Mario Draghi, former European Central Bank president, has delivered a European Commission-sponsored white paper that attempts to offer a comprehensive plan to revitalize Europe’s economy. “The future of European competitiveness” report proposes over 150 recommendations focusing on boosting productivity, enhancing industrial policy, reforming competition rules, and increasing investments. The goal is to make Europe more competitive globally, especially against the US and China in emerging technologies and industries. 

One statistic that summarizes the problem: Of the 25 largest technology companies by market cap, only two are based in Europe: ASML (#13) and SAP (#16). This chart from the The Economist story on the report also gets at the issue:

The story, by the way, is encouraged by Draghi’s advocacy for more integrated markets to help startups scale, unified decision-making on public investments, streamlined regulations for European firms, and interconnected electricity grids. But less so this:

This is the second technocratic door-stopper commissioned by the European Union as it tries to bring stagnation to an end. As Mr Draghi observes in our online By Invitation column, an ageing population means that, if productivity growth does not rise, Europe’s economy will be no bigger in 2050 than it is today. … The biggest question was how much he would endorse the interventionist policies many politicians crave. Here Mr Draghi is too sympathetic to the mercantilists and their calls for subsidies for “strategic” industries, such as carmaking, the relaxation of competition and state-aid rules, and tariffs on imports from China. He pays little heed to Europe’s high-tech success stories, which owe more to markets than governments. Even the academic papers Mr Draghi cites in support of his case are generally agnostic about whether state support brings aggregate benefits to an economy, rather than just helping favoured sectors.

In other words, the EU economy needs more venture-capital-backed, entrepreneur-powered creative destruction and competitive intensity. And it’s not just Europe that could use a greater assist from Mr. Market. So, too, China, which also has been moving in the wrong direction on that front. For example: The Financial Times reports that China’s once-thriving venture capital sector has experienced a dramatic decline. Once considered the world’s second-best venture capital destination after the US, China has seen its startup ecosystem wither. In 2018, 51,302 startups were founded; by 2023, this number plummeted to 1,202, with 2024 projections even lower. This downturn stems from various factors, including economic slowdown, COVID-19 lockdowns, a burst property bubble, and stagnating equity markets. But also this:

Keyu Jin, associate professor at the London School of Economics, says the industry “has been critical to spur China’s entrepreneurial dynamism”. … [The decline] is also the direct result of political decisions taken by President Xi Jinping that have dramatically changed the environment for private business in China — including a crackdown on technology companies regarded as monopolistic or not attuned to Communist party values, and an anti-corruption crusade that continues to ripple through the business community. Desmond Shum, author of Red Roulette and a former real estate mogul, says the party “has throttled the private sector”. “Successful entrepreneurs . . . can expect to be closely monitored, unable to transfer money offshore and their transactions and public statements scrutinised,” he adds. “Their money is the country’s money.”

Both stories, that of Europe and China, should serve as cautionary tales for American policymakers who a) embrace government-directed industrial policy and b) may be forgetting what impact policy can have—both positive and negative—on high-impact entrepreneurship. Free enterprise is the American economic superpower, and it can be both enhanced and diminished by what Washington does with taxes, immigration, science investment, trade, and regulation.

What’s happening in Europe and China is bad news. Americans should want both regions to be economically dynamic, innovative, and able to maximize the human potential of its citizens. Their countries will be better off, and humanity will be better off if more of us are productive and innovative. And that includes China, whose prosperity and technological inventiveness over the rest of this century will depend on its reversing course to become more open politically and economically. That version of China, the version many were hoping for at the turn of this century, would merely be an economic competitor rather than a geopolitical threat.

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