Duration: 29:18
🌍 A Tale of Two Stories: Repetition and the End of an Era
This keynote presents an economic analysis of Europe's competitive position in the emerging AI-dominated world, drawing parallels to the eurosclerosis period of the 1970s-80s following the oil shocks. The speaker, an economist with historical perspective, frames the discussion around two interrelated narratives: a story of repetition where Europe repeatedly falls behind during technological disruptions, and a story marking the end of an era where the rules-based international order that enabled Europe's post-war success is fundamentally breaking down.
The presentation centers on the Draghi Report, a recent European Commission analysis highlighting Europe's lagging economic performance. While GDP and per-capita measurements show concerning gaps with the United States, equity market valuations reveal even starker contrasts. The core thesis: Europe doesn't like disruption. European social norms and regulatory frameworks excel at incremental technological progress—building superior combustion engines, aircraft, and pharmaceuticals—but struggle when rapid, transformative innovation demands "moving fast and breaking things" in the Silicon Valley model.
Though Odoo in Belgium represents a counter-example of European tech success, the broader pattern holds: Europe consistently lags during disruptive technological transitions, particularly in AI where the continent risks permanent third-place status behind the United States and China.
🔄 Eurosclerosis Then and Now: The Repetition Story
The parallels between contemporary European challenges and the eurosclerosis period 40-45 years ago are striking. Following the 1970s oil shocks, European economies were characterized as too rigid, lacking innovation, and moving too slowly. The diagnosis sounds remarkably familiar to today's assessments found in the Draghi Report.
Europe's recovery from that earlier crisis involved two decisive policy choices: openness to trade (which became an exclusive EU Commission competence) and strict state aid rules preventing wasteful subsidies to failing industries. These choices eliminated widespread industrial policy in favor of market mechanisms and competition. The strategy succeeded—Europe recovered economically and found its place in accelerating globalization through the 1980s-2000s.
However, even during this period of relative success, Europe missed transformative technological waves. The continent never developed significant players in mainframes, personal computers, or the ICT revolution generally. European companies and consumers eventually adopted these technologies, but wealth creation and first-mover advantages accrued to American firms like IBM, Microsoft, and eventually the "Magnificent 7" (Apple, Microsoft, Google/Alphabet, Amazon, Meta, Nvidia, Tesla).
The network economy wave—social media, e-commerce, digital connectivity—created even more durable competitive advantages. Strong network effects mean early movers establish positions extremely difficult to displace. Europe produced no equivalent to the Magnificent 7, while China developed parallel ecosystems (Alibaba, Tencent, ByteDance). Europeans participate as consumers and investors, channeling excess savings into U.S. equity markets, but value creation remains concentrated elsewhere.
🤖 The AI Challenge: Third Place at Best
Artificial intelligence represents the next major technological disruption, and Europe's positioning appears weak. While Belgium performs reasonably within Europe, the continent dramatically lags the United States in investment levels and the presence of major AI players. Mistral AI, France's celebrated AI startup, recently announced a funding round—but the deal size represents a small fraction of typical U.S. AI investment rounds occurring regularly.
The pattern follows Europe's established response to disruption: regulate first, innovate later. The EU AI Act exemplifies this approach—comprehensive regulation of AI systems before widespread deployment or European market leadership. This contrasts sharply with the American model of permissionless innovation followed by regulation addressing demonstrated harms.
Talent flows reveal the structural challenge. Undergraduate students studying AI-related fields come from globally distributed sources including Europe and China. However, at graduate and post-graduate levels, talent overwhelmingly concentrates in the United States. The reason is straightforward: compensation. Reports suggest top AI researchers command packages approaching $200 million in the United States—figures utterly unthinkable in European contexts.
The European instinctive reaction to such compensation levels is taxation and redistribution rather than celebration of innovation and value creation. This reflects fundamentally different social values prioritizing equality and control over winner-take-all dynamics. While neither approach is inherently wrong, they produce dramatically different outcomes for attracting and retaining cutting-edge technical talent in rapidly evolving fields.
🎯 Does Third Place Matter? Assessing AI's Strategic Importance
Whether finishing third in AI constitutes a serious problem depends on whether AI follows the PC commoditization pattern or the network economy winner-take-all pattern. Historical analysis of previous technology waves provides instructive context.
When Europe missed the mainframe and PC revolution, initial disadvantages seemed significant. However, mainframes eventually disappeared and PCs became commodities. While Microsoft Windows created lasting rent-extracting positions through operating system dominance, broadly speaking, European businesses and consumers could adopt these technologies with only modest delays. During rapid ICT sector growth, the United States experienced faster GDP growth, but the advantage wasn't insurmountable or permanent.
