to encompass all forms of innovation in strategically important sectors, helping push Europe to the forefront of technological development.
• Financing the Transformation: The scale of investment required to digitalize, decarbonize, and enhance defense capabilities is unprecedented in recent European history. The investment-to-GDP ratio will need to rise by 5 percentage points annually, a level last seen during the post-war era. Mobilizing private finance will be critical, but the private sector cannot bear the full burden. Public sector support will be essential, particularly in areas where market failures exist, and governments will need to balance productivity growth with fiscal sustainability. The EU must reform its capital markets to channel household savings into productive investments, and productivity increases will be key to expanding fiscal space for public investments.
• Reforming EU Governance: For the industrial strategy to succeed, the EU must reform its governance to improve coordination and reduce the regulatory burden on businesses. The EU’s decision-making processes are often slow and fragmented, which hampers effective action in areas that require swift and coordinated responses. The EU needs to act more as a unified entity, especially in areas where collective action is more effective than individual national policies. Governance reform should focus on removing unnecessary regulatory barriers, simplifying procedures, and aligning policies to achieve common goals.
• Preserving Social Inclusion: While pursuing innovation and productivity growth, Europe must ensure that these advancements do not come at the cost of increased inequality. The European social model, which provides strong public services, social protection, housing, and education, will be critical during this transition. As technological advancements disrupt traditional industries, Europe must ensure that workers can move into new roles through access to education and retraining. The goal is to foster a social contract where economic transformation leads to prosperity for all, not just a select few.

Social Inclusion and Cohesion Policy

Europe’s industrial strategy must be balanced with the need to preserve social inclusion and cohesion. The rapid technological and sectoral changes ahead, combined with demographic shifts, mean that Europe must make the best use of its available workforce while maintaining social equity. This will involve ensuring that workers displaced by technological change can find new employment in growing sectors, supported by a robust welfare state that provides education, housing, and social services.

The EU’s cohesion policy must evolve to reflect the changing dynamics of trade and innovation. Future growth is expected to come from the service sector, which tends to cluster in larger, wealthier cities. Innovation also tends to agglomerate in specific regions, potentially creating disparities between urban and rural areas. To avoid these disparities, Europe must ensure that more cities and regions can participate in the new economy. This will require investments in infrastructure, digital connectivity, and planning at the regional level, ensuring that cities and regions outside the traditional economic hubs can thrive in the new industrial landscape.

Learning from the Past: A New Approach to Globalization

The era of hyper-globalization brought significant economic benefits to Europe, but it also contributed to social unrest and growing inequality. The EU must learn from these mistakes as it moves forward. Globalization was perceived as benefiting corporations and the wealthy while leaving workers behind. Policymakers must now ensure that future economic transformations are inclusive and that the state remains responsive to the needs and concerns of its citizens. This requires engaging with civil society, trade unions, and employers in meaningful dialogue to build consensus around the necessary changes.

Trade Policy in the New Industrial Strategy

The global trading order, governed by multilateral institutions, is in crisis, and Europe’s trade policy is already adapting to this new reality. The EU must continue to push for reform of institutions like the World Trade Organization (WTO) but must also recognize the need for a more pragmatic approach to trade. Trade policy should be carefully tailored to support Europe’s industrial strategy, balancing the need for open markets with the imperative to protect critical industries and supply chains.

In some sectors, such as digital goods and services, maintaining open trade with key partners like the United States will be crucial for accessing the latest technologies. In other sectors, defensive trade measures may be necessary to level the playing field and protect European industries from unfair competition. This is particularly true in sectors like clean technologies, where state-sponsored competition from countries like China poses a significant threat.

Enhanced coordination of foreign direct investment (FDI) decisions will also be necessary. While the United States has taken a more protectionist stance toward China, the EU has pursued a different strategy, welcoming inward FDI, particularly in Central and Eastern Europe. However, this strategy must be coordinated to ensure that foreign investments contribute to Europe’s technological advancement and job creation.

A New Era for Europe

Europe’s industrial strategy represents a bold response to the transformations it faces. By closing the innovation gap, managing the energy transition, and strengthening security, the EU can navigate the challenges ahead and emerge as a stronger, more competitive player in the global economy. However, success will require coordinated action at all levels—national, regional, and European—and a commitment to social inclusion and cohesion. The path forward is challenging, but the opportunities are immense. If Europe can seize this moment, it can build a future of shared prosperity and global leadership in innovation, sustainability, and security.

Closing the Innovation Gap: Europe’s Productivity Challenge

Europe’s economic future depends on addressing its productivity challenge. The continent needs faster productivity growth to ensure sustainable economic expansion, particularly as demographic shifts begin to put downward pressure on growth. Following World War II, Europe experienced decades of rapid catch-up growth fueled by both rising productivity and a growing population. However, these two engines of growth are now losing momentum. While European labor productivity converged from 22% of the US level in 1945 to 95% by 1995, it has since fallen below 80% of the US level. This is a striking indicator of Europe’s productivity struggles, particularly as the EU is entering a period in which labor force growth will no longer support GDP expansion.

By 2040, the EU workforce is projected to shrink by nearly 2 million workers annually, and the ratio of working to retired people is expected to decline from 3:1 to 2:1. Without a significant boost in productivity, Europe’s growth will stall. Based on current trends, if the EU maintains its recent labor productivity growth rate of 0.7% per year, it will only be enough to keep GDP constant until 2050. In this scenario, Europe risks a future of stagnant growth, unsustainable public debt, and an inability to meet the rising fiscal demands of decarbonization, digitalization, and defense spending.

The Role of Digital Technology in Europe’s Productivity Decline

A key factor in Europe’s productivity gap with the US is the continent’s failure to capitalize on the first wave of the digital revolution. In the 1990s, as the internet began to transform the global economy, Europe lagged behind the US in developing tech companies and integrating digital technology into traditional industries. This failure to harness the potential of digital transformation has been a major contributor to Europe’s diverging productivity growth.

If the tech sector is excluded from the analysis, Europe’s productivity performance over the last two decades would have been comparable to the US. However, Europe is now falling behind in the foundational digital technologies that will drive future growth, such as artificial intelligence (AI), cloud computing, and quantum computing. Since 2017, around 70% of foundational AI models have been developed in the US, and three American companies—known as “hyperscalers”—control over 65% of both the global and European cloud markets. In contrast, the largest European cloud operator accounts for just 2% of the EU market.

Quantum computing represents the next frontier of digital innovation, but Europe is again trailing behind. Of the top 10 tech companies in terms of quantum investment, five are based in the US and four in China, with none in the EU. This widening gap in digital technology has serious implications for Europe’s future productivity growth, as digitalization increasingly drives economic output across a wide range of industries.

Seizing Opportunities in the Next Wave of Digital Innovation

Despite these challenges, Europe still has opportunities to capitalize on future waves of digital innovation. While the cloud computing market may be increasingly dominated by US companies, Europe can still develop strong domestic capabilities in areas where technological sovereignty is critical, such as security and encryption through “sovereign cloud” solutions. Maintaining a presence in these areas is crucial not only for Europe’s security but also for its broader economic competitiveness.

Moreover, AI offers Europe a chance to regain ground in the tech sector. Europe holds a relatively strong position in autonomous robotics, accounting for around 22% of global activity, and in AI services, hosting around 17% of worldwide activity. AI is a transformative technology that has the potential to revolutionize industries where Europe already has a competitive edge, such as pharmaceuticals, automotive manufacturing, and energy.

For example, AI is expected to drive significant advancements in the pharmaceutical industry through the development of “combination products” that integrate drugs, devices, and biological components with AI-powered feedback systems. In the automotive sector, AI-powered algorithms will enhance vehicle design, optimize material use, and streamline logistics, improving both productivity and performance. In the energy sector, AI is already being used for grid maintenance, load forecasting, and other functions, but there are still opportunities to unlock even greater gains.

However, Europe’s ability to fully capitalize on AI depends on overcoming barriers to scaling up innovative companies. There is a significant gap in later-stage financing between Europe and the US, which prevents European tech companies from growing to the scale needed to compete globally. No EU company has reached a market capitalization of over EUR 100 billion from scratch in the last 50 years, whereas all six US companies with valuations exceeding EUR 1 trillion were created during that period. Closing this gap will be essential to unlocking Europe’s productivity potential.

Integrating AI to Drive Productivity Growth

Integrating AI vertically into European industries will be a key factor in boosting productivity across sectors. Although estimates of AI’s aggregate impact on productivity remain uncertain, it is clear that AI will play a transformative role in several key industries. In pharmaceuticals, for example, AI can significantly reduce the time it takes to bring new products to market, while in the automotive sector, AI will optimize manufacturing processes and supply chains. AI also offers opportunities to enhance energy efficiency and sustainability by improving grid management and predicting energy demand.

While AI presents immense opportunities, it also poses challenges for the European labor market. AI could disrupt jobs in both high- and low-skilled sectors, as more tasks become automated. A recent survey found that nearly 70% of European workers favor government restrictions on AI to protect jobs. Although AI has so far enhanced employment in Europe rather than replacing jobs, this trend may change as businesses gain a deeper understanding of how to deploy these technologies effectively.

To mitigate the potential negative impacts of AI on employment and ensure that its benefits are widely shared, Europe must prioritize education and skills development. Providing workers with the training they need to use AI and other digital tools effectively will help make the transition to a more automated economy more inclusive. Europe should aim not only to match the US in innovative capacity but also to exceed it in providing opportunities for lifelong learning, ensuring that workers are equipped to thrive in the digital age.

Addressing the EU-US Productivity Gap in Key Sectors

The EU-US productivity gap can largely be attributed to differences in industry composition and the diffusion of technology across sectors. The US has led in sectors like information and communication technology (ICT), where much of the recent productivity growth has occurred, while Europe has traditionally been stronger in mid-technology sectors such as manufacturing and agriculture. These sectors, while important, have not been the primary drivers of recent productivity gains.

Excluding ICT-related industries from the analysis significantly narrows the productivity gap between the EU and the US. However, this does not account for the indirect impact that ICT has had on productivity growth in other sectors, such as professional services, finance, and insurance, where the US has seen significant gains thanks to the widespread adoption of digital technologies.

In contrast, Europe has performed relatively well in sectors like wholesale and retail, where it has caught up to innovations introduced in the US over the past decade, such as e-commerce, advanced inventory management systems, and digital payment platforms. But even in these sectors, Europe must continue to innovate and invest in technology to remain competitive.

Closing the Innovation Gap

Europe’s productivity challenge is deeply linked to its ability to harness the power of digital technology. The first wave of the digital revolution may have left Europe behind, but the next wave—centered around AI, quantum computing, and other advanced technologies—offers a chance for Europe to catch up. However, this will require bold action to foster innovation, close the financing gap, and ensure that the benefits of technological advancements are shared across society.

By integrating AI into key industries, investing in education and lifelong learning, and addressing the structural barriers that prevent European companies from scaling up, Europe can unlock higher productivity growth and secure its place as a global economic leader. The stakes are high, but the rewards are immense: a more innovative, competitive, and inclusive Europe that is ready to face the challenges of the 21st century.

Key Barriers to Innovation in Europe: Breaking the Vicious Cycle

Europe’s struggle to lead in digital technologies and innovation stems from deep-seated structural issues within its industrial landscape. Unlike the US, which has continually redirected investment toward emerging high-tech sectors, Europe’s industrial composition has remained static over the past two decades. The top three US companies in research and innovation (R&I) shifted from automotive and pharma industries in the 2000s to software, hardware, and the digital sector by the 2020s. In contrast, Europe’s R&I spending has consistently been dominated by the automotive industry, representing a failure to adapt to the shifting global economic landscape.

In 2021, EU companies invested around EUR 270 billion less in R&I than their US counterparts, a gap driven primarily by much higher investments in the US tech sector. This investment shortfall reflects a broader issue in Europe, where low industrial dynamism, limited innovation, and stagnant productivity growth have trapped the economy in what is often referred to as the “middle technology trap.” Europe’s inability to transition to new high-growth sectors has created a vicious cycle of low innovation and low investment, further entrenching its position as a follower rather than a leader in the global technology race.

Innovation Lifecycle Challenges: From Research to Commercialization

One of the most significant barriers to innovation in Europe is the inefficiency in transitioning from research and development to commercialization. Public sector support for R&I is poorly focused on disruptive technologies and suffers from fragmented financing structures. This lack of coordination limits Europe’s ability to scale high-risk, breakthrough technologies. Even when European companies succeed in early-stage innovation, they face significant challenges in scaling up and reaching the market. Regulatory hurdles, jurisdictional fragmentation, and a highly complex EU market make it difficult for innovative companies to grow into mature, profitable enterprises within Europe.

As a result, many of Europe’s most promising tech companies turn to the US for venture capital financing and market expansion. The US venture capital ecosystem is far more developed, offering these companies the opportunity to scale more easily in a unified, large market. Between 2008 and 2021, 147 European unicorns (startups valued over USD 1 billion) were founded, but 40 of them relocated their headquarters abroad, with the majority moving to the US.

Weak Academic-Industry Linkages and Insufficient R&I Focus

Europe’s innovation challenges also extend to its academic institutions and research infrastructure. While Europe remains strong in fundamental research, it falls behind in translating this knowledge into commercial applications. In 2021, Europe accounted for 17% of global patent applications, but only about one-third of the patented inventions registered by European universities or research institutions are commercially exploited. This failure to bring innovations to market stems, in part, from weaker connections between academia and industry. Unlike the US, which has developed vibrant innovation clusters—networks of universities, startups, large companies, and venture capitalists—Europe lacks the same level of integration. These clusters are vital for the commercialization of high-tech innovations, and their absence has contributed to Europe’s lag in emerging sectors like AI, cloud computing, and quantum technology.

Another significant barrier is the fragmentation of public spending on R&I. While EU governments spend a similar share of GDP on R&I as the US, only 10% of that spending is coordinated at the EU level. The rest is spread across national budgets, diluting its impact and preventing the scale necessary to compete globally. EU-wide programs like Horizon Europe, with a budget of EUR 100 billion, are also hampered by excessive bureaucracy and a lack of focus on disruptive innovations. In comparison, US agencies like DARPA, which focus on breakthrough technologies, have much larger budgets and are run by top scientists and innovation experts rather than government officials.

