The Way Forward - A European renAIssance

September 11, 2024 (3mo ago)

Following Draghi's report the theme of re-industrialization and a European renaissance is in the air.

To reclaim its competitive edge, here are actionable tips for a Europe from a European followed by deeper explanation of the background and context.

Pan-European Business Entity

  • Create a new "EU-Corp" structure with simplified opening, initial operations, and minimal taxation
  • One-hour online registration process, valid across all EU countries
  • Zero corporate tax for the first two years or until €1 million in revenue
  • Streamlined compliance and reporting requirements

Energy Revolution

  • Launch an ambitious pan-European nuclear program, focusing on next-gen technologies like thorium reactors
  • Remove regulatory red tape on nuclear energy development and expedite plant construction
  • Massively scale up renewable energy production and storage
  • Create an EU-wide smart grid to optimize energy distribution

"Made in Europe" Initiative

  • Implement aggressive incentives for local production of critical technologies
  • Create "Manufacturing Innovation Zones" with state-of-the-art facilities and minimal red tape
  • Develop a European raw materials strategy to secure critical supply chains
  • Offer energy subsidies for innovative, high-growth manufacturing companies

AI Moonshot

  • Invest €100+ billion over 3-5 years in AI research, development, and implementation
  • Create a European AI Cloud with massive computing resources available to startups and researchers
  • Establish AI ethics guidelines that balance innovation with European values
  • Implement an "AI-First" policy for government services and public sector innovation

European Innovation Agency

  • Create a powerful, well-funded agency modeled after DARPA
  • Focus on high-risk, high-reward research in strategic technologies
  • Streamline grant processes and embrace a "fail fast" culture
  • Coordinate innovation efforts across member states

Cross-Border Innovation Clusters

  • Establish special economic zones spanning multiple countries
  • Offer custom tax incentives and regulatory sandboxes for innovative companies
  • Create world-class research facilities and living labs in these zones
  • Foster close collaboration between academia, industry, and government

Skills and Education Overhaul

  • Launch a European Digital Skills Academy with free, high-quality online courses
  • Implement a "Digital Sabbatical" program for mid-career professionals to retrain
  • Revamp primary and secondary education to emphasize STEM, creativity, and entrepreneurship
  • Create a pan-European student exchange program focused on tech and innovation

Capital Market Revolution

  • Establish a true pan-European stock exchange for tech companies
  • Reform pension fund regulations to allow greater investment in venture capital
  • Create a European Tech Sovereign Wealth Fund to invest in strategic startups
  • Implement aggressive tax incentives for R&D spending and VC investments

Regulatory Reimagining

  • Implement a "One In, Two Out" rule for new regulations affecting innovative sectors
  • Create a "Regulatory Sandbox" approach for testing new technologies
  • Establish a single EU-wide regulator for digital technologies
  • Introduce "sunset clauses" for all new regulations to ensure regular review

Strategic Autonomy Initiative

  • Identify critical technologies where Europe must lead
  • Invest heavily in space technology, quantum computing, and advanced materials
  • Develop European alternatives for critical digital infrastructure
  • Foster stronger tech partnerships with like-minded democracies

This vision is ambitious, even radical. But the stakes are too high for half-measures. Europe's economic future, its cherished social model, and its global influence all hang in the balance. It's time for Europe to embrace bold action and unleash its innovative potential. As tech leaders, we must be at the forefront of driving this change, partnering with policymakers to turn this vision into reality. The future of Europe depends on our collective willingness to reimagine what's possible and act decisively to make it happen.

EU

Background for the points:

The Marshall Plan Comparison:

Many commentators have rushed to compare Draghi's proposed annual investment of €750-800 billion to the Marshall Plan. But this comparison reveals a troubling truth about Europe's economic stagnation. Let's break down the numbers:

  • Total aid: Approximately $13 billion over 4 years (1948-1952)
  • Adjusted for inflation: About $150-160 billion in today's dollars
  • Percentage of US GDP: About 1.1% annually over the 4-year period
  • In today's terms: 1.1% of current US GDP would be about $296.45 billion annually
  • Percentage of recipient countries' GDP: About 2.5% annually over the 4-year period

Draghi's Proposal:

  • Annual investment: €750-800 billion (approximately $815-870 billion)
  • Percentage of current EU GDP: About 4.4-4.7% annually

This comparison reveals two important points:

  • Draghi's plan is significantly larger in both absolute terms and relative to GDP than the Marshall Plan was, indicating the scale of investment he believes is necessary to address Europe's challenges.
  • The fact that Europe needs an investment program more than twice as large (relative to GDP) as the Marshall Plan highlights how much ground it has lost economically. In the late 1940s, Europe needed reconstruction aid. Today, it needs massive investment just to maintain its competitive position.

