US widens AI-driven investment gap with Europe

Business investment in the US is on track to rise more than three times faster than in Europe in the six years since the pandemic, according to forecasts that highlight the AI-driven gulf opening between the two economies.

Corporate spending on new equipment and facilities in the US is projected to increase 40 per cent in real terms between 2021 and the end of next year, according to forecasts from Oxford Economics.

The consultancy said surging outlays on AI equipment were key drivers in its forecasts. The US surge compared with a real-terms increase of just 12 per cent in the euro area, while German business investment is expected to have all but stagnated over the same period.

The figures underscore the challenge facing Europe as it struggles to keep up with the explosion in American spending on high-tech equipment and facilities. The continent was lagging behind the US’s booming IT investment even before the rise of large language models that started with the launch of ChatGPT in late 2022.

But they also raise questions for the US itself as it bets heavily on AI when the Bank for International Settlements and other institutions are warning of the rising risk of a costly “investment bust”. Google, Meta, Microsoft and Amazon are on track to invest more than $725bn in 2026 alone as they dash to build more AI infrastructure.

The Oxford Economics forecasts show that Europe has made little, if any, progress in closing its investment gap since former European Central Bank president Mario Draghi published a landmark report on competitiveness in September 2024.

Draghi warned that digitalisation, decarbonisation and higher defence spending required an “unprecedented” surge in investment to levels “last seen in the 1960s and 70s”. The increase needed was bigger than the investment push from the Marshall Plan after the end of the second world war, he said.

“The US is a more dynamic economy, more entrepreneurial, so it is moving faster and there are more rewards with the AI race,” said Daniel Harenberg, an economist at Oxford Economics. “Europe is much slower.”

Europe also faces a large and growing productivity gap with the US. “The United States has recently pulled further ahead of Europe,” Bart van Ark, a professor at the University of Manchester, told ECB policymakers at the ECB Forum in Sintra this summer.

According to van Ark’s analysis, GDP per hour worked increased $14 in the US between 2018 and 2025, compared with just $2 in Europe. “The gap is not only a digital sector story,” added van Ark, stressing that the US outperformance also extended to other sectors, including wholesale and retail as well as professional services.

But van Ark argued that higher investment in itself was unlikely to fix Europe’s productivity woes. Europe’s “deeper problem” was that innovation is “not properly connected” to the adoption of new ideas and tools by businesses in different sectors.

ECB president Christine Lagarde warned in a speech last year that the region’s manufacturing-dependent growth was “geared towards a world that is gradually disappearing”.

Europe has been one of the first jurisdictions globally to enact strict laws regulating the use of AI, with its 2024 AI Act becoming “the first-ever legal framework” on the technology, according to the European Commission.

Critics have warned that stringent rules can stifle innovation and discourage AI investments. “We are out of step with a shifting world,” said French President Emmanuel Macron in a speech two years ago, warning that Europe was “over-regulating” and “underinvesting”.

Karsten Junius, chief economist at Bank J Safra Sarasin, said that “Europe has missed out on the latest wave of cutting-edge technology”.

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The US investment boom is hugely reliant on continued spending on AI, however, leaving it vulnerable to a correction if returns fail to meet expectations. The Bank for International Settlements, which advises central banks, in June warned of a prolonged “investment bust” if returns from AI spending fail to match expectations.

Junius said he was confident that Europe’s vast investment gap with the US was at least partly a temporary phenomenon.

“AI investment in the US is not going to continue at this scale indefinitely,” he said, adding that investment cycles in IT and semiconductor technology existed in the past, “and we’ll continue to have them”.

But the problem was made worse by less innovation and agility in Europe, which Junius said he partly attributed to ossified labour markets.

“If Europe fails to catch up in cutting-edge technology, our relative standard of living compared with the US will continue to erode,” he said.