If one were to receive a warning about a trajectory leading toward "slow agony," immediate attention would likely follow. This is the cautionary message many have overlooked in the aftermath of the Draghi report.
Officially titled The Future of European Competitiveness, the document, authored by former European Central Bank President Mario Draghi in September 2024, presents a sobering outlook. Draghi, who has also held the position of Italy’s prime minister, asserts that without significant reform, the European Union is poised for economic and geopolitical deterioration.
The gravity of these warnings may not be surprising to European business leaders, who have been navigating a landscape characterized by stringent regulations, economic instability, and the evolving demands of the AI sector for some time.
Competitiveness Crunch
In his report, Draghi identifies several factors contributing to Europe's diminishing competitiveness. While it primarily addresses the European Union, many challenges parallel those faced by non-member nations, including the U.K. A prominent concern is Europe’s escalating innovation gap. As the United States and China advance in high-tech fields such as artificial intelligence and quantum computing, numerous startups across Europe opt for relocation, discouraged by insufficient funding. Research from Amazon Web Services (AWS) indicates that up to 40% of European startups may consider moving outside Europe to enhance their growth potential.
However, the narrative is not merely one of decline. “We see European AI adoption reaching a tipping point,” asserts Tanuja Randery, vice president and managing director of AWS EMEA. “We’ve reached a milestone with over half of European businesses using AI.” The central issue, according to her, lies in the application of AI rather than its adoption: “Some companies are deeply innovating, integrating advanced AI into their processes—while others are merely exploring the surface.” She adds that advancements in deeper adoption have remained stagnant.
Another significant obstacle for the AI industry in Europe is the exorbitant cost of energy, where electricity prices can reach two to three times those in the U.S., and natural gas can be as much as five times more expensive. Compounding the issue is Europe’s fragmented energy infrastructure, comprised of numerous providers across individual countries, complicating efficient distribution of renewable energies.
The topic of regulation generates considerable debate. Draghi contends that EU regulatory frameworks hinder growth and advocates for a simplification of the General Data Protection Regulation (GDPR) and the EU AI Act. He calls for reduced reporting requirements for businesses and a transition towards more innovation-friendly regulations.
Regulation Meets Reality
This sentiment resonates with many leaders in the European business landscape, including Erik Ekudden, chief technology officer at telecommunications giant Ericsson.
“The EU set ambitious goals regarding consumer protection, yet some of these regulatory frameworks are counterproductive,” Ekudden remarks. “Innovation must take precedence over regulation; we cannot impose regulatory frameworks before innovations even emerge.” This pervasive and stringent regulatory environment directly affects business operations, with AWS research revealing that 42% of IT budgets are allocated to compliance alone.
For Ekudden and his team at Ericsson, the challenge is not solely about over-regulation; it also pertains to the lack of market consolidation across Europe. The proliferation of regional telecom operators could be a key impediment to global competitiveness.
“In the U.S., the market is dominated by three principal operators,” Narvinger elaborates, Ericsson’s executive vice president of the business area of networks. “In India, there are two leading players and a couple more. China similarly features three prominent operators. In Europe—I struggle to keep count.” He argues that, akin to mobile networks, AI requires economies of scale. To develop efficient algorithms, substantial data is necessary, and in a fragmented market like Europe, “it becomes both complicated and expensive for smaller operators to compete with larger counterparts from other regions.”
Chief economist at KPMG U.K., Yael Selfin, believes this situation reflects a deeper philosophical divergence beyond policy errors. “Europe emphasizes stability, protection, and quality of life, while the U.S. prioritizes profit growth,” she explains. “These differing values contribute to the existing disparities.”
What Enables Growth?
Not all stakeholders perceive regulation as a hindrance. Shail Deep, chief operating officer for EMEA and APAC at global financial data and technology company Experian, argues that regulation can foster innovation.
“The initial reaction to regulation is often, ‘How will we innovate under these new constraints?’” she explains. “However, if we consider regulation from the outset, we can innovate more swiftly… We won’t need to backtrack because unaddressed risks have surfaced during a project."
Deep contends that legislative measures like the EU AI Act provide essential clarity for companies in high-risk sectors where consumer trust is crucial. “It instills confidence in our clients regarding AI utilization,” she notes. “Greater transparency regarding our solutions is indeed beneficial.” This clarity also has tangible business implications. “When clients have faith in our service, they are more inclined to adopt our solutions.”
She cites additional examples from the financial sector where European regulations have facilitated safer, more transparent innovation, such as in open banking and buy-now, pay-later systems.
Share this story