Draghi report sounds alarm on Europe's competitive decline

This week, the European Union released a report about the future of European competitiveness authored by Mario Draghi, former Italian prime minister and president of the European Central Bank.

The nearly 400-page report, a year in the making, presents over 170 recommendations. It is a stark warning, highlighting Europe's competitive shortcomings against China and the United States in many areas. 

It offers recommendations and analysis of both sectoral (energy, pharma, AI, transport) and horizontal (innovation, skills gap, governance) policies to ensure the EU remains a competitor to the US and China in the future. 

The European tech scene is characterised as overregulated, underinvested, and suffering from brain drain as talent leaves for the US. This is nothing new, but when you dig into the report, it just gets worse. 

Daniel Elk, CEO and founder of Spotify, called the report critical on X, noting:

Mario Draghi’s report on the future of European competitiveness comes at a critical time. I’ve thought a lot about our ambitions and what’s at stake and couldn’t agree more when he describes Europe as facing “an existential challenge.” 3 things I found especially interesting and… https://t.co/xJSn0up5bM

— Daniel Ek (@eldsjal) September 10, 2024

"There is no EU company with a market capitalisation over EUR 100 billion that has been set up from scratch in the last fifty years, while all six US companies with a valuation above € 1 trillion have been created in this period." 

Further, "between 2008 and 2021, close to 30 per cent of the "unicorns" founded in Europe relocated their headquarters abroad, with the vast majority moving to the US."

The Employers' Group of the European Economic and Social Committee agrees that the move to the United States affects not only startups but also very well-established EU firms. 

Mr Pierre Bollon, French member of the Employers Group, said:

"The unicorns mentioned by Mr Draghi are, unfortunately, the most visible tip of a melting iceberg." 

Overregulation is part of the reason why European startups fail to raise funds and attract and retain talent. 

Bureaucracy and red tape choke European startups

Red tape is familiar to Europe. As a commentator on X asserts, "The USA innovates, China replicates, the EU regulates."

Even a cursory skim of the report offers a warning sign to everyone about the dangers of overregulation at a time when tech is the shining example of exponential innovation that far faster the laws, policies, and attempts to regulate.

The report calls for less regulation,  quoting the 13,000 new EU rules versus the 3000 adopted in the US during the same time.

According to Elon Musk:

Mario Draghi’s critique is accurate.

A thorough review of EU regulations to eliminate unnecessary rules and streamline activity in Europe would revitalize growth and strengthen competitiveness.

Things should be default legal, rather than default illegal. https://t.co/NQQom5OYIS

— Elon Musk (@elonmusk) September 9, 2024

Every sector and ecosystem is critiqued with terms like "overly complex process" with "multiple regulatory, legal, and bureaucratic barriers hampering startup scaling" 

In sectors like manufacturing, an average of 15 authorities (and up to 30 authorities) may be involved in a given project in a Member State. 

Investor  Michael Jackson, Venture Partner at  Multiple Capital and Wilbe and Member of Advisory Board and Investment Committee, Quantum Fund Redstone sees the report as a wake up call for Europe. 

"There are still many Europeans in denial.

There's still this political and bureaucratic class in Europe that just does not understand the digital economy, technology, or science. They can get away with not needing to understand, but at the same time, some of these people are making policy."

According to Jackson, the EU has turned regulation into a lucrative industry. 

"You have people making really good livings just helping European companies write grants with advisory service providers taking five, six, seven per cent.

Every time there's a new regulation, there's just this whole crop of consulting firms that pop up."

You only need to look at funding programs such as Horizon Europe. 

Bureaucracy bogs down Horizon Europe's innovation potential

The report identifies multiple weaknesses in the Horizon Europe programme, which, from 2021 to 2027, has a budget close to €100 billion. 

While Horizon alumni includes unicorns  CELLINK (Sweden), SWORD Health (Portugal) BioArctic (Sweden) and soonicorns ICEYE HUMA and Pasqal, the program suffers from thinly spread resources and program rules (for submitting proposals and for managing projects once successful)  that are excessively complex and in need of simplification. 

Data analysis last year revealed that 7 out of 10 applications are rejected, resulting in an entrepreneurial burst of service providers making coin from helping with grant writing — I now see them shilling their wares at every tech conference I attend.  

Further, programs like EIC are criticised for being mostly led by EU officials rather than top scientists and innovation experts, with the programme's performance "difficult to measure in terms of output, notably patent registration."

Further, the report also highlights the fact that the potential of public-private partnerships is not fully seized. 

For example, the European Innovation Council's (EIC) Pathfinder has a budget of only €250 million for 2024. 

