The European economy is facing a profound structural crisis, steadily falling behind global competitors as it struggles to adapt to a fast-evolving technological landscape. At the turn of the century, European Union labor productivity was on a steady upward trajectory, reaching almost 95 percent of United States levels. Since then, however, that positive trend has sharply reversed. Today, EU productivity sits at an alarming 20 percent lower than that of the United States.
A primary driver behind this widening economic chasm is Europe’s historic failure to meaningfully participate in the digital revolution. Of the world’s 100 most valuable high-tech companies, only two are headquartered within the European Union. The bloc boasts virtually no global-scale market leaders in critical modern sectors such as cloud computing, online advertising, mobile devices, or advanced semiconductor chip design. Furthermore, Europe has only a single remaining competitor—France’s Mistral—still in the race to build the massive large language models that power the current artificial intelligence surge.
This stark reality prompted a shift in political attitudes following the 2024 publication of a landmark report on European competitiveness authored by former Italian Prime Minister Mario Draghi. The comprehensive report recommended a series of crucial policy interventions, chief among them increased public investment in research and development alongside the long-delayed creation of a unified European capital market. By mid-2026, approximately 30 percent of the report’s recommendations had been successfully implemented, marking a constructive beginning.
However, experts note that even if the Draghi report’s proposals were fully and perfectly adopted, they would still not be enough to fully revive Europe’s flagging competitiveness. The reason is simple: they do not address the root cause of the malaise. The fundamental problem is not that the European Union and its national governments are failing to do enough to artificially spur competitiveness through state intervention. Rather, the core issue is that they are doing far too much to actively impede it.
Through the slow, cumulative accretion of layers of complex labor and tax policies, heavy bureaucratic red tape, and stringent technology regulations, European authorities have inadvertently erected formidable barriers against the creation of the kind of large, vibrant startup ecosystem currently thriving in the United States. This American ecosystem has long served as the cradle for many of the world’s most innovative high-tech enterprises, as well as the spark for innovation and growth across entirely traditional sectors. If the European Union fails to foster the necessary conditions for such high-growth companies to naturally develop, the bloc’s current economic decline may well become irreversible.
DRIVE ON
Large legacy companies are inherently difficult to change, and global, long-standing, historically successful enterprises are perhaps the hardest to transform of all. Europe is home to many such established giants. On average, the 50 most valuable companies in the European Union trace their origins back more than 150 years. When these venerable corporations are suddenly confronted with fast, broad, and deep technological change, they routinely struggle to respond effectively. The divergent trajectories of the European and U.S. automotive and aerospace industries—sectors that have historically driven broad economic growth and industrial innovation—vividly reveal the vital importance of fostering a healthy, dynamic startup ecosystem.
During the first quarter of the twenty-first century, major global carmakers have experienced two immense structural transformations. First, driven by a combination of tightening environmental regulations and shifting consumer demand, they have been forced to begin the arduous transition from manufacturing traditional internal combustion engine vehicles to producing electric vehicles. Second, rapid breakthroughs in digitization and automation have necessitated profound changes in their overall vehicle offerings and software architectures.
Europe’s traditional carmakers have floundered remarkably in the face of these combined challenges. Volkswagen has arguably tried harder than any of its regional peers. The German automotive giant committed to an entirely new electric vehicle platform as early as 2015, announced ambitious electrification goals across all brands within the VW Group, and established Cariad as a dedicated new software subsidiary.
Since making those commitments, Volkswagen has sold approximately two million electric vehicles. Yet it remains exceedingly difficult to label the carmaker’s overall electrification effort a success. Cariad was forced through multiple leadership and structural reorganizations, software updates consistently arrived late, and several high-ranking executives, including the chief executive officer, abruptly departed the company. Other prestigious brands under the broader VW Group umbrella, including Porsche, Audi, and Bentley, announced severe, major delays to their planned electric vehicle models and underlying platforms. Porsche alone absorbed approximately $5 billion in corporate write-downs directly associated with its stumbling electrification efforts.
