There is perhaps no more striking point made in Mario Draghi’s report on Europe’s competitiveness than the fact that “there is no EU company with a market capitalization over €100 billion that has been set up from scratch in the last 50 years.”

This report, in vividly exposing Europe’s multiplicity of macroeconomic challenges, has galvanized the European Commission to make competitiveness its policy lodestar for the near term. Yet, by September 2025, a year after the former European Central Bank governor’s landmark diagnosis of Europe’s waning international competitiveness, only 11 percent of his 383 recommendations had been implemented. The pace has not noticeably quickened since.

Similarly, the UK’s general election in 2024, which ushered in a Labour government under Keir Starmer in a landslide vote, also promised to put competitiveness and greater investment at the top of its agenda. Yet, despite positive reforms to pension investment regulation as well as changes in planning law designed to unlock crucial infrastructure projects, whole-economy investment in the UK in Q3 2025 was just 18.6 percent of GDP, the lowest among G7 nations.

Whether it is the Draghi report, Starmer’s missions or, for that matter, the embattled policy agenda of the Merz government in Germany, blueprints for raising productivity in Europe share a remarkable consensus on priorities: Europe, it’s widely acknowledged, must invest in decarbonization, close the technology and innovation gap with the U.S. and China, and spend more on defense. More investment combined with structural policy changes could raise productivity and wages, making up ground on innovation while also seeing off the domestic challenge of populist insurgent parties.

One of the structural impediments to Europe’s ability to raise investment in these crucial areas, however, is a lack of fiscal room to maneuver. Growing public debt, accumulated partly during the 2008-9 financial crisis and the Covid-19 pandemic but also stemming from long-run challenges such as an aging population, constrains the ability of governments to cure what ails by throwing public money at the problem.

For one thing, it would take a lot of throwing: closing the competitiveness gap would cost upward of $4 trillion by 2030. Indeed, one worry we have heard from those in one of the few major European economies with fiscal space – Germany – is that the ability to spend money on its priorities might blunt incentives to make hard policy choices on structural reforms.

From Diagnosis to Action

To boost investment in Europe to the levels needed to regain competitiveness, leaders must find ways to make its priority areas attractive to private investors who have the option of allocating assets anywhere in the world. To do so, they need to offer both innovative financing mechanisms and reforms that have enough of an effect on investors’ risk/return perception to “crowd-in” additional funds. If the Draghi report sets out what Europe needs to do in terms of increasing investment in key areas, exactly how this should be done remains to be determined.

That is where we have stepped in, launching the Milken Institute’s Investing in Europe’s Competitiveness Initiative. By breaking down three major areas designated by Draghi (and the avowedly related objectives of Europe’s political leadership) into ongoing workstreams, we are bringing together investors, policymakers and others to identify routes forward in three priority sectors: infrastructure, tech and defense.

While we have busied ourselves with policy projects relating to each of these three verticals, one vital “horizontal” has repeatedly emerged in discussions with thought leaders across sectoral boundaries: the need for Europe to capitalize on its world-leading research base to commercialize more R&D. Getting there would require policy changes at both national and EU levels – but also a mindset shift into how governments can best partner with the private sector.

To understand the scale of the change that tech could make in Europe’s priority sectors, consider what we learned in discussions with investors and thought leaders on questions of infrastructure and decarbonization. They have repeatedly made clear that Europe has the potential to lead in clean technologies such as green hydrogen and fusion energy, and to transform infrastructure to support 

ambitious net-zero goals. Their views are backed by the International Energy Agency, which estimates that new technology has the potential to provide over 70 percent of the emissions reductions needed in the energy sector to reach global net zero by 2050, while digital technologies alone could reduce global emissions by up to 20 percent by 2050.

The Urgency of Now

The potential impact of breakthrough technologies on Europe’s competitiveness has been sharpened by recent events. The geopolitical and economic realities of the war in Ukraine – where Europe’s spending on Russian energy still outstrips its own aid to Ukraine – have helped to highlight both its own energy dependence and the higher prices borne by companies in the EU compared to their Chinese or U.S. equivalents.

