Europe’s Competitiveness Reset: Industry, Technology and Investment
Something has shifted in the way Europe talks about its own economy. For most of the past decade, the conversation about European competitiveness ran on a familiar track: a slow productivity drift, a tech sector that never quite arrived, an industrial base everyone agreed was world-class but somehow always on the defensive. The diagnoses were available. They were just rarely said out loud, and almost never acted on.
That changed between 2024 and 2026. Mario Draghi’s report landed in September 2024 and named the problem in language European institutions had spent twenty years avoiding: productivity, scale, capital, energy, fragmentation. Enrico Letta’s report on the Single Market, published months earlier, said much the same thing in a different register. The Commission picked up the language and built a policy architecture around it: the Competitiveness Compass in January 2025, the savings-and-investments union, the Clean Industrial Deal, the Scaleup Europe Fund. The ECB endorsed it. National capitals signed on. By late 2025, ECB President Christine Lagarde was describing Europe as facing an “existential crisis,” and the characterisation registered as analysis rather than rhetoric.
This represents a substantive shift. After a prolonged period of analytical drift, European institutions have converged on a coherent reading of the structural challenge. The more consequential question is whether that reading can be reflected in measurable economic outcomes.
The evidence to date is mixed at best. Hourly labour productivity in the euro area grew by 0.9 percent between the fourth quarter of 2019 and the second quarter of 2024; in the United States, it grew by 6.7 percent over the same period. EU R&D intensity stood at ~2.2% of GDP in 2024, broadly unchanged over a decade and substantially below comparable indicators in the United States (3.45 percent), Japan (3.44 percent), and South Korea (5.10 percent). Venture capital deployed in Europe in 2025 amounted to 22 percent of the US total, despite the two economies being of broadly comparable size. Industrial electricity prices for energy-intensive users averaged roughly twice US levels through 2025. Foreign direct investment into the European Union declined by 58 percent in 2024, the steepest regional contraction recorded that year.
These figures describe an economy that has correctly identified the distance between its present position and the one it needs to occupy, and is attempting to close that distance from within an institutional architecture designed for a different set of problems. A union of twenty-seven partially integrated economies, calibrated for consensus, is now seeking to execute industrial strategy at the pace global capital markets and frontier technology cycles require.
That is the European competitiveness reset. The question this analysis takes up is whether it is yet happening and whether the policy convergence and the new architecture of instruments are producing measurable change in the economic data they were designed to move.
Industrial Capacity and Production Base
Europe’s industrial base has not collapsed. Throughout the trade and energy shocks of 2022–2024, the production system has kept up, though in places visibly weakened, but recognisably the same continental manufacturing complex that has anchored European GDP for three decades. The headline numbers from Eurostat tell a story of stagnation rather than decline. EU industrial production rose by 1.5 percent across 2025 as a whole, recovering modestly from a difficult 2024. The index sat at 101 against a 2021 baseline of 100 by the end of the year. Four years of disturbance, and output essentially flat.
Beneath the aggregate, the picture is more revealing. The first month of 2026 brought a 1.6 percent contraction across the EU, with capital goods, durable consumer goods, and intermediate goods all retreating in tandem. Germany has been the recurring source of weakness, recording monthly contractions of 5.2 percent in August 2025, 2.9 percent in December, and 1.3 percent in January 2026. The euro area’s largest economy is not in freefall, but it is not growing either, and the industrial cycle that historically pulled the rest of the continent forward has gone quiet.
What has changed the most visibly is sectoral performance across the EU. Pharmaceuticals, specialty chemicals, advanced machinery, and parts of aerospace continue to generate trade surpluses and command global market positions. However, the automotive industry is the visible casualty. The European People’s Party leader Manfred Weber noted in September 2025 that the European car industry had lost roughly 90,000 jobs over the previous twelve months. This figure captures the convergence of pressures the sector now faces: the transition to electric vehicles, Chinese competitive entry into European mass-market segments, and a structural cost base that has become difficult to sustain.
