Have you ever wondered why a continent that once gave the world the steam engine, the automobile, and the internet itself now struggles to produce the next Google, Tesla, or OpenAI?
It’s not that Europeans suddenly became less clever. Walk into any university lab in Paris, Munich, or Stockholm and you’ll still find world-class minds pushing the boundaries of science. Yet somehow, almost none of these discoveries turn into the kind of companies that reshape the planet. Something is broken, and the usual suspects—lack of funding, not enough STEM graduates, or insufficient “political will”—don’t really hold up when you look at the numbers.
The real story is both simpler and more uncomfortable: Europe is slowly but surely regulating, taxing, and redistributing itself out of the innovation game.
The Quiet Collapse of European Dynamism
For the last forty years, something startling has been happening beneath the surface of Europe’s comfortable welfare states. While the United States—and now China—raced ahead in the technologies that matter most (software, semiconductors, artificial intelligence, automation), Europe’s productivity growth flat-lined.
This isn’t a minor gap. In the sectors driving the current technological revolution, the difference is dramatic. European workers are now roughly 30 % less productive than their American counterparts in information and communication technology. That gap has been widening steadily since the 1990s.
And yet, when European leaders finally woke up to the problem, the solutions they proposed were almost comical in their predictability: more public spending, more centralized industrial policy, more “strategic” subsidies. In other words, exactly the same medicine that got us here in the first place.
Europe Still Has the Brains—Just Not the Environment
Let’s start with what Europe actually gets right. The old continent still punches above its weight in pure scientific output. It publishes roughly a fifth of the world’s top-tier research papers. Its universities and public labs file an impressive share of global patents. Public R&D spending as a percentage of GDP is higher than in the United States.
In short, the raw material for innovation is there. What’s missing is the oxygen that turns ideas into billion-dollar businesses.
The problem is not that Europe lacks inventors. It’s that it lacks the ecosystem that rewards risk, scale, and ruthless efficiency.
Only about a third of university patents ever get commercialized. Compare that to the United States, where tight networks of venture capitalists, experienced entrepreneurs, and deep capital markets swarm around promising research like bees around honey.
The Unicorn Graveyard
Europe actually creates plenty of startups—sometimes as many as the United States in absolute terms. The difference appears later, when it’s time to grow.
Out of every ten unicorns (private companies valued above a billion dollars) born in the last fifteen years, only one still has its headquarters in Europe. The rest either stay small forever or pack their bags and move to California or Singapore.
- Heavy compliance costs that scale with company size
- Labor laws that make hiring and firing expensive and slow
- Tax systems that punish equity compensation—the fuel of startup growth
- Fragmented capital markets that make IPOs painful and rare
Add a venture capital industry that is a fraction the size of its American counterpart, and you understand why promising companies leave. It’s not patriotism holding them back—it’s survival.
Where Did All the Capital Go?
One of the most puzzling facts about Europe is that several countries sit on enormous piles of domestic savings. Germany, the Netherlands, Sweden—households and companies in these nations save like mad. Yet almost none of that money stays home to finance the next generation of European champions.
Instead, it flows out. German pension funds and Dutch insurers are some of the largest investors in American tech stocks. The continent runs persistent current-account surpluses that rival China’s in size. The money is there. The opportunities, apparently, are not.
Private R&D spending tells the same story. European companies invest roughly two-thirds of what their American competitors do when measured against GDP. The gap with East Asia is even larger.
Capital always flows toward freedom and away from friction.
And friction is something Europe specializes in. From endless permitting processes to aggressive taxation of corporate profits and capital gains, the message to anyone trying to build something big is crystal clear: do it somewhere else.
The Regulatory Straitjacket
Ask any entrepreneur who has tried to scale a business in France or Italy what the biggest obstacle is, and nine times out of ten the answer is the same: the state.
Employment protection legislation in many European countries remains among the strictest in the world. Hiring your hundredth employee can trigger a avalanche of new obligations. Green regulation has become so complex that entire departments exist just to interpret it.
Then there’s taxation. Several large European economies collect more than 45 % of GDP in taxes—levels unheard of in the United States or most of Asia. That money has to come from somewhere, and increasingly it comes from the very companies that are supposed to drive the next industrial revolution.
The Welfare Trap Nobody Talks About
Generous welfare states were sold as a way to create social peace and give people security. In practice, they’ve created something else: a culture where the penalties for failure are low, but so are the rewards for success.
When unemployment benefits replace 80 or 90 % of previous income for years, the urgency to retrain or start a company diminishes. When taxes eat half of every additional euro earned above a certain threshold, the incentive to work harder or take risks disappears.
The numbers are brutal. The average French or German worker clocks about 20 % fewer hours per year than an American, and closer to 35 % fewer than someone in South Korea. In a knowledge economy, time is the ultimate raw material.
The Myth of “Picking Winners”
Lately, a new chorus has emerged claiming Europe simply needs to be more like China: bold industrial policy, massive state investment, national champions protected from competition.
It’s an appealing story, especially when Chinese companies dominate solar panels, batteries, and electric vehicles—sectors Europe itself tried to nurture with hundreds of billions in subsidies.
But the narrative falls apart on closer inspection. Europe has been “picking winners” for decades. The results speak for themselves: Airbus is a success, but it’s an exception. Most state-backed champions either disappeared or survive on perpetual life support.
Meanwhile, China’s real advantage wasn’t central planning—it was allowing a degree of economic freedom in the 1990s and 2000s that Europe abandoned long ago. Special economic zones, low taxes for foreign investors, and a willingness to let inefficient firms die created the conditions for explosive growth. Once the state tightened control again, inefficiencies started piling up there too.
What Europe Actually Needs
The path forward is painfully obvious to anyone who isn’t paid to ignore it.
- Cut corporate tax rates to competitive levels—think Ireland or Estonia, not France
- Reform labor laws so companies can grow without triggering regulatory landmines
- Allow stock-option compensation to be taxed as capital gains, not income
- Build a true single capital market instead of 27 fragmented puddles
- Stop demonizing risk capital and start celebrating entrepreneurs
None of this requires inventing new institutions. Several European countries already do pieces of it successfully. The challenge is political, not technical.
Until Europe decides that economic freedom is not a dirty word, the innovation train will keep leaving the station without it. And no amount of subsidies, green deals, or “strategic autonomy” rhetoric will change that basic reality.
The ideas are still here. The talent hasn’t vanished. All that’s missing is the courage to let them breathe.
