‘A slow-motion crisis’: How corporate Europe can finally become more competitive

Europe’s relative lack of competitiveness on the technology front is no secret, but new research from the McKinsey Global Institute, published this morning, demonstrates how serious the problem is for corporate Europe and for the continent as a whole.

MGI found that Europe’s large firms have on aggregate been growing 40% more slowly than their U.S. counterparts, while investing 40% less in research and development. As a result, they’re around 20% less profitable, in terms of return on invested capital. The differences are “not sustainable in the long run,” MGI partner Jan Mischke told me this morning.

Europe is leading on cleantech innovation and the production of next-generation materials, but otherwise it’s lagging on technologies that cut through a variety of sectors, such as distributed computing and applied A.I., MGI warned. And that, the researchers claim, will end up threatening European strongholds like the automotive and luxury-goods sectors.

So, how to fix this? According to Mischke and his colleagues, Europe needs to treat the situation—in which it risks losing out on €2 trillion to €4 trillion in annual value by 2040—like the crisis that it is, comparable in some ways to the challenges Europe faced with the financial crisis, COVID, and now Russia’s invasion of Ukraine.

“Now all eyes are obviously on the energy crisis,” he said. “Technology is as critical for the economy and quality of life in many ways as energy is…We are in a slow-motion crisis here, so let’s respond with the same speed and boldness.”

Some of the think tank’s recommendations for EU policymakers boil down to accelerating the sort of more-Europe initiative that is already the European Commission’s bread and butter—create real single markets for energy and finance; build a common European electronic ID system. MGI also recommends removing barriers to cross-border consolidation and harmonizing public procurement.

“At a European level, you will immediately trigger a significant consolidation wave of European firms while at the same time raising competition, Europe-wide and globally, rather than in each of the 27 member states,” said Mischke, who also urged a debate around limiting international takeovers in certain areas, “to allow nascent firms in Europe to grow towards the scale at which they can compete globally.”

That’s all about creating an “enabling environment” for European companies, Mischke said. But on the other hand, the onus is also on those companies themselves to step up.

“This is also a call out on nonexecutive boards and executive boards to think bolder and take more risks,” he said, calling for more strategic thinking around M&A, for example. “As long as this period of disruption and innovation lasts, scale and speed matter more than in more stable times. This is a time when you really need to be fast, large and bold, and that is exactly where Europe is at a disadvantage with its fragmentation and relatively slow decision-making machine.”

More news below.

David Meyer
@superglaze
david.meyer@fortune.com

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This edition of CEO Daily was edited by David Meyer.