The European Council is convening a rare special meeting to brainstorm and focus on opportunities for strengthening the competitiveness of the single market in a world of rising geopolitical tensions and accelerating technological change. How Europe chooses to respond in this moment could be one of the biggest, most consequential decisions shaping its long-term future.

Europe’s innovation ecosystem now stands at a critical inflection point.  Europe’s competitiveness has long lagged behind its global counterparts because of lackluster technology adoption, and its past challenges are now coming to a head. As technology transforms almost every sector of the global economy, Europe’s slow technology adoption rates combined with a tsunami of sometimes contradictory new technology regulations have converged to stall foreign investment and pose what is perhaps the biggest fundamental threat to the region’s future prosperity in decades. It is constraining the region’s ability to reap the benefits of broad-based digital transformation or to scale its own global champions.

In sounding the alarm on Europe’s expanding technology gap, McKinsey found large European companies are now 20% less profitable than their American counterparts, with 90% of the gap attributable to technology-creating industries. They warn that unless Europe closes its technology gap, European firms across broad sectors will likely be put at a competitive disadvantage, jeopardizing Europe’s long-term prosperity. Persistent structural barriers, years of underinvestment, a risk-averse regulatory mindset, lagging digital infrastructure, and a persistent digital skills gap have slowed its innovation engine.  

But now, a rare alignment of geopolitical, regulatory, and technological shifts is creating new urgency and, with it, a window to advance smarter digital policies and critical regulatory reforms. And the good news is that if Europe can foster a more innovation-friendly environment and close its growing technology gap, Accenture research, for example, estimates that Europe could generate a staggering €3.2 trillion in additional economic gains – impacting and helping lift nearly every sector of the European economy. It’s the kind of economic shot in the arm Europe urgently needs.

To reap these gains, Europe must chart a smarter course that puts it on a better, more dynamic, competitive trajectory. To change course, it must reject the overly simplistic proposals aimed at reducing its dependencies on modern technologies and instead make the hard choices to fix its broken innovation engine, and remove its regulatory roadblocks.  

In this paper, we explore key opportunities Europe can and should pursue. We examine Europe’s broader innovation ecosystem and highlight four key opportunities to advance a more dynamic, vibrant, innovative, and trustworthy ecosystem that can lift its economy, and propel new competition.

However, because some of the necessary steps require significant budgetary investment that is often politically unachievable, and even then can take years to bear fruit, we also examine near-term regulatory changes that could produce meaningful results in months, not years, without breaking the bank. We show how Japan, for example, pursued reforms to its digital markets in a smarter user-centric way, which if replicated more broadly in Europe can create meaningful competitiveness gains in the short run, and broad economic gains in the long run.

How can Europe close its innovation gap? Is sovereignty the answer?

As Europe begins its summit, one often discussed concept involves digital sovereignty. It involves shunning foreign technology dependency by exiting the global tech market or “techxit,” regulatorily restraining non-European innovation leaders, or creating a “Made in Europe” Eurostack of technologies that enables European digital self-sufficiency across all layers of its critical digital infrastructure. The ideas vary, but the basic concept is to shun its dependencies on foreign innovation and develop its own chips, hardware, software, devices, services, phones, clouds, and AI so it’s less dependent on others. While various flavors of digital sovereignty may have political appeal, such an approach is neither realistic, affordable, effective, achievable, nor necessary. The more the Commission decouples from modern technologies and services, the more unsustainable its strategy becomes.

Not only would it take years to see any meaningful gains, but the economic cost could be staggering. For example, according to the Center for European Policy Analysis, considering the cost of semiconductor fabrication facilities, software and hardware, the development of digital services, the recruitment and retention of a skilled workforce, and the opportunity costs of this operation, digital sovereignty would conservatively cost the EU €3.6 trillion ($4.2 trillion) over 10 years. That means the cost to the EU is essentially 20 percent of its annual GDP over the next decade. Such staggering costs will put European businesses at a direct economic disadvantage with their global competitors. Instituting “Buy European” initiatives, decoupling from modern technologies and services only disconnect Europe from opportunity. Competitiveness cannot be built through isolation. A fortress Europe does not a more vibrant Europe make. 

What can/should Europe do?  Meeting Europe’s Innovation Challenge.  

