Compete or Disappear (II): the technology trap

Europe can invent. It cannot scale. And now comes artificial intelligence

In the first instalment of this series I wrote that Draghi certifies the death of the old European model: cheap Russian energy, free American military protection, open export markets to China. Three pillars that have collapsed — not temporarily, but permanently. In this second, we enter the heart of his analysis. And it is unsettling, because it reveals that the problem is not a shortage of resources or ideas. It is the presence of too many divergent directions, none of which leads anywhere useful.

Draghi opens with a provocation worth quoting at length. In 1994, Paul Krugman called the preoccupation with competitiveness a "dangerous obsession". His argument was that long-term growth derived from productivity gains, not from attempts to grab market share from rivals. Draghi does not refute him. He makes a more precise point: that Europe has misunderstood both things. It turned inward, identifying its European neighbours as competitors — including in sectors such as defence and energy where it had deep common interests. And it failed to look outward, where the real competition was taking shape.

The number that changes everything

There is one figure in these chapters that renders everything else secondary. Since 2000, European GDP per capita at purchasing power parity has been roughly a third lower than in the United States. Seventy per cent of that gap comes down to a single variable: lower productivity. And lower productivity is driven, overwhelmingly, by a single cause: technological lag.

If you strip out the technology sector, European productivity growth over the past twenty years is broadly comparable to America's. The problem is not manufacturing, not labour, not social structure. The problem is that Europe did not participate in the digital revolution. Over the past two decades, the three largest investors in research and development in Europe have consistently been car companies. In the United States, over the same period, the top three became technology firms.

This is not a detail. It is a portrait of an economy that kept investing in the sectors of the past while others were building the sectors of the future.

The mid-technology trap

Draghi identifies with precision the mechanism that holds Europe back. Ideas are not lacking. Researchers are not lacking. Academic quality is not lacking. What is lacking is the next step: commercialisation. Only a third of the inventions patented by European universities are ever exploited commercially. Between 2008 and 2021, nearly 30 per cent of the "unicorns" founded in Europe — startups that reached a valuation above one billion dollars — relocated their headquarters abroad. There are no European innovation clusters among the world's top ten.

The result is that Europe is good at inventing and incapable of scaling. Innovative companies encounter obstacles at every stage of growth, and end up raising capital on Wall Street and expanding in the American market. Not for lack of ideas, but for lack of the ecosystem that turns ideas into industry.

And now comes artificial intelligence. Around 70 per cent of the world's foundational AI models are developed in the United States. Three American companies account for 65 per cent of the global cloud computing market. The cost of training frontier AI models remains so high that it is accessible only to those backed by the large American technology groups. European companies, with rare exceptions, are not.

Energy costs as a structural problem

There is a second factor Draghi addresses with equal candour. European industrial companies pay between two and three times more for electricity than their American competitors. This is not a cyclical fluctuation. It is a structural differential driven by delays in building clean energy infrastructure, by the fragmentation of the internal energy market, and by market rules that fail to decouple renewable energy prices from those of fossil fuels.

In 2023, around 60 per cent of European companies said energy prices were a significant obstacle to investment — more than twenty percentage points above the equivalent figure for American firms. The International Energy Agency projected that electricity consumption by data centres could double globally by 2026, an increase equivalent to Germany's entire electricity demand. Higher productivity depends on building a genuine European energy market. Without it, the digital transition risks remaining a document.

The Marshall Plan nobody wants to mention

Draghi is explicit about the financing. Europe needs additional investment of between 750 and 800 billion euros per year. To put that in perspective: it is an effort more than twice the size of the Marshall Plan as a share of GDP. Historically, investment in Europe has been financed roughly 80 per cent by private capital and 20 per cent by public funds. That ratio cannot hold for investment at this scale. What is needed is a Capital Markets Union that allows European private savings — currently parked largely in bank deposits — to be channelled into productive investments across the Union. And what is needed is common European debt, not to finance current spending or subsidies, but to finance the public goods on which all member states have already agreed they want to invest: research, energy grids, integrated defence.

The words "common debt" still make the northern frugals flinch. Draghi does not avoid them. He explains them: this debt is not destined for general public expenditure. It serves to achieve objectives on which all member states have already reached agreement. The distinction is between transferring resources to others and investing together in shared infrastructure.

The only hope left

The conclusion of the final chapter covered in this second review of Draghi's book is the sharpest in the whole work. Draghi writes that Europe faces a choice between three options: paralysis, exit, or integration. The exit route has already been tried and has not delivered what its supporters hoped (see: the United Kingdom). Paralysis is becoming unsustainable as Europe slides into growing anxiety and insecurity. Integration, therefore, remains the only hope.

This is not Europhile rhetoric. It is the logical conclusion of an analysis that leaves no workable alternative. Our rivals are ahead of us because they can act as a single country with a single strategy. If we want to catch them, we need to build something that resembles the same thing. Not through a treaty that refounds the Union overnight, but through a renewed partnership among member states that is, to quote Draghi directly, "no less ambitious than what the founding fathers had in mind seventy years ago, with the creation of the European Coal and Steel Community."

This is the pragmatic federalism Draghi proposes as the way out of the treaty deadlock: not waiting for unanimous agreement among twenty-seven, but starting with those who are ready, building something that works, and allowing others to join when conditions permit. The most eloquent precedent is not the single currency, which many know, but Airbus: a consortium born on 18 December 1970 from an agreement between France, West Germany, the United Kingdom and Spain to challenge the American monopoly in civil aviation, then dominated by Boeing and McDonnell Douglas. The four founding countries pooled their aerospace industries — Aérospatiale for France, Deutsche Airbus for Germany, British Aerospace for the United Kingdom and CASA for Spain — with different shareholdings but a common objective. The first aircraft, the A300, flew in 1972 with a handful of orders. Today Airbus is the world's largest aircraft manufacturer. No treaty. No formal transfer of sovereignty. Only the political will to do together what none could do alone.

The difficulty is that this method requires at least one of the two large countries. France heads into the 2027 presidential election with Macron in the terminal phase of his mandate and Le Pen leading the polls, with a programme that is anything but integrationist. At this moment, all hopes rest on Merz. Will Germany rise to the moment?