71. How Europe can fight back!

0:00Welcome to The Difference Engine, the show for tech founders, investors and innovators.

0:09so Paul what have we got coming up today we're lacing up our gloves in this Europe fights back episode and we're stepping into the ring for Europe yeah we'll explore where Europe can truly lead over the next five years and bring some clarity to the blurry lines of digital sovereignty right across the continent but for our first punch let's set the record straight on why Europe has not missed tech.

0:36Hot on the heels of Christina Kafara's compelling analysis in episode 69 of why the wrong people are so often charged with ensuring the success of European tech, you might think that Europe has missed tech. But think of it in a different way. It's only partially true if you define tech as being big tech. And that really means consumer apps and, of course, the data that guys with them. This is a hot topic and just so you're clear we believe Europe has not missed tech as much as it's specialised. Let's remember we pioneered commercial computing with the UK's Leo computer back in the 50s. SAP span out of IBM in the 70s but we do continue to dominate categories those categories where complexity, where regulation and physical systems matter.

1:28Industrial and deep tech is the clearest example. I mean, Netherlands ASML alone reshapes the global semiconductor stack. Yeah, and it's not an accident that Europe's good at this stuff. We have kept our specialism and our specialist manufacturing, even as others lost out and globalization kicked in, particularly in markets like microprocessors, in phone handsets, and latterly, sadly, in cars. The fact is engineers like to sit close to the action. They like to be close to the factories. That's different with code, but it's not the same with manufacturing. You can ask Elon Musk about that because that feedback loop doesn't exist in Silicon Valley.

2:07And the fact that Musk's moved all of his space ventures to be together have proved the value of this model yet again. Yeah, so broadly in this case, we can think about it in this way. I guess the US optimized for abstraction and speed. China optimized for scale. And Europe optimized for precision. Yeah, and that's why smart infrastructure and industrial software and automation firms like Siemens, ABB, Dasso, they're global leaders. And they build 50-year moats, not three-year hyper-growth stories. Yeah, and you won't be surprised to know, I also think climate tech is another area that people underestimate European power.

2:45Yeah, in the US, although we've just seen Mr. Trump does not agree that climate tech's got anything to tell us and has waived all sorts of protectionism. The idea of more regulation scares investors in the States. In Europe, not so much. Regulation can often create or at least shape markets. Remember, the best solutions can often come when there are restraints that are driving the design here. If we look at things like, arguably carbon pricing, grid rules, emission targets, they all are constraints that demand innovation. That's for sure. And that's actually built firms like Östed, Vestas, Schneider, you know, and many more.

3:27Again, Europe treats climate as essential infrastructure, not a VC narrative. I mean, that's true. Although you and I slightly disagree on this. We've had our fair share of failures, particularly close to home. Remember British Vault, the$3.8 billion giga plant plan. Of course, every politician in the country wanted to be associated with that. However, when it flipped and the job losses were described in TechCrunch as following, British Valt's bankruptcy is the death knell for the UK's battery industry. So you remember Swedish battery manufacturer Northvolt filed for bankruptcy in Sweden in 2025 because it failed to secure the essential funding, both making a major setback for the European EV supply chain ambitions.

4:14in wider terms though you're right China manufactures at scale and we unfortunately set the standards the US does neither it's arrived late and it's paying the price yeah maybe then maybe the lesson for Europe there is if you're going to build a battery gigafactory don't name it with the name of your country followed by Volt it seems to be well I give you British Steel I give you British Rail I give you British Airways you're right yeah British Leyland yeah I think I think we can have a whole episode on how nationalization only turns a sick industry into a dead one. Let's move on from this little bit of doom and gloom.

4:52We can't really deny that fintech is interesting, but not so much the consumer apps, although we've got a few unicorns there, but it's actually the infrastructure in which Europe excels. Yeah, PSD2 and open banking has forced banks to open their APIs. They didn't want to, but they did. And that's painful in the short term. But it's also birthed some amazing businesses like Wise and Adjun, Monzo, Revolut, Starling, etc. And a lot of feisty fintechs playing all levels in the stack based around open banking platforms. And in this case, it is regulation, but it's deregulation, you know, a form of reducing the amount of regulation, keeping it there, taking it down, which has helped.

