Europe is currently trailing the United States and China in the critical field of artificial intelligence. Philippe Aghion, a French economist and 2025 Nobel laureate in economics, warns that the continent is at risk of repeating the same mistakes it made during the IT revolution. While the US fully embraced the changes brought by personal computers and the internet, Europe was more hesitant, causing a widening economic gap that has left the US with a per capita gross domestic product nearly twice that of the European Union today.
Aghion, who was awarded the Nobel Prize alongside Canadian Peter Howitt and Israeli-American Joel Mokyr for his groundbreaking research on how technological innovation drives long-term economic growth, emphasizes that Europe needs to wake up. The US and, to a lesser extent, China are currently far ahead in AI development. Major firms including OpenAI, Anthropic, Google, Meta, and Microsoft are investing billions into large language models (LLM) such as ChatGPT, Gemini, and Claude, as well as the massive computing power required to sustain them.
China is also advancing with models like DeepSeek. While Europe produces excellent research, it has historically struggled to scale startups and attract the same level of venture capital as the US, with the French firm Mistral serving as a rare exception to this rule.
To bridge this divide, Aghion argues that Europe should focus on applying AI to its traditional strengths, such as the healthcare sector. He notes that Europe possesses fantastic health data, which is significantly better than what is available in the US, providing a foundation for developing specialized AI health applications. Furthermore, he suggests that Europe’s penchant for regulation could be transformed into a competitive advantage. By focusing on data protection and privacy, Europe could meet the growing global demand for ethical, safer AI.
This perspective is shared by industry leaders like Thomas Saueressig, vice chair of the Board of Directors at SAP, Europe's largest software company. Saueressig advocates for using AI beyond the confines of LLMs to put traditional European industries, such as manufacturing, on steroids. He believes that using physical AI to leapfrog existing models is essential, noting that in uncertain times, the biggest risk is failing to take a risk.
However, achieving these goals requires significant structural homework. Aghion insists that Europe must create a better research environment characterized by long-term financing. He also highlights the urgent need for more venture capital and the involvement of pension funds. Marlene Schörner, a researcher on EU financial markets at the Jacques Delors Centre in Berlin, explains that the continent lacks enough specialized investors, such as venture capital firms or angel investors, who are willing to accept the high failure rate of startups in exchange for the potential of successful ones.
A major obstacle to attracting this capital is the lack of harmonized bankruptcy laws across the 27 EU member states, which leaves investors uncertain about their ability to recover funds if a business fails.
To inject life into the startup scene, there is a push to harness Europe’s massive private savings. Luxembourg's Prime Minister, Luc Frieden, noted during the Brussels Economic Forum in May that Europe sits on approximately €12 trillion ($13.6 trillion) in household savings, yet most of this capital flows into real estate and government bonds rather than startup investments. In response, the European Commission has launched the Savings and Investment Union, a rebranding of the Capital Markets Union.
While the goal of integrating European capital markets has existed for a long time, it has seen limited success due to member states' reluctance to relinquish control over their financial markets. There is now hope that shifting geopolitics, concerns regarding the reliability of the US as a partner, and the necessity for European self-reliance will provide enough pressure for EU members to finally set aside their differences.
Aghion also proposes a bold structural change modeled after the US Defense Advanced Research Projects Agency (DARPA), which played a pivotal role in developing technologies like the internet and GPS. He suggests that France and Germany could take the lead in establishing a joint European DARPA, which other countries could then join. As a self-described "fighting optimist" regarding AI, Aghion also offers a stern warning for European politicians.
He stresses that to manage the destructive potential of AI, Europe must prioritize education and the retraining of workers who lose their jobs. Without robust social security and education systems, he warns that AI could create significant frustration and unhappiness, leading to a high risk of long-term populism.
"I believe there will be a demand for a more ethical AI, an AI that avoids some dangers," he said. "People want to be protected. To have some regulations will make us even more attractive."
"Bankruptcy laws are very important for investors. They want to know whether or not they can get their money back if a business fails. But these laws vary a lot between EU member states," Schörner told DW's German-language business podcast "Wirtschaft im Gespräch."