This disparity underscores how much the US economy has outpaced Europe's growth in the intervening decades. It's not just that Draghi's plan is big; it's that Europe's relative economic position has deteriorated to the point where such a large investment is deemed necessary. This economic stagnation is evident across several key areas, with the innovation gap being perhaps the most critical.

The Innovation Gap: Europe's Achilles Heel

Europe's struggle to foster innovation extends far beyond the recent AI boom. As Draghi's report starkly illustrates, this is a systemic issue that threatens Europe's long-term competitiveness across multiple sectors.

The numbers paint a sobering picture:

  • Only four of the world's top 50 tech companies are European
  • From 2013 to 2023, the EU's share of global tech revenues dropped from 22% to 18%, while the US share rose from 30% to 38%
  • In the AI sector, the disparity is even more pronounced. Around 70% of foundational AI models have been developed in the US since 2017, and just three US 'hyperscalers' account for over 65% of the global and European cloud market.

This innovation deficit isn't limited to tech. Even in traditional areas of European strength, such as pharmaceuticals and automotive manufacturing, the region is losing ground. Of the top ten best-selling biological medicines in Europe in 2022, just two were marketed by EU companies, while six were marketed by US-based companies. This innovation deficit is further exacerbated by a growing skills gap. Europe is struggling to produce and retain the talent needed for cutting-edge industries. The EU turns out around 850 STEM graduates per million inhabitants per year compared to more than 1,100 in the US. Moreover, many of these graduates are lured away by better opportunities elsewhere, creating a brain drain that further undermines Europe's innovative potential. To truly foster innovation, Europe needs to tackle its significant funding gap.

The Funding Gap: Where Capital Fears to Tread

Europe's innovation crisis is exacerbated by a significant funding gap. Draghi's report notes that EU companies spent about half as much on Research and Innovation (R&I) as a share of GDP compared to US companies – a staggering €270 billion difference. This funding gap is particularly acute in later-stage financing for startups. While Europe produces innovative ideas, it struggles to scale them. Between 2008 and 2021, nearly 30% of European "unicorns" – startups valued at over $1 billion – relocated their headquarters abroad, mostly to the US. The venture capital landscape in Europe is particularly concerning. The share of global VC funds raised in the EU is just 5%, compared to 52% in the US and 40% in China. This lack of capital not only hinders the growth of innovative startups but also forces many to look outside of Europe for funding, often leading to relocation. To address this, Europe needs to not only increase public R&I spending but also create an environment that encourages private investment in innovation. This could include tax incentives for R&I spending, reforms to make it easier for pension funds to invest in venture capital, and the creation of a true pan-European stock exchange to provide easier exit opportunities for investors. While addressing the funding gap is essential, it's not the only factor holding back European innovation and manufacturing. Another critical issue is the high cost of energy.

The Energy Gap: A Crucial Competitive Disadvantage

Europe's energy landscape is a significant barrier to its competitiveness. Draghi's report highlights that EU companies face electricity prices that are 2-3 times those in the US, and natural gas prices are 4-5 times higher. This price disparity directly impacts Europe's ability to attract and retain energy-intensive industries, including many high-tech manufacturing sectors. The impact of these energy costs cascades through the entire innovation ecosystem. High energy prices not only deter large-scale manufacturing but also impact the viability of data centers, AI research facilities, and other energy-intensive innovation hubs. This creates a vicious cycle where high costs deter investment, leading to less innovation, which in turn makes Europe less attractive for future investments. To break this cycle, Europe needs a radical rethinking of its energy strategy. While the push for renewable energy is commendable, it needs to be balanced with the immediate need for affordable, reliable baseload power. Advanced nuclear technologies, including thorium reactors, could provide a game-changing solution. China's recent launch of its first thorium reactor underscores the potential of this technology to deliver safe, clean, and affordable energy at scale. A pan-European nuclear program, leveraging countries like France with extensive nuclear expertise, could provide the baseload power needed to support innovation and manufacturing. This would not only address the energy cost issue but also position Europe as a leader in next-generation nuclear technology, creating a new avenue for innovation and economic growth.

The energy gap doesn't just impact innovation; it's also a major factor in Europe's declining manufacturing competitiveness.

