Nobel laureate Philippe Aghion says that Europe is missing a key industrial policy among other measures, that could help it compete in the modern global economy and which must be addressed in part to reduce the trend of long term institutional investors such as pension funds putting the bulk of their AI related investments into the US.
Aghion, who is a professor at the London School of Economics, Collège de France, and INSEAD, outlined the critical intersection of artificial intelligence, market concentration, and the pressing need for revamped strategy at a briefing held alongside the Amundi World Investment Forum 2026.
He based his arguments on the academic research into growth and “creative distruction”, which he said took place during each of the past four key technological revolutions, starting with steam power, then electricity, then IT and now AI.
Addressing immediate concerns regarding the high concentration of market power among a few dominant firms in the artificial intelligence sector, Aghion contextualised AI as a general purpose technology (GPT), drawing parallels to the IT revolution between 1995 and 2005.
During that previous era, a growth upsurge in the United States coincided with a sharp rise in market concentration among firms such as Google, Microsoft, Walmart, and Amazon, which mastered the new technology. This concentration eventually discouraged the entry of new firms, leading to a subsequent decline in productivity growth.
Aghion noted that a similar initial risk may play out in the AI value chain. Areas such as the cloud are dominated by Amazon, Google, and Microsoft. However, he also noted that GPTs can in themselves help counter such dominance through the impact of diffusion across the wider economy.
As GPT costs continue to fall, it encourages a democratisation of adoption, which in turn enables smaller firms to acquire expertise previously only available to larger organisations. As this diffusion penetrates, more firms will reorganise to adopt the innovation.
Industrial policy
The noted diffusion is not enough on its own, however. Aghion said it must take place within an ecosystem of finance and policy that encourages joined up thinking between policy and, particularly, venture capital that is seeking to fund innovations.
Europe – the EU – has failed here because it has let its industrial policy slide in favour of a focus on competition to produce positive outcomes. This has led to moving away from sectoral state aid, at a time when, for example, the US has blended strong competition policy with a robust industrial policy agenda to achieve its goals. In the US this involves agencies such as Darpa and Barda – in the areas of defence and biotech respectively. China has used top-down industrial policy blended with encouraging competition between its regions.
Aghion argued strongly in favour of a European ‘Darpa’, that would support defence, AI and biotech. For AI he cited the field of physics, saying a “Cern of AI” would support the development of large data centres. These are required, because while Europe produces good mathematicians and scientists, the data is missing to make best use of the AI revolution.
Competition rules should be changed. He was particularly scathing about the decision not to allow the merger between Alstom and Siemens. This, he argued, showed that policy makers could not understand that even such a combined entity would face significant ongoing competition, such as from makers of high speed trains based in China. Instead, Europe should adopt competition rules that can be applied on a more case specific basis.
He recommended expanding the EU Digital Markets Act across the entire AI value chain, promoting open source, and reducing regulatory barriers, specifically citing national data commissions (like France’s CNIL) as “nightmares” that actively stifle critical health and scientific research.
European decline?
When questioned about rising trade tensions with China and the debate over protectionist tariffs, Aghion argued that the best response to foreign competition is domestic innovation: “innovation is the best way out of competition”.
While the threat of retaliatory tariffs can be used, he stressed that innovation does better. Instead of tariffs, he said that, for example, trade negotiations with China should proceed on the basis that Chinese entrants to European markets should be forced into mandatory joint ventures, to ensure production stays within Europe, using European employees, alongside agreements on technology transfers. This would effectively apply the reverse of what supported China’s development in recent decades – when western companies were allowed into China via JVs.
Citing Mario Draghi’s warning about European competitiveness, Aghion said European leaders continue to ignore the decline that has taken place. To bypass institutional inertia, he proposed a “coalition of the willing” led by France, Germany, and the UK (“come back, come back!”, he suggested, implying a Brexit reverse), to build single capital and high-tech markets.
On the point of investors, he highlighted Sweden as a model for Europe, where automated contributions into pension funds support not only the pension system, but facilitate investments in startups and drive domestic innovation. Instead, for many European countries, the status quo sees institutional capital routinely exported to the US.
