Sectoral Analysis – Energy

A Major Driver of Europe’s Competitiveness Gap

It’s about the energy, stupid! The Draghi Report emphasises the energy sector as a significant factor of the European Union’s competitiveness gap, driven by high energy costs and extreme price volatility. In the second semester of 2024, gas retail and wholesale prices in the EU were three to five times higher than in the US, while electricity retail prices for industry were two to three times higher than those in the US and China. Historically, retail electricity prices in the EU have been up to 80% higher than in the US, closely aligning with those in China.

The energy crisis has further widened price disparities across EU Member States. Previously, industrial electricity prices within the EU had been converging; however, the crisis reversed this trend. Differences in national policy responses and Russia’s weaponisation of energy supplies have led to energy prices fluctuating from above €250/MWh in some Member States to under €100/MWh in others. The price spread doubled in 2022 and increased by another 15% in 2023.

Volatility in the energy market has also become a structural issue. While price fluctuations were limited for nearly a decade, volatility surged in late 2019 and 2022 due to the COVID-19 pandemic and the energy crisis. This unpredictability affects not only electricity markets but also investment decisions, as businesses struggle with hedging costs and uncertainty.

High energy costs deter investment and impact economic growth. In 2023, 60% of European companies cited energy prices as a major barrier to investment, a figure that exceeds that of the US by over 20 percentage points. The burden is particularly heavy on energy-intensive industries, which rely on natural gas and electricity for production. Moreover, Europe’s reliance on energy imports results in a major outflow of financial resources. The EU’s fossil fuel import bill increased from €341 billion in 2019 to €416 billion in 2023, accounting for approximately 2.7% of GDP, diverting resources from infrastructure and innovation.

Root Causes of the EU’s Energy Competitiveness Gap

The Report identifies 8 root causes of the EU’s Energy Competitiveness Gap:

1. Dependence on gas imports & exposure to spot markets – Europe is the largest global importer of natural gas and liquefied natural gas (LNG) but does not leverage its collective market power effectively. Its over-reliance on short-term and spot markets leaves it vulnerable to price volatility compared to countries where state-led gas procurement stabilises prices (e.g., Japan, Korea).

2. Marginal Pricing – The EU electricity market operates on marginal pricing, meaning that the most expensive power source (often gas) determines the final electricity price. Despite gas providing only 20% of electricity, it set wholesale prices 63% of the time in 2022, keeping power costs high. Without a significant reduction in fossil fuel dependence, electricity prices are unlikely to stabilise before the mid-2030s.

3. Underdeveloped long-term contracts solutions (like PPA markets) hinder benefits from increasing renewable energy sources (RES) roll-out – Power Purchase Agreements (PPAs) provide price stability for industrial consumers, but their adoption in the EU is underdeveloped due to financial risks, market illiquidity, and a lack of standardisation. In parallel, self-consumption of solar power is rising, but grid access delays limit its impact.

4. Higher carbon costs – As part of the EU Emissions Trading System (ETS), carbon pricing increases the cost of electricity placing the EU at a competitive disadvantage against global trade partners with lower or no carbon pricing mechanisms (e.g., the US or China). For instance, for gas-fired power plants, carbon costs contribute €20-25/MWh to production costs.

5. Higher volatility and non-transparent financial markets for energy – Gas derivatives markets in the EU suffer from a lack of transparency and high concentration of trading activity among a few financial players. The top five non-financial corporations control over 50% of derivatives trading, increasing price volatility and market manipulation risks. Liquidity constraints and financial fragmentation exacerbate this issue, further destabilising energy costs.

6. Infrastructure bottlenecks, which may increase during the energy transition – Gas and electricity network bottlenecks prevent the emergence of a real Single Market for energy. The EU’s power grid is also underfunded and outdated to accommodate renewable energy growth and electrification.

7. Lengthy and uncertain permitting process for new power supply and grids – Permitting delays are a major bottleneck for power generation and grid expansion. Solar projects take up to two years for approval, while onshore wind farms take up to nine years. Environmental impact assessments and regulatory complexities further slow down development. While some Member States (e.g., Germany, Spain, Portugal) have streamlined permitting, EU-wide delays persist.

8. Higher and fragmented taxation and subsidies – Energy taxes and subsidies vary significantly among EU Member States, affecting retail energy prices. While industrial electricity prices in the US are free from federal taxes, EU industries face a complex mix of levies, network charges, and CO2 costs. The Inflation Reduction Act (IRA) in the US further reduces energy costs for American industries through long-term subsidies for clean energy, while the EU’s fragmented approach to state aid puts smaller Member States at a disadvantage.

The Perspective Forward

According to the Draghi Report, the EU’s energy transition must be accompanied by massive investment in renewables, nuclear energy, grid expansion, and energy storage. The shift from fossil fuels to clean energy will take time, requiring efficient planning and financing mechanisms to ensure cost-effective deployment.

To mitigate future risks, grid modernisation, interconnection improvements, and permitting acceleration must be prioritised. Expanding cross-border energy trade will enhance stability and reduce reliance on volatile markets. Additionally, investment in advanced energy technologies, hydrogen, and AI-driven energy management will be key to long-term competitiveness.

Without decisive action, Europe risks prolonged exposure to high energy prices, market volatility, and infrastructure constraints. A coordinated EU strategy is essential to achieving energy security, price stability, and sustainable industrial growth.

Sectoral Analysis – Critical Raw Materials

Global Dependencies, Local Vulnerabilities: Europe’s CRMs Challenge

Critical raw materials (CRMs) underpin a vast array of technologies:

Lithium, cobalt, and nickel are essential for batteries and clean energy applications.
Gallium is crucial for semiconductors.
Titanium and tungsten support defence and space sectors.

The demand for these minerals has grown sharply – driven largely by electric vehicles and clean tech – and is projected to increase significantly. Under different scenarios according to the International Energy Agency, demand for clean energy technologies will multiply between two and three times by 2030.

Despite rising investments globally, most of them occur outside the EU. Challenges persist: insufficient supply assurance, high initial production costs for new mines, and product quality inconsistencies. Moreover, supply chains remain heavily concentrated geographically. China dominates rare earth and graphite extraction and refining; the Democratic Republic of Congo supplies most cobalt; Indonesia and Australia lead in nickel and lithium, respectively.

Diversification efforts have yielded little progress. Refining operations are increasingly concentrated, with China and Indonesia planning the majority of future capacity. Risks of market collusion and price manipulation – while not yet institutionalised – are growing.

Export restrictions exacerbate vulnerabilities, with over 10% of CRMs exports subject to limitations, particularly from China, India, Russia, Argentina, and the DRC. Such restrictions are often opaque and difficult to monitor, especially those involving case-by-case export permits.

Governance concerns also weigh on supply security, as many CRM-exporting countries score poorly on transparency and rule of law. Stockpiling mechanisms akin to those for fossil fuels are largely absent. Volatility in global CRM prices has surged, with lithium prices swinging wildly – discouraging investment and increasing uncertainty across the supply chain. Such volatility threatens to derail the EU’s green and digital ambitions.

From Mine to Market: Europe’s Double Dependency

The EU faces a dual dependency: on both the extraction and the processing of CRMs. Unlike fossil fuels, for which the EU mostly depended on raw imports, the CRM supply chain is far more fragmented and externally controlled. The EU’s share in global CRM production remains below 7%, and it continues to rely on imports for most processing and manufacturing inputs.

Some sectors, such as solar photovoltaics and batteries, are particularly exposed across the entire CRM supply chain. In 2023, the European Commission has identified 34 CRMs and 16 strategic raw materials, which are not only economically vital but also prone to supply disruptions. These materials are indispensable for the twin transitions and for applications in defence and space.

Who’s Winning the CRMs Race?

Other global players are advancing more swiftly in securing CRM supply chains.

China is the undisputed leader, controlling the majority of both extraction and refining. It actively invests abroad through its Belt and Road Initiative, acquiring mining assets and establishing overseas refining facilities. Recent regulations further consolidate state control over rare earths, reinforcing its quasi-monopoly.

The United States, under the Inflation Reduction Act and related laws, is rapidly building domestic capacity in CRMs extraction, refining, and recycling. Its federal strategy coordinates multiple agencies to secure national and international supply chains.

Japan, highly reliant on imports, has developed a comprehensive approach: stockpiling, overseas investment via JOGMEC, domestic innovation, and recycling. Through strategic diplomacy, Japan has successfully reduced its dependence on Chinese rare earths, with a target of bringing any single-country reliance below 50% by 2025.

South Korea’s strategy for “securing reliable supply of critical minerals” identifies 33 CRMs and reinforced stockpiles to suffice for 100 days. It created KOMIR to support global investment, mitigate risks, and strengthen international partnerships.

Canada and Australia have unveiled CRMs strategies to position themselves as reliable global suppliers. They benefit from streamlined permitting and are seeking to expand downstream processing capacity.

… Not Yet Europe

In contrast, the EU lacks a fully integrated CRMs strategy. It relies largely on private actors and market forces, while competitors mobilise state-driven investments and vertical integration. EU CRMs projects are constrained by fragmented funding and bureaucratic hurdles.

Despite significant domestic CRMs potential, the EU continues to depend on imports. Lithium, for instance, is mostly sourced from brine operations in Chile, while EU production remains negligible. Refining capacity is also insufficient, making the EU reliant on external providers to meet its growing demand – especially for batteries.

A lack of coordinated public funding for the entire CRMs value chain further weakens the EU’s position. While many financial instruments exist, they are difficult to navigate, particularly for SMEs.

Tapping into European Potential

Domestic Production – The EU holds substantial mineral deposits and could significantly reduce its CRMs dependencies by 2030. Notably, Sweden recently discovered over 1 million tonnes of rare earth oxides, while Portugal continues to mine small quantities of lithium. Projections indicate that up to 100% of EU lithium demand could be met domestically by 2030, with cobalt and nickel meeting 15-25% of EU needs if projects are realised.

Recycling – Recycling could play a growing role in CRMs supply security. By 2040, recycled materials could meet at least 10% of the demand for select minerals, and potentially over 50% by 2050 in optimal scenarios. However, recycling is currently less economical than landfilling and suffers from infrastructural and regulatory fragmentation across Member States.

Despite advancements in secondary raw materials use, Europe still sends significant volumes of waste materials to China, and the contribution of recycled CRMs to total supply remains marginal.

Excellence in Projects – The EU boasts excellence across the CRMs value chain, especially in the Nordics. These countries lead in sustainable mining, advanced refining, and responsible practices. Cutting-edge mining techniques include robotics, automation, and AI for efficiency and safety. Refining in Finland, for example, emits 10–20 times less CO₂ per tonne of nickel than in Indonesia.

Strong manufacturing ecosystems, such as Northvolt’s battery plant in Sweden (co-financed by the EIB), provide important signals to upstream investors. Moreover, Nordic countries excel in benefit-sharing with local communities and ecological mine management, from project planning to closure.

The Critical Raw Materials Act

The EU’s Critical Raw Materials Act (CRMA) marks an important step forward. It sets binding 2030 targets: at least 10% of CRM consumption to be met by EU mining, 40% by EU processing, and 25% by recycling. It also imposes a diversification cap, so that no more than 65% of any strategic CRM at any processing stage originates from a single non-EU country.

The CRMA introduces faster permitting (27 months for mining, 15 for processing/recycling) and establishes Strategic Projects eligible for EU support. It also strengthens circularity by developing a robust secondary CRM market.

