Europe 2035: Innovation vs. regulation
While global competitors streamline regulation to attract talent and scale innovation, Europe remains hamstrung by red tape.
In a nutshell
Whether Europe becomes a leading center of dynamic entrepreneurship or retreats further into defensive regulation depends on decisions made today. Europe’s trajectory toward 2035 will be shaped by how it reconciles two powerful, generally conflicting forces: the need to foster innovation in a rapidly transforming global economy, and the drive to regulate for fairness, stability and sustainability.
The continent has long prided itself on its model of democratic governance, legal stability, robust consumer and environmental protection, and high ethical standards. These pillars have helped ensure social cohesion, safeguard individual rights and preserve prosperity in some respects.
Yet in the 21st-century race for technological leadership, these very strengths risk becoming strategic liabilities. For far too long, Europe has been living off the interest of past achievements – namely, its institutional credibility, historical wealth and scientific legacy – while failing to reinvest in the conditions that made those achievements possible in the first place.
The innovation-regulation tension
In a world where first-mover advantage and rapid iteration define global competitiveness, Europe’s dense web of rules and procedures can act as a brake on innovation. Despite the European Union’s single market, the continent still lacks a truly unified digital and entrepreneurial environment. Digital businesses face a patchwork of national regulations on data protection, taxation, labor laws and consumer rights.
Startups seeking to scale across borders must navigate 27 different legal systems, languages and compliance regimes, creating significant friction compared to more integrated markets like the United States or China. Capital markets remain nationally fragmented. This discourages risk-taking and undermines Europe’s ability to build continental-scale digital enterprises.
While global competitors like the U.S. and China aggressively deploy regulatory agility as a tool for economic and geopolitical advantage, Europe remains anchored to a defensive posture, prioritizing risk avoidance over value creation. Without a deliberate shift toward policy flexibility, decentralization and a pro-innovation mindset, Europe risks becoming a dependent consumer of foreign technology and innovation, rather than a driver of progress.
Migration: The missing link in Europe’s strategy
In a global economy driven by ideas, talent is a crucial resource. The countries and regions that succeed in attracting and retaining highly skilled individuals − especially in science, technology, engineering and entrepreneurship − will define the technological and economic landscape of the coming decades. Europe, however, remains a net exporter of such talent. While it educates many of the world’s most promising engineers, researchers and innovators, it often fails to provide them with the incentives, opportunities and conditions necessary to build their futures at home.
The reasons for this are structural. Many highly skilled Europeans face steep tax burdens early in their careers, especially if they choose to be self-employed or launch a business. High marginal tax rates on labor and capital gains discourage entrepreneurial risk-taking. The complexity and opacity of the tax systems in many EU countries further deter foreign professionals and returning nationals alike. Navigating compliance can be costly and time-consuming, particularly for small businesses and freelancers in the digital economy.
Facts & figures
European Innovation Scoreboard 2024
Labor markets, though protected and stable, are often rigid. Foreign credentials may not be recognized, language barriers remain high in professional licensing, and unionized labor markets can be difficult to penetrate. For entrepreneurs, launching a company in Europe typically means dealing with a maze of administrative procedures, delayed approvals and legal uncertainties. These conditions contrast sharply with the agility offered by startup ecosystems in the U.S. or certain parts of Asia.
Just as critically, Europe’s regulatory approach often suffers from a one-size-fits-all mentality. Harmonization within the EU, while intended to ensure fairness and cohesion, has too often flattened regional strengths instead of enhancing them. Young innovators or skilled migrants looking to relocate find few jurisdictions within Europe that offer a truly differentiated and competitive environment tailored to the needs of fast-moving, high-risk sectors.
There are exceptions. Estonia has positioned itself as a digital innovation hub through its e-residency program, paperless bureaucracy and tax system that defers corporate taxes until profits are distributed. It offers a compelling setting for location-independent entrepreneurs and tech startups.
The Netherlands has taken steps to streamline startup visas, and offers high-quality English-language education and public services while continuing to invest in international R&D partnerships. However, tight housing markets and increasingly contested immigration narratives complicate the country’s openness.
Meanwhile, larger economies such as Germany and France remain far more hesitant in attracting ambitious foreign talent. Though both have launched token initiatives – Germany with its Blue Card scheme and France with the French Tech Visa – bureaucratic inertia and cultural resistance to labor market liberalization still pose severe barriers.
By contrast, the jurisdictions that consistently attract talent, such as Canada, Switzerland, the U.S. or Singapore, combine several key features. They offer simple, transparent and competitive tax regimes, which make it easier for skilled professionals and entrepreneurs to keep a greater share of what they earn and reinvest it. They provide straightforward and predictable immigration pathways, with digital application systems and clear criteria for work, residency and entrepreneurship visas. Many operate within decentralized or federal systems that encourage institutional competition and policy experimentation, allowing regions or cities to act as magnets for specialized industries, such as artificial intelligence, biotech or fintech.
Crucially, these systems also offer social narratives that normalize risk-taking and failure. The freedom to fail, start over and build fast is embedded not just in laws but in culture. Talented individuals are drawn not only to financial incentives but to the broader psychological and professional atmosphere that supports ambition and reinvention.