5:40Deregulation, which unfortunately, I think, will agree is out of fashion in Europe right now, can be a powerful play. Yeah. But meanwhile, and let's not forget, the creaky US financial system is still writing checks and really duct taping fintech onto a creaky old legacy core banking system. Yeah. I mean, how many banks have they got? Thousands, right? Nuts. And as we mentioned before, China's fintech is powerful, but because of the way that country works and its seeming inability to really deregulate and, you know, let, as they say, let founders build, it has an issue. Europe has got cross borders, always has, much smaller countries, lots more borders.

6:24So it's dealt already with the complexity by default. And as we've mentioned before, GDPR, that's the General Data Protection Regulation, for those not familiar with it, it is the toughest privacy and security protection law in the world. it's been around since 2018 and it didn't kill innovation it spawned it content management identity verification compliance tooling all became products yeah interestingly as far as i know became big uh from a above a betting shop in dublin god bless it yes uh in the us of course regulation is anathema certainly currently and therefore technology response response is sporadic and reactive.

7:05Short bursts of intense energy, then regulation. In China, though, funnily enough, privacy is not their priority. Indeed. And Europe, meanwhile, turned trust into a technology advantage. Now, I think you could argue that the issues facing the US big tech players in Europe, such as data sovereignty, finds for meta and especially google uh the restriction on tick stock scrolling algorithms etc they've all got their roots in the pretty strident stance taken during the development of gdpo yeah indeed and lots going on with that right now um fascinating to watch um mobility and automotive tech yet another overlooked area of european excellence because um you know people fixate on Tesla, but Europe dominates systems of safety, systems of integration of various parts of the buses in vehicles and automotive software stacks.

8:05Yeah, and companies like Bosch and Continental don't look sexy, but they quietly run global mobility, including providing the tyres on which I cycled to do this pod this morning. Yeah, Europe leads where standards, regulation, one could say common sense, but that would be stretching it and hardware software integration collide what they call ITOT. Yeah, and that's no better exemplified by health tech and medical devices which follow exactly the same path. Yeah, universal healthcare systems create continuity of data and make new innovation much more validatable if that's a word, but you can get validation much more easier.

8:45That's gold for medtech. Yeah, it is. And there's also some other effects like the US private healthcare system is optimized for billing. That's always where you start your development. China still needs Western clinical credibility and is buying that in, for instance, investing heavily in state-of-the-art surgical robotics. Yeah. So what is the meta problem here? So what is the meta problem that Europe has in all of this patterns of light and shade? Yeah, I think if you really want to boil it down, Europe wins and builds category leaders, where success requires, I guess, patience, regulation, and possibly most of all, systems thinking.

9:27Yeah, and it loses, and it just frankly can't compete with speed, where growth demands hype, consumer virality, which seems to be all the rage right now, and it doesn't love a winner-takes-all dynamic. Europe builds the tech that societies run on, not really the tech people scroll through. Yeah, exactly. And that distinction is going to matter more and more over the next decade, unless Christina Kafara's revolution comes to pass.

10:01Well, guys, in this increasingly volatile world, many of us are looking for digital sovereignty. and now more than ever, our national health providers, those in the law and order community, governments and public sector organisations want more control over their communications. They want a digitally sovereign solution which can never be interrupted based on external demands, no matter how powerful they are, and a service which means they are not reliant on a single vendor. Opting for open standard software means a competitive vendor ecosystem and solutions which are designed to interoperate with other organisations' infrastructure.

10:35This is where Matrix, the secure communications open standard, plays a vital role. Most European governments already use matrix-based solutions for communications and Element is the leading provider of matrix-based secure communication solutions. It's already working with the European Commission, NATO, the United Nations and governments in France, Germany, the Netherlands, Sweden and many others. Element provides sovereign, interoperable and end-to-end communications. If you're responsible for a nation's trusted and resilient communications, take a look at the Matrix Open Standard and Element at element.io.

