Artificial intelligence could become one of the clearest tests of whether Europe can overcome its longstanding productivity and competitiveness problems, according to Bundesbank President and European Central Bank Governing Council member Joachim Nagel. His warning comes as policymakers increasingly view AI not simply as a technology story but as a potential dividing line between economies capable of generating sustained productivity growth and those that fall further behind the United States and China.
Nagel has argued that artificial intelligence has the potential to deliver significant productivity gains, although its ultimate economic impact remains uncertain. In earlier comments, he said he was positive about AI’s ability to raise productivity, reflecting a growing view among European policymakers that the technology could help address some of the structural constraints weighing on the region’s economy.
The stakes are particularly high for Europe because the region enters the AI race from a weaker position than the US. Research presented by the Bundesbank shows that the European Union ranks third in AI investment, behind the United States and China. US institutions produced 40 notable AI models in 2024, compared with 15 in China and only three in Europe. Private AI investment was also far larger in the US, at about $109 billion, versus $19.4 billion in Europe.
Those numbers expose the central problem facing European policymakers. Europe has world-class industrial companies, universities and research institutions, but it has struggled to turn technological expertise into large global technology companies. The weakness is especially pronounced in scale-up financing, computing infrastructure and the development of frontier AI models, areas where American companies remain dominant.
Nagel’s warning therefore fits into a broader European debate over productivity. The continent has spent years trying to close the growth gap with the US, while businesses face fragmented national markets, higher regulatory burdens and more limited access to venture capital and growth financing. Mario Draghi’s competitiveness report highlighted many of these problems, but implementation of its recommendations has remained slow. Recent assessments suggest only a minority of the report’s hundreds of recommendations have been fully implemented.
AI could either deepen that gap or help Europe narrow it. If European manufacturers, financial institutions, logistics companies and service providers successfully integrate AI into their operations, productivity could increase without requiring a dramatic expansion of the workforce. That possibility is particularly important for a region facing demographic pressures and relatively weak potential growth.
The European Central Bank has already been studying the productivity implications. An ECB survey published in August found that workplace AI adoption had doubled over two years, with employees reporting significant time savings. At the same time, the benefits vary considerably between workers and companies, while barriers continue to prevent wider adoption.
For central bankers, AI also presents a complicated policy problem. Higher productivity could increase the economy’s potential growth rate and ease some price pressures by allowing companies to produce more efficiently. But AI could also generate additional demand for investment, electricity and computing infrastructure. The result could be an economic transformation whose effects on inflation and interest rates are difficult to predict.
The ECB is already watching another side of the AI boom: financial markets. The central bank recently warned that soaring technology valuations could create vulnerabilities if expectations about AI-driven profits become detached from actual economic gains. Its researchers have compared some elements of the current technology rally with conditions seen during the dot-com era, while stressing that today’s AI investment boom is also producing genuine economic transformation.
Europe’s financing challenge could become even more significant as US technology companies expand their presence in European capital markets. Major American hyperscalers have been issuing substantial amounts of euro-denominated debt to finance AI and data-center investment. Reuters reported that US technology giants had issued about €40 billion of such debt, raising concerns that they could absorb investment capacity that European companies and governments also need.
The challenge is therefore not simply to develop better European AI models. Europe needs the capital, electricity, data centers, skilled workers and unified market needed to deploy AI across the broader economy. Without those foundations, even strong research may fail to translate into higher productivity.
That makes AI a broader test of Europe’s economic model. The technology could give European companies a new source of efficiency and help offset demographic constraints, but only if businesses can scale innovations quickly and policymakers reduce the structural obstacles that have historically limited growth.
Nagel’s message comes at a particularly important moment for the ECB, which is balancing inflation risks against weak underlying growth. Economists expect the central bank to raise its deposit rate to 2.5% at its September meeting, while growth forecasts remain modest.
For Europe, the AI race ultimately may be less about producing the world’s most famous chatbot and more about whether millions of businesses can use the technology to become more productive. If they can, AI could help change the region’s growth trajectory. If adoption remains fragmented and investment stays concentrated elsewhere, the technology may instead expose the very weaknesses Europe has spent years trying to fix.