Europe’s vulnerability isn’t dependence itself – it’s the lack of a robust domestic innovation infrastructure that enables the bloc’s startups to scale and grow. The lack of attention to these barriers has long slowed European adoption of the productivity-improving technologies being employed elsewhere around the globe. Instead of trying to build a trillion-euro fortress of technological self-sufficiency, Europe needs to jumpstart its own innovation engine, upgrade its lagging digital infrastructure, drive digital transformation across every sector of its economy, take advantage of trustworthy technologies to boost its lagging adoption rates, remove counterproductive regulatory roadblocks, and ensure access to the world’s most capable and trusted technologies.    

These steps can help ensure technology companies (across the entirety of the supply chain) can be born, scale, and stay in Europe, and that European enterprises can rely on trustworthy platforms to boost their productivity and competitiveness – in turn expanding European economic opportunity. A thriving, dynamic, and competitive European technology ecosystem is not only compatible with global cooperation, but benefits from it. A core initial test of leadership is whether Europe’s politicians can resist the emotional appeal of “independence” and instead embrace the hard work necessary to achieve a broader strategic interdependence. 

Four Essential Steps to Mobilize Europe’s Innovation Ecosystem and Close its Innovation Gap

To jumpstart Europe’s innovation ecosystem and ensure its long-term competitiveness, there are four key steps it must embrace as a baseline to change.   

1. Invest in a high-tech R&D future to fuel disruptive innovation. The EU is significantly underinvesting in R&D in its high-tech industries, limiting its ability to produce breakthrough new technologies. EU spending on R&D (at only about 2% of GDP) is only a fraction of what innovation-leading countries invest. Compounding the problem, EU business expenditure on R&D is also lagging – accounting for just 1.2% of the EU’s GDP in 2020, as compared to US businesses that invest at double that rate. Putting research and innovation at the heart of the EU’s growth strategy can accelerate tomorrow’s technology breakthroughs and drive long-term economic gains throughout the economy. In fact, every €1 invested in EU research is projected to generate up to €11 in GDP gains. But current investment levels are insufficient to close the innovation gap and leave Europe woefully behind. Instead, Europe needs to radically resize its R&D investments and refocus its commitments on disruptive innovation.
2. Close the persistent digital skills gap. A skilled workforce is essential for boosting European innovation. But Europe faces a significant, persistent technology skills gap, with only 56% of adults possessing basic digital skills. In fact, 60% of EU companies cite a lack of tech talent as a key barrier to growth, with demand projected to outpace supply by 2-4 times over the coming years. The skills gap is especially apparent around AI skills. EU businesses report that digital skill shortages lead to a 46% decrease in productivity and a 32% loss of contracts. When workers lack digital expertise, economies suffer. It prevents promising startups from scaling, threatens Europe’s competitiveness, and is holding Europe behind. Despite a broad range of existing skill-focused efforts, Europe still trails behind the US and China in skills adoption. It needs more investment and faster implementation.
3. Close the digital trust gap. One of the biggest barriers to closing Europe’s innovation gap is slow technology adoption across sectors, which is often tied to the level of trust in technology – the foundational privacy, safety, and security safeguards necessary to protect businesses and consumers from key risks. Consumers and businesses simply don’t adopt new technologies when they fear they could put their privacy, safety, or security at risk. In fact, according to Eurobarometer, three-quarters of Europeans point to the need for stronger cybersecurity and better protection of data in order to increase their use of digital technologies. Europe must fully embrace a more trusted technology future and reform new digital rules that are unintentionally impeding core privacy, safety, and security safeguards built into smartphones – one of the most essential European technologies now in the pockets and purses of almost every CEO, government official, consumer, judge, and journalist. While Europe has implemented laws to boost privacy, safety, and security, it has also recently put in place rules like its Digital Markets Act that is in direct conflict with those goals – weakening the very safeguards that European businesses and consumers depend upon to keep their data and livelihoods safe. If Europe can change course, and companies can foster digital trust, McKinsey found they can increase annual growth by 10% or more.
4. Invest in digital infrastructure and overcome its lagging mobile 5G adoption rate. To ensure the benefits of Europe’s digital transformation can benefit everyone, it needs to upgrade its lagging digital infrastructure. As mobile devices have become the primary means by which Europeans now access the internet, and vital to the operation of every sector of its economy, Europe needs to take steps to maximize trust throughout the mobile ecosystem and overcome its lagging mobile 5G adoption rate. While other countries race ahead, slow rollout of 5G networks and smartphones is holding Europe back. Ookla’s speed tests found that Europe is trailing woefully far behind in the race to the mobile future. While 5G Standalone technology reached 91% population coverage in North America in 2024, it only reached 40% in Europe. And with recent digital market rules unintendedly limiting Europe’s access to the latest technologies, it means European smartphone users are already missing out and being left behind.  To achieve the €1 trillion in estimated gains that next-generation mobile innovation is projected to deliver, Europe needs to improve both its 5G digital infrastructure and remove barriers inherent in its 5G smartphone regulatory infrastructure.