11:08We've used Element ourselves and find it fast, secure and so easy to adopt. If you want digital sovereignty, you have to check out Element. See our show notes for more information and get on board with the new secure world of communications today. So I've been thinking a little bit recently about where Europe can lead in tech over the next five years and what categories might it dominate. We think we know where Europe has been, but if Europe's going to lead in the next wave of tech, we can be pretty much certain it's not going to be by outscaling the US on foundation models or the Chinese on making lots of things.

11:44Europe is not likely to win on raw compute. I think that's fair to say at this point. Germany also faces some pretty strategic issues with power generation having cut its long-held ties with Russian gas suppliers, which it was reliant on for many years. And in AI, Europe will win categories where AI actually gets deployed. So less of the inference and compute, more of the usage, which all starts with a version of regulated AI. Yeah, exactly. A responsible, auditable, trustworthy AI. and you know where would you want to find that well perhaps in healthcare finance infrastructures defense exactly the places where move fast as a liability and break things is a definite no-no yeah interestingly on defense i've just noticed that the danish sovereignty fund has focused on defense um as we've said before the eu um the eu ai act and the much delayed probably never going to happen uk ai act scares startups but it could also be seen as a bit of a moat um maybe it has the same pattern as gdpr where europe sets the rules for the for the world and everyone and everyone else that fancies you know access to half a billion reasonably well-off customers ends up complying and so over time quality of product increases yes indeed and uh industrial Automation, I think, is the next obvious next layer for AI.

13:11Europe already owns the stack, robotics, sensors, control systems, and of course, safety certification. I think it's a lot more nuanced, to be fair. Clearly, just adding AI isn't about just adding Microsoft's co-pilots. Sorry about that. It's about uptime. It's about yield, energy, efficiency, and failure can be very expensive, as I think some of the large big tech US players are about to find out. So the bar is really high. Another consideration is the debate about whether we let US firms into the heart of our data set. Controversially, Palantir has just gained access to the NHS and public sector.

13:55And I know from anecdotally from people I've been speaking to quite senior positions in the NHS, certain of the unions there are not allowing their workers to access systems they believe Palantir is behind. So interestingly, ground level revolt. More recently, it's just been announced without that much due diligence, some would argue no due diligence, that it's won a£241 million UK Ministry of Defence contract. I think that one might run and run. Yeah, yes, run and run and run and run. So I think, you know, summarizing this, in this case, the US does have the AI talent. China has the scale, but Europe has the integration.

14:35Yeah, yeah. And moving on to something that's literally a world apart, quantum. So quantum computing is a very, at the frontiers, a bleeding edge of technology. And it's not yet reached, I hope not the hype stage. It's more about sensible structure. How do we make sense of a vast emerging category? Yeah, and typically Europe isn't racing for a general purpose quantum computer. It's focused on secure communication, sensing, and of course, sovereign networks. Yeah, and there are UK players and other players across Europe, a couple come to mind, which actually are focusing on the needs of buyers.

15:19A lot of these align with defence currently, and national resilience, et cetera. Yeah, and somewhat connected to that, energy is another area where Europe's framing matters. Again, we're going back to this basic theme is Europe treats energy as infrastructure, not a startup experiment. As we said, there's lots to play out when we see who's left with their pants on once the tide goes out in the US AI fundraising. More proselytically here, we do things like carbon pricing. we have cross-border grids and interconnect connectors we've done some real innovation you know grid software hydrogen power fusion storage system level thinking the sort of ground up stuff yeah and increasingly what we're seeing is that China's building the hardware but Europe is orchestrating the system that orchestration layer is important but let's not forget We also do base research, you know, materials like graphene and batteries.

16:16They don't get enough attention because everybody's obsessed with the now characters. Everybody knows who the AI players are and who the founders are. But because these early or more fundamental basic science projects are slow to market and they're research heavy, you know, they don't get the spotlight. And that's helpful for aggressive nation states. There are persistent rumors of espionage by Chinese students and others around these cutting-edge technologies. Graphene famously invented in the University of Manchester, or both of our alma maters. And it's disappointing, for instance, to see the UK's only recently admitted that this was an issue.

