By Igor Pejic
While future defense spending could produce an edge in innovation, Europe will need to build a strong private tech muscle to scale any technology, whether as a pioneer or as an emulator. But the capital markets that European tech companies can tap are nowhere near American levels, nor are the returns. Eliminating capital gains taxes on EU tech champions can change the calculus.
For years European tech autonomy was one of those fancy goals everybody in the EU subscribed to, but nobody actually tackled in a meaningful manner. Decisionmakers shied away from more ambitious, controversial policy proposals. Instead, initiatives like the European Chips Act got the direction right but vouched very small investments. The 32 bn € in the specific case of the Chips Act seem homeopathic to the capital America puts up. Microsoft, Alphabet, Meta, and Amazon alone will spend $5.3 trillion between 2025-2030, despite already being in an insurmountable lead.
The focus of the EU so far has not been on building homegrown competitors, but on obstructing American ones. This approach is backfiring. Carmakers like Stellantis and Volvo are already warning of restrictions in digital procurement. Yet there are even bigger headaches than competitiveness. In April this year it became painfully clear that tech dependence on foreign companies, even those from allies, can be an existential threat. Anthropic released its new Mythos model, an artificial intelligence so powerful Anthropic rolled it out only to a handful of companies due to cybersecurity concerns. Mythos found countless vulnerabilities in major software components that have gone unnoticed for years. Not a single European company was granted access. To be clear, European tech sovereignty is not a bid to replace American leadership. It is an attempt to make a close ally less fragile. A digitally helpless partner is a liability. A digitally capable one is burden-sharing against shared rivals. Hence, a powerful European tech industry must be built for the sake of both, the EU and the US.
A gap that government money cannot close
Europe’s innovation problem stems from the absence of a real defense industry. Historically the military has given birth to most breakthrough innovations. Since Russia’s invasion on Ukraine the EU has ramped up defense spending. That was long overdue. But regardless of whether Europe manages to turn military spending into an innovation edge, it will need to build a strong private tech muscle to scale any technology, whether as a pioneer or as an emulator.
The EU has a smart and well-educated workforce, and a combined market even larger than America. Private capital is a problem, but the major obstacle to scaling technology is the absence of deep capital markets. Recently the CEO of Mistral, Europe’s AI leader, explicitly said that capital is the biggest bottleneck to European tech independence. Last year Mistral was valued at €21bn. xAI, as part of Space X, has a corporate valuation hovering around 2trn USD.
In 2026 the entire EU budget was below €200b. The bloc can try to bolster its semiconductor industry, AI efforts, and cloud-infrastructure as much as it wants, but tech independence will not be built through bigger public initiatives. Moreover, public capital always lags behind private capital in frontier technologies. That is also the main reason America still outcompetes China on AI.
Tapping public investor capital as the game changer
The answer to the EU’s conundrum must come from market-based financing. Europe’s capital markets are at a natural disadvantage due to low retail investor participation and corporate preference for bank-based financing. Europeans are more skeptical about stock markets, and it will be an uphill battle to make them switch from savings accounts to stocks and ETFs. It’s a battle that needs to be fought, but more critical now is to give those people already investing a strong reason to rotate their money to European tech companies.
Today, there is no way an investor might conclude that European tech stocks are an adequate alternative to American ones. Last year, the IT segment of the S&P500 earned a return of 34% compared to a 22% return of its European counterpart (Stoxx Europe 600). There is a simple and powerful way to nullify this advantage and to set in motion a spiral of European tech growth: Eliminate capital gains tax on tech companies headquartered in the EU. This is the only measure that could generate the massive inflow of capital needed to jump-start a true tech industry of significance.
Abolishing capital gains tax would require unanimity in the EU member states. And like every impactful proposal, it will come with a backlash. The first instinct by many will be to mourn the foregone tax revenue in a time of a ballooning deficits across the continent. But you can’t lose what you don’t have.
Since the EU’s current tech sector is negligible, so are capital gains tax revenues. On the other hand, if Europe manages to build Big Tech companies, they would generate enormous amounts of income taxes, corporate and trade taxes, value-added taxes, and would fire up many other revenue sources. A strong European tech sector can also be an engine of prosperity and the prime source of future economic growth. But in the long run, it is simply a matter of survival. The path to European technology giants leads solely through a massive strengthening of the capital markets.
About the Author
Igor Pejic is an award-winning author, keynote speaker, and banker. His latest book Tech Money uncovers the new rules of investing in the technology age. He is a regular speaker at institutions such as the Bank of England, the Financial Post, the German Banking Association, Euromoney, and UK Finance. Pejic publishes the Substack newsletter The New Frontier.
