The competitiveness of a social Europe

The EU’s focus is, rightfully, shifting towards competitiveness (and security). Mario Draghi, the former European Central Bank chief and Italian Prime Minister, wrote in his 2024 report on EU competitiveness: “Without action, the EU risks a ‘slow agony’ of declining competitiveness.”

When EU leaders gathered in a ‘retreat’ in Belgium yesterday (in the presence of Mr Draghi), the question was therefore not whether Europe should pursue competitiveness — it must. The question was which model of competitiveness it should pursue.

For decades, Europe has stood for a model that favoured shared prosperity and general well-being over the mere pursuit of individual wealth. Yet it now appears sluggish in many respects: overregulated, ageing, and not sufficiently innovative. In terms of competitiveness and productivity, it seems to be falling behind key global competitors.

At their informal meeting, EU leaders agreed to further simplify EU rules, deepen the Single Market, ease regulatory frameworks for businesses, promote investment, protect strategic industries and foster global free trade.

The urgency to act is real — and so are the familiar reflexes that tend to follow in such moments.

Fostering competitiveness has often come at the price of deregulation and the dismantling of the welfare state. History has seen many phases in which internal devaluation, fiscal contraction, social spending cuts and public-sector retrenchment were presented as unavoidable paths to restoring economic strength.

Yet this often resulted in social fragmentation, impoverishment, weakened public services and, not least, political instability — quite the opposite of what underpins Europe’s traditional model of broad-based well-being.

Alongside the conviction that competitiveness can best be achieved through deregulation and the dismantling of social protection, another belief has taken hold: the belief that technological progress alone will deliver growth and shared prosperity.

From Silicon Valley to Davos, the global debate on competitiveness is increasingly shaped by a powerful technological optimism — the assumption that innovation and artificial intelligence will generate jobs, growth and prosperity almost automatically.

At the 2026 World Economic Forum, Elon Musk claimed that robotics and AI will lead to a future of “abundance” (of jobs, opportunities and services); and according to NVIDIA’s CEO, Jensen Huang, AI infrastructure will create new jobs across sectors, helping address, for instance, healthcare workforce shortages.

Yet economic history can teach us otherwise. The so-called ‘Engels’ Pause’ (a term coined by the economic historian Robert C. Allen in reference to the German philosopher Friedrich Engels) suggests that technological progress and productivity increases do not necessarily — and certainly not immediately — lead to improvements in human well-being.

Friedrich Engels observed in early industrial Britain that industrialisation massively increased output and profits, but that workers’ living standards stagnated or worsened for decades. The gains were captured first by capital owners, not labour. That shift came much later.

One could argue that we are in a new ‘Engels’ Pause’: AI and digital technologies boost profits and market capitalisations, wages lag behind productivity, job security erodes, and wealth concentrates. Seen through this lens, “abundance” narratives can sound like: “trust us — the benefits will trickle down. Eventually”.

Yes, technological progress creates the capacity for abundance; but institutions determine whether that abundance is shared — or concentrated.

This is why Europe’s model matters.

CESI’s EU co-funded project ‘SynCrisis’ showed that competitiveness can be achieved only when social policy is part of the strategy. Periods of strong public investment — notably during the suspension of fiscal rules during and after Covid-19, and the launch of NextGenerationEU — coincided with improvements in debt-to-GDP ratios and a recovery momentum.

The project’s findings also show that countries with stronger social protection systems often rank higher in competitiveness indices. This is not accidental. Social investment strengthens human capital, stabilises demand, and enhances institutional trust — all decisive factors for long-term productivity.

In 2025, CESI’s Presidium emphasised that sustainable competitiveness depends on strong public services and social dialogue. Acknowledging the growing role, importance and benefits of AI and ICT, it stressed that technology should not become synonymous with deregulation and social cuts — nor a pathway to them.

These are not arguments for slowing down reforms, innovation and competitiveness efforts. They are arguments for ensuring that these efforts remain guided by social stability and investment in people.

As the Draghi Report underlined, promoting competitiveness should not lead to wage repression to lower relative costs. Draghi stressed that the skills and knowledge of the workforce are an important competitive factor. “Without such human capital at the centre,” he said, “Europe risks declining growth in the face of global rivals”.

Sustainable competitiveness is not about deregulation and social cuts. It is about promoting innovation, and investing in people, infrastructure, innovation and strong public institutions. It is about skills and lifelong learning, fair labour standards, robust social dialogue — and ensuring that technological progress benefits the many, not just the few.

Technological progress and industrial innovation could unlock unprecedented prosperity. But, as Engels observed in the 19th century, early industrial growth did not automatically improve workers’ lives. It took institutions, collective bargaining and political struggles to translate productivity gains into shared welfare.

Today, Europe stands at a similar crossroads. Abundance is possible — for the many — but only if Europe chooses a model that strengthens its social foundations rather than weakens them.