Is Europe too regulated to win the AI race—or ready for a second act?

If someone told you that your current trajectory was taking you toward “slow agony,” you might sit up and take notice. Yet this is exactly the warning many have ignored following the publication of the Draghi report.

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Formally known as The Future of European Competitiveness, the report was published in September 2024 and authored by former European Central Bank President Mario Draghi. Its findings are stark. Draghi, who also served as Italy’s prime minister, states that, without radical reform, the European Union is set to slip into economic and geopolitical decline.

However dire the warnings, they came as little surprise to European business leaders, many of whom have been grappling with stringent regulations, economic turbulence, and the demands of the AI age for years now.

Something must change. But in a market comprising more than 44 countries, and hundreds of companies that have been operating for over a century, making the necessary changes at speed is no easy thing.

Competitiveness crunch

Draghi’s report highlights several reasons why Europe’s competitiveness is faltering.

Although it focuses solely on the European Union, many of the bloc’s problems overlap with those of non-member countries, such as the U.K. The first major issue is Europe’s rapidly widening innovation gap. As the United States and China make leaps forward in high‑tech sectors such as artificial intelligence and quantum computing, many of Europe’s brightest startups are choosing to set up shop elsewhere, frustrated by the lack of funding. Recent research by Amazon Web Services (AWS) shows that as many as four in 10 European startups would consider relocating outside Europe to scale.

But the picture is more nuanced than a straightforward decline. “We see European AI adoption reaching a tipping point,” says Tanuja Randery, vice president and managing director of AWS EMEA. “We’ve reached a milestone with over half of European businesses using AI.” The issue, she explains, is not whether companies are adopting AI but how they are using it: “There are some companies that are experimenting deeply, embedding advanced AI into their processes—then you have those who are simply experimenting at the edge.” The challenge for Europe, she says, is that progress on deeper adoption “hasn’t really moved—it’s stayed pretty flat.”

Another reality plaguing the AI industry is the extremely high cost of energy in Europe. Electricity on the continent can be two to three times as expensive as it is in the U.S., with natural gas prices up to five times as high.

The situation is exacerbated by Europe’s vast and fragmented energy networks, with thousands of different providers across each of its countries, making it almost impossible to distribute renewable energy efficiently.

Then there is the subject of much heated debate: regulation. Draghi states that EU regulatory barriers constrain growth and advocates for simplification of the General Data Protection Regulation (GDPR) and EU AI Act; fewer reporting requirements for businesses; and a shift to more innovation‑friendly regulation.

Regulation meets reality

This is an opinion heartily shared by many European business leaders, including Erik Ekudden, chief technology officer at telecoms giant Ericsson.

“The EU set out with strong ambition in the area of consumer protection, but some of these regulatory tools are not helping,” Ekudden says. “You need to lead with innovation; you can’t lead with regulation. We have to dial back this inclination to regulate something before it’s even been innovated.” The ubiquity and strictness of regulation has real business impacts. AWS research found that, currently, 42% of IT budgets are spent on compliance alone.

For Ekudden and his colleagues at Ericsson, the issue is not just over‑regulation but a lack of consolidation across Europe. The existence of so many regional telecoms operators may be precisely what is preventing competitiveness on a global stage.

“In the U.S., there are basically three main operators,” explains Per Narvinger, Ericsson’s executive vice president of business area networks. “In India, there are two very dominant ones and two more. In China you have three. In Europe—I lose count.”

He points out that, like mobile networks, AI is an industry of scale. To train algorithms, you need a massive amount of data, and in a market as fragmented as Europe, “it will be both complicated and expensive for every small operator to do the same as large operators in other continents.”

For Yael Selfin, chief economist at KPMG U.K., this tension reflects something philosophically important and deeper than policy missteps. “Europe values stability, protection, and quality of life, whereas in the U.S. profit growth has a stronger value,” she says. “These values drive some of this discrepancy.”

What enables growth?

There are those, however, who do not see regulation as a stifling force. Shail Deep, chief operating officer for EMEA and A