The Fragmented Single Market and the Venture Capital Gap

The EU’s fragmented Single Market is another significant hurdle for innovative companies looking to scale up. Although the EU’s venture capital market is underdeveloped compared to the US and China, the lack of scale-up financing in Europe is often a symptom of broader structural issues. Scaling a company across the fragmented European market requires navigating different regulatory environments, tax systems, and public procurement rules, all of which increase costs and slow growth.

This fragmentation also leads to lower demand for venture capital financing, as growth prospects in the EU are more limited. Many companies prefer to seek financing from US venture capitalists, where they can tap into a larger, more unified market. This has resulted in the relocation of many promising European startups to the US, further deepening the innovation gap.

Regulatory Barriers: Hindering Growth in the Tech Sector

Europe’s regulatory environment is particularly challenging for tech companies, especially young and innovative firms. Complex and costly regulatory requirements across different national systems make it difficult for companies to operate efficiently across the Single Market. Intellectual property rights (IPR) procedures are often cumbersome and costly, dissuading young firms from protecting their innovations. Additionally, the EU’s precautionary regulatory stance toward new technologies, such as AI, often imposes strict ex-ante rules that stifle innovation.

For example, the EU’s AI Act imposes additional regulatory requirements on AI models that exceed a predefined computational power threshold, creating a regulatory burden for companies developing cutting-edge AI technologies. Furthermore, the lack of coordination in data storage and processing regulations across Member States raises compliance costs and prevents the creation of large, integrated datasets that are essential for training AI models. This stands in stark contrast to the US and China, where large datasets are more readily available due to more favorable regulatory environments.

Scaling Challenges in the Wider Economy: The Size Barrier

Beyond the tech sector, the lack of a true Single Market prevents many companies in the broader economy from reaching the size necessary to adopt advanced technologies like AI. Europe has proportionally fewer small and medium-sized enterprises (SMEs) than the US, but more micro-companies, which often struggle to invest in new technologies. Evidence shows that larger firms are better positioned to adopt advanced technologies because they can spread the fixed costs of investment over greater revenues, have more skilled management, and possess larger datasets.

In 2023, only 7% of European SMEs had adopted AI compared to 30% of large businesses, a clear indication of the size-related barriers to technology adoption. This fragmentation of the Single Market puts European companies at a disadvantage in terms of adopting and deploying new AI applications, further delaying Europe’s digital transformation.

The Digital Bottleneck: Infrastructure and Computing Power

Europe’s digital infrastructure is another weak point in its innovation ecosystem. Training AI models and building AI-driven applications require massive amounts of computing power, leading to an ongoing “AI chip race” globally. Smaller and less well-funded European companies may struggle to compete in this race due to the high costs of AI training, which are expected to rise significantly in the coming years. The cost of training next-generation AI systems could soon exceed USD 1 billion, and even reach USD 10 billion by the end of the decade.

At the same time, Europe is falling behind its 2030 Digital Decade targets for fiber and 5G deployment. Full gigabit and 5G coverage across the EU would require an estimated EUR 200 billion in investments, but Europe’s per capita investment in digital infrastructure is significantly lower than in the US and China. This is partly due to the fragmented nature of Europe’s telecom sector, with 34 mobile network operators in the EU compared to only a handful in the US or China. This fragmentation makes it harder for EU companies to capitalize on emerging technologies like edge computing and artificial intelligence.

Declining Competitiveness in Pharmaceuticals

Europe’s competitiveness challenges extend beyond digital technology to other high-tech sectors like pharmaceuticals. Although the EU leads in pharma trade by value, it is losing ground in dynamic market segments like biological medicines and advanced therapy medicinal products. Of the top 10 best-selling biological medicines in Europe in 2022, only two were marketed by EU-based companies, while six were from US-based firms.

A key factor behind this decline is Europe’s lower investment in pharmaceutical R&I. Total EU public sector spending on pharma research is less than half that of the US, while private sector investment is about one-quarter of US levels. Europe’s complex and slow regulatory framework also hinders innovation in this sector. The median approval time for new medicines in Europe was 430 days in 2022, compared to 334 days in the US, putting European pharma companies at a competitive disadvantage.

Breaking the Cycle of Low Innovation

Europe faces significant barriers to becoming a global leader in innovation. These challenges—ranging from static industrial structures and fragmented markets to complex regulatory environments—have created a vicious cycle of low investment, low innovation, and stagnant productivity growth. However, with coordinated action to reform the Single Market, streamline regulatory processes, and increase investment in high-tech sectors, Europe has the potential to break out of this cycle.

To compete on the global stage, Europe must focus on fostering innovation clusters, scaling up venture capital markets, and ensuring that cutting-edge technologies like AI and quantum computing can be developed and commercialized within its borders. By addressing these key barriers, Europe can close the innovation gap and secure a more dynamic and competitive future.

A Programme to Tackle the Innovation Deficit: Europe’s Path to Closing the Gap

Europe faces an urgent need to enhance its innovation capacity and ensure that breakthrough technologies can thrive in its ecosystem. To address the root causes of its innovation deficit, the EU must overhaul its research and innovation (R&I) frameworks, focusing on reforming its next Framework Programme for R&I and creating an environment conducive to disruptive innovation. The report outlines several critical areas for action that will help Europe tackle its innovation challenges, from funding and governance reform to better coordination among Member States and fostering the transition from invention to commercialisation.

Reforming the EU’s Framework Programme for R&I

The European Union’s primary mechanism for supporting research and innovation, the Framework Programme for R&I, needs substantial reform. The current structure spreads resources too thinly, lacks focus, and is overly bureaucratic. The next iteration of this programme must prioritize a smaller number of commonly agreed-upon priorities, concentrating resources where they can have the greatest impact. The report recommends several steps to enhance this programme:

• Refocusing Priorities: The next Framework Programme should concentrate on a more focused set of priorities, targeting breakthrough technologies and high-impact innovations.
• Boosting Funding for Disruptive Innovation: The European Innovation Council (EIC), which is meant to foster high-risk, high-reward projects, should be reformed to function like an “ARPA-type agency” (inspired by the US Defense Advanced Research Projects Agency, DARPA). The EIC should focus on funding projects with the potential for breakthrough technological advances and disruptive innovation.
• Streamlining Governance: The governance of the programme must be managed by project leaders and professionals with proven expertise in innovation, allowing for faster decision-making and reducing bureaucratic delays. The aim is to make the process more efficient, outcome-driven, and accessible to young and innovative companies.
• Increasing the Budget: Conditional on these reforms, the report recommends doubling the budget of the Framework Programme to EUR 200 billion over seven years, ensuring that Europe has the financial capacity to compete globally in the innovation race.

Creating a European Research and Innovation Union

To further streamline efforts, the report suggests the establishment of a Research and Innovation Union. This entity would serve as a platform for better coordination among Member States, the European Commission, and the private sector. A joint European Research and Innovation Action Plan would be developed, facilitating more cohesive policies and collaboration across national borders, which is essential for scaling large, high-impact R&I projects.

Strengthening Academic Excellence

Europe’s universities and research institutions are at the heart of innovation, but their global competitiveness must be enhanced. While Europe leads in some areas of fundamental research and patenting, it lags behind the US and China in translating academic research into commercialized products. The report proposes several measures to consolidate European academic institutions:

• Doubling Support for the European Research Council (ERC): Increasing funding for fundamental research through the ERC will enable more groundbreaking research projects to be pursued. The number of grant recipients should be significantly expanded, while maintaining high funding levels for individual projects.
• Introducing an “ERC for Institutions” Programme: This highly competitive programme would provide top-tier funding to leading academic institutions, positioning them as global leaders in research and development.
• Attracting World-Class Researchers: A new “EU Chair” position for world-class scholars should be created to attract and retain top academic talent. These positions would be supported by a new EU framework for private funding to enhance compensation policies and provide additional resources for research.

Fostering the Transition from Invention to Commercialisation

A critical component of Europe’s innovation deficit lies in its failure to effectively transition from invention to commercialisation. The EU must make it easier for inventors to become investors and ensure that promising startups and scale-ups have access to the resources they need to grow. Key recommendations include:

• Intellectual Property (IP) Management: The EU should implement a new blueprint for fair and transparent royalty sharing to reduce bureaucratic hurdles in universities and research institutions. This will enable researchers to better manage their intellectual property rights.
• Unitary Patent System: Adopting the Unitary Patent across all EU Member States would lower application costs for young companies and provide uniform IP protection, facilitating a smoother path to commercialization.
• Supporting Scale-Up Companies: The creation of a new legal status, the “Innovative European Company,” would provide start-ups with a single digital identity recognized across the EU, harmonized regulations, and greater access to cross-border financing opportunities.
• Excluding SMEs from Complex Regulations: A thorough impact assessment of digital and other regulations on small businesses should be conducted to ease the regulatory burden on SMEs. The goal is to create a regulatory environment that allows smaller companies to thrive without being overwhelmed by requirements only large corporations can meet.

Enhancing the Financing Environment for Innovation

Addressing Europe’s financing gap is crucial for ensuring that start-ups and scale-ups can grow within the European market. While high-growth companies often secure financing from international investors, the EU must develop a deeper and more supportive local financing ecosystem. Recommendations include:

• Expanding Business Angel Networks: Encouraging more angel investment and seed capital funding will provide early-stage startups with the resources they need to develop.
• Revisiting Capital Requirements: The EU should assess whether changes to capital requirements under Solvency II, which governs insurance companies, are necessary to stimulate institutional investment in innovative companies.
• Increasing EIF and EIC Collaboration: The European Investment Fund (EIF) should have its budget increased to provide greater support for SMEs. Better coordination between the EIF and EIC will help rationalize Europe’s venture capital funding environment.
• Co-Investment Mandates for the EIB: The European Investment Bank (EIB) should be empowered to co-invest in ventures that require larger capital volumes. This would encourage private investors to follow suit and help mobilize substantial funding for innovation.

Strengthening High-Performance Computing (HPC) and AI Infrastructure

The EU already has a significant advantage in computing capacity, thanks to its Euro-HPC Joint Undertaking, but this infrastructure must be leveraged to support AI development. Three of Europe’s supercomputers rank among the top 10 worldwide, and the EU is planning the launch of two exascale computers. The report recommends the following actions to build on this existing capacity:

• Expanding HPC Access for AI Startups: The EU should open its HPC facilities to AI startups and SMEs, providing them with the computational resources they need to train AI models and develop new algorithms.
• Developing a Federated AI Model: By coordinating public and private infrastructures, the EU can create a federated AI model that pools resources across sectors, boosting Europe’s competitive scale in AI development.
• Offering Computing Capital for Startups: The EU should explore offering free access to computing capacity in exchange for equity options, royalties, or dividends from innovative SMEs, ensuring long-term sustainability for its HPC infrastructure.

Fostering AI Vertical Integration and Cross-Industry Collaboration

To accelerate the integration of AI into European industries, the EU should promote cross-industry collaboration and data sharing. The report proposes an AI Vertical Priorities Plan that targets 10 strategic sectors—such as automotives, energy, agriculture, and pharmaceuticals—where rapid AI adoption would yield significant benefits. Key components include:

• Data Sharing for AI Model Training: EU companies should contribute data to train AI models, which would be safeguarded within open-source frameworks and protected from antitrust enforcement by competition authorities.
• AI Sandboxes: The creation of experimental regulatory sandboxes across the EU would allow companies to test AI technologies in real-world conditions while providing regular feedback to regulators.

Consolidating the Telecom Sector and Strengthening Connectivity

Connectivity is essential for Europe’s digital transformation, but the fragmented telecoms sector has hampered investment. The report recommends facilitating consolidation in the telecoms industry to increase investment in 5G and fiber networks. It also calls for the harmonization of spectrum licensing rules and an EU-wide auction design to create scale. Commercial investment sharing between network operators and online platforms is also suggested to ensure that large tech companies contribute to network financing.

Revitalizing R&I in the Pharmaceutical Sector

Finally, the report emphasizes the need to sustain and expand R&I in key manufacturing sectors like pharmaceuticals. The European Health Data Space (EHDS) should be accelerated to support the digitization of health records, enabling the pharma industry to tap into rich datasets for AI-driven drug development. EU-level support for genome sequencing and clinical trials will also help position Europe as a leader in life sciences and advanced therapy medicinal products.

Europe’s Opportunity to Lead in Innovation

Europe has a unique opportunity to reverse its innovation deficit and become a global leader in breakthrough technologies. By reforming its R&I frameworks, improving coordination, and fostering a more supportive environment for startups and scale-ups, Europe can close the innovation gap with the US and China. The path forward requires bold action, but with the right policies and investments, Europe can build a future that combines technological leadership with social and economic inclusion.

Closing Skills Gaps: Addressing Europe’s Labor Shortfall and Innovation Challenge

Europe’s innovation and economic growth prospects are threatened by persistent skills gaps across key sectors of the economy. The European labor market faces significant shortages in both low- and high-skilled workers, compounded by demographic trends that are expected to shrink the workforce over the coming decades. Addressing these gaps is critical for ensuring Europe’s future competitiveness, particularly in areas such as digitalization, decarbonization, and technology adoption.

Skills Shortages Across Europe

Europe’s skills gaps manifest in multiple sectors, and the problem is pervasive. Around one-quarter of European companies struggle to find employees with the right skills, and over 50% report difficulties in hiring appropriately skilled workers. Even newly hired employees often lack the necessary skills to perform their roles adequately, with 77% of EU companies indicating that new hires are underqualified.

These shortages are not limited to technical fields; they extend to management, where outdated management practices hinder the effective use of human capital and slow the adoption of advanced technologies. For instance, Europe’s slow uptake of information and communication technologies (ICT) in the late 1990s and 2000s is partly attributed to insufficient management skills, especially in micro and small enterprises.

The situation is further exacerbated by demographic changes. While the US population is projected to continue growing in the coming decades, Europe faces a declining labor force. This demographic headwind makes it imperative for Europe to address its skills gaps across all levels of the workforce. Moreover, Europe suffers from deep gender disparities in certain high-demand fields, such as STEM (science, technology, engineering, and mathematics), which limits the full utilization of available talent.

Barriers to Innovation and Technology Adoption

Skills shortages are a significant barrier to innovation and the adoption of new technologies, particularly digitalization and decarbonization. Although Europe produces high-quality STEM talent, the supply is insufficient to meet growing demand. The EU produces approximately 850 STEM graduates per million inhabitants annually, compared to over 1,100 in the US. Furthermore, Europe suffers from brain drain, with top talent leaving for better employment opportunities abroad, further depleting the local talent pool.