A Critical Raw Materials Board will oversee strategic project selection, funding, monitoring, stockpiling, and societal acceptance, enhancing coordination across EU policies.

Sectoral Analysis – Digitalisation & Advanced Technology

Digital Sovereignty for European Prosperity

The EU’s future competitiveness will increasingly rely on the digitalisation of all sectors and the development of advanced technological capabilities – both of which are key drivers of investment, job creation, and economic growth. Across industrial and service sectors, digitalisation enhances cost efficiency and productivity, while playing an ever-greater role in fostering innovation and improving the quality of goods and services.

It is also essential to Europe’s open strategic autonomy. The EU remains heavily reliant on third countries for digital inputs, including a “data value loss” (EU data transferred abroad) estimated at 90% – a significant risk to industrial know-how in a data-driven economy.

Digital technologies are equally vital to the green transition, enabling energy efficiency and circularity, and to the resilience of Europe’s social model. In particular, AI can modernise education and healthcare, while digitised public services can improve accessibility, efficiency, and fairness.

However, Europe’s industrial model – still centred on importing advanced technologies while exporting traditional goods such as automobiles, chemicals, and fashion – lags behind global trends. With 70% of future global value expected to be digitally enabled, the EU’s dependency on non-EU sources for over 80% of its digital stack exposes a growing vulnerability. Meanwhile, competitors like the US and China have been shifting decisively toward ICT since the early 2000s, with further acceleration following the 2019 AI revolution.

Establishing leadership in critical digital technologies could generate between € 2 trillion and € 4 trillion in corporate added value for the EU by 2040 – a strategic opportunity the Union can no longer afford to miss.

Building a Telecom Sector Fit for the Future

Europe’s telecommunications sector is highly fragmented, with dozens of operators serving 450 million consumers – unlike the US and China, where a few large players dominate. This fragmentation results in lower revenues per user and significantly reduced capital expenditure per capita, at less than half the levels seen in the US and Japan, even when adjusted for purchasing power.

Research indicates that the EU telecom market exceeds the optimal number of operators for such a capital-intensive sector. Yet, current regulatory and competition policies discourage consolidation, leading to a proliferation of small, national players and a patchwork of costly, divergent obligations. This lack of a pan-European market structurefurther complicates investment and operational efficiency.

Meeting the EU’s Digital Decade 2030 targets will require major substantial investment in digital infrastructure, yet infrastructure gaps persist: fibre-to-the-premises networks only cover 56% of households, half of rural homes lack advanced connectivity, and 5G coverage lags behind global peers both in reach (81% in the EU against 95% in the U.S. and China) and quality. Copper networks are still widespread, with no clear phase-out plans. These shortfalls contribute to a persistent digital urban-rural divide and slow 5G adoption compared to global peers.

The telecom sector’s declining profitability is a growing threat to Europe’s broader digitalisation agenda, particularly as state-of-the-art infrastructure is essential for modernising industrial supply chains. An estimated €200 billion in investment is needed to achieve full gigabit and standalone 5G coverage across the EU. Yet, four key structural factors are constraining the telecom industry’s ability to finance these investments:

Soaring data traffic – Fixed broadband traffic grew by around 90% and mobile data usage surged by 138% between 2019–2022. Despite this growth, returns on capital remain below the weighted average cost of capital, undermining investment viability.
Costly and fragmented spectrum allocation – Over the past 25 years, spectrum auctions have prioritised revenue maximisation over infrastructure investment, service quality, or innovation, and remain uncoordinated across member states.
Limited capacity for innovation investment – Telecom operators face significant financial constraints, limiting their ability to fund emerging revenue-generating technologies such as IoT, edge computing, and API commercialisation.
Disintermediation by software – As network functions become software-based, independent communication applications increasingly bypass traditional telecom infrastructure, eroding operators’ value and threatening the European equipment industry.

Despite these headwinds, the transition to edge computing and the development of open network services via APIs offer strategic opportunities to strengthen EU control over digital infrastructure, support industrial competitiveness, and reinforce Europe’s data sovereignty.

The broader telecom equipment and software sector is also vital to cybersecurity, infrastructure resilience and data protection. Yet, leading European firms are facing serious challenges, including: a loss of access to the Chinese market, fierce competition from Chinese firms in emerging economies, significantly lower levels of investment in Europe. Europe’s policy response to China’s aggressive tech strategy has been inconsistent, with many Member States lacking coordinated measures to safeguard data and infrastructure or to counteract non-market practices.

Another critical vulnerability lies in satellite connectivity – a domain also dominated by US players –, which is increasingly central for digital sovereignty. The EU also has no significant presence in communication device software: Android and iOS hold 66% and 34% of the market respectively, while the hardware market is led by Apple (33%), Samsung (31%), and Xiaomi (15%). EU manufacturers have virtually disappeared.

All these trends have eroded the market capitalisation of Europe’s telecom sector. From 2015 to 2023, the market value of EU telecom and equipment firms fell by 41% to around €270 billion – less than half that of their US counterparts. Whereas the top five US tech firms are worth $8.7 trillion collectively, only four of the world’s 50 largest tech companies are EU-based: ASML, SAP, Siemens, and Schneider Electric.

Computing & AI: From Supercomputers to Sovereignty

The EU is steadily losing ground in R&D and the development of globally competitive tech firms. EU companies account for just 7% of global R&D in software and internet, compared to 71% for the US and 15% for China. In hardware and electronics, the EU’s share is only 12%, well behind the US (40%) and China (19%).

As a result, Europe has failed to produce major homegrown digital platforms. None of the most visited platforms in the EU are European; among the top ten, six are US-based and four Chinese. In practice, European citizens rely predominantly on non-EU digital services.

Cloud services reflect the same imbalance. In 2022, the EU’s cloud computing market was valued at €87 billion and is set to more than double by 2028. Yet, 65% of this market is controlled by US hyperscalers – Amazon Web Services, Microsoft Azure, and Google Cloud. Despite initiatives like Andromède, Gaia-X, and Catena-X, EU-led cloud projects have had limited impact due to the market’s scale, investment intensity, and integration needs.

In response, some Member States have promoted ‘sovereign cloud’ arrangements, where EU-based infrastructure providers collaborate with US hyperscalers while retaining control over security and encryption. Though not fully sovereign technologically, these hybrid solutions are currently the most realistic path toward safeguarding sensitive data and territorial digital autonomy.

On a more promising front, the EU has secured a leading position in high-performance computing (HPC), with three supercomputers – Lumi (Finland), Leonardo (Italy), and Mare Nostrum 5 (Spain) – ranked among the world’s top ten. While HPC has been primarily used for scientific research, the Commission is now opening access to AI start-ups and SMEs through the AI Innovation Package, to unlock its potential in industrial applications.

AI presents both a major opportunity and a strategic risk. Without rapid integration, EU industries risk dependency on foreign-designed models – not only for general-purpose AI, but also for sector-specific applications in critical industries like automotive, telecoms, banking, healthcare, and retail. While promising players such as Aleph Alpha and Mistral are emerging in the EU, they lack the scale and funding of their US counterparts.

A weak AI ecosystem could stall productivity gains and undermine EU leadership in sectors like advanced robotics. While the GDPR and AI Act provide strong regulatory safeguards, their complexity and potential overlap risk deterring innovation. The EU must navigate a delicate balance between protecting fundamental rights and enabling agile, pro-innovation frameworks such as regulatory sandboxes.

In quantum computing, the EU holds strong cards: significant public investment (€7 billion), top-tier research capabilities, and coordinated initiatives like the Quantum Flagship, EuroQCI, and the Euro-HPC deployment plan. Europe ranks second globally in public quantum funding – behind China – but lags in private investment. None of the top ten private investors in quantum are EU-based; five are in the US and four in China. EU firms attract only 5% of global private funding, compared to 50% in the US.

Across AI, cloud, and quantum, the EU faces three persistent structural challenges: lack of private capital, skills shortages, and a fragmented digital single market. Reversing these trends is essential to restore Europe’s technological competitiveness and strategic autonomy.

Securing Europe’s Semiconductor Future

The EU holds key strengths in specific segments of the semiconductor market but remains heavily reliant on non-EU players, particularly in high-value, innovative areas. While Europe has established capabilities in mature technologies – such as sensors, power control systems, and automotive microcontrollers – these segments face increasing pressure from low-cost competitors and user firms that are beginning to internalise chip design.

Semiconductor manufacturing demands massive scale and global coordination, given the growing, diverse demand for chips. The global market is dominated by a few large players and characterised by oligopolistic structures. The US leads in chip design, while Korea, Taiwan, and China dominate manufacturing. Japan and select EU countries, notably the Netherlands, play essential roles in supplying critical materials and equipment, such as optics, chemicals, and lithography tools.

Despite contributions, Europe lacks presence in critical areas like memory chips and advanced processors for high-performance computing and graphics (GPUs), making its AI industry highly dependent on US-based suppliers like Nvidia. Currently, the EU has no foundry capable of producing chips below the 22 nm node, leaving advanced chip production concentrated in Asia – primarily with TSMC and Samsung. Europe and the US together remain dependent on Asia for 75–90% of chip manufacturing. Additionally, the EU depends on countries like China for key raw materials (e.g. germanium, gallium) and for downstream processes like design packaging and assembly.

Approximately 75% of global semiconductor value added accrues to chip designers and foundries, though this may shift toward advanced packaging. The value chain spans seven critical functions: design, electronic design automation (EDA), core IP, front-end fabrication, back-end assembly and testing, equipment/tools, and materials. Future value creation will hinge on players with strong design capabilities or large-scale R&D and manufacturing infrastructure in cutting-edge product lines.

Structural demand fluctuations and costly, desynchronised supply processes are expected to persist. The availability of specialised engineering talent will be decisive in maintaining the EU’s position in R&D and manufacturing.

The EU Chips Act addresses several of these challenges, aiming to consolidate Europe’s strengths in mainstream and frontier segments (e.g. chiplets and quantum technologies), enhance strategic autonomy, and reduce exposure to external shocks. It promotes a « lab-to-fab » innovation model, investment attraction, capacity expansion, and emergency response mechanisms. Notably, it sets a target for the EU to operate 2 nm fabs by 2030.

However, despite these ambitions, public and private investment in EU semiconductor production still lags behind that of the US. Given the capital intensity, long timelines, and technological complexity of the industry, the Chips Act is a necessary first step – but insufficient on its own. It must be scaled up to secure Europe’s role in supplying vital electronics for key strategic sectors.

Another challenge lies in the lack of large EU electronics and end-user companies, which weakens demand coordination. Efforts to attract foreign semiconductor firms to Europe risk fuelling intra-EU subsidy competition that could favour non-EU incumbents rather than strengthening indigenous capabilities.

A more coordinated and strategic industrial policy approach is therefore essential to build the EU’s future competitiveness in the semiconductor sector.

Sectoral Analysis – Energy-Intensive Industries

Economic Weight and Systemic Importance

EIIs account for around 16% of total manufacturing gross value added (GVA) and 13% of manufacturing employment across the EU in 2021. Their production is deeply embedded in Europe’s industrial fabric, supplying critical materials to downstream industries. These linkages reinforce the resilience, circularity, and innovative potential of Europe’s broader industrial ecosystem.

