Christine Lagarde warns Europe cannot afford to lose the AI race

Europe cannot afford to fall behind in artificial intelligence after failing to capture a sufficient share of the economic gains generated by the first digital revolution, European Central Bank President Christine Lagarde has warned, linking the continent’s AI challenge to a broader erosion of the economic model that supported European prosperity for decades.

Speaking at a World Economic Forum event in Geneva on Wednesday, Lagarde argued that artificial intelligence represents a second digital revolution whose economic consequences could be profound. While European businesses are investing in AI, the continent continues to struggle to turn technological innovation into companies capable of competing at global scale, particularly against rivals in the United States and China.

“Europe largely missed out on the first digital revolution,” Lagarde said, arguing that the commercial benefits generated by the spread of information and communications technologies were disproportionately captured elsewhere. “We cannot afford to repeat that experience with artificial intelligence, the second digital revolution.”

The warning touches one of the most important economic debates currently facing the European Union. Europe has world-class universities, research institutions, industrial companies and engineering capabilities, but has repeatedly struggled to transform those advantages into technology businesses with the scale of their American or increasingly Chinese competitors.

AI is making that structural weakness more urgent. The United States and China have taken leading positions in the global race, with companies in both economies developing advanced large language models and investing heavily in the computing infrastructure and data centres required to train and operate increasingly powerful AI systems. Europe, meanwhile, is attempting to build its own artificial intelligence ecosystem while simultaneously developing one of the world’s most comprehensive regulatory frameworks for the technology.

Europe’s fragmentation problem is becoming an AI problem

For Lagarde, the challenge is not simply that European companies invest too little in technology. A deeper obstacle lies in the structure of the European economy itself.

Despite decades of integration, the EU remains fragmented across national markets in areas ranging from capital and regulation to services and corporate financing. That fragmentation makes it more difficult for companies to expand rapidly across the continent and limits their ability to raise the amounts of capital available to competitors in the United States.

According to the ECB president, European businesses are not competing sufficiently across the entire euro area and face greater difficulties obtaining financing than their US counterparts. The result, she argued, is fewer European companies reaching global scale and a slower diffusion of new technologies throughout the economy.

That becomes particularly consequential in artificial intelligence because scale is central to the economics of the sector. Developing advanced models, building computing capacity and deploying AI across large organisations can require enormous investments in infrastructure, energy, talent and data. Companies capable of accessing larger pools of capital and expanding across large unified markets therefore have an important advantage.

The problem extends beyond AI startups. Artificial intelligence is increasingly becoming a productivity technology for manufacturing, finance, healthcare, logistics, professional services and other industries in which Europe already has significant economic strengths. Falling behind in AI adoption could therefore affect the competitiveness of established European companies as much as the continent’s ability to produce its own technology champions.

Lagarde’s remarks consequently add to pressure for Europe to deepen its single market and improve the financing environment for innovative companies. The EU has spent years debating how to mobilise more private capital and prevent promising European businesses from relocating or turning to foreign investors when they need funding to expand.

For the ECB president, however, the technology race is unfolding at the same time as another structural transformation: the weakening of the external conditions that underpinned Europe’s post-war prosperity.

For decades, Lagarde said, the European economic model benefited from three major pillars: a rules-based international order supported by US security guarantees, access to relatively cheap energy and expanding global trade. All three are now weakening as the geopolitical environment changes.

“These shifts suggest that Europe’s post-war growth model is eroding,” she said, adding that it is unlikely to return in the form Europeans once knew.

The changing relationship with the United States has reinforced that uncertainty. Since returning to the White House, President Donald Trump has imposed significant tariffs on European Union imports and questioned longstanding American security commitments to the continent, increasing pressure on Europe to strengthen its own economic and strategic capabilities.

AI becomes part of Europe’s competitiveness battle

Lagarde’s intervention places artificial intelligence at the centre of Europe’s broader competitiveness challenge. If the continent can no longer rely to the same extent on cheap energy, continuously expanding international trade and external security guarantees, productivity and technological innovation become increasingly important sources of future growth.

That raises the stakes surrounding Europe’s ability to commercialise innovation.

The challenge is not necessarily a shortage of European ideas or scientific expertise. It is whether companies created or operating within Europe can access sufficient financing, grow across national borders and deploy technology quickly enough to compete with businesses operating in larger and more integrated markets.

AI could magnify the consequences of getting that equation wrong. Companies that successfully integrate artificial intelligence may be able to automate processes, reduce costs, improve productivity and develop new products more rapidly. Economies where adoption is slower risk seeing productivity gaps widen over time.

Europe is therefore confronting two related races. The first is to develop competitive AI technologies and infrastructure of its own. The second — potentially even more important economically — is to ensure that artificial intelligence spreads rapidly through European industry.

Lagarde’s warning suggests that the debate over AI in Europe is moving beyond regulation and technological sovereignty. It is becoming a question about the future structure of the European economy itself.

The continent already missed much of the value creation associated with the emergence of the world’s dominant internet platforms. Allowing a similar gap to develop around artificial intelligence could be considerably more consequential because AI is expected to penetrate virtually every major sector of the economy.

For Europe, the next phase will therefore depend not only on how much it invests in AI, but also on whether it can address the structural barriers preventing its companies from achieving scale.

The technological race is becoming inseparable from Europe’s search for a new growth model. And as Lagarde made clear in Geneva, the cost of missing a second digital revolution could be far higher than the first.