3 priorities to boost Europe's competitiveness in a changing world

The European economy has lagged behind Asia and the US for 15 years. The underperformance will continue, and could even worsen, without a dramatic rethinking of economic regulation as we know it – a conclusion reinforced by Mario Draghi's recent report on European competitiveness.

The new US administration is implementing an aggressive economic growth agenda driven by deregulation, tax cuts and trade policy that could leave European economies further behind, just as artificial intelligence and other transformative technologies take hold.

The European Commission has recognized these challenges in its new Competitiveness Compass, proposing measures to boost innovation and coordinate policy. But while this is a step in the right direction, more fundamental changes are needed.

The stakes today are high. Oliver Wyman estimates that if Europe were to stay on its 2021-23 growth trajectory rather than match that of the US, European GDP per capita by 2030 would be €11,200 lower in today’s euros. And that’s before factoring in the Trump growth agenda.

To prevent this outcome, Europe must fundamentally reshape its approach to economic growth by aligning three critical policy levers: industrial strategy, public finance and regulatory oversight. Only by transforming these fragmented domains into a coordinated system can Europe compete in the industries that will define the next decade.

As AI transforms industries and geopolitical shifts reshape trade patterns, the imperative to integrate policy levers will only intensify. Currently, they operate in isolation, managed by separate agencies with distinct agendas, which leads to contradictory priorities and missed opportunities.

For instance, while innovation policy promotes AI development, fragmented regulatory frameworks often impede deployment, and financing mechanisms fail to support scale-up. Creating coherence across these three dimensions can generate a positive flywheel effect, where aligned policies channel investment into strategic sectors, enhancing productivity and driving growth. The EC's proposed Competitiveness Coordination Tool aims to align EU and national policies and integrate industrial and research policies. But real and lasting transformation requires deeper integration of the three policy levels at all levels.

Taiwan's emergence as a semiconductor powerhouse demonstrates the power of alignment. The economy combined specialized intellectual property protection frameworks with strategic co-investment programmes, while focusing industrial policy on advanced manufacturing capabilities. It is now home to more than 65% of advanced chip manufacturing.

Israel's YOZMA programme, meanwhile, turned $100 million in government capital into an $8.5 billion venture capital industry by adapting regulatory frameworks to encourage foreign venture capital participation and catalyzing private investment through matched funding.

Effective industrial strategy is the foundation of an aligned economic policy. While the EC's Competitiveness Compass identifies a broad range of strategic sectors from AI to biotechnology, Europe must further prioritize sectors where it holds genuine competitive advantage and transformative potential – evaluating not just growth prospects, but also the ability to benefit from synchronized policy support.

Setting a strategy must go beyond high-level planning and add depth through granular real-time market intelligence and data-driven execution to coordinate policy responses.

The Netherlands' Brainport Eindhoven technology region demonstrates how this could work, using granular ecosystem mapping to identify precise intervention points and coordinate policy responses across domains. The region is expected to create more than 50,000 new tech and IT jobs by 2032.

While industrial strategy sets the direction, the second critical lever – public finance – must be structured to drive development at scale. The EC’s proposed Competitiveness Fund promises flexible funding mechanisms for private capital mobilization. But success still requires effective coordination across EU, national and regional levels, as well as integration across programmes.

Saxony's coordinated financing approach and “cluster strategy” to support its micro- and nano-electronics industry demonstrates this potential, combining significant subsidies, tax incentives and investments in high-tech infrastructure to attract global semiconductor manufacturers.

The state collaborated with the national government and the city of Dresden to develop specialized industrial parks, streamline regulatory processes and create public-private partnerships. It also prioritized workforce development by funding university and technical programmes tailored to the semiconductor sector, positioning Dresden as a premier hub for innovation. These measures successfully attracted joint ventures from major global players, cementing Silicon Saxony as the largest microelectronics cluster in Europe, with 600 members.

The challenge now is to replicate such successes using the EC's new funding architecture. This means not just consolidating funding streams, but also ensuring they work in concert with regional development strategies. This requires critically reassessing support for legacy sectors like coal and traditional automotive manufacturing, while ensuring robust transition programmes for affected workers.

The third essential lever, regulatory frameworks, must evolve in concert. The EC's commitment to reduce administrative burdens by 25% is welcome, but regulatory transformation must go beyond simplification to actively enable innovation in strategic sectors. This means establishing an appropriate risk-innovation balance early in sector development, as well as mechanisms to recalibrate regulation particularly in high-priority sectors as they evolve.

Regulatory sandboxes, which allow businesses to test products without full regulatory oversight, demonstrate this approach. Participating firms are 50% more likely to raise capital, while providing regulators with crucial insights about emerging risks and opportunities.

For instance, an innovative mortgage broker that participated in an early UK regulatory sandbox pioneered a business model offering free borrower-to-lender connections. This approach earned the company recognition as the UK’s best mortgage broker for 13 consecutive years by a mortgage industry association. By tailoring oversight to actual risks and streamlining processes, we can foster innovation while maintaining robust protections.

Europe's technical expertise, research infrastructure and market scale provide the building blocks for renewed leadership in the global economy. What’s needed now is the courage to focus efforts where they matter most and the commitment to align policy levers to reignite European dynamism and drive the next generation of growth.