Digitalization, one of the key drivers of future economic growth, is hampered by these shortages. Nearly 60% of EU companies cite the lack of digital skills as a major obstacle to investment, while a similar share report difficulties in recruiting ICT specialists. Meanwhile, around 42% of Europeans lack basic digital skills, including 37% of those currently in the workforce.

The green transition also requires new skills. The demand for clean-tech manufacturing workers has risen sharply, with job vacancy rates in this sector doubling between 2019 and 2023. However, 25% of companies in the EU reported labor shortages in this area by the third quarter of 2023, and these shortages are expected to worsen as decarbonization efforts ramp up. By 2035, the most acute labor shortages will likely be in high-skilled occupations, driven by both retirement and the changing demands of the economy.

Declining Educational Attainment and Adult Learning Gaps

Europe’s education system is failing to keep pace with the skills required for the modern economy. The decline in educational performance is reflected in the OECD’s PISA scores, where Europe has experienced a significant drop. Leading positions in global rankings are now dominated by Asian countries, while Europe lags behind. In 2022, only 8% of EU students achieved high levels of competence in mathematics, and just 7% in reading and science. Moreover, large gender disparities persist in STEM education, with male students significantly outnumbering female students.

Adult learning and vocational training also fall short of what is needed. In 2016, only 37% of adults in Europe participated in any form of training, and this figure has remained stagnant. The European Skills Agenda aims to increase this figure to 60%, but this would require an additional 50 million workers to receive training annually. Vocational training, which is critical for equipping workers with the skills needed for the green and digital transitions, varies widely in quality across Member States.

Challenges in EU Skills Policy

The EU’s investment in skills development has yielded limited results, despite significant funding. Around EUR 64 billion is allocated to skills investments under the current EU budget, but this has not been sufficient to close the skills gap. Several factors contribute to this failure:

• National Responsibility: Education and skills policies are primarily the responsibility of individual Member States, many of which have been reluctant to go beyond soft coordination and implement more stringent, results-oriented reforms.
• Lack of Industry Involvement: There is insufficient collaboration between educational institutions and industry, resulting in curricula that do not fully align with labor market needs.
• Insufficient Evaluations: EU skills investments lack systematic evaluations, making it difficult to assess which strategies are effective and how interventions can be improved.
• Underuse of Skills Intelligence: Reliable, granular data on existing skills gaps and labor market needs are not being utilized to their full potential. This lack of “skills intelligence” hampers the ability of policymakers to make informed decisions about where to direct resources and reform efforts.

Recommendations for Closing the Skills Gap

To close the skills gap and prepare Europe for future economic challenges, the report recommends a comprehensive overhaul of the EU’s approach to education and training. Key proposals include:

• Enhanced Use of Skills Intelligence: The EU and Member States must improve their use of data to understand and act on existing and emerging skills gaps. More granular and accurate data will allow policymakers to target investments where they are most needed.
• Responsive Education and Training Systems: Curricula should be revised to reflect the changing needs of the labor market, with employers playing a greater role in shaping job-specific skills training. This will ensure that the skills taught align with the demands of industries like ICT, clean tech, and advanced manufacturing.
• Common Certification System: The EU should introduce a common system of certification for skills acquired through training programs. This would make qualifications more transparent and understandable to employers across the EU, improving mobility and employability.
• Redesigning EU Skills Programs: EU-funded skills programs should be redesigned for greater impact. Stricter accountability measures and systematic evaluations should be introduced to ensure that funds are spent efficiently and yield tangible results.
• Focus on Adult Learning and Vocational Training: Adult learning will be crucial to ensuring that workers can adapt to technological and sectoral changes. The report proposes a broad reform of vocational training across the EU, ensuring that it meets the needs of strategic value chains and emerging industries.
• Targeted Interventions for STEM and Technical Skills: To address shortages in technical fields, a new Tech Skills Acquisition Programme should be launched. This program would aim to attract tech talent from outside the EU, offering EU-wide scholarships and internships in STEM subjects, and creating a visa program for students, graduates, and researchers. This will help retain talent in Europe during the early stages of their careers.

Attracting Global Tech Talent

Europe must also improve its ability to attract and retain top talent, especially in STEM fields. The proposed Tech Skills Acquisition Programme would combine academic scholarships, internships, and a new EU-level visa program for international students and researchers. By offering competitive opportunities and creating clear career paths for tech talent within Europe, the program would help prevent brain drain and ensure that more skilled workers remain in the EU.

Building a Future-Ready Workforce

The skills gap in Europe is not just a challenge; it is a barrier to future growth and innovation. If left unaddressed, these shortages will impede Europe’s ability to compete globally in the digital and green economies. A comprehensive strategy that includes improving education, fostering adult learning, enhancing vocational training, and attracting global talent is essential. By closing the skills gap, Europe can ensure that its workforce is prepared to meet the challenges and opportunities of the 21st century, fostering a more innovative and competitive economy.

A Joint Decarbonisation and Competitiveness Plan for Europe

Europe is at a critical juncture in its journey towards decarbonisation, as it faces the dual challenge of managing high energy costs while ensuring that its industrial competitiveness is not eroded. High energy prices have been a significant barrier to growth, particularly for energy-intensive industries (EIIs), while the lack of sufficient generation and grid capacity could slow the spread of digital technologies and the electrification of transport. The urgency of addressing these issues is underscored by the European Commission’s estimates, which highlight the negative impact of energy costs on potential growth. In this context, Europe must chart a course that simultaneously lowers energy prices, fosters clean technology innovation, and protects its industrial base from unfair competition, particularly from countries like China, which have made significant strides in clean tech manufacturing.

The Energy Challenge: High Costs and Volatility

High energy costs are a significant obstacle for European industry, particularly for energy-intensive sectors. Since 2021, production in these industries has dropped by 10-15%, while imports from countries with lower energy costs have increased. Furthermore, the volatility of energy prices in Europe has created uncertainty in corporate investment decisions, as hedging against price fluctuations has become more expensive. Without substantial improvements in generation and grid capacity, the growth of digital industries—such as AI and data centers—may also be constrained. Data centers alone accounted for 2.7% of the EU’s electricity demand in 2023, and this figure is projected to rise by 28% by 2030.

In addition to energy costs, Europe’s decarbonisation targets are far more ambitious than those of other major economies. The EU has committed to reducing greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. In contrast, the US has set a non-binding target of a 50-52% reduction from 2005 levels, and China aims only to peak its carbon emissions by the end of the decade. This creates significant near-term investment needs for European companies that their global competitors do not face. For EIIs such as chemicals, basic metals, non-metallic minerals, and paper, decarbonisation is expected to cost EUR 500 billion over the next 15 years. Additionally, decarbonising the hardest-to-abate sectors like maritime and aviation will require annual investments of EUR 100 billion from 2031 to 2050.

The Opportunity in Decarbonisation: Clean Tech Leadership

While the decarbonisation of Europe’s energy system presents significant short-term costs, it also offers an opportunity for Europe to reduce energy prices and take the lead in clean technology innovation. The shift to low-marginal-cost energy sources, such as renewables and nuclear power, is essential for Europe’s energy security and long-term competitiveness. Europe has significant potential in renewable energy, with Southern Europe ideally suited for solar power and the North and Southeast for wind power. By 2023, renewables accounted for 22% of the EU’s gross final energy consumption, compared to 14% in China and 9% in the US.

Europe is also a leader in clean tech innovation, with a strong presence in sectors such as low-carbon fuels, which are crucial for the decarbonisation of transport. The EU holds 60% of the world’s high-value patents in this area and ranks among the top innovators globally in sustainable transport technologies. This innovative strength positions Europe to capitalize on the global demand for clean tech, particularly as the International Energy Agency (IEA) estimates that more than a third of the required CO2 emission reductions globally by 2050 will depend on technologies that are currently at the demonstration or prototype stage.

However, this opportunity is threatened by increasing competition from China. The EU aims to achieve 42.5% of its energy consumption from renewable sources by 2030, which will require a near tripling of installed solar capacity and a doubling of wind power capacity. China, driven by state subsidies and low manufacturing costs, has become a dominant player in clean tech exports, particularly in solar PV, battery cells, and electric vehicles (EVs). China’s overcapacity in these sectors could flood global markets, undermining Europe’s clean tech industry. Already, the EU is experiencing a deterioration in its trade balance with China, largely due to imports of clean tech products like EVs and solar panels.

Managing the Risk of Deindustrialisation

Europe must confront several fundamental decisions about how to pursue its decarbonisation path while maintaining the competitiveness of its industry. Emulating the US’s approach of systematically blocking Chinese technology could slow Europe’s energy transition and impose higher costs on the EU economy. Additionally, given that more than a third of the EU’s manufacturing GDP is absorbed outside the EU, triggering reciprocal tariffs with China could be more harmful to Europe than to the US. However, a laissez-faire approach is equally untenable, as it risks undermining European jobs, productivity, and economic security.

For example, simulations by the European Central Bank (ECB) suggest that if China were to apply the same subsidies to its EV industry as it did to solar PV, domestic production of EVs in the EU could decline by 70%, while the market share of EU producers could fall by 30 percentage points. This poses a significant threat to Europe’s automotive industry, which employs nearly 14 million people and is vital to the continent’s economy. Moreover, deindustrialisation in energy-intensive sectors could threaten Europe’s food security and defense autonomy, further endangering the political viability of the European Green Deal, which is built on the promise of creating new green jobs.

A Mixed Strategy for Decarbonisation and Competitiveness

Europe must adopt a mixed strategy to manage its decarbonisation efforts while preserving industrial competitiveness. Four broad cases for policy intervention can be identified:

• Importing Technology: In industries where Europe’s cost disadvantage is too large, it makes sense to import necessary technology, allowing foreign taxpayers to bear the costs of subsidies. However, Europe should diversify suppliers to reduce dependencies and ensure long-term economic security.
• Protecting Jobs Through Inward Investment and Trade Measures: In sectors where the EU is agnostic about the origin of the underlying technology but needs to protect domestic jobs, a combination of encouraging inward foreign direct investment (FDI) and applying trade measures to offset the cost advantage of foreign subsidies can be effective. This approach is already being applied in the automotive sector, where tariffs and FDI announcements are helping to level the playing field.
• Ensuring Technological Sovereignty: In strategic industries where it is important for Europe to retain know-how and manufacturing capacity, the EU should promote long-term investment through local-content requirements and joint ventures with foreign companies. This will help Europe maintain technological sovereignty and ramp up production if needed in times of geopolitical tension.
• Supporting Infant Industries: For new industries with high growth potential, such as clean tech, Europe should apply a full range of trade-distorting measures to protect these sectors until they reach sufficient scale. Once the industries are competitive, these protections can be withdrawn.

Aligning Policies Behind the EU’s Objectives

To execute this strategy, Europe needs a joint decarbonisation and competitiveness plan that aligns all policies with its overarching goals. The plan should focus on three priority areas:

• Lowering Energy Costs: Europe must transfer the benefits of decarbonisation to end users by lowering energy costs and accelerating the deployment of clean energy in a cost-efficient manner. Leveraging all available solutions, including renewables, nuclear power, and advanced grid technologies, will be essential for maintaining competitiveness.
• Capturing Industrial Opportunities from the Green Transition: Europe should remain at the forefront of clean tech innovation, scaling up manufacturing capacity for green technologies and exploiting the opportunities provided by circular economy models. The EU must ensure that its clean tech demand is met by domestic supply, preventing foreign competitors from undermining Europe’s industrial base.
• Levelling the Playing Field: In sectors where European companies face unfair competition due to foreign subsidies or more stringent decarbonisation targets, Europe should apply trade measures such as tariffs or local-content requirements. This will help protect jobs and ensure that Europe’s green transition does not lead to deindustrialisation.

A Balanced Path to Green Growth

Europe’s ambitious decarbonisation goals are a necessary response to the global climate crisis, but they also pose significant challenges for industrial competitiveness. High energy costs, volatile prices, and competition from countries like China threaten to undermine Europe’s green transition and its industrial base. However, by adopting a mixed strategy that balances the need for clean tech leadership with policies to protect European jobs and industries, Europe can navigate this complex landscape.

A joint decarbonisation and competitiveness plan that aligns energy, industrial, and trade policies behind the EU’s objectives will be essential for ensuring that Europe emerges as a leader in the global clean energy economy. By capturing the industrial opportunities of the green transition, lowering energy costs, and safeguarding its industrial base from unfair competition, Europe can achieve sustainable growth while meeting its climate goals.

The Root Cause of High Energy Prices in Europe: Structural and Market Issues

Europe’s high energy prices are rooted in deep structural challenges within its energy market, which are being exacerbated by both longstanding and new issues. The energy price gap between Europe and other major economies, particularly the US, is driven by several key factors: Europe’s relative scarcity of natural resources, slow infrastructure investment, and suboptimal market rules that prevent industries and households from fully benefiting from clean energy. Additionally, the high volatility in energy prices, spurred by financial and behavioral factors in derivative markets, further undermines investment certainty and economic stability.

Europe’s Structural Disadvantages in Natural Resources and Collective Bargaining

One of the primary reasons for Europe’s energy price differential with the US is its lack of natural resources, particularly fossil fuels like natural gas. While the US benefits from abundant domestic production of natural gas, Europe is heavily reliant on imports, making it vulnerable to global price fluctuations and supply chain disruptions. Despite being the world’s largest buyer of natural gas, Europe has not effectively leveraged its collective bargaining power. This weak negotiating position leaves Europe at the mercy of volatile international markets, particularly for liquefied natural gas (LNG), which has become increasingly important since the loss of Russian pipeline gas supplies.

Europe’s energy market also suffers from significant reliance on spot market prices, which are more volatile than long-term contracts. In 2023, 42% of Europe’s gas imports were in the form of LNG, up from 20% in 2021. LNG prices are typically higher than pipeline gas due to the added costs of liquefaction and transportation. Additionally, more gas is now being traded on spot markets, influenced by global demand, especially from Asia. This dependence on spot markets makes Europe more susceptible to price spikes, as seen during the 2022 energy crisis when intra-EU competition for gas pushed prices unnecessarily higher.

Market Rules and Infrastructure Bottlenecks

Europe’s energy market rules, coupled with its fragmented and slow-moving infrastructure investments, contribute significantly to its high energy prices. Renewable energy generation, while increasing, is not yet fully integrated into the market in a way that allows consumers to benefit from its lower marginal costs. Even as Europe reduces its dependence on natural gas, market rules still tie electricity prices to the price of gas, which is often the marginal price setter. For instance, during the peak of the 2022 energy crisis, natural gas set the price of electricity 63% of the time, even though it accounted for only 20% of the energy mix.

