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Closing the Innovation Gap
Mind the Gap: Can Europe Reignite Productivity?
PRODUCTIVITY, PRODUCTIVITY, PRODUCTIVITY – The Draghi Report identifies Europe’s productivity challenge as its primary concern and calls for reigniting productivity growth to sustain Europe’s long-term prosperity.
DIGITAL DEFICIENCIES – The widening productivity gap with the US is largely driven by digital technology. Without decisive action, Europe may continue falling behind in key digital sectors. To reverse this trend, the EU should strive to capitalize from future waves of innovation. Artificial intelligence, in particular, offers significant potential.
FOCUS ON AI – Artificial intelligence, in particular, offers significant potential to boost industrial productivity. However, without a strong emphasis on skills development, it could also threaten the foundations of Europe’s social model. To stay competitive, Europe must not only keep pace with US innovation but aim to lead in education and lifelong learning – ensuring that the benefits brought by AI are widely shared and the risks of social exclusion mitigated.
Why Europe’s Innovation Engine is Stalling
“MIDDLE TECHNOLOGY TRAP” – The report proceeds to highlight key barriers to innovation in Europe, rooted in a static industrial structure that creates a cycle of low investment, low innovation, and weak productivity growth.
WEAK INVESTMENT CYCLE – Europe’s lack of industrial dynamism stems from weaknesses in the innovation lifecycle, limiting the emergence of new sectors and challengers. Many innovative firms turn to US venture capitals (VCs) for financing and expansion, finding the fragmented EU market less attractive. Academic excellence is also insufficiently exploited, and only one-third of patented inventions from European universities are commercially exploited. A major factor is the weak integration of researchers into innovation clusters – networks of universities, start-ups, large firms, and VCs – which have been key to US success. While the US has four and China three of the world’s top 10 clusters, Europe has none.
SYSTEMIC BARRIERS TO SCALING AND INVESTMENT – Despite the €100 billion Horizon Europe R&I program, public investment remains insufficient and poorly focused on breakthrough innovation. Single Market fragmentation hampers scale-up opportunities, reducing demand for EU-based financing. Many high-potential EU firms prefer US markets for easier expansion and profitability. Regulatory barriers, particularly in tech, further slow growth, while limited investment in connectivity and computing power risks creating digital bottlenecks. Similar challenges – low R&I investment and regulatory fragmentation – are weakening Europe’s position in sectors like pharma.
Can Europe Train Its Way Out of a Workforce Crisis?
DEMOGRAPHICS & TALENT SHORTAGES – Europe faces growing skills gaps, worsened by a shrinking labour force. While the US population is set to expand, Europe’s workforce is declining, creating barriers to innovation, technology adoption, and even decarbonization. Brain-drain further depletes the talent pool as professionals seek better opportunities abroad.
CLOSING THE SKILLS GAP – The root of the problem lies in education and training systems that fail to equip workers for technological change. Despite EU investments, results have been weak, partly due to education remaining a national competency. To address this, the EU must adopt a more strategic, future-focused approach to closing skill gaps and preparing for emerging labour market needs.
