How to break Europe's innovation stasis

After decades of R&I investment, Europe still lags behind global leaders. The new EU Commission must confront fragmented policies, revitalise competitiveness, and integrate security into its growth strategy.

https://www.socialeurope.eu/how-to-break-europes-innovation-stasis



Research and Innovation (R&I) have traditionally been considered pivotal to Europe’s future growth strategy. Since the Lisbon summit in 2000, the European Commission (EC) has promoted growth policies intended to be smart—yielding high value-added and productivity; sustainable—such as the European Green Deal aimed at achieving the Paris climate targets; and inclusive—enhancing not only the income conditions of European citizens but also their individual welfare and well-being. It is, therefore, unsurprising that recent policy reports comissioned by the EC on the future of the single market—the Letta report—and on the future of competitiveness—the Draghi report—have once again underscored the critical importance of R&I for Europe’s future prosperity.

What is surprising, however, is that despite the growth and “consolidation” of the European R&I system over recent decades, supported by stronger legal foundations in various treaties, its impact on European productivity and competitiveness has, as Draghi observes, become “stuck.” Over the past two decades, Europe appears to have been caught in an “innovation gap” or “mid-tech trap,” with productivity growth lagging behind the United States and China. Draghi highlights that “on a per capita basis, real disposable income has grown almost twice as much in the US as in the EU since 2000.” In both the US and China, corporate investment in R&I significantly exceeds that of Europe, resulting in markedly higher productivity growth, start-up rates, and new business activity. While EU labour productivity caught up with the US between 1950 and 1995, it lost momentum between 1995 and 2010 and has since grown only on par with US productivity but at a lower overall level. Commentators on the Draghi report have pointed out that Europe’s relative decline in competitiveness has been obscured by what might be described as European “economic somnolence.” How so?

Firstly, previous competitive growth engines, such as the automotive industry, have lost steam. Europe’s automotive sector had established itself as a producer of high-quality, technologically sophisticated premium goods with secure export markets. However, new opportunities in green and digital transformation have primarily benefitted foreign competitors due to regulatory frameworks offering single market advantages to these external players. Secondly, Europe’s reliance on cheap Russian oil and gas sustained the competitiveness of its large, energy-intensive industries, such as chemicals. This access enabled incremental CO2 reductions within the framework of the EU’s Emissions Trading System, which was laden with exemptions and free allowances, delaying systemic transformation. Finally, the “peace dividend” allowed many European countries to redirect funds into social welfare systems, as European treaties prohibited EU funding for military purposes. This restriction not only stymied the development of a competitive European defence industry but also limited technological breakthroughs due to a lack of opportunities for scaling and procurement. Unsurprisingly, the Draghi report identifies these three areas as priorities for bold reforms in EU policymaking.

The first aspect Draghi addressed is the “innovation gap” in the emerging growth areas of the 21st century, particularly digitalisation and Artificial Intelligence (AI). The second is the “competitiveness gap,” exacerbated by higher energy prices that undermine industrial decarbonisation efforts. The third is the “security gap,” reflecting the vulnerabilities of Europe’s open trade and investment model. To address these challenges, the Draghi report advocates for a “new industrial strategy” centred on closing the innovation gap, formulating a joint plan for decarbonisation and competitiveness, and enhancing security while reducing dependencies. The implications for European Research and Innovation (R&I) policy deriving from Draghi’s analysis warrant closer examination. Three critical aspects stand out.

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