In theory, long-term contracts, such as Power Purchase Agreements (PPAs) and Contracts for Difference (CfDs), could help decouple electricity prices from volatile fossil fuel prices. However, these solutions are underdeveloped in Europe, and their implementation is inconsistent across Member States. Without a broader and more effective deployment of such mechanisms, the benefits of renewable energy generation will not be fully passed on to consumers, and energy prices will remain linked to the volatility of fossil fuel markets.

Infrastructure bottlenecks further compound the issue. The permitting process for new renewable energy projects and grid expansions is often lengthy and uncertain, creating delays in bringing new capacity online. For example, it can take up to 9 years to approve an onshore wind farm in some EU countries, compared to under 3 years in more efficient Member States. Similarly, ground-mounted solar photovoltaic (PV) systems can take 3-4 years to permit in some regions, but only 1 year in others. These delays are partly due to the extensive environmental impact assessments required, and the lack of administrative capacity and digitalization at the local level hampers faster approval processes. A significant proportion of municipalities—69%—report a lack of skills related to environmental and climate assessments, which further slows down progress.

Volatility in Gas Markets and the Role of Financial Derivatives

The volatility in European gas markets is exacerbated by the way these markets function, particularly in relation to financial derivatives trading. A small number of companies dominate trading in European gas markets, concentrating market power and influencing price movements. According to the European Securities Markets Agency (ESMA), the top five companies held around 60% of positions in certain trading venues in 2022, and their short positions increased significantly during the largest spikes in natural gas prices.

Unlike in the US, where commodity companies are not exempt from supervision and energy commodities are subject to position limits, European gas markets have looser oversight. Many commodity companies that engage in trading can claim exemptions from regulatory supervision under the “ancillary” exemptions, which apply to companies whose primary business is not trading. This regulatory gap allows for less precise scrutiny of trading activities, leading to greater price volatility. The US has stricter regulations, particularly on natural gas trading (Henry Hub contracts), which limits the concentration of market power and reduces the potential for price manipulation.

Energy Taxation and the Price of Decarbonisation

Energy taxation is another key driver of high retail energy prices in Europe. Taxes on electricity and natural gas vary widely across Member States, and while these taxes are often intended to incentivize decarbonisation, they add a significant burden to end users. Unlike the US, which does not levy federal taxes on electricity or natural gas consumption, Europe’s higher taxes contribute to the energy price gap. Additionally, the EU’s Emissions Trading Scheme (ETS) adds a carbon cost to power generation, which can further increase electricity prices for both households and industries.

The cost of carbon in Europe is high and volatile. For gas-fired power generation, the carbon cost under the ETS in the EU was around EUR 20-25/MWh in 2022, compared to EUR 10-15/MWh in California. In some cases, the carbon cost can make up 15-20% of the total commodity cost. This adds to the already high retail prices, which are further inflated by network costs and taxation. In 2022, approximately 45% of household electricity prices and 65% of industrial electricity prices were composed of generation costs, with the remainder split between network fees and taxes.

Policy Solutions for Reducing Energy Costs

To address these challenges and bring down energy costs in Europe, a multi-pronged approach is required. Key policy solutions include:

• Leveraging Collective Bargaining Power: Europe must better leverage its position as the world’s largest buyer of natural gas by coordinating purchasing efforts and reducing reliance on volatile spot markets. The EU’s AggregateEU mechanism is a step in the right direction, but joint purchasing should be mandatory to increase bargaining power and secure more stable, long-term contracts at competitive prices.
• Decoupling Electricity Prices from Fossil Fuels: Europe needs to accelerate the development of long-term contract solutions such as PPAs and CfDs to decouple electricity prices from the volatile gas market. These contracts would provide consumers with more stable and predictable energy prices, reducing their exposure to the price swings of fossil fuels.
• Streamlining Permitting Processes: Reducing the permitting times for renewable energy projects and grid expansions is essential for accelerating the transition to clean energy. The EU must continue to push for reforms that simplify and speed up the permitting process, particularly by addressing the lack of administrative capacity and improving digitalization at the local level.
• Reforming Energy Taxation: While energy taxation is an important tool for driving decarbonisation, the variation in tax rates across Member States creates inconsistencies in retail energy prices. The EU should consider harmonizing energy taxes to reduce the burden on consumers and industries while still maintaining incentives for cleaner energy sources. Additionally, adjustments to the ETS may be necessary to ensure that the carbon cost remains predictable and does not disproportionately affect end users.
• Strengthening Oversight of Gas Derivatives Markets: Europe should tighten regulations on gas derivative markets, ensuring that commodity companies are subject to the same level of scrutiny as financial institutions. This would help reduce the concentration of market power and limit the volatility caused by speculative trading in energy markets.

A Path to Lower Energy Prices and Increased Competitiveness

The structural challenges behind Europe’s high energy prices require a comprehensive policy response that addresses both supply-side and market dynamics. By leveraging its collective bargaining power, decoupling electricity prices from volatile fossil fuel markets, and streamlining the permitting process for renewable energy projects, Europe can reduce its energy costs and enhance its competitiveness. Moreover, regulatory reforms in the gas derivative markets and adjustments to energy taxation will help stabilize prices and create a more predictable environment for both consumers and industries.

The transition to a cleaner energy system presents significant opportunities for Europe, but it will only succeed if the cost of energy is brought under control. By addressing these fundamental issues, Europe can position itself as a leader in clean energy innovation while ensuring that its economy remains competitive on the global stage.

The Threat to Europe’s Clean Tech Sector: A Growing Challenge for Industrial Competitiveness

Despite being a world leader in clean technology innovation, Europe faces a serious risk of losing its competitive edge in this critical sector. While the European Union (EU) accounts for over 20% of global clean tech innovations, systemic weaknesses in its innovation ecosystem threaten its ability to maintain and scale up this leadership. The clean tech sector is facing the same challenges seen in other high-tech areas, such as digital technologies, where Europe has struggled to commercialize innovations and turn early-stage advantages into industrial superiority. As a result, Europe’s clean tech leadership is being eroded, with significant implications for its industrial future, decarbonisation goals, and economic competitiveness.

Early-Stage Advantages at Risk

Europe has historically been at the forefront of clean tech innovation. More than half of EU clean tech innovations are at the launch or early revenue stage, while 22% are scaling up, and 10% are considered mature. This strong pipeline underscores Europe’s potential to lead the global transition to a low-carbon economy. However, the momentum has slowed in recent years. For example, patenting in low-carbon innovation has decelerated, and the EU’s share of early-stage venture capital (VC) funding for hydrogen and fuel cells has plummeted from 65% in 2015-2019 to just 10% in 2020-2022. This decline highlights Europe’s struggle to turn innovative breakthroughs into viable commercial ventures that can compete on the global stage.

The challenges faced by the clean tech sector mirror those of other innovative industries in Europe. The lack of consistent regulation across the Single Market and limited access to finance are among the most significant barriers. Medium and large companies point to regulatory consistency as a critical factor for commercialization, while smaller firms identify finance as a primary obstacle to growth. These issues result in a significant funding gap between the EU and the US, particularly in later-stage financing, which is essential for scaling up successful technologies.

Manufacturing Challenges: Losing Ground to Global Competitors

Although Europe is a significant market for clean technologies such as solar photovoltaics (PV), wind energy, and electric vehicles (EVs), it is increasingly losing its manufacturing edge to global competitors. In sectors like solar PV, where Europe was once a pioneer, China now dominates global production, with European companies relegated to a much smaller role. In wind power, Europe still leads in turbine assembly, serving 85% of its domestic market, but its global market share has declined sharply, from 58% in 2017 to 30% in 2022. Similar challenges are seen in other clean tech sectors, such as electrolysers and carbon capture, where European companies continue to innovate but are increasingly producing at scale outside Europe, particularly in China.

One of the main reasons for this decline is the cost disadvantage faced by European manufacturers. Chinese manufacturing costs for solar PV are 35-65% lower than in Europe, while battery cell manufacturing costs are 20-35% lower. These disparities are driven by a combination of state subsidies, lower labor costs, and larger economies of scale in China, which has positioned itself as the global leader in clean tech production. The US, too, is making significant strides in this area, particularly with the passage of the Inflation Reduction Act (IRA), which provides substantial subsidies to clean tech manufacturers and helps bridge the cost gap with China.

The Net Zero Industry Act: A Fragmented Response

In response to these challenges, the EU introduced the Net Zero Industry Act (NZIA) in 2023, aiming to strengthen the continent’s clean tech manufacturing capacity. The NZIA sets ambitious targets for EU production in key clean tech sectors, including solar, wind, and batteries. However, the support provided under the NZIA remains fragmented, with different programs offering varying levels of financial backing. Importantly, EU support does not typically cover operating costs, where cost gaps with competitors are the largest, and overall financing for manufacturing is significantly less generous than the IRA in the US.

Moreover, the NZIA does not include explicit minimum quotas for local production, which other regions regularly apply to support their domestic industries. Without such quotas, there is no guarantee that European demand for clean technologies will be met by EU-based manufacturers. As a result, European companies may continue to struggle against global competitors, particularly in sectors where they already face significant cost disadvantages.

The Battery Industry: A Glimmer of Hope

The EU’s battery industry offers a rare example of success in the face of these broader challenges. Europe’s market share in lithium-ion batteries remains modest at 6.5%, but production is growing rapidly. In 2023, European battery manufacturing reached 65 GWh, a 20% increase over the previous year. This growth has been driven by public support for battery research and development, with public R&I spending in this sector increasing by 18% annually over the past decade. Additionally, Europe ranks among the top regions for patent applications in battery storage technologies.

The battery sector demonstrates that focused public policy efforts can strengthen Europe’s industrial position. However, many of the investments in battery manufacturing announced in 2023 have yet to be realized, and a significant proportion of the projects involve non-EU companies. This underscores the need for the EU to balance openness to foreign direct investment (FDI) with the development of domestic know-how and manufacturing capacity.

The Decarbonisation Challenge: Uneven Support and Asymmetric Competition

For Europe’s energy-intensive industries (EIIs), the challenges of decarbonisation are compounded by a lack of sufficient public support. While these industries face enormous investment needs to transition to low-carbon production, they receive relatively little assistance compared to their counterparts in other regions. For example, China provides over 90% of the global subsidies in the aluminum sector and offers significant support for steel decarbonisation. By contrast, only a small share of the EU’s Emissions Trading Scheme (ETS) revenues are allocated to supporting EIIs, with the bulk directed toward residential energy efficiency, renewable energy development, and reducing household energy bills.

The transport sector, too, faces significant decarbonisation challenges, particularly in the hardest-to-abate industries like aviation and maritime shipping. These industries are partially excluded from the ETS, meaning that the prices of extra-EU flights and sea journeys do not yet fully reflect their climate impact. This creates the risk of carbon leakage, where companies relocate to regions with less stringent climate policies, undermining the EU’s decarbonisation efforts.

The lack of a coordinated strategy for decarbonising the transport sector is particularly concerning. Transport accounts for 25% of Europe’s greenhouse gas emissions, and unlike other sectors, emissions from transport are higher today than they were in 1990. Despite this, transport is excluded from the EU’s mandatory National Energy and Climate Plans, leading to fragmented and inconsistent approaches to reducing emissions across Member States.

The Automotive Sector: A Case Study in Misaligned Policy

The automotive sector is a prime example of the challenges facing Europe’s clean tech ambitions. The EU has set ambitious targets for the sector, including the goal of zero tailpipe emissions by 2035, which will effectively phase out the sale of internal combustion engine vehicles. However, the EU has not implemented a comprehensive industrial policy to support the supply chain transformation required to meet these targets.

By contrast, China has been investing in the full electric vehicle (EV) supply chain since 2012 and is now one generation ahead of Europe in EV technology. Chinese manufacturers produce EVs at lower costs and are rapidly gaining market share in Europe. In 2023, Chinese carmakers accounted for nearly 15% of the European EV market, up from 5% in 2015, while the market share of European carmakers in their own market has fallen from 80% to 60% over the same period.

Europe at a Crossroads in Clean Tech

Europe’s leadership in clean technology is under serious threat from global competitors, particularly China and the US, which have adopted more aggressive industrial policies to support their clean tech sectors. While the EU remains a world leader in clean tech innovation, it is failing to translate this innovation into industrial dominance, largely due to systemic barriers in its innovation ecosystem, a lack of coordinated public support, and a fragmented approach to industrial policy.

To preserve its position as a global leader in clean technologies, Europe must adopt a more cohesive and ambitious industrial strategy. This includes increasing financial support for manufacturing, ensuring that EU demand is met by domestic production, and streamlining regulatory processes to reduce delays in scaling up new technologies. Without these changes, Europe risks losing its clean tech edge and falling further behind in the global race to decarbonise.

A Joint Plan for Decarbonisation and Competitiveness: Addressing Energy Costs and Industrial Strategy

The European Union (EU) faces the dual challenge of reducing energy costs while achieving ambitious decarbonisation goals, all while maintaining the competitiveness of its industries. The energy transition offers Europe significant opportunities, particularly in clean technologies, but also brings risks associated with high energy prices and the potential loss of industrial competitiveness. A joint plan for decarbonisation and competitiveness is essential to align energy policies with industrial strategies, ensuring that the benefits of decarbonisation are realized without sacrificing Europe’s position as a global economic leader.

Lowering Energy Costs for End Users

One of the critical goals of the EU’s decarbonisation plan is to lower energy costs for end users, which will require significant reforms in how energy is procured, priced, and taxed. Although natural gas will continue to play a role in Europe’s energy mix for the foreseeable future, gas demand is expected to fall by 8% to 25% by 2030 as the EU shifts towards renewable energy sources. Reducing volatility in gas prices is essential to avoid economic shocks and ensure that energy remains affordable for consumers and businesses alike.

To achieve this, Europe must reinforce its collective bargaining power by strengthening joint procurement mechanisms, particularly for liquefied natural gas (LNG). This would allow the EU to leverage its position as the world’s largest gas importer and negotiate better long-term deals with diversified and reliable trade partners. Additionally, the EU must reduce its reliance on spot market prices, which have proven volatile and susceptible to speculative trading. Financial position limits and dynamic price caps, similar to those used in the US, could help mitigate price spikes caused by market disruptions.

