The good, the cautious and the costly

The good, the cautious and the costly

Artificial intelligence offers Europe a chance to turn fragmentation into opportunity. Its vast savings could help finance the transformation, if governments do their part.

Ask a Brussels official to summarise Europe's condition this autumn and you will likely get three answers, delivered in the same breath: things are getting better, things are staying much the same and things are getting worse. Unusually, all three would be correct. Yet the continent's familiar weaknesses may conceal some less familiar opportunities.

The good: Europe embraces the machines

For two decades, the story of European productivity has been one of relative decline compared with the US. The spread of artificial intelligence offers a reason to question whether that must continue. According to the European Central Bank's Consumer Expectations Survey, which polls some 20,000 people a month across 11 euro-area countries, the share of workers using AI on the job rose from 26% in 2024 to 41% in 2025 and has since climbed to 52% in 2026. Users report saving a median of three hours a week. Turning time saved into higher output is another matter, but the speed of adoption is encouraging.

Europe may also have more to gain from some applications of the technology. US firms already operate across a vast market with a common language and, despite differences between states, a more unified legal framework. European businesses must navigate different languages, national rules and administrative customs. AI could make translating documents, comparing requirements and preparing compliance paperwork substantially cheaper. For a small company contemplating its first foreign market, that could matter as much as writing software faster.

Algorithms cannot repeal contradictory laws and their legal interpretations require checking. Nor is adoption evenly spread: highly educated workers remain far more likely to use the tools. But a technology that lowers the cost of complexity could be unusually valuable on a continent that produces so much of it. Europe's fragmentation gives it an additional source of potential productivity gains.

Adoption is also markedly uneven across the continent, but in a more encouraging sense. Statistics Sweden reports that 35% of Swedish firms used some form of AI in 2025, compared with an EU-27 average of just 20%, while Denmark was higher still at 42%. If the rest of the continent could simply catch up with Scandinavia, much of Europe's AI dividend would arrive without anyone inventing anything new.

The cautious: an ocean of capital that mostly stays in port

Europe's problem has never been a shortage of savings. Euro-area households saved 14.7% of their disposable income in 2025. The problem is how little of that financial caution translates into a willingness to finance growing businesses. Research from EFAMA, the European fund industry's trade body, finds that households kept 40% of their financial wealth in bank deposits in 2025, up from 37% a decade earlier.

Deposits provide security and fund bank lending. But a financial system built around collateral and physical assets is poorly suited to an unproven software company whose chief assets go home each evening. Too many promising European firms consequently look abroad for the capital to expand.

The result, as Mario Draghi, former President of the European Central Bank and former Prime Minister of Italy, noted in his 2024 report on European competitiveness, is that not a single EU company worth more than EUR 100 billion had been built from scratch in the previous 50 years, while the US had produced six firms worth more than EUR 1 trillion.

Sweden offers a rare glimpse of what the alternative looks like. Decades of tax-favoured, low-friction retail investing, anchored by the "investeringssparkonto", a simplified investment account now held by around 40% of the population, have left Swedish households with more than half their financial assets exposed to equities, compared with roughly a quarter in the euro area as a whole. Swedish fund assets are 69% equity, the highest share in Europe.

None of this happened by accident. It reflects 30 years of policy designed to make investing as easy as saving. It is also, not coincidentally, a country that has produced a disproportionate share of Europe's best-known scale-ups.

That is a serious failure of financial intermediation elsewhere in Europe. It is also a measure of the opportunity. The rest of the continent does not need to persuade its households to discover thrift. It needs products that allow savers to move along the risk spectrum in graduated steps, as Swedish savers already do, rather than jumping straight from a deposit account to venture capital.

Fund ranges built along these lines already exist. They span Nordic corporate bond strategies that blend higher-yielding, less liquid credit with more liquid investment-grade bonds, balanced multi-asset funds graduated by growth-asset exposure and thematic global equity strategies for investors willing to accept more volatility in return for higher long-term return potential.

Espiria's Nordic Corporate Bond fund, for example, has grown from a standing start in late 2022 to more than SEK 9 billion under management, providing evidence that when savers are offered a clear, graduated product, many are willing to use it. Past performance is no guide to future returns and capital remains at risk throughout. But the underlying point holds regardless of any one product's results: the missing piece in Europe's savings glut is often not appetite, but architecture.

The costly: the price of keeping the lights on

If AI offers an engine for growth, expensive energy remains a brake. Despite the passing of the acute 2022 price shock, industrial electricity in the EU is still punishingly expensive. The International Energy Agency's Electricity 2026 report finds that EU prices for energy-intensive industry averaged more than twice US levels in 2025 and were nearly 50% above those in China.

Even when wholesale power is cheap or negative, fixed network charges, taxes and levies can keep final bills high. Governments urge households to buy heat pumps, while tax systems often favour the gas boilers they would replace.

