Europe is losing the global technology war
Europe is having a difficult time in many areas due to mass immigration, regulation, a questionable energy policy, and overbearing bureaucracy. The era of unbridled globalization, characterized by a relaxed attitude towards dependencies on other countries’ resources, productive capacities, and technological competencies, has ended. Recent global disruptions, from critical product shortages during the COVID-19 pandemic to energy price surges, and the intensifying geopolitical and geoeconomic rivalry between China and the United States, have forced the European Union to reassess its traditionally liberal approach to trade, investment, and technology.
A surge in protectionist policies, coupled with the influence of Silicon Valley’s surveillance capitalism and the increasing willingness to weaponize economic dependencies, now threatens the EU’s autonomy and sovereignty. This is particularly critical in areas vital for its future prosperity and stability, such as the green and digital transitions, and healthcare. The erosion of domestic productive and technological competencies due to outsourcing and offshoring, leading to the expansion of efficient but fragile, highly concentrated, and often China-centric global value chains, is now recognized as a primary concern demanding industrial policies previously considered undesirable. This is a need in Europe to find a more independent path, away from the U.S. and China.
Consequently, economic and, specifically, technological dependencies have become a significant threat to both the EU’s economy and its autonomous policymaking. As the Draghi-Report aptly acknowledges, “If the EU does not act, we risk being vulnerable to coercion.” Countries with strong technological foundations benefit from path dependencies, positive dynamic scale effects arising from accumulated knowledge, and crucial network effects, particularly in digital technologies. Thus, technology-gap models of economic development suggest that a lack of competencies in key technologies can precipitate a vicious circle of relative decline and divergence.
Given that mastery and availability of technologies are essential for a successful twin transition and sustained productivity growth, technological dependencies are viewed as a significant source of structural vulnerability for the EU’s socioeconomic development. Domestic firms should be capable of providing substitutes and surge capacity for key technologies in the event of supply chain disruptions or geopolitical tensions. While this may incur short-term static inefficiencies and costs, it is essential to retain the ability to act in accordance with European values in a world marked by geopolitical conflict and assertive national self-interest.
Standard indicators used to analyze technological capabilities include research and development (R&D) activities, patents, scientific publications, and trade and production of technology-intensive products. Measured in constant US dollars at purchasing power parity, the U.S. and China spent 63% and 55% more on R&D than the EU, respectively. Furthermore, R&D investments in the EU are growing more slowly than in China and the U.S., resulting in China outspending the EU on R&D since 2015.
As firms are central to innovation systems and global value chains, focusing on the role of EU companies is particularly important. Notably, the EU’s R&D shortfall compared to China and the U.S. primarily stems from inferior R&D performance by the EU’s business sector and the EU bureaucracy. The divergence between EU companies on one side, and U.S. and Chinese companies on the other, can largely be explained by structural change: while dominant R&D-intensive EU firms continue to operate in broadly the same economic sectors, Chinese firms rapidly shifted from more traditional sectors in 2005 to new technology related activities in 2023, which exhibit much higher R&D intensities than more traditional, medium-tech sectors like automotive or industrials. Notably, the EU lacks a comparative advantage in any of the key digital technologies. China, conversely, commands a comparative advantage in all key digital technologies.
An example of a European failure is the Gaia-X project, announced in 2020 by the European Commission as part of the European Data Strategy. The aim was to create a federated European cloud infrastructure to ensure that “Europe remains in control of its digital future“. Indeed, the market for cloud infrastructure is dominated by Amazon (AWS), Microsoft (Azure), and Google (Google Cloud), with China’s Alibaba Cloud ranking fourth. Yet, due to a lack of funding, no clearly defined mission goal, and dominance by U.S. tech giants, this ambitious objective has, at least for now, failed.
IT-related technologies are certainly one field where the EU is at a disadvantage and technologically dependent on U.S. and Asian firms. In this context, cloud computing, AI, semiconductors, cybersecurity, 5G technology, and quantum technologies are among the most frequently cited examples. Green technologies for the energy transition represent another critical area where the EU suffers from a lack of technological innovation. In particular, the EU lacks technological and production capabilities in batteries and photovoltaic cells.
Europe has been dependent on globalization and taking advantage of other nations for cheap energy and technology. As the world is becoming more partisan and bloc-oriented, the lack of independence will have a price. It will take time before Europe can catch up with the U.S. and China, if ever. The EU serves as a road-bloc and prevents innovation, and the end-users are having to pay more and more.