EU industrial electricity prices were €0.199 per kilowatt-hour in 2024, far higher than in China (€0.082) and the U.S. (€0.075). British energy prices are even higher thanks to its reliance on natural gas in grid balancing and in setting wholesale electricity prices, as well as additional levies to fund renewables. Indeed, Britain’s families face average bills more than £50 a month higher than they were five years ago, abetting a populist backlash against ongoing efforts to reach net zero.

New fuel sources, advances in long-term battery storage and new technologies to decarbonize industry must be at the heart of any responsible climate policy portfolio. But change is also necessary to level the playing field for Europe’s manufacturers and exporters who need lower energy costs to thrive.

One stakeholder pointed out to us that Europe has a unique opportunity to assert global leadership in climate innovation thanks to the Trump administration’s reversal of President Biden’s Inflation Reduction Act subsidies for emerging clean technologies. Nonetheless, while Europe has outpaced the U.S. in decarbonizing both its energy system and broader economy, it has been far less successful at attracting startup capital to emerging climate technologies. EU cleantech venture investment totaled €8.8 billion in 2024, down from €11.6 billion in 2023, giving it a modest 22 percent global share in cleantech VC investment. Even adding in the £5 billion from companies that raised money in the United Kingdom in 2024, the figure was far below the United States’ 42 percent global share in cleantech fundraising.

Europe must also act urgently to ensure that it does not lose its technological lead to other geo-strategic rivals, in particular China. Many of the innovations driving the current wave of decarbonization – notably, solar and wind power – were developed in Europe. But competition from China, which has not only achieved enormous scale and reduced the cost curve in solar-panel production but has out-innovated Europe, has led to the evisceration of Europe’s solar industry. To avoid repetition of this predicament in other cleantech industries, Europe must focus investment on R&D and avoid complacency in the face of anti-competitive practices by other economic blocs.

The most urgent demand – a direct lesson of the war in Ukraine – is the need to boost Europe’s defenses. Up to €800 billion in additional spending by 2030 will be mobilized through the ReArm Europe Plan, with the European Commission proposing funds for joint procurement and research alongside member states committing to targeting higher GDP percentages (like Germany’s push toward 3.5 percent). The UK for its part spent around 2.3 percent of GDP on defense in 2024, with plans to increase this to 2.5 percent by 2027 and 3.5 percent by 2035.

The lesson from the battlefields of Eastern Ukraine that Europe must rapidly invest in its sovereign capabilities has a crucial qualifier. Defense ministries cannot merely invest in “heavy metal” platforms procured over long timescales from established sources. They must also invest across a range of technologies and capabilities to meet readiness needs evident both now and in the future, when they are likely to profoundly change.

Along with demonstrating the roles of warships, fighter jets and missile systems to project force at range and scale, Ukraine taught us that cheap drones can destroy expensive weapons systems. The side that wins isn’t necessarily the side with the latest high-tech hardware, but rather the side that diagnoses, builds, replaces and adapts faster than its adversaries. If the UK and EU are to add new, tech-driven sources into a future sovereign procurement mix – and not be forced to choose between foreign market-leading providers and inferior domestic solutions – then defense ministries will need to move from largely passive shoppers to shaping an innovative but sustainable domestic technology market.

This will require an urgent effort to identify both pain points and opportunities to close readiness gaps in constant conversation with technologists and European allies, moving faster on contracts to sustain venture-backed businesses and actively fostering competition to encourage suppliers to improve on initial solutions. It also requires adaptions in work practices so companies can partner to leverage data, rapidly develop new software, and build the necessary hardware to take advantage of the new capabilities it unleashes.

While Helsing, a software company specializing in defense missions, is one promising example of an emerging European defense challenger, Europe conspicuously lacks the Palantirs and Andurils – offshoots of Silicon Valley bringing the promise of AI to develop breakthrough defense capabilities. Ukraine’s drone companies have emerged as world leaders (along with the Russians opposing them). But it remains to be seen how adeptly they might be made part of a permanent European defense ecosystem when fighting relents in their own country.