Energy-intensive industries are absorbing similar pressure through a different channel. Ineos announced the closure of two German chemical plants in 2025, citing untenable energy prices. ExxonMobil moved to close its Scottish chemical facility and indicated it might withdraw from European chemicals altogether.
The competitive map beyond Europe is also being changed. The Trump administration’s return to broad tariff use in 2025, with average U.S. tariff rates rising significantly from their pre-2025 levels, reinforced the broader shift toward a more protectionist trade environment. Mexican FDI inflows grew 11 percent in 2024, the standout performance in Latin America, on the back of nearshoring to serve the North American market. Vietnam’s industrial FDI continued to rise through 2024 before cooling in 2025, as firms recalibrated their China-plus-one strategies. ASEAN as a region attracted a record $235 billion in FDI in 2024. India added 13 percent. None of this is happening at Europe’s expense in a direct sense, but each represents a reshaping of the global manufacturing map in which Europe is neither the principal beneficiary nor a credible alternative for the production European multinationals are themselves relocating.
Against this backdrop, the Commission has assembled the ambitious EU-level industrial policy framework. The Clean Industrial Deal set the strategic direction by binding decarbonisation to competitiveness through affordable energy, lead markets for low-carbon products, and a Clean Industrial State Aid Framework to channel investment into energy-intensive sectors and clean technology. The Industrial Accelerator Act gives that framework its operational instrument: accelerated permitting, sustainability and resilience criteria embedded in public procurement, and a commitment to raise the share of industrial manufacturing in EU GDP from 14.3 percent in 2024 to 20 percent by 2035.
In terms of industrial capacity, however, the reset has not yet become visible in measurable economic outcomes. Output is flat against its 2021 baseline, the German cycle has gone quiet, and a policy framework only finalised in 2025 and 2026 has not had time to move an indicator that responds in years rather than quarters.
Technology and Innovation Gap
The technology gap between Europe and its principal competitors is not, in the first instance, a research gap. European science remains globally competitive. European universities still produce some of the world’s most-cited research. On the other hand, individual European firms such as ASML, Novo Nordisk, SAP, Airbus sit at the frontier of their respective sectors. The gap is at the next stage: the chain that converts research into commercial scale. Twenty years of comparative data make the same point in different ways, and the post-pandemic period has widened rather than narrowed the divergence.
The headline indicator is R&D intensity. EU gross domestic expenditure on research and development reached €403.1 billion in 2024, equivalent to ~2.2% of GDP, remaining broadly unchanged from 2.28 percent in 2020 and well short of the 3 percent target the European Council set in 2002. Comparatively, R&D intensity in 2023 stood at 3.45 percent in the United States, 3.44 percent in Japan, 5.1 percent in South Korea, and 2.7 percent in China. The EU has not closed that gap in twenty years; on most current trajectories it is widening it. What is striking in the recent data is the rate of change among competitors: US R&D expenditure increased by roughly 146 percent in nominal terms between 2014 and 2023, while EU spending grew at a substantially slower pace.
At the firm level and according to the European Commission’s 2025 EU Industrial R&D Investment Scoreboard, US-headquartered companies in the global top 2,000 invested an average of €48,700 per employee in R&D in 2024, which represents nearly three times the EU figure of €16,800. Of the world’s top fifty corporate R&D investors, only twelve are headquartered in the EU.
The most consequential analytical point underneath these numbers is that the gap is largely a problem of sectoral specialisation. Roughly 60 percent of the EU–US private R&D intensity gap is explained by industrial mix rather than by lower research effort within sectors. The top three US corporate R&D investors shifted from automotive and pharmaceuticals in the 2000s to software and hardware in the 2010s, and to digital and AI in the 2020s. The EU’s top three have remained dominated by automotive throughout. Europe is not under-spending in the sectors it has; it has not built the sectors that now define the global research frontier.
