The year 2025 is approaching, and as the European Union (EU) grapples with a sluggish economy, the potential imposition of 2.0 tariffs looms large, posing a significant challenge to maintain its economic competitivenessThe situation is particularly stark for Germany, often considered the economic powerhouse of the EURecent figures from the Federal Statistical Office of Germany reveal a concerning trend: the country's economic output declined by 0.3% in 2023, followed by an estimated further decrease of 0.2% in 2024. This marks the first instance of consecutive economic contraction in Germany since 2003, highlighting a stark contrast with the economic performance of the United States and many other European nations, such as Spain.

Experts and industry insiders who spoke with Financial First reporters suggest that the disparity in competitiveness between the United States and Europe centers largely around the tech sector

Key factors contributing to this divide include differences in levels of financing and the complexity of regulatory frameworksSuch challenges are underscored in an impending draft report by the European Commission, slated for release soon, which will address the state of the single market and competitiveness in 2025. According to this draft, the EU has experienced a significant decline in its share of the global technology and digital services market, plummeting to just 10.8% over the past decade, while the United States saw its share rise by one-third to 38%.

Further data from the Oxford Economic Institute reflects a worrying trend: since 2010, productive investment in the U.Shas consistently outstripped that in the EurozoneSpecifically, the proportion of GDP coming from productive investment in the U.Shas risen from 16.1% in 2008 to 18.3% in 2023, while the Eurozone has stagnated at around 15.6%. This disparity is perhaps best illustrated through the stark differences in the number of unicorn companies—startups valued at over $1 billion—between Europe and the U.S.

The unfortunate reality for Europe's tech startup scene is that capital is severely lacking

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Experts pointed out that Europe is not devoid of talent or innovation; rather, it struggles to access sufficient financingFor instance, while France has produced companies like Mistral AI, these instances remain painfully rare compared to the abundant funding opportunities available in the U.Sor even in ChinaAs the report from the European Commission suggests, Europe currently hosts only 263 unicorns, a minuscule figure compared to the U.S.’s impressive tally of 1,539 and even trailing behind China’s 387 unicorns.

Moreover, a staggering one-third of the unicorns established in Europe between 2008 and 2021 have relocated their headquarters—largely to the United StatesThis trend illustrates a concerning lack of resilience in Europe’s venture capital landscape, where the scale of the market remains disproportionately small, comprising less than one-thousandth of economic output

As a direct consequence, many innovative companies feel compelled to move to jurisdictions with more favorable financing conditions.

The International Monetary Fund (IMF) further corroborates these findings in its October 2024 European Economic Outlook report, emphasizing that Europe’s venture capital market is only a quarter of that in the U.S., contributing to a lack of business dynamism in the regionNotably, new firms that have been operational for five years or less capture only about half the market share compared to their American counterparts.

For Zhao Yongsheng, who has spent years working in France, these dynamics are painfully apparentThe financing structures differ significantly between Europe and the U.S., with the latter relying more heavily on equity and bond financing rather than relying predominantly on loansZhao points out that based on data from the European Central Bank, interest rates have been declining over 2024, making borrowing costs gradually more manageable for businesses and households

Yet, further reductions will be necessary in 2025—an optimistic outlook that still feels insufficient.

In October 2024, the average interest rate on new loans to businesses in the EU fell to 4.7%, down by more than half a percentage point from its peak the previous yearBanking activity regarding lending to businesses is showing signs of recovery, with a year-on-year growth of 1.2%, while mortgages continue to rise at a rate of 0.8%. The Oxford Economic Institute posits that investments need to be channeled into the right sectorsFor example, although investments in the information and communications technology (ICT) fields constitute a small portion of GDP, their impact stretches far and wide, leading to significant productivity gains.

Since the mid-1990s, the U.Shas seen broad productivity growth concentrated primarily in sectors that leverage ICTThis gap, in part, explains the divergent economic performances of the U.S

and Europe, as the latter has lagged in developing and deploying technologies that enhance productivityHarvey, an assistant economist at the Oxford Economic Institute, references comments previously made by former European Central Bank President Mario DraghiDraghi pointed to the failure to fully capitalize on the ICT revolution as a prime factor contributing to the productivity divide between the EU and the U.S.

In comparative terms, the U.Sdominates the tech industry, with the ICT sector accounting for a significant share of its GDP and boasting productivity rates that outshine most other economiesU.SICT workers produce an average of $580,000 per capita, far exceeding the second highest level among advanced economiesHarvey argues that intellectual property investment, which includes research and development as well as computer software, has been the primary driver of growth in U.S

investment levels in recent years.

He explains that this type of investment largely accounts for the investment gap between the U.Sand EuropeBy stimulating innovation through R&D and software development, productivity levels across various sectors can be elevated"A combination of strong intellectual property and ICT asset investment is likely a significant factor behind the U.S.’s leading role in new product development and their successful dissemination across the entire economy," he notes.

The question remains: can the EU mobilize significant resources to bolster its competitiveness? Draghi previously recommended an annual investment in the range of €750 billion to €800 billion—around 4.4% to 4.7% of the EU’s GDP—to enhance competitivenessThe European Commission has recently proposed a €300 billion plan aimed at reviving Europe’s stagnating economy

However, skepticism persists among analysts regarding whether private investors will indeed furnish the necessary funds to realize such initiatives, which is a sentiment echoed by the Oxford Economic Institute.

The principal challenge facing Europe is the magnitude of its investment gapAchieving parity with the U.Swould require the Eurozone to elevate its investment levels to around 3.3% of GDP, with even starker gaps evident in countries like the U.Kand GermanySimultaneously, ensuring that investments catch up with the U.S.’s current levels poses an additional complication, especially as many economies have suffered from insufficient investment relative to U.Scapital stock for years“Therefore, the magnitude of investment increase required to close this gap could be even more substantial,” Harvey warns.

However, such an extraordinary jump in investment levels remains improbable

“At the government level, the current political and fiscal realities hinder the feasibility of the required government expenditure,” he notesGovernment spending currently constitutes 19% of total productive investment in the Eurozone, and any success in meeting Draghi's recommendations will heavily depend on its effectiveness in stimulating significant growth in private investment.

The report from the Oxford Economic Institute also highlights that significant political obstacles exist regarding potential policy changes that could catalyze a surge in investmentsComprehensive regulatory changes would likely entail making difficult trade-offs regarding the maintenance of existing worker, social, and environmental rightsHowever, European governments are unlikely to weaken their commitments to high regulatory standards or entertain significant tax reforms that could undermine welfare provisions.