In the public debate, the observation seems established, Europe would lack the capital to compete with American tech, with the only solutions being more funds, more subsidies, more risk capital.
In a working paper from the European Central Bank, Jonathan Bothner, Paloma Lopez-Garcia, Daphne Momferatou, Ralph Setzer analyzed data from 25 European countries over fifteen years, and concluded that the determining variable is not only the volume of money available, but the institutional and regulatory quality in which this money is invested.
In 2021, around 17% of European market investment was directed towards high-tech sectors, compared to almost 33% in the United States. A difference that is not marginal and reflects a different allocation of capital. The question then becomes: why is European capital moving less towards the riskiest and most innovative sectors?
The cost of failure as a filter
Technology sectors (digital, AI, biotech) record high failure rates and rapid restructuring needs, with profitability that strongly depends on the cost of adjustment, i.e. laying off, pivoting, liquidating, restarting.
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The study shows that better institutional quality and especially less regulatory burden are factors favorable to a higher share of investment in high-tech sectors. The indicators used are not marginal: quality of governance, administrative efficiency, job protection, ease of business creation. Thus, the higher the cost of failure, the more capital is diverted from risky sectors.
A simulation that changes the order of priorities
The authors estimate that aligning European countries with the institutional level of the “border” country of the Union could increase the share of investment in high-tech sectors up to almost 50% compared to the current level. The order of magnitude suggests that institutional reform could close a substantial part of the gap with the United States. If this result does not deny the importance of capital, it puts its primacy into perspective, and injecting billions into an environment where risk is expensive does not mechanically modify sectoral allocation.
AI: revealing rigidities
The sectors most exposed to AI are particularly sensitive to institutional quality. In these activities, the speed of adaptation is structuring. LThe debate is therefore not only about “more or fewer rules”, but about the structure of incentives. While protective regulation can stabilize the economy, it can also increase the cost of risk.
Rethinking competitiveness
If Europe has abundant savings and powerful public instruments, the study highlights a problem of allocation, and not just financing. Technological competitiveness depends significantly on the context in which failure occurs: if failure is costly, so is innovation.
The question we must address is no longer just how to finance European tech more, but how to reduce the friction that weighs on risk-taking. An approach which, in a constrained budgetary context, could find particular resonance with political leaders and public decision-makers.