The post-2022 AI investment cycle has compounded this asymmetry. AI funding is concentrating geographically and competitively in ways that work against any economy operating outside the US–China axis. The Bay Area alone absorbed more than half of global venture investment in AI in 2024. Europe has produced credible frontier players including Mistral in France, Lovable in Sweden, a small cluster of UK and German specialists. Their growth capital, however, is increasingly American: Lovable’s $330 million Series B in December 2025 was led by CapitalG (Alphabet) and Menlo Ventures. The companies remain headquartered in Europe; the financial gravity sits elsewhere. As Christine Lagarde observed at the Atlantic Council in October 2024, reflecting on the Draghi diagnosis, “you need capital, and you need capital that is prepared to take risks. This is not something that we are very good at in Europe.”
The Competitiveness Compass and the Strategic Technologies for Europe Platform represent the EU’s first serious attempt to address this geography directly. Their effectiveness will depend on whether the policy framework can change a corporate research base whose sectoral specialisation has been stable for two decades. That is a longer test than the political cycle generally accommodates.
What the recent data shows is a corporate research base that has not yet begun to shift and an AI investment cycle concentrating outside Europe rather than inside it. In this dimension, the reset is closer to being designed than being measured.
Capital and Investment Environment
European households accumulated over €4 trillion in deposits and securities holdings during the post-pandemic period, pension systems hold roughly €4 trillion in assets, and the EU as a whole runs persistent current-account surpluses. Therefore, the problem is not the stock of capital but the architecture that deploys it. The European financial system converts a smaller share of savings into productive equity investment than its principal competitors, and a meaningful share of what is converted leaves the continent to be deployed elsewhere. Villeroy de Galhau framed the diagnosis directly in September 2025: “Europe has a wealth of savings but it lacks equity capital, which is vital to enable firms to innovate.” He quantified the gap as 85 percent of GDP in non-financial corporation equity financing in the euro area, against 220 percent in the United States.
The cleanest illustration is venture capital. According to CEPR research published in February 2026, total VC deployed in Europe across 2025 reached €66.2 billion, against roughly $300 billion in the United States. In other words, Europe is operating at 22 percent of the US level for two economies of broadly comparable size. The cumulative gap is more visible: between 2014 and 2023, European VC investment totalled €89 billion against US deployment exceeding €1,000 billion. The shortfall concentrates in late-stage rounds, where Jacques Delors Centre research puts EU funding at $21.3 billion against $133 billion in the US which is the segment where companies scale from regional to global.
One part of the explanation is institutional architecture. US venture capital draws roughly 72 percent of its funds from institutional sources: pension funds, endowments, sovereign wealth funds, insurance companies. The equivalent share in Europe is around 30 percent, with the balance dominated by public sources including the European Investment Fund. European pension funds invest approximately 0.02 percent of their assets in venture capital, against roughly 2 percent for US pension funds. The largest pool of long-duration capital in Europe is structurally precluded by twenty-seven national prudential regimes. What this geometry produces is a continent whose corporate frontier does not refresh: as Mario Draghi observed, no EU-headquartered company with a market capitalization above €100 billion has been founded from scratch in the past fifty years, while all six US firms above €1 trillion were.
This is the policy-versus-data gap in its clearest form. The capital exists. The diagnosis has been delivered. What is missing is the architecture that converts one into the other at frontier speed.
The same pattern is visible in broader investment data. Foreign direct investment into the European Union collapsed by 58 percent in 2024, the steepest regional contraction UNCTAD recorded that year. The 56 percent rebound in 2025 was driven substantially by conduit flows through low-tax jurisdictions rather than by greenfield commitments. Over the same period US FDI grew 23 percent on more than 2,100 greenfield projects, Indian inflows rose 13 percent, Mexican inflows grew 11 percent on nearshoring momentum, and ASEAN attracted a record $235 billion. Global capital is reallocating across a broader competitive set than the United States and China alone, and Europe is not the principal beneficiary of that reallocation in any segment.
No EU-headquartered company with a market capitalization above €100 billion has been founded from scratch in the past fifty years
The Commission’s response, formalised in March 2025, was the savings-and-investments union: the most ambitious effort since the 2015 Capital Markets Union to unify European capital markets and channel domestic savings into productive investment. Its instruments include a Scaleup Europe Fund launched in October 2025 with €1 billion of public capital intended to catalyse €4 billion of private commitments, alongside regulatory simplification for cross-border investment products and phased harmonisation of insolvency, securities, and prudential rules. The strategy is the right one. The execution challenge is that capital markets reform requires twenty-seven national legal systems to converge on instruments designed at EU level, and historically that convergence has proceeded at a pace measured in decades rather than years. Whether the savings-and-investments union becomes the architectural shift its name implies, or another framework that compresses ambition into communiqué, is the single most important open question for European competitiveness in the second half of the 2020s.
