Europe's innovation and tech decline is a cautionary tale

Arab News

25-05-2025

https://arab.news/n6x7b
Mario Draghi, the former European Central Bank president, briefly grabbed headlines last September when he pinpointed the root cause of Europe's economic stagnation. 'The EU is weak in the emerging technologies that will drive future growth ... This is an existential challenge,' he wrote in a report.
But, as a recent Wall Street Journal report pointed out, Draghi used the opportunity to emphasize the necessity of public funding — complemented by private capital — to spur Europe's lagging tech sector. That conclusion felt counterintuitive in the sense that the US has built a flourishing tech and innovation ecosystem largely through private investments and a culture of risk-taking.
So, what are the pitfalls that Saudi Arabia, the UAE, and other leading destinations for advanced tech companies should avoid?
One of the biggest and most obvious is overregulation. Europe's complex and fragmented rules burden startups with red tape and high compliance costs. Instead of creating an even playing field, the rules often end up helping the same US tech giants that Europe is trying to restrain because they can afford the legal teams and resources to navigate the system.
Decision-making is also painfully slow. Getting venture funding approved can take more than a year in some European countries — an eternity in the fast-paced tech world. Compare that with the US, where nimble funding cycles mean entrepreneurs can get ideas off the ground in weeks, not months.
Another major roadblock is Europe's fragmented market. Dozens of languages, different legal systems and inconsistent tax regimes make growing a business across the Continent a logistical nightmare. In contrast, a startup in the US has instant access to a vast, unified consumer base under one set of rules. The EU talks a lot about a 'digital single market,' but the reality is still at odds with the rhetoric.
Cultural attitudes also play a role. The general consensus is that there is a deeply ingrained aversion to risk in present-day Europe. This is reflected in rigid labor laws, long notice periods, and strict hiring and firing rules. Unlike Silicon Valley, where failure is often seen as just a fact of life, European entrepreneurs often do not get a second chance. That makes people less likely to try bold ideas in the first place.
Then there is the venture capital gap. Europe's VC scene is not just smaller, it is also more conservative. Investors often impose unrealistic terms on founders, taking too much equity and leaving them with little control or motivation. The result? Many of Europe's best startups either pack up and move to the US or get acquired before they can grow into global giants.
Instead of nurturing homegrown innovation, European policymakers have focused on regulating and fining Big Tech, particularly US firms. While accountability is important, this focus on policing has meant that Europe has not built many champions of its own. The new EU AI Act, for instance, aims to lower risk and enforce ethical standards, but could very well end up stifling experimentation and pushing cutting-edge innovation elsewhere.
The US thrives thanks to its light-touch regulations.
Arnab Neil Sengupta
Europe also suffers from talent drain. It produces world-class engineers and scientists, but many leave for better opportunities in the US or China. High taxes, complex labor rules, and the lack of financial incentives make it harder to retain top talent. Until recently, stock options were taxed so heavily in many European countries that they were hardly worth offering at all.
Startups that do get off the ground face slow adoption and evolution. Customers, funders and regulators are all slower to respond than in the US, making it tough to maintain momentum. Many of Europe's best-known tech firms — Spotify, DeepMind, Skype — either moved abroad, got sold to US companies, or partnered with foreign giants. Very few have grown independently into global players.
Europe had early success in semiconductors, mobile phones, and chipmaking through companies such as Nokia, ARM, and ASML. But slow decision-making and underinvestment let others take the lead. Today, the Continent is lagging behind in critical areas such as AI, quantum computing, and cloud infrastructure.
Instead of nurturing a dynamic private investment landscape, many European governments have been pinning their hopes on public spending programs. But it is private capital — faster, more flexible, and more demanding — that plays a crucial role in spurring innovation. Without it, many startups remain stuck in the early stages of development.
Numerous analysts, policy institutes and think tanks have argued that Europe's 'regulate first' approach discourages innovation and limits its appeal to global investors. Meanwhile, the US thrives thanks to its light-touch regulations, strong intellectual property protections, and a culture that celebrates hard-charging entrepreneurs.
The US also benefits from something harder for competitors to create: an interconnected innovation ecosystem. Universities, entrepreneurs, investors, and tech companies all feed into each other and contribute to invention and growth. Europe has pockets of excellence, but lacks the same level of synergy and enthusiasm.
The EU's Draghi was right to call this an existential challenge. But the answer is probably a mindset shift rather than excessive dependence on government funding. No matter how diverse Europe's views on the appropriate balance between regulation and market freedom, any region that wants to keep pace with technology must prioritize speed, reward risk-takers, simplify regulation, and let private capital do what it does best.
Had Europe emerged as an innovation powerhouse full of companies providing strong competition to US Big Tech, the world would have been better off. But the truth is, no systematic attempt has been made at course correction. Unless it shifts gears quickly, Europe will continue to serve not as a rival to US and Chinese tech dominance, but as a cautionary tale of missed opportunities.