It's European Tech's Time To Shine

Europe may be on the verge of a generational tech boom - and most investors haven't noticed yet. Many see Europe as the land of the past or of second-rate consumer firms when it comes to technology. America's seven biggest tech firms generate 10 times the revenue of Europe's top seven, and the venture capital market is roughly five times smaller.

But ironically, Trump being an unreliable ally is paving the way for European tech's success. And Europe is capitalizing on the opportunity.

Setting the Stage: Weakened Competition

It's difficult to grow domestic industry in areas where international competition is fierce. In this respect, Trump may be European tech's biggest ally. He's actively making the US a less desirable place to move for the high-skilled immigrants US firms need to thrive, reducing trust in US products by using supply dependencies as negotiating tools, and driving up American energy costs with his peculiarly fierce opposition to clean energy - even when it's cheaper.

Initially Chinese tech seemed like the big winner. In 2024, China was the only player even competing on a global scale in many product categories. Xi had previously throttled the private tech sector, so he could easily boost it by simply relaxing the heavy hand of the state. Xi needed an economic boost - why not make that the tech sector, especially as the American market leaders became less competitive? It seemed he had every incentive to do so. Stock in China's tech sector (as measured by the Hang Seng Tech Index) soared more than 40%. However, Xi has not fully capitalized on this advantage (for reasons I'll explore in another post). Europe, however, can.

Talent Supply Shock: Europe's Structural Advantage

The first few steps Europe took to catch up to American tech were modest but calculated - a 500 million Euro grant for scientists coming to Europe, supplemented by national grants from France (100 million euros), Norway, Spain, Germany and the Netherlands. Although these grants together form less than one percent of the existing 403 billion European R&D budget (itself a figure that has been growing), Europe may be able to get many scientists on a bargain - those who lose their visas to the US may not have another option.

The EU was already increasing the number of high-skill immigrants. While we don't yet have the data to fully see how much Europe's immigration increased post-Trump, the number and quality of immigrants is almost certainly going up. Quality is a force multiplier on the economic impact of immigrants, and when globally sought-after talent begins to see the US and China as simply different degrees of unfree, Europe becomes an attractive option for the best of the best.

Israel has provided an additional source of talented migrants. Since the start Netanyahu's changes to the judicial system, emigration has spiked: more than 125,000 people left in 2023 and 2024. Highly-educated people formed a large fraction of emigrants and many of them choose Europe as their new home. If global instability keeps increasing, shifts like this will become ever more common.

Capital Markets: The Key to Growing Giants

However, the main obstacle to European dominance of high-tech industry hasn't been lackluster R&D. It was the inefficiency of European capital markets. Promising European startups often move to the US where valuations are much higher. It barely matters how many scientists Europe attracts if the companies they create end up moving to the US anyway for better funding.

Which is why the progress now underway on European capital market integration deserves more attention. The EU's new Savings and Investments Union — a rebranded and more ambitious successor to the earlier Capital Markets Union framework — is designed to break down the regulatory and structural barriers that prevent investors in one member state from comfortably backing companies in another. A more unified market expands the investor pool available to any given startup to any EU investor and, crucially, makes the EU a more attractive destination for foreign capital as well. This is because once Europe has a united set of investment rules, foreign investors only have to learn that one set in order to invest in a huge market - making the incentives for doing so that much greater. If the project delivers, European startups may be able to grow at home rather than emigrating in search of a term sheet.

Tailwinds for Euro-Denominated Investments

The dollar is the dominant global medium of exchange. This boosts investment in the US, as international investors seek dollar-denominated assets they can trade with almost any country. But if America is behaving unpredictably, that decreases the appeal of the dollar as an international unit of exchange. Trump seems to be putting pressure on the dollar: eroding central bank independence, exploding the federal deficit, and threatening allies on the world stage. All this decreases confidence and goodwill towards the US.

As a result, global demand for the dollar has plummeted and central banks have diversified away from it. While America retains reserve currency status for now, many are searching for alternatives. The Euro's 13.5% gain against the US dollar in 2025 shows that it may be well positioned to take at least some of the market share of the dollar.

Historically, the disunited nature of the EU and the lack of common EU-issued debt was an obstacle here. That is finally changing. The EU has been increasingly willing to issue common debt since the 2020 pandemic, showing a sense of solidarity and creating safe financial instruments for people to invest in Euro assets. Most importantly for our tech analysis, that means more money available for investment, including in tech.

Catch-Up Growth

Since the Eurozone has a much smaller existing tech ecosystem than America or China, foreign investment can play a key role in helping Europe catch up.

