Europe possesses extraordinary technological capabilities. Advanced Semiconductor Materials Lithography (ASML) dominates advanced chipmaking equipment. The continent produces world-class engineering talent and maintains sophisticated research institutions.
Yet this potential consistently fails to translate into scaled digital champions. No European company has reached €100 billion in market cap since German software maker SAP achieved that milestone years ago. Of the world’s 100 most valuable companies, only 18 call Europe home. While the US invests $784 billion annually in research and development and China spends $723 billion, Europe manages just $410 billion. The venture capital gap is even starker – American firms have raised $800 billion more than their European counterparts over the past decade.
The problem lies not in European innovation, but in European structure. A startup that wants to scale across Europe must navigate 27 different regulatory regimes, while its American competitor builds once and deploys everywhere. European pension funds allocate a mere 0.1% of assets to venture capital, compared to 0.8% in the United States. Most damagingly, stock options are typically taxed as regular income at rates exceeding 40%, making it nearly impossible for European companies to attract and retain talent.
There are signs of progress. European leaders increasingly recognize that this is not just an economic shortfall – it’s a strategic one. The appointment of Finland’s Henna Virkkunen as Executive Vice-President for Tech Sovereignty represents unprecedented institutional focus on tech. Former Italian Prime Minister’s Mario Draghi’s competitiveness report places technological capability at the center of European recovery. The AI Act, for all its regulatory complexity, offers at least one opportunity: the creation of innovation-friendly testing environments.
Get the Latest
Sign up to receive regular Bandwidth emails and stay informed about CEPA’s work.
But understanding problems and solving them are different things. Europe needs reforms that address its structural disadvantages. Five stand out:
- Accelerate Regulatory Sandboxes. The AI Act mandates them, but they must become true fast-track environments for AI, quantum, and space – not just compliance exercises. These sandboxes should include flexible oversight, fast timelines, and clear performance thresholds to bring innovation to market.
- Enable Startup Scaling. A company approved in one European country should be able to operate across the bloc – no more 27 separate regimes. Europe needs a true “28th regime”: a streamlined path that sits above national systems, enabling businesses to operate seamlessly across borders. The new regime would help companies to scale fast and compete globally.
- Fix Stock Option Taxation. Follow Estonia and France: treat equity compensation as capital gains, capped at 20%. Without this, Europe can’t compete for top talent. Startups must be able to offer competitive incentives, particularly for founders and early employees who drive innovation.
- Leverage Defense Spending. Europe spends €240 billion annually on defense. Some of that must go toward advance purchase commitments for homegrown AI, cloud, and cyber tech. These commitments help startups de-risk private capital, accelerate deployment, and build the trust needed to win follow-on contracts.
- Unlock Pension Capital. Requiring just 1-2% of pension assets to be invested in European tech could unlock €40-60 billion in new capital annually. Targeted adjustments to pension fund mandates – combined with appropriate risk buffers – would allow capital to flow without jeopardizing fund security.
None of these reforms require grand new institutions or massive public spending.
Europe’s reform agenda will be most effective if paired with thoughtful transatlantic cooperation. American actors have a vital role to play – not as patrons, but as partners. A capable Europe benefits everyone, especially the US, which needs resilient allies who can co-develop, co-invest, and co-lead on the technologies shaping the future.
Here’s how US stakeholders can help. American venture firms can de-risk early-stage capital in Europe by co-investing with local funds, helping catalyze growth without demanding control. US defense tech firms are starting to partner with European counterparts – but deeper joint R&D, true co-production, and shared IP remain the exception, not the rule. I recently co-authored this article detailing how the alliance could be strengthened by doubling down on these partnerships and linking them to NATO procurement.
The technologies emerging from Silicon Valley and Shenzhen will reshape global power whether Europe participates or not. The question is whether Europe will help shape that future – or be shaped by it. Europe has the tools, the talent, and the capital. What it needs now is the will to act.
Wendy R. Anderson is a national security and technology executive who served as Chief of Staff to the late Deputy Secretary of Defense Ash Carter. In the last decade, she has worked at the forefront of defense technology, most recently as Senior Vice President for National Security at Palantir Technologies.
Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions expressed on Bandwidth are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
