The Draghi report on European competitiveness, published in 2024, opened with a fact that European policymakers have been reluctant to confront directly: since 2000, real GDP per capita in the EU has grown by 35% — less than half the 80% growth recorded in the United States over the same period. The productivity gap between Europe and America has widened over two decades, and it is not explained by hours worked, demographic structure or resource endowments. It is explained by productivity — the amount of economic value generated per hour of work. Understanding why Europe falls short on this measure, and what might be done about it, is now one of the EU’s most urgent policy questions.

Where the gap actually lives

Dr. Reinhilde Veugelers, senior fellow at Bruegel and professor at KU Leuven, has spent years mapping the European productivity gap at the sectoral level. Her research identifies a striking pattern: “Europe’s productivity gap with the United States is not uniform — it is concentrated in the technology and digital sectors. In traditional manufacturing, logistics, and several professional services sectors, European productivity is broadly comparable to American levels. The gap is almost entirely a story about digital and tech-intensive industries, where the US has pulled ahead dramatically since 2000.”

This diagnosis matters for policy. The EU’s productivity problem is not a general economic management failure — it is a specific failure to build global-scale technology companies and to diffuse digital technologies through the broader economy at sufficient speed. Europe has excellent research universities, strong engineering talent, and well-functioning financial markets for smaller companies. It has consistently failed to produce the kind of hyperscale technology platforms — social media, cloud computing, search, e-commerce — that have driven American productivity growth.

The structural reasons

Veugelers identifies three structural factors. First, market fragmentation: the EU’s single market, despite decades of integration, remains fragmented enough in services and digital markets that European companies face a more complex regulatory environment than American firms operating in a genuinely unified national market. “A European startup scaling across the EU faces 27 legal systems, 24 languages, and numerous national regulatory variations. An American startup scaling nationwide faces one,” she notes.

Second, capital markets: European venture capital and growth equity markets have deepened significantly in the last decade, but remain smaller and more risk-averse than their American counterparts. European pension funds and insurance companies direct a lower proportion of their assets into high-risk equity than their American equivalents — a structural feature of European financial culture that reduces the capital available for technology scale-up.

Third, labour market flexibility: European labour market regulations, which provide stronger worker protection than US equivalents, also slow the reallocation of labour from declining sectors to expanding ones. This is a genuine trade-off — the same regulations that make European workers more secure also reduce the economic dynamism of the labour market — and the political economy of reforming them is extremely difficult.

The EU response: competitiveness as the new green deal

The Commission’s response to the Draghi report has elevated competitiveness to the same political priority as climate action and defence. The Competitiveness Compass, published in early 2025, sets out a framework for reducing regulatory fragmentation, deepening the Capital Markets Union, and prioritising investment in emerging technology sectors. As noted in our EU-US trade analysis, the competitive pressure is not only from the United States — Chinese companies in clean technology are closing gaps that Europeans assumed were protected. The productivity question is urgent. The answers remain politically contested.