In comparison:

• US ARPA agencies have significantly higher budgets (DARPA: USD 4.1 billion for 2023; ARPA-H: USD 1.5 billion; ARPA-E: USD 0.5 billion). 
• Similarly, the UK's ARIA has a budget of GBP 800 million over several years.
• The German Federal Agency for Disruptive Innovation (SPRIN-D) has a budget of EUR 220 million for 2024. 

Can the quantum computing sector show a way forward? 

Jackson argues that Europe's lack of a dedicated innovation hub, similar to Boston's medtech and biotech ecosystem, hinders its ability to compete effectively in the global market. He suggests that countries like France and Germany should specialise in specific sectors to maximise their impact.

And that thing could be quantum computing. 

The report suggests that quantum computing could contribute up to €850 billion to the EU economy in the next 15-30 years. 

Sabrina Maniscalco, co-founder and CEO of Algorithmiq (Finland) calls for a pan-European quantum strategy "that fuses research, investment, and commercial deployment."

Startup founders also cite the need for to prioritise real-world applications, bolstered by private investment, and less regulation: 

Tom Darras, CEO and co-founder Welinq (France), sees Europe at risk of becoming a lab instead of a leader "we need bold investment, infrastructure, training, streamlined regulations, and a commitment to turning cutting-edge research into real-world applications"

Alexander Glätzle, CEO and co-founder of planqc (Germany) asserts "attracting greater private capital is essential if we are to industrialise quantum breakthroughs and secure our leadership."

Ion Hauer, Principal at APEX Ventures cites the need for "significantly more private growth funding and a unified capital market."

Akhetonics (Germany) co-founder, Michael Kissner, asserts that 

"Europe needs to shift from being a research powerhouse to a commercial leader, fostering environments where quantum breakthroughs aren't just theoretical but drive tangible impact. 

It's time to focus on real-world applications that can transform industries and bring advanced computing out of the lab and into everyday business."

Denmark's quantum strategy: A model for international collaboration and public-private partnerships

For me, Denmark offers an example of how this can work in practice. I'm visiting Denmark this week for the Tech BBQ conference.

It's a country which really succeeds when it comes to the necessary, and proven, trinity – that interconnected relationship between academia, government, and enterprise/industry with real commercial use cases that turn the technology into something tangible, especially when it comes to quantum computing.

Denmark has a National Quantum Strategy focusing on the commercialisation, security, and international collaboration of quantum technology. 

The Niels Bohr Institute in Copenhagen is the home of the  NATO Center for Quantum Technologies, which is also part of NATO's Defence Innovation Accelerator for the North Atlantic (DIANA), developing dual-use (civilian and defence) deep tech, which helps solve challenging defence and security problems.

While the country's invested just $406 million — small bones compared to Germany's $5.2 billion … in quantum tech, the landscape is also supported by significant private sectors investment including initiatives from the Novo Nordisk Foundation — such as the Novo Nordisk Foundation Quantum Computing Programme — and the establishment of Quantum House Denmark to foster a competitive environment for quantum startups. 

In August, the Novo Nordisk Foundation, in collaboration with the University of Copenhagen, launched an initiative to develop Denmark's first fully functional quantum computer by 2034. It aims to help develop new medicine and provide new insight into climate change and the green transition that cannot be achieved with classical computers today.

Further, while Denmark doesn't have a massive number of quantum startups, its ome to companies such as Sparrow Quantum, Hafnium Labs, Molecular Quantum Solutions, NKT Photonics, and Kvantify. The country is also home to strong multidisciplinary sectors such as photonics, material science, nanotechnology, and computer science, complementing quantum research.

From here to... more committee meetings? 

So where do we go from all of this? The report's year-long development cycle and almost 400-page length undermine the need for urgency.

Adopting an iterative, agile approach, similar to software development, of releasing findings and recommendations in smaller, more focused segments would have meant policymakers—or countries under their own initiative—could have begun implementing solutions sooner, potentially narrowing the gap between analysis and action.

Jackson suggests one way forward is for the EU to focus on "low-hanging fruit."

Examples include regulation exemptions until startups reach a certain amount of revenue and employee size, and standardisation with the  European equivalent of Delaware

"If they can just focus on making everything more frictionless, that's already a huge win. 

But the big projects they're talking about, like shared debt and fixing the capital markets, are going to be really difficult to achieve. 

If they can come out and say, 'Hey, we're going to standardise the EU,' that's something they could win and get through, and it would be massively helpful."

Ultimately, the report offers an opportunity for political grandstanding about everything that's failing in European innovation and who's to blame and why.

But I think we're going to see more talk than action as the report's recommendations risk being lost in bureaucratic discussions and committee meetings. 

The exponential speed of tech innovation also means that the report's insights could become obsolete before they are debated, much less implemented.