McKinsey: EU must catch up in various technology areas

The European Union (EU) must catch up with other major regions in terms of several key technologies. Failure to catch up will leave Europe vulnerable in all sectors in terms of growth and competitiveness, as well as security and strategic strength. This hampers the EU's long-term resilience.

For this, Sven Smit, Magnus Tyreman, Jan Mischke, Philipp Ernst, Eric Hazan, Jurica Novak, Solveigh Hieronimus and Guillaume Dagorret of consultancy firm McKinsey warn in a strategic analysis. McKinsey points out that the EU has evolved rapidly in recent decades. For instance, the 2008 financial crisis led to increased financial cooperation between EU member states. The COVID-19 pandemic provided a higher level of fiscal coordination through the NextGeneration EU fund.

McKinsey, however, warns that the battle between Russia and Ukraine reveals vulnerabilities. These range from food security to energy and defence availability. "The war has accentuated the reality that resilience depends on a strong economy with strategic autonomy in these critical areas long taken for granted," McKinsey writes.

Technology is crucial, argues McKinsey. If Europe does not catch up with other major region in terms of key technologies, but this leaves all European sectors vulnerable when it comes to growth, competitiveness, security and strategic strength. "Given the earthquakes on its own continent, a robust Europe is needed more than ever. But to achieve that, the region must face a slow motion competitive crisis that has been quietly unfolding for two decades, focused on the business and technology gap with other major regions," writes the consultancy.

The consulting firm argues that Europe has several strong performing companies, but European business as a whole is underperforming compared to other major regions. For example, European companies grow more slowly, have lower revenues and invest less in R&D than US competitors. McKinsey attributes this in part to the fact that Europe "missed the boat" on the latest technological revolution and lags behind in terms of value and growth in both ICT and other disruptive innovations.

McKinsey warns that the consequences could be dire if Europe does not catch up. The consulting firm estimates that €2 to 4 trillion in business value could be at stake by 2040. This, according to McKinsey, is equivalent to:

If the EU does not adequately address this crisis, it could put Europe at a disadvantage in several areas. These include growth, inclusiveness and sustainability, but also strategic autonomy and the weight of Europe's voice in the world. "Europe can build on its strengths. Its socio-economic model has served it well so far. But if companies want to play to the scale and speed needed to compete in a world where technological disruption is spreading everywhere, often with dynamics that produce the most winners, a reassessment of long-held beliefs and trade-offs may be needed. An integrated set of initiatives could create an environment that enables them to do so, while ensuring that the current high quality of life of many of Europe's citizens is maintained in the long term," McKinsey said.

"When Europe works, it works well," argues McKinsey. Particularly when it comes to sustainability and inclusiveness, Europe - especially northern and continental Europe - performs strongly. For instance, Europe has 2.4 times lower CO2 emissions per capita than the United States, while CO2 emissions per unit of GDP are 1.8 times lower. Both have fallen faster than in the US since 1990. Europe also aims to be CO2 neutral faster than other regions.

In terms of inclusiveness, Europe is ahead. For instance, in terms of inequality, Europe scores 30 on the Gini index, while the US scores 41. When it comes to social mobility, all countries in the top 10 are European. EU also has the highest life expectancy in the world. The average life expectancy in the EU is 80 years, compared with 79 in the US and 77 in China.

When it comes to growth, however, performance is less rosy. For instance, GDP growth is 30 per cent lower than that of the United States (US). The gap narrowed in recent years, but this trend has now reversed.

Europe's GDP per capita growth rate grew at about 1.2 per cent annually between 2000 and 2019, which is almost equal to the 1.1 per cent growth recorded by the US. However, in the US, total GDP grew by 1.9 per cent per year during this period, while growth in Europe remains at 1.4 per cent per year. This reflects higher population growth, reports McKinsey.

However, Europe's GDP per capita is still 30 per cent lower than that of the US. McKinsey reports that 40 per cent of this difference can be attributed to conscious choices around labour, such as retirement ages, holiday days and parental leave. Thirty per cent McKinsey attributes to the large differences between various European regions. However, McKinsey also points to the income of European and US citizens; only 10 per cent of Europeans earn more than their counterparts in the US.

McKinsey lists the European Union's performance around ten key technologies. These include:

Europe leads exclusively with next-generation materials and future clean energy technologies.

McKinsey's full analysis is available here.

Author: Wouter Hoeffnagel
Photo: Michal Jarmoluk via Pixabay