Despite decades of neglect and underinvestment in its innovation ecosystem, working swiftly to tackle these four core challenges can begin the process of closing Europe’s innovation gap. Too often, efforts to address these challenges have been underfunded, ineffective at scale, and have failed to deliver. That’s because overcoming these core challenges requires hard choices, difficult levels of investment, and can take years of effort to achieve meaningful gains. Given Europe faces a constricted budget to confront these challenges, a EuroBond – a common borrowing capacity – could help raise needed capital to help achieve these goals. But such proposals, like others, face a broad range of challenges in becoming a reality.    

But there is another path – a set of efforts that can deliver meaningful results in months, not years, and that doesn’t break the bank – and that’s a path through regulatory realignment.  

Growing consensus: Addressing regulatory barriers to innovation can play a central role in boosting the EU’s competitiveness and encouraging investment.

There is a growing consensus amongst many observers that regulatory simplification could be the single most powerful lever to boost investment and innovation in Europe – especially in the short term. Over the past 5 years, Europe’s digital landscape has been shaped by the introduction of nearly 40 different regulatory regimes that, despite well-meaning goals, are inconsistent, contradictory, and too often undermine Europe’s broad goals of advancing a technology ecosystem that is dynamic, competitive, and that protects the security, safety, and privacy of every user. The result is that Europe’s inconsistent approach to regulation is shackling its unique potential to grow its domestic technology innovators.  

For example, an analysis by Strand Partners reveals that EU businesses estimate that 40% of their tech resources are spent on compliance with regulation – a figure that climbs to 45% for startups. Imagine if almost half of the precious investment going into driving innovation and getting a startup off the ground is instead spent on compliance with regulation? That’s not a successful recipe for innovation, fairness, competition, or growth. It may be one reason why 30% of European unicorn companies (startups valued at over $1 billion) relocated outside the EU from 2008 to 2021.

As EC President Ursula von der Leyen laid out in her speech at the EPP Congress in April, “the vitality of the Single Market is held back by too many national barriers, fragmentation, and bureaucracy.” She noted that, “If we remove all trade obstacles inside our Union, we could boost our GDP by as much as 10%.”  

The EC president isn’t alone. As Belgian Prime Minister Bart De Wever wrote in his just-released book, “In Europe, we have far exceeded the limit of overregulation.”  He warns that, “it leads to us being economically less relevant in the sectors of the future.” It’s not just key political leaders who get this. A new BCG Survey of European CEOs and citizens found that 80% believe Europe needs radical reform, not incremental tweaks. Only 20% believe that Europe can simplify and streamline the existing regulatory framework, while approximately 40% say that substantial reform is possible but will require significant political will and sustained effort. They also found a clear consensus of business leaders (95%) who support prioritizing a few core sectors and industries for regulatory overhaul – including specifically in the technology sector.

In this moment of introspection, Europe now has an opportunity to rethink and remake its regulatory infrastructure. If Europe were to comprehensively review its conflicting digital mandates, focus like a laser on areas where its digital rules have produced unintended consumer harm to privacy, safety, and security, and recalibrate and realign its implementation to better achieve its goals in more effective ways, Europe could produce swift and meaningful near-term gains. It’s why regulatory simplification and improvement has emerged as the single most powerful lever to boost investment and innovation in Europe in the short term.  

The Digital Markets Act is a Prime Example of rules that hold back Europe

One of the best examples, and a great place to start, would be to look closely at Europe’s approach to digital market regulation through its Digital Markets Act or DMA. The DMA is a prime example of a European rulebook that, while well-intentioned, has been implemented in ways that are in direct conflict with other important EU regulatory objectives, undermining Europe’s long-term ability to improve its digital ecosystem, unintentionally exposing Europeans to new harms, and triggering major economic losses throughout the EU.

For example, while not its goal, because of the contrarian way the DMA has been implemented, European consumers and businesses face a less secure, less innovative, and more fragmented digital experience. The DMA has created a digital disconnect between the EU’s Digital Services Act’s (DSA) ambitions for a safer app store ecosystem and the DMA’s sideloading loophole that creates a backdoor for harmful apps – expanding some of the exact harms the DSA tries to mitigate. The DMA also exacerbates some of the very mobile security risks that its Cyber Resilience Act is designed to protect against – creating vast new security weaknesses that put European consumers and businesses at risk. Its interoperability rules. For example, dangerously disable key security safeguards designed to protect user privacy and safety.

