Europe Technology Gap: How the European economy could be left behind.

• Author: Mischke, Jan

Europe seems to change most decisively as a result of crises. The European Union was created in the aftermath of World War II. The 2008 global financial crisis and the eurozone crisis that followed led to more financial cooperation among European countries. The Covid-19 pandemic triggered greater fiscal coordination through the Next Generation EU recovery fund. Now the war in Ukraine is upending Europe's energy strategy and sparking a new conversation about defense.

In this context, policymakers must not forget another slow-motion crisis: the significant lag in European companies' technological prowess, relative to other leading economies. As technology spreads into every sector and reshapes competitive dynamics, innovation and tech leadership is as pivotal to the European Union's strategic autonomy as energy supplies or defense are, especially amid increasing geopolitical turbulence.

Lagging technology largely explains why major European firms are underperforming their U.S. counterparts. According to new research by the McKinsey Global Institute, between 2014 and 2019, large European companies' revenues increased 40 percent more slowly than those of their U.S. peers. They invested 8 percent less (measured by capital expenditure relative to the stock of invested capital), and they spent 40 percent less on research and development. Information and communications technology and pharmaceuticals accounted for 80 percent of the investment gap, 75 percent of the research and development difference, and 60 percent of the disparity in revenue growth.

Europe has long been aware of its technological shortcomings and has recently launched a flurry of initiatives aimed at putting the region on a higherperforming path. These include the European Union's [euro]95.5 billion ($100 billion) Horizon Europe program, the Smart Specialization initiative, and the Important Projects of Common European Interest framework. Similarly, the United Kingdom is investing [pounds sterling]800 million ($1 billion) over four years in a new Advanced Research and Invention Agency.

These moves are welcome, but may not be enough. Today, European companies lack the scale and speed of counterparts in the United States and China. Our new analysis examined ten "transversal technologies"--such as artificial intelligence, cloud, and biotech--that spread horizontally across sectors. Our analysis found that Europe leads the United States and/or China in only two.

Consider cleantech...