Energy and Infrastructure Constraints
The acute phase of Europe’s energy crisis ended in 2023. Wholesale gas prices, having peaked above €300 per megawatt-hour in August 2022, returned to roughly €30 by early 2024. The rolling blackouts that European industry feared through the winter of 2022–2023 did not materialise. The structural consequence, however, has been less reassuring than the headline normalisation suggests. Across 2024 and 2025, European energy prices did not settle at pre-crisis levels, but at a new, structurally elevated baseline that European industry now treats as the operating environment of the rest of the decade.
The IEA’s Electricity 2026 report, published in March 2026, places EU industrial electricity prices at approximately twice the United States level and around fifty percent above prices in China and India. The wholesale picture confirms the same gap: the EU wholesale electricity benchmark averaged roughly $95 per megawatt-hour across 2025, up ten percent year-on-year, and futures markets are pricing $95 per megawatt-hour for 2026 and $85 per megawatt-hour for 2027. On the gas side, OECD’s 2025 survey of the European Union estimated EU wholesale gas prices at roughly five times US levels through 2024, with industrial retail electricity prices running at approximately twice their pre-crisis level. The energy import bill for 2024 came in at €427 billion, which is well below the €604 billion peak of 2022, but still a substantial outflow against a continent attempting to reindustrialise.
The competitive consequences of this geometry are now visible in capital expenditure decisions. Ineos’s closure of two German chemical plants in 2025 was framed by the company explicitly in terms of energy cost differences with US Gulf Coast facilities. ExxonMobil’s withdrawal from its Scottish chemical operations carried similar reasoning. The pattern is broader than headline closures. The European Chemical Industry Council’s January 2026 closures and investments tracker, prepared with Roland Berger, recorded approximately 37 million tonnes of European chemical production capacity announced for closure across 2022–2025, roughly nine percent of the continent’s total chemical production capacity, with closure announcements rising from 2.9 million tonnes in 2022 to 17.2 million tonnes in 2025 alone. Forty-nine percent of those closure announcements cited energy cost competitiveness as the primary rationale, ahead of weak demand (19 percent), overcapacity (9 percent) and regulatory factors (8 percent). Capacity utilisation in the sector remains 9.5 percent below the 2014–2019 pre-crisis baseline. These are structural reallocations of productive capacity to jurisdictions where the energy cost geometry is more favourable for the long term.
Infrastructure constraints amplify the price disadvantage. European grid investment has not kept pace with the demand profile that decarbonisation and digital expansion now imply. Ireland’s moratorium on new data centre grid connections through 2028, after existing facilities consumed more than a fifth of the country’s electricity in 2024, is the visible end of a broader bottleneck. The European Investment Bank’s 2025 Investment Report estimated that EU electricity grid investment needs to roughly double through 2030 to support electrification and renewable integration on the trajectories the Commission’s own targets imply. Permitting timelines for transmission infrastructure remain measured in years; for some cross-border interconnectors, in decades.
The Commission’s response, the Affordable Energy Action Plan launched alongside the Clean Industrial Deal in February 2025, addresses prices through measures including long-term contracts for industrial users, expanded support for power purchase agreements, and accelerated permitting for renewables and grid investment. Like the Industrial Accelerator Act, the plan is ambitious in design and constrained in execution by the architecture it operates within. Energy markets in Europe remain twenty-seven national markets imperfectly stitched together; an integrated continental electricity market, repeatedly identified by the Commission and the ECB as the single most consequential reform available, has not yet been delivered. Until it is, the gap between European industrial energy costs and those of its principal competitors will continue to operate as a permanent feature of the competitive geometry European industry plans against.
