The European economy is falling behind. At the turn of the century, EU labor productivity was on a steady upward trajectory and had reached almost 95 percent of U.S. levels. Then the trend reversed. EU productivity is now 20 percent lower than that of the United States. One important cause of this decline is Europe’s failure to participate in the digital revolution. Of the world’s 100 most valuable high-tech companies, only two are headquartered within the EU. The bloc has no global-scale companies in cloud computing, online advertising, mobile devices, or chip design, and it has only one competitor—France’s Mistral—remaining in the race to build the large language models powering the current AI surge.

The publication in 2024 of former Italian Prime Minister Mario Draghi’s report on European competitiveness heralded a shift in attitudes. The report recommended several policy interventions, including increased public investment in R & D and a capital markets union. By mid-2026, around 30 percent of its recommendations had been implemented. That is a good start. But even if the report’s proposals were fully adopted, they would not be enough to revive Europe’s flagging competitiveness—because they do not address the root cause.

The problem is not that the EU and its national governments are not doing enough to spur competitiveness. It is that they are doing too much to impede it. Through the slow accretion of layers of labor and tax policy, red tape, and technology regulation, they have erected barriers to the creation of the kind of large, vibrant startup ecosystem currently thriving in the United States. This ecosystem has been the cradle of many major innovative high-tech companies, as well as those sparking innovation and growth in other sectors. If the EU does not create the conditions for such companies to develop, then the bloc’s decline may become irreversible.

Big companies are hard to change. Global, long-standing, historically successful ones might be the hardest of all. And Europe has many of these. The 50 most valuable EU companies trace their origins back more than 150 years, on average. When such companies are confronted by fast, broad, and deep technological change, they struggle to respond effectively. The differing trajectories of the European and U.S. auto and space industries—which have historically driven growth and innovation—reveal the importance of fostering a healthy startup ecosystem.

In the first quarter of the twenty-first century, carmakers have experienced two immense changes. First, owing to a combination of regulation and demand, they have begun the transition from manufacturing internal combustion engine vehicles to manufacturing electric ones. Second, breakthroughs in digitization and automation have necessitated further changes in their offerings. Europe’s carmakers have floundered in the face of these changes. Volkswagen has probably tried hardest. It committed to an entirely new EV platform in 2015, announced ambitious electrification goals across the brands of the VW Group, and created Cariad, a new software subsidiary. Since then, Volkswagen has sold approximately two million EVs. But it is hard to label the carmaker’s overall electrification effort a success. Cariad was reorganized multiple times, updates arrived late, and several executives, including the CEO, left the company. Other brands within the VW Group, including Porsche, Audi, and Bentley, announced major delays of EV models and platforms, and Porsche took approximately $5 billion in write-downs associated with its electrification efforts.

In China, still VW’s largest overseas market, car buyers have shifted to EVs—but not European ones. As a consequence, profits from VW’s Chinese operations fell by 80 percent in the decade to 2026. The market capitalization of the entire VW Group followed a similarly dire trajectory, dropping by more than 60 percent in real terms between the end of 2015 and the second quarter of 2026. By the middle of 2026, VW Group as a whole was in deep trouble, with the Financial Times reporting that its CEO, Oliver Blume, proposed shuttering four factories in Germany, and laying off as many as........

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