Europe’s artificial intelligence challenge is no longer simply about whether its companies can produce competitive technology. The more immediate problem is that European businesses and public institutions are becoming increasingly dependent on computing infrastructure, cloud services and AI systems controlled by companies outside Europe. That dependence could become economically significant as artificial intelligence moves from an optional business tool into infrastructure supporting transport, healthcare, banking, taxation, manufacturing and public administration.

European Central Bank President Christine Lagarde has warned that Europe faces an unusually serious risk if access to foreign AI technology is disrupted or its commercial terms change. Her warning reflects a broader structural problem already identified by European policymakers: demand for computing capacity is rising rapidly, while Europe’s domestic supply remains limited and heavily dependent on non-European providers. The European Commission has consequently proposed measures aimed at expanding domestic cloud, data centre and AI capacity.

The issue is not that Europe will suddenly lose access to artificial intelligence. There is no evidence that such a cutoff is imminent. The concern is that dependence creates leverage for whoever controls the technology and infrastructure on which European users increasingly rely. As AI becomes embedded across more sectors, the economic consequences of losing access, paying substantially more for access or accepting restrictive terms could become much larger.

AI Dependence Is Becoming Infrastructure Dependence

Artificial intelligence requires much more than software. Advanced models depend on large amounts of computing power, specialized chips, data centres, electricity and cloud infrastructure. Companies and governments that do not own these resources must obtain them from providers that do. Europe’s vulnerability therefore extends beyond the question of who develops the most advanced AI model.

The European Commission has identified a substantial dependence on non-European cloud providers. Three non-European hyperscale cloud companies account for more than 70 percent of the European cloud market, while the share held by European providers fell from 29 percent in 2017 to 15 percent in 2022 and has since remained broadly stable. The Commission has also warned that reliance on foreign infrastructure can create risks involving data control and operational continuity.

That matters because cloud services are increasingly becoming the delivery mechanism for AI. A European company may not need to build its own AI model or data centre if it can access computing through a foreign cloud provider. From a commercial perspective, this can be efficient. Building equivalent infrastructure domestically would require enormous capital investment, large amounts of electricity and specialist expertise.

The economic advantage of importing technology is therefore real. The vulnerability emerges when imported infrastructure becomes indispensable. Once critical operations depend on an external provider, switching becomes difficult and costly, particularly if alternatives are limited.

Europe Has a Computing Capacity Problem

The shortage of domestic computing infrastructure makes this dependence more difficult to resolve. Europe’s AI ambitions require data centres capable of handling increasingly intensive workloads, but expanding that capacity involves more than constructing buildings and installing servers.

Data centres require reliable electricity, suitable land, high-speed networks, cooling systems and substantial financing. They also face planning and permitting requirements that can delay construction. The European Commission has identified limited access to energy, land and financing, together with lengthy permitting processes, as obstacles to expanding cloud and data centre capacity.

The scale of the future requirement is particularly significant. Lagarde has pointed to projections that Europe’s data centre capacity gap could grow more than sixfold over the next decade if current trends continue. The European Commission’s own assessment projects a potential 19 gigawatt gap between European Union data centre demand and installed capacity by 2036.

This creates a potentially damaging cycle. Europe needs more AI capacity to increase AI adoption, but expanding AI adoption increases demand for computing faster than infrastructure can necessarily be built. If domestic supply does not expand sufficiently, European businesses have little choice but to rely more heavily on foreign cloud and computing providers.

The problem is therefore not simply technological backwardness. Europe has strong universities, research institutions, industrial companies and artificial intelligence researchers. The weakness lies in converting those capabilities into sufficient commercial computing infrastructure and globally competitive technology businesses.

The Cost of Falling Behind Is More Than Technology

Lagarde’s argument is also economic because artificial intelligence could become an important source of productivity growth. If companies can use AI to automate routine tasks, improve decision-making and increase output from existing workers and equipment, productivity can rise without a proportional increase in inputs.

Europe has particular reasons to pursue these gains because productivity growth has been relatively weak compared with the United States. Lagarde has previously noted that the technology sector accounts for a large share of the productivity gap between the European Union and the United States. European Central Bank analysis has also suggested that widespread AI adoption could produce meaningful productivity gains over the coming decade.

The potential benefit extends beyond individual companies. Higher productivity can increase economic output, strengthen corporate profitability and potentially broaden the tax base. For governments facing ageing populations and rising public spending requirements, faster productivity growth could make it easier to finance existing commitments.

But this opportunity creates another form of risk. If European companies adopt AI more slowly because they lack affordable computing capacity or depend excessively on external providers, they could lose productivity gains relative to competitors elsewhere. The cost would not necessarily appear as a sudden economic shock. It could emerge gradually through slower investment, weaker business formation and a persistent productivity gap.

Europe’s Response Is Shifting Toward Domestic Capacity

European policymakers are already attempting to address the infrastructure problem. The proposed Cloud and AI Development Act is designed to increase computing capacity inside the European Union, improve conditions for data centre investment and reduce risks associated with dependence on non-European cloud services. The broader European technological sovereignty package also includes measures covering semiconductors, artificial intelligence, cloud services and open-source technology.

The approach does not necessarily require Europe to replace every foreign technology provider. That would be economically difficult and could reduce competition. A more practical objective is to ensure that European businesses and public institutions have credible alternatives if access to foreign infrastructure becomes restricted or commercially unfavorable.

This distinction is important. Technological independence does not mean producing every component domestically. Modern technology supply chains are global, and Europe will continue to depend on foreign companies for some chips, software, cloud services and equipment. The strategic objective is greater resilience rather than complete isolation.

Recent private investment demonstrates that foreign technology companies themselves see Europe as an important AI market. Google, for example, announced a major investment in Finnish AI infrastructure, including three new data centres and a long-term electricity arrangement involving nuclear power. Such projects can increase European computing capacity even when the infrastructure is owned by foreign companies.

That creates a policy dilemma. Foreign investment can help close Europe’s infrastructure gap quickly, but it does not necessarily eliminate dependence on foreign technology companies.

Financial Markets Add Another Layer of Exposure

Europe’s AI dependence also has a financial dimension. European investors have substantial exposure to major United States technology companies through investment funds and pension assets. If expectations surrounding artificial intelligence weaken sharply, European savers could therefore experience losses even when the underlying companies are based outside Europe.

Lagarde has also highlighted how the enormous financing requirements of United States technology companies can affect European capital markets. Large technology companies are raising substantial amounts of capital to finance data centres and AI infrastructure, including through European debt markets. This can influence financing conditions for other borrowers competing for investment capital.

That does not mean European investors should avoid American technology companies or that foreign AI investment is inherently harmful. It means Europe’s dependence operates through several channels at once: technology, infrastructure, capital markets and productivity.

The central challenge is consequently broader than producing a European alternative to the largest AI models. Europe needs enough computing infrastructure, investment capital, energy capacity and domestic technological capability to ensure that AI becomes a source of economic strength rather than another area in which its growth depends heavily on decisions made elsewhere. If AI becomes as fundamental to the economy as cloud computing, banking networks or telecommunications, maintaining credible domestic alternatives could become less a question of technological prestige and more a matter of economic resilience.

(Adapted from EuroNext.com)

Categories: Economy & Finance, Regulations & Legal, Strategy