Europe's competitiveness challenges for 2025
A new global economy driven by high technology is emerging. Europe has a strong scientific foundation but must reinvigorate its competitive and technological resources to avoid falling behind.
The wind is not blowing in Europe's sails. France and Germany are grappling with deep social and political crises (and little needs to be added about the UK, adrift after Brexit). The announcement of a possible closure of three Volkswagen plants in Germany capped off a year of bad news regarding European competitiveness.
The period 2017–2024 will likely be remembered as a historic turning point. The old globalization has ended. The crisis sparked by the ban on the Chinese company Huawei in 2017 initiated a budding global fragmentation into two spheres of influence: one led by the United States and the other by China. Where does this leave Europe?
A turbulent period
In 2017, during President Trump’s first term, a tech-commercial war began between China and the US due to Trump's ban on 5G technology (crucial for high-speed urban digitalization) provided by Huawei. The company was developing cutting-edge 5G devices at highly competitive costs, but the US administration expressed concerns about data security flowing through Chinese-origin circuits and systems. Additionally, suspicions loomed over significant Chinese government subsidies to Huawei’s R&D efforts.
At the time, Europe hesitated in defining its position. Shortly thereafter, during the pandemic, the continent faced the stark reality of its extreme fragility and dependence on external suppliers of critical technologies, from advanced textiles to semiconductors. The case of electronic chips was particularly alarming: in 2020, when supply chains broke down, the Western world realized that semiconductor production clusters were concentrated in Asia.
Neither the US nor Europe had autonomy in such a critical technology. Chips have become the building blocks of the digital economy. Without chip supplies, everything grinds to a halt, and Europe goes straight back to the Ice Age.
Europe stands alone at the start of a new Cold War fought on the battleground of high technology
Europe’s traumatic wake-up call continued in 2022 with the outbreak of the war in Ukraine. Europe also realized its dependence on others for energy, security, and defense supplies. That same year brought a transformative revelation: evidence surfaced that China had surpassed the US in scientific output, both in quantity and quality, according to a report by Japan’s Ministry of Technology. Alongside China, a major alternative bloc to the West solidified: the BRICS nations (Brazil, Russia, India, China), with countries like Saudi Arabia, the UAE, Egypt, Iran, and Ethiopia aligning themselves with it.
Two-thirds of humanity have not embraced the model of liberal democracy and market capitalism. This alternative bloc is now equipped with technology on par with, or even superior to, the Western bloc, which itself is splintering as the US charts an independent path. Europe finds itself alone as a new Cold War takes shape on the technological front.
The rules of the new techno-economy
The rules of the game have changed dramatically in just three years. While the “mantra” of globalization was outsourcing and offshoring low-cost activities, the new focus is on urgently concentrating and controlling high-tech activities. Global supply chains are giving way to local clusters. Cost considerations have been replaced by decisions based on resilience and supply security. Public-private partnerships and investments in R&D are being revitalized globally to strengthen local innovation systems.
In 2022, the US launched the Inflation Reduction Act (IRA), a massive $700 billion reindustrialization and economic revitalization plan. The US economy is reindustrializing at breakneck speed, embracing direct support for companies to control local production and research, especially in high-tech sectors—practices questioned or banned during the era of globalization.
The competition to attract such activities has reached unprecedented levels: Canada announced $13.2 billion in subsidies to secure a $7 billion Volkswagen investment in an electric battery plant in Ontario. Meanwhile, South Korea unveiled a $450 billion plan with companies like Samsung to establish a major chip production ecosystem. At the same time, a new player is reshaping the global geopolitical and economic landscape: artificial intelligence (AI).
Nine of the world’s ten most valuable companies are tech giants
The 2022 launch of ChatGPT marked the beginning of an expansive economic “blue ocean” with large language models (LLMs) and generative AI, a transformative technology poised to reshape industries and sectors.
Among the ten most valuable companies globally, nine are tech-focused (Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta, Tesla, Broadcom, and Taiwan Semiconductor Manufacturing). Only the tenth, Berkshire Hathaway, is financial but invests heavily in technology. The global economy has rapidly evolved into a techno-economy increasingly driven by AI.
Europe, however, lags far behind: the first European company on this list is Denmark’s pharmaceutical firm Novo Nordisk, ranked 23rd. While the US fosters a new technolibertarian wave and China consolidates its tech-state model, Europe debates regulation and must urgently find its place in the sun. According to the Draghi Report (commissioned by European Commission President Ursula von der Leyen), Europe must invest €800 billion annually to maintain its competitive edge against the US and China while upholding its welfare state.
Europe and Spain’s role in 2025
The time has come for European integration and scaling up its technological and innovation systems. Seven European nations (Germany, Denmark, Sweden, Finland, Austria, the Netherlands, and Switzerland) are among the world’s ten most innovative economies. However, they are too small to make a global impact. Europe has a robust scientific base but must quickly channel it into social and economic applications.
European industry (exemplified by Germany) has been slow in digital transformation and achieving the critical mass needed to compete globally against the two leaders of this new Cold War: China and the US. On the positive side, a mindset shift is underway, and urgency is being acknowledged in reactivating Europe’s competitive and technological strengths.
Spain’s R&D investment grew by 15.7% last year
Evidence of this shift includes the establishment of seven AI Factories—mega-clusters centered on supercomputers within the European high-performance computing network—to accelerate AI adoption in European institutions and businesses. The Barcelona Supercomputing Center will host one of these AI Factories.
Europe is also implementing the Next Generation EU plan, a major financial program aimed at digitalization, technological competitiveness, and ecological transition. Spain is already showing signs of progress. According to the National Statistics Institute, Spanish R&D investment increased by 15.7% last year, with over €3 billion in new investments. Fifteen of Spain’s 17 regions are achieving double-digit growth in R&D, and 11 of them have boosted their R&D efforts by more than 40% over the past three years.
These are promising developments, indicating an apparent shift in Spain’s competitive base. However, caution is necessary: Spain’s total R&D investment is only 1.49% of GDP, half the European target for 2020. Much work remains, as the contribution from businesses—currently at 56%—is proportionally low and needs to increase by ten percentage points. We run the risk that this R&D effort remains confined within the boundaries of universities and research centers, without translating into jobs and real productivity in the economy. Most importantly, we risk that this positive momentum will abruptly halt once the supply of Next Generation EU funds ends, unless the effort is sustained with domestic resources and the Draghi Plan ultimately takes shape.