Beyond reforming gas procurement, the EU needs to decouple the pricing of renewable and nuclear energy from fossil fuel-based generation. Although natural gas currently sets the marginal price for electricity in many cases, new tools such as Power Purchase Agreements (PPAs) and Contracts for Difference (CfDs) offer the potential to decouple clean energy pricing from fossil fuels. Expanding the use of these contracts across the EU would allow more consumers and industries to benefit directly from lower-cost renewable energy.

Another key element of lowering energy costs is addressing the high levels of taxation and surcharges in the European energy market. Energy taxes in the EU are significantly higher than in other major economies, contributing to elevated retail prices. Reducing energy taxation, while maintaining a sustainable fiscal policy, would help lower the cost of electricity and gas for consumers and businesses alike.

Accelerating Decarbonisation in a Cost-Efficient Way

Decarbonisation is not only an environmental imperative but also an economic opportunity for Europe. To achieve its ambitious targets, the EU must adopt a technology-neutral approach that supports a wide range of clean energy solutions, including renewables, nuclear, hydrogen, bioenergy, and carbon capture, utilization, and storage (CCUS). This approach should be backed by a massive mobilisation of public and private finance, as outlined in previous investment strategies.

One of the major bottlenecks to decarbonisation is the slow permitting process for new energy projects. Permitting delays for renewable energy installations, such as wind and solar farms, can take up to nine years in some Member States, significantly hindering the pace of clean energy deployment. To address this, the EU needs to accelerate the permitting process by extending existing emergency regulations and digitalising national permitting procedures. Furthermore, simplifying environmental assessments and appointing national authorities to oversee permitting would help streamline the approval process for new projects.

The EU’s energy grids will also play a crucial role in accelerating decarbonisation. Expanding and upgrading the grid infrastructure, including interconnectors between Member States, is essential to ensure that renewable energy can be efficiently transmitted across the continent. A new “28th regime” could be established to provide a special legal framework for interconnectors deemed Important Projects of Common European Interest (IPCEIs), simplifying permitting and preventing individual Member States from blocking crucial cross-border infrastructure projects.

Supporting Hard-to-Abate Industries and Transport

Energy-intensive industries (EIIs) and the transport sector face unique challenges in the transition to a low-carbon economy. These industries are not only highly reliant on fossil fuels but also face significant competitive pressures from international players who may not be subject to the same decarbonisation targets or carbon pricing mechanisms. The EU must take a pragmatic approach to ensure that decarbonisation does not lead to industrial decline or carbon leakage.

For EIIs, financial support for decarbonisation must be increased. A larger share of the revenues from the EU Emissions Trading Scheme (ETS) should be earmarked for supporting the transition of energy-intensive industries, with a focus on innovating assets and processes and upskilling the workforce for the green transition. Supporting technologies such as green hydrogen and CCUS will be critical for reducing emissions in hard-to-abate sectors.

In the transport sector, the EU must invest in alternative fuels and infrastructure to support the decarbonisation of aviation and maritime industries, which are currently excluded from some of the more stringent carbon pricing mechanisms. Carbon Contracts for Difference (CfDs), blending EU grants with support from the European Investment Bank (EIB), and regulatory asset-based models could all help de-risk investments in low-carbon transport solutions. At the same time, the EU should work towards a level playing field for transport operators to avoid carbon leakage to regions with less stringent climate policies.

Strengthening Clean Tech Manufacturing

To capitalise on the opportunities presented by the green transition, Europe must strengthen its clean tech manufacturing capacity. Although Europe is a leader in clean tech innovation, it faces significant challenges in scaling up manufacturing and maintaining its competitive edge. The EU’s Net Zero Industry Act (NZIA) aims to address some of these challenges, but more focused support is needed to ensure that Europe’s clean tech sector can thrive.

The EU should streamline the number of funds devoted to clean tech manufacturing, focusing on technologies where Europe has a competitive advantage, such as batteries and electrolysers. Support for manufacturing should be expanded to include both capital and operational expenditures, ensuring that companies can not only build but also operate clean tech facilities at scale.

Public procurement and CfD auctions should also be used to support local production, with explicit minimum quotas for EU-manufactured products. This would provide predictable demand for the EU’s clean tech industry and help offset the trade distortions caused by subsidies in other regions, particularly China and the US.

Leveraging Trade Policy for Decarbonisation and Competitiveness

Trade policy will play a critical role in ensuring that Europe can achieve its decarbonisation goals while maintaining competitiveness on the global stage. The EU must strategically partner with other regions to secure access to critical raw materials and low-cost renewable energy, while also leveraging its clean tech leadership to expand markets for near zero-emissions technologies.

Industrial partnerships with third countries could be established to co-invest in manufacturing projects or offtake agreements across clean tech supply chains. The EU’s Global Gateway initiative could be used to finance these partnerships, ensuring that Europe remains a leader in the global clean energy market. However, the EU must also be prepared to apply trade measures when European companies face unfair competition from state-sponsored competitors.

An Industrial Strategy for the Automotive Sector

The automotive sector is a critical part of Europe’s economy and a key area where decarbonisation and industrial policy intersect. The EU has set ambitious targets for the sector, including a ban on new internal combustion engine vehicles by 2035, but these targets must be matched by a coherent industrial strategy that supports the entire automotive supply chain.

In the short term, the EU must prevent the delocalisation of automotive production to non-EU countries and protect European manufacturers from unfair competition. Countervailing tariffs against Chinese electric vehicle manufacturers are a step in the right direction, but more is needed to ensure that Europe remains a leader in automotive innovation.

Looking forward, the EU should develop an industrial roadmap for the automotive sector that addresses the convergence of electrification, digitalisation, and circularity. This roadmap should focus on supporting innovation in areas such as small and affordable electric vehicles, autonomous driving technologies, and the development of a circular economy for automotive materials.

Increasing Security and Reducing Dependencies: Strategic Imperatives for Europe

As Europe faces increasing geopolitical challenges, including the potential for economic fragmentation and coercion, it must confront its vulnerabilities, particularly those tied to critical raw materials (CRMs), advanced technologies, and defense capacities. To enhance security and reduce dependencies, Europe needs a comprehensive strategy that addresses both the immediate risks and long-term structural issues across these key areas.

Reducing External Vulnerabilities

Europe’s dependence on critical raw materials (CRMs) and advanced technologies from a limited number of suppliers presents significant risks, especially in an increasingly fragmented global trade environment. More than 40% of Europe’s imports come from a few countries, many of which do not align with its strategic interests. This over-reliance on a small number of suppliers, particularly China, leaves Europe vulnerable to potential supply chain disruptions and economic coercion. While a rapid decoupling of global trade appears unlikely in the medium term, the risk of geopolitical leverage being used to disrupt supplies is real.

The global demand for CRMs, driven by the energy transition, has skyrocketed, and Europe is falling behind other major economies like the US and China in securing its supply chains. The EU’s dependencies are particularly acute in CRMs essential for clean technologies such as lithium, cobalt, and nickel. The concentration of supply chains in countries like China, which processes a significant portion of these materials, increases Europe’s vulnerability to price volatility and supply disruptions.

To mitigate these risks, the EU needs to implement a comprehensive strategy covering the entire CRM supply chain, from extraction to recycling. The Critical Raw Materials Act (CRMA) is a step in the right direction, but it must be complemented by additional measures such as the creation of a dedicated EU Critical Raw Material Platform. This platform would coordinate joint purchasing of critical materials, aggregate demand, and manage strategic stockpiles, following successful models used in Japan and South Korea. Additionally, strengthening “resource diplomacy” through initiatives like the Global Gateway will be key to securing long-term partnerships with resource-rich countries.

Enhancing Domestic Production and Innovation

Europe also has untapped potential within its borders, particularly in mining and recycling critical materials. For example, the EU has lithium deposits in Portugal, which could meet its entire demand for the mineral. To accelerate domestic production, the permitting process for strategic projects needs to be streamlined. The CRMA sets ambitious targets for permitting times, but additional efforts to increase administrative capacity and improve regulatory efficiency are essential to meet demand in a timely manner.

Recycling offers another opportunity to reduce Europe’s dependence on external suppliers. By establishing a Single Market for waste and circularity, Europe could recycle enough materials to meet a significant portion of its future CRM needs. Strengthening the secondary market for critical raw materials and enforcing waste collection and shipment regulations will be key to scaling up recycling efforts. Furthermore, investing in research and innovation (R&I) to develop alternative materials and processes, such as reducing the lithium content in batteries, could help Europe reduce its reliance on critical imports.

Strengthening Strategic Technologies

Europe’s dependence on foreign suppliers extends beyond CRMs to critical technologies, particularly semiconductors, cloud services, and artificial intelligence (AI). The EU relies on non-EU countries for over 80% of digital products and services, with acute dependencies in semiconductors, AI hardware, and cloud infrastructure. These technologies are essential for the digitalisation of Europe’s economy, and any disruptions in supply could have severe consequences.

To reduce vulnerabilities in these areas, Europe must develop a coordinated strategy to bolster domestic production capacity and innovation. The European Chips Act is a promising initiative aimed at enhancing Europe’s position in semiconductor manufacturing, but the current fragmented approach risks undermining its effectiveness. The report recommends creating a centralised EU budgetary allocation for semiconductors, supported by a new fast-track IPCEI (Important Projects of Common European Interest). This tool would facilitate co-financing from the EU budget and accelerate approval times for semiconductor projects, ensuring that Europe can compete in advanced segments of the chips industry.

Additionally, the EU should focus on securing its digital infrastructure by favoring EU-based vendors for spectrum assignments and telecom equipment. This will not only protect Europe’s digital networks from potential security threats but also support the growth of strategic industries within the EU.

Building Defense and Industrial Capacity

As geopolitical tensions rise, Europe faces growing pressure to increase its defense spending and capabilities. With conventional warfare on its Eastern border and hybrid warfare tactics targeting its infrastructure and democratic processes, the EU must invest in its defense industrial base to reduce reliance on external actors. Currently, only ten EU Member States meet NATO’s 2% of GDP defense spending commitment, and the region faces an estimated EUR 500 billion investment gap in defense over the next decade.

To fill this gap, Europe needs a coordinated defense strategy that prioritizes investment in new technologies, replenishes depleted stocks, and restores lost capabilities. Cooperation among Member States will be essential to avoid duplication of efforts and ensure that investments are targeted towards the most pressing defense needs. The European Defense Fund (EDF) should be expanded to support joint research and development in defense technologies, while Public-Private Partnerships (PPPs) can help foster innovation and ensure that the EU defense industry remains competitive.

Increasing security and reducing dependencies is a complex but essential task for Europe as it navigates a rapidly changing geopolitical landscape. By securing critical raw materials, strengthening domestic production capacities, and building a robust defense industry, Europe can reduce its vulnerabilities and enhance its strategic autonomy. These efforts will require coordinated action across Member States, significant investments in infrastructure and innovation, and the development of new partnerships with like-minded countries. Through these measures, Europe can safeguard its economic and geopolitical interests while remaining competitive on the global stage.

Strengthening Industrial Capacity for Defence and Space

The European defence and space industries are critical components of the EU’s strategic autonomy, but they face significant challenges in terms of investment, coordination, and innovation. Both sectors need focused strategies to address fragmentation, underinvestment, and the lack of technological advancement to remain competitive globally and meet growing security needs.

Defence Sector: Bridging the Investment and Innovation Gaps

Europe’s defence industry, though competitive globally with an annual turnover of EUR 135 billion, lags behind the US in both overall defence spending and technological innovation. The EU allocates far less to defence research and development (R&D), with the US spending EUR 130 billion on defence R&D compared to the EU’s EUR 10.7 billion. This gap has left the EU vulnerable in areas requiring advanced technology, such as drones, hypersonic missiles, and defence AI.

Key challenges include the fragmentation of the EU defence industry, which results in inefficiencies, such as the lack of standardisation and interoperability among Member States. For instance, EU countries operate 12 different types of battle tanks, while the US operates only one, complicating logistics and cooperation in joint defence operations. This fragmentation is compounded by a failure to aggregate demand at the EU level, with only 18% of defence procurement conducted through collaborative projects, well below the 35% target.

To address these challenges, the EU needs to increase demand aggregation and promote cross-border integration of defence assets. Swift implementation of the European Defence Industrial Strategy and European Defence Industry Programme will be essential. These initiatives should focus on consolidating EU defence capacities, improving standardisation, and fostering joint procurement to increase scale and reduce reliance on non-EU suppliers (currently 78% of procurement spending is directed outside the EU). This can be achieved through reinforcing European preference principles in procurement, ensuring that EU companies are prioritized for rising defence demand.

The EU must also boost investment in defence R&D by concentrating resources on common pan-European initiatives. Innovative segments like drones and AI call for coordinated funding, as no single Member State can afford the investments required to maintain leadership in these technologies. The report proposes establishing European Defence Projects of Common Interest, a dedicated platform for industrial cooperation in R&D, and increasing dual-use programmes that could generate both military and civilian technological advancements.

Space Sector: Unlocking Europe’s Potential

Europe’s space sector, though highly advanced in areas like satellite navigation and Earth observation, is falling behind in critical segments such as commercial launchers, satellite mega-constellations, and rocket propulsion. Despite its capabilities, the EU’s investment in space has stagnated at 15-20% of US levels, with public expenditure in 2023 standing at USD 15 billion compared to the US’s USD 73 billion. China is expected to surpass Europe by 2030.

The fragmentation of the European space sector, driven by the European Space Agency’s (ESA) “geographical return” principle (which allocates resources based on member countries’ financial contributions rather than industrial capacity), is a key issue. This system has led to the duplication of capacities and missed opportunities to invest in the most competitive technologies.

To strengthen the space sector, the EU needs to remove the geographical return principle and replace it with a focus on industrial competition and technological advancement. ESA’s procurement should prioritize the best providers, regardless of location, to ensure resources are concentrated where they can generate the most significant scientific or technological gains.

In addition, the EU should create a Single Market for space, harmonising standards and licensing requirements to reduce fragmentation. A Space Industrial Fund is proposed to allow the European Commission to act as an “anchor customer” for joint purchases of space services and products, boosting the capacity of the European space industry. Enhanced joint strategic priorities for space research and innovation, supported by increased funding and resource pooling, will help Europe maintain its leadership in key space technologies.

