Europe’s Path to Global Leadership: Investment, Innovation, and Integration

Europe must enhance competitiveness by integrating markets, simplifying regulations, and leveraging strengths in research and sustainability. The 2025 EIB Investment Report highlights the need for targeted public investments and improved access to risk capital. Regulatory barriers and declining private sector investment pose challenges, while AI and biotech lag behind global competitors. The green transition remains a stronghold, with Europe leading in clean technology exports. Strategic, coordinated policies are essential for securing long-term economic resilience and leadership.

Europe’s Path to Global Leadership: Investment, Innovation, and Integration

As global uncertainties rise, Europe must strengthen its competitiveness while ensuring security. Insights from the 2025 European Investment Bank (EIB) Investment Report highlight three key strategies for maintaining leadership: expanding market opportunities through integration and streamlined regulations, leveraging strengths in research, sustainability, and social infrastructure, and optimizing public sector interventions with targeted European strategies.

Adapting to a Shifting Global Economy

Europe faces critical choices regarding security, economic resilience, and reducing external dependencies. Geopolitical shifts are transforming its global position, economic growth model, and trade dynamics. Previous reports by Mario Draghi (2024) and Enrico Letta (2024) emphasized deepening the single market, creating a Savings and Investment Union, improving industrial policy coordination, and addressing substantial investment needs. These priorities have become even more pressing following recent geopolitical developments.

European Commission President Ursula von der Leyen has positioned her administration around investment-led strategies. The 2025 Competitiveness Compass outlines measures to enhance industrial policy, simplify regulations, integrate the single market, and improve risk capital accessibility (Zettelmeyer, 2025). Current initiatives, such as the Clean Industrial Deal and Omnibus regulations, aim to cut bureaucratic complexity. The EIB Investment Report (2025) underscores three core drivers of competitiveness: large-scale innovation investment, deeper EU market integration, and regulatory simplification. By capitalizing on Europe’s strengths in research, social policies, and green leadership, public investments can achieve greater impact.

Investment Trends and Challenges

Recent years have seen significant public investment initiatives, including the Recovery and Resilience Facility (RRF), EU funds, and financial instruments like the European Fund for Strategic Investments and InvestEU. However, since 2024, investment growth has relied primarily on public funding, while private sector investment has declined. Closing Europe’s €800 billion investment gap—especially in security and defense—requires innovative strategies to stimulate growth.

Historically, major EU investment surges followed structural changes such as the establishment of the single market, EU enlargement, and post-pandemic recovery programs like the Green Deal and RRF.

Strengthening Market Integration and Simplifying Regulations

A more unified single market will enhance European firms’ global competitiveness by fostering investment incentives and reducing regulatory fragmentation. According to the EIB Investment Survey (EIBIS) of 12,000 European businesses, 60% of exporting firms—and 74% of leading innovators—cite regulatory and consumer protection disparities as obstacles to cross-border operations.

A fully integrated Savings and Investment Union is crucial for financing innovation. Data suggests that companies’ ability to raise equity depends more on market size and financial depth than GDP per capita. Firms with access to equity financing experience 7% higher investment growth and are 13% more likely to develop new innovations.

Regulatory compliance costs are a significant burden, particularly for smaller businesses. About 86% of EU firms have dedicated regulatory staff, with costs averaging 1.8% of turnover—rising to 2.5% for SMEs. By comparison, recent energy price shocks accounted for 4% of turnover.

Leveraging Europe’s Strengths in Industry and Research

While Europe remains strong in industry, trade, and research, productivity and competitiveness must improve. The EU lags behind in biotech, digital technologies, and artificial intelligence (AI), despite excelling in some sectors. Large European firms dominate traditional industries but rely on foreign companies for digital technologies. AI and advanced digital tool adoption is rising but still trails behind the U.S.

One area where Europe leads is the green transition. It remains a global hub for green technology patents, with low-carbon technology exports growing 65% since 2017—compared to 79% for China and 22% for the U.S. Maintaining ambitious climate policies ensures that firms benefit from energy efficiency investments, whereas weaker climate policies limit returns for energy-intensive industries.

Investing in Social Infrastructure for Economic Growth

Europe’s social model is an asset, linking investments in education, skills, healthcare, and housing to economic prosperity. A shortage of skilled labor is a growing challenge—51% of firms cited it as a major investment barrier in 2024, up from 39% in 2016. Despite this, business investment in employee training has remained stagnant. Addressing labor shortages is essential for the green and digital transitions. For instance, if female workforce participation matched the highest EU levels, GDP could grow by 4%.

Housing shortages also impact labor mobility and productivity, especially in expanding urban centers. These shortages disproportionately affect younger workers and mobile employees, limiting long-term homeownership opportunities. Inefficiencies in the construction sector, low productivity, and slow regulatory approvals further exacerbate the issue.

Optimizing Public Investment with Targeted Strategies

Since the pandemic, government investment has played a crucial role, growing by 7.2% year-on-year in early 2024 and offsetting a 2.5% decline in private investment. Public investment as a share of GDP reached 3.5% in 2023, with subsidies rising from 0.6% to 1.6%. The Recovery and Resilience Facility has been instrumental, but as funding winds down, governments will face difficult financial decisions.

Maximizing the impact of public funds requires financial instruments and stronger EU coordination. Targeted policy incentives—such as specific grants or preferential financing—are far more effective than broad-based subsidies. Firms receiving targeted aid are significantly more likely to invest in green transformation and innovation. Coordinating industrial policy at the EU level also minimizes market distortions and enhances efficiency, particularly in mid-tech sectors.

Conclusion

To maintain global leadership, Europe must prioritize large-scale investment in innovation, the green transition, and security. This strategy should focus on three pillars: enhancing market opportunities through integration and simplification, leveraging strengths in research and sustainability, and optimizing public investment with targeted, coordinated approaches. By embracing these principles, Europe can ensure long-term competitiveness and economic resilience in an increasingly uncertain world.