Rewiring Europe’s Productivity Framework: Aligning Investment, Innovation, and Diffusion

First, by examining Europe’s productivity shortfall in detail, it shows that slow growth is widespread within industries rather than mainly the result of sectoral composition, highlighting the importance of policies that foster the diffusion of innovations across firms, sectors, and regions. Second, by exploring the links between technology, innovation, and diffusion, with particular attention to artificial intelligence (AI), the paper argues that Europe’s thin innovation frontier and long diffusion lags go some way to explaining its difficulty in reversing the productivity slowdown.

Third, this difficulty appears to be compounded by weak investment in intangible assets, which limits firms’ absorptive capacity and their ability to capture the productivity benefits of broad-based adoption. Fourth, the paper argues that Europe’s policy framework needs to better integrate investment, innovation, and diffusion if it is to support broader and more inclusive productivity growth. The main policy recommendation is to give greater prominence to horizontal policies that address weak diffusion within and across sectors by supporting the wider adoption, absorption, and effective use of new technologies and innovations, particularly at national and regional levels.

At the same time, effective vertical action at European level will require greater governance capacity, anchored in disciplined, selective, and performance-based industrial policy. Updated version from paper presented at ECB Forum on Central Banking 2026 “Shaping Europe’s future: innovation, growth and stability”, 29 June-1 July 2026, Sintra, Portugal (updated 13 July 2026)