The sectors also carry significant weight in the EU’s climate strategy. Together, they are responsible for 68% of EU manufacturing greenhouse gas (GHG) emissions in 2021. Their emissions are harder to abate due to technical constraints (e.g., high-temperature processes, fossil feedstock), but EIIs are also indispensable for the green transition, supplying key materials for renewable infrastructure, electric vehicles, and energy-efficient buildings. Decarbonisation technologies vary by sector – hydrogen and carbon capture and storage (CCS) for chemicals and steel, electrification for aluminium, and biomass or recycling where feasible.

Importantly, European EIIs have historically led in innovation, particularly in green technologies, energy efficiency, and recycling. However, production is increasingly concentrated in large firms, with SMEs playing a smaller role, which has implications for the diffusion of innovation and for resilience.

Declining Competitiveness: Signals and Risks

Since the 2022 energy crisis, EIIs have faced a sharp decline in competitiveness. EU producers are contending with significantly higher energy prices compared to international rivals, leading to contraction in domestic output, particularly in chemicals and metals. Simultaneously, reliance on imports has grown, trade intensity has increased, and export performance has weakened – particularly in sectors with high energy intensity. Once shuttered, EII facilities are difficult and costly to restart due to lost skills, disrupted supply chains, and stranded technological assets.

Structural Challenges Behind the Competitiveness Gap

Several structural issues underlie this erosion of competitiveness:

High Energy Costs – Energy is a major cost component, directly accounting for 7-9% of production value in EIIs,and 12-15% indirectly (data from 2018). The EU suffers from persistently higher energy and feedstock prices, with the 2022 crisis amplifying this disadvantage. These cost pressures decisively affect investment location and long-term viability of operations.
High Emissions Costs – EU EIIs are disproportionately exposed to carbon pricing via the EU Emissions Trading System (ETS). Their carbon intensity is many times higher than other manufacturing sectors. Until now, free allowances have cushioned the impact, but the planned phase-out by 2035 will raise costs substantially, especially without offsetting mechanisms.
Insufficient Investment Support for Decarbonisation – The investment required to decarbonise EIIs is massive – around €500 billion by 2040. However, current funding tools are inadequate. EU ETS revenues are largely unallocated for industrial decarbonisation, and the EU Innovation Fund supports only a small subset of eligible projects. Most funding is focused on capital expenditure (CAPEX), while operational costs (OPEX) for green production often remain unsupported. Long investment cycles and weak market signals (e.g., no price premium for green products) exacerbate the issue.
Uneven Playing Field and Regulatory Complexity – Globally, other regions (e.g., the U.S. via the Inflation Reduction Act, and China through massive subsidies) provide more accessible and generous support. Overcapacity, especially in carbon-intensive steel production, suppresses global prices and distorts markets. In contrast, the EU’s regulatory landscape is fragmented, complex, and bureaucratic. Permitting can take years, and implementation of directives varies across Member States. Additionally, trade barriers are rising globally, and many sectors are vulnerable to carbon leakage.
Underutilised Circularity Potential – Circular economy strategies hold promise – especially in metals like aluminium and steel, where recycling can dramatically reduce costs and emissions. However, for plastics and chemicals, recycling often lacks a viable business case due to collection, processing, and quality constraints. Waste incineration and landfilling remain cheaper alternatives in many cases.

Looking Ahead: Transformation Under Pressure

The EU’s ambitious decarbonisation targets will intensify adjustment pressures on EIIs. The gradual removal of ETS free allowances, combined with a projected carbon price of €100/tonne by 2030, raises the urgency for investment in green technologies. The Carbon Border Adjustment Mechanism (CBAM) is designed to prevent carbon leakage and ensure a level playing field, but it comes with design, implementation, and enforcement challenges. There is also a risk of downstream carbon leakage if only upstream sectors are covered.

To maintain a competitive industrial base while meeting climate goals, the EU must scale up support mechanisms such as Carbon Contracts for Difference (CCfDs), the European Hydrogen Bank, and circularity strategies. The Net-Zero Industry Act (NZIA) offers a promising framework to streamline permitting and label key projects as strategic, but effective delivery remains a challenge.

Finally, decarbonisation will likely reshape Europe’s industrial geography. Regions with abundant, affordable, low-carbon energy are poised to become future hubs for EII production, with implications for regional development and cohesion within the EU.

Sectoral Analysis – Clean Technologies

The Race for Clean Technology Leadership

Clean technologies are indispensable for achieving climate neutrality. They span a broad range of systems that generate, store, or offset emissions – particularly solar PV, wind, batteries, heat pumps, CCUS, and electrolysers. These are considered the backbone of the decarbonisation process and are forecast to contribute 65% of emissions reductions by 2030. The market for clean technologies is expanding rapidly. In 2022, it approached $300 billion globally – nearly triple its 2010 size. Investment in clean energy technologies now outpaces that in conventional energy. By 2030, the global market is projected to grow to $650 billion.

Manufacturing is a key driver of this growth. In 2023, clean tech manufacturing represented about 4% of global GDP growth and nearly 10% of investment growth. Investment in the production of five clean energy technologies exceeded $200 billion that year, up more than 70% from 2022. Reaching climate targets will require $640 billion in manufacturing investments between 2022 and 2030 – two-thirds of which will go to EV batteries. Clean tech deployment is also a major employment engine, with around five million new jobs expected by 2030 in EV and battery assembly alone.

Nevertheless, projected demand for technologies such as wind turbines, heat pumps, and electrolysers exceeds current manufacturing capacity, pointing to undercapacity risks. Compounding this is the concentration of supply: for key upstream components like solar PV wafers and battery materials, 90% of production is located in the Asia-Pacific, a pattern unlikely to change soon.

China plays an outsized role, accounting for 40% of its GDP growth in 2023 through clean technologies. In solar PV, for instance, China met only 36% of global demand in 2021 but produced over 75% of global supply. Overcapacity is already evident in several segments: China’s solar PV manufacturing capacity is projected to double global demand by 2030, and its battery cell production is poised to meet or exceed global needs.

Europe’s Green Paradox: Global Leadership Meets Industrial Fragility

Europe remains one of the largest markets for clean technologies globally, second only to China. EU policy and climate targets have spurred rapid expansion: between 2010 and 2023, solar PV and wind capacity grew by nearly 490 GW. Further investment will be needed to match future demand, with estimates ranging from €52 billion to €119 billion by 2030, depending on the extent of EU manufacturing autonomy, and an additional €23 billion by 2040.

Europe’s industrial ecosystem offers many synergies: automotive strengths support EV battery innovation; offshore wind benefits from oil and gas experience; and the chemicals sector plays a key role in upstream component production. European firms also lead in high-value innovation, holding large shares of global innovative activity in wind, heat pumps, electrolysers, solar PV, batteries, and CCUS. EU R&D support has further positioned Europe as a global frontrunner in electrolysis and CO₂ capture technologies. Sustainability is another area of leadership, exemplified by the EU’s eco-design regulations and the world-leading Battery Regulation.

The EU also had an early-mover advantage. In the 2000s, it was a leader in solar PV and wind manufacturing, with countries like Germany and Denmark at the forefront. Although some capacity and innovation remain – such as world records in wind turbine output and floating solar farms in the Netherlands – Europe’s manufacturing sector faces growing difficulties.

These vary across technologies:

Solar PV: The sector illustrates the EU’s vulnerabilities: domestic production meets just 3% of demand. Global overcapacity – driven by Chinese subsidies – has driven prices down, while EU firms struggle with higher costs and limited support. Imports from China surged from €4 billion in 2018 to €22.6 billion in 2022. While the EU is innovating with high-efficiency perovskite and tandem cells, production remains marginal and under pressure.
Wind: Although the EU still leads in turbine assembly – meeting 85% of domestic demand and remaining a net exporter – it has rapidly lost global market share to China, dropping from 58% in 2017 to just 30% in 2022. Despite holding the world’s second-largest share in several wind turbine components, the gap with China is stark: the EU produces only 10% of global gearboxes and power converters, compared to China’s 66% and 77%, respectively.
Heat pumps: The EU industry meets 60–70% of domestic heat pump demand, yet has become a net importer over the past three years. A large share of compressors is now imported, as well as air-to-air heat pumps, which accounted for 40% of EU sales in 2021.
Batteries: EU production reached 65 GWh in 2023. Committed projects could meet EU battery demand by 2030. However, 50–70% of deployed cells still come from China. Next-gen technologies like sodium-ion and solid-state batteries are in development, with strong public R&D support. Yet, about half of announced EU capacity is from non-EU firms, raising concerns about long-term technological autonomy.
Electrolysers: The EU is a technology leader but lacks large-scale manufacturing.
CCUS: The EU leads globally in carbon capture technologies, attracting over half of global investment in 2023. However, deployment remains limited, partly due to challenges in securing CO₂ storage sites and transport infrastructure.
Sustainable fuels: The EU has technological edge but limited installed capacity.

As a whole, the EU increasingly relies on imports. Trade deficits are widening – even in wind, where the EU traditionally held a surplus. For batteries, imports from China rose 7.5-fold between 2017 and 2023. Overall, EU clean tech imports from China reached €43 billion in 2023. This dependence extends to critical machinery, exposing Europe to vulnerabilities in maintenance and supply.

Despite Europe’s ambitions, there are worrying signs of deindustrialisation. Companies are announcing production cuts or offshoring to regions with cheaper costs or stronger incentives (e.g., China, US, Canada). Meanwhile, domestic expansion projects – 100 of them across key technologies – may be jeopardised unless conditions improve.

What’s Holding Europe Back?

A combination of structural and policy barriers limits the EU’s clean tech competitiveness. These fall into seven main categories:

Higher Operating and Capital Costs – Manufacturing facilities in Europe are 70% to 130% more expensive per unit of capacity than in China. Operating costs are also higher, due to elevated energy prices, labour costs, and raw material expenses. In solar PV, for example, upstream manufacturing (wafers, polysilicon) is especially energy-intensive and thus costlier in Europe.
Dependency on Critical Raw Materials – The EU produces only a small fraction of the raw materials it needs – no more than 5% for any given clean technology. Batteries, for instance, require five critical materials (lithium, cobalt, graphite, etc.), with the EU 100% reliant on imports for refined lithium. The wind industry’s use of rare earths and permanent magnets poses similar risks.
Unlevel Playing Field – China has heavily subsidised its clean tech sector since the 2000s, combining industrial policy with trade protections and innovation incentives. The US Inflation Reduction Act (IRA) has emerged as a transformative policy, attracting unprecedented investment via generous tax credits, predictable processes, and broad eligibility. In contrast, the EU’s support mechanisms are fragmented, less targeted, and difficult to access. EU public funding for manufacturing (€8 billion) falls far short of estimated needs. Only five Member States have plans to scale manufacturing, and the burden of financing largely rests with national governments, many of which are not directing ETS revenues to clean tech.
Lengthy and Complex Permitting – Permitting is slow and cumbersome in many Member States, involving up to 30 different authorities. In some cases, permitting can take four years. This raises project risks and delays investments.
Skills Gap – Labour shortages are rising: between 2019 and 2023, job vacancy rates in clean tech manufacturing doubled. One-third of clean tech jobs are in manufacturing, but most Member States lack funding or strategies to address workforce training. Technical certification remains fragmented across the EU.
Innovation-Commercialisation Gap – While the EU is strong in research, it lags in scaling up innovations. Horizon Europe does not sufficiently support manufacturing processes (e.g., automation in wind turbine production). Venture capital investment is limited and concentrated in a few companies. From 2015 to 2019, the EU led in hydrogen-related VC; by 2022, its share had dropped sharply.
Regulatory Misalignment – The regulatory environment creates uncertainty. Potential bans on PFAS chemicals, for instance, could affect battery and electrolyser production. Inverter makers face non-harmonised grid standards across Member States. Varying rules for product design, transport, and decommissioning further complicate operations.

