European economy

By Mauro Macchi, Dominic King, and Ladan Davarzani

Europe’s economy shows promise, but stock market turbulence, political uncertainty and war could disrupt it any time. Resilience hinges on investing in continuous reinvention.

Is the European economy turning a corner? Business has been battered in recent years, first by the pandemic and supply chain disruption, then by the energy crisis and rising prices. Yet, recent economic data looks slightly healthier: inflation across the Eurozone is down to 2.0%;[i] gas storage levels are at record highs, which should keep prices down;[ii] and growth in the EU is expected to tick up from 0.5% in 2023 to 0.9% this year and 1.7% in 2025.[iii]

This more positive economic outlook has boosted business confidence. Our survey from August found 79% of business leaders expecting revenue growth in Europe in 2025. More than a quarter (27%) of the 2,694 CXOs surveyed anticipate more than 5% growth in the region.[iv] Only in the US were they more bullish about achieving this level of growth (32%).

The key lesson from the COVID-19 pandemic is that companies must hedge against uncertainty by building resilience.

That said, stock market turbulence, fractious elections and the ongoing Russia-Ukraine war all show that nothing can be taken for granted. The key lesson from the COVID-19 pandemic is that companies must hedge against uncertainty by building resilience. This means committing to continuous reinvention and making the right investments at the right pace to sustain high performance.

The price of efficiency

However, the turmoil of recent years has seen many European companies take their eye off long-term value creation. Instead, they prioritized efficiency: streamlining operations, reducing headcount, and optimizing supply chains to minimize risk, take out cost and maintain profitability.

This short-term “firefighting” mindset was a perfectly rational response to a challenging economic environment. But it has come at a cost. A third (32%) of Europe’s top financial performers from 2019 dropped into “low revenue growth” over recent years; that compares to 27% of peers globally.[v] Even many of those European companies that are growing profitably today are under-investing in resilience (36%) compared with peers in other regions (26%).

As investments in innovation and expansion have been delayed, long-term growth prospects have declined. The share of “long-term profitable growth” companies in Europe is now 25% below where it should be (ceteris paribus), while the US share is 60% higher. This has seen a wide performance gap open up: more resilient European companies are expected to grow revenues and profits more than seven percentage points faster than their less resilient rivals over the next three years.[vi]

As Ursula von der Leyen, President of the European Commission, said recently when proposing a new European Competitiveness Fund to develop and manufacture strategic tech in Europe: “…our competitiveness needs a major boost. The fundamentals of the global economy are changing. Those who stand still will fall behind. Those who are not competitive will be dependent.”[vii]

Underinvestment in tech: a familiar story

Europe ranks below the US and Asia for spending on cloud, data & AI and, cyber, as well as for AI VC M&A Investment, on Accenture’s Resiliency index.

The European resilience story is nuanced. The continent’s companies score well overall but remain 34pp behind their US counterparts in the key area of technology maturity—a composite measure of investment in applications, infrastructure and cybersecurity.

As noted in previous reports, Europe ranks below the US and Asia for spending on cloud, data & AI and, cyber, as well as for AI VC M&A Investment, on Accenture’s Resiliency index.[viii] The continent’s businesses do score much better for tech skills, board TQ and cyber talent. But as the returns on tech investment accelerate, European competitiveness will suffer if our engineers, developers and others are starved of resources.

As Mario Draghi observed recently when launching his Future of European Competitiveness report: “The EU remains weak in the emerging technologies that will drive future growth… [this] will not only rob it of the growth opportunities of the coming AI revolution. It will also hinder innovation in a wide range of adjacent sectors—such as pharmaceuticals, cars and defence.”[ix]

Could generative AI change the narrative?

“The EU remains weak in the emerging technologies that will drive future growth… [this] will not only rob it of the growth opportunities of the coming AI revolution. It will also hinder innovation in a wide range of adjacent sectors—such as pharmaceuticals, cars and defence.”

