EU Faces Critical Innovation Gap, Draghi Report Urges Antitrust Reforms

In a new report released on September 9, former European Central Bank President Mario Draghi has highlighted the European Union’s (EU) concerning decline in competitiveness and warned of a widening innovation gap with global leaders such as the United States and China. The study, titled “The Future of European Competitiveness,” underscores a pressing need for substantial investment and policy reforms to prevent further erosion of Europe’s economic model and geopolitical influence.

According to PYMNTS, the report paints a stark picture of Europe’s lag in technological innovation and productivity growth compared to its global counterparts. Draghi’s foreword to the report emphasizes the gravity of the situation: “This is an existential challenge,” he writes. “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 study resonates with earlier warnings from David Evans, a renowned economist and chairman of Market Platform Dynamics. Per PYMNTS, Evans had previously highlighted the digital business innovation gap between Europe and the U.S. and China, despite Europe’s economic strengths and technological resources. Evans’ analysis, detailed in his article “Why Europe Must End Its 30-Year Digital Winter to Ensure Its Long-Run Future,” identifies this innovation gap as symptomatic of broader economic issues, including persistent disparities in GDP per capita and productivity.

One of the report’s key findings is Europe’s underperformance in artificial intelligence (AI), a sector where 70% of foundational AI models since 2017 have emerged from the U.S. Meanwhile, just three American tech giants dominate over 65% of both the global and European cloud markets. Draghi’s report calls for a significant boost in research and innovation funding, recommending that the EU’s next Framework Programme for Research and Innovation be increased to 200 billion euros ($220 million) over seven years, with a stronger focus on disruptive technologies.

The report also sheds light on the “brain drain” affecting European tech talent and startups. Between 2008 and 2021, nearly 30% of EU-founded unicorns — startups valued over $1 billion — moved to the U.S. To counteract this trend, Draghi suggests implementing a new EU-wide legal framework for innovative startups, which would provide a unified digital identity across the bloc and streamline legislation on crucial issues.

Per PYMNTS, the Draghi report emphasizes that Europe has a critical opportunity to realign its trajectory with the rise of AI and other emerging technologies. However, seizing this chance will require overcoming significant obstacles such as fragmented markets, complex regulations and inadequate risk capital.

To address these challenges, the report advocates completing the EU’s Capital Markets Union and enhancing mechanisms to channel household savings into productive investments. It also proposes reforms to simplify scaling for innovative companies within Europe and suggests issuing common EU debt to support strategic investments, akin to the NextGenerationEU recovery fund. However, this approach would need to be balanced with stringent fiscal rules to maintain debt sustainability.

Additionally, the report recommends governance reforms to accelerate EU decision-making and reduce regulatory burdens. A proposed “Competitiveness Coordination Framework” aims to better align policies across the EU, which Draghi argues is essential for maintaining Europe’s economic and social model amid escalating global competition and geopolitical uncertainties.

David Evans, reflecting on the report’s findings, notes that traditional explanations for Europe’s innovation challenges, such as market fragmentation and lack of venture capital, fall short. Instead, he points to an overreliance on regulation, a risk-averse culture, and a deficiency of successful tech hubs as root causes. Evans advocates for a shift away from government-led initiatives towards fostering a more entrepreneurial environment that attracts venture capital and encourages risk-taking.

As both Draghi and Evans underscore, Europe faces a critical juncture.

Source: PYMNTS