For European businesses, these DMA requirements can expose their enterprise networks, critical infrastructure, and daily operations to disruptive and expensive new security threats. If Europe’s enterprise customers are less secure, they face higher remediation costs, and will need to invest significantly more to defend against threats that their global competitors are better protected from, and be less competitive in global markets.  

The cost isn’t small. Today, a single mobile malware exploit can cost a European business hundreds of millions of euros. A single mobile phishing attack, for example, could cost a 5,000-employee organization almost $4 million according to Lookout. But unmitigated mobile phishing threats could end up costing organizations with 10,000 mobile devices as much as $35 million per incident and up to $150 million per incident for organizations with 50,000 mobile devices. Lookout’s threat report found that  mobile phishing is now one of the biggest challenges facing IT and security teams today, and 80% of global smishing attacks target EU citizens. Already one in four European SME business owners has been targeted by cyber scammers. This isn’t the time to be weakening European security, or mandating interoperable insecurity.

The DMA is having a negative economic impact throughout the EU. Despite the DMA’s pro-competition goals, the DMA is triggering major economic losses of as much as €114 billion for firms across the broader EU economy, with total turnover in the sectors considered down up to 0.64% per year since May 2023, according to economic analysis by Lama Economic Research. The study further estimates annual revenue losses per worker up to €1,122 depending on the intensity of digital service use across sectors. These regulations are driving away the investment that the EU badly needs and choking the growth of its most promising scaleups.

Europeans deserve a digital ecosystem that is vibrant and innovative, safe and secure, competitive and trustworthy. So what if there was a way to help achieve the DMA’s broad goals of fostering competition, while avoiding some of the major downsides in the way it has been implemented?     

Japan offers a smarter model for achieving the DMA’s core goals.  

Japan offers a model for how Europe can realign its DMA and still address core goals, but do so in a way that doesn’t undermine privacy, security, or children’s safety. While far from  perfect, Japan’s Mobile Smartphone Competition Act (MSCA), offers a more pragmatic and measured approach than the DMA. For example, Japan has more explicitly written in a set of more appropriate guardrails which will lead to better solutions for protecting Japan’s consumers and businesses. Japan’s approach helps better protect children and empower parents by ensuring consistent age ratings and protections for children. They’ve helped close an app governance gap by requiring alternative marketplaces to implement guardrails themselves and limited direct app downloads from untrusted websites. They’ve enabled payment choices, but done so in a way that puts trusted choices side by side with other alternatives. And they’ve enabled interoperability in a much more informed, effective way than Europe’s approach so that Japan’s privacy and security can be more effectively protected. 

It’s an approach that recognizes that security, privacy, and children’s safety are not obstacles to competition, but integral elements for elevating a more competitive, trustworthy, and dynamic digital ecosystem. It’s been implemented without restricting or delaying new features in Japan or replicating the most egregious harms generated through Europe’s less-informed DMA approach. Japan is being more successful in achieving its goals because they rejected the technology micro-management that has come from Europe. They recognized that differentiation is what drives competition and enables  consumer choice, not rules that lead to smartphone homogenization. It’s a smarter approach that Europe could, if it wants to boost competition, follow and still achieve its same core DMA goals.  

This is but one example of how Europe can reformulate its rules to achieve important goals, without all of the broad collateral harms. The EU should make its regulatory reset count by recalibrating its 40-plus digital frameworks to better align goals, drive a more trustworthy ecosystem, and strengthen the EU digital economy. It should start by holistically reviewing digital rulebooks, taking a more informed and consistent approach to its regulatory frameworks, revising provisions that undermine innovation and security, and aligning the frameworks in a user-centric way so they are consistent, effective, and synergistic in addressing some of the very real challenges the DSA, the DMA, the CRA, the GDPR, and Europe’s security agencies were designed to address. Europe also needs to retarget its digital markets mandates to address actual consumer harms, with evidence-based solutions that specifically address these harms to produce corresponding consumer benefits.

Summary

At this pivotal moment that could decide its long-term economic potential, Europe stands at a critical digital crossroads. How Europe chooses to respond in this moment could be one of the most consequential decisions that shapes its long-term future. To move from technological laggard to leader, to crank up its economic engine, close its technology gap, boost its long-term economic competitiveness, and unlock the previously unthinkable mobile opportunities that improve people’s lives, Europe must fully embrace a more trusted technological future. And the shortest path to progress begins with a regulatory retooling.