Europe is rapidly losing ground in the global technology race, a problem that could hurt its economy and reduce its influence on the world stage. While the United States and China surge ahead, Europe is failing to produce and scale up new technology firms, which has already started to impact its economic growth.
The Unicorn Gap
A key measure of technological progress is the number of unicorns—private companies valued at more than $1 billion. The data shows that Europe has only 107 of these valuable firms, with a combined value of $333 billion. In contrast, China has 162 unicorns valued at $702 billion, and the United States leads the pack with 690 unicorns worth a combined $2.5 trillion.
According to the Wall Street Journal, “Unicorns are a good measure of capitalist innovation; they are almost always fast-growing firms that have found a new way of doing something and are shaking up an existing industry.” The fact that Europe has so few shows that it is not producing enough of these innovative firms to compete with China and the United States.
Trouble Scaling Up
Europe’s challenge is not just creating unicorns but also helping them grow into big, public companies. The Wall Street Journal pointed out that Europe has only 14 publicly held, from-scratch companies valued at over $10 billion that are younger than 50 years old. Meanwhile, the U.S. has 241 of these companies, with a total value of $29.57 trillion.
This problem is partly because Europe’s markets are fragmented across 30 different countries, each with its own laws, languages, and cultures. This makes it hard for startups to grow and reach more customers. Europe also lacks venture capital, a crucial source of funding for early-stage tech companies. “There is also less venture capital—a fifth of U.S. levels in dollar terms,” the Wall Street Journal reported.
Innovation Investment Shortfalls
Another reason Europe is lagging behind is a lack of investment in research and development (R&D). While European governments spend about as much as the U.S. per person on R&D, private investment is much smaller in Europe. The Wall Street Journal said this happens “partly due to the lack of economic growth and obstacles to business such as excessive regulation.”
Philippe Aghion and other experts noted in a piece for AEIdeas that “Europe’s private-sector investment in research and development is only half that of the US.” This is a major problem because R&D spending helps drive innovation and create the new products and services that fuel economic growth.
Productivity and Economic Growth
Because of this lack of innovation, European workers are becoming less productive compared to American workers. In the late 1990s, European workers produced about 95 percent as much as their American counterparts did per hour. Today, they produce less than 80 percent. “European workers are becoming slightly less productive than their American counterparts,” the Wall Street Journal observed. Europeans also work fewer hours, which makes it even harder for them to catch up.
This is one reason why the European economy is growing much more slowly than the American economy. The European Union’s economy is now about one-third smaller than the U.S. economy, and it has been growing at only a third of the pace of America in recent years.
Cultural and Structural Challenges
Experts point to cultural factors that make it harder for Europe to compete. “The underlying drivers are partly cultural, including a focus on stability, job security and quality of life over long hours and flamboyant risk-taking,” the Wall Street Journal noted. This mindset can make it harder to take the big risks needed to build new tech companies.
Europe also faces structural challenges like an aging population and slowing productivity growth. Former European Central Bank President Mario Draghi warned that the EU is facing “huge economic challenges that could soon make the bloc irrelevant on the global economic scene.” In his recent report, Draghi called for the EU to completely overhaul the way it funds innovation.
A Dire Warning and a Possible Path Forward
The Draghi report calls for Europe to spend an extra 750 billion to 800 billion euros every year to close the gap with the United States. This is an enormous amount, representing about 5 percent of the EU’s entire economy. But without it, Draghi argues, Europe will continue to fall further behind.
The report suggests that Europe could also fix some of its problems without such a massive investment. For example, the EU could create a central program to identify and fund a few key technology sectors, like artificial intelligence and quantum computing. Pooling resources across countries could help create European tech champions that can compete globally.
The report also notes that Europe needs to attract more venture capital and make it easier for startups to expand. Right now, many promising European startups end up moving to the U.S. because they cannot find enough money to grow at home. Since 2013, about five times more venture capital has gone into U.S. startups than into European ones.
What If Europe Fails?
If Europe cannot turn this around, the consequences could be severe. “The likeliest scenario is that the bloc will continue to fall further behind the United States and China in the global race for economic might, technological prowess, and geopolitical relevance,” the Draghi report says. Europe might also struggle to fund its generous social programs without the economic growth that comes from being a global technology leader.
Europe’s challenges are real, but experts say there is still time to act. Philippe Aghion and others wrote that “Europe urgently needs to create the conditions for promising new innovators to emerge. Absent any change in its economic doctrine… Europe runs the risk of suffering an irremediable decline.”
For Europe to stay relevant and prosperous, it must take bold steps to support innovation. This includes not just spending more on research but also removing barriers that make it hard for new firms to grow. As the world moves faster into a digital economy, Europe cannot afford to be left behind.
FAM Editor: Unfortunately, we see other problems that are compounding the problem of a lack of innovation and investment in technology. The flood of immigrants from the middle east, together with the lack of sustaining birth rate among its citizens, has watered down their culture and seems to be making them less ambitious.
Second, the movement toward a green economy (more solar and wind, less coal, oil and gas, coupled with Germany’s insane move to close all of its nuclear plants), together with its untenable link to Russia for oil and gas has left Europe short on energy. Some of Germany’s most important manufacturing companies are moving out.
