Contrary to what far-right leaders claim, Europe’s greatest challenge is not immigration or “wokeness,” but its own economic and technological backwardness. With productivity growth lagging and innovation increasingly taking place elsewhere, Europe must confront its structural weaknesses or risk falling further behind.
US President Donald Trump’s new National Security Strategy offers misguided assessment of Europe, long regarded as America’s most reliable ally. Unrestrained immigration and other policies derided by administration officials as “woke,” it warns, could lead to “civilizational erasure” within few decades.
Misreading Europe’s Predicament
That argument rests on fundamental misreading of Europe’s current predicament. While European Union does face existential threat, it has little to do with immigration or cultural politics. In fact, share of foreign-born residents in United States is slightly higher than in Europe.
Real threat facing Europe lies in its own economic and technological backwardness. Between 2008 and 2023, GDP rose by 87% in US, compared to just 13.5% in EU. Over same period, EU’s GDP per capita fell from 76.5% of US level to 50%. Even poorest US state – Mississippi – has higher per capita income than that of several major European economies, including France, Italy, and EU average.
This widening economic gap cannot be explained by demographics. Instead, it reflects stronger productivity growth in US, largely owing to technological innovation and higher total factor productivity. Today, roughly half of world’s 50 largest technology firms are American, while only four are European.
Over past five decades, 241 US firms have grown from startups into companies with market capitalizations of at least $10 billion, compared with just 14 in Europe.
Which Countries Will Lead Future Industries?
These trends raise critical question: Which countries will lead industries of future, and where does Europe fit in? Race for technological leadership now spans wide range of fields, including AI and machine learning, semiconductor design and production, robotics, quantum computing, fusion energy, fintech, and defense technologies. Europe enters this race at clear disadvantage.
Whether US or China currently leads industries of future remains open to debate, but most observers agree that it’s essentially two-horse race, with America still ahead in several key areas. Beyond that, innovation is concentrated in countries like Japan, Taiwan, South Korea, India, and Israel. In Europe, by contrast, innovative activities are largely confined to United Kingdom, Germany, France, and Switzerland – two of which are not even EU member states.
It is hardly surprise, then, that while US and China dominate global technological rankings, Europe finds itself far from top. And outlook is anything but reassuring, given that next wave of innovation is widely expected to be more disruptive than anything we have seen over past half-century.
Multiple Factors Behind Technology Gap
Technological gap between US and Europe can be attributed to several factors. First, US has far deeper and more dynamic ecosystem for financing startups, while Europe still lacks genuine capital markets union, limiting scale and speed at which new firms can grow. Venture capital funds in EU account for just 5% of global total, whereas those in United States and China secure 52% and 40%, respectively.
Second, Europe is hampered by excessive and fragmented regulation. US startup can launch product under single regulatory framework and immediately access market of more than 330 million consumers. EU has population of roughly 450 million but remains divided among 27 national regulatory regimes. International Monetary Fund analysis shows that internal market barriers in EU act like tariff of around 44% for goods and 110% for services – far higher than tariff levels US imposes on most imports.
Third, cultural attitudes toward risk-taking differ sharply. Until relatively recently, failed entrepreneur in some EU countries (like Italy) could face criminal penalties, while in US, tech founder who has never failed is often seen as too risk-averse.
Fourth, US benefits from deeply integrated academic-military-industrial complex, while Europe’s chronic underinvestment in defense has weakened its innovation capacity. Technological leaders like US, China, Israel, and, more recently, Ukraine spend heavily on defense, with military research often producing technologies that have civilian applications.
Defense Spending Paradox
Despite this, many European political leaders continue to frame higher defense spending as tradeoff between security and social welfare. In reality, free-riding on US defense spending since end of World War II has limited type of innovation that could have generated more of both through higher productivity. Paradoxically, sustaining Europe’s social model will require greater investment in defense, beginning with meeting NATO’s new spending target of 3.5% of GDP.
If Europe allows its technological lag to grow over coming decades, it risks prolonged stagnation and continued economic decline relative to US and China. There are, however, reasons for cautious optimism. Increasingly aware that Europe faces existential challenge, policymakers have begun to advance serious reform proposals. Most notable examples are two major 2024 reports on EU competitiveness and single market by former Italian prime ministers Mario Draghi and Enrico Letta, respectively.
Europe Retains Considerable Strengths
Europe also retains considerable strengths, including high-quality human capital, excellent education systems, and world-class research institutions. With right incentives and regulatory reforms, these assets could support much higher levels of commercial innovation. With better environment for entrepreneurship, Europe’s high per capita income, large internal market, and elevated savings rates could help unleash wave of investment.
Crucially, even if Europe never leads in cutting-edge technologies, it could still significantly boost productivity by adopting and adapting American and Chinese innovations. Many of these technologies are general-purpose in character, benefiting both adopters and pioneers.
At an Inflection Point
All of this leaves Europe at inflection point. As Ernest Hemingway famously observed, bankruptcy happens “gradually and then suddenly.” So far, Europe’s technological decline has been gradual. But if it fails to confront its structural weaknesses, today’s slow erosion could give way to sudden and irreversible loss of economic relevance.
Original analysis by Nouriel Roubini from Project Syndicate. Republished with additional research and verification by ThinkTanksMonitor.