Labour, Productivity and Regulation
Eurostat reported average hourly labour costs of €34.9 across the EU in 2025 and €38.2 across the euro area, with a national range stretching from €12.0 in Bulgaria to €56.8 in Luxembourg. Germany’s manufacturing labour costs, at roughly €48 per hour, sit among the highest globally. So does German manufacturing productivity. The most competitive European economies such as the Netherlands, Denmark, Sweden, combine elevated wages with output per hour that comfortably matches or exceeds the United States in their respective sectors. European workers also work fewer hours: Eurostat’s 2024 labour force survey reported an EU average working week of 36.0 hours, ranging from 32.1 in the Netherlands to 39.8 in Greece, against roughly 38 hours in the United States.
The relevant competitiveness measure is therefore what employers pay per unit of output produced. On this measure, the recent European trajectory has deteriorated. ECB projections from late 2023 anticipated euro area unit labour costs rising 6.1 percent in 2023, 4.1 percent in 2024 and 2.6 percent in 2025, with productivity recovery doing most of the work to bring the rate down. The wage moderation arrived broadly on schedule: EU full-year hourly labour costs rose 4.1 percent in 2025, with quarterly growth decelerating to 3.7 percent by Q3. The productivity story is more equivocal. Hourly productivity in the euro area grew only 0.9 percent between Q4 2019 and Q2 2024 against 6.7 percent in the United States. Eurostat reported EU labour productivity per hour worked rising 1.4 percent across 2025, the first material inflection since the energy shock, but the recovery was concentrated in Ireland (+10.5 percent, substantially reflecting the tax accounting of US multinationals), Latvia, Poland and Romania. Germany contributed almost nothing, Italy contracted, and the euro area aggregate registered only 0.5 to 0.7 percent year-on-year through the second half. Unit labour costs in the euro area accordingly continued rising at rates that erode rather than restore competitiveness.
Hourly productivity in the euro area grew only 0.9 percent between Q4 2019 and Q2 2024 against 6.7 percent in the United States
Layered on this is the regulatory cost structure. The cumulative compliance burden generated by the Single Market acquis, GDPR, the AI Act, the Corporate Sustainability Reporting Directive, sector-specific frameworks, and twenty-seven national implementations of EU-level rules has become a recurrent theme in the diagnostic literature. The Draghi report estimated regulatory compliance costs at approximately €150 billion annually for European SMEs alone. The Commission’s response, the Omnibus Simplification Packages launched in February 2025 and proceeding in successive waves through 2026, represent the most serious attempt in two decades to reduce the regulatory accumulation. Their substantive impact will depend on what survives the legislative process. Historically, simplification packages contract during co-decision rather than expand. Whether the current cycle breaks that pattern is one of the smaller but not insignificant tests of whether the broader competitiveness reset can move from communiqué to balance sheet.
Fragmentation as the Multiplier
Each of the dimensions examined so far operates within a constraint that does not appear in the dimension itself. Each of them operates in the fragmented system that turns each of them from a competition problem to a structural one. European industrial production runs across twenty-seven national permitting regimes. European R&D is funded through twenty-seven national tax codes and corporate frameworks. European venture capital is deployed across twenty-seven prudential systems for institutional investment. European energy moves through markets that are formally integrated but operationally national. European labour is regulated, twenty-seven times over, on top of the EU-level acquis. The Single Market is the foundational achievement of European integration and the principal explanation for half a century of convergence within the bloc. It is also, by the assessment of the institutions that built it, materially incomplete in precisely the segments that determine frontier competitiveness.
The most direct measure of that incompleteness is observable rather than estimated. Cross-border trade in goods within the EU rose from 30 percent of EU GDP in 1999 to over 40 percent in 2024, a clear integration dividend. Trade in services followed a different trajectory: intra-EU services trade rose from 8 percent of GDP in 1999 to 16 percent in 2024, a level effectively identical to EU services trade with the rest of the world. Thirty years into the Single Market, being inside the bloc confers no measurable advantage over operating from outside it for the sector that now accounts for three-quarters of European economic activity. Christine Lagarde, addressing the Frankfurt European Banking Congress in November 2025, framed the consequence directly: “our internal market has stood still, especially in the areas that will shape future growth, like digital technology and artificial intelligence, as well as the areas that will finance it, such as capital markets.”
