The IT sector is bringing down Europe all on its own

On Monday of last week, former European Central Bank chief Mario Draghi presented his “long-awaited” report on the EU’s competitiveness, which the Commission tapped him to produce a year ago. The report will form the basis of the policy work going forward for the new commission that will soon take office. 

I put long-awaited in quotation marks because, although it is described as such, it takes a certain masochistic disposition to look forward to a slap in the face like this. It’s pure horror reading.

You may have seen the main features: Draghi states that productivity and thus GDP in the EU lags behind considerably and that the US and China have Usain Bolt–ran away from us when it comes to innovation. 

“Europe’s households have paid the price in foregone living standards. On a per capita basis, real disposable income has grown almost twice as much in the US as in the EU since 2000.”

To remedy this, if it’s even possible, Mario Draghi wants, among other things, to see investments in the vicinity of €800 billion (!) per year (!!).

“This is an existential challenge,” writes Draghi.

Much of the report is about things such as energy transition and increased sovereignty in important areas, but the central issue is IT and technology. In fact, IT is the culprit in the whole drama. This is what Draghi writes in a fact box (page 23):

“Excluding the main ICT sectors (the manufacturing of computers and electronics and information and communication activities) from the analysis, EU productivity has been broadly at par with the US in the period 2000-2019.”

Ouch! 

So many proofs of how the EU has fallen behind in tech and innovation can be found in the report that it is nearly impossible to list them all, but for example: 

• “There is no EU company with a market capitalization over €100 billion that has been set up from scratch in the last fifty years, while all six US companies with a valuation over €1 trillion have been created in this period.”
• “Around 70% of foundational AI models have been developed in the US since 2017 and just three American ‘hyperscalers’ account for over 65% of the global as well as European cloud market. The largest European cloud operator accounts for just 2% of the EU market.” 
• “Quantum computing is poised to be the next major innovation, but five of the top ten tech companies globally in terms of quantum investment are based in the US and four in China. None are based in the EU.”
• “Using volume of publications in top academic scientific journals as an indicative metric, the EU has only three research institutions ranked among the top 50 globally, whereas the US has 21 and China 15.”

The report also highlights that it is difficult for smaller tech companies to get investment and grow in Europe, not least because (what a hoot) the amount of regulations that have been added:

“The EU’s regulatory stance towards tech companies hampers innovation: the EU now has around 100 tech-focused laws and over 270 regulators active in digital networks across all Member States.”

According to Draghi, some digital sectors are likely already lost. Like cloud computing where the gap will only widen. But it is not time to give up ambitions, as a weak European tech sector hinders innovation in other areas such as pharmaceuticals, energy, and defense. 

He also sees opportunities in areas such as security and encryption where sovereignty is preferred. And he thinks the AI ​​train hasn’t completely left the station and apparently we’re very good at autonomous robots? Cool!

But nothing will get better unless funding, education, and general structures are fixed. The list of measures he proposes is 170 points long and is presented in roughly 300 pages.

I cannot answer what is the right way forward, but there will be many others who think they can in the future. For example, Draghi’s mammoth report barely had time to land on Ursula von der Leyen’s desk before a number of heavy-hitting CEOs — among them Ericsson’s CEO, SAP’s CEO, and Capgemini’s CEO — sent an open letter demanding action. The lobbying industry is not expected to have any productivity problems going forward.

“Now there is wide consensus that it must be at the top of our agenda, and at the heart of our action,” Ursula von der Leyen said when she received the report. 

Yes, one really hopes so.