The network economy wave proved different. First-mover advantages created by network effects remain entrenched decades later. The Magnificent 7 dominate not through superior products alone but through self-reinforcing network effects where platform value increases with user adoption. China developed parallel ecosystems behind regulatory barriers, but Europe created no equivalent champions. European consumers access these American platforms, and European investors participate in their financial success, but strategic value and control reside elsewhere.
For AI, indications point in both directions, leaving the outcome uncertain. The winner-take-all view is supported by massive capital deployment: projected $3 trillion investment in U.S. AI infrastructure, with the Magnificent 7 and venture capital pouring resources into AI development. Investors placing such enormous bets presumably believe first-mover advantages will create lasting competitive moats generating substantial future profits.
Conversely, the commoditization view draws support from developments like DeepSeek, a Chinese AI system reportedly only six months behind leading U.S. models despite using less efficient chips and smaller model sizes. If competitive AI systems can be developed rapidly with fewer resources, perhaps third-place positioning doesn't doom Europe to permanent disadvantage.
A middle ground suggests AI value will concentrate in B2B applications and bespoke industry solutions rather than general consumer-facing models. Large language models suffer from hallucination problems that may prove inherent rather than solvable. If so, real business value will come from customized AI applications built for specific industries requiring accuracy and reliability. This industry-by-industry implementation game might favor Europe's strengths in manufacturing, automotive, pharmaceuticals, and other sectors.
Additionally, bubble speculation surrounds AI investment. Historical technology cycles feature investment bubbles followed by crashes that reshuffle competitive positions. While bubble dynamics seem evident, predicting outcomes remains speculative.
The most realistic assumption: Europe remains third. The continent needs more favorable regulatory environments and innovation ecosystems, but the battle for AI leadership is likely already lost. The question shifts from winning to managing consequences.
🪨 Stuck Between Rock and Hard Place: The End of an Era
Beyond repeating historical patterns of lagging technological adoption, Europe faces a fundamentally new challenge: simultaneous pressure from both directions. The United States leads in disruptive innovation while China increasingly competes in the traditional manufacturing and incremental innovation domains where Europe previously excelled.
Europe's ambitious climate leadership illustrates this squeeze. European policymakers assumed first-mover advantages in green transition technologies would create new industrial champions dominating global markets. Instead, those technologies—solar panels, batteries, wind turbines—are increasingly produced at scale in China, often more efficiently and cheaply than European alternatives.
Europe's strategic response to the PC/ICT era—becoming the "regulation champion" through the Brussels Effect—imposed European standards globally. Privacy regulations (GDPR), competition policy, and product standards became de facto global norms because companies needed to comply for EU market access and simply adopted those standards worldwide. This represented European strength: shaping global rules even without technological leadership.
However, the Brussels Effect is fading. The rest of the world increasingly refuses to play by European rules. This reflects deeper shifts in the international order. Europe is fundamentally a legal construction—more than member nation-states, the EU embodies principles of rule of law, level playing fields, trade openness, and competition. The European way means defining clear rules then following them consistently.
The world is moving toward a post-rules environment. International relations now emphasize deal-making, transactionalism, and power politics. This shift is epitomized by Trump-era trade policy but extends far beyond any single leader. The U.S.-EU trade deal negotiated under pressure demonstrates Europe had little choice but to accept terms that previous frameworks would have made unthinkable.
Europe finds itself under attack on multiple fronts: the green agenda, "wokish" social policies, and trade openness. The institutional architecture built over 40 years—strict state aid rules, exclusive EU trade competence, and single market principles—faces mounting pressure from both external forces and internal contradictions.
⚙️ The Draghi Report: Creating Urgency Without Confronting Tradeoffs
The Draghi Report succeeds in generating urgency about European competitive challenges. Commissioned by the European Commission and authored by former Italian Prime Minister and ECB President Mario Draghi, the report comprehensively documents how Europe lags economically and technologically. This achievement shouldn't be understated—creating political consensus around problems represents necessary first steps toward solutions.
However, the speaker expresses skepticism about Draghi's proposed solutions, summarized as an "end-end story": deregulate, de-risk, decarbonize, all while spending substantially more money. The criticism isn't that these goals are wrong, but that Draghi avoids hard tradeoffs between competing objectives.
The speaker's core contention: achieving these goals requires revisiting fundamental choices made after Eurosclerosis 1.0, choices now embedded in European institutions and identities. Simply spending more money cannot solve structural tensions between competing policy objectives.