Beyond adjacent technology-led capabilities like drones and autonomous underwater vehicles, European defense ministries must also monitor and leverage breakthroughs in critical and emerging technologies such as quantum computing. Paulo Surico of London Business School argues that rather than spur future “guns vs. butter” debates that risk curtailing defense investment, military spending will actually boost economic growth and competitiveness as long as it is skewed toward R&D. His research finds that an increase in R&D-related military spending worth 1 percent of GDP could lift aggregate output by as much as 2 percent over time.

Public Squalor Does Not Lead To Private Abundance

Publicly funded research with defense applications, from the development of GPS to the creation of the internet, has long benefitted the private sector economy. Mariana Mazzucato (University College London) has demonstrated how that icon of private sector consumption, the iPhone, depended hugely on public sector innovation for many of its most compelling features. The Trump administration’s abandonment of global leadership on climate issues and cuts in public research spending give Europe an opening to catch up by boosting R&D, targeting the recruitment of leading research teams to relocate across the Atlantic.

Our workshops and roundtables have identified two key gaps that the continent must close to achieve global tech leadership. First, Europe needs to convert its leading research into commercial products. Second, it needs to channel its surplus savings into domestic production, a process facilitated by the development of a deeper, more unified capital market.

The first step in bridging the gap from basic research to commercialization remains daunting despite the reality that Europe is well endowed with research capacity. The UK’s globally renowned universities including Cambridge, Oxford, Imperial and University College London compete with their top U.S. counterparts, while the likes of the Sorbonne, ETH Zurich and LMU Munich regularly make lists of world-leading research institutions. However, U.S. institutions have long lured Europe’s leading PhD students and researchers to American shores, where universities offer better funding, higher pay and more varied job prospects.

Equally important, the U.S. continues to lead Europe in spinning off companies from universities and capitalizing on academic research. There are multiple causes for this, but a key explanation lies in the maturity of the investment ecosystem. There is a lack of venture capital in Europe compared to the U.S., with only London and Munich making it onto lists of global VC hubs.

How best can Europe catch up with its global competitors in commercializing government- funded innovation? Participants in our workshops point to the need to keep the best researchers from defecting to U.S. universities, coaxing back those who have left and copying some of the best aspects of the U.S.’s Bayh-Dole Act to make it easier for researchers to establish companies. The EU’s Choose Europe initiative, as well as the UK’s Global Talent Fund and the British Academy’s International Fellowships, aims to make the continent more attractive for researchers and recruit teams to locate in European labs.

Scaling To Compete

We focused above on ways to bring more human capital to the table. But strategic deployment of financial capital into world-leading infrastructure needed to accomplish breakthroughs could also help Europe catch up. For example, the UK is now investing over £350 million (part of a £1 billion funding boost to expand capacity 20-fold by 2030) to create a network of advanced supercomputers specifically for AI research, with new sites in Edinburgh, Bristol and Cambridge. The UK is also looking to infrastructure investment to support its lead in quantum computing. Such investments reflect on disappointing past experience where promising domestic European tech startups such as DeepMind had to turn to the capital and infrastructure of Silicon Valley giants to help them grow and scale.

But new companies spilling out of European universities are only useful if they are neither strangled in the crib due to lack of funding nor forced to leave home for the U.S. due to a fragmented European market. Our roundtable at the Berlin Global Dialogue in late 2025 and meetings with both private- and public-sector leaders in Germany made clear that while Europe’s single market in goods remains a source of strength, the diversity of both data sources and tech regulation made scaling less attractive than in the U.S. with its unified market and less risk-averse corporate technology adopters. Proposals such as EU Inc to create a single standardized EU legal entity were greeted with enthusiasm, but their potential will only be fully felt if there is greater harmonization of national-level regulation.

