The European economy is facing an unprecedented structural crisis, steadily falling behind global competitors as it struggles to participate in the modern digital revolution. At the turn of the century, European Union labor productivity was on a steady, encouraging upward trajectory, reaching almost 95 percent of United States levels. Then, a profound trend reversal occurred. Today, EU productivity sits 20 percent lower than that of the United States, driven largely by the bloc’s failure to capture a meaningful share of the digital economy.
The stark reality of this lag is visible across the global high-tech landscape. Of the world’s 100 most valuable high-tech companies, only two are headquartered within the European Union. The bloc boasts no global-scale enterprises in critical modern sectors such as cloud computing, online advertising, mobile devices, or advanced chip design. In the race to build the large language models powering the current artificial intelligence surge, Europe has only one major competitor remaining: France’s Mistral.
The publication in 2024 of a landmark report on European competitiveness by former Italian Prime Minister Mario Draghi heralded a much-needed shift in political and economic attitudes. The report recommended several vital policy interventions, including significantly increased public investment in research and development alongside the creation of a unified capital markets union. By mid-2026, roughly 30 percent of those recommendations had been implemented—a commendable start. However, financial analysts and policy experts note that even if the report’s proposals were fully adopted, they would not be enough on their own to revive Europe’s flagging competitiveness because they fail to address the underlying root cause.
The fundamental problem is not that the EU and its national governments are failing to take action to spur economic competitiveness. Rather, it is that they are doing far too much to impede it. Through the slow, compounding accretion of complex layers of 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 dynamic American ecosystem has long served as the cradle for major innovative high-tech companies, while simultaneously sparking innovation and growth across traditional sectors. If the European Union fails to purposefully create the economic and regulatory conditions for such high-growth companies to develop and scale, the bloc’s economic decline may soon become irreversible.
Drive On
Large, established corporations are inherently difficult to transform. Global, long-standing, and historically successful enterprises can be the hardest of all to pivot in a new direction, and Europe is home to many such legacy firms. On average, the 50 most valuable companies in the European Union trace their origins back more than 150 years. When these entrenched giants are confronted by fast, broad, and deep technological shifts, 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—reveal the critical importance of fostering a healthy, unhindered startup ecosystem.
Throughout the first quarter of the twenty-first century, traditional automakers have experienced two immense, disruptive changes. First, driven by a combination of stringent environmental regulations and shifting consumer demand, manufacturers have had to begin the massive transition from producing internal combustion engine vehicles to manufacturing electric vehicles. Second, profound breakthroughs in digitization and automation have necessitated further fundamental changes in their vehicle offerings and software capabilities.
Europe’s legacy carmakers have notably floundered in the face of these dual transformations. Volkswagen, as an incumbent, likely tried harder than most. The company committed to an entirely new electric vehicle platform back in 2015, announced highly ambitious electrification goals across all brands within the VW Group, and created Cariad, a specialized new software subsidiary. Since then, Volkswagen has sold approximately two million electric vehicles. Yet, it remains difficult to label the carmaker’s overall electrification effort a success. Cariad was reorganized multiple times amid internal turmoil, crucial software updates consistently arrived late, and several top executives, including the chief executive officer, eventually left the company. Other prestigious brands within the VW Group, including Porsche, Audi, and Bentley, announced major delays to their upcoming electric vehicle models and underlying platforms. Porsche subsequently absorbed approximately $5 billion in financial write-downs directly associated with its difficult electrification efforts.
In China, which remains Volkswagen’s largest overseas market, car buyers have rapidly shifted toward electric vehicles—but they are overwhelmingly bypassing European models. Consequently, profits from Volkswagen’s Chinese operations plummeted by 80 percent in the decade leading up to 2026. The market capitalization of the entire Volkswagen 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 was in deep financial trouble, with the Financial Times reporting that CEO Oliver Blume had proposed shuttering four major manufacturing factories in Germany and laying off as many as 100,000 workers.
Europe’s other large automakers have not fared much better under the pressure. 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, according to independent financial analyses. Stellantis absorbed more than $20 billion in electric vehicle-associated write-downs in 2026 alone, watching its market capitalization decline by 76 percent since it first floated shares in the first quarter of 2021.
The automotive industry accounts for approximately ten percent of all EU manufacturing employment, translating to more than three million direct jobs, according data from the European Automobile Manufacturers’ Association. That vital employment figure appears likely to fall further in the coming years unless there is a substantial increase in foreign-owned production or a dramatic, unforeseen reversal in fortunes among legacy European automakers. Current market valuations strongly indicate that modern investors do not anticipate such a turnaround.
Mirroring the automotive sector, space exploration and commercialization have been fundamentally transformed in recent years. And, much like their automotive counterparts, European aerospace companies have consistently stumbled. The Ariane 6 rocket, developed by Europe’s ArianeGroup, was originally scheduled to begin operational service in 2020 but did not launch until 2024. Its estimated development cost ballooned from about $2.7 billion in 2015 to approximately $4.2 billion by 2022. Today, its ongoing operations are propped up by annual state subsidies of up to roughly $370 million jointly committed by the French, German, and Italian governments. Similarly, the EU’s sovereign IRIS² satellite network has faced repeated delays; originally scheduled to enter service in 2024, its first launches are now pushed back to 2029.
