Europe’s Gap Widens

Sebastien Callebaut -

Falling Behind Forever

The continent that once gave the world the printing press, the jet engine and the World Wide Web is now conspicuously absent from the global tech vanguard. While American and Chinese companies sprint ahead in AI, cloud computing, and space technology, Europe continues to grapple with structural barriers that stifle innovation and deter investment. The result: a growing sense that the continent is losing the race for the future.

  • Apple Inc.’s market capitalization alone now exceeds that of the entire German stock exchange.
  • Europe, by contrast, lacks homegrown giants on par with Google, Amazon, or Meta Platforms. The few European startups that do reach scale often either relocate or get acquired by U.S. players.
  • In a sweeping report commissioned by the European Union last year, Draghi called out the continent’s weak performance in emerging technologies as a key factor behind its economic malaise. Europe, he warned, is failing to build the companies that will power tomorrow’s growth.
  • Once neck-and-neck with the U.S. in output per worker, Europe’s productivity has steadily declined. By the late 1990s, the average EU worker produced 95% of what their American counterpart made per hour. Now, that figure is under 80%.
  • Over the past 50 years, the U.S. has created 241 companies from scratch with market caps exceeding $10 billion. Europe has created just 14. While the U.S. economy is driven by digital platforms, advanced manufacturing, and next-gen defense, Europe remains anchored to legacy sectors.
  • The average founding year for the top 10 publicly traded U.S. firms is 1985. In Europe, it’s 1911. Productivity gains in industries like autos, utilities, and banking were largely realized decades ago.

The broader economy reflects that slippage. The EU is now one-third smaller than the U.S. economy and has grown at just a third of the U.S. pace over the past two years.

Regulation, Regulation, Regulation

Despite boasting a highly educated workforce and a population larger than the U.S., Europe remains a second-tier player in tech. Investors and entrepreneurs cite a constellation of roadblocks: rigid labor laws, cautious corporate culture, burdensome regulations, and a fragmented market. Access to venture capital is also limited. Europe’s tech VC funding remains a fifth of U.S. levels, according to CB Insights.

  • That capital gap translates into fewer unicorns and less innovation. The U.S. currently boasts 90 privately held tech companies each worth more than $1 billion, with a combined valuation of $2.53 trillion.
  • China has 162 such companies valued at $702 billion. Europe trails with 107, totaling $333 billion.

Meanwhile, regulatory inertia continues to delay AI product rollouts in Europe. Meta's latest model launched nearly a year later in the EU than in the U.S. due to compliance hurdles, and Apple only recently enabled its AI features for iPhones in the region. These slowdowns mirror the broader drag of regulation on European competitiveness in emerging technologies.

Highly Protected Unskilled Labour

Europe’s preference for regulation over rapid innovation is increasingly pushing its most ambitious entrepreneurs across the Atlantic. At Berlin-based AI startup Jina AI, early funding came from American and Chinese venture firms, but subsequent capital came predominantly from Silicon Valley.

  • The founders initially aimed to build a scalable enterprise search solution in Europe, but they struggled to find qualified engineers, faced labor disputes, and encountered legal challenges when attempting to manage underperformance.
  • Regulatory complexity compounded the difficulties, with nearly half of IT budgets at European firms consumed by compliance efforts.
  • By late last year, leadership at the Jina AI began spending extended time in California, drawn by faster decision-making, deeper capital pools, and a more permissive innovation environment.
  • They eventually decided to shift operations to the U.S., citing a sluggish European AI market and limited local demand.

The experience reflects a broader trend among European founders: many startups with global ambitions now use Europe primarily as a back office, while leadership, funding, and high-value work migrate to the U.S.

Defense and Dollars

The innovation gap is especially clear in the defense sector. U.S. startups like Anduril, Palantir, and Shield AI are rapidly reshaping the battlefield with AI-powered drones, autonomous systems, and next-gen software—all backed by billions in venture funding and fast-moving government procurement. Anduril alone is valued at over $28 billion.

  • Europe, meanwhile, has committed several billion euros to stimulate innovation in its defense industry through initiatives like the European Defence Fund.
  • But the money flows slowly, often routed through bureaucratic channels and legacy firms. By the time the funds reach startups, American competitors are already deploying real-world systems.

The likely outcome: the U.S. will create dozens of multibillion-dollar defense startups with advanced capabilities and global reach, while Europe will have exhausted its defense budget with little more than a short-term uptick in domestic contracts—a fleeting blip on the radar.

Regulate First, Compete Later? Europe’s Losing Formula

A growing chorus of European technocrats insists that the continent’s strength lies in its ability to regulate. To them, Brussels' sprawling rulebooks are a sign of sophistication—proof that the European Union leads with thoughtfulness, while the U.S. and China charge ahead with reckless, cowboy-like capitalism.

  • This mindset, however, is becoming Europe’s economic Achilles’ heel. Since the formation of the EU, productivity has lagged, innovation has stumbled, and growth has weakened.
  • The regulatory impulse—however well-intentioned—has too often served as a brake on progress rather than a blueprint for it.
  • Europe's bet on bureaucracy over dynamism increasingly looks like a strategic miscalculation. As the global tech race accelerates, Europe finds itself not just lagging behind, but dependent on the very powers it seeks to constrain.
  • And when the continent eventually needs access to critical technologies—from semiconductors to AI platforms—it will face uncomfortable leverage from Washington and Beijing.
  • The price of access may well be the rollback of the very regulations Europe now holds up as its crown jewel.

In the end, Europe may find itself with neither the technological edge nor the regulatory clout. A framework built on controlling others is unlikely to hold when those others become your lifeline.

Disclaimer

Please note that Benchmark does not produce investment advice in any form. Our articles are not research reports and are not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by NASA / Unsplash.