With a bigger volume of breakthrough companies and a smoother path to growth within Europe, the final piece of the jigsaw for creating a global leadership is greater accessibility to funding for scaling up. A Milken Institute-hosted meeting between European Commissioner Valdis Dombrovskis (the commissioner in charge of cutting EU red tape) and leading investors at recent IMF meetings made clear that reforms embodied in Europe’s Savings and Investments Union are proceeding too slowly. Marching orders are clear, if a bit daunting:

• Europe must continue to reform its pension systems so they can invest at the scale of leading global pension funds.
• The region must complement SME bank lending with deeper and more sophisticated capital market funding, and in the process mitigate the effects of the tough Basel rules inhibiting bank lending to SMEs – as the UK has done with its Edinburgh Reforms.
• Bankruptcy regimes need to be harmonized across the EU.
• Europe needs to unify its securities listings environment to give investors the depth and liquidity enjoyed in the United States.

One of the least remarked upon effects of Brexit has been that the chances of London remaining the financial heart of a Europe-wide capital markets union in the medium-term are no longer realistic. That is certainly a blow to former Italian Prime Minister Enrico Letta’s vision for financial integration. However, growing recognition that Europe’s underpowered capital markets are now a serious threat to not only the continent’s competitiveness but also its security should provide the political impetus to reforms that have hitherto been lacking.

While London may no longer enjoy the status of Europe’s financial epicenter, the UK’s Mansion House reforms have made welcome progress in pooling domestic pension assets and encouraging investment into earlierstage growth companies and crucial infrastructure assets. This remains part of a longer journey, though, as many public pension funds generate their own internal management capabilities.

Governments Must Think Like Co-Investors

While our roundtables and our deep-dive projects in three workstreams identified the need for a step change in attention to emerging and critical technologies, it also became clear that doing this in a sustained way would require governments to go from simply instituting one-off, high-potential reforms to becoming flexible ongoing partners in directing Europe’s technological potential.

In interviews with high-ranking Biden administration officials, leading U.S. investors and corporate heads – including both those supportive and critical of the Biden administration’s industrial policies – we uncovered lessons for how European governments could be fast followers. The idea is to take what worked with the Inflation Reduction Act, the Bipartisan Infrastructure Law and the CHIPS and Science Act while taking to heart the obstacles that stymied efforts to spur infrastructure deployment.

In the 1960s, industrial policy meant picking winners and losers. In the 1980s, industrial development was left to the “free market.” But at the same time there was an emerging consensus that governments needed to think of themselves as investors in innovation. A revised vision offered today by Harvard’s Dani Rodrik: rather than singling out national champions, governments should invest in, cultivate and unencumber a portfolio of diverse bets on critical technologies.

Governments Must Reform to Win Industries of the Future

To give that portfolio of bets the best chance of success, our research suggests that governments need to concentrate on four main areas:

• Providing the incentives to encourage private “crowd-in” investment in critical priority areas.
• Recognizing the complexity of modern industrial policymaking by bringing expertise into all levels of government.
• Overcoming barriers to delivery, particularly in the spheres of planning and regulation.
• Creating markets for new technologies that facilitate effort to scale.

In short, governments need to do more than allocate funds for joint efforts with private investors. They must be true venture partners, engaging energetically with a large portfolio of investments.

Lessons from the U.S. show the vital importance of government capacity as well as failures of government coordination. Some agencies like the CHIPS Program Office benefitted greatly from recruiting external expertise, showing the potential gains when government can sit across from investors and technologists as equals. Others were hamstrung by insufficient sector knowledge, staffing and a failure to manage conflicts between national priorities and local realities on the ground.

To learn from these lessons, European governments must move beyond traditional squeamishness in recruiting those with atypical backgrounds, create more opportunities for civil servants to move into the private sector with the confidence that they can be recruited back and understand that cuts to subnational tiers of government – where policy is typically delivered – risk derailing the rollout of national government priorities.

