Europe's AI Innovation Opportunity

In September 2024, Europe received a serious warning, a wake-up call delivered by Mario Draghi’s critical report on »The future of European competitiveness«. According to the report, the EU lacks industrial dynamism, innovation and investment. In addition, its productivity growth is low. Europe might face »slow agony« caused by three fundamental structural challenges: an aging workforce, fierce export competition in increasingly restricted global markets and a lack of competitiveness in advanced technology.

One of the most important challenges mentioned in the report is the innovation gap between Europe and the United States – especially due to slow productivity growth and lagging tech innovation and adoption. In fact, EU economic growth has been persistently slower than in the US over the past two decades. Around 70% of the gap in per capita GDP compared to the US is explained by lower productivity in the EU. »For the last decades, the key driver of the rising productivity gap between the EU and the US has been digital technology – and Europe currently looks set to fall further behind«, says Martin Thelle, Senior Partner at Implement Consulting Group. He and his team took a closer look at Europe's innovation gap and AI’s potential to close it. They found that closely connected to the innovation gap is an R&D investment gap. »What’s interesting is that the primary explanation behind Europe’s R&D gap compared to the US is a discrepancy in private R&D investment«, explains Martin Thelle. Current figures show that public R&D investment levels are similar with 0.7% in the EU against 0.8% of GDP in the US.

Another reason for the innovation gap is that R&D intensity in Europe’s high-tech sectors did not keep pace when US high-tech intensified R&D around 2013. The increase was triggered by new scientific discoveries in deep learning and amplified by R&D-friendly policies and cheap capital following the financial crisis. European businesses failed to sufficiently invest in these new opportunities. For over 20 years, the same companies, mostly from the automotive sector, have dominated EU R&D activity. Researchers call this »the middle technology trap«, meaning that the technology is neither cost-effective nor at the cutting edge, thus failing to yield significant returns.
According to analysts, it will be challenging to reverse this underinvestment in the short term. Nevertheless, many experts and politicians consider AI to be the biggest opportunity when it comes to closing the innovation gap and strengthening Europe’s competitiveness. And according to Ursula von der Leyen, President of the EU Commission, the AI race is far from being over: »We’re only at the beginning«, she said during the Artificial Intelligence Action Summit (2025). »The frontier is constantly moving. Global leadership is still up for grabs.«

Potential to boost GDP by 8%

In plain figures, AI’s potential economic impact is huge – yet its realisation depends on how Europe will approach AI. According to Implement Consulting, a scenario following the current policy environment with widespread adoption and access to the best AI models has the potential to boost GDP in the EU by 8%, equivalent to EUR 1.2-1.4 trillion in 10 years. In this scenario, the development of the AI value chain occurs on market terms.

Limiting AI adoption would mean endangering one of Europe’s current strengths. OECD and EU figures show that a number of smaller European countries display higher labour productivity than that of the US despite not being major developers of foundational digital technologies. And countries like Denmark and Switzerland consistently rank high in digital public services, broadband coverage and ICT usage by businesses. This can largely be attributed to the countries’ effective adoption and integration of digital tools. And it shows that Europe’s opportunity lies not only in creating new technologies but in scaling and integrating them – based on a robust technological and legislative infrastructure and a secure environment.

Infrastructure and innovation play a major role in the Draghi report and the initiatives that followed. The EU Compass and the AI Continent Action Plan stress the need to expand physical infrastructure such as supercomputers – where Europe is quite strong already. According to Implement Consulting, Europe runs 26% of the world’s Top 500 supercomputers and ranks second in quantum computing patents, giving it the power and know-how to join the global AI innovation frontier.

Other fields of infrastructure need to develop quickly to close the infrastructure and innovation gaps. For example, forecasters project European data centre capacity will need to double or triple towards 2030 to meet future demand. To expand capacity, Europe must leverage the best available and most cost-effective solutions. As Marianne Janik, Vice President, EMEA North – Google Cloud explains, Google is highly committed to enabling European innovation through infrastructure investments. She also points out that Google is committed to leveraging digital technologies to support Europe’s decarbonisation goals, which are an important part of the EU Compass.