This frustrating pattern holds true across several other foundational industries, with the European Union’s legacy companies steadily losing ground to international competitors. A quarter-century ago, European companies accounted for 36 percent of the total market capitalization among the world’s 100 most valuable companies. By the end of 2025, that figure had collapsed to below ten percent. In a sobering 2026 speech, Mario Draghi underscored the grave consequences if these persistent trends are not reversed, warning of a future where Europe risks becoming subordinated, divided, and deindustrialized all at once—and cautioning that a Europe unable to defend its economic interests will not preserve its core values for long.
Way Out West
The United States has successfully outcompeted the European Union in recent decades, in part because legacy American companies have managed digitization, globalization, and other twenty-first-century disruptions somewhat better. However, similar to their European counterparts, American incumbent firms in the automotive and space sectors have also suffered significant missteps. Neither General Motors nor Ford has produced any runaway hit electric vehicles, and both have dramatically scaled back their ambitious production targets. Over the past year alone, General Motors has recorded write-downs of at least $8 billion related to electric vehicles, while Ford has faced nearly $20 billion in similar adjustments.
In aerospace, the United Launch Alliance—a joint venture between Lockheed Martin Space and Boeing—has experienced a cascading series of technical setbacks, leaving its Vulcan rocket program years behind schedule. Meanwhile, a 2024 test flight intended to certify Boeing’s Starliner spacecraft for crewed missions encountered such grave operational problems that NASA ultimately refused to let the vehicle return from the International Space Station with astronauts aboard.
Despite these struggles among legacy corporations, the United States still launches far more rockets and places vastly more payload into orbit than the rest of the world combined, while holding a near-monopoly outside China in space-based internet connectivity. The United States also produces the only fully driverless autonomous cars operating on public roads in the West, alongside top-selling electric vehicle models sold both domestically and across Europe. Crucially, these major technological accomplishments stem not from legacy firms, but from the nation’s dynamic, venture-backed startup ecosystem.
Silicon Valley serves as a convenient shorthand for this broader American innovation ecosystem. Originally, the region’s entrepreneurs and investors focused heavily on computer hardware, software, and networking industries. In recent years, however, Silicon Valley’s ambitions have expanded drastically, bringing its agile innovation models to complex physical sectors. A notable prime example is Tesla, which since its founding in 2003 has designed, produced, and sold over ten million electric vehicles while building a proprietary network of roughly 40,000 charging stalls in the United States and 20,000 in Europe. According to company annual reports, Tesla has generated $45 billion in profit since 2020. The company currently operates commercial robotic taxis in six U.S. cities, and in Texas, it has begun testing the Cybercab, a two-passenger autonomous vehicle built without a steering wheel or pedals.
More recent startup companies have similarly transformed traditional industries. The defense technology startup Anduril, founded in 2017, successfully outbid established defense primes like Boeing, Lockheed Martin, and Northrop Grumman in early 2024 to become one of the two primary suppliers for the U.S. Air Force’s Collaborative Combat Aircraft program. By 2026, Anduril’s advanced autonomous aircraft moved past the prototype phase, securing a lucrative contract to provide unmanned drone wingmen.
A parallel success story is visible in space technology. SpaceX, founded in 2002, made history by successfully relaunching an orbital-class rocket booster in 2017. The company has since executed more than 600 such booster relaunches. By comparison, Jeff Bezos’s Blue Origin has successfully relaunched an orbital booster just once, while the rest of the global aerospace industry combined has yet to achieve the feat even once. SpaceX also commands a dominant position in the global market for space-based internet connectivity. Its Starlink service currently boasts approximately 11,000 satellites in orbit and 12 million active customers across roughly 160 countries and territories. When Boeing’s Starliner mission faltered, it was a SpaceX Crew Dragon spacecraft that safely returned the stranded astronauts back to Earth.
These American companies have undoubtedly benefited from combinations of U.S. government-funded research, direct subsidies, federal procurement contracts, and government loans. Many have also profited from the willingness of domestic regulators to permit high-stakes experimentation in risky domains, such as testing autonomous driving systems on public roads. None of these individual factors is strictly unique to the United States or to Silicon Valley. Yet, Silicon Valley remains distinct. As financial historian Sebastian Mallaby aptly observes, Silicon Valley is "the most durably productive crucible of applied science anywhere, ever."
Copy What Works
For Europe, developing its own productive innovation crucible is an urgent necessity. Recent high valuations for a handful of continental startups have sparked temporary optimism that the region’s entrepreneurial ecosystem has finally turned a corner. However, the core economic fundamentals remain poor, marked by a history of false dawns. In 2023 and 2024, overall EU venture capital investment jumped to more than 20 percent of the U.S. total. By 2025, however, that figure dropped sharply back to about 12 percent, mirroring its stagnant multi-year average since 2010. Over the past twelve years, the total combined valuation of European unicorns—private, high-growth companies worth at least $1 billion—has hovered stubbornly around ten percent of the U.S. total. In 2025 and early 2026, that metric fell further to approximately eight percent.
