Nobel Price in Economics: Innovation as Catalyst

Innovation is no longer merely a driver of progress but has become a necessity for survival in global competition.

For centuries now, Europe has produced considerable research, prestigious universities and institutions, while investing billions in innovation programs in recent decades. Yet, the United States recorded over 700 unicorns in 2023, compared with fewer than 150 across Europe. This disparity puts forward the question of how innovative systems in the United States and China contrast with those in Europe. 

The 2025 Nobel Prize in Economics offers insights into the argument that innovation prospers when the state acts as a partner rather than a controller. On October 13th, the Royal Swedish Academy of Sciences awarded the prize to Peter Howitt (Canada), Philippe Aghion (France), and Joel Mokyr (Netherlands-US-Israel) for their work on how innovation drives economic growth through creative destruction. Their study is centered on economic growth, particularly on how societies foster innovation while managing its disruptive effects. This article will explore Europe’s current position in global innovation, trapped between the technological giants of the United States and China, through the lens of Aghion, Howitt, and Mokyr’s instructive research. 

THE STATE AS A PARTNER OF INNOVATION

Economic growth does not happen randomly; it results from innovation and the constant renewal of ideas and research. This is the very idea that economists Philippe Aghion and Peter Howitt sought to explain through the theory of creative destruction: new technologies displace existing ones. Following this idea, the Netherlands serves as a case study for achieving economic growth through innovation. ASML, a chip-making equipment company based in Veldhoven, holds a 90% global monopoly on advanced chip-making equipment, and no American or Chinese company comes close to this achievement. 

This dominance can be explained by decades of private-public partnership, with the Dutch government investing in technical universities and research labs, while private firms take care of commercialization. ASML collaborates with top European research networks and hires top graduates without bureaucratic bounds. 

This aligns perfectly with what Aghion and Howitt describe in their research: states enable innovation by funding education and research, then pull back and allow entrepreneurs to compete and commercialize.  

THE LIMITS OF STATE INTERVENTION

Success stories such as ASML highlight one side of state intervention. Understanding to what extent this intervention can be productive requires examining where it fails.  France’s Minitel and Germany’s BTX offer precisely such lessons. Both were innovative communication systems developed in the 1980s, supported by the state. Both started with significant success. However, it did not last in the long term due to high levels of nationalization and centralization that could not adapt when the open internet emerged. France Télécom distributed about 9 million terminals by the end of the 1990s. The state largely contributed to Minitel’s success, with heavy public investment and centralized planning. This strategy initially prospered; however, as France Télécom controlled access, pricing, and technical standards, the system was not able to evolve and became rigid. While private firms could innovate within Minitel, the state had strong incentives to protect a profitable national system rather than taking risks and embracing an open global internet. 

Thus, when the World Wide Web arrived in 1991, French entrepreneurs were not able to keep up, as they frequently needed permission from the state. This, in turn, slowed down the French advance, while it used to hold cutting-edge digital infrastructures in 1990. Germany’s BTX suffered the same fate. These examples demonstrate the limits Nobel winners identified. 

THE CHALLENGE OF SCALING INNOVATION

While earlier innovation constraints were often national, European companies now face an additional issue: scaling across a whole continent characterized by different regulations and requiring approval of 27 member states. BioNTech, a German pharmaceutical company, developed the first approved COVID-19 vaccine, with advanced technologies. Still, BioNTech partnered with Pfizer, an American giant, to be able to manufacture and distribute its products globally. This partnership highlights Europe’s difficulties in scaling innovation independently, as Europe struggles with commercialization. European resources are spread across 27 countries, each with its own regulations and approval processes. While a German startup needs multiple regulatory approvals, an American one simply needs one. This is a fundamental problem as time is crucial in innovation.  

One effort to address Europe’s scaling challenge is the Horizon Europe programme, which fosters research and innovation with the aim of enhancing competitiveness and facilitating the path from research to market across member states. Nevertheless, EU innovators still face fragmented regulations and administrative complexity, which might burden commercialization in comparison with the American national regulations. 

EUROPE’S COMMERCIALIZATION GAP AND THE CASE FOR STRATEGIC FOCUS

In recent interviews, Philippe Aghion has emphasized that Europe needs, more than ever, to strengthen its innovation capabilities to close the gap with technological leaders. Over the past decades, this gap has grown not just in quantitative terms but also in the nature of innovation itself. According to Aghion, Europe’s weakness lies in the lack of risk-taking and inadequate funding for research, as he states, “We do not have a financial ecosystem conducive to innovation.” Indeed, Europe faces structural limits in competing with the scale of the U.S. capital or Chinese manufacturing and research & development.  Eurostat data show that the European Union’s R&D spending reached around 403 billion euros in 2024, less than either China or the United States. Moreover, the American  R&D spending is estimated at 784 billion dollars in 2023, highlighting a consequent gap with Europe. 

Meanwhile, considering Europe’s existing strengths, from Dutch chip-making and German engineering to French aerospace, Europe continues to set international standards. Instead of spending billions across diverse emerging technology sectors, Europe could focus on its existing assets. Yet, Aghion and Howitt’s research suggests that betting heavily on current advantages means vulnerability when the next technological advancement emerges. 

COMPETING VISIONS FOR EUROPE’S PATH FORWARD 

Philippe Aghion advocates for concrete institutional changes. Europe could benefit from an agency modeled on America’s ARPA, dedicated to high-risk, high reward projects in artificial intelligence, climate technology or biotechnology. But there are limits to this approach that should be pointed out. For instance, when states try to “pick winners,” it can lead to innovative failures as they might choose to support the wrong project. Bureaucrats can lack what the economist Friedrich Hayek (1899-1992) called the knowledge of “the man on the spot,” the real-time market information that entrepreneurs, on the other hand, possess. Large public funding programs could create dependency rather than encouraging innovation. 

However, the Scandinavian model offers another alternative, focusing not only on creating and innovating but also on social aspects. Nordic countries combine heavy investment in R&D, a flexible labor market, and universal social protection that encourages risk-taking and entrepreneurial confidence. Their “triple helix” collaboration between universities, industries, and government favors knowledge transfer without too much control. Even so, important questions remain; Sweden's population represents 10 million people. Whereas this model could be applied to a larger population, such as Germany’s 83 million inhabitants, remains an open question. These different solutions are not exclusive and could be combined or completed according to the various situations. 

CONCLUSION: URGENCY AND POLITICAL IMPLICATIONS

As Philippe Aghion argues, “those who innovate will win,” highlighting the importance of innovation in the economy. This concept is especially true with countries like the United States and China, which continue to advance through investments in strategic technologies. In line with this reasoning, Europe would benefit from strategically funding high-risk projects and smart regulations that would correctly frame innovations and foster public-private collaborations. Although this proposal has not been proven to be the sole path to innovation, it is strongly supported and rigorously examined by leading economists such as Aghion, Howitt, and Mokyr. The challenge now lies in the future choices that will be made by European leaders and whether they will find an optimal balance of state intervention.

Sources: techniques de l’ingenieur, PBS NEWS, the Nobel prize, Project syndicate, the royal Swedish academy of sciences, CEPR, Federal Reserve Bank of Atlanta, C.D. Howe Institute, TSEG, Le Monde, BFMTV, Horizon Europe, European Commission, Euractiv