Enhancing Defence and Space Cooperation

The defence and space sectors both suffer from insufficient coordination among Member States, which limits their ability to respond to rising demands and emerging threats. For the defence industry, the lack of joint procurement hampers the ability of manufacturers to predict long-term needs, while in the space sector, fragmented investment and procurement policies limit the growth of strategic projects.

To overcome these issues, Europe must adopt a more integrated approach to defence and space industrial policy. This includes promoting joint R&D programmes across Member States, fostering cross-border cooperation on major defence and space projects, and enhancing the ability of EU companies to scale and compete globally. The report recommends exploring new governance models, such as creating a European Defence Projects of Common Interest for defence cooperation and a multi-purpose Space Industrial Fund to support strategic space initiatives.

To strengthen its industrial capacity in both defence and space, the EU must address underinvestment, fragmentation, and lack of coordination. By focusing on demand aggregation, increasing R&D investment, and promoting cross-border industrial integration, Europe can bolster its strategic autonomy and remain competitive in critical sectors. These measures, coupled with greater public-private partnerships and enhanced cooperation among Member States, will ensure that Europe is better prepared to meet future security challenges and leverage its industrial capabilities.

Financing Investments: Addressing Europe’s Financial Gaps

The European Union faces massive investment needs to meet its strategic objectives, with a minimum annual additional investment of EUR 750 to 800 billion required, equating to 4.4-4.7% of EU GDP in 2023. This substantial financial demand is necessary to drive the green transition, boost innovation, enhance defence capabilities, and maintain economic competitiveness. However, Europe struggles with low productive investment and fragmented capital markets, despite having ample private savings. To unlock the required investment, public support and reforms in financial structures are essential.

Root Causes of Low Investment in Europe

Europe’s low investment financing is rooted in a fragmented capital market and excessive reliance on bank financing. There are three primary fault lines in Europe’s capital markets:

• Fragmented Regulation: The EU lacks a single securities market regulator and a unified rulebook, leading to high variations in supervisory practices.
• Underdeveloped Post-Trade Environment: Clearing and settlement processes in Europe are far less unified than in the US.
• Limited Long-Term Capital Supply: Pension fund assets in the EU are significantly smaller than those in the US or the UK, limiting the supply of long-term investment capital.

Most European pension wealth is held in public pay-as-you-go systems, leaving the private sector with insufficient pension assets. This situation is exacerbated by Europe’s continued dependence on bank financing, which, though important, is not well-suited to finance innovative projects or high-risk ventures.

Mobilising Private and Public Finance

To meet investment needs and stimulate private investment, Europe must build a Capital Markets Union (CMU) and support the growth of long-term savings through enhanced pension schemes. A stronger CMU would centralise and harmonise the regulatory environment for securities, improve the post-trade landscape, and foster pension fund development across all Member States. The report recommends transforming ESMA into a single common regulator, similar to the US Securities and Exchange Commission (SEC), to streamline governance and reduce national biases.

The EU should also focus on revitalising securitisation, a financing tool that could unlock additional lending by allowing banks to package loans into tradable assets. A dedicated securitisation platform, backed by public support, would deepen the market, especially if combined with lower capital charges for low-risk securitised assets.

Additionally, the EU budget should be reformed to focus on strategic projects that align with Europe’s priorities, such as clean tech, defence, and digital transformation. The report suggests establishing a Competitiveness Pillar within the EU budget, concentrating financial resources on initiatives that drive growth and innovation, while reducing the complexity of accessing EU funds. The InvestEU Programme should be expanded to support higher-risk and scale-up investments, with the European Investment Bank (EIB) taking on more substantial projects.

Issuance of Common Safe Assets

A significant recommendation is the issuance of common safe assets, such as EU bonds, to fund joint investment projects. A common safe asset would standardise the pricing of corporate bonds and derivatives across the EU, lower the cost of capital, and enhance market integration. These assets would provide a benchmark for pricing, a type of secure collateral for financial institutions, and a liquid investment option for European households.

To ensure the sustainability of such a financial mechanism, stronger fiscal rules must be implemented to prevent public debt from becoming unsustainable. Issuing these bonds would allow the EU to finance large, strategic projects in areas such as infrastructure, research, and defence, creating a deeper and more liquid market in EU bonds, helping to further integrate Europe’s capital markets.

Supporting Innovation and Clean Tech

Given the challenges in financing high-risk ventures, Europe must provide more robust support for startups and scale-ups, particularly in sectors such as clean tech, AI, and digital technologies. Public-private partnerships and targeted EU funding schemes will be essential to bridge the investment gap for these high-growth sectors. The focus should be on reducing the cost of capital for innovative projects by using public guarantees and enhancing access to long-term financing.

In parallel, joint funding for R&I, defence procurement, and infrastructure should be bolstered through common EU resources. Such projects, especially in AI and green energy, will generate productivity gains that will not only pay off the investments but also reduce long-term fiscal burdens.

Europe’s success in meeting its investment goals depends on the ability to unlock private capital through a unified capital market, enhance pension schemes, and strategically leverage public resources. Reforming the EU budget to focus on high-priority areas and issuing common safe assets will ensure that the necessary financing is available for critical projects. With a well-coordinated financial strategy, Europe can close its investment gaps, foster innovation, and secure its long-term economic competitiveness.

Strengthening Governance for Europe’s New Industrial Strategy

For the EU’s new industrial strategy to succeed, its governance structure must evolve to handle the increasing complexity and urgency of the challenges it faces. Key areas include better coordination across sectors, streamlining processes, and accelerating decision-making. Europe’s existing institutional setup often slows down actions and makes it difficult to implement cross-cutting strategies, particularly in areas like investment, regulation, education, and foreign policy. While substantial Treaty changes may eventually be required, significant improvements can be made without them.

Refocusing the EU’s Work

A major recommendation is to create a new Competitiveness Coordination Framework that would streamline and focus EU-wide efforts on strategic priorities. This framework would replace existing coordination mechanisms like the European Semester and the National Energy and Climate Plans, which have proven to be bureaucratic and ineffective.

The Competitiveness Coordination Framework would:

• Identify EU Competitiveness Priorities, adopted by the European Council, which would guide economic policies.
• Be divided into Competitiveness Action Plans for each strategic priority, defining objectives, governance, and financing mechanisms.
• Minimise bureaucracy and involve key stakeholders, including EU institutions, Member States, private sector representatives, and technical experts.

The EU’s budget would also need to be refocused on strategic priorities under this framework. A proposed Competitiveness Pillar within the next Multiannual Financial Framework (MFF) would direct EU funds to critical public goods like clean tech, defence, digital infrastructure, and innovation.

Subsidiarity—the principle that the EU should only take action when Member States cannot achieve objectives alone—should be more rigorously applied. National parliaments should have a stronger role in ensuring the EU adheres to this principle, with better scrutiny processes and an EU-wide inquiry into why subsidiarity is often passively overlooked.

Accelerating Decision-Making

The EU’s current decision-making rules, particularly those requiring unanimity in the Council of the European Union, slow down progress. The report suggests leveraging the “passerelle” clause in the EU Treaties to expand Qualified Majority Voting (QMV) in areas where decisions are frequently blocked by the need for unanimity. This would accelerate legislative processes and enable faster responses to critical challenges.

Where full EU action is blocked, enhanced cooperation between like-minded Member States should be pursued. This mechanism, already available under the EU Treaties, allows a subset of Member States to work together on specific policies. For example, enhanced cooperation could be used to harmonise corporate law or insolvency rules for innovative companies. As a last resort, intergovernmental cooperation could be considered, but this would lack the oversight of EU institutions, limiting its democratic legitimacy and coherence with broader EU goals.

Simplifying Rules

The regulatory burden in the EU has grown, particularly affecting businesses, with no common methodology to measure the cumulative impact of new legislation. The report highlights three main issues:

• Accumulation of Regulation: The volume of EU legislation, with potential overlaps and inconsistencies, creates unnecessary complexity for businesses.
• Divergent National Transposition: Member States often implement EU laws with additional national requirements, creating fragmentation within the Single Market.
• Disproportionate Impact on SMEs: EU regulation disproportionately affects smaller firms, but there is no standard framework to assess these specific impacts.

To address these issues, the report recommends:

• Appointing a Vice President for Simplification within the European Commission, tasked with reducing the overall regulatory stock and overlap. This role would coordinate efforts across EU institutions to streamline laws and reduce red tape.
• Introducing a single, clear methodology to quantify the cost of new legislation across the EU, ensuring consistency in assessing the burden on businesses.
• Conducting a six-month stress test at the beginning of each Commission mandate to assess existing regulations by sector and identify areas for simplification.
• Strengthening the Single Market Enforcement Taskforce (SMET) to address incorrect or excessive national transposition of EU laws.

In addition, SMEs should benefit from a 25% reduction in reporting obligations, with a goal of further reducing this by up to 50% for small and medium-sized enterprises. A competitiveness test should also be applied to all new legislative proposals, ensuring that their cumulative impact is assessed and mitigated, particularly for SMEs.

The success of Europe’s new industrial strategy depends on reforms to governance that streamline decision-making, simplify regulations, and focus on strategic priorities. By creating a more focused and flexible framework, improving coordination among Member States, and ensuring that the regulatory burden is reduced, the EU can more effectively drive innovation, investment, and competitiveness.