17:00And MA5, just very recently, has briefed our universities that maybe there's some espionage going on. Yeah, and why would that be the case? as well, Europe is good at deep research. Matters, yeah. Stuff with long timelines, public-private funding, an industrial pull. Yeah, that's how you get real breakthroughs. Not 10 companies all demoing very similar tech. Yeah, sure. And the defense tech, unsurprisingly, is an area that's clearly shifted. And broadly, that's gone from big, heavy hardware to autonomous software-defined systems. Yeah, sadly for us all, a lot of the proving ground this is in Europe.

17:41But Europe's advantage is definitely interoperability that was forced by the NATO standards, by compliance issues, and the fact that all of our markets were, at one point, working freely together. This is a lot less flashy than Silicon Valley, but it's much more deployable. And we know this from our work with the secure communications firm, Element, and they have built on the matrix standard, which is a global open standard that is adopted now by several armed forces across Europe. And of course, Mr. Macron has recently talked about using exactly this tech, so the matrix open standard, to discontinue Europe's reliance on American Zoom and the frankly god-awful teams from Microsoft.

18:29Yeah, hurrah, we can all agree on that. And moving on that i think supercomputing is is another misunderstood area um but europe definitely isn't trying to be aws yeah it's building we hope uh sovereign capabilities um you know ai native compute for research and industry purpose-built infrastructure early days but we'll see not mass market sell as much as you can pile them high sell them cheap cloud infrastructure or or should I say pile them high, sell them cheap until you have a captive market and then ramp your costs up. This is a different game that Europe's playing. Yeah, and I also think digital twins feel like Europe's home turf.

19:09Simulation, CAD, PLM, Europe already dominates there. Yeah, oddly, yeah. And AI just comes into these systems and makes them more dynamic. But it's detailed work, right? Real-time factories, smart cities, smart grids. these are about decisions not superficial visuals yeah exactly sort of spatial computing without the consumer hype so uh another area we could be proud of biotech um is quietly following the same plan given we have reservations about letting us uh data firms hoover up all of our national health data we talked about that previously uh the us uh obviously spends the most on health care with arguably less good results but it also leads very much on the investment on the capital markets europe leads on validation of innovation of solutions and deployment yeah and i think one of the advantages europe has is is universal healthcare systems actually help in in in in this and you know longitudinal data regulation aware innovation it's really hard to copy yeah but it might be easy to cut and paste.

20:18And that's the worry if we keep allowing US and other based companies, who are frankly data leeches, to leach out our healthcare, universal healthcare data that we built up, you know, with a sort of notion it could be valuable for decades. And now it turns out to be gold. There's some pretty long running and deep data records in the UK's NHS, is possibly the best in the world. And so, yeah, maybe more positively, if we can get to grips with that issue, we can look at autonomy and robotics, not consumer robots, infrastructure, you know, B2B robots. Yeah, sort of in logistics, agriculture, I've seen some early startups there, defense, ports, different systems that must operate, and again, Europe's really good at this, safely in the real world.

21:09So the common thread here is obvious. It's about certification, maybe there's a better way of saying regulation, certification for safety reasons and integration. Europe leads where tech has to be trusted, regulated, integrated and maintained for decades. Yeah, I'm sorry to announce it, but in case you haven't guessed, Europe's not going to dominate social networks or the ad-driven world of the attention economy that we've seen the US and now China dominate in terms of ad tech and social media. But we can dominate in the less glamorous, if you will, fundamental systems that economies rely on. And we do need to be aware of the creeping threat of what is now, at least it looks like, a seemingly less friendly US regime in power.

22:01Yeah, so Europe should be about quiet capability, durable leadership, very old school, not at all shouty, very European. Carry on.

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23:08So pardon our French, which frankly for us is usually a euphemism for swearing. But what's fascinating right now in Europe is how everyone keeps going on about digital sovereignty. But when you look closely, they mean wildly different things by that term. Yeah, I'm very disappointed with the Online Safety Act, as I've said before, here in the UK. And several of these European directives seem ill-judged. It's not surprisingly, given our cultural and industrial history, which we should be reasonably proud of, that the UK and France are almost textbook opposites. They share anxiety about foreigners, but mainly US folks.

