Draghi competition report: gloomy tech outlook – only niches remain for the EU

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Around a year ago, EU Commission President Ursula von der Leyen asked former Italian head of government Mario Draghi to compile a report on Europe's competitiveness. On Monday, the Commission published its several hundred page-long description of the current situation along with recommendations. Von der Leyen is unlikely to like much of what it contains. Particularly in the area of key technologies, the work reads like a merciless reckoning with the countless failures of politics and business on the old continent. The former President of the European Central Bank (ECB) puts his finger in the wound: there is a lack of money and financing options, skills and human capital, as well as easy access to a large domestic market.

Take artificial intelligence (AI), for example: "AI developments are an opportunity for industrial companies in the EU to increase their competitiveness," writes the 77-year-old. However, it is crucial to integrate the technology quickly. Only 11% of EU companies currently use AI. 73 percent of the basic models developed since 2017 come from the USA, 15 percent from China. Draghi warns: "For Europe, there is a risk of being completely dependent on AI models designed and developed abroad." This applies not only to general AI applications, but also to vertical solutions intended for important EU sectors such as the automotive, banking, telecommunications (TC), healthcare, mobility and retail industries.

The few companies developing generative AI models in Europe, such as Aleph Alpha and Mistral, require large investments to become competitive alternatives to their US counterparts, according to the report. This need is currently not being met by the EU's capital markets, forcing local players to look abroad for funding opportunities. Looking at the world's leading AI start-ups, 61 percent of global financing went to US companies, 17 percent to Chinese companies and only 6 percent to companies in the EU. Furthermore, the EU has "a small total number of new data scientists" compared to the US and China. The relevant talent pool is comparatively small and highly qualified specialists are often lured away by high salaries abroad.

AI Act and GDPR – too much of a good thing?

"The EU's weak position in the development of AI means that it may not be able to fully exploit its competitive advantage in several industries in the future," Draghi points out. A weak AI ecosystem would in turn be an obstacle to the digitalization and productivity gains of EU companies and a threat "to Europe's current leadership in advanced robotics".

The central banker describes the ambitions that EU legislators have shown with the General Data Protection Regulation (GDPR) and the AI Regulation as praiseworthy in principle. "However, their complexity and the risk of overlaps and inconsistencies could undermine the EU industry's developments in the field of AI." The EU must now find a compromise between stronger protection of fundamental rights and product safety and less stringent requirements to promote investment and innovation, for example through regulatory freedom. This requires simplified regulations and harmonized GDPR implementation. Overlaps with the AI Act must be eliminated.

Draghi attributes the USA's strong position in AI mainly to the size of the cloud hyperscalers Amazon Web Services (AWS), Microsoft Azure and Google Cloud, close partnerships between them and specialized companies such as OpenAI, as well as the availability of venture capital. As a result, the expert states: "The EU market for cloud services is largely lost to players based in the US." The demand for computing power and the volume of data is growing rapidly in all sectors. However, the three hyperscalers already account for 65 percent of this market. The share of EU cloud providers fell to less than 16 percent in 2021. Economies of scale and the high real estate and energy costs in Europe argue against a trend reversal.