Can Europe compete in a world dominated by the U.S. and China?
Wednesday, 26 February 2025
As Europe grapples with declining productivity and increasing geopolitical uncertainty, the question of how the continent can maintain its competitiveness has never been more pressing. With Donald Trump back in the White House and economic nationalism on the rise, the European Union faces a wake-up call: can it keep pace with the U.S. and China, or will it continue to fall behind?
In a recent episode of our podcast series Future is Blue, we explored this challenge with Antonin Bergeaud, Associate Professor of Economics at HEC Paris. He dissected the key takeaways from the Draghi report—a blueprint for Europe’s economic future—and offered an insightful assessment of Europe’s strengths, weaknesses, including urgent policy priorities.
You can listen and subscribe to our podcast here.
A long-standing decline, not a sudden crisis
The return of Trump and his protectionist agenda has undoubtedly reshaped global economic dynamics, but according to Bergeaud, the real issue predates this political shift.
"The fact that Trump was elected didn’t really change anything in terms of the diagnosis," Bergeaud explained. "We have been lagging behind the U.S. in terms of productivity and innovation for quite some time—since around 1995. The election of Trump is just a wake-up call that comes at a moment when we can no longer ignore this trend."
One of the core problems is that Europe has failed to develop the kind of high-tech industries that dominate global markets. The continent has successful firms in traditional sectors—manufacturing, automotive, and mid-tech industries—but it lacks the tech giants and biotech leaders that drive innovation in the U.S. and China.
"We have good scientists, we have promising startups, but we don’t have companies with the scale of the giants in the U.S. and China. And now, with Trump back, European firms will likely face more barriers exporting to the U.S., which puts even more pressure on our already fragile competitiveness."
Regulatory fragmentation: A self-inflicted obstacle
One of the Draghi report’s key findings is that regulatory fragmentation is a major handicap for Europe. Unlike the U.S., where companies can scale seamlessly across state borders, European firms still face significant national barriers.
"Every country in Europe still has its own regulations, making it much harder for companies to expand and compete on a global scale," Bergeaud pointed out. "Take the telecom industry, for example. In the U.S., you have three or four major players operating nationwide. In Europe, each country has its own telecom rules, which prevents companies from growing to the same size and level of competitiveness."
A striking statistic illustrates the problem: Europe’s internal barriers are equivalent to a tariff of 45 per cent for manufacturing and 110 per cent for services. As noted by Draghi recently in an FT piece, these effectively shrink the market in which European companies operate: trade across EU countries is less than half the level of trade across US states.
"We've had the single market for years, but in reality, we’ve never fully integrated it. That’s why Draghi’s recommendations on reducing internal barriers are so critical. If we don’t fix this, we will never be able to compete at the same level as the U.S. and China."
R&D spending: The missing private investment
While Europe’s public spending on research and development (R&D) is relatively strong, private sector investment lags significantly behind that of the U.S. and China. This is one of the biggest challenges facing Europe’s innovation ecosystem.
"The EU spends about 2% of its GDP on R&D, which sounds like a lot, but it’s still far below the U.S. and China. The real issue is that European companies are not investing enough in innovation themselves," he said. "It's not that governments aren’t supporting R&D—they are. But firms aren't picking up the baton."
One of the reasons is that many R&D policies in Europe are inefficient. In France and Spain, for example, governments offer broad-based tax credits for R&D, but these often go to large, established firms that are slow to innovate, rather than to the small, high-potential startups that could drive real technological breakthroughs.
"The U.S. approach is different—they fund many small firms, knowing that most will fail but that one or two will succeed massively. In Europe, we have a reflex to put all our money on a single 'national champion' instead. That’s not how innovation works."
France and Spain: Where do they stand?
As two of the EU largest economies, France and Spain play a critical role in shaping the competitiveness agenda. However, Bergeaud argues that both countries, like many others in Europe, suffer from a national-first mentality that limits broader EU progress.
"When a major European project is launched—whether it’s about developing new battery technologies or quantum computing—every country fights to have the hub on their own territory," he noted. "This leads to suboptimal decisions where resources are spread too thin instead of being concentrated where they would have the greatest impact."
The same issue arises with R&D funding. Many European firms fail to leverage the world-class research produced by European universities.
"We have amazing research institutions in Europe, but instead of European companies commercializing those ideas, it’s often American and Chinese firms that turn them into patents and profitable products. We’re giving away our best research for free", he warned.
What’s the first big move Europe should make?
The Commission top priority should be to fully integrate the EU market—starting with capital markets and regulation.
"We need to make sure that the European Union is truly an integrated market," he said. "That means creating a real union of capital markets so that businesses can invest and expand anywhere in Europe, without unnecessary barriers. It also means overriding national regulations in key sectors like telecoms and banking, which are still too fragmented."
While acknowledging that this would be politically difficult, he argued that there is no alternative if Europe wants to maintain its social model.
"We like our European social model—it’s more generous than the U.S., it protects workers. But without productivity growth, we will eventually have to pay for it by either cutting benefits or working more hours. Neither of those options is appealing, so increasing productivity is the only way forward."
A sense of urgency
The choice for Europe is inevitable. It can either take bold action to become a true innovation powerhouse, or it can continue its slow decline in global influence. The Draghi report provides a roadmap, but as political fragmentation increases within the EU, the challenge will be translating that vision into action.
You can listen and subscribe to our podcast here.
Carlos Carnicero Urabayen