ECB's Lagarde Warns Europe Must Unify to Compete in AI Race

European Central Bank President Christine Lagarde on Wednesday urged the European Union to urgently complete its single market and integrate capital markets, warning that the bloc cannot afford to repeat its failure to capture commercial gains from the first digital revolution in the field of artificial intelligence.

"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," Lagarde said at a World Economic Forum event in Geneva.

Her analysis echoes the 2024 competitiveness report by predecessor Mario Draghi, which identified AI as a last chance for Europe to rejoin the global tech race. The European Commission has since launched initiatives to promote AI uptake in strategic sectors and finance massive data centres.

**Three pillars weakening**

Lagarde said Europe's post-war economic model had relied on three pillars: expanding global trade, strength in mid-technology manufacturing supported by cheap energy, and a stable, rules-based global order underpinned by US security guarantees.

"All three are weakening as the international environment changes," she said. "These shifts suggest that Europe's post-war growth model is eroding. And it is unlikely to return to the form we once knew."

Last year, more than 2,500 trade restrictions were implemented globally, Lagarde noted. China now competes directly with the euro area in close to 40% of sectors where Europe has a comparative advantage, up from about 25% in the early 2000s. 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, also pointing to geopolitical tensions that have exposed critical economic dependencies and chokepoints.

The return of US President Donald Trump to the White House has further shaken transatlantic relations, according to the rtl.lu report, with tariffs on EU imports and questions about long-standing US security commitments.

**Strengths and barriers**

Despite the pressures, Lagarde said 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. The bloc also has the world's largest network of trade agreements, with deals recently concluded or advanced with India, Indonesia, Australia, Mexico and Mercosur, according to the cyprus-mail report.

Survey evidence suggests euro area firms expect to allocate an average of around 9% of their total investment to AI this year, Lagarde said.

The challenge, she argued, is turning research strength into commercial success. "Too often, the barriers that prevent firms from scaling also hold back that diffusion," Lagarde said.

She identified two key barriers: fragmentation in the single market and fragmentation in capital markets. EU businesses rely heavily on bank credit while capital markets remain limited at the national level. Legal fragmentation creates practical cost and time barriers for cross-border operations, meaning a European company faces more hurdles to scale than a US rival and may turn to non-EU capital markets.

"The result is fewer firms growing to global size and slower diffusion of new technologies across the economy," Lagarde said.

**Policy push**

Lagarde called for speeding up two reforms currently under negotiation in Brussels, according to the euronews report: the Savings and Investment Union (SIU) package aimed at creating more integrated capital markets, and single market integration reforms including EU Inc., a Commission proposal for an optional EU-wide company structure designed to make it faster and cheaper for startups to incorporate and operate across borders.

Legislators hope to reach a deal on SIU by year-end, though significant divisions remain among member states over centralised supervision of capital markets. EU Inc. is also expected to be approved by the end of 2026.

The euro area economy grew by 1.5% last year, with the expansion driven entirely by domestic demand, Lagarde said. Growth continued in 2026 despite the energy shock, with domestic demand contributing positively to quarter-on-quarter growth of 0.4% in the second quarter.

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