It’s encouraging, therefore, to see the continent enthusiastically embracing today’s inescapable technology: generative AI. Most European executives see generative AI as key to their reinvention strategy (80%) and expect it to significantly improve performance (72%).[x] Indeed, 86% say they have received material financial benefits from using generative AI—ranging from 90% in Germany to 77% in Italy, with telecoms and technology (90%) and financial services (84%) companies most positive.[xi]

But perhaps more importantly, the advent of generative AI seems to be prompting a mindset shift in Europe: 78% of executives say that these investments are driving revenue growth, against 22% who see them as more beneficial for cost reduction. This trend could help businesses on the continent find a better balance between efficiency and resilience, thereby boosting long-term growth prospects.

Reinvention relies on the digital core

This shift in focus is important – but to realize the full value that employing generative AI at scale could unlock, European companies need a secure, integrated digital core. This combines the digital platforms, data and AI backbone and digital foundations – from cloud infrastructure to cybersecurity – necessary to drive continuous reinvention. Indeed, our research finds that companies with industry-leading digital cores plan to reinvent twice as many functions with gen AI compared to competitors and expect to create twice as much value.[xii]

However, we have uncovered significant readiness gaps across the continent: for example, under half of European companies say AI is embedded into all business processes (49%).[xiii] Executives say they are constrained by three main barriers: data strategy (36%), cloud infrastructure (35%), and change management (34%).[xiv] Overcoming each will serve to realize the potential of generative AI while simultaneously boosting tech resilience and long-term continental competitiveness.

Data quality is a prerequisite for realizing the potential of generative AI. A company without a data strategy is like an airplane without a refueling plan: it won’t be in the air for long. High-quality proprietary data, perhaps pulled together in public-private partnerships, could offer businesses in the region a competitive advantage. A large, European banking group worked with Accenture to build a new knowledge application that provides specific answers to users’ regulatory questions by searching through its vast and growing collection of data and documents. The tool increases accuracy and compliance and saves the user time and manual effort.

A robust data strategy must be underpinned by a mature cloud infrastructure to take advantage of generative AI capabilities. Companies operating in a connected cloud environment can scale solutions more efficiently than their unconnected competitors. For example, AXA worked with Accenture to migrate its public claims system to the public cloud to boost agility, speed and transparency, and to lower costs. Client-centric innovations include AI-powered self-service portals that shorten claims registration and settlement times.

Nothing changes if our people don’t

Most European workers (95%) see the value in working with generative AI, but many (60%) are worried about accuracy and job displacement.

While the technology is clearly critical, so are the people using it. New generative AI tools will fail to build resilience and drive reinvention if people don’t use them. Most European workers (95%) see the value in working with generative AI, but many (60%) are worried about accuracy and job displacement. This highlights the need for companies to adopt a people-centric approach. Business leaders must reskill their people – for example to work hand-in-glove with virtual agents – but also themselves, given 33% are not yet using generative AI tools regularly (i.e., once a week).[xv] Fail to incorporate training into the roll-out, and Europe stands to lose out on a collective €2.3 trillion of economic growth over the next 15 years.[xvi]

In today’s ever-changing environment, European companies must also develop a new muscle: the ability to anticipate and manage constant change. They have experience – 96% have undergone 2+ transformations in the past three years – but just 33% (falling to 26% in Ireland and 22% in Sweden) feel confident about their change capabilities.[xvii] Accenture’s generative AI “GPS” can help by pinpointing how leaders need to adapt both themselves and their organizations.[xviii]

The speed and complexity of change is undoubtedly a challenge for European companies. They will need to tap into their ecosystem of partners to accelerate reinvention by moving from experimenting with generative AI to scaling solutions effectively. But in doing so, they will boost the tech maturity of their organizations, increase resilience and help shift Europe back onto the path to long-term, sustainable growth.

The authors would like to thank Ana Ruiz Hernanz and Corbin Lazier for their contributions to this article.

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About the Authors

Mauro Macchi

Mauro Macchi is Chief Executive Officer, EMEA – Accenture

 

Dominic King

Dominic King is EMEA Lead – Accenture Research

 

Ladan Davarzani

Ladan Davarzani is a Senior Principal – Accenture Research

 

References

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