It feels like you can’t open a browser without seeing headlines that Europe is falling behind.
GDP growth over the past two years has hovered at or below one percent, according to recent World Bank figures. The European Commission’s 2024 Draghi report on EU competitiveness highlights the urgency of the situation, with some commentators warning that Europe risks losing influence on the global stage.
This ought to be seen as a call to action: Europe’s slowing productivity gains in the post-pandemic period highlight the need for swift, coordinated efforts to boost growth.
The contrast with other major economies is stark.
According to the European Central Bank, “Between the fourth quarter of 2019 and the second quarter of 2024, labor productivity per hour worked increased by 0.9% in the euro area, whereas it increased by 6.7% in the United States.”
Yet within this challenge lies a powerful opportunity for Europe to reclaim its position and foster a competitive and resilient future. Some conditions are already in the continent’s favor.
Europe is a global leader in the energy transition and a major player in clean tech. European nations have been early adopters of industrial automation, the preeminent champions of Industry 4.0, and are consistently leading performers on measures like industrial robot density. Gartner projects $1.28 trillion in total European IT spending in 2025, up a hefty 8.7% versus last year.
In short, Europe is investing in technologies that should provide an edge in both competitiveness and productivity. So why is the economic impact relatively low? What’s behind this industrial productivity paradox?
And most importantly, what can be done about it?
A productivity paradox
Europe’s industrial productivity paradox resists simple framing. It’s a convoluted knot of interlocking challenges. A few things stand out, however.
First, Europe clearly lags other regions on one key innovation yardstick: private R&D spending. In 1991, Europe trailed the US in R&D expenditure by around 40%. Fast forward 30 years, and that gulf stood at 77%. Lower R&D translates to fewer patents and lower levels of disruptive innovation.
Much of the digitalization that Europe has undergone in recent years has been disproportionately concentrated in a few select sectors. This has resulted in what some observers refer to as the “mid-tech trap” of Europe, where innovation occurs more in highly mature, lower-growth sectors like automotive, aerospace and machinery, rather than in high-growth industries such as semiconductors and software. European business dynamism is also lacking, with slower rates of business formation (and market exit), and a dearth of equity financing and venture capital.
While Europe has its success stories, a “digitalization divide” exists within the European industrial base, with leading firms harnessing digital capabilities effectively and a large number struggling to do so. With the European economy being comprised to a greater degree of small and medium-sized enterprises (SMEs), the innovation gap between large and small companies has been more acute in Europe than elsewhere. This divide is highlighted by the rise of AI: While roughly half of large European enterprises have scaled a generative AI initiative, less than a third of SMEs have done so.
It should also be acknowledged that European industry has been dealt a series of blows by energy supply shocks and geopolitical uncertainty that have curbed competitiveness. Industrial firms have been vulnerable to volatility, with energy prices in Europe still 2-4 times those of major trading partners.
But the biggest factors in subdued productivity growth in Europe have been in people and business process dimensions. Europe’s millstone is its so-called “total factor productivity” – its ability to translate capital and labor into organizational value through innovation, efficiency and knowhow. European corporations trail their American counterparts in return on invested capital (ROIC) by four percentage points.
This comes down to systemic human capital issues like skills shortages and rubber-meets-road challenges like innovation cultures and organizational behaviors. Despite an enviable university and institutional research engine, Europe struggles to scale disruptive innovations, undercutting competitiveness.
Fixing productivity woes
Like the problem they address, solutions to Europe’s industrial productivity paradox must be multifaceted.
Europe needs a comprehensive refresh of how it supports its innovation ecosystem, including start-ups, but especially scale-ups, which have the potential to convert disruptive ideas into positions of market leadership and drive overall productivity.
Europe has a window of opportunity to address AI, but more urgent action is required at all levels, including shared compute and data infrastructure, increased access to capital, support for labor mobility, and smart, pro-business regulation grounded in public-private partnership to protect users while encouraging innovation.
The creation of a public, multilingual, open-source large language model in Switzerland is an intriguing development. Much more work is needed to drive productive, responsible adoption of AI at the company level.
Europe’s embrace of Industry 5.0, an evolution of the 4.0 focus on automation to encompass workforce upskilling, human-centric AI, and sustainable industry practices, is a positive step. At the enterprise level, continued investment in change management and people-focused policies will be essential to making Industry 5.0 a reality.
This includes reimagining how industrial companies attract and retain the next generation of talent – a generation growing up as digital natives in an AI-driven world, with expectations for purpose-driven work, exposure to the latest technologies, and continuous learning.
With some major economies pulling back on supports for renewable power and a new electrification supercycle emerging, doubling down on green energy and clean tech through efforts like the Clean Industrial Deal is a timely move for Europe that will result in long-term dividends.
The path ahead for productivity
Europe’s leaders are distracted by mounting pressures like new trade tensions and increased demand for both defense and domestic spending.
But a lack of competitiveness demands leadership – from politicians and industry alike. Competitiveness is the foundation of prosperity. Without it, progress on sustainability and other worthwhile social goals will stall.
As industry leaders, we collectively need to do our part to empower Europe’s workforce to be the innovators we know them to be.
Be sure to join us at Schneider Electric’s Innovation Summit, coming up October 22-23, in Copenhagen, for lively discussions and learning on the issues and innovations driving industrial competitiveness.
We invite your perspectives.
To learn more about the event, please visit our Innovation Summit Copenhagen 2025 page.
Add a comment