Here again, the Nordics point to what is possible rather than merely what is wrong. Norway runs on close to 100% renewable power, four-fifths of it flexible hydro. Denmark has some of the highest wind and solar penetration in the world. Sweden and Finland combine renewables with nuclear to similar effect.

The result has historically been the lowest electricity prices in Europe. In 2025, Sweden recorded more negative-price hours than any other European country, as wind output regularly exceeded demand. Finland, Sweden, Denmark and Norway together generated more than twice as much wind power per person as the US.

The task for the rest of the continent is not to reinvent this model, but to connect to it through better grids, more storage and pricing that rewards flexibility, allowing Spanish sunshine and Nordic hydropower to reach the factories that need them. Much of the work is unglamorous. Its economic returns need not be.

The squeeze: bigger armies, tighter budgets

These changes must happen while governments face competing demands on their finances. Pandemic support and the energy crisis left many heavily indebted. Higher interest bills have reduced their room for manoeuvre. NATO's Hague summit in June 2025 added a commitment to spend 5% of GDP on defence and security by 2035, split between 3.5% on core military capability and 1.5% on broader resilience and infrastructure.

It is worth noting, amid the gloom, one respect in which the euro area's stricter fiscal rules have left it in better shape than its usual point of comparison. Euro-area government debt stood at around 87% of GDP in 2025, edging towards 88% in 2026. US federal debt, by contrast, stood above 120% of GDP and is projected by the IMF to continue climbing towards 134% by 2029.

Being forced to mind the till has costs, but it has also preserved some of Europe's borrowing capacity for exactly the kind of spending now being asked of it, a reserve the US has already used.

The trade-offs are nonetheless real. More spending will require some combination of higher revenues, borrowing, savings elsewhere and faster growth. Populist parties have prospered by presenting each choice as a betrayal: welfare sacrificed for Ukraine, or cheap energy surrendered to a green transition imposed by distant elites.

The stakes reach beyond national politics. As populist parties gain ground, unanimity in Brussels becomes harder to secure, precisely when a coordinated response is most needed. The result is a genuine feedback loop: financing defence and decarbonisation demands choices that feed populist gains, while populist gains make it harder for the EU to agree on financing defence and decarbonisation.

But the size of the bill also depends on how intelligently governments spend. Joint procurement could buy more defence for each euro. Better energy infrastructure could strengthen security while lowering costs. Faster productivity growth would make both public services and military spending easier to afford. None of these measures abolishes the trade-offs. All could soften them.

A way through

Much of a plausible response is already taking shape. The European Commission's Savings and Investments Union aims to direct more household wealth towards productive investment. Its market-integration package, unveiled in late 2025, offers another opportunity to make European finance work across national borders.

The test will be whether savers and firms notice the difference. Fund ranges built with graduated risk tiers rather than a single one-size-fits-all product, of the kind Sweden has offered for years, are one practical answer to what "noticing the difference" could mean in a saver's own portfolio.

It is worth distinguishing, however, between investment that depends on governments and investment that does not. Draghi's estimate that Europe needs an additional EUR 750-800 billion a year is a benchmark for public and pooled private capital. It says little about what companies do on their own account.

European industrial firms, particularly those already exposed to global demand, have not been standing still. Saab's order backlog reached roughly SEK 274 billion in early 2026, funding SEK 8-10 billion a year of self-financed capacity expansion without waiting for any EU instrument to be finalised. Rheinmetall is building new ammunition, rocket and drone production lines against an order backlog of more than EUR 80 billion, adding capacity in Germany and Spain years before any joint European procurement programme is likely to be agreed.

Firms with global order books and the balance sheets to match can and do allocate their own capital to European production when the incentives are there. The policy task is less about replacing that instinct than about removing the obstacles that stand in its way.

On energy, the priorities are a better-connected grid and taxes that stop discouraging electrification. On defence, the EU's EUR 150 billion SAFE instrument offers loans to support joint procurement, complementing rather than replacing the capacity companies are already funding themselves. Success will depend on governments agreeing on common requirements and larger orders rather than protecting every national preference.

The politics will remain awkward. Faster permitting, better-targeted subsidies and fewer national barriers all threaten established interests. Governments are generally more enthusiastic about European scale in speeches than in purchasing decisions.

Europe nevertheless has more room for improvement than its habitual pessimism suggests. AI could reduce the commercial cost of its linguistic and regulatory divisions. Financial integration could put more of its savings behind its entrepreneurs, following a model one of its own members has already built. Energy investment could turn periods of abundant, cheap power into a more durable industrial advantage, as parts of the Nordic region already demonstrate. And where companies can move faster than governments, many already are.

None of this guarantees a happy ending. Europe has spent years producing excellent diagnoses and administering its remedies in small doses. But its problems are increasingly matched by practical means of addressing them, some still to be built and others already operating, mostly in its own northern corner.

A continent rich in savings, skills and complexity has good reason to welcome a technology that makes knowledge cheaper to use. If its governments can make Europe easier to do business in, its firms may discover that some of the greatest gains are waiting at home.