Europe risks falling into a “middle-income trap” unless it strengthens competition, improves education and gives workers greater security to adapt to technological change, Nobel Prize-winning economist Philippe Aghion told EPRA’s annual conference in Milan.
Aghion, who shared the 2025 Nobel Prize in Economic Sciences, said Europe had fallen behind the US on innovation and needed to rethink its approach to capitalism rather than choosing between economic dynamism and social protection.
“Competition is very much a driver of innovation,” Aghion said, arguing that it acts as a double-edged sword. While the “top of the class” can use rivalry to push boundaries and excel, weaker performers can become discouraged by increased competition, leading to market exit or stagnation.
Similarly, Europe’s relatively fragmented market was holding back the development and scaling of innovative companies. He pointed to the experience of the IT revolution, when the emergence of very large “superstar” firms ultimately discouraged new companies from entering markets and contributed to weaker productivity growth.
Europe risks repeating that pattern with artificial intelligence, he said. The cloud infrastructure underpinning AI is dominated by Amazon, Google and Microsoft, while the market for graphics processing units is concentrated around a single major player. “The market is dominated by a few US firms. Europe needs to develop its own AI model that is true to its social values,” Aghion said.
He called for stronger competition policy, including greater data sharing, closer scrutiny of mergers and acquisitions and support for open-source development. “AI has considerable growth and employment creation potential,” he said, but argued that Europe would need the right policies to capture it.
He also rejected the idea that greater innovation necessarily requires weaker social protection like in the US. Denmark’s “flexicurity” model, under which workers receive substantial income support and retraining after losing their jobs, demonstrated that labour-market flexibility and security could coexist, he said.
Aghion’s call for Europe to strengthen its competitiveness was echoed by former Italian prime minister Enrico Letta, who urged Europe to deepen integration of its single market.
Europe is lagging behind the US economically, financially and in terms of innovation, Letta said. In the real economy, Europe accounts for 17% of global GDP, compared with 25% for the US, while its share of global finance falls to 11%, compared with as much as 60% for the US, he said. “This is, in my view, the main issue,” Letta said, attributing the gap primarily to fragmentation. “We don’t have one single market in financial services. We have 27 financial services markets, and this is just one example,” he said. The result, he argued, was that Europeans continued to rely heavily on US financial infrastructure despite having a single currency and a single market in many other areas.
“It’s very complicated for an Italian to use a French credit card and it’s very complicated for a French to use a German credit card. But we are all happy to use only American credit cards. This is Europe,” he noted.
Commenting on AI, Letta highlighted the importance of scale in the development of the technology. He criticised the proliferation of national AI investment plans, pointing out that European governments were announcing investments worth billions of euros while US investment was increasingly measured in trillions.
He argued that the issue went beyond investment and technology to questions of economic influence and strategic power.
The European response, he said, should be greater integration of the single market, allowing European companies to scale and giving the continent greater control over critical technologies and infrastructure. “The battle on AI is clearly a topic of influence and power,” Letta said, adding that Europe risks becoming dependent on the US or China in areas including technology, finance and energy unless it achieved greater scale.
“Sovereignty and competitiveness today means and needs scale. It’s impossible to be sovereign, competitive, and small,” Letta said. “If you are without the dimension, the scale dimension, at the end of the day you will depend on the others.”
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