Europe’s productivity growth has slowed markedly over the past two decades and has fallen further behind the United States. While the debate often focuses on whether Europe needs more frontier innovation or better diffusion of existing technologies, this paper argues that the real challenge is how to connect the two more effectively. The main bottleneck is not a lack of ideas, but Europe’s difficulty in turning innovation into widespread productivity gains across firms, sectors, and regions.
The evidence shows that Europe’s productivity gap largely reflects weaker performance within industries rather than an unfavourable industrial structure. Many firms struggle to adopt new technologies, scale successful innovations, and build the organisational capabilities needed to use them effectively. These challenges are especially important in the era of artificial intelligence (AI), where productivity gains depend as much on skills, management quality, data, and organisational change as on the technology itself.
A key weakness is Europe’s relatively low investment in intangible assets such as software, data, skills, organisational capital, and management capabilities. These investments strengthen firms’ ability to absorb and benefit from technological advances. Europe also faces persistent barriers to scaling innovative firms, fragmented capital markets, and uneven diffusion of knowledge across regions.
The paper concludes that Europe needs a more integrated productivity strategy that aligns investment, innovation, and diffusion. While Europe should strengthen frontier innovation and support strategic industrial policies in key technologies, the highest priority is to improve the dissemination and adoption of innovations throughout the economy. This requires stronger horizontal policies on skills, competition, finance, market integration, and business capabilities, alongside better coordination across European, national, and regional levels. Only by combining innovation with broad-based diffusion can Europe achieve faster, more inclusive, and more resilient productivity growth.
Author Bart van Ark