Meanwhile, in China, which remains Volkswagen’s largest single overseas market, local car buyers have rapidly shifted toward electric vehicles—just not European ones. Consequently, profits generated from Volkswagen’s critical Chinese operations plummeted by a staggering 80 percent in the decade leading up to 2026. The market capitalization of the entire VW Group followed a similarly dire trajectory, dropping by more than 60 percent in real terms between the end of 2015 and the second quarter of 2026. By mid-2026, the VW Group as a whole found itself in deep financial trouble, with the Financial Times reporting that CEO Oliver Blume had proposed the unprecedented shuttering of four manufacturing plants in Germany and the potential layoff of as many as 100,000 workers.
Europe’s other large legacy automakers have fared little better against the shifting global tides. Mercedes-Benz has seen its market capitalization decline by more than half since the end of 2015, while BMW’s valuation has dropped by nearly 60 percent. Stellantis absorbed more than $20 billion in electric-vehicle-associated write-downs in 2026 alone, watching its market capitalization sink by 76 percent since it first floated shares in the first quarter of 2021.
The European automotive industry is the direct source of approximately ten percent of total EU manufacturing employment, accounting for well over three million jobs according to figures from the European Automobile Manufacturers’ Association. That vital employment figure seems poised to fall further unless there is a dramatic increase in foreign-owned production within the bloc or a massive, unforeseen reversal in fortunes among legacy European automakers. Current market valuations suggest that investors harbor little expectation of such a turnaround.
A parallel narrative of decline has unfolded in the aerospace sector. Like car manufacturing, space exploration and commercialization have been radically transformed in recent years. And like European carmakers, the continent’s legacy space companies have repeatedly stumbled. The Ariane 6 rocket, developed by Europe’s ArianeGroup, was originally scheduled to begin commercial operations in 2020 but did not successfully launch until 2024. Its estimated development cost ballooned from about $2.7 billion in 2015 to roughly $4.2 billion by 2022, while its ongoing operations are heavily propped up by annual government subsidies of up to $370 million committed collectively by the French, German, and Italian governments. Similarly, the European Union’s sovereign IRIS² satellite network has faced persistent delays; originally scheduled to enter public service in 2024, its first operational launches are now pushed back to 2029.
This identical pattern holds true across several other foundational industries, where the European Union’s legacy companies have steadily lost competitiveness and surrendered significant market share to foreign rivals. A quarter century ago, European companies accounted for 36 percent of the total market capitalization of the world’s 100 most valuable companies. By the end of 2025, that figure had plummeted to below ten percent. In a sobering 2026 speech, Mario Draghi underscored the grave consequences awaiting the continent if these entrenched trends are left unchecked, warning that Europe risks becoming subordinated, divided, and deindustrialized all at once—and that a Europe incapable of defending its economic interests will ultimately fail to preserve its foundational values.
WAY OUT WEST
The United States has consistently outcompeted the European Union in recent decades, largely because legacy American corporations have generally adapted more effectively to the pressures of digitization, globalization, and twenty-first-century economic disruptions. However, much like their European counterparts, American legacy firms operating in the automotive and aerospace sectors have also encountered major missteps. Neither General Motors nor Ford has managed to produce a runaway hit electric vehicle, and both domestic giants have dramatically scaled back their ambitious production targets. Over recent years, General Motors has recorded write-downs of at least $8 billion related to electric vehicles, while Ford has faced nearly $20 billion in similar financial adjustments.
In the aerospace arena, the United Launch Alliance—a major corporate partnership between Lockheed Martin Space and Boeing—has suffered a series of compounding technical setbacks, leaving its Vulcan rocket program years behind schedule. Meanwhile, a 2024 crewed flight intended to certify Boeing’s Starliner spacecraft for regular missions to the International Space Station encountered such severe operational anomalies that NASA ultimately refused to permit the capsule to return to Earth with its astronauts aboard.
Despite these high-profile struggles among established firms, the United States still launches far more rockets and places vastly more payload weight into orbit than the rest of the world combined, while holding a near-monopoly outside China in advanced satellite-based internet connectivity. The United States also produces the only fully driverless autonomous passenger cars operating commercially on public roads in the West and manufactures the top-selling electric vehicle models both domestically and across Europe. Crucially, these remarkable accomplishments are not the work of legacy industrial firms, but rather the direct product of the country’s dynamic, venture-backed startup ecosystem.
