Bridging the innovation gap: 5 ways Europe can compete again

Europe stands at a critical crossroads. Once nearly matching US GDP at €16 trillion in 2014, the EU now lags significantly behind, with the gap widening to a stark 50% difference by 2024. This divergence isn't merely a statistical anomaly – it reflects a fundamental shift in global economic power, driven largely by America's dominant tech sector and Europe's stagnation in fostering high-growth innovation. Without decisive action, this gap will only grow.

The "magnificent seven" tech giants – Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia, and Tesla – now command 25% of the S&P 500's market capitalization. Meanwhile, Europe's venture capital funding attracts just one-third of US investment levels, suggesting this competitive gap may continue to expand. Several observers described Davos discussions about Europe with the words "Peak Pessimism", however there were also action-oriented discussions about a way forward. Here are the five worth fighting for.

The proposed EU Inc initiative offers a practical solution to Europe's fragmented market structure. By establishing a standardized pan-European corporate framework – effectively a "28th regime" – this reform would streamline cross-border operations, simplify investment processes and create unified employee stock option programmes. Most importantly, it would digitize incorporation processes in English, removing a significant barrier to international investment.

Andreas Klinger, one of the initiators of the grassroots EU Inc initiative, explains:
"No Slovenian investor will touch a Portuguese entity because of tax and legal implications — it's an administrative headache. Compare this to the US, where a Chicago startup can easily get investors from both the East and West coasts. This won’t happen in Europe. So it's a completely different level of liquidity, with small countries especially locked in."

European governments must leverage their considerable purchasing power. Public procurement, reaching approximately €2 trillion in 2024, represents an untapped resource for innovation. Allocating just 1.5% toward startups would inject €30 billion into the ecosystem – nearly matching current VC investment levels.

The US provides a clear blueprint. SpaceX, for instance, received $278 million in NASA contracts before it had secured even half that amount in private funding. By 2014, NASA had awarded SpaceX an additional $2.6 billion to develop its Crew Dragon spacecraft. As of early 2025, SpaceX has received around $14.4 billion from NASA and $11.9 billion from private investors, underscoring the role of public procurement in catalyzing private-sector growth. Europe can and must replicate this strategy.

Outdated investment regulations severely constrain European VC funding. EU pension funds on average invest a mere 0.02% of their total assets in venture capital, whereas US pension funds allocate 2%. Additionally, these ratios are applied to a much lower base: over 140% of GDP in the US compared with around 30% in the EU. European pension funds mostly follow a defined benefit approach, so they only have $3 trillion in assets under management compared to $12 trillion in the US.

Solvency II, the EU regulatory framework for insurance companies and pension funds, requires these institutions to hold disproportionately high capital reserves against venture capital investments. With capital charges exceeding 39%, many prefer "safer" assets like government bonds. Since pension funds and insurance firms manage vast pools of capital, these restrictions limit the funding available for high-growth startups. The Draghi Report on EU competitiveness suggests revising these regulations to encourage long-term investments in innovation while maintaining financial stability.

Europe's absence from the global educational elite – with no EU institutions among the Times Top 25 Universities – demands attention. Many of the brightest European minds leave for the US, where elite institutions such as Stanford and MIT offer better funding, mentorship and networking opportunities.

One German founder now living in the US described how, in the European system, he was always top of his class and moved through each level of education with the same cohort. This contrasts sharply with the US, where top institutions deliberately pool the best students, professors and resources. To compete globally, Europe should establish a European Institute of Technology, combining top academic talent with successful entrepreneurs and ambitious students from across the continent.

Perhaps most challenging is Europe's deeply ingrained risk aversion. Unlike the US, where entrepreneurial failure is often seen as a learning experience, European business culture stigmatizes failure and views exceptional success with skepticism.

As Robert Falck, founder of Swedish unicorn Einride, points out: "Words shape perception. In the US, it’s called venture capital — signaling exploration and opportunity. In Europe, we call it risk capital — emphasizing caution. We need to shift the narrative and position tech investment as a bet on growth and leadership."

Beyond language, European policies reinforce this caution. Bankruptcy laws are harsher than in the US, where failing founders can quickly start over. Media and public discourse also play a role; success is often scrutinized rather than celebrated. To foster a culture of innovation, policymakers and business leaders must actively highlight entrepreneurship's economic benefits, job creation and ability to solve societal challenges.

These reforms form an integrated approach to revitalizing European innovation. While cultural transformation may take time, policy reforms like EU Inc and procurement modernization can deliver immediate impact. Success demands coordinated action from EU institutions, national governments and business leaders – but the alternative of continued decline makes this effort essential for Europe's future prosperity. Europe cannot afford another decade of debate. It needs to take bold action now.