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APPENDIX 1 – Summary table

Section	Critical Issues	Key Numerical Data/Stats	Examples/Case Studies	Recommendations	Remarks/Notes
Capital Markets Union & Common Safe Assets	Fragmented capital markets and a lack of common safe assets prevent Europe from fully mobilising private investment for large-scale projects.	EU households have EUR 1.39 trillion in savings (2022), but these funds are not efficiently directed into productive investments.	Capital markets are underdeveloped, and the absence of a common safe asset prevents the creation of a large, liquid market that could lower borrowing costs and attract global investors.	Continue issuing common safe assets for joint investment projects (e.g., innovation, grids, defence) while ensuring fiscal sustainability across Member States and deepening Capital Markets Union.	A common safe asset could enhance Europe’s financial resilience and support investment in critical areas, but it requires fiscal safeguards and political consensus.
Challenges in Clean Tech Leadership	Europe is losing its competitive edge in clean tech manufacturing to China and the US due to fragmented policies and lack of investment in scaling technology.	EU accounted for 65% of global VC for hydrogen (2015-2019); this dropped to 10% (2020-2022).	EU’s share in the global wind turbine market fell from 58% (2017) to 30% (2022), losing to China. The solar PV manufacturing cost in China is 35%-65% lower than in Europe.	Introduce local production quotas for public procurement, streamline funding for scale-ups, focus investments on high-potential technologies like batteries and electrolysers.	Without stronger support for manufacturing and scaling, Europe risks losing its clean tech innovation lead to China and the US, where state support is significantly higher.
Challenges to Clean Tech Manufacturing	Europe’s leadership in clean tech innovation is being eroded by lower-cost manufacturing in China, exacerbated by fragmented policies and underinvestment in scaling.	EU clean tech patenting down; from 2015-19, EU had 65% of global VC for hydrogen, but this dropped to 10% in 2020-2022.	EU’s share of wind turbine market fell from 58% in 2017 to 30% in 2022, losing out to China. Production costs in China for solar PV are 35%-65% lower than Europe.	Set local content quotas for clean tech manufacturing, focus EU funding on scaling technologies like batteries and electrolysers, and develop a single point of entry for clean tech funding.	The risk of clean tech deindustrialization is real unless the EU strengthens support for scaling technologies and develops local manufacturing capacity.
Closing the Innovation Gap	Europe lags behind the US in digital technology, cloud computing, and AI due to slow tech diffusion, low investment, and fragmented regulations.	EU productivity growth at 0.7%, lagging behind the US. Shrinking workforce by 2 million/year by 2040.	EU generates 22% of AI robotics, but 70% of foundational AI models developed in the US.	Focus on increasing innovation, improve regulatory framework, reduce bureaucracy, enhance tech sector funding, target digital transformation initiatives.	Urgent focus on tech sector needed to catch up with US and China in critical fields.
Common Safe Assets and Joint Investment	Fragmented financing mechanisms limit Europe’s ability to mobilize capital for critical projects such as defence procurement, innovation, and clean energy.	Investment gap between EU and US: EUR 150 billion annually.	The EU’s current funding structure is too fragmented, making it difficult to mobilize resources for large-scale, cross-border projects that require significant investment.	Move towards issuing common safe assets for joint investment projects, especially for defence procurement, clean tech, and digital infrastructure. Use NGEU as a model for future bond issuance.	Issuing common safe assets would lower capital costs and integrate capital markets, but it requires political will and institutional safeguards to manage national debt sustainably.
Decarbonisation and Cost-Efficiency	Fragmented and slow permitting processes delay renewable energy projects, while energy taxation contributes to high retail prices.	Permitting times: Up to 9 years for onshore wind in some countries; only 3 years in others.	Administrative capacity lacking in 69% of municipalities responsible for permitting processes. Fragmentation of permitting slows renewable energy projects across Europe.	Streamline the permitting process for renewable energy and grids, extend acceleration measures, and consider limited exemptions in environmental legislation until climate neutrality is reached.	Addressing administrative bottlenecks and simplifying the permitting process are key to accelerating renewable energy projects across Europe.
Defence & Space Industry Capacity	EU defence spending lags behind the US and is fragmented, limiting innovation and creating capacity gaps. Similarly, Europe is losing its lead in space technologies.	EU defence R&D spending: EUR 10.7 billion vs. USD 140 billion in the US. Europe spends only 15%-20% of what the US spends on space.	Fragmentation: EU countries operate 12 types of battle tanks, complicating logistics. Space: EU relies on SpaceX for satellite launches.	Consolidate defence procurement, raise defence R&D investment, and strengthen space industry through joint EU procurement and new funding models.	Europe must address defence fragmentation to remain competitive and secure. Space funding and governance must also be streamlined.
Defence and Space Industrial Gap	EU defence spending lags far behind the US, fragmented procurement, lack of interoperability, underinvestment in R&D, and reliance on foreign suppliers for critical tech.	US defence R&D budget: EUR 130 billion (16% of total), EU: EUR 10.7 billion (4.5% of total).	Fragmentation: EU uses 12 types of battle tanks, US uses 1. EU forced to rely on SpaceX to launch satellites for the Galileo programme.	Increase collaborative procurement, standardize equipment, reinforce EU preference in defence procurements, and boost funding for defence R&D.	European defence sector needs urgent reform to avoid dependency on foreign suppliers, especially in critical areas like satellites.
Defence Industry Capacity	EU defence industry is fragmented, lacks scale, and suffers from low collaborative procurement, making it vulnerable to supply crises and reducing operational effectiveness.	EU defence spending is one-third that of the US. Defence R&D spending is EUR 10.7 billion in EU vs. EUR 130 billion in the US.	Fragmentation: EU Member States operate 12 types of battle tanks vs. 1 in the US. Multiple artillery types complicate logistics in Ukraine.	Consolidate defence procurement across EU Member States, increase defence R&D spending, reinforce EU preference in defence equipment procurement, and promote defence industry consolidation.	Collaboration in procurement and standardization across Member States is essential for EU defence effectiveness.
Defence Sector Fragmentation	The EU defence sector is fragmented, limiting scale and preventing the development of standardised, interoperable equipment.	EU defence R&D spending is EUR 10.7 billion (2022), far behind the US (EUR 130 billion).	EU operates 12 types of battle tanks, while the US operates only one. Fragmentation creates inefficiencies and limits the ability to compete globally in high-tech defence equipment.	Increase defence R&D cooperation among Member States, develop a European Defence Projects of Common Interest, and consolidate industrial capacity to enhance scale and standardisation.	Fragmentation in defence procurement and lack of investment in R&D are holding back the EU’s ability to compete in next-generation defence technologies.
Defence Spending Gaps	EU defence spending is significantly lower and less focused on innovation compared to the US, and industrial fragmentation is a major challenge.	EU defence R&D: EUR 10.7 billion (2022); US defence R&D: EUR 130 billion. Only 10 EU Member States meet the NATO target of 2% of GDP on defence spending.	The EU operates 12 types of battle tanks, while the US operates only one, leading to significant operational inefficiencies.	Increase joint defence procurement, implement a medium-term EU Defence Industrial Policy to consolidate assets and ensure standardisation across Member States.	Fragmentation in the EU defence industry hinders competitiveness and rapid scale-up of capacities, especially in high-tech segments like drones and AI defence.
Energy Market Reform	Structural causes behind high energy prices, including lack of natural resources and fragmented energy markets across Europe.	EU natural gas: 42% imported as LNG in 2023 (up from 20% in 2021); EU gas demand to fall by 8-25% by 2030.	In 2022, natural gas was the price setter for electricity 63% of the time despite constituting only 20% of the electricity mix.	Reinforce joint LNG procurement, reduce speculative trading behavior, and improve the EU’s gas market supervision. Also, decouple clean energy pricing from fossil fuel prices through long-term contracts (PPAs, CfDs).	High dependency on LNG imports and speculative behavior increases volatility in the energy markets. Coordinated purchasing and regulation are essential.
Energy Sector: Addressing Price Volatility	Europe’s reliance on natural gas and fragmented energy policies lead to price volatility, impacting industrial competitiveness.	EU electricity demand from data centres is projected to increase by 28% by 2030. Natural gas sets energy prices 63% of the time in 2022.	The EU lacks a coordinated strategy for gas procurement, leading to high costs and volatile pricing. The fragmented permitting process delays renewable energy projects.	Joint gas procurement strategies, reduce reliance on spot market sourcing, decouple clean energy prices from gas, and accelerate renewable energy permitting and grid infrastructure development.	Fragmentation of energy markets and inconsistent regulatory frameworks hinder Europe’s ability to achieve energy security and cost-efficiency.
Energy-Intensive Industries (EIIs)	EIIs face challenges from high energy prices and insufficient public support for decarbonisation, making them less competitive globally.	Decarbonisation of EIIs: EUR 500 billion investment needed over next 15 years.	EU aluminium and steel sectors are receiving fewer subsidies compared to global competitors, including China, leading to competitive disadvantages in global markets.	Direct more ETS revenues to EIIs for decarbonisation projects, including green hydrogen and carbon capture technology. Increase support for low-carbon fuels in transport.	Without substantial investment, EIIs risk becoming uncompetitive as decarbonisation targets increase and global competition grows.
External Dependencies & Strategic Vulnerability	Europe’s dependencies on critical raw materials (CRMs) and advanced technologies make it vulnerable to coercion and geo-economic fragmentation.	40% of EU imports sourced from few suppliers. 50% of these imports are from non-aligned strategic partners.	CRMs for clean energy: 65%-70% of refining for nickel, cobalt, lithium is concentrated in China, risking geopolitical dependency.	Create a dedicated EU Critical Raw Material Platform for joint purchasing and stockpiling. Deepen resource diplomacy with allied countries (e.g., G7+ Critical Raw Materials Club).	EU risks overdependence on non-aligned countries for CRMs, particularly in clean tech sectors. Collaboration with aligned countries and domestic supply chain building is critical.
Financing Investment for Strategic Projects	EU’s investment requirements for decarbonisation, defence, and digital infrastructure are not being met due to fragmented financing mechanisms.	EUR 750-800 billion needed annually to meet the EU’s climate and digital goals. Private investment gap estimated at 4% of GDP.	The InvestEU program remains too conservative in its risk appetite, preventing it from unlocking more high-risk, high-reward investments in critical sectors.	Reform the EU budget to focus on strategic priorities, increase the EU guarantee for the InvestEU program, and develop dedicated financing schemes for high-risk, high-reward investments.	The EU needs to shift towards higher-risk, high-reward investments in key strategic sectors to maintain global competitiveness and meet its long-term growth and sustainability goals.
Financing Investments	Low productive investment in the EU, fragmented capital markets, heavy reliance on bank financing, and underdeveloped pension funds leading to inefficient financial flows.	EU household savings EUR 1,390 billion, but lower wealth returns than in the US. EU investment gap: 750-800 billion annually.	Pension assets in the EU: 32% of GDP vs. 142% in the US. Bank loan securitization 0.3% of GDP (vs. 4% in US).	Build Capital Markets Union, encourage private investment through pension reform, securitization, harmonize taxation, and invest in pan-European projects.	Addressing the pension gap and reducing reliance on bank financing is critical for fostering innovation.
Financing Investments	EU faces a massive investment gap to meet its strategic goals, with insufficient productive investment and a fragmented capital market.	EU needs EUR 750-800 billion in annual additional investment, around 4.4-4.7% of GDP, compared to Marshall Plan’s 1-2% of GDP.	EU household savings EUR 1,390 billion, but lower financial market returns than the US. Private investment gap with the US persists since the Great Financial Crisis.	Build Capital Markets Union (CMU), harmonize EU insolvency and tax regimes, promote pension fund development, and encourage securitization for better capital market integration.	Completing the CMU is key to unlocking private investment and reducing reliance on bank financing for innovative projects.
Financing Investments	Europe faces a EUR 750-800 billion annual investment gap to meet its goals in digitalisation, clean tech, and infrastructure. Private savings are high but not efficiently invested.	EU needs 4.4%-4.7% of GDP in additional investment. EU household savings reached EUR 1,390 billion in 2022, compared to EUR 840 billion in the US.	EU pension assets are only 32% of GDP, compared to 142% in the US. Bank loans still dominate EU corporate financing, limiting innovation funding.	Complete the Capital Markets Union, harmonise tax and insolvency rules, revive securitisation markets, and focus on long-term pension savings products.	Mobilising private capital through better financial market integration is key to meeting Europe’s investment needs.
Financing Large-Scale Investments	The EU needs an additional EUR 750-800 billion per year to meet its decarbonisation, digital, and defence objectives, but private investment remains underwhelming.	EU investment needs: 4.4-4.7% of GDP annually. The EU’s pension assets are 32% of GDP, compared to 142% in the US.	Despite high household savings, capital markets remain fragmented, limiting the flow of funds into productive investment. The InvestEU program is risk-averse and lacks focus on high-impact projects.	Complete Capital Markets Union, increase pension fund assets, create a single regulator for securities markets, and develop long-term savings products to direct capital into productive investments.	To meet investment targets, the EU must deepen its capital markets, increase pension funds, and promote risk-taking in high-impact projects like clean tech and innovation.
Governance & Coordination Reforms	EU governance structures are slow and fragmented, making it difficult to implement the necessary strategic reforms across critical sectors.	It takes 19 months, on average, to pass new EU laws. The EU passed 13,000 legislative acts from 2019-2024, compared to 3,500 in the US.	EU decision-making rules have not kept up with global changes, and fragmented coordination tools like the European Semester have proven ineffective.	Establish a Competitiveness Coordination Framework to align strategic goals across policy areas, extend qualified majority voting (QMV) in the Council, and simplify EU legislation.	Streamlined governance is key to accelerate reforms, reduce regulatory burdens, and implement strategic priorities across the EU in a coordinated, timely manner.
Governance & Decision-Making	EU decision-making is slow and fragmented, hindering its ability to respond quickly to external challenges and implement coordinated industrial policies.	EU takes an average of 19 months to pass new legislation.	The EU’s complex decision-making structure and multiple layers of regulation delay action, while national vetoes in key areas slow down integration and strategic planning.	Extend Qualified Majority Voting (QMV) to more policy areas, streamline coordination through a Competitiveness Coordination Framework, and accelerate action via enhanced cooperation mechanisms.	Speeding up EU governance and focusing on priority areas will be key to implementing the industrial strategy and ensuring Europe remains competitive in a rapidly changing global environment.
Governance and EU Decision-making	Slow decision-making, fragmented policies, lack of strategic coherence, and excessive regulatory burden.	Average time to pass EU legislation: 19 months.	13,000 EU legislative acts vs. 3,500 federal laws in the US.	Streamline decision-making, extend qualified majority voting, establish a Competitiveness Coordination Framework, and simplify regulatory burdens for SMEs.	Governance reforms required to improve EU competitiveness and speed of decision-making.
Governance Reform: Competitiveness Coordination	The EU’s decision-making process is slow and fragmented, with multiple layers of regulation and insufficient focus on strategic priorities.	Average time to pass new EU laws: 19 months. EU passed 13,000 legislative acts between 2019-2024.	Decision-making is often blocked by unanimity requirements in the Council, slowing down key initiatives. The European Semester and National Energy Plans are ineffective at fostering real coordination.	Establish a new Competitiveness Coordination Framework, streamline EU decision-making by extending QMV, and create Competitiveness Action Plans for priority areas such as innovation and skills.	Speeding up decision-making and focusing on key strategic priorities will be critical to implementing the EU’s industrial and innovation strategies effectively.
Governance Reforms	EU’s decision-making is slow, fragmented, and highly regulated, with a complex legislative process that prevents timely execution of strategic policies.	Average time to pass EU legislation: 19 months. EU passed 13,000 legislative acts vs. 3,500 in the US during 2019-2024.	Too many overlapping coordination tools, such as the European Semester and National Energy and Climate Plans, creating bureaucratic delays.	Establish a Competitiveness Coordination Framework, consolidate EU budgetary resources, simplify regulations, and reduce legislative duplication and inconsistencies.	Simplification of EU governance and decision-making processes is necessary to enable faster responses to emerging challenges.
Governance Reforms	The EU’s decision-making processes are slow, fragmented, and hindered by too many regulatory layers, which delays action on strategic priorities.	Average time to pass EU laws: 19 months. The EU passed 13,000 legislative acts between 2019-2024, compared to 3,500 in the US.	EU decision-making rules have not evolved since the enlargement of the EU and the increase in global complexity.	Establish a Competitiveness Coordination Framework, extend qualified majority voting (QMV) to more areas, and streamline EU regulation.	Governance reforms are essential to streamline EU decision-making and improve responsiveness to strategic challenges.
Grid Infrastructure Development	Europe’s grid infrastructure is insufficient to handle the expansion of renewable energy and clean tech deployment, slowing decarbonisation progress.	Electricity demand from data centers expected to rise by 28% by 2030.	Investment in grid deployment is lagging behind other major economies. Grid capacity bottlenecks risk slowing the adoption of digital and renewable technologies.	Focus on expanding interconnectors, create a “28th regime” for cross-border grid projects, and mobilize public and private finance to accelerate grid expansion and modernization.	Interconnectors and grid investment are essential for both energy security and the decarbonisation process, yet Europe’s fragmented approach hinders progress.