Reversing these figures and building a robust European startup ecosystem capable of supplying fresh economic growth engines will be exceptionally difficult. Yet, closely studying and adapting the U.S. model provides a clear starting point. Silicon Valley’s decades of experience demonstrate that high-powered employee compensation incentives such as stock options that are not taxed until exercised, flexible labor markets, pass-through partnership legal structures favored by venture capital firms, and minimal administrative paperwork are all vital elements of a vibrant technology ecosystem.
Significantly, all of these policy areas remain under the direct control of individual EU member states, meaning they do not necessarily require complex, protracted legislative coordination across all national governments. While individual European countries have implemented isolated measures—such as Denmark’s highly flexible labor market or Luxembourg’s adoption of U.S.-style limited partnerships—none have successfully deployed a cohesive bundle of tax and labor policies as inherently friendly to entrepreneurs and startup investors as those found in the United States.
Europe could similarly learn valuable lessons from much smaller nations. Israel successfully emerged as a globally recognized "startup nation" after enacting critical structural changes, including opening up pass-through partnerships to foreign investors. The results have been striking: despite possessing a population smaller than Belgium’s and a primary language shared by no other country, Israel currently maintains almost four times as much unicorn valuation per capita as France, and more than three times as much as Germany. The Israeli example effectively challenges long-held arguments from researchers at organizations like the Center for Policy Research who claim that an insufficient domestic market size represents an insurmountable barrier to scaling young European companies.
No More Red Tape
Brussels must fundamentally reevaluate its approach to technology regulation. At times, EU officials appear to operate under the assumption that heavy regulation imposes few, if any, meaningful constraints on innovators and entrepreneurs. On occasion, regulatory authorities even suggest that increased oversight might actively unleash innovation and entrepreneurship. In 2023, Margrethe Vestager, then the executive vice president of the European Commission, embodied this regulatory mindset when she maintained that the EU’s sweeping Artificial Intelligence Act would "not harm innovation and research, but actually enhance it."
The AI Act was formally adopted in 2024, piling on top of the Digital Services Act and the Digital Markets Act passed in 2022, as well as the General Data Protection Regulation enacted in 2016. As empirical evidence has steadily accumulated regarding the real-world effects of these regulations, it has become increasingly difficult to sustain the belief in a harmonious relationship between economic competitiveness and European bureaucratic red tape.
The GDPR, for instance, has measurably decreased venture capital investment flowing into the European Union, increased the market share of already dominant U.S. technology companies, hurt the financial performance of firms targeting the European consumer market, and consistently inconvenienced everyday consumers. One comprehensive empirical study by researchers Rebecca Jansen, Reinhold Kesler, Michael E. Kummer, and Joel Waldfogel revealed that the GDPR led directly to the disappearance of roughly one-third of all mobile applications available on the Google Play Store, alongside a 50 percent reduction in the introduction of new apps over time. The regulation achieved these restrictive outcomes by imposing substantial compliance costs and strictly limiting companies’ ability to collect efficiency-enhancing user data.
Despite these findings, Brussels has shown little appetite for fundamentally changing its approach to technology regulation. While the European Parliament introduced minor simplifications to the AI Act in June, it insisted that the regulation’s core provisions and rigid risk-based approach would be maintained. Furthermore, while a 2026 official report addressing EU startup financing acknowledged industry complaints regarding the high costs of regulatory compliance, it neither formally made nor endorsed those arguments.
Yet industry concerns carry substantial merit. Many of the AI Act’s extensive requirements—including strict mandates regarding risk management, data governance, technical documentation, system logging, transparency, human oversight, accuracy, and technical robustness—apply strictly prior to market entry. Compliance with these rules is inherently costly and time-consuming for any established firm, let alone an agile startup operating on limited runway. Investors and entrepreneurs routinely factor these regulatory burdens into their decisions, and many ultimately choose to take their business ventures—and themselves—elsewhere.
The European Union cannot successfully close its widening competitiveness gap without pursuing deeper and more fundamental reforms than those currently under consideration. Brussels must reverse course and fundamentally rethink its onerous technology regulations. Simultaneously, national governments must embrace established best practices to create genuinely attractive environments for top innovators, entrepreneurs, and risk capitalists.
Europe possesses undeniable strengths. It remains a populous, prosperous region anchored by strong institutions, excellent educational systems, and an abundance of talented builders. However, it is equally true that local entrepreneurs currently face steep barriers that impede their ability to scale businesses, attract world-class risk capital, and make a decisive global impact.
Unless those institutional and regulatory barriers are systematically dismantled, the European Union will continue to fall further behind global rivals. Moreover, Brussels does not have the luxury of time. European industries will face increasingly stringent competitive challenges in the coming years, and near-term policy choices will ultimately determine whether the new economic growth engines rising to meet those challenges will be European. As things currently stand, they will not.
