Projections indicate that over the six years following the pandemic, business investment growth in the United States is expected to outpace Europe's by more than threefold, highlighting the widening chasm driven by artificial intelligence between the two major economies.

Oxford Economics forecasts that real business spending on new equipment and facilities in the US will surge by 40% between 2021 and the end of next year. The consultancy attributes this outlook primarily to a dramatic escalation in AI-related equipment spending. In stark contrast, commercial investment in the euro area is projected to grow by a mere 12%, while Germany's business investment during the same period has nearly ground to a halt.

These figures underscore the predicament facing Europe: while the US has seen a massive influx of spending on high-tech equipment and infrastructure, Europe is struggling to keep pace. Even before the launch of ChatGPT in late 2022 and the subsequent rise of large language models, European information technology investment was already lagging behind the US boom.

However, the data also raises questions for the US itself, which is making a substantial bet on AI. Institutions like the Bank for International Settlements (BIS) have cautioned that the risk of a costly "investment bubble bursting" is on the rise. Alphabet Inc (NASDAQ: GOOGL), Meta Platforms Inc (NASDAQ: META), Microsoft Corp (NASDAQ: MSFT), and Amazon.com Inc (NASDAQ: AMZN) are alone projected to allocate over $725 billion in 2026 as they race to expand AI infrastructure.

Oxford Economics' projections reveal that Europe has made little tangible headway in narrowing the investment gap since former European Central Bank (ECB) President Mario Draghi released a landmark competitiveness report in September 2024. Draghi warned that digitalisation, decarbonisation, and heightened defence spending would necessitate an "unprecedented" surge in investment, returning to levels seen in the 1960s and 1970s. He noted that the required investment increase would even surpass the scale of investment spurred by the Marshall Plan following World War II.

Daniel Harenberg, an economist at Oxford Economics, stated: "The US economy is more dynamic, with a stronger entrepreneurial culture, so it is progressing faster in the AI race and reaping greater rewards. Europe is considerably slower."

There is also a significant and widening productivity gap between Europe and the US. Earlier this summer, Professor Bart van Ark of the University of Manchester told ECB policymakers at the central bank's forum in Sintra: "Recently, the US has extended its lead over Europe even further." Van Ark's analysis shows that between 2018 and 2025, GDP per hour worked in the US rose by $14, compared to just $2 in Europe. Van Ark added: "This gap is not confined to the digital sector," emphasising that US advantages are also evident in wholesale, retail, and professional services.

However, van Ark argues that merely increasing investment is unlikely to resolve Europe's productivity woes. The "deeper problem" lies in the failure to effectively connect innovation with the adoption of new ideas and tools by businesses across various industries. ECB President Christine Lagarde warned in a speech last year that the region's reliance on a manufacturing-led growth model "suits a world that is gradually fading away."

The European Union has been among the first jurisdictions globally to enact stringent AI regulations. The European Commission has stated that the AI Act, which took effect in 2024, is the world's first comprehensive legal framework for the technology. Critics caution that strict regulatory measures could stifle innovation and deter investment in the AI sector. French President Emmanuel Macron remarked two years ago in a speech: "We have fallen behind the changing world," warning of both "over-regulation" and "under-investment" in Europe. Carsten Junius, chief economist at Bank J. Safra Sarasin, noted: "Europe has missed the boat on this wave of cutting-edge technology."

Nevertheless, the US investment surge is heavily dependent on continued spending in AI, leaving the country vulnerable to a correction if returns fail to meet expectations. The Bank for International Settlements, which advises central banks, warned in June that a sustained "investment bubble bursting" could occur if the payoffs from AI investments underperform. Junius believes that at least part of the vast investment gap between Europe and the US is temporary. "US AI investment will not continue at its current scale indefinitely," he said, adding that the IT and semiconductor sectors have experienced investment cycles in the past and "will continue to see cyclical fluctuations in the future."

But Europe's lack of innovation capacity and flexibility exacerbates the issue. Junius attributes part of the problem to rigid labour markets. He stated: "If Europe fails to catch up in cutting-edge technology, our standard of living relative to the US will continue to decline."