Sectoral Analysis – Automotive

Engines of Growth

The automotive sector holds significant structural importance for the EU economy. It provides employment to 13.8 million people (6.1% of total EU employment), including 2.6 million directly in vehicle manufacturing – 8.5% of EU manufacturing jobs. It generates 8% of the value added in manufacturing and records a €117 billion surplus in extra-EU trade, reflecting its traditional export strength.

The sector is deeply integrated within the EU’s Single Market. European supply chains are highly interconnected; for instance, 22% of the value added in French car production and 14% in German car production originates from other Member States. It also features strong upstream and downstream linkages, stimulating demand in sectors like metals, chemicals, and ICT.

Innovation is a hallmark of this industry. With an R&D investment of €59 billion in 2021 – 15% of the sector’s gross value added – it accounts for a third of Europe’s corporate R&D spending, qualifying it as an advanced manufacturing sector.

A New Era for Automotive: The Sector’s Structural Overhaul

The automotive industry is experiencing the most significant structural transformation in over a century. This transformation encompasses both a shift in the global geography of demand and a convergence of multiple new value chains: electric vehicles (EVs), digital technologies, mobility services, and the circular economy. These differ substantially from traditional internal combustion engine (ICE) vehicle production.

Global demand is increasingly centred in emerging economies like China, reducing the positive impact of world demand on EU-based production. The rise of EVs – battery electric vehicles (BEVs) and plug-in hybrid vehicles (PHEVs) – is reshaping the sector. In 2023, EVs represented 22.3% of new car registrations in Europe. This transition demands major reorientations in manufacturing, including re-skilling workers, adapting supply networks, and building charging infrastructure. Electromobility also brings environmental benefits, eliminating exhaust emissions and noise.

The sector is also integrating with the digital value chain. Electronics and software are projected to constitute up to 50% of a car’s value by 2030. AI and digital tools are transforming mobility via connected vehicles, driver assistance, and autonomous driving. This requires new infrastructure and skills across manufacturing and mobility services.

The mobility value chain is evolving as well, with new models such as car-sharing and energy services emerging. Infrastructure investment needs are substantial, with an estimated €15 billion per year required between 2031 and 2050, including €4 billion annually for fast-charging points on the Trans-European Transport Network.

The circular economy is another area of growing relevance, particularly regarding battery and component recycling. The EU holds a competitive advantage here due to its strong regulatory framework, established collection systems, and technical expertise.

Europe: From Leader to Laggard

Despite these transformations, the EU’s competitiveness in the automotive sector is declining. Vehicle production in the EU has been falling, while China’s output has surged. From 2017 to 2022, EU vehicle exports dropped by 16%, and imports from China rose fivefold, making China the EU’s largest non-European vehicle supplier.

Chinese firms are outperforming European competitors in the rapidly expanding BEV and PHEV segments. European market share in China is falling, while Chinese brands are gaining ground in Europe. Chinese original equipment manufacturers (OEMs) lead in nearly every technological dimension, from battery range and charging time to software and user interfaces, and enjoy significantly lower production costs.

The transition also challenges traditional EU car part suppliers. ICE vehicles, which are mechanically complex, required highly specialised components. BEVs, by contrast, have simpler powertrains, increasing supplier competition and inviting new entrants from other industries. Many OEMs are bringing component production in-house to retain workforce capacity and reduce dependence. As the industry shifts to software and data, traditional suppliers face diminishing roles in after-sales markets.

Structural Fault Lines in Europe’s Automotive Competitiveness

Several structural issues explain the EU’s loss of competitiveness. While climate policy has introduced ambitious goals – such as phasing out tailpipe CO₂ emissions from new vehicles by 2035 – adjustments in the supply chain have lagged. China, by contrast, has acted swiftly and at scale across the EV value chain, achieving lower costs and a technological lead. The US has responded with protectionist tariffs and large-scale subsidies (via the Inflation Reduction Act), while the EU’s fragmented regulatory landscape often impedes progress.

EU legislation has sometimes been incoherent. For example, the Carbon Border Adjustment Mechanism (CBAM) excludes indirect emissions, while the Corporate Sustainability Reporting Directive (CSRD) includes them. Similarly, impact assessments have occasionally lacked stakeholder engagement, as in the case of the contested Euro 7 standards. EU climate legislation has yet to reduce overall road transport emissions, which rose 20% between 1990 and 2019, due to increased car ownership and heavier vehicles.

The principle of technological neutrality has not been consistently applied. While CO₂ standards are based on a ‘tank-to-wheel’ approach, favouring BEVs, other options like CO₂-neutral fuels receive limited regulatory support. A framework for lifecycle-based emissions assessments is still under development.

Alternative fuels, such as biodiesel, renewable diesel, ethanol, and e-fuels, offer additional decarbonisation pathways, especially for hard-to-electrify segments. However, these fuels vary in energy efficiency and infrastructure requirements. Gaseous alternatives – biogas, autogas, and hydrogen – also show potential but face similar challenges.

The EU was late in establishing a coordinated EV supply strategy. The European Battery Alliance launched only in 2017, whereas China had already declared New Energy Vehicles a strategic industry in 2012 and made massive investments across the entire value chain.

In response, the EU has recently imposed countervailing duties on Chinese BEV imports (ranging from 17.4% to 37.6%), aiming to address unfair subsidisation. Still, the EU faces persistently higher production and labour costs. Battery production remains capital-intensive, and the sector also suffers from critical ICT and engineering skills shortages.

The affordability gap remains a key barrier. In 2023, the cheapest new EV in Europe was 92% more expensive than the cheapest ICE model. By contrast, in China, EVs were already cheaper than ICE equivalents. High costs, lower resale values, and steeper insurance premiums hinder broader EV adoption in the EU. Corporate fleets – which represent 60% of new sales – also lag in electrification, despite their higher turnover rates.

Charging infrastructure is improving, but unevenly across the EU. Significant investment is still required to reach future targets. The electrification of heavy-duty vehicles presents additional challenges, such as the need for powerful chargers and robust grid access. Regulatory incentives for carmakers and fleet operators are not matched by similar obligations for energy providers or coordinated grid development.

If the EU fails to adjust swiftly to these new realities, it risks losing even more ground in the global automotive race. Some forecasts suggest that more than 10% of EU automotive production could be displaced within the next five years.

Sectoral Analysis – Defence

Innovate, Integrate, Defend…

The European Union’s defence sector is pivotal for safeguarding Europe’s strategic autonomy amid escalating external security threats. It is also a powerful engine of innovation, with spill overs that benefit the broader economy. However, the EU’s defence industrial base currently lags behind global competitors due to limitations in capacity, know-how, and technological edge.

New geopolitical realities – such as the return of war to the EU’s borders, the proliferation of hybrid threats, and increasing cyber and infrastructure vulnerabilities –demand that Europe take more responsibility for its own security. This is especially critical as the U.S. has increasingly shifted focus toward the Pacific. Simultaneously, the EU must address its own nuclear deterrence capacity. The competitiveness of the EU’s technological and industrial capabilities in defence will be essential to ramping up military capacity in response to rising global defence budgets.

Historically, the defence sector has driven innovations that have transformed civilian life – from carbon fibre to the internet and GPS. Today, the flow of innovation is increasingly bidirectional, as civilian technological advancements are rapidly applied to defence. While EU defence exports remain strong and certain technologies are globally competitive, the sector suffers from persistent structural weaknesses, including insufficient public investment, industrial fragmentation, weak coordination, international dependence, and underdeveloped innovation ecosystems.

Europe’s Defence Spending Imperative

Defence spending in the EU has suffered from decades of underinvestment, largely due to prolonged peace and reliance on US protection. This trend has only recently reversed, with a notable uptick following Russia’s invasion of Ukraine in 2022.

Despite this, EU defence expenditure remains significantly lower than that of its peers. In 2023, EU Member States collectively spent $313 billion – only a third of US defence spending and on par with China, which may underreport its actual spending. Only ten Member States meet NATO’s 2% GDP spending benchmark, and the European Commission estimates that an additional €500 billion will be required over the next decade to rebuild industrial and military capabilities.

Overcoming Barriers to Private Investment

Beyond public investment, access to private capital poses a major barrier for the EU’s defence sector, especially for SMEs and mid-sized firms that form the backbone of innovation. A 2024 study estimated a combined equity and debt financing gap of approximately €4 billion for SMEs in the defence sector.

Financial institutions often exclude defence-related activities due to interpretations of the EU’s ESG and Sustainable Finance Frameworks. Regulatory complexity surrounding defence procurement and production further discourages investment. Although the European Investment Bank (EIB) has recently eased some restrictions on dual-use projects, it continues to exclude core defence activities, which discourages broader financial sector engagement. As a result, the defence sector remains underrepresented in EU funding initiatives.

Fragmentation Versus Scale: The EU’s Defence Industry Challenge

The EU’s defence industrial landscape is fragmented, with primarily national actors operating in small domestic markets. This fragmentation undermines scale and efficiency and leads to duplications across Member States, particularly in land systems.

Unlike the EU, the U.S. has implemented large-scale consolidation of its defence industry, reducing the number of key players from 51 to 5 since the 1990s. While this has enhanced US scale and capacity, the EU has struggled to replicate such integration due to sovereignty concerns and the reluctance to abandon national capabilities.

Some sectors, such as helicopters, have achieved partial consolidation, but others – like naval vessels, combat vehicles, and defence electronics – remain highly fragmented. Moreover, EU competition rules discourage mergers that could create market power, even in dual-use sectors.

Efforts to integrate defence industrial assets structurally across the EU require strong political backing, acceptance of interdependence, scaling down duplications, and the establishment of specialised centres of excellence. Integration also demands operational and corporate alignment within industrial groups, including coordinated R&D strategies.

The Strategic Imperative of Coordination

The absence of coordination and standardisation across EU Member States results in inefficient spending, reduced interoperability, and missed opportunities for economies of scale. While collaborative defence procurement represented only 18% of total defence equipment expenditure in 2022, this remains far below the 35% target set by the European Defence Agency.

Without a shared map of industrial capacities and better aggregation of demand, Member States struggle to address production bottlenecks and plan for future needs. Notable examples of successful cooperation – such as the A330 MRTT project – demonstrate the potential of EU-level coordination.

Lack of standardisation is starkly visible in Ukraine, where the diversity of donated equipment has complicated logistics. There are multiple types of artillery and battle tanks in use, compared to a single standard in the US. This fragmentation exacerbates inefficiencies and undermines the EU’s export competitiveness, especially given the absence of a central authority to promote defence deals abroad.

External Dependence: The EU’s Ongoing Reliance on Non-European Defence Suppliers

EU Member States remain heavily reliant on non-EU defence suppliers – particularly the US. Between June 2022 and June 2023, 78% of procurement spending went to non-EU firms, with 63% going to US suppliers.

This trend persists despite growing awareness of the need to secure strategic technologies domestically. Contributing factors include administrative simplicity, better transparency of US offerings, and Member States’ alignment with US military doctrine. Additionally, emerging suppliers from countries like Turkey and South Korea are gaining EU market share due to faster delivery and availability, increasing fragmentation and dependence further.