Furthermore, Europe excels at producing plans. The Lisbon Agenda, Junker Plan, Europe 2020, Next Generation EU—ambitious strategic documents appear every 5-10 years proposing to solve European economic challenges. If planning alone sufficed, Europe would lead globally. Yet as one Financial Times columnist wryly noted: "The US did not plan for the Magnificent 7." American tech dominance emerged from entrepreneurial ecosystems, risk capital, and regulatory permissiveness, not strategic plans.
This doesn't mean planning is useless, but it highlights that European weaknesses are structural and cultural, not addressable through better documentation of aspirations.
⚖️ Irreconcilable Tradeoffs: Climate, Trade, and the Single Market
The climate agenda exemplifies tensions between core European commitments. Europe maintains three fundamental principles: trade openness, single market integrity, and climate leadership. Pursuing all three simultaneously grows increasingly difficult.
The United States withdrew from the Paris Agreement, signaling it won't accept competitive disadvantages from climate policies. This creates asymmetry: if European industries face carbon costs that American competitors don't, European firms become uncompetitive. Without protection, those industries collapse.
Europe's responses create their own problems. The Carbon Border Adjustment Mechanism (CBAM) and tariffs on Chinese electric vehicles provide some protection but contradict trade openness principles. Moreover, EV tariffs actively harm climate goals—if the objective is reducing emissions, making cheaper Chinese EVs more expensive slows adoption.
The single market faces renewed threats from state aid. With Brussels lacking budgets for industrial policy, the Commission increasingly allows member states to subsidize national industries. Germany announced massive subsidy packages for domestic industry—precisely the kind of competitive subsidy war that strict state aid rules were designed to prevent during Eurosclerosis 1.0.
Heavy industry demonstrates the impossible position. Energy-intensive sectors face high costs from carbon pricing while competing globally with firms facing no such costs. They demand protection or subsidy. Providing either undermines trade openness or single market principles. Refusing means industrial collapse. Something must give.
🛡️ Strategic Autonomy Contradictions
Strategic autonomy—reducing dependency on geopolitical rivals for critical supplies—creates similar contradictions. The COVID-19 pandemic revealed European dependence on China for antibiotics and pharmaceutical precursors. European policymakers agreed this dependency was unacceptable and committed to reshoring production.
Reality proved stubborn. Europe had two companies producing basic pharmaceutical inputs—one in Denmark, one in Italy. The Danish facility recently closed because it couldn't compete with Chinese production costs. Rhetoric about strategic autonomy cannot override economic fundamentals: if you're not competitive, you lose market position.
Maintaining strategically important but uncompetitive industries requires either sustained subsidies (violating state aid rules) or protectionism (contradicting trade openness). The corner solution adopted after Eurosclerosis 1.0—strict openness to trade plus strict state aid rules—functioned when Europe accepted some foreign dependencies and focused on competitive advantages. That framework breaks down when adding climate ambitions and strategic autonomy objectives.
The speaker argues reopening these debates is essential but acknowledges the political difficulty: "if you open that debate, it's going to be chaos." European institutions and member states have widely divergent views on industrial policy, trade, and sovereignty. Consensus will be extraordinarily difficult. Yet avoiding the conversation means continuing contradictory policies that satisfy no objectives fully.
🌐 Three Intertwined Challenges Facing Europe
The conclusion identifies three main challenges requiring European attention, each interconnected with the others:
Technology Challenge: Europe lags in disruptive innovation, particularly AI. The question isn't whether this is true—it obviously is—but whether current approaches are salvageable. Specifically: should Europe rebalance consumer protection and innovation? European regulation heavily prioritizes consumer protection, data privacy, and precautionary principles. This has costs, namely reduced innovation capacity and slower deployment of new technologies. Making different tradeoffs doesn't mean abandoning consumer protection but recognizing it isn't cost-free.
Institutional Challenge: Pursuing climate ambition and strategic autonomy requires revisiting positions on trade openness and industrial policy. The post-Eurosclerosis framework of radical openness and minimal industrial policy cannot accommodate new policy objectives. This debate will be politically explosive, with profound disagreements about whether to maintain free trade ideals, which industries deserve strategic protection, and how much member states can independently subsidize national champions.
Geopolitical Challenge: The international environment has become far less friendly. Trump, Xi Jinping, and Putin represent a world fundamentally different from the relatively benign post-Cold War order. Europe must learn to operate in a power politics environment rather than assuming rule-based cooperation. The speaker notes Europeans need to "relearn about sometimes being angry"—a capacity atrophied over 40 years of assuming institutional frameworks would constrain geopolitical competition.
