by Mac Slavo, SHTF Plan:
This article was originally published by Mihai Macovei at The Mises Institute.
Europe became prosperous through a burst of innovation and capital accumulation during the eighteenth-century industrial revolution that allowed individual freedom to replace feudalistic rents and privileges. A new industrial revolution based on digitalization, advanced artificial intelligence (AI), and automation is in the making, but the reputed analyst Wolfgang Münchau claims that Europe is about to miss it. In his view, Europe has forgotten how to innovate, because it may still have the aptitude, but it has lost the right attitude to foster creative destruction. Münchau and other analysts put down this failure on the European government’s inability to pick winners like China or capitalize on military investment like the US, in order to promote cutting-edge technologies and research. In our view, this is wrong – Europe does not need more and better targeted government intervention, but considerably less.
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Europe lags behind in productivity growth and innovation
For almost four decades, Europe has been falling behind the US, and now China, in digital technology sectors, such as internet, semiconductors, ICT equipment and software, and AI. These sectors are recording the highest productivity growth rates and account for most of the widening productivity gap between the EU and the US (Graph 1).
Graph 1: EU vs US labor productivity 1890-2022
Source: The Draghi report: A competitiveness strategy for Europe (Part A)
European decision makers could not just ignore the productivity growth problem and turned their attention to closing the innovation gap with the US. However, despite strong competition from China and the US, Europe still appears to retain a decent capacity to produce innovative ideas. According to Mario Draghi’s report on EU competitiveness, the EU produces almost one-fifth of the world’s scientific publications, lagging behind China but ranking ahead of the US. It also has a strong position in patent applications, with 17% of the world’s patent applications. EU’s public spending on R&D at 0.74% of GDP is slightly larger than 0.7% in the US, and 0.5% in both Japan and China. Overall, according to the European Innovation Scoreboard, the EU continues to trail the US closely in terms of scientific research (Graph 2), while China comes strongly from behind and outranked Germany in the latest Global Innovation Index 2025.
Graph 2: Innovation performance of the EU, China, and the US
Source: The Draghi report: A competitiveness strategy for Europe (Part B)
It seems that Europe’s main problem is not a lack of scientific discoveries, but of providing the right conditions for businesses to develop them into marketable products. The links between higher education and businesses are weak. Only about one-third of the patented inventions by European universities or research institutions are commercialized. Successful commercialization in high-tech sectors is linked to innovation “clusters” of networks of universities, start-ups, large companies, and venture capitalists (VCs), which are less developed in Europe.