Scaling Up Defence R&D and Skills: Closing the Distance to Global Competitors

The EU significantly lags behind its global counterparts in defence R&D. In 2022, EU Member States invested €9.5 billion in R&D, supplemented by €1.2 billion from the European Defence Fund (EDF). In contrast, the US Department of Defence allocated $140 billion for R&D in the same year.

Few EU academic and research institutions are actively engaged in defence innovation. Only 7.2% of EU defence R&T is collaborative – well below the 20% target. Given the high cost and long cycles of next-generation defence systems, no single Member State can independently support the necessary research and development.

The EDF supports cross-border collaboration but needs to scale up considerably. Moreover, the EU defence sector faces acute skills shortages, exacerbated by negative perceptions, lack of diversity, and competition for talent with other high-tech sectors like aerospace and ICT.

Fragmented Governance, or Defence Without Direction

The governance of EU defence industrial policy remains fragmented due to historical divisions of competence and limited political will. The EU lacks a central authority to coordinate funding, procurement, and industrial strategy effectively. Institutional responsibilities are spread across the European Commission, EEAS, and EDA, without a clear mandate or structure to manage defence industrial integration.

Recent initiatives signal progress. These include:

The European defence industry reinforcement through common procurement Act (EDIRPA) established a short-term EU instrument seeking to reinforce European defence industrial capacities through common procurement by EU Member States.
The Act in Support of Ammunition Production (ASAP) aims to strengthen the responsiveness and ability of the EU’s defence industry to ensure the timely supply of ammunition and missiles.
The Defence Joint Procurement Task Force (DJTPF) aims to provide one million rounds of artillery ammunition for Ukraine through a joint effort.

In March 2024, the Commission and the High Representative launched the European Defence Industrial Strategy (EDIS) and the European Defence Industry Programme (EDIP). These aim to address structural weaknesses and encourage more effective, collaborative, and European-focused defence spending.

Sectoral Analysis – Space

Global Space Dynamics: Growth, Transformation, and Europe

The global space sector stands at the forefront of technological innovation, driving resilience and securitythrough satellite services, data, and applications across a wide range of fields. In transport, positioning, navigation, and timing (PNT) underpin all modes, including smart transportation and autonomous mobility systems. In communications, Low Earth Orbit (LEO) constellations now provide broadband services globally. Earth Observation systems contribute critically to environmental monitoring, agriculture, disaster management, and climate change tracking, especially as supercomputing and AI enhance predictive capabilities. In the energy sector, satellites facilitate the development and operation of offshore renewable energy infrastructure, and weather data improves energy generation reliability. Satellite timing is essential for the functioning of global financial markets, while security and defence applications depend on satellites for threat detection, secure communications, and intelligence.

Beyond these direct benefits, space activities generate broad spill over effects –economic (through the exploitation of data and services), technological (such as solar panels and communication protocols), industrial (through enhanced product reliability), and in fields like robotics and remote operations. The value of the global space economy stood at $630 billion in 2023, with projections indicating it could grow to $1.8 trillion by 2035, alongside a broader impact already exceeding $3 trillion. Growth will be driven mainly by space-enabled data, but also by new sectors like pharmaceuticals, semiconductors, and biotechnologies. However, strategic enablers such as access to space remain essential.

The space industry is undergoing profound change with the rise of “New Space” – a private-sector-led transformation characterized by disruptive innovation, private financing, faster delivery cycles, and greater risk tolerance. The decommissioning of the International Space Station (ISS) by 2031 will further accelerate commercial and national space capabilities. Public-private partnerships and smaller country groups will increasingly drive large space projects.

The EU has developed world-class space assets and capabilities, particularly strong in system assembly and satellite manufacturing. Europe funds, owns, and manages critical space infrastructure, directly supporting over 250,000 highly skilled jobs and generating €46–54 billion in value-added. It leads in satellite navigation through Galileo, which delivers the world’s most accurate PNT services, and Earth Observation through Copernicus, which is a global leader alongside the United States. In secure communications, the IRIS constellation will deliver resilient government communications from 2027.

Despite this strength, the European space industry faces growing challenges to its competitiveness.

The Erosion of Europe’s Space Competitiveness

The EU’s space sector, while historically competitive, has lost ground in key areas. It has ceded leadership in commercial launchers (once dominated by Ariane 4 and 5) and geostationary satellites, temporarily depending on US rockets (SpaceX) for critical launches like those of the Galileo programme. Several EU start-ups are developing new transportation solutions but limited domestic demand and protected foreign markets (especially in the US and China) make scaling up difficult. In 2023, the European Commission and ESA launched the Flight Ticket Initiative to reshape governance, foster competition, and prioritize European launch providers. However, while aiming to enhance competitiveness, there is a risk of further fragmenting the EU’s industrial base.

Technological gaps have emerged in rocket propulsion, telecom mega-constellations, satellite receivers, and applications – segments much larger than traditional space activities. Dependence on imported high-end electronic components has grown.

Commercial and export sales have declined since 2017, with profitability falling sharply, exacerbated by COVID-19 and Russia’s war in Ukraine. From 2021 to 2022, final sales dropped from €8.6 billion to €8.3 billion, mainly affecting launchers and satellite applications.

The EU’s Systemic Shortfalls in Space

Lower public funding for space policy – Public investment is crucial for building and sustaining a competitive space sector. Historically, the EU’s investment has been just 15–20% of that of the US. In 2023, EU public expenditure on space stood at $13 billion compared to $73 billion in the US, with US spending expected to continue rising while European spending stagnates. China is projected to overtake Europe’s space investment by 2030. Larger budgets in the US and China foster stronger industrial bases and technological leadership. Europe, in contrast, accounts for only about 10% of the ~6,500 institutional satellites expected to be launched globally between 2023 and 2032.

Lacking coordination – The absence of coordinated investment among EU Member States prevents the aggregation of demand and “anchor spending” for critical technologies. Unlike the US and China, Europe lacks mechanisms to ensure domestic preference for institutional space missions. Fragmentation has eroded the competitiveness of EU-developed technologies, with investments failing to mature or scale.
Insufficient investment in R&D – Despite hosting world-class research institutions, Europe’s public investment in space R&D is insufficient (€2.8 billion/year vs. US €7.3 billion). Increasing investment and developing a coherent European space R&I strategy are urgent priorities. Emerging fields like in-space services and quantum technologies require targeted support.
Limited access to finance – European space start-ups struggle to scale up due to restricted access to late-stage venture capital and loans. As a result, many turn to non-EU investors, risking loss of EU ownership and technology. The private investment gap in Europe is estimated at €10 billion over the next five years. Public procurement opportunities for New Space companies remain limited.
A complex and fragmented governance model – By contrast to the US space sector (primarily managed through NASA and the Space Force), the EU’s space governance is highly fragmented among the European Commission, ESA, EUSPA, and national agencies – each with distinct budgets and strategies. ESA’s “geographical return” principle, intended to balance Member State contributions, now hinders efficiency and competitiveness. Fragmented supply chains, duplicated capacities, and non-optimal resource allocation weaken the EU’s ability to compete with agile global private players. The absence of a unified European Space Law further limits market integration and legal certainty.
Limited coordination between space and defence – While space is increasingly recognised as strategic, coordination between civilian and military space activities remains weak in Europe. Only recently has the EU begun to develop such synergies, whereas the US (Space Force, 2018) and China (Strategic Support Force, 2016) have integrated space fully into their military doctrines.
International dependency – Europe remains dependent on critical foreign components (e.g., space-grade semiconductors). US export controls (ITAR, EAR) and protectionist measures limit EU access to technologies and markets, while the EU’s own market remains open to foreign players. This strategic vulnerability hampers European industrial sovereignty.

From First Steps to Giant Leaps: Securing Europe’s Future in the New Space Economy

Without significant new investment – both public and private – the European space sector risks:

Missing emerging commercial opportunities in the New Space economy;
Facing barriers to entry and suffering « late mover » disadvantages;
Deepening strategic dependence on foreign suppliers;
Losing the ability to offer comprehensive space solutions;
Seeing its industrial base progressively eroded.

The European Commission has launched initiatives like the CASSINI Space Entrepreneurship Initiative, deploying €1 billion for venture capital funds supporting EU space companies. Additional efforts involve the EIB Group, ESA, EUSPA, and the European Innovation Council (EIC). Measures are also being taken to strengthen New Space companies’ access to public procurement.

However, while positive first steps, these initiatives must be substantially scaled up and reinforced to match the sector’s growing needs and secure Europe’s place in the future space economy.

Sectoral Analysis – Pharma

Why Pharmaceuticals Matter: Economic Strength and Strategic Imperative

The pharmaceutical sector is a cornerstone of the global economy, ranking as the fourth largest market by net sales and the third by overall profitability. In 2022, the global market for medicines stood at €1.2 trillion and is expected to grow to €1.76 trillion by 2027. Ageing populations are expected to continue fuelling demand over the long term.

In the European Union, the pharmaceutical industry plays a significant economic role, contributing 5% of the value added from manufacturing and representing over 20% of value added in countries like Belgium and Denmark. Pharmaceuticals account for nearly 11% of EU exports and directly employ 937,000 people (Q4 2023), with the total employment impact more than doubling when including indirect jobs. The sector offers highly skilled, well-remunerated positions, with 15% of the workforce engaged in research and development (R&D).

Beyond its economic contribution, the pharmaceutical sector holds geostrategic importance, as highlighted during the COVID-19 pandemic when swift vaccine development and distribution were crucial to the EU’s economic recovery.

Europe’s Enduring Pharma Strengths

The European Union can leverage a strong historic footprint in the pharmaceutical sector, underpinned by several key strengths:

The EU enjoys a leading global position in pharmaceutical trade by value, consistently recording a growing trade surplus, especially with the United States (€45 billion in 2023). Exports have grown by nearly 10% annually between 2002 and 2023.
The EU maintains a robust manufacturing base, particularly in innovative medicines, with 77% of active pharmaceutical ingredients (APIs) sourced internally. Overall, imports and exports of APIs are balanced in both value and volume.
The EU performs strongly in scientific research, matching or surpassing the United States in the number of published scientific papers, particularly in international journals. However, the citation impact of EU research remains lower than that of US research.

Europe’s Struggle in High-Growth Pharma Segments

Despite these strengths, significant challenges are emerging. Over the past decade, the pharmaceutical markets have undergone transformative changes, with dynamic growth in biologicals, orphan medicines, and advanced therapy medicinal products (ATMPs).

The EU is losing ground in these fast-growing segments. Among the ten best-selling biological medicines in Europe in 2022, only two were marketed by EU companies, while six were marketed by US firms. For orphan medicines, no EU-based company featured among the top ten best-sellers. The EU’s share in the orphan medicines market plummeted from over 40% in 2012 to less than 5% in 2022, while US companies now dominate with nearly 70% of market share.

In ATMPs, although the global market reached around €8 billion, the EU’s share is limited to €1 billion, with most sales stemming from US and Swiss companies. Between 2017 and 2022, global spending on ATMPs grew at a compound annual growth rate of 60%.

Confronting Europe’s Structural Weaknesses in Pharma

Lesser and Fragmented Public R&D Investment

The EU lags behind in public R&D investment compared to the U.S. and China. The US National Institutes of Health (NIH) alone commanded a budget exceeding $45 billion in 2023, complemented by BARDA’s $823 million for public health emergencies. In contrast, the EU’s Horizon Europe allocates €8.2 billion to health research between 2021 and 2027.

