A recent national security strategy from Donald Trump's administration posited that unrestrained immigration and 'woke' policies in Europe could lead to 'civilisational erasure'. This assessment contrasts with analyses suggesting Europe's primary challenges lie elsewhere, such as in its economic and technological performance. Data indicates that the share of foreign-born residents in the United States is marginally higher than in Europe.
Between 2008 and 2023, GDP in the United States increased by 87%, while in the European Union, it rose by 13.5%. During this period, the EU's GDP per capita decreased from 76.5% to 50% of the US level. The per capita income of Mississippi, the lowest among US states, exceeds that of several major European economies, including France, Italy, and the EU average.
Technological Disparity
This economic divergence is attributed to stronger productivity growth in the US, driven by technological innovation and higher total factor productivity. Approximately half of the world's 50 largest technology firms are American, while four are European. Over the last five decades, 241 US companies achieved market capitalizations of at least $10 billion from startup status, compared to 14 in Europe.
The competition for technological leadership encompasses areas such as AI, machine learning, semiconductor development, robotics, quantum computing, fusion energy, fintech, and defence technologies. In this context, Europe exhibits a lag. While the US and China are widely considered the primary contenders for future industry leadership, with the US showing strengths in several key sectors, innovation globally is also prominent in Japan, Taiwan, South Korea, India, and Israel. Within Europe, significant innovative activities are largely concentrated in the UK, Germany, France, and Switzerland, with the UK and Switzerland being non-EU member states.
Factors Contributing to the Gap
The technological disparity between the US and Europe is attributed to multiple factors:
- Startup Financing: The US possesses a more extensive and dynamic ecosystem for startup financing. Europe, in contrast, lacks a unified capital markets union, which affects the growth trajectory of new businesses.
- Regulatory Framework: The US offers a single regulatory framework for a market exceeding 330 million consumers. The EU, with approximately 450 million people, operates under 27 distinct national regulatory regimes. An International Monetary Fund (IMF) analysis indicates that internal market barriers within the EU function as a tariff equivalent of about 44% for goods and 110% for services.
- Risk Tolerance: Cultural approaches to risk-taking vary. Historically, entrepreneurs in some EU countries, such as Italy, faced potential criminal penalties for business failure, contrasting with a cultural perception in the US where lack of prior failure in tech entrepreneurship can be seen as risk aversion.
- Defence Investment and Innovation: The US benefits from an integrated academic-military-industrial complex. Europe's lower defence spending is cited as a factor in its innovation capacity. Countries like the US, China, Israel, and Ukraine allocate substantial resources to defence, with military research frequently generating technologies applicable in civilian sectors. It is argued that increased defence spending, potentially reaching NATO's target of 3.5% of GDP, could enhance innovation and productivity, thereby supporting Europe's social model.
Outlook and Potential Solutions
Continued technological lag in Europe could result in prolonged economic stagnation and decline relative to the US and China. However, policymakers are increasingly addressing these structural challenges, as evidenced by major 2024 reports on EU competitiveness and the single market from former Italian prime ministers Mario Draghi and Enrico Letta.
Europe possesses strengths such as high-quality human capital, robust education systems, and leading research institutions. With appropriate incentives and regulatory adjustments, these resources could foster increased commercial innovation. An improved entrepreneurial environment, coupled with Europe's high per capita income, substantial internal market, and high savings rates, could stimulate significant investment. Furthermore, even without leading in cutting-edge technologies, Europe has the potential to enhance productivity through the adoption and adaptation of innovations from the US and China, as many of these technologies have broad applications. Europe is currently at a critical juncture concerning its future economic trajectory, where structural weaknesses, if unaddressed, could lead to a significant loss of economic relevance.