Europe’s Future beyond the Energy Crisis

The war in Ukraine has brought to the forefront one of Europe’s most pressing vulnerabilities: its reliance on Russian energy. Although European leaders have shown great resolve in their initial response to the war in Ukraine, the solution of weaning the continent off Russian energy dependence is not immediately clear or painless. A similarly pressing issue is resolving Europe’s corporate and technology crisis and failure to do so may result in permanent economic hardships.

Europe has benefited from the crises that have been visited upon it. The European Union (EU) was established in response to the ravages of World War II, the end of Communism brought about the integration of the economies in Central and Eastern Europe and the 2008 financial crisis led to more financial cooperation among European countries. The global Covid pandemic triggered a higher level of fiscal coordination within the bloc while Russia’s invasion of Ukraine galvanized the European community into unprecedented joint action.
Nevertheless, experts at McKinsey argue that the war has exposed a range of fragilities, from food security and energy to defence. “The war has accentuated the reality that resilience depends on a strong economy with strategic autonomy in these critical areas that has long been taken for granted,” McKinsey said in a study entitled ‘Securing Europe’s future beyond energy: Addressing its corporate and technology gap.’ An estimated EUR 2-4 trillion of annual value could be at stake—six times the amount needed for the net-zero transition—and with it Europe’s long-term prosperity and strategic autonomy. A program of 11 actions can turn the tide, according to the study.

The technology challenge
Unless Europe catches up with other major regions on key technologies, it will be vulnerable across all sectors on growth and competitiveness—compromising the region’s relatively robust record on sustainability and inclusion—as well as security and strategic strength. Given seismic events within its own continent, a robust Europe is arguably needed more than ever. “To make that a reality will require the region to address a slow-motion competitiveness crisis that has quietly been unfolding for two decades, centered on its corporate and technology gap with other major regions,” states the McKinsey report. Confronting this gap will require leaders to show the same resolve and collaboration as they initially displayed in their response to the war in Ukraine.
Although Europe has many high-performing companies, in aggregate European companies underperform relative to those in other major regions: they are growing more slowly, creating lower returns, and investing less in R&D than their US counterparts. This largely reflects the fact that Europe missed the boat on the last technology revolution, lagging behind on value and growth in information and communications technology (ICT) and on other disruptive innovations, according to McKinsey.
ICT and other tech sectors have spawned a range of transversal technologies, which are spreading horizontally across sectors and determine competitive dynamics. Of the ten transversal technologies studied by McKinsey in the report Europe leads on only two of the ten. “If Europe is not successful in competing in these technologies, it could also lose its strongholds in traditional industries. To give just one example, Europe has been a leader in automotive but could become a laggard in autonomous driving,” the report argues.
Taking another example, none of the top ten large companies investing in quantum technology today is European; they are either American or Chinese. Nearly 60% of external funding for the development of 5G technologies is snapped up by China, 27% goes to the United States, and only 11% ends up in Europe.
Developing cleantech technologies is Europe’s forte 'territory of sovereignty', as our region is leading the way in terms of the number of patents filed, the amount of venture capital investment and the capacity built into mature technologies. Nevertheless, China is the absolute leader in cleantech manufacturing in almost every field, and the highest number of breakthrough technologies hail from the United States.

High stakes
The stakes are high, not only in terms of expected growth, but also with respect to maintaining Europe’s strategic independence, according to the study. What is at risk is the added value generated in the field of the above mentioned ten transversal technologies estimated at EUR 2-4 trillion by 2040. This amount is equivalent to 30-70% of Europe’s expected GDP between 2019 and 2040 and corresponds to roughly 90% of total current European social spending. In addition, in a gradually polarized geopolitical environment, Europe's strategic independence could be jeopardized, the study stressed.
McKinsey put forward eleven proposals to political decision-makers that could lead to fundamental, profound changes. These include a shift toward joint procurement in areas related to innovation, be it military technology or health development. Another proposal is to regulate large companies at European level, which would allow companies with high growth potential to work together smoothly across the continent.
“European decision-makers and companies will need to take stronger action if they are to make a real difference in terms of technological catching-up and competitiveness,” the study concludes.