EU public R&D funding remains fragmented across Member States, with disparities in spending intensity and risk of duplication. Although Germany, France, and Denmark lead in national health research funding, many Member States invest significantly less, undermining EU-wide synergies.

Lesser Private R&D Investment and a Weaker Innovation Ecosystem

Private-sector R&D investment also lags. Although the R&D intensity of US and EU firms is comparable (14.5% versus 13.2%), the overall scale of US companies’ activities results in much higher absolute investments. The U.S. captures 40% of global pharmaceutical R&D compared to the EU’s 20%.

In venture financing, the disparity is starker: US biotech companies raised $62.5 billion between 2021 and 2022, compared to $11.2 billion in Europe. While initiatives like HERA Invest and the EIB’s life sciences portfolio attempt to bridge the gap, European innovation hubs remain fragmented and too small to rival US hubs like Boston or San Francisco.

The absence of unified support contrasts with the US and China’s strategic focus on building strong biotech clusters. Moreover, tax incentives in the US are uniformly applied at the federal level, offering consistent advantages for pharmaceutical R&D, whereas EU Member States operate divergent and sometimes competing tax policies.

Slow and Complex Regulatory Framework

Approval processes in the EU are slower and more complex. In 2022, the median approval time for new medicines was 430 days in the EU, compared to 334 days in the US and even shorter in Japan and Australia.

Post-approval, the fragmentation continues with 27 separate national pricing and reimbursement procedures, causing uneven and delayed market access. National Health Technology Assessments (HTAs) introduce further complexities, as additional evidence requirements vary widely between Member States.

Complex Emergence of a European Health Data Space (EHDS)

Although GDPR permits the secondary use of health data under safeguards, uptake across Member States has been uneven. This has limited the effective use of health data for research and innovation.

To address this, the European Commission has proposed the EHDS regulation, aiming to harmonise access to health data. A political agreement was reached in spring 2024, promising to build a European framework for secondary health data use.

Modernising Regulation and Unlocking Innovation in EU Pharmaceuticals

Several recent initiatives aim to modernise the regulatory environment and foster innovation.

An April 2023 proposal seeks to revise pharmaceutical legislation by speeding up approval timelines, introducing regulatory sandboxes, streamlining GMO rules, and promoting electronic submissions.
Clinical trial reform efforts include the Clinical Trials Regulation (effective from 2022) and the ACT EU initiative, which aims to integrate clinical research more efficiently across Europe.
The new EU HTA Regulation (applicable from January 2025) enables joint clinical assessments, helping streamline national pricing and reimbursement decisions.
Efforts to unlock real-world data are also advancing. The EHDS Regulation aims to help unlock health data for research and innovation (secondary use). DARWIN EU®, operational since 2022, provides real-world evidence from healthcare databases across Europe.
Complementary initiatives like the 1+ Million Genomes (1+MG) and its successor B1MG aim to establish a European Genomic Data Infrastructure by 2026.

How AI Could Reshape EU Pharma

Artificial intelligence (AI) is poised to revolutionise healthcare, particularly through combination therapies integrating drugs, devices, and algorithms.

Applications already show promise in medical imaging, with AI outperforming human observers in some diagnostic tasks. Across medicines lifecycle, AI is helping accelerate discovery, improve clinical trials, and personalise treatments. Efficiency gains of 25–50% are estimated during early R&D stages, with potential annual industry-wide gains of $60–110 billion.

However, Europe faces challenges in realising AI’s pharmaceutical full potential:

Building quality data infrastructures.
Developing supportive regulatory frameworks.
Training a skilled workforce versed in both pharma and AI.
Encouraging market-oriented R&D and fostering start-up ecosystems.

The success of the EHDS, continued digitisation of health systems, and targeted support for AI innovations will be critical to ensuring the EU’s future competitiveness in this rapidly evolving field.

Sectoral Analysis – Transport

Why Transport Matters for Europe’s Future

Transport is fundamental to the competitiveness of the EU economy, enabling access to goods, services, resources, and innovation, and fostering social and territorial cohesion. Recognised in the EU Treaties as a service of general interest, transport is also pivotal for the transition to a net-zero economy. Yet, it remains one of the few sectors where CO₂ emissions have continued to rise since 1990. The sector is increasingly attractive, driven by soaring global demand for both passenger and freight transport, and its contribution to global logistics, e-commerce, and tourism is growing. By 2050, passenger and freight demand are expected to rise by 79% and 100%, respectively.

The sector is also undergoing deep green and digital transformations, with the adoption of AI, autonomous systems, real-time monitoring, and sustainable fuels. Transport’s role in defence and crisis response is equally strategic, with up to 90% of military-use infrastructure also serving civilian purposes. However, vulnerabilities remain due to terrorist threats, cyberattacks, fragile global supply routes, and climate-related disruptions, such as extreme weather and infrastructure damage.

The Strategic Edge of Europe’s Transport Infrastructure

Transport contributes 5% of EU GDP, 5% of direct jobs, and 10% of cross-border employment. The EU’s logistics sector is globally competitive, home to leading firms and representing 26% of all transport-related employment. EU households spend 12% of their budget on transport, the third-largest category after housing and food.

The EU boasts a world-class connectivity infrastructure: some of the world’s largest container ports and airports, the second-longest high-speed rail network (with 80% electrification), and an extensive inland waterway system. Liberalisation has brought increased competition and efficiency, especially in air and long-distance coach transport.

Sustainable mobility has been the EU’s guiding principle since 1992, and the bloc has set a target to reduce transport emissions by 90% by 2050. European industry is a global first-mover in green transport technologies, including electric and hydrogen aircraft, methanol-fueled container ships, and green airports and ports. The EU also leads in manufacturing: it dominates global exports in aircraft, marine equipment, and rail systems, and is a frontrunner in developing urban air mobility. Completing the Trans-European Transport Network (TEN-T) could yield up to €467 billion in annual GDP gains by 2050, while improved intermodal and rail infrastructure could significantly reduce congestion and costs.

Unblocking Europe’s Transport Potential: The Road Ahead

Strategic investment needs

Transport infrastructure requires major investment to bridge existing gaps. Completing the TEN-T demands €845 billion by 2040, yet public funds will only cover a fraction of this amount, and private investment remains limited due to high risk and long lead times. Maintenance costs are set to rise, especially for ageing land transport networks, while the EU lags behind the US and China in recent infrastructure investment trends.

Administrative obstacles

Infrastructure projects face barriers due to complex and inconsistent permitting processes, particularly for cross-border and inland waterway projects. Planning lacks integration across transport, energy, and digital networks, and fails to fully align with EU-level strategies. National Energy and Climate Plans often overlook transport needs, including for electric grid expansion.

Lack of EU market integration

Despite progress, the EU transport market remains fragmented. National divergences in regulation, infrastructure, and digital systems hinder seamless operations.

In air transport, fragmented airspace management leads to inefficiencies and emissions.
Rail markets remain governed by national rules, with limited cross-border service expansion and significant barriers for new entrants.
Road transport suffers from fragmented rules on standards and pricing, and new mobility services face regulatory hurdles.
Inland waterway operations are hampered by diverging rules and underdeveloped port cooperation.
Intermodal transport, while growing, remains limited due to outdated legislation and insufficient support.

Digitalisation is slow, with only 1% of cross-border operations fully digital and most logistics processes still paper-based. Fragmented IT systems hinder interoperability, particularly in rail and air freight. The deployment of technologies such as the European Rail Traffic Management System (ERTMS) and other rail digital tools is lagging, while digital air traffic management systems face coordination and regulatory delays.

Decarbonisation challenges

Meeting EU decarbonisation targets requires large-scale investment: around €150 billion annually until 2030 and over €860 billion per year from 2031 to 2050. Aviation, maritime, and heavy-duty road transport face the greatest hurdles due to high costs and limited technological maturity. EU measures support the adoption of sustainable fuels (e.g., SAF, RFNBOs), but production remains marginal and costs high.

The EU risks losing competitiveness unless international frameworks (IMO, ICAO) ensure a level playing field. Electrification of heavy-duty vehicles is progressing slowly due to costs and infrastructure gaps. Alternative fuels are essential but constrained by high capital needs, limited production, and dependency on third-country feedstock.

External pressures and competition

EU transport manufacturing is undercut by state-subsidised competitors. In sectors like shipbuilding and rail, Asian firms offer prices up to 40% lower. Chinese investment is expanding across EU transport infrastructure, particularly in ports and logistics. Foreign control raises concerns over strategic autonomy, while EU screening mechanisms are limited in scope and effectiveness.

The EU’s share of the global maritime fleet is declining. EU players are largely absent from the top ranks of global terminal operators, and commercial banks have reduced support for EU shipping. These developments threaten Europe’s industrial and strategic position in global logistics.

Workforce shortages and reskilling needs

Transport faces acute labour shortages, notably in trucking, manufacturing, and logistics. The workforce is ageing, gender imbalanced, and often exposed to poor working conditions. Digitalisation and decarbonisation are driving a profound shift in required skills. Maritime reskilling alone may affect 250,000 workers. Yet current training and certification systems are not harmonised across Member States and lag behind emerging needs.

Sectoral Analysis – Transport

Why Transport Matters for Europe’s Future

Transport is fundamental to the competitiveness of the EU economy, enabling access to goods, services, resources, and innovation, and fostering social and territorial cohesion. Recognised in the EU Treaties as a service of general interest, transport is also pivotal for the transition to a net-zero economy. Yet, it remains one of the few sectors where CO₂ emissions have continued to rise since 1990. The sector is increasingly attractive, driven by soaring global demand for both passenger and freight transport, and its contribution to global logistics, e-commerce, and tourism is growing. By 2050, passenger and freight demand are expected to rise by 79% and 100%, respectively.

The sector is also undergoing deep green and digital transformations, with the adoption of AI, autonomous systems, real-time monitoring, and sustainable fuels. Transport’s role in defence and crisis response is equally strategic, with up to 90% of military-use infrastructure also serving civilian purposes. However, vulnerabilities remain due to terrorist threats, cyberattacks, fragile global supply routes, and climate-related disruptions, such as extreme weather and infrastructure damage.

The Strategic Edge of Europe’s Transport Infrastructure

Transport contributes 5% of EU GDP, 5% of direct jobs, and 10% of cross-border employment. The EU’s logistics sector is globally competitive, home to leading firms and representing 26% of all transport-related employment. EU households spend 12% of their budget on transport, the third-largest category after housing and food.

The EU boasts a world-class connectivity infrastructure: some of the world’s largest container ports and airports, the second-longest high-speed rail network (with 80% electrification), and an extensive inland waterway system. Liberalisation has brought increased competition and efficiency, especially in air and long-distance coach transport.

Sustainable mobility has been the EU’s guiding principle since 1992, and the bloc has set a target to reduce transport emissions by 90% by 2050. European industry is a global first-mover in green transport technologies, including electric and hydrogen aircraft, methanol-fueled container ships, and green airports and ports. The EU also leads in manufacturing: it dominates global exports in aircraft, marine equipment, and rail systems, and is a frontrunner in developing urban air mobility. Completing the Trans-European Transport Network (TEN-T) could yield up to €467 billion in annual GDP gains by 2050, while improved intermodal and rail infrastructure could significantly reduce congestion and costs.