The Manufacturing Gap: Losing Ground in Key Industries

Europe's manufacturing prowess, once a cornerstone of its economy, is slipping across multiple sectors. The automotive industry, long a European stronghold, serves as a stark example. Chinese carmakers' market share for EVs in Europe rose from 5% in 2015 to almost 15% in 2023, while the share of European carmakers in the European EV market fell from 80% to 60%. But the problem extends far beyond automotives. In the pharmaceutical sector, of the top ten best-selling biological medicines in Europe in 2022, just two were marketed by EU companies, while six were marketed by US-based companies. In clean energy technology, Europe is losing ground to both the US and China. The EU's share in global exports of clean energy technology products decreased from 23% to 17% between 2015 and 2021. This decline in manufacturing capability is closely tied to the energy and innovation gaps. Without access to cheap energy and cutting-edge technology, European manufacturers struggle to compete globally. Moreover, the regulatory environment often makes it more attractive for companies to manufacture outside of Europe and import finished goods, rather than producing within the EU. To reverse this trend, Europe needs a comprehensive industrial strategy that addresses energy costs, supports R&D in advanced manufacturing techniques, and creates a regulatory environment that encourages production within the EU.

The challenges in manufacturing and other sectors are further compounded by Europe's complex regulatory environment.

The Regulatory Red Tape: Strangling Innovation

A key theme in Draghi's report is the stifling effect of European regulations on innovation and scaling. The EU now has around 100 tech-focused laws and over 270 regulators active in digital networks across all Member States.

For a European startup to scale across the EU, it must navigate:

  • 27 different corporate tax systems
  • 27 sets of labor laws
  • 27 different regulatory frameworks for data protection (despite GDPR)
  • 24 different languages
  • Numerous local and regional regulations

This regulatory burden makes it easier for many European startups to scale in the US and return to Europe only after achieving significant size. These interconnected challenges - from innovation and skills to energy and regulation - have significant implications for Europe's global standing.

Geopolitical Implications: Europe's Global Standing at Risk

The decline in Europe's competitiveness has implications that extend far beyond economics. As the EU loses ground in key industries and technologies, it risks becoming increasingly dependent on other global powers for critical goods and services. This could weaken Europe's geopolitical position and ability to advocate for its values on the global stage. Moreover, as other regions race ahead in areas like AI, quantum computing, and biotechnology, Europe risks being left behind in the industries that will shape the future global order. This could have profound implications for everything from military capabilities to economic diplomacy. To maintain its global influence, Europe must view its competitiveness challenge through a geopolitical lens. This means not only focusing on economic metrics but also considering how innovations in areas like AI, space technology, and advanced manufacturing contribute to Europe's strategic autonomy and global influence. To address these challenges effectively, Europe needs to move beyond national interests and adopt a truly pan-European approach.

The Pan-European Perspective: Beyond National Interests

A crucial point often missed in discussions of Draghi's report is its emphasis on a pan-European approach. Many initial reactions focused on national implications, with commentators worrying about their individual country's risk of stagnation. However, Draghi's central argument is that the EU must act as a unified bloc to compete globally. The challenges and solutions he outlines require coordinated action across all member states, not a patchwork of national policies. If Europe fails to act decisively, the consequences could be severe.

The Consequences of Inaction: A Bleak Future for Europe

If the trends outlined in Draghi's report continue unchecked, the consequences for Europe could be severe. Projections suggest that without significant changes, Europe's share of global GDP could shrink from 18% today to just 11% by 2050. This economic decline would have far-reaching effects:

  • Erosion of the Social Model: Europe's renowned social safety net and quality of life could become unsustainable as the economic base to support it shrinks.
  • Brain Drain Acceleration: As opportunities dwindle, Europe could see an exodus of its best and brightest, further undermining its innovative capacity.
  • Geopolitical Marginalization: With a smaller economic footprint, Europe's voice in global affairs could be increasingly sidelined.
  • Technological Dependence: Europe could become reliant on other regions for critical technologies, compromising its strategic autonomy.
  • Climate Goals at Risk: Without a strong economy and technological leadership, Europe's ambitious climate targets could become unattainable.

These potential outcomes underscore the urgency of acting on Draghi's recommendations. The choice facing Europe is not just about economic metrics, but about preserving its way of life, values, and global influence for future generations.

Links:

  • Mario Draghi’s - ‘The future of European competitiveness’: https://commission.europa.eu/topics/strengthening-european-competitiveness/eu-competitiveness-looking-ahead_en
  • Daniel Ek - CEO of Spotify: https://x.com/eldsjal/status/1833483050207855080
  • TMSR-LF1 - Chinese Thorium Reaction: https://en.wikipedia.org/wiki/TMSR-LF1