Hard-to-Abate Industries & Decarbonisation	EIIs and transport face difficulties in meeting decarbonisation goals due to high investment needs, regulatory hurdles, and lower state support compared to competitors.	EU transport sector emissions have risen compared to 1990. EIIs face EUR 500 billion in decarbonisation costs over the next 15 years.	Low-carbon fuel ramp-up is slow. China provides 90% of global aluminum subsidies and large steel subsidies, giving Chinese industries a competitive edge.	Allocate more ETS revenues to EIIs, support the uptake of low-carbon fuels through CfDs, and ensure a global level playing field through trade policies.	The EU needs to accelerate its support for hard-to-abate industries, or risk carbon leakage and competitive disadvantages.
Joint Decarbonisation & Competitiveness Plan	High energy costs and a lack of grid capacity impede Europe’s transition to a digital and green economy. Energy costs higher than competitors due to taxes, reliance on natural gas.	EU industrial gas demand to drop by 8%-25% by 2030. 2.7% of EU electricity demand comes from data centers, expected to rise 28% by 2030.	Energy-intensive industries (EIIs) production fell by 10-15% since 2021. Europe has a 20% share in renewable energy vs. 14% in China and 9% in the US.	Joint gas procurement for better bargaining power, financial position limits to reduce speculation, decoupling gas prices from clean energy, and accelerating renewable permitting processes.	Europe’s lack of coordination on energy procurement and fragmented permitting delays the transition to renewable energy.
Joint Decarbonisation Plan	High energy costs and volatility in Europe due to slow infrastructure investment, and dependency on imported energy sources, especially natural gas.	Data centers account for 2.7% of EU electricity demand; expected to rise by 28% by 2030.	Solar energy in Southern Europe; wind in Northern Europe. EU lags behind China in solar PV, wind turbine production.	Reinforce joint procurement of LNG, promote renewables (solar, wind), and increase grid investment. Focus on energy efficiency to reduce dependency on fossil fuels.	Urgent need to accelerate green energy infrastructure and grid deployment to ensure long-term stability.
Joint Procurement & Defence Coordination	Lack of joint defence procurement and fragmented national industries limit Europe’s ability to ramp up defence capacities quickly.	Only 18% of defence procurement is collaborative within the EU, falling far short of the 35% benchmark.	Without demand aggregation, EU countries compete for limited supplies, creating a vicious cycle that weakens the overall defence industrial capacity.	Implement a European Defence Industrial Strategy, increase joint procurement spending, and reinforce European preference in procurement to protect domestic companies.	Defence R&D and procurement coordination are critical to enhancing scale and reducing fragmentation in the EU defence market, especially given growing global security concerns.
Key Barriers to Innovation	Static industrial structure, fragmented financing, low venture capital, difficulty scaling up tech companies, regulatory and jurisdictional hurdles.	EU companies spent half as much on R&I as US companies. The US raised 52% of global VC funds, China 40%, EU only 5%.	EU unicorns moving abroad: 147 unicorns founded between 2008-2021; 40 relocated to the US.	Create more venture capital funding, simplify regulations for scale-ups, integrate fragmented EU tech policies, and harmonize regulatory frameworks.	Harmonizing venture capital markets and regulations across Europe is essential to avoid further brain drain.
Pension Assets & Investment Channels	EU pension systems are underdeveloped, limiting the availability of long-term capital for investments in innovation and infrastructure.	EU pension assets amount to only 32% of GDP, compared to 142% in the US and 100% in the UK.	A majority of pension wealth in Europe is concentrated in a few countries (Netherlands, Denmark, Sweden), highlighting the underdevelopment of pension systems across much of the EU.	Promote the development of second-pillar pension schemes across all Member States to better channel household savings into capital markets and long-term productive investments.	Strengthening pension funds will increase capital availability for investment in strategic sectors like clean energy, infrastructure, and digitalisation.
Public Investment and Private Sector Financing	EU’s fragmented capital markets hinder private sector investment in innovation and growth. Pension assets remain underdeveloped, limiting long-term capital allocation.	EU pension assets are 32% of GDP, compared to 142% in the US. EU household savings reached EUR 1,390 billion (2022).	Europe’s reliance on bank loans limits innovation funding. US securitisation levels (4% of GDP) are much higher than the EU (0.3%). EU public investment remains low relative to global peers.	Complete Capital Markets Union, harmonise tax and insolvency rules, enhance securitisation, and establish long-term saving products to boost investment in high-potential innovation sectors.	Mobilising private capital through more integrated financial markets is critical for achieving Europe’s investment targets, particularly in innovation and clean technology sectors.
Reducing Dependencies	Europe is vulnerable due to external dependencies on critical raw materials (CRMs), advanced technologies, and trade, especially with strategic rivals like China.	EU relies on 40% of imports from a small number of suppliers, many of which are not strategically aligned with the EU. Global demand for lithium tripled from 2017 to 2022.	China controls 35-70% of global nickel, copper, lithium, and cobalt processing. Export restrictions increased ninefold from 2009 to 2020.	Implement Critical Raw Materials Act (CRMA) fully, create joint purchasing platforms for critical materials, stockpiling strategies, diversify suppliers, and boost domestic mining.	Urgent focus on securing supply chains for CRMs, with accelerated domestic mining and recycling efforts.
Reducing External Vulnerabilities	High reliance on non-EU countries for critical raw materials (CRMs) and advanced technologies (e.g., semiconductors).	80% of EU’s digital products, infrastructure, and services come from non-EU countries. EU has no foundry for sub-22 nm chips.	China controls 35%-70% of global CRM processing. Belt and Road Initiative: USD 10 billion invested in mining in Africa and Latin America during the first half of 2023.	Implement the Critical Raw Materials Act, launch a joint procurement platform for CRMs, accelerate domestic mining projects, and develop a G7+ CRM Club with strategic partners like Japan.	Europe must accelerate CRM supply chain security to reduce vulnerability to external pressures and ensure technological competitiveness.
Reducing External Vulnerabilities (CRMs)	Europe remains vulnerable to supply chain shocks for critical raw materials, heavily relying on imports from China, which dominates refining and processing.	EU depends on China for 35%-70% of processing for key minerals like nickel, copper, lithium, and cobalt. CRM demand for clean energy to grow by 4-6x by 2040.	China’s export restrictions grew 9-fold between 2009-2020. EU’s own CRM stockpiles and recycling capacities are insufficient to buffer against market shocks.	Develop a Single Market for waste and circularity, accelerate domestic mining for CRMs, and incentivise recycling to meet 50%-75% of CRM demand for clean tech by 2050 through recycling.	EU must secure independent CRM supply chains to meet the rising demand from clean tech industries. Investment in both mining and recycling capacities is necessary.
Regulatory Burden	EU companies face a high and growing regulatory burden, with significant overlap and inconsistent national transpositions of EU laws, especially affecting SMEs.	EU enacted 13,000 legislative acts between 2019-2024, compared to around 3,500 federal laws passed in the US during the same period.	SMEs face disproportionate regulatory burdens, with around 80% of Commission Work Programme items relevant to SMEs but limited focus on their specific challenges.	Appoint a Commission Vice President for Simplification, streamline EU legislation, adopt a single methodology for regulatory impact assessments, and focus on reducing SME burdens.	Reducing regulatory complexity and implementing a comprehensive simplification strategy will improve the business environment for SMEs.
Regulatory Burden on SMEs	SMEs are disproportionately affected by the rising weight of EU regulations, which stifles innovation and competitiveness.	80% of Commission Work Programme items are relevant to SMEs, but only half of the impact assessments substantially focus on them.	SMEs face regulatory burdens from both EU laws and the “gold-plating” of these laws by Member States.	Appoint a Vice President for Simplification, streamline EU legislation, adopt a single methodology for regulatory assessments, and reduce compliance burdens for SMEs.	Simplifying regulations is critical for improving the competitiveness of SMEs and boosting innovation.
Reviving Securitisation & Completing Banking Union	EU banks remain over-reliant on traditional bank loans, and the underdevelopment of securitisation limits lending to innovative projects.	EU securitisation issuance: 0.3% of GDP (2022), compared to 4% in the US.	Securitisation could allow EU banks to release capital and increase lending, especially for SMEs and innovative companies that struggle to secure financing from traditional banks.	Revive securitisation by adjusting capital charges for certain assets, deepening the market for securitised assets, and completing the Banking Union to create a truly integrated banking market.	EU’s banking sector requires reform to meet the financing needs of the digital and green transitions, with a focus on expanding non-bank financing options like securitisation.
Security & Reducing Dependencies	Europe is highly dependent on external suppliers for critical raw materials (CRMs) and technologies, especially from non-aligned countries like China, posing strategic risks.	Global demand for lithium tripled from 2017-2022, cobalt up 70%, and nickel up 40%. China processes 35%-70% of key CRMs like nickel, lithium, and cobalt.	China’s Belt and Road Initiative significantly increased overseas investments in mining, with USD 10 billion invested in the first half of 2023 alone.	Create an EU Critical Raw Materials Platform for joint procurement and stockpiling, develop resource diplomacy with like-minded countries, and accelerate domestic mining projects.	Europe needs a comprehensive strategy to secure CRM supplies, especially as demand rises with the energy transition.
Semiconductors & Digital Technology Dependencies	Europe lacks domestic semiconductor manufacturing capacity, leaving it vulnerable to supply chain disruptions and technological lag behind the US and Asia.	EU relies on non-EU countries for 75%-90% of wafer fabrication capacity. EU has no foundry producing below 22 nm process nodes.	US and Asian countries dominate chips design and production, while Europe remains reliant on imports for digital infrastructure and advanced technologies.	Launch a centralised EU strategy for semiconductors, focused on joint efforts in advanced packaging, mainstream chips innovation, and back-end manufacturing capabilities.	Strengthening Europe’s semiconductor sector will require substantial public and private investment, as well as closer coordination between Member States.
Skills Gap	Declining educational performance, gender disparity in STEM, low participation in adult learning, limited digital skills.	Only 7% of EU students excel in math/science; EU has 850 STEM graduates/million vs. 1,100 in the US.	Adult learning participation in the EU: 37% (vs target of 60%).	Reform education and vocational training, focus on tech skills, especially in STEM. Create lifelong learning systems and reform vocational training systems across EU.	Expanding STEM education and vocational programs crucial for reducing dependency on foreign talent.
Space Industry & Investment Gaps	The EU space industry lags behind the US and China in investment, and industrial fragmentation due to ESA’s geographical return principle weakens competitiveness.	EU public space expenditure: USD 15 billion (2023), compared to USD 73 billion in the US. China expected to overtake the EU by 2030, spending USD 20 billion.	The ESA’s geographical return principle leads to fragmented investment, hindering the EU’s competitiveness in the rapidly growing space sector.	Remove ESA’s geographical return principle, establish a Space Industrial Fund, and create a Single Market for space with harmonised standards and licensing requirements.	To remain competitive, Europe must coordinate public spending on space more effectively and support innovative SMEs and start-ups in space technology.
Space Industry Challenges	EU space sector losing ground due to lower public funding, fragmentation, and reliance on non-EU launch providers like SpaceX.	EU public space expenditure in 2023: USD 15 billion vs. USD 73 billion in the US. China expected to overtake Europe by 2030 with USD 20 billion spending.	EU temporarily relied on SpaceX to launch Galileo satellites. ESA’s “geographical return” principle creates fragmented supply chains.	Remove ESA’s geographical return principle, create a Single Market for space, pool resources for joint space programs, and establish a Space Industrial Fund for procurement.	The EU must increase space funding, improve procurement strategies, and encourage joint ventures to remain competitive in space technologies.
Space Sector Governance	EU space sector is world-class but lacks investment and suffers from the geographical return principle, which fragments resources and hinders competitiveness.	EU public space expenditure: USD 15 billion (2023) compared to USD 73 billion in the US.	The ESA’s geographical return principle leads to fragmented supply chains, undermining the competitiveness of the space sector and preventing the optimal allocation of resources.	Remove geographical return principle from ESA, establish a Space Industrial Fund for joint procurement, and create a Single Market for space with harmonized standards and licensing.	ESA’s funding structure needs reform to focus on competitiveness and innovation, allowing the EU space sector to better compete with the US and China.
Space Sector Weaknesses	Europe is losing ground in space technologies, especially commercial launchers and satellite applications.	EU space expenditure: USD 15 billion (2023), compared to USD 73 billion in the US.	EU relies on SpaceX rockets for Galileo satellite launches. ESA’s geographic return principle leads to inefficient resource allocation across fragmented supply chains.	Remove ESA’s geographical return principle, establish a Single Market for space with harmonised standards and licensing, and create a Space Industrial Fund to increase joint investment.	ESA’s principles need reform to ensure funding and project alignment with industrial competitiveness.
Strategic Dependencies in Digitalisation	Europe relies on non-EU countries for over 80% of its digital products and services, especially in semiconductors and cloud services, leaving it vulnerable.	Europe lacks any semiconductor foundries for advanced chips (<22 nm). Europe relies on Asia for 75%-90% of wafer fabrication.	The US dominates the advanced processor market for AI, while Europe remains dependent on US cloud services and lacks quantum computing leadership.	Strengthen Europe’s semiconductor capacity through joint strategies, coordinate innovation efforts in key areas, and favor EU-based vendors in strategic sectors like telecoms.	Strategic independence in digital technologies is critical to maintain Europe’s competitive edge and reduce vulnerability to external shocks.
Strategic Dependencies in Technology	High reliance on non-EU countries for semiconductors, cloud services, and digital products leaves Europe exposed to disruptions in critical tech sectors.	EU relies on Asia for 75-90% of semiconductor wafer fabrication; no domestic foundry produces below 22 nm process nodes.	Semiconductor design and manufacturing dominated by US, Korea, Taiwan, and China. EU lacks key capabilities in advanced processors for AI and quantum computing.	Strengthen EU innovation in semiconductors, build domestic capacity in strategic areas, launch EU Chips Act for centralized funding, and promote EU trusted vendors in telecoms.	Europe must prioritize semiconductor production to reduce its dependency on external suppliers.
Strategic Dependencies on Digital Technologies	Europe’s reliance on foreign countries, especially the US and China, for semiconductors, cloud services, and AI hardware is a major strategic risk.	EU relies on Asia for 75%-90% of wafer fabrication. EU is dependent on a single US company for advanced processors used in AI hardware.	The US dominates advanced processor markets, leaving the EU highly dependent on non-EU suppliers for digital infrastructure (e.g., cloud and AI services).	Strengthen Europe’s semiconductor sector through joint strategies, coordinate innovation for AI and cloud services, and promote EU-based vendors in telecom and technology sourcing.	Ensuring technological sovereignty is vital for Europe’s long-term digital resilience and global competitiveness.
Strengthening Industrial Capacity for Defence and Space	Fragmented European defence industry, lack of focus on technological innovation, and heavy reliance on non-EU suppliers.	EU defence R&D spending: EUR 10.7 billion (2022); US spends EUR 130 billion in R&D for 2023.	EU defence industry turnover: EUR 135 billion in 2022. 78% of procurement spending goes to non-EU suppliers, with 63% directed to the US. A330 Multi-Role Tanker Transport collaborative project.	Increase aggregation of demand for joint defence procurement, launch European Defence Projects of Common Interest, and focus EU funds on dual-use technology and defence innovation.	EU lacks a coordinated strategy, creating bottlenecks in innovation and defense production. A more integrated approach is critical.
The Threat to Europe’s Clean Tech Sector	Europe is losing its early lead in clean tech due to low investment in later-stage development and production costs compared to competitors, especially China and the US.	EU share of global VC for hydrogen dropped from 65% (2015-2019) to 10% (2020-2022). EU clean tech scale-ups face financing challenges.	In 2017, Europe had 58% of the global wind turbine market share; this dropped to 30% by 2022 due to increasing Chinese dominance.	Introduce minimum quotas for local clean tech production, streamline funding, focus on high-potential technologies like batteries, support scale-ups with operational funding.	Without intervention, Europe will continue to lose clean tech leadership to countries with higher subsidies and lower production costs.
Transport Sector Decarbonisation	Transport is responsible for 25% of greenhouse gas emissions in the EU, with insufficient planning to integrate energy, telecoms, and transport infrastructure.	CO2 emissions from transport are higher than in 1990; only 1% of cross-border maritime operations are paperless.	The EU’s ambitious EV goals (zero tailpipe emissions by 2035) are not being met with comparable investments in charging infrastructure or energy grid capacity.	Plan for multimodal sustainable transport and integrate charging infrastructure with energy networks. Launch EU innovation projects for transport decarbonisation (e.g., zero-emission flights).	The lack of coordinated infrastructure planning between energy and transport sectors risks slowing the EU’s shift to sustainable mobility.

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source data : https://commission.europa.eu/ – and OSINT research

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