23:50We've all watched the tech dominance of the US, but we've got totally different responses. Recent weeks have thrown up a classic example of different forms of dirigism, presumably like entrepreneur, a concept that a certain past US president might have thought the French don't have a word for. He might have thought that bigly. Bigly, yeah. So why don't we just take the UK first? Now, for those of you not familiar with England in particular, in South Yorkshire is a town called Barnsley. Hold on. Barnsley. Barnsley. For those of us from the west of the Pennines, that's quite difficult to pronounce.

24:27But those of you from the east of the Pennines, it's your territory. Anyway, Barnsley is famous for three things, by my reckoning. Professionally being in Yorkshire, a former mining centre and the birthplace of iconic chat show host Michael Parkinson. Anyway, Barnsley has become the first of the UK's tech towns, 40 years too late in our opinion, but this is a classic piece of British pragmatism. So in this case, the UK government isn't saying, let's replace American platforms, it's saying let's use the industry standard category leading tools available and see how far we can push them. Good look with that I mean that basically means Microsoft, Google I guess you know Cisco, Adobe push these are all the US hyperscalers and they're all deeply embedded already despite efforts to remove them and we've talked before about Macron trying now into UK government.

25:31And so the UK is, again, pragmatically taking investment directly from the USA, most recently with a 31 billion US-UK tech prosperity deal. Is that real? Which is actually integrating all of this infrastructure more heavily into our government and our society, hopefully, to produce some benefits. How sovereign is that? I mean, Barnsley, their experiment is really about applying AI in everyday life, led by a council trying to create an economy for Barnsley that is more than just state benefits dependent. You know, it's going to be a kickstart that includes free digital training for residents, AI adoption for local businesses, imagined productivity gains in healthcare and education.

26:23I mean, it's very outcomes and frankly, party politically led. Right. Not sure. The sovereignty angle here in the UK is softer. It's more about capability than control. If communities or workers are taught or know how to use AI, then the councils can deploy it effectively. And if not, they can't. um just this week i was speaking to one of our largest vendors and having a conversation where somebody spent literally an hour teaching me how to use a quite obscure set of controls in their software my response was why don't you just put an ai interface on this and i wouldn't need to learn to program your goddamn program so there's a lot a long way to go with this um but if we can get We can imagine that there'd be productivity gains in healthcare, in education, two of the largest budget items on the UK agenda, and it would become very outcomes and maybe party politically led.

27:23France hears the same global signal, and it's about dependency, risk, cloud outages, geopolitics, and goes, we're going to build our own. So that's a vision, and it's a strong statement. And whatever you think about France, they do have a good record of long-term vision. We've seen this ambition to replace Microsoft Teams, WebEx, and Zoom across all governments by 2027. I mean, I want to see it. That's not a pilot, though. They're pretty serious. That's industrial policy. And talking about pilots, the French are the only European country that can produce fighter aircraft all on their own, as they have previous in this approach.

28:11And let's not forget Le Concorde. It's not just video conferencing that the French government wants to replace. This system, this movement called Vizio sits in the whole sweet numeric vision, replacing Gmail, Slack, all the invisible plumbing. of public sector work. Yeah, hats off, right? Because all of that will be open source, which is, you know, that was the solution looking for a problem that I think is coming together quite nicely. And what I love from this, from a category design perspective, is how explicit the French have been about sovereignty, meaning ownership of the stack. You know, French built software, such as, you know, the French AI startup for transcription, you know, a French sovereign cloud via Outscale and Dassault systems.

29:07We've seen a bunch of this stuff. You know, they do have their own data centers that can run AI without their data ever touching US-owned carriers, originally maybe for GDPR, but certainly it's now looking like a smart move. And so they're avoiding the entire set of regulations that is the land grab called the US Cloud Act. That's a very different risk model. The US worries about falling behind. France worries about losing control. And because of this, they're optimizing for different futures. Right. So Barnsley's partnership with US firms is about speed and scale and testing AI in the real world.