Europe will be “doomed” in this fourth industrial revolution without the right mix of industrial policy, education and a strong labour market, according to Philippe Aghion, winner of the 2025 Nobel Prize in Economic Sciences.
Alongside colleague Peter Howitt, he was jointly awarded the prize for their work on the theory of sustained growth through creative destruction, explaining how new products and innovations displace older ones in dynamic markets.
AI represents the fourth industrial revolution, he told the Amundi World Investment Forum. The first, in the late 1700s and early 1800s, followed the invention of the steam engine in Europe.
“Then you had electricity and the combustion engine, the second revolution that started in the US in the 1920s and 1930s,” said Aghion.
The third revolution was the internet revolution at the start of the century, with the fourth revolution happening today with the proliferation of AI.
Artificial intelligence is a general purpose technology, the London School of Economics professor said. It will spread to all the sectors of the economy and has the potential to power growth as well as future employment.
He estimated that the current enthusiasm is that AI will automate tasks in the production of goods and services. If capable, this would add around 0.7 percentage points annually to growth over the next 10 years.
However, its other big capability is idea generation, with the technology able to turn abstract ideas into real-world applications. This, he argued, could add “at least” another 0.3-0.4 percentage points to growth every year in perpetuity.
“That is enormous,” argued Aghion, who said the technology “can really boost growth” in the future. The major risk, however, is that countries outside of the US and China get left behind through not having their own dedicated technological revolution.
In Europe, appropriate industrial policy to build computing centres, good competition policy, good education and a strong labour market will be crucial for the success of the continent.
“If we don't do that, then we are doomed,” Aghion warned, as the AI revolution risks being “monopolised by two or three firms that end up discouraging the entry of new innovators”.
“It all depends on the institutions and policies we put in place. We can get the best or the worst [of AI].”
Europe has already missed the start of the AI wave – large language models (LLMs) – as there are no true large-scale tech hyperscalers on the continent. However, it is not too late to dominate the “next revolution within the revolution”.
To do this, first there needs to be a unified capital market. Currently, each country has its own, which has led to “too much fragmentation”. This then needs to be followed up with centralised regulation on goods and services, he argued, as currently each country adds its own regulation on top of European regulation, something known as “gold-plating”.
“We don't have a truly unified market – and for innovation you need a big market. In the US you have a big market. In China you have a big economy. In Europe it's segmented,” the Nobel Laureate explained.
Next on the way to “breakthrough innovation” is a shift in the cultural mindset that means people are willing to fail. The current system in Europe is not built for this, he argued. Long-term research (with failures along the way) requires long-term funding but the European Research Council, for example, only lasts for five years.
“We need more 10-year, long-term research funding. In the US you have that,” said Aghion, who noted that some of this comes from private foundations.
This led him to the third aspect Europe must improve upon: venture capital. There is not enough money willing to back start-ups, he argued, partly because there are too many regulations and partly because “we didn't develop enough institutional investors, such as pension funds or mutual funds”.
“Those that we do have in Europe invest too much in the US and not enough in Europe. So it's not only that we don't have enough, they invest in the US. They don't invest enough in developing technologies in Europe.”
That is not to say Europe does not have a strong foundation. Aghion pointed to the “fantastic” scientists, mathematicians and engineers on the continent that need to be harnessed to “push for the next revolution within the revolution”.
Additionally, Europe has soft power, such as democracy and freedom, including “flexicurity” – a welfare state model that balances a highly flexible labour market with strong social security for workers – which he said will be important with AI.
It is also leading in some areas such as being at the frontier on green innovation.
But to be successful in a post-AI world, what is required is a mixture of government support, innovation-friendly policies and venture capital. The 2025 Nobel Prize winner argued for “smart regulation”, as too many rules risk creating barriers to entry for new firms, creating a monopoly of companies outside of Europe.
He highlighted the Defence Advanced Research Projects Agency in the US, which is designed for the development of emerging technologies for use by the military as one such organisation Europe could look to emulate as a “pro-competition way to do industrial policy”.
Another is to extend the Digital Markets Act, which is designed to ensure fair and competitive digital markets and stop large platforms from gatekeeping the technology, across the entire AI value chain.
Get this right, however, and “Europe can really play an important role in the next wave of the AI revolution – in the post-LLM era in particular”, he concluded.