Europe’s at risk of losing the global tech race

Mark Boris Andrijanič was the first minister for digital transformation of the Republic of Slovenia. He’s a vice president at Kumo.AI, a member of the Governing Board of the European Institute of Innovation and Technology, and a senior fellow at the Atlantic Council. Philip Meissner is the founder and director of the European Center for Digital Competitiveness and a professor of strategy and decision making at the ESCP Business School in Berlin.

Some may be surprised to learn just how competitive Europe’s tech landscape actually is. According to the International Institute for Management Development’s annual World Digital Competitiveness Ranking, 4 out of the top 10 countries are European. Another global study, INSEAD business school’s Global Talent Competitiveness Index, reveals the same: 4 out of the world’s top 10 countries are in the EU.

These four countries are Denmark, Finland, Sweden and the Netherlands. They are the birthplace of global tech leaders, like the chip manufacturer ASML and music streaming pioneer Spotify, as well as home to technologically advanced entities in traditional industries, such as healthcare giant Novo Nordisk — Europe’s most valuable company.

While these European digital champions have some of the highest GDP per capita globally, they are home to just 14 percent of the total EU population and 18 percent of its GDP. What they do illustrate, however, is that the foundations for a European Tech Powerhouse are already here — just not at scale.

And while this is reason for optimism, we shouldn’t ignore the many factors that seem to be eroding the EU’s position in the global tech race. This competition is ultimately a race for progress, wealth and geostrategic influence, and its importance for Europe’s future cannot be overvalued.

The case of Munich-based start-up Marvel Fusion lays bare many of the EU’s tech problems: A global leader in fusion technology, in 2023, the company announced it would move the bulk of its R&D to the U.S. due to burdensome regulation and lack of funding in Europe. And it’s just one in many highly innovative companies in the green tech sector that are leaving Europe for the U.S. and Asia due to similar reasons.

For example, taking a look at alternative proteins like lab-grown meat or plant-based eggs, we can see these markets provide a much more favorable regulatory environment, with the U.S. Food and Drug Administration already clearing lab-grown meat for sale in the U.S. Meanwhile, in Europe, we don’t even have a reliable timeline for regulatory approval — in fact, Italy banned lab-grown meat in November last year.

The EU needs to boost funding for tech start-ups and scale-ups. | Sean Gallup/Getty Images

Such overregulation and lack of funding puts the EU’s AI sector at risk of global insignificance too. For instance, while France’s Mistral and Germany’s Aleph Alpha recently raised $415 million and $500 million, respectively, California-based OpenAI is in talks to raise $10 billion at a $100 billion valuation. The funding gap becomes even more obvious when looking at total private AI investments: According to the Stanford AI Index, during the period from 2013 to 2023, private investments in AI in the U.S. totaled $335.2 billion, followed by $103.7 billion in China, then $22.3  billion in the U.K., while Germany, France and the rest of the EU combined invested less than the U.K. alone.

Furthermore, the bloc’s recently adopted AI Act received a chilly reception from its tech community, as it adds an additional layer of complexity to an already heavily regulated market. The main concern is that the new rules will stifle innovation by significantly increasing the compliance costs for home-grown AI start-ups and scale-ups. Many of them are already considering moving to the U.K. or the U.S., or pivoting away from innovating in healthcare and other critical areas deemed high-risk by the new regulation.

These stories — and even the experiences of anyone who has ever attempted to go cashless in Germany — may indicate that Europe’s digital gap is already too big to close. But let us not forget that many of the world’s leading digital nations are actually European.

So, what’s the answer? Should the EU be more like the already mentioned European digital champions? What should lead the next European Commission’s agenda? And what can member countries do to bridge the digital divide inside the EU and catch up to the U.S. and Asia?

In our view, the EU and its members need to prioritize a vision of growth that’s  focused on creating a business-friendly environment, and scaling already existing best practices in the most innovative parts of Europe across all its members.

The Vivatech technology startups and innovation fair in Paris. | Magali Cohen/AFP via Getty Images

After many years of increasing regulation, we need to minimize the burden on businesses and give them the freedom to innovate, rather than turning them into mere compliance organizations.

For this, we suggest five specific initiatives:

First, Europe needs to overcome its two-speed digital transformation. One major benefit of digital technologies is that once created, they can be scaled at almost zero cost. In other words, when a world-class government app exists in one European country, why shouldn’t it be made the standard for all nations in Europe? Following the example of Diia, Ukraine’s celebrated government app, such an app wouldn’t just offer key government services — it should also include a digital ID, allowing EU citizens to use it in all interactions with authorities and businesses. Making the acceptance of digital payments mandatory throughout the bloc would also be an important step in this direction.

Next, the EU needs to boost funding for tech start-ups and scale-ups. Currently, Europe lags significantly behind the U.S. in the availability of venture capital — especially in later rounds. Mobilizing European pension funds to boost their investments in the European tech ecosystem would be crucial in bridging this gap. According to the State of European Tech Report 2023, just 0.02 percent of European pension funds’ total assets — estimated at $3.4 trillion — were invested in European tech ventures in 2022. But in the U.S. and the Nordics, pension funds play a significant role in driving tech investments. European regulators must create a framework that will incentivize fund managers to follow their lead.

Another key hurdle for start-up and scale-up founders and employees is dry income taxation of share options — which means they have to pay significant taxes upfront based on a hypothetical value of often very risky assets. Instead, European countries should adopt tax policies that encourage the use of stock options for all employees, deferring taxation to the point of sale. Additionally, many European countries impose an exit tax on dry income from ownership, which hampers the free movement of tech entrepreneurs and employees across the EU. Such taxation should be abolished, incentivizing entrepreneurs to start and grow companies across Europe.

Moreover, innovators need clarity regarding policies, quick regulatory approvals and well-functioning test environments for new technologies. The EU should focus on several broad strategic areas — such as AI, smart manufacturing, green transformation and life sciences — without picking winners in terms of underlying technologies or specific companies. We also believe that such a pro-innovation agenda must be institutionalized at the EU level, with a new commissioner for frontier technologies — much like the United Arab Emirates, which appointed a minister of AI and digital economy back in 2000. This new commissioner should form an advisory body consisting of leading European tech entrepreneurs and researchers who operate not only in the EU but also in the U.S. and other parts of the world, to aid in the preparation of policy recommendations and annual evaluations of the state of Europe’s digital competitiveness.

Finally, the EU needs an agenda for attracting top talent. AI champions like Mistral and Aleph Alpha were both founded by European innovators who returned to Europe after successful careers in the U.S. — and these are just two examples that the impact of attracting European tech talent back to the bloc can have. European countries should copy the Nordic model of tax and other incentives aimed at attracting top talent, while the EU should enact a unified tech talent visa for foreign workers, presenting itself as the most attractive global destination— particularly since the U.S. maintains a tight immigration policy, even for highly skilled labor.

The European project started with a vision of progress, prosperity and peace. We need to renew this vision and prove the bloc can inspire optimism and action — and for this, technology is key. Following the example of Europe’s own digital champions, enabling growth should be the priority of the new European Parliament and Commission — as well as all governments in Europe.