The institutional consequence is that the EU-level instruments now being assembled to address competitiveness are operating against a substrate they were not designed to navigate. The Scaleup Europe Fund deploys risk capital across twenty-seven legal frameworks for innovation companies; the proposed 28th regime is the first acknowledgment that this substrate is itself a binding constraint, and its early reception suggests that the substrate may absorb rather than yield. The Clean Industrial Deal channels investment through twenty-seven national permitting systems; the Industrial Accelerator Act’s permitting-acceleration provisions exist because the substrate is the bottleneck. The savings-and-investments union confronts twenty-seven prudential regimes for the largest pools of long-duration capital in the European economy. In each case, the EU-level instrument is doing only a fraction of what its design implies, because the markets it operates on have not been integrated to absorb it at scale.
Conclusion
The policy architecture is in place. The Draghi and Letta reports, the Competitiveness Compass, the Clean Industrial Deal, the Industrial Accelerator Act, the savings-and-investments union, the Scaleup Europe Fund, the proposed 28th regime, and the Omnibus Simplification Packages, taken together, represent the most coherent competitiveness response the European project has produced in a generation. The instruments are reasonable. The direction is correct. What remains uncertain is whether the architecture executing the strategy can move at the speed its own diagnosis demands.
What Europe brings to that test is considerable, and is sometimes obscured in the discussion of what it lacks. The continent retains some of the world’s most productive specialised manufacturing complexes, universities that continue to anchor the global research frontier, integrated industrial supply chains that no other economic bloc has matched at scale, and a regulatory reach that shapes global standards in domains from data protection to sustainability disclosure. The most competitive European economies combine high wages with output per hour that matches or exceeds the United States. The competitiveness question is not whether these assets exist. It is whether the policy architecture now being assembled around them can compound their value at the rate frontier industries require.
The data through early 2026 has not yet registered the change. EU industrial production is essentially flat against its 2021 baseline. China’s R&D intensity has moved closer to the OECD average, while the EU has remained broadly stable at around 2.2% of GDP. Venture capital deployed in Europe in 2025 was 22 percent of the US level, and FDI inflows in 2024 fell 58 percent in a year. Industrial electricity prices have settled at roughly twice US levels and are priced by futures markets to remain there through 2027. Productivity has inflected at the margin in 2025 but only in catch-up economies and Ireland’s tax-distorted figures; the German and Italian manufacturing cores have not participated, and euro area unit labour costs continue to erode competitiveness.
Global capital is reallocating across a broader competitive set than the United States and China alone and towards India, ASEAN, Mexico, and the nearshoring corridors that are reshaping the global manufacturing map. Europe is not the principal beneficiary of that reallocation in any segment. This constitutes a continent whose policy ambition is running ahead of its measured economic outcomes.
The savings-and-investments union confronts twenty-seven prudential regimes for the largest pools of long-duration capital in the European economy
The benchmarks for the next phase are concrete enough to test. By 2027 and 2028, the questions will be whether the savings-and-investments union has unlocked institutional capital flows in meaningful volume; whether the 28th regime has been adopted in a form that genuinely simplifies rather than layering on national variations; whether industrial production has moved off its flat trajectory; whether unit labour costs have stabilised; whether FDI has returned in greenfield rather than conduit form; and whether the Industrial Accelerator Act has translated permitting reform into measurable investment commitment.
Is the European competitiveness reset happening? In policy convergence and instrument design, unambiguously yes, and the speed at which that convergence has occurred since 2024 is itself a meaningful change in the European political economy. In the economic data the reset is meant to produce—not yet, while in some dimensions the gap is still widening.
The next twenty-four months will reveal whether the architecture now in place is capable of moving the data, or whether the gap between European ambition and European outcome has become the structural feature of the decade.
By Jovan Nicolic, Serbia
Photo: shutterstock(5), KUKAgroup; EmDee / CC BY-SA 4.0;