And since European tech starts from a low base, any change to make the tech environment stronger could have disproportionate effects, percentage-wise, from catch-up growth. Catch-up growth is a concept used to explain why poor countries can catch up quickly to rich countries in an open trading system but it also applies here. Just as a poor country can take advantage of the technical learnings of richer countries and simply copy a successful playbook to a large degree, Europe can learn from what makes US tech companies successful as well as what is failing right now. And because Europe's existing tech market is much smaller than America's, even just a fixed amount of investment shifting from America to Europe would imply tremendous growth in percentage terms. As an example, 70 billion dollars in venture capital funding redirected from America to Europe would still keep the US above 2024 levels – but it would double Europe's venture capital market.

Security Spending as a Catalyst

America's erratic behavior also creates strong domestic tech demand. Prior to 2024, having a world-beating domestic tech industry wasn't necessary for security. They trusted the US to regulate their companies reasonably well, and if the US failed Europe could always fine them. Europe also didn't need domestically-sourced military components (which would in turn require domestic tech companies capable of providing them) when US ones were working just fine.

And at least one strong dis-incentive worked against building up a domestic weapons industry - buying US weapons provided a lobby in the US for staying involved as the world police. France and Germany are less likely to go to war with each other if they both depend on the US for security, and America was more likely to support both against the Soviet Union/Russia (as well as keep their own military strong in general) with a large domestic constituency for arms spending.

The effects of this strategy can be seen most clearly by the difference in America's attitudes after each World War. During the first, America produced very little matériel as they had entered late and the factories of Britain and France were already producing guns. As a result, America was less interested in maintaining a strong military after the war. There was no domestic constituency for arms spending. After the second, where America had already produced a lot of the armaments used by the allies (and the factories used by Germany and Japan had been mostly obliterated), America became the world's primary arms dealer and as a result got a strong lobby for a beefed-up military - a tremendous result for western Europe, which relied on America to protect it from the Soviet Union.

Relying on America didn't always work to Europe's favor, as they found out in the Suez Crisis. America refused to back the British-French intervention, and French leadership resolved to keep an independent military-industrial complex lest America refuse to assist them again. But until recently, the tradeoffs were acceptable for most European nations.

No longer. Europe needs their own advanced tech and manufacturing companies because they need domestically produced military hardware and software if they can't trust America's, and it's difficult to do that without having an advanced tech industry in general. Of course Europe has some existing tech firms and advanced manufacturing firms, but the size is much smaller than America's. That needs to change now for military as well as economic reasons. Which also means likely government support and government contracts for firms in strategically valuable fields like drones, AI, cybersecurity, chipmaking, and nuclear power.

Early Returns

One clear return is AMI Labs, the AI company founded by Yann LeCun (formerly chief AI scientist at Meta) and headquartered in Paris. The firm raised $1.03bn in seed funding to pursue what its founders describe as a "world model" approach to artificial intelligence: building systems that reason about physical and causal structure rather than merely learning statistical patterns in language. Many of the investors were foreign, showcasing the increasing attractiveness of EU-based tech for foreign investors.

From an AI research perspective, this architectural bet is a credible one. The dominant paradigm in large language models works by encoding statistical relationships between tokens; it is powerful but brittle in domains that require genuine causal reasoning. A richer world model — one that captures how objects interact, how actions produce consequences, how time unfolds — could plausibly represent a more durable foundation for general intelligence. Whether AMI Labs will vindicate this approach remains to be seen. But the fact that the company exists, is based in Paris, and attracted over a billion dollars at inception suggests that something is shifting in the geography of AI ambition.

Tangentially, European-headquartered AI and software companies matter not only as economic assets but as cultural ones. Societies tend to adopt new technologies more readily when those technologies emerge from within, rather than being imported from distant and occasionally adversarial powers. When AI's leading practitioners are compatriots rather than foreign nationals, it becomes easier for chief executives and policymakers to have frank conversations about what the technology can and cannot do — and what risks it might introduce. This will increase productivity in Europe as a whole.

Risks

Europe still has a long way to go before it can supersede the US as the world's technology leader. The current oil shock might harm the European economy. And with a possible recession on the horizon, hiring in Europe is especially risky because of strict labor laws which might saddle companies with obligations they cannot fulfill.

Energy is important in tech for another reason: datacenters' high energy consumption. The US and China have ample energy resources to feed those datacenters, whereas Europe right now is strained. And the EU is still more divided than the US or China even after recent reforms, which constrains their ability to respond to this crisis as well as others.

But Europe is currently earning a dividend from being more divided as well – their leadership is more stable. In a world where the US is erratic and untrustworthy and China refuses to make the needed reforms to take its place, this might be Europe's time to shine – and there's nowhere that's more true than tech.