Silicon Valley remains the global shorthand for this unique economic engine. Originally, the region’s entrepreneurs and venture capitalists focused heavily on computer hardware, software, and networking infrastructure. In recent years, however, Silicon Valley’s ambitions have expanded dramatically, bringing rapid innovation to entirely new sectors. A prime example is Tesla, which since its founding in 2003 has designed, produced, and sold over ten million electric vehicles, built a massive proprietary charging network comprising roughly 40,000 individual stalls in the United States and 20,000 in Europe, and generated $45 billion in cumulative profit since 2020. The company currently operates commercial robotic taxi fleets in six U.S. cities and has begun active public testing of the Cybercab in Texas—a specialized autonomous vehicle designed for two passengers featuring neither a steering wheel nor foot pedals.
More recent startup companies have similarly transformed traditional industries. Defense tech startup Anduril, founded in 2017, managed to beat out established aerospace heavyweights such as Boeing, Lockheed Martin, and Northrop Grumman in early 2024 to secure selection as one of the primary suppliers for the U.S. Air Force’s Collaborative Combat Aircraft program. By 2026, Anduril’s advanced autonomous aircraft successfully transitioned past the prototype phase, winning a lucrative military contract to provide uncrewed drone wingmen.
A remarkably similar success story is visible across the commercial space sector. SpaceX, founded in 2002, made history by becoming the first private entity to successfully relaunch an orbital-class rocket booster 15 years later, a feat it has now repeated more than 600 times. By contrast, Jeff Bezos’s Blue Origin has successfully relaunched an orbital booster only once, while the rest of the global aerospace industry combined has yet to achieve the milestone even once.
SpaceX also maintains an unchallenged, dominant position in the global market for high-speed space-based internet connectivity. Its Starlink service currently boasts approximately 11,000 active satellites in orbit, serving roughly 12 million paying customers spread across about 160 countries and territories. Furthermore, when Boeing’s Starliner crewed mission encountered critical failures in orbit, it was a SpaceX Crew Dragon spacecraft that was dispatched to safely bring the stranded astronauts back to Earth.
These American disruptors have unquestionably benefited from various combinations of government-funded research, targeted subsidies, federal procurement contracts, and government-backed loans. Many have also profited from the willingness of domestic regulators to permit active experimentation in high-risk domains, such as testing autonomous driving systems directly on public roads. None of these foundational ingredients are inherently unique to the United States or to Silicon Valley. Yet, as financial historian Sebastian Mallaby aptly observes, Silicon Valley remains "the most durably productive crucible of applied science anywhere, ever."
COPY WHAT WORKS
It has become essential for Europe to develop its own productive entrepreneurial crucible. Recent high market valuations for a handful of continental startups have occasionally sparked misplaced optimism that the region’s broader entrepreneurial ecosystem has successfully turned a corner. However, the underlying economic fundamentals remain decidedly poor, and Europe has suffered through several similar false dawns in the past.
Indeed, throughout 2023 and 2024, overall European venture capital investment jumped to more than 20 percent of total U.S. levels. By 2025, however, that encouraging figure plummeted back down to approximately 12 percent, precisely mirroring its stubborn long-term average since 2010. For the past dozen years, the total combined valuation of European unicorns—private, high-growth startup companies valued at $1 billion or more—has hovered stubbornly around ten percent of the U.S. total. Throughout 2025 and into 2026, that dismal metric dropped further to roughly eight percent.
Reversing these figures and building a robust European startup ecosystem capable of supplying the new engines of economic growth that the continent desperately needs will not be easy. Yet, closely imitating the successful U.S. model would provide a highly constructive starting point.
The deep, historical experience of Silicon Valley strongly indicates that high-powered employee compensation incentives—such as stock options that are not taxed until they are actually exercised—alongside flexible labor markets, pass-through partnership legal structures favored by U.S. venture capital firms, and minimal bureaucratic paperwork are all indispensable elements of a vibrant technology ecosystem. Crucially, all of these policy areas remain entirely under the direct control of individual EU member states, meaning they do not inherently require cumbersome legislative coordination across national governments.
Several European countries have already implemented fragments of these proven measures. Denmark, for instance, maintains a notably flexible labor market, while Luxembourg has successfully enabled U.S.-style limited partnerships. Yet, not a single European nation currently offers a comprehensive bundle of tax and labor policies as genuinely friendly to entrepreneurs and startup investors as that found in the United States.