Unblocking Europe’s Transport Potential: The Road Ahead

Strategic investment needs

Transport infrastructure requires major investment to bridge existing gaps. Completing the TEN-T demands €845 billion by 2040, yet public funds will only cover a fraction of this amount, and private investment remains limited due to high risk and long lead times. Maintenance costs are set to rise, especially for ageing land transport networks, while the EU lags behind the US and China in recent infrastructure investment trends.

Administrative obstacles

Infrastructure projects face barriers due to complex and inconsistent permitting processes, particularly for cross-border and inland waterway projects. Planning lacks integration across transport, energy, and digital networks, and fails to fully align with EU-level strategies. National Energy and Climate Plans often overlook transport needs, including for electric grid expansion.

Lack of EU market integration

Despite progress, the EU transport market remains fragmented. National divergences in regulation, infrastructure, and digital systems hinder seamless operations.

In air transport, fragmented airspace management leads to inefficiencies and emissions.
Rail markets remain governed by national rules, with limited cross-border service expansion and significant barriers for new entrants.
Road transport suffers from fragmented rules on standards and pricing, and new mobility services face regulatory hurdles.
Inland waterway operations are hampered by diverging rules and underdeveloped port cooperation.
Intermodal transport, while growing, remains limited due to outdated legislation and insufficient support.

Digitalisation is slow, with only 1% of cross-border operations fully digital and most logistics processes still paper-based. Fragmented IT systems hinder interoperability, particularly in rail and air freight. The deployment of technologies such as the European Rail Traffic Management System (ERTMS) and other rail digital tools is lagging, while digital air traffic management systems face coordination and regulatory delays.

Decarbonisation challenges

Meeting EU decarbonisation targets requires large-scale investment: around €150 billion annually until 2030 and over €860 billion per year from 2031 to 2050. Aviation, maritime, and heavy-duty road transport face the greatest hurdles due to high costs and limited technological maturity. EU measures support the adoption of sustainable fuels (e.g., SAF, RFNBOs), but production remains marginal and costs high.

The EU risks losing competitiveness unless international frameworks (IMO, ICAO) ensure a level playing field. Electrification of heavy-duty vehicles is progressing slowly due to costs and infrastructure gaps. Alternative fuels are essential but constrained by high capital needs, limited production, and dependency on third-country feedstock.

External pressures and competition

EU transport manufacturing is undercut by state-subsidised competitors. In sectors like shipbuilding and rail, Asian firms offer prices up to 40% lower. Chinese investment is expanding across EU transport infrastructure, particularly in ports and logistics. Foreign control raises concerns over strategic autonomy, while EU screening mechanisms are limited in scope and effectiveness.

The EU’s share of the global maritime fleet is declining. EU players are largely absent from the top ranks of global terminal operators, and commercial banks have reduced support for EU shipping. These developments threaten Europe’s industrial and strategic position in global logistics.

Workforce shortages and reskilling needs

Transport faces acute labour shortages, notably in trucking, manufacturing, and logistics. The workforce is ageing, gender imbalanced, and often exposed to poor working conditions. Digitalisation and decarbonisation are driving a profound shift in required skills. Maritime reskilling alone may affect 250,000 workers. Yet current training and certification systems are not harmonised across Member States and lag behind emerging needs.

Sectoral Analysis – Pharma

Why Pharmaceuticals Matter: Economic Strength and Strategic Imperative

The pharmaceutical sector is a cornerstone of the global economy, ranking as the fourth largest market by net sales and the third by overall profitability. In 2022, the global market for medicines stood at €1.2 trillion and is expected to grow to €1.76 trillion by 2027. Ageing populations are expected to continue fuelling demand over the long term.

In the European Union, the pharmaceutical industry plays a significant economic role, contributing 5% of the value added from manufacturing and representing over 20% of value added in countries like Belgium and Denmark. Pharmaceuticals account for nearly 11% of EU exports and directly employ 937,000 people (Q4 2023), with the total employment impact more than doubling when including indirect jobs. The sector offers highly skilled, well-remunerated positions, with 15% of the workforce engaged in research and development (R&D).

Beyond its economic contribution, the pharmaceutical sector holds geostrategic importance, as highlighted during the COVID-19 pandemic when swift vaccine development and distribution were crucial to the EU’s economic recovery.

Europe’s Enduring Pharma Strengths

The European Union can leverage a strong historic footprint in the pharmaceutical sector, underpinned by several key strengths:

The EU enjoys a leading global position in pharmaceutical trade by value, consistently recording a growing trade surplus, especially with the United States (€45 billion in 2023). Exports have grown by nearly 10% annually between 2002 and 2023.
The EU maintains a robust manufacturing base, particularly in innovative medicines, with 77% of active pharmaceutical ingredients (APIs) sourced internally. Overall, imports and exports of APIs are balanced in both value and volume.
The EU performs strongly in scientific research, matching or surpassing the United States in the number of published scientific papers, particularly in international journals. However, the citation impact of EU research remains lower than that of US research.

Europe’s Struggle in High-Growth Pharma Segments

Despite these strengths, significant challenges are emerging. Over the past decade, the pharmaceutical markets have undergone transformative changes, with dynamic growth in biologicals, orphan medicines, and advanced therapy medicinal products (ATMPs).

The EU is losing ground in these fast-growing segments. Among the ten best-selling biological medicines in Europe in 2022, only two were marketed by EU companies, while six were marketed by US firms. For orphan medicines, no EU-based company featured among the top ten best-sellers. The EU’s share in the orphan medicines market plummeted from over 40% in 2012 to less than 5% in 2022, while US companies now dominate with nearly 70% of market share.

In ATMPs, although the global market reached around €8 billion, the EU’s share is limited to €1 billion, with most sales stemming from US and Swiss companies. Between 2017 and 2022, global spending on ATMPs grew at a compound annual growth rate of 60%.

Confronting Europe’s Structural Weaknesses in Pharma

Lesser and Fragmented Public R&D Investment

The EU lags behind in public R&D investment compared to the U.S. and China. The US National Institutes of Health (NIH) alone commanded a budget exceeding $45 billion in 2023, complemented by BARDA’s $823 million for public health emergencies. In contrast, the EU’s Horizon Europe allocates €8.2 billion to health research between 2021 and 2027.

EU public R&D funding remains fragmented across Member States, with disparities in spending intensity and risk of duplication. Although Germany, France, and Denmark lead in national health research funding, many Member States invest significantly less, undermining EU-wide synergies.

Lesser Private R&D Investment and a Weaker Innovation Ecosystem

Private-sector R&D investment also lags. Although the R&D intensity of US and EU firms is comparable (14.5% versus 13.2%), the overall scale of US companies’ activities results in much higher absolute investments. The U.S. captures 40% of global pharmaceutical R&D compared to the EU’s 20%.

In venture financing, the disparity is starker: US biotech companies raised $62.5 billion between 2021 and 2022, compared to $11.2 billion in Europe. While initiatives like HERA Invest and the EIB’s life sciences portfolio attempt to bridge the gap, European innovation hubs remain fragmented and too small to rival US hubs like Boston or San Francisco.

The absence of unified support contrasts with the US and China’s strategic focus on building strong biotech clusters. Moreover, tax incentives in the US are uniformly applied at the federal level, offering consistent advantages for pharmaceutical R&D, whereas EU Member States operate divergent and sometimes competing tax policies.

Slow and Complex Regulatory Framework

Approval processes in the EU are slower and more complex. In 2022, the median approval time for new medicines was 430 days in the EU, compared to 334 days in the US and even shorter in Japan and Australia.

Post-approval, the fragmentation continues with 27 separate national pricing and reimbursement procedures, causing uneven and delayed market access. National Health Technology Assessments (HTAs) introduce further complexities, as additional evidence requirements vary widely between Member States.

Complex Emergence of a European Health Data Space (EHDS)

Although GDPR permits the secondary use of health data under safeguards, uptake across Member States has been uneven. This has limited the effective use of health data for research and innovation.

To address this, the European Commission has proposed the EHDS regulation, aiming to harmonise access to health data. A political agreement was reached in spring 2024, promising to build a European framework for secondary health data use.

Modernising Regulation and Unlocking Innovation in EU Pharmaceuticals

Several recent initiatives aim to modernise the regulatory environment and foster innovation.

An April 2023 proposal seeks to revise pharmaceutical legislation by speeding up approval timelines, introducing regulatory sandboxes, streamlining GMO rules, and promoting electronic submissions.
Clinical trial reform efforts include the Clinical Trials Regulation (effective from 2022) and the ACT EU initiative, which aims to integrate clinical research more efficiently across Europe.
The new EU HTA Regulation (applicable from January 2025) enables joint clinical assessments, helping streamline national pricing and reimbursement decisions.
Efforts to unlock real-world data are also advancing. The EHDS Regulation aims to help unlock health data for research and innovation (secondary use). DARWIN EU®, operational since 2022, provides real-world evidence from healthcare databases across Europe.
Complementary initiatives like the 1+ Million Genomes (1+MG) and its successor B1MG aim to establish a European Genomic Data Infrastructure by 2026.

How AI Could Reshape EU Pharma

Artificial intelligence (AI) is poised to revolutionise healthcare, particularly through combination therapies integrating drugs, devices, and algorithms.

Applications already show promise in medical imaging, with AI outperforming human observers in some diagnostic tasks. Across medicines lifecycle, AI is helping accelerate discovery, improve clinical trials, and personalise treatments. Efficiency gains of 25–50% are estimated during early R&D stages, with potential annual industry-wide gains of $60–110 billion.

However, Europe faces challenges in realising AI’s pharmaceutical full potential:

Building quality data infrastructures.
Developing supportive regulatory frameworks.
Training a skilled workforce versed in both pharma and AI.
Encouraging market-oriented R&D and fostering start-up ecosystems.

The success of the EHDS, continued digitisation of health systems, and targeted support for AI innovations will be critical to ensuring the EU’s future competitiveness in this rapidly evolving field.

Sectoral Analysis – Space

Global Space Dynamics: Growth, Transformation, and Europe

The global space sector stands at the forefront of technological innovation, driving resilience and securitythrough satellite services, data, and applications across a wide range of fields. In transport, positioning, navigation, and timing (PNT) underpin all modes, including smart transportation and autonomous mobility systems. In communications, Low Earth Orbit (LEO) constellations now provide broadband services globally. Earth Observation systems contribute critically to environmental monitoring, agriculture, disaster management, and climate change tracking, especially as supercomputing and AI enhance predictive capabilities. In the energy sector, satellites facilitate the development and operation of offshore renewable energy infrastructure, and weather data improves energy generation reliability. Satellite timing is essential for the functioning of global financial markets, while security and defence applications depend on satellites for threat detection, secure communications, and intelligence.

Beyond these direct benefits, space activities generate broad spill over effects –economic (through the exploitation of data and services), technological (such as solar panels and communication protocols), industrial (through enhanced product reliability), and in fields like robotics and remote operations. The value of the global space economy stood at $630 billion in 2023, with projections indicating it could grow to $1.8 trillion by 2035, alongside a broader impact already exceeding $3 trillion. Growth will be driven mainly by space-enabled data, but also by new sectors like pharmaceuticals, semiconductors, and biotechnologies. However, strategic enablers such as access to space remain essential.

The space industry is undergoing profound change with the rise of “New Space” – a private-sector-led transformation characterized by disruptive innovation, private financing, faster delivery cycles, and greater risk tolerance. The decommissioning of the International Space Station (ISS) by 2031 will further accelerate commercial and national space capabilities. Public-private partnerships and smaller country groups will increasingly drive large space projects.