It is not enough to simply will the ends without providing the means: delivery barriers constrain the deployment of much-needed infrastructure, which can have major knock-on effects on the wider ecosystem. Building infrastructure or industrial facilities is fraught with risks that contractors, clients and project sponsors must navigate, and the U.S. has repeatedly struggled to build major projects, as detailed in Ezra Klein and Derek Thompson’s book Abundance and in our own interviews. The UK and EU recognize echoes in the U.S. discussion of their own often-sclerotic approaches to rolling out large projects, impacted by similarly complex regulation and frameworks that give too much power to stakeholders who object outright to projects.

While both Abundance and Dan Wang’s book Breakneck, contrasting Chinese engineering culture with the U.S.’s lawyerly one, have raised the salience of supply-side constraints on building national infrastructure, the perils of an overly legalistic approach have been recognized for decades. A 1990 study found a strong positive correlation between a higher proportion of engineering college graduates in a country and a faster rate of economic growth. Conversely, countries with a higher proportion of lawyers tended to grow more slowly. Lawyers, the researchers argued, serve an important function in establishing the rule of law. But too many of them can lead to unproductive, rent-seeking activities like inordinate litigation and wealth redistribution rather than wealth creation, undermining overall productivity and investment.

European governments on both the left and right have shown some appetite to unblock barriers to infrastructure deployment and constraints on growth planning for specific sectors. But these policies must continue on both a supranational, national and project basis for growth to meaningfully change.

While the EU has embraced simplification in many areas, some participants in our roundtables called for more deregulation as well as simplification. Mario Draghi himself has expressed frustration at the pace of deregulation and decreasing the burdens on European businesses while growth remains sluggish.

Finally, new technologies cannot become reliable competitors of incumbent solutions without government help to reach the scale needed to lower costs. The Biden administration’s Inflation Reduction Act aimed to lower the cost of renewables primarily through a comprehensive system of long-term tax credits designed to incentivize domestic manufacturing and project development.

The ability of U.S. renewable energy projects to reach cost parity with fossil fuels was curtailed by President Trump’s reversal of many of the IRA’s provisions. But the principle remains to be learned by European governments. Just as venture capitalists monitor the potential upside value as a technology comes to market and customers react to its potential, so, too, do investors seek to monitor their portfolio companies’ fixed and marginal cost base as operations expand.

European governments lack the “exorbitant privilege” of possessing the globe’s primary reserve currency (the U.S. dollar) and thus cannot emulate the fiscal largesse of the Biden administration in spending profligately to scale new technologies on their own. There is still much that they could do, though, to encourage the take up of new technology.

“Challenger” defense companies in the United States have decried cost-plus procurement contracts given to incumbents rather than specifying needed effects and price points and letting competitors find innovative ways to deliver – ways in which European defense procurement might also evolve. Advance market commitments (an idea developed by Nobel economist Michael Kremer to facilitate innovation in vaccines) can help lock in demand from government if milestones are reached, thereby reducing risk borne by private investors. Lastly, greater partnerships between and across European countries can help create bigger markets for entrepreneurs and investors sensitive that the size of the prize is correlated with the amount worth investing to achieve it. That can take the form of joint cooperation and procurement on defense with European allies, or with greater coordination to foster a more unified European energy market.

From Potential to Global Leadership

While the scale of the prescription outlined above might seem daunting, we have discovered more optimism among key players than might be expected. Europe is seen by many to have an opportunity before it and considerable comparative advantages to success. Moreover, the present geopolitical environment also provides the necessary pretext, to borrow Jean Monnet’s phrase, of a crisis from which new solutions can be developed. While the U.S. has attracted more financial assets from abroad than all other global regions combined since 2010, Europe ended 2025 with stock markets up from where they started, with hopes that an end to the war in Ukraine is in sight, and with governments focused on competitiveness and growth like never before.

But hope is not a strategy. Only by continuing the hard work of policymakers, investors, corporate leaders, entrepreneurs and others coming together to unleash the region’s potential can we hope to make good on the call to action issued by Draghi and others. Europe should not be seen as the continent of yesterday, but as the author of tomorrow.