Software, Scale, and Sovereignty: Europe Must Embrace a New Technological Paradigm

Europe’s productivity struggles are not merely a matter of lagging behind the United States or China in innovation. They represent a slow, painful unraveling of the continent’s ability to shape its future, welfare, and security. And much of this is not just about markets or metrics; it is about cultural inertia and the failure to embrace a narrative where Europe plays a decisive role in the defining technologies of the 21st century.

As I reflected on Andrew McAfee's recent thoughts on incumbent competitiveness, I was reminded of a persistent truth: Europe’s challenges stem not from a lack of resources or talent but from a deeper cultural, strategic, and intellectual failure.

1. The Digital Value Divide: Europe’s Industrial Blind Spot

The economic engine of the 21st century is digital technology. Take a look at Andrew's chart and analysis of the top 50 US company incumbents by market value over the decades. The world’s largest, most impactful and most valuable companies today are young and driven by software, data, and often platform economics. And more importantly: the digital revolution doesn’t just create big companies, it builds much bigger and more valuable companies than ever before, faster and with higher geopolitical importance. Decades ago, Brian Arthur elucidated the concept of increasing returns to scale in software-driven systems. Unlike traditional industrial models with diminishing returns, these systems experience exponential value growth as they scale.

Yet Europe ignored this and continues to glorify its industrial champions, imagining a future where legacy players remain at the center of value creation. They are not -- the US example shows a logical rejuvenation of large companies. Manufacturing will indeed stay relevant, but software-driven systems (or culture) with their speed and increasing returns to scale now run the show. This fundamental misunderstanding of modern economic dynamics—one that predates energy crises and disrupted supply chains—leaves Europe at a strategic disadvantage. The value differential between digital-first companies and traditional industrial players will only widen. I wrote the same thing in 2019 and have seen little change since.

2. Consumer Platforms as Launchpads for Scale and Revolutionary Technologies

Europe has also failed to recognize the role of consumer platforms as incubators for transformative technologies. From AI to quantum computing, many of today’s revolutionary technologies emerged from consumer-focused companies like Google, Amazon, and Meta. These platforms operate at unparalleled scale and economics, generating the data, capital, and ecosystems necessary for breakthrough innovation.

Their success is not accidental; it stems from the creative and entrepreneurial intelligence that enables them to expand across markets. Scale is central to this phenomenon, yet European technologists and policymakers continue to ignore that or play on the margins, focusing on incremental progress rather than building the foundational platforms needed for the new age. You simply need massive scale as an enabler for playing big and across markets – however you get it. Identifying a scale playbook will be key for any European technology contender; and simply promoting isolated "deep technologies" without such is doomed to fail.

3. Europe’s Cultural Blind Spots

Which leads me to the real thing: At the heart of Europe’s decline is a profound cultural and intellectual blind spot. Policymakers, investors, and business leaders fail to grasp the economics of software and the strategic importance of assertive scale.

a. The Need for New Industries

European debates often center on retrofitting the continent's traditional "metal-bashing" industries with new technologies rather than forcefully building out entirely new ones. Just open the business section of any newspaper and look for the omnipresent "digitization" theme. Observers like Wolfgang Munchau have astutely pointed out that that this entirely misses the point: resilience and competitiveness require diversification, not concentration.

This is what makes Germany’s economic decline a structural slump, rather than a normal economic crisis. Right now, the policy is to double-down on what they did before. No one in Germany talks about diversification, the only known remedy for excessive dependence. - Wolfgang Münchau

Yet, within core Europe—particularly Germany—the focus remains on sustaining legacy sectors. True economic resilience comes from creating industries of the future, not merely optimizing the past. This is not how you play competitively and with ambition. Contrast this with the United States, where decision-makers, media or politicians understand the strategic game, assertively. Leaders articulate a vision that links enabling technologies with national priorities.

b. The Power of Scale

I said it above: scale is everything. Competing globally requires serving hundreds of millions, if not billions, of users. This demands not just software but a mindset shift to embrace the network effects and exponential growth dynamics that define modern technology. Europe’s failure to prioritize scale leaves it uncompetitive on the global stage.

4. Strategic Technology Assertiveness

Energy policy illustrates Europe’s strategic myopia. While the continent focuses on climate change—a critical priority—it neglects the broader role of energy in enabling advanced technologies. AI systems require enormous computational power, which in turn demands massive energy resources. Similarly, transformative technologies like decentralized drone networks and quantum computing systems depend on abundant energy supplies and robust infrastructure. None of this features in European energy agendas or in the wider press.

The U.S. and China are investing heavily in these areas, linking energy policy directly to technological ambition. Both understand the mid- to long-term value flows (vs. just technologies) and act to capture as much as possible. Europe, by contrast, lacks a coherent strategy, confining its debate to environmental concerns while ignoring the broader implications, and opportunities.

5. What Europe Must Do to Reverse Its Decline

Europe’s path to relevance in the global technology race requires bold action on two fronts:

a. A Cultural Revolution

Europe must embrace the reality that software dynamics drive modern economies. This means moving beyond the romanticism of the “Mittelstand” and industrial nostalgia. It has been denying this reality for close to 30 years. Foundational tech players at massive scale are not optional—they are essential for global competitiveness. This requires top-tier talent, abundant energy, and an unwavering commitment to technological excellence. Getting there might mean a serious re-education and re-orientation of the economic caste and the wider populations. A certain intellectual assertiveness will be key to understand and act (after all, Brian Arthur's popular piece on software was published in 1996 and didn't feature widely in Europe).

b. Scaling Ambition: Europe’s Path to Technological Sovereignty

Europe doesn't lack early-stage capital; it lacks consistent world-class entrepreneurship fueled by strategic intelligence and ambition. It also lacks the customer and exit markets needed to support bold visions and ignite the flywheel of growth, by funneling returns back into the venture system. Simply injecting more venture capital into the ecosystem won't suffice, as David Clark of Vencap has consistently argued. It's the quality of companies behind the money that truly matters and, in line with my other comments, that quality must mean assertive, strategic ambition. For "deeper" tech, governments must act as anchor customers for emerging technologies, providing the initial demand that enables scale. This requires a level of assertiveness and urgency currently absent from Europe's technology landscape. Simply put, we need markets more than capital.

6. The Opportunity in Crisis

Don't let the mood fool you. Despite its omissions, Europe has a unique opportunity to build serious value during this transformative phase of technological development. In fact, the current challenges might be the first real moment for a serious technology kick-off, particularly in critical industries and markets. This isn’t just about economics—it’s about sovereignty, security, and shaping the future of its civilization.