💬 Q&A Insights: Navigating an Uncertain Future
The Q&A session reveals additional nuances about navigating these challenges:
Post-Trump prospects: While Trump's extreme transactionalism is unique, the deeper shift toward power politics transcends any individual leader. Trump views all issues—trade, defense, climate—as cards in a unified negotiating game, while Europe remains siloed with trade under Commission competence, defense largely national, and various policy areas requiring unanimity. This structural mismatch creates disadvantages beyond Trump's personal style. The majority of challenges will persist after he leaves office.
European leadership opportunities: Europe might lead a "coalition of the willing" with like-minded partners (Canada, Japan, South Korea) preserving rule-based relationships and potentially collaborating on AI infrastructure and standards. This wouldn't solve fundamental problems but could preserve spaces where European values operate. Simultaneously, Europe must learn engaging with China and a changed United States realistically rather than naively, recognizing geopolitical alignments (Putin-Xi partnership) that threaten European interests.
China's AI position: China aggressively pursues AI leadership with state-directed policy and capital deployment. Whether they'll match U.S. capabilities depends partly on whether reliance on non-Nvidia chips proves disadvantageous. Europe cannot emulate China's state-directed model—the EU controls roughly 1% of European GDP, mostly committed to agricultural and regional policies, leaving minimal discretionary spending for strategic initiatives. When European experts say "we should do X" about AI, it's unclear who "we" refers to, given Europe's distributed authority structure.
Monetary policy implications: Federal Reserve decisions matter less than whether the Fed maintains institutional independence focused on inflation control. If future administrations compromise Fed independence, resulting inflation volatility would create particular challenges for Europe through market turbulence, especially in sovereign debt markets.
🧠 Viewpoint: European Integration Perspective
⚠️ Disclaimer: AI-generated creative perspective inspired by European values.
What this analysis ultimately reveals is that European integration was optimized for a specific world—one characterized by American security guarantees, open global trade, technological catch-up rather than leadership, and general acceptance of multilateral rules. That world is disappearing, but European institutions change glacially. The genius of post-war European construction was creating binding legal frameworks that prevented nationalist reversion and conflict. We turned political questions into legal-technical ones, deliberately. Sovereignty was pooled precisely to escape the power politics that destroyed the continent twice in the 20th century. Now we're told that world demands power politics again, but our entire institutional architecture militates against it. We have 27 member states with different threat perceptions, economic models, and geopolitical relationships. Unanimous agreement on industrial policy or trade protection is fantasy. Yet the critique is correct: our framework doesn't work for climate ambition plus strategic autonomy plus technological competition. Perhaps the real question isn't whether Europe can compete with American AI or Chinese manufacturing—it's whether European civilization itself, built on rule of law and negotiated compromises, can survive in a world that no longer values those principles.
🏢 Viewpoint: Global Economic Perspective
⚠️ Disclaimer: AI-generated fictional commentary representing economic analysis.
The European dilemma represents a case study in institutional path dependency. After Eurosclerosis 1.0, Europe made trade openness and competition policy the core of its economic model because these choices were compatible with political constraints—member states would accept rules-based competition but not centralized industrial policy that picked winners. This model worked brilliantly in an era of technology diffusion and globalization. But now Europe faces the impossible: climate leadership requires industrial policy and trade protection; strategic autonomy requires the same; technological competition requires regulatory tolerance of disruption and concentrated wealth creation. Each contradicts the institutional settlement. The economic logic points toward hard choices: which objectives matter most? But European decision-making requires broad consensus, making hard choices nearly impossible. The most likely outcome is muddling through—partially pursuing all objectives, fully achieving none, gradually losing competitiveness while political elites produce plan after plan. The comparison to U.S. tech success is instructive: America didn't plan for dominance, but had institutional foundations (risk capital, labor mobility, bankruptcy law, equity compensation, research universities) that enabled it. Europe could theoretically create those foundations, but doing so would require transforming national innovation systems, tax policy, labor markets, and cultural attitudes toward failure and inequality. That transformation faces insurmountable political obstacles. Third place in AI may be inevitable not because Europeans are less capable, but because institutional constraints preclude the policies and ecosystem conditions that enable technological leadership.
Disclaimer: This article contains AI-generated summaries and fictionalized commentaries for illustrative purposes. Viewpoints labeled as "European Integration Perspective" or "Global Economic Perspective" are simulated and do not represent any real statements or positions. All product names and trademarks belong to their respective owners.