Investments and Innovation: The US’s Bigger Step

Investments and Innovation: The US’s Bigger Step

The alarms about the European Union’s economic competitiveness have been largely overestimated until now. The European economy has grown – in real terms and at a constant exchange rate – over the last ten years almost at the same pace as the United States, which is truly booming. The income difference between the two sides of the Atlantic is largely explained by Americans working more than Europeans. However, the defeatist statistics, also published by prestigious international media, have been refuted by more careful analyses. But this does not mean it will continue like this in the future. On the contrary, if we look towards the future of Europe, we can spot some alarms on the horizon.

The US’s lead over the EU in investments
Since the Great Financial Crisis of 2008, there has been a real gap between the investment capacity of the European Union and the United States. Although growing, the share of the European Union’s GDP devoted to investments – excluding those for residential real estate – leaves about one percentage point of GDP behind each year compared to what happens on the other side of the Atlantic. This represents an annual gap of over 250 billion euros. The EIB, the European Investment Bank, tells us where this deficiency is concentrated: “the gap is conditioned by higher US investments in machinery, components, and innovation, especially in the Information Technology sector and in the development of patents by the public sector and defense.”

European companies are less inclined towards innovation compared to American ones. It is always the EIB that denounces a lack of use of advanced digital technologies compared to their US counterparts: a gap that today is narrowing, but until the pandemic had reached even 11 percentage points. And if we look at technologies still in the development and adoption phase, in the US more than one company out of two is ready to introduce one, while in the European Union the share drops to 39 percent. Even the European frontier of artificial intelligence seems backward compared to the American one. Without mentioning the case of Mistral AI, which had to ally with the US giant Microsoft to access the technologies and funding it aspires to accelerate its growth, last year the American companies that made use of big data analytics and artificial intelligence increased by a quarter, while in Europe they remained stagnant.

Tight public budget and spread on private capital
These are worrying trends given the challenges Europe must face. Decarbonization, deglobalization, and generative artificial intelligence are three fronts that even taken individually would make the continent’s knees shake. The months-long debate on updating the community budget has made it clear how short the blanket is: member states have directed some tens of billions of euros to help Ukraine invaded by Russia, while the funds for the climate and digital transition have been left with crumbs. And the protests of farmers, the European delay on generative artificial intelligence, and the brake on German debt are already increasing pressure, just when the reformed Stability Pact comes back into force.

This is why the attention of policymakers focuses on private capitals. And in particular on the union of the capital market, still to be completed regarding supervision, taxation, and insolvency. The European Union boasts an economic space and an internal market that allow it to impose regulations often adopted as the gold standard also in the rest of the world. But without common rules, debt, and fiscal instruments, European companies will continue to have to pay a premium on financing compared to American ones and will have fewer incentives to aggregate. And this means fewer investments, and less innovation.