Besides physical infrastructure, R&D is vital for enabling a thriving AI ecosystem. But in 2023, the EU spent 2.2% of its GDP on R&D, amounting to a total of EUR 386 billion, while the US spent 3.5% (corresponding to EUR 884 billion). Japan’s R&D spending has historically been above or on par with the US as a percentage of GDP, while China has rapidly increased R&D spending and is now at Europe’s level as a percentage of GDP. For Europe to catch up with other world regions, private investments will need to go up, and partnerships between startups, researchers and traditional and high-tech companies such as Google may further help to foster AI innovation.

While infrastructure is the backbone of AI innovation, widespread adoption and adaptation of AI are vital for boosting productivity and unlocking AI’s economic potential. According to the EU Competitiveness Compass, integrating AI into strategic sectors where Europe has traditionally been strong will be critical to maintaining their competitive edge. AI’s actual potential depends on businesses’ ability to adopt and innovate with AI: Implement Consulting estimates that if European companies only manage to assist and automate tasks at a low difficulty level, generative AI could boost GDP by 2% in 10 years. However, if businesses find innovative applications to help with difficult and complex tasks, the potential is estimated to rise to an 11% GDP boost.

In its AI Continent Action Plan, the EU also makes clear that the digital skills gap needs to be overcome if companies want to be able to fully benefit from AI. Many large European companies in critical sectors (e.g. Mercedes-Benz) have successfully adopted and adapted Google AI and used Google infrastructure to innovate their own business or increase productivity. However, 99% of European businesses are small and
medium-sized enterprises (SMEs), providing jobs to over 85 million people. Though AI use among SMEs increased from 7% in 2023 to 13% in 2024, they are still far behind large enterprises – 41% of which use AI. This disparity indicates that SMEs have

different awareness, abilities and needs when adopting AI services. They depend more on ready-to-use technologies and open-source software.Google provides many of these technologies, empowering SMEs to use AI.

In addition, the public sector offers significant untapped opportunities for AI adoption. The smart use of AI may raise efficiency and general productivity in administration and public services (see page 25). And, more importantly, European citizens would benefit from these AI-driven improvements.

Security is one of the core areas for action described in the EU Compass. As the digital age is accelerating the speed of cyberthreats and cyberattacks, entire economic sectors and essential services depend on the resilience of Europe's digital, transport and space infrastructure, energy grids and technological hardware. One recent example of this threat is a 2024 incident in Romania, when over 100 healthcare facilities were hit by a ransomware attack, with some hospitals having to take their systems offline.

The Compass points out that »increasing hybrid threats require a closer alignment between the public and private sector.« Google is convinced that AI can and should be used to enhance cybersecurity and improve cyberdefence. It is providing many products that help advance cyberresilience. Partnerships with research institutions and universities across Europe are important, too. Besides fostering cybersecurity innovation, these partnerships help to attract new talents. They are urgently needed as Europe is facing a lack of cybersecurity experts. That’s why Google supports the efforts of the European Cybersecurity Competence Centre (ECCC) to increase Europe’s cybersecurity capacities and competitiveness.

With regard to economic security, AI can play a major role in strengthening Europe’s competitiveness – as the latest figures presented by Implement Consulting show. Digital sovereignty, too, can be an important means to reduce dependencies and protect critical industries. Together with local partners, Google provides a number of sovereign solutions to provide trust, assurance and choice. At the same time, digital sovereignty shouldn’t be understood as economic isolation – as this would run counter to advancing Europe’s economic competitiveness. According to Implement Consulting, a »made in Europe only« policy for AI might drastically reduce Europe’s AI potential.

Illustrations: Maaike Canne (1), Ryan Melgar (3)