The core of the European Union's strategy to compete technologically with the U.S. and China is to build "Technological Sovereignty" by deliberately choosing an "EU values-based innovation model."

EU heads of state propose to leverage the continent's regulatory strength to set global standards (the "Brussels Effect"), while simultaneously mobilizing massive public and private investment to close the innovation gap and reduce critical dependencies, thereby transforming the Single Market into a global technology superpower that is both competitive and ethically grounded.

This approach balances two distinct sets of policies:

I. The Offensive Strategy: Massive Investment to Close the Innovation Gap

EU leaders, guided by reports highlighting Europe's lagging position in key areas like advanced semiconductors, cloud computing, and AI foundation models, recognize that regulation alone is insufficient. The offensive strategy focuses on direct, coordinated investment to foster homegrown innovation and rapidly scale up European businesses.

A. Targeted Industrial Policy and Financial Mobilization

The EU is moving away from purely laissez-faire economics toward a proactive industrial policy that targets strategic technologies.

1. Strategic Technologies for Europe Platform (STEP): This is the EU's main instrument for achieving technological autonomy. It pools and directs EU funds toward strategic technologies deemed essential for the continent's future, including:

   • AI and Quantum Computing: Essential for future economic and military power.

   • Biotech and Clean Technologies: Central to the EU's climate-neutral goals and global competitiveness.

2. The European Chips Act: This landmark legislation is designed to ensure Europe’s security of supply by boosting domestic semiconductor production. The goal is to reach 20% of the global market share by 2030, reducing the EU's structural reliance on Asian fabrication and American design. The Act mobilizes significant public and private investment to build "mega-fabs" in Europe, directly competing with the US CHIPS Act and similar subsidies in China.

3. AI Factories Initiative: Recognizing that the EU lags significantly behind the U.S. and China in developing large-scale foundational AI models, the Commission is launching this initiative to:

   • Create AI ecosystems linking universities, industry, and supercomputing centers.

   • Invest in AI "gigafactories" equipped with high-end chips and data resources to facilitate the training and deployment of large AI models.

   • The aim is to translate Europe’s strength in scientific research (where it leads globally) into economic leadership.

B. Single Market Enhancement and Capital Mobilization

European leaders consistently emphasize that the EU's greatest untapped asset is its Single Market of 450 million consumers.

• Completion of the Single Market: Speeches by Commission President Ursula von der Leyen call for overcoming remaining national barriers in finance, energy, and telecommunications. This includes introducing a new "fifth freedom" for knowledge and innovation to make it easier for companies to scale up across EU borders.

• Scaleup Europe Fund and Capital Markets Union: The EU aims to create a deep and liquid capital market by integrating capital markets across the continent. Initiatives like the Scaleup Europe Fund are designed to provide the necessary risk capital for European start-ups in critical tech sectors (AI, quantum, biotech) that currently seek funding in the U.S., leading to the loss of European technology ownership and jobs.

II. The Defensive Strategy: Regulation to Compete and De-risking

The EU's most unique and powerful tool is its regulatory strength. Instead of viewing regulation as a barrier to competition, EU leaders frame it as a competitive advantage that allows the EU to export its values globally.

A. Exporting Values through the "Brussels Effect"

The concept of the "Brussels Effect" is central to the EU's competitive strategy. This is the phenomenon where global companies, seeking access to the vast European Single Market, choose to comply with EU regulations worldwide rather than manage different standards for different regions.

• The AI Act: As the world's first comprehensive legal framework for Artificial Intelligence, the AI Act exemplifies this strategy. It mandates a human-centric, risk-based approach to AI, ensuring that systems respect fundamental rights, transparency, and safety.

  • Risk-Based Approach: It bans AI applications deemed "unacceptable risk" (e.g., social scoring) and imposes strict conformity assessments for "high-risk" applications (e.g., medical devices, critical infrastructure).

  • Competitive Intent: The EU intends for the AI Act to become the de facto global standard for trustworthy AI, forcing US and Chinese companies to design their products to European ethical and safety specifications if they want to operate in the EU—a massive non-monetary exercise of power.

• The Digital Markets Act (DMA) and Digital Services Act (DSA): These regulations target the market dominance of U.S. "Gatekeeper" platforms (Big Tech) to ensure a fair and competitive digital economy. By enforcing interoperability, data access, and transparency, the EU aims to create a level playing field where European start-ups can compete and scale without being immediately crushed by dominant American players.

B. Economic Security and De-risking from China

The EU strategy has shifted from a simplistic "partner, competitor, systemic rival" model for China to one focused on "de-risking"—reducing strategic dependencies without full "decoupling." This is the key measure for maintaining EU values and security in the face of state-driven competition.

• Reducing Critical Dependencies: Leaders emphasize the need to reduce reliance on China for key inputs, especially in the green and digital transitions (e.g., solar panels, batteries, critical raw materials). The war in Ukraine is cited as a major lesson on the dangers of weaponized economic dependencies.

• Defensive Trade Instruments: The EU has implemented a "defensive toolbox" to ensure a level playing field:

  • Foreign Subsidies Regulation: Allows the Commission to address market distortions caused by foreign subsidies, primarily targeting China’s state-backed industrial power.

  • International Procurement Instrument (IPI): Enables the EU to restrict the access of non-EU companies to EU public tenders if their home countries do not grant reciprocal access to EU firms.

  • Outbound Investment Screening (Proposed): This is a new protection mechanism to prevent European knowledge and technology from being transferred to strategic rivals through investments in non-EU countries.

The long-term success of the EU's strategy hinges on its ability to strike a delicate balance between internal competition and external strength. The challenge is whether the rigorous regulations designed to protect values and consumers will end up stifling the very innovation they aim to foster, thereby handing the technological future to the less-regulated, state-subsidized models of the U.S. (market-driven) and China (state-driven). The current consensus among EU heads of state, however, is that the only way to compete effectively while maintaining European values is to embed those values into the technology, thereby creating a globally preferred "trustworthy" alternative.