A new report published Monday (Sept. 9), which was spearheaded by former European Central Bank President Mario Draghi, paints a stark picture of the European Union’s declining competitiveness and calls for urgent action to close a widening innovation gap with global rivals.

The study, titled “The Future of European Competitiveness,” warned that the EU is falling behind the United States and China in key areas of technological innovation and productivity growth. It argued that without a dramatic increase in investment and policy reforms, Europe risks compromising its economic model and geopolitical standing.

“This is an existential challenge,” Draghi wrote in the report’s foreword. “If Europe can no longer provide [prosperity, equity, freedom, peace and democracy in a sustainable environment] to its people — or has to trade off one against the other — it will have lost its reason for being.”

The report echoes a wake-up call sounded earlier this year in PYMNTS by David Evans, noted economist and chairman of Market Platform Dynamics.

In “Why Europe Must End Its 30-Year Digital Winter to Ensure Its Long-Run Future,” Evans detailed a digital business innovation gap in the EU compared to the U.S. and China, despite its economic strength and technological advantages. Evans wrote that this gap is symptomatic of broader economic challenges, including persistent differences in GDP per capita and productivity between Europe and the U.S. He argued that this failure to innovate in the digital realm poses a significant threat to European industries as they risk falling further behind in an era where most sectors will be driven by digital and other cutting-edge technologies.

Weakness in AI

The Draghi report identified lagging productivity as a core issue, noting that EU labor productivity has fallen from 95% of the U.S. level in 1995 to below 80% today. This decline is largely attributed to Europe’s failure to capitalize on the digital revolution.

The EU’s weakness in breakthrough technologies like artificial intelligence (AI) was a key focus of Draghi’s report. It found that 70% of foundational AI models developed since 2017 originated in the U.S., while just three American “hyperscalers” control over 65% of both the global and European cloud markets.

To address these shortcomings, the report called for a massive increase in research and innovation spending. It recommended doubling the EU’s next Framework Programme for R&I to 200 billion euros ($220 million) over seven years, focusing more on disruptive innovation.

The study also highlighted a “brain drain” of European tech talent and companies to the U.S. Between 2008 and 2021, nearly 30% of EU-founded “unicorns” — startups valued over $1 billion — relocated abroad, mostly to America.

The report proposed creating a new EU-wide legal statute for innovative startups to stem this tide and foster a more dynamic innovation ecosystem. This would provide a single digital identity that is valid across the bloc and access to harmonized legislation on key issues.

The report stressed that the EU faces a critical window of opportunity with the rise of AI and other emerging technologies.

“Europe still has an opportunity to change track,” it said. “With the world now on the cusp of another digital revolution, triggered by the spread of artificial intelligence (AI), a window has opened for Europe to redress its failings in innovation and productivity.”

However, capitalizing on this opportunity will require overcoming significant hurdles. The study cited fragmented markets, complex regulations and insufficient risk capital as major barriers to innovation in Europe.

Addressing the Challenges

To address these challenges, the report called for completing the EU’s Capital Markets Union and taking steps to channel more household savings into productive investments. It also recommended reforms to make it easier for innovative companies to scale up within the European market. The study made a case for issuing common EU debt to fund strategic investments, building on the model of the NextGenerationEU recovery fund. However, it stressed that such a step would need to be accompanied by stronger fiscal rules to ensure debt sustainability.

The report also called for governance reforms to accelerate EU decision-making and reduce regulatory burdens on companies. It proposed a new “Competitiveness Coordination Framework” to align policies across the bloc better, arguing that these measures are essential for preserving the European economic and social model in the face of intensifying global competition and geopolitical instability.

Evans contended that common explanations for Europe’s digital shortcomings, such as market fragmentation or lack of venture capital, are insufficient to explain the depth and duration of this innovation deficit. Instead, he suggested that Europe’s challenges stem from a combination of factors, including an overemphasis on regulation rather than innovation, a risk-averse culture and a lack of successful tech hubs. To reverse this trend, he argued that Europe must embrace a greater reliance on market forces, foster a stronger risk-taking culture and reduce its regulatory appetite.

He emphasized, as Draghi did in the report, the need for drastic action, but suggested moving away from government-led initiatives and heavy regulation toward creating an environment that encourages entrepreneurship and attracts venture capital. These changes, he said, could lead to the formation of successful tech hubs and a positive feedback loop of innovation.