The Political Economy of Artificial Intelligence: The EU's Fight for Competitiveness

Abstract

As global power structures shift and Artificial Intelligence (AI) emerges as a potential new leading sector, the European Union (EU) finds itself squeezed between the United States (US) and China in an intensifying battle for dominance in the political economy of AI. Faced with the risk of technological dependency, the EU acknowledged its stagnating competitiveness in the 2024 Draghi Report and responded in 2025 with new industrial policy proposals aimed at restoring strategic strength. This thesis seeks to understand how the EU arrived at its current position in the global AI competition, what lessons might be drawn from its international competitors, and whether the EU’s new industrial policy agenda can meaningfully address these structural weaknesses. To answer this, the thesis develops a conceptual framework that integrates theories of economic statecraft and technological catch-up into the context of AI. This framework guides case studies on the US, China, and the EU, each analyzed through process tracing, followed by a comparative analysis supported by quantitative data and a qualitative assessment of current EU initiatives. The findings reveal that AI competitiveness is shaped by four key factors: semiconductor dominance, data control, strong ecosystems, and skilled human capital. The EU’s embedded liberalism model has led to a cautious, rights-based approach to industrial policy, contributing to its position as a latecomer in the global AI competition. It faces structural disadvantages across all four dimensions, including a lack of sovereign chip supply, restricted access to data, fragmented ecosystems, and a continuous drain of talent. The study shows that industrial policy is becoming increasingly security-driven across the US, China, and the EU. While the US and China advanced early with scale, coordination, and strategic intent, the EU is only now beginning to shift from regulation to market-shaping industrial policy. Whether this pivot can overcome structural constraints and close the gap remains the defining test in the EU’s fight for competitiveness.