The EU has developed world-class space assets and capabilities, particularly strong in system assembly and satellite manufacturing. Europe funds, owns, and manages critical space infrastructure, directly supporting over 250,000 highly skilled jobs and generating €46–54 billion in value-added. It leads in satellite navigation through Galileo, which delivers the world’s most accurate PNT services, and Earth Observation through Copernicus, which is a global leader alongside the United States. In secure communications, the IRIS constellation will deliver resilient government communications from 2027.

Despite this strength, the European space industry faces growing challenges to its competitiveness.

The Erosion of Europe’s Space Competitiveness

The EU’s space sector, while historically competitive, has lost ground in key areas. It has ceded leadership in commercial launchers (once dominated by Ariane 4 and 5) and geostationary satellites, temporarily depending on US rockets (SpaceX) for critical launches like those of the Galileo programme. Several EU start-ups are developing new transportation solutions but limited domestic demand and protected foreign markets (especially in the US and China) make scaling up difficult. In 2023, the European Commission and ESA launched the Flight Ticket Initiative to reshape governance, foster competition, and prioritize European launch providers. However, while aiming to enhance competitiveness, there is a risk of further fragmenting the EU’s industrial base.

Technological gaps have emerged in rocket propulsion, telecom mega-constellations, satellite receivers, and applications – segments much larger than traditional space activities. Dependence on imported high-end electronic components has grown.

Commercial and export sales have declined since 2017, with profitability falling sharply, exacerbated by COVID-19 and Russia’s war in Ukraine. From 2021 to 2022, final sales dropped from €8.6 billion to €8.3 billion, mainly affecting launchers and satellite applications.

The EU’s Systemic Shortfalls in Space

Lower public funding for space policy – Public investment is crucial for building and sustaining a competitive space sector. Historically, the EU’s investment has been just 15–20% of that of the US. In 2023, EU public expenditure on space stood at $13 billion compared to $73 billion in the US, with US spending expected to continue rising while European spending stagnates. China is projected to overtake Europe’s space investment by 2030. Larger budgets in the US and China foster stronger industrial bases and technological leadership. Europe, in contrast, accounts for only about 10% of the ~6,500 institutional satellites expected to be launched globally between 2023 and 2032.

Lacking coordination – The absence of coordinated investment among EU Member States prevents the aggregation of demand and “anchor spending” for critical technologies. Unlike the US and China, Europe lacks mechanisms to ensure domestic preference for institutional space missions. Fragmentation has eroded the competitiveness of EU-developed technologies, with investments failing to mature or scale.
Insufficient investment in R&D – Despite hosting world-class research institutions, Europe’s public investment in space R&D is insufficient (€2.8 billion/year vs. US €7.3 billion). Increasing investment and developing a coherent European space R&I strategy are urgent priorities. Emerging fields like in-space services and quantum technologies require targeted support.
Limited access to finance – European space start-ups struggle to scale up due to restricted access to late-stage venture capital and loans. As a result, many turn to non-EU investors, risking loss of EU ownership and technology. The private investment gap in Europe is estimated at €10 billion over the next five years. Public procurement opportunities for New Space companies remain limited.
A complex and fragmented governance model – By contrast to the US space sector (primarily managed through NASA and the Space Force), the EU’s space governance is highly fragmented among the European Commission, ESA, EUSPA, and national agencies – each with distinct budgets and strategies. ESA’s “geographical return” principle, intended to balance Member State contributions, now hinders efficiency and competitiveness. Fragmented supply chains, duplicated capacities, and non-optimal resource allocation weaken the EU’s ability to compete with agile global private players. The absence of a unified European Space Law further limits market integration and legal certainty.
Limited coordination between space and defence – While space is increasingly recognised as strategic, coordination between civilian and military space activities remains weak in Europe. Only recently has the EU begun to develop such synergies, whereas the US (Space Force, 2018) and China (Strategic Support Force, 2016) have integrated space fully into their military doctrines.
International dependency – Europe remains dependent on critical foreign components (e.g., space-grade semiconductors). US export controls (ITAR, EAR) and protectionist measures limit EU access to technologies and markets, while the EU’s own market remains open to foreign players. This strategic vulnerability hampers European industrial sovereignty.

From First Steps to Giant Leaps: Securing Europe’s Future in the New Space Economy

Without significant new investment – both public and private – the European space sector risks:

Missing emerging commercial opportunities in the New Space economy;
Facing barriers to entry and suffering « late mover » disadvantages;
Deepening strategic dependence on foreign suppliers;
Losing the ability to offer comprehensive space solutions;
Seeing its industrial base progressively eroded.

The European Commission has launched initiatives like the CASSINI Space Entrepreneurship Initiative, deploying €1 billion for venture capital funds supporting EU space companies. Additional efforts involve the EIB Group, ESA, EUSPA, and the European Innovation Council (EIC). Measures are also being taken to strengthen New Space companies’ access to public procurement.

However, while positive first steps, these initiatives must be substantially scaled up and reinforced to match the sector’s growing needs and secure Europe’s place in the future space economy.

Sectoral Analysis – Defence

Innovate, Integrate, Defend…

The European Union’s defence sector is pivotal for safeguarding Europe’s strategic autonomy amid escalating external security threats. It is also a powerful engine of innovation, with spill overs that benefit the broader economy. However, the EU’s defence industrial base currently lags behind global competitors due to limitations in capacity, know-how, and technological edge.

New geopolitical realities – such as the return of war to the EU’s borders, the proliferation of hybrid threats, and increasing cyber and infrastructure vulnerabilities –demand that Europe take more responsibility for its own security. This is especially critical as the U.S. has increasingly shifted focus toward the Pacific. Simultaneously, the EU must address its own nuclear deterrence capacity. The competitiveness of the EU’s technological and industrial capabilities in defence will be essential to ramping up military capacity in response to rising global defence budgets.

Historically, the defence sector has driven innovations that have transformed civilian life – from carbon fibre to the internet and GPS. Today, the flow of innovation is increasingly bidirectional, as civilian technological advancements are rapidly applied to defence. While EU defence exports remain strong and certain technologies are globally competitive, the sector suffers from persistent structural weaknesses, including insufficient public investment, industrial fragmentation, weak coordination, international dependence, and underdeveloped innovation ecosystems.

Europe’s Defence Spending Imperative

Defence spending in the EU has suffered from decades of underinvestment, largely due to prolonged peace and reliance on US protection. This trend has only recently reversed, with a notable uptick following Russia’s invasion of Ukraine in 2022.

Despite this, EU defence expenditure remains significantly lower than that of its peers. In 2023, EU Member States collectively spent $313 billion – only a third of US defence spending and on par with China, which may underreport its actual spending. Only ten Member States meet NATO’s 2% GDP spending benchmark, and the European Commission estimates that an additional €500 billion will be required over the next decade to rebuild industrial and military capabilities.

Overcoming Barriers to Private Investment

Beyond public investment, access to private capital poses a major barrier for the EU’s defence sector, especially for SMEs and mid-sized firms that form the backbone of innovation. A 2024 study estimated a combined equity and debt financing gap of approximately €4 billion for SMEs in the defence sector.

Financial institutions often exclude defence-related activities due to interpretations of the EU’s ESG and Sustainable Finance Frameworks. Regulatory complexity surrounding defence procurement and production further discourages investment. Although the European Investment Bank (EIB) has recently eased some restrictions on dual-use projects, it continues to exclude core defence activities, which discourages broader financial sector engagement. As a result, the defence sector remains underrepresented in EU funding initiatives.

Fragmentation Versus Scale: The EU’s Defence Industry Challenge

The EU’s defence industrial landscape is fragmented, with primarily national actors operating in small domestic markets. This fragmentation undermines scale and efficiency and leads to duplications across Member States, particularly in land systems.

Unlike the EU, the U.S. has implemented large-scale consolidation of its defence industry, reducing the number of key players from 51 to 5 since the 1990s. While this has enhanced US scale and capacity, the EU has struggled to replicate such integration due to sovereignty concerns and the reluctance to abandon national capabilities.

Some sectors, such as helicopters, have achieved partial consolidation, but others – like naval vessels, combat vehicles, and defence electronics – remain highly fragmented. Moreover, EU competition rules discourage mergers that could create market power, even in dual-use sectors.

Efforts to integrate defence industrial assets structurally across the EU require strong political backing, acceptance of interdependence, scaling down duplications, and the establishment of specialised centres of excellence. Integration also demands operational and corporate alignment within industrial groups, including coordinated R&D strategies.

The Strategic Imperative of Coordination

The absence of coordination and standardisation across EU Member States results in inefficient spending, reduced interoperability, and missed opportunities for economies of scale. While collaborative defence procurement represented only 18% of total defence equipment expenditure in 2022, this remains far below the 35% target set by the European Defence Agency.

Without a shared map of industrial capacities and better aggregation of demand, Member States struggle to address production bottlenecks and plan for future needs. Notable examples of successful cooperation – such as the A330 MRTT project – demonstrate the potential of EU-level coordination.

Lack of standardisation is starkly visible in Ukraine, where the diversity of donated equipment has complicated logistics. There are multiple types of artillery and battle tanks in use, compared to a single standard in the US. This fragmentation exacerbates inefficiencies and undermines the EU’s export competitiveness, especially given the absence of a central authority to promote defence deals abroad.

External Dependence: The EU’s Ongoing Reliance on Non-European Defence Suppliers

EU Member States remain heavily reliant on non-EU defence suppliers – particularly the US. Between June 2022 and June 2023, 78% of procurement spending went to non-EU firms, with 63% going to US suppliers.

This trend persists despite growing awareness of the need to secure strategic technologies domestically. Contributing factors include administrative simplicity, better transparency of US offerings, and Member States’ alignment with US military doctrine. Additionally, emerging suppliers from countries like Turkey and South Korea are gaining EU market share due to faster delivery and availability, increasing fragmentation and dependence further.

Scaling Up Defence R&D and Skills: Closing the Distance to Global Competitors

The EU significantly lags behind its global counterparts in defence R&D. In 2022, EU Member States invested €9.5 billion in R&D, supplemented by €1.2 billion from the European Defence Fund (EDF). In contrast, the US Department of Defence allocated $140 billion for R&D in the same year.

Few EU academic and research institutions are actively engaged in defence innovation. Only 7.2% of EU defence R&T is collaborative – well below the 20% target. Given the high cost and long cycles of next-generation defence systems, no single Member State can independently support the necessary research and development.

The EDF supports cross-border collaboration but needs to scale up considerably. Moreover, the EU defence sector faces acute skills shortages, exacerbated by negative perceptions, lack of diversity, and competition for talent with other high-tech sectors like aerospace and ICT.

Fragmented Governance, or Defence Without Direction

The governance of EU defence industrial policy remains fragmented due to historical divisions of competence and limited political will. The EU lacks a central authority to coordinate funding, procurement, and industrial strategy effectively. Institutional responsibilities are spread across the European Commission, EEAS, and EDA, without a clear mandate or structure to manage defence industrial integration.

Recent initiatives signal progress. These include:

The European defence industry reinforcement through common procurement Act (EDIRPA) established a short-term EU instrument seeking to reinforce European defence industrial capacities through common procurement by EU Member States.
The Act in Support of Ammunition Production (ASAP) aims to strengthen the responsiveness and ability of the EU’s defence industry to ensure the timely supply of ammunition and missiles.
The Defence Joint Procurement Task Force (DJTPF) aims to provide one million rounds of artillery ammunition for Ukraine through a joint effort.