Lagarde warns Europe must unify or repeat the mistake of missing the AI revolution

GENEVA — European Central Bank President Christine Lagarde warned Wednesday that Europe largely missed out on the first digital revolution and cannot afford to repeat that experience with artificial intelligence, urging the bloc to overcome market fragmentation or risk falling further behind the United States and China.

Speaking at the World Economic Forum in Geneva, Lagarde said the continent's post-war growth model is eroding and unlikely to return to its previous form, as three long-standing pillars of economic success weaken simultaneously.

"Europe largely missed out on the first digital revolution, as the commercial gains from the spread of information and communication technologies were captured disproportionately elsewhere. We cannot afford to repeat that experience with artificial intelligence, the second digital revolution," she said.

The euro area economy grew by 1.5% last year, driven entirely by domestic demand, with quarterly growth of 0.4% in the second quarter of 2026. But Lagarde argued that sustained long-term growth requires making better use of the EU's 450 million-consumer single market — the largest among advanced economies — to help firms scale up.

**Eroding pillars**

Lagarde identified three pillars that had underpinned Europe's post-war success: expanding global trade, strength in mid-technology manufacturing supported by relatively cheap energy, and a stable rules-based global order under the US security umbrella. All three are under pressure, she said.

On trade, Lagarde noted that last year alone more than 2,500 trade restrictions were implemented globally. Europe remains roughly twice as open to trade as the United States, but continued expansion can no longer be taken for granted.

On manufacturing, she said China now competes directly with the euro area in close to 40% of sectors where Europe holds a comparative advantage, up from around 25% in the early 2000s. Europe's energy advantage has also faded: electricity prices for energy-intensive industries in the EU were more than twice US levels on average last year and around 50% higher than in China, according to Lagarde. "The cheap energy on which European industry once relied — including that from Russian gas — has faded," she said.

The third pillar — the stable, rules-based global order — is under threat from geopolitical tensions and security challenges near Europe's borders. The return of US President Donald Trump to the White House has shaken transatlantic relations, with his administration imposing hefty tariffs on European Union imports and questioning long-standing US security commitments, as reported by RTL Today.

"When economic dependencies can be weaponised or when perceptions of deterrence weaken, concerns about resilience enter economic decisions directly," Lagarde said, warning that firms may invest less when capital is perceived as less secure.

**Fragmentation as barrier**

Despite the pressures, Lagarde argued Europe retains substantial strengths. The EU accounts for about 6% of the world's population but 15% of its researchers, and produces almost one-fifth of the world's most-cited scientific publications. Survey evidence indicates euro area firms expect to devote an average of around 9% of their total investment to AI this year.

But she said those assets are not translating into commercial success because of fragmentation in both the single market and capital markets. EU businesses rely heavily on bank credit, while national-level capital markets remain too limited to provide the scale of funding that US competitors can access.

"The result is fewer firms growing to global size and slower diffusion of new technologies across the economy," Lagarde said, according to RTL Today. "Too often, the barriers that prevent firms from scaling also hold back that diffusion," Euronews reported her adding.

**Reforms in the pipeline**

Lagarde called for accelerating key reforms under negotiation in Brussels, namely the Savings and Investment Union (SIU) and single market integration measures such as the EU Inc. proposal, the sources indicate.

The SIU is a legislative package aimed at creating more integrated capital markets, with a deal expected by year-end despite significant divisions among member states over centralized supervision. EU Inc. is the European Commission's proposal for an optional EU-wide company structure designed to make it faster and cheaper for startups to incorporate and operate across borders, sidestepping the current patchwork of 27 national systems. That measure is also expected to be approved by the end of 2026.

While the EU has the world's largest network of trade agreements — expanding through recently concluded or advanced deals with India, Indonesia, Australia, Mexico and Mercosur — and retains world-class manufacturing capabilities including global leadership in lithography and precision optics, Lagarde stressed that scale is particularly critical as new technologies reshape productivity growth.

"The task now is to turn that domestic resilience into a more durable source of growth over the long run," she said.