Migration and innovation are not merely correlated. They are causally linked. A dynamic innovation ecosystem depends on openness to global talent and the capacity to circulate people, ideas and capital across borders without friction. If Europe continues to treat migration policy as a reactive or peripheral matter, primarily shaped by demographic fears or humanitarian concerns, it will remain at a structural disadvantage. If, however, it embraces skilled migration as a core pillar of its innovation strategy, and aligns its tax, visa and labor systems accordingly, it can turn the prevailing trend around.
The challenge is not simply to keep talent from leaving, but to give it compelling reasons to come, stay or return.
The principle of subsidiarity: A forgotten advantage
The principle of subsidiarity, embedded in the Treaty on European Union (Maastricht Treaty), asserts that decisions should be taken as closely as possible to the citizens they affect, and that higher levels of governance should intervene only when objectives cannot be sufficiently achieved at lower levels. In theory, subsidiarity is meant to preserve diversity, encourage local innovation and prevent unnecessary centralization. In practice, however, it has often been sidelined, especially in recent years. The EU has pursued increasingly harmonized policies in areas such as taxation, digital regulation and industrial policy, taking away the possibilities for individual regions to carve out a competitive advantage for themselves.
This drift toward top-down uniformity stems from understandable motives: the desire to create a level playing field, reduce regulatory arbitrage and protect the integrity of the single market. But these efforts, while well-intentioned, often undermine one of Europe’s greatest untapped assets – its capacity for institutional diversity and localized experimentation.
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Revitalizing subsidiarity would mean more than simply avoiding regulatory overreach from Brussels. It would involve actively enabling member states, and even individual regions and cities, to design and implement policies that reflect their specific comparative advantages, administrative capabilities and cultural conditions. Rather than forcing conformity, the EU could position itself as a framework provider: setting basic parameters and legal interoperability, while allowing jurisdictions to compete and innovate within those boundaries.
When subsidiarity is respected, Europe can function as a laboratory of policy pluralism. Countries or regions can test novel approaches to taxation, labor law, startup regulation or digital services, learning from each other’s successes and failures. This dynamic already exists in nascent form: Lithuania has developed a competitive fintech industry through regulatory flexibility; Bavaria has become a biotechnology cluster by combining academic strength with industrial policy; and Portugal has positioned itself as a destination for remote workers and digital entrepreneurs, as has Estonia. But these examples often flourish despite the EU’s regulatory framework, not because of it.
Crucially, subsidiarity also reinforces legitimacy. Policies crafted closer to citizens are more likely to reflect local preferences, respond to feedback and command public trust. A Europe that is responsive and decentralized is also more resilient, both politically and economically, than one that seeks to manage complexity from the center.
Subsidiarity and institutional competition provide Europe with a unique edge over centralized systems like China. By allowing diversity and decentralization to flourish, Europe can become a mosaic of innovation-friendly jurisdictions, not a regulatory monolith.
Scenarios
Less likely: Entrepreneurial confederation
In this scenario, Europe embraces subsidiarity and decentralization as drivers of innovation. Member states and regions gain greater autonomy to tailor tax, labor and innovation policies. Instead of harmonizing, the EU ensures interoperability and legal clarity across borders while allowing jurisdictions to compete.
Countries like Estonia, Portugal and the Netherlands become magnets for skilled migrants and startups through simplified taxes, digital bureaucracy and flexible visa regimes. Regulatory sandboxes and digital nomad zones flourish. The EU becomes a platform for bottom-up innovation, not top-down control.
Europe reclaims competitiveness by removing barriers rather than subsidizing outcomes. It becomes a dynamic, pluralistic space where talent and capital flow to the most agile regions. The likelihood of this scenario is 10 percent.
Likely: Middle of the road
Europe follows a cautious reform path. Some improvements are made as the costs of overregulation become too obvious to deny. Startup visas become more accessible, select tax burdens are lowered, and parts of the regulatory environment become more adaptive. However, the EU remains inclined toward centralization and harmonization. The innovation-regulation tension is managed rather than resolved. Talent outflows slow but are not reversed. Bureaucratic hurdles linger, and scale remains a persistent barrier. Particular interests that benefit from regulation and centralization are too strong to be overcome. The likelihood of this scenario is 45 percent.
Equally likely: The technocratic fortress
Faced with global uncertainty, the EU centralizes further. Industrial strategy, taxation, digital regulation and climate policy are consolidated at the European level. National flexibility is curtailed in favor of uniformity and control.
Tax competition ends; innovation policies are bureaucratized. Migration becomes rigid with little room for entrepreneurial or bottom-up dynamics. Skilled talent continues to leave. Low-skilled labor continues to be attracted by generous welfare systems.
Europe maintains high regulatory standards and social protections but falls further behind in global innovation and competitiveness. Discontent grows as citizens feel distant from decision-making. This scenario is bleak, but not entirely unlikely given the trend of the past decades. The likelihood of this scenario is 45 percent.
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