Philippe Aghion is an expert in creative destruction. Economists use this term when innovations disrupt entire industries and create new industries. Think the steam engine, assembly line production, and the IT revolution. Or now, artificial intelligence (AI).
For his groundbreaking research on how technological innovation can drive long-term economic growth, Aghion, who is French, was awarded the Nobel Prize for Economics in 2025, along with Canadian Peter Howitt and Israeli-American Joel Mokyr.
“More than ever, AI will bring creative destruction,” Aghion told DW on the sidelines of this year’s Brussels Economic Forum. “There will be job destruction. And there will be job creation. If you manage creative destruction right, it is an engine of social promotion.”
Importance of embracing change in Europe
To illustrate the benefits of creative destruction, Aghion points to the difference in economic growth in the European Union (EU) and the US.
For decades, they evolved in lockstep. But when the IT revolution happened – personal computers, the Internet and everything connected with it – America fully accepted the changes. Europe not so much.
The result was that the gap became wider. Today, GDP per capita in the US is almost double that of the EU.
With AI, Europe risks repeating the mistake. “We need to wake up,” warned Aghion.
The US and to a lesser extent China are far ahead when it comes to AI development. OpenAI, Anthropic, Google, Meta, Microsoft and many other companies are investing billions in the development of large language models (LLM) and the computing power required for these models, such as ChatGPT, Gemini, Cloud or DeepSeq, a Chinese model.
Finding strengths in EU data protection
Europe conducts excellent research but has historically struggled to scale startups and attract venture capital on a par with the US.
European models such as the French Mistral are exceptions to the rule.
While it may be difficult or even impossible for Europeans to get hold of the LLM field, Aghion argues that they should bring AI into their traditional strengths like health.
“We have fantastic health data in Europe, much better than the US. And there will be fantastic AI health applications there. We can develop a lot of specialized AI,” he said.
And if done well, European penchant for regulation can become a force to be reckoned with, for example in data security and privacy.
“I believe there will be a demand for more ethical AI, an AI that will avoid certain threats,” Aghion said. “People want to be safe. Creating some rules would make us more attractive.”
How can Europe catch up with AI?
Some business leaders agree. Thomas Saueresig, vice chairman of the board of directors of SAP, Europe’s largest software company, wants to see the use of AI beyond the scope of the LLM to put traditional European industries “on steroids”.
“Take for example our capabilities in manufacturing: We can use physical AI and bring it to the next level,” Soeressig told DW’s business podcast “The Dip.” “We need to use this technology to propel our existing models into the future. In uncertain times, the biggest risk is not taking risks.”
But to do that, Europeans need to do their homework, says Nobel laureate Aghion. “First, we need to create a better research environment with more long-term funding for research,” he said. “We also need more venture capital and more pension funds.”
Why does Europe need more venture capital?
European startups, whether they deal with AI or not, generally have difficulty securing financing. Banks are often reluctant to finance startups because many young companies fail and lack collateral.
“It’s different for specialized investors,” also known as venture capital firms or angel investors, said Marlene Schörner, a researcher on financial markets in the EU at the Jacques Delors Center in Berlin.
“They don’t care that many startups fail because they actually make profits from the successful startups they invest in. We need more investors like this.”
One way to attract more venture capital is to harmonize regulations within the EU.
“Bankruptcy laws are very important for investors. They want to know whether they can get their money back if a business fails. But these laws vary greatly between EU member states,” Schörner told DW’s German-language business podcast. “Economy in Conversation.”
Can Europe’s savings fund AI innovation?
Another way to breathe some life into Europe’s startup scene is to tap the continent’s vast private savings.
“Europe sits at around €12 trillion [$13.6 trillion] in domestic savings,” Luc Frieden, Luxembourg’s prime minister, said during a speech brussels economic forum In May. “But most of that money flows into real estate and government bonds rather than investing in startups.”
To change this, the European Commission has launched the Savings and Investments Union, which is basically a rebranding of the Capital Markets Union, explains Marlene Schörner.
“The goal of unifying European capital markets has been around for a very long time. However, this effort has not been very successful so far,” he said.
In the past, countries were reluctant to give up control over their financial markets.
The hope is that recent changes in geopolitics, discussions about whether the US is still a reliable partner, and the need for European self-reliance will put enough pressure on the 27 EU members to set aside their differences and create a common financial market.
A European DARPA for AI
Philip Aghion believes that research and funding can be greatly improved by bringing in the military. “We need something like DARPA,” he said, referring to the Defense Advanced Research Projects Agency, a US organization charged with developing technology for military use.
DARPA was created in 1958 and played a key role in technologies such as the Internet and GPS.
Since Aghion doubts that all EU members will support the idea of a European DARPA, he suggests that France and Germany take the lead. “We can have a French-German DARPA, and other countries can join in if they want.”
The Nobel laureate describes herself as a “combative optimist” when it comes to AI. However, he also has words of warning for European politicians. To tackle the destructive potential of AI, Europe needs to focus on education. It also means retraining those who lose their jobs.
“In countries without good social protection and education systems, AI will create a lot of unhappiness and frustration, and there is a big risk that they will slide into populism in the long run,” Aghion said.
Edited by: Tim Rooks