Europe's productivity challenge: AI and innovation policy

European productivity has significantly decelerated since the 1970s, leading to a widening gap with the United States.

In 1995, euro area labour productivity closely matched the US level, but by 2019, the US held an 18 percent advantage, expanding beyond 20 percent by 2023.

This disparity is particularly concerning given the backdrop of rapid technological change, global warming, and population aging.

Historically, euro area labour productivity quadrupled between 1950 and 1980, driving substantial increases in living standards and leisure time.

However, growth rates have steadily declined since the mid-1970s, averaging 2.1 percent in the 1980s, 1.6 percent in the 1990s, 0.8 percent in the 2000s, and 0.7 percent in the 2010s.

This extended slowdown raises significant concerns for economic policy and societal well-being, prompting discussions about potential secular stagnation.

Europe's persistent productivity slowdown is attributed to inadequate innovation policy, a challenge since the 1970s.

This includes fragmented domestic R&D and poor integration between scientific research and the private sector, leading to a focus on "mid-technologies" such as transport manufacturing.

The rise of Artificial Intelligence, primarily driven by US and Chinese innovation, risks positioning Europe as a 'second mover' in this technological revolution.

Despite its market size, strong universities, and leadership in green innovation, Europe faces a critical need to adapt its innovation policy.

Addressing the misallocation of R&D resources and fostering radical new technologies are essential to unlock significant productivity gains and avoid further divergence from the US.