Europe could similarly draw valuable lessons from nations much smaller than the United States. Israel famously emerged as a thriving "startup nation" after implementing sweeping structural reforms, including opening up pass-through partnerships to attract foreign investors. The resulting economic performance has been striking. Despite possessing a total population smaller than that of Belgium and speaking a primary language shared by no other country, Israel currently boasts nearly four times as much unicorn valuation per capita as France, and more than three times as much as Germany. Israel’s remarkable success directly challenges the common argument—frequently advanced by Bo Becker and fellow researchers at the Center for Policy Research—that an insufficient domestic home market size represents an insurmountable impediment to scaling up young European companies.
NO MORE RED TAPE
Brussels must urgently reevaluate its overarching approach to technology regulation. At times, EU officials appear to genuinely believe that regulatory frameworks impose few, if any, meaningful constraints on genuine innovators and entrepreneurs. On occasion, regulatory bodies even speak as though heavier government intervention might somehow actively unleash innovation and entrepreneurship.
This attitude was starkly embodied in 2023 by Margrethe Vestager, then the executive vice president of the European Commission, who publicly maintained that the European Union’s sweeping Artificial Intelligence Act would "not harm innovation and research, but actually enhance it." The AI Act was officially adopted in 2024, piling on top of the Digital Services Act and the Digital Markets Act passed in 2022, as well as the landmark General Data Protection Regulation introduced back in 2016. As mounting empirical evidence accumulates regarding the actual economic effects of these sweeping regulations, it has become increasingly difficult to sustain any credible belief in a harmonious relationship between industrial competitiveness and European bureaucratic red tape.
The General Data Protection Regulation, for instance, has measurably decreased overall venture capital investment flowing into the European Union, increased the market dominance of already powerful U.S. technology monopolies, damaged the financial results of companies targeting the European market, and frequently inconvenienced everyday consumers. One comprehensive academic study conducted by researchers Rebecca Janssen, Reinhold Kesler, Michael E. Kummer, and Joel Waldfogel revealed that the GDPR led to the sudden disappearance of roughly one-third of all mobile applications available on the Google Play Store, alongside a permanent 50 percent reduction in the rate at which new applications were added over time. The regulation achieved these restrictive outcomes by imposing substantial compliance costs and strictly limiting the ability of companies to collect efficiency-enhancing user data.
Despite these cautionary lessons, Brussels has shown little appetite for fundamentally changing its approach to technology regulation. While the European Parliament introduced minor administrative simplifications to the Artificial Intelligence Act, it stubbornly insisted that the regulation’s core provisions and rigid risk-based approach must remain fully intact. Furthermore, while a 2026 official report concerning the improvement of EU startup financing formally acknowledged industry stakeholders’ vocal complaints regarding the exorbitant costs of regulatory compliance, the report neither made nor endorsed those valid arguments.
Yet those critical arguments carry immense weight. Many of the AI Act’s extensive requirements—including strict mandates related to risk management, data governance, technical documentation, operational logging, algorithmic transparency, continuous human oversight, accuracy, and technical robustness—apply universally prior to initial market entry. Complying with these complex rules represents a profoundly costly and time-consuming burden for any established firm, let alone an agile startup operating on limited runway. Rational investors and ambitious entrepreneurs naturally take these heavy administrative costs into account, and many ultimately choose to take their innovative business ventures—and themselves—elsewhere.
The European Union cannot successfully close its widening competitiveness gap without implementing much deeper and fundamentally different reforms than those currently under consideration. Brussels must decisively reverse course and rethink its onerous technology regulations. Simultaneously, national governments across the bloc must embrace established global best practices to create genuinely attractive environments for top innovators, entrepreneurs, and venture capital investors.
It is undeniably true that Europe possesses great underlying strengths. It remains a populous, prosperous region anchored by strong democratic institutions, excellent educational systems, and an abundance of talented builders. Yet it is equally true that, under the current status quo, entrepreneurs face a suffocating wall of regulatory barriers that severely impede their ability to scale businesses, attract world-class risk capital, and make a decisive impact on the global stage.
Unless those institutional barriers are systematically dismantled, the European Union will inevitably fall farther behind. Brussels does not possess the luxury of time. European industries are set to face increasingly stringent global economic challenges in the coming years, and near-term policy choices will ultimately determine whether the new growth engines that rise to meet this challenge are European. As things currently stand, they will not be.
