The European Union is the second largest economy in the world and the largest trader of manufactured goods and services. European firms already showed their agility in responding to trade shocks in 2022 and 2023 by investing in resilience and digital tracking, increasing inventories and diversifying suppliers. This served as a test for the new wave of trade shocks. • Europe is a research powerhouse. It issues 24% more research publications than the United States, according to the Nature Index. This is an indicator of the strength of Europe’s research base and an asset to exploit for more industrial and service applications. • European firms are positioned to exploit the opportunity presented by the integration of AI into industrial and service processes. So far, AI investments have largely focused on two basic components: infrastructure, such as data centres, and models. Both are highly energy intensive, while the latest developments suggest their use is becoming a commodity. Progress has been much slower in a third component – integration, or the adoption of AI in manufacturing and services – where productivity gains are large. • The share of firms using big data analytics and AI in the European Union is 6 percentage points lower than it is in the United States. However, preliminary analysis shows that EU firms in manufacturing and services that integrate AI into their processes have a higher productivity compared with other firms. Correlation is not causation, but this initial result indicates a potential upside for EU firms going forward. • To seize this opportunity and accelerate AI adoption, the European Union can leverage its ongoing investment in cheap and clean energy, its focus on data centres and digital infrastructure, a consistent regulatory framework (which ensures the integrity and security of company and personal data), a favourable competition-policy environment for market consolidation, and more integrated product and services markets. • Digital and AI adoption will be supported by Europe’s strong university system. Enhanced investment in employee skills also presents an opportunity.There are three key drivers to consolidate Europe as a global leader in new technologies: market integration, simplification and large-scale investment in innovation. Integration: European firms need market scale at home to remain globally competitive • 60% of exporting European firms – and 74% of firms with cutting-edge innovation – say that the intraEU market fragmentation (due to different national consumer protection standards, value-added tax, labelling, and licensing requirements) is an obstacle to business opportunities. • Larger capital markets are key to mobilising large-scale and higher-risk finance for innovation. • Financial integration in Europe remains lower than it was before the financial crisis, when it reached a peak. If the gap with that peak level were to be halved, cross-border financial flows could increase by 3% of gross domestic product (GDP), and GDP itself could increase by 1%. • Being able to raise equity finance makes firms 13 percentage points more likely to innovate. • EU scale-up firms have raised, on average, 50% less capital than their US counterparts in the last ten years. Simplification: The cost of bureaucracy is a significant burden for EU firms About 86% of EU firms employ staff specifically to deal with regulatory compliance, at an average cost of 1.8% of turnover. The cost increases to 2.5% of turnover for small and medium-sized enterprises (SMEs). As a comparison, EU firms’ spending on energy after the energy shock is equal to 4% of turnover. Large-scale investment in innovation and economic transformation • The significant boost to private investment derived from strong public support during the COVID-19 pandemic and the energy crisis is slowing down. This makes the creation of a favourable business environment rich in opportunities even more important. • Improving the business environment by reducing barriers to investment is associated with higher economic growth, especially for investment-intensive industries and high-tech sectors. • 79% of EU firms cite uncertainty as a barrier to investment, with the scarcity of skilled staff and energy costs similarly significant, at 77%. The most dynamic firms are more likely to report constraints.
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