EU Cloud and AI Development Act | The Draghi report
What is the Draghi report: A competitiveness strategy for Europe?
In an era where technological advancement defines global economic leadership, the European Union (EU) faces mounting challenges in maintaining its competitiveness against powerhouses like the United States and China. Recognizing this urgency, former Italian Prime Minister Mario Draghi was commissioned by the European Commission to assess Europe's economic resilience and propose a strategic roadmap. The result was the Draghi Report on the Future of European Competitiveness, a document outlining critical reforms necessary to enhance innovation, technological sovereignty, and industrial productivity.
One of its most significant recommendations revolves around digital infrastructure, high-performance computing, and artificial intelligence (AI), forming the basis for the upcoming EU Cloud and AI Development Act.
On September 17, 2024, Mario Draghi presented his report before the European Parliament in Strasbourg, delivering a stark assessment of Europe's position in the global digital economy. His findings painted a picture of a continent at risk of falling behind, particularly in AI adoption, cloud computing capabilities, and digital infrastructure investments.
Draghi asked for a comprehensive strategy that includes a bold regulatory and investment framework to position Europe as a leader in secure, sustainable, and sovereign AI and cloud infrastructure.
Following Draghi’s recommendations, the European Commission is developing the EU Cloud and AI Development Act, a legislative initiative aimed at closing Europe’s digital gap and reinforcing its technological independence. This act is expected to introduce a unified framework for high-performance computing, cloud services, and AI development, ensuring that European businesses have access to the necessary digital infrastructure without overreliance on non-EU providers.
As global competition intensifies, the EU has a narrow window of opportunity to reclaim its position as a leader in AI, cloud computing, and digital innovation. Through strategic investments, regulatory harmonization, and fostering technological independence, the EU can bridge the gap between ambition and reality.
Understanding the Draghi report.
This report identifies three main areas for action to reignite sustainable growth. We read:
In each area, we are not starting from zero. The EU still has general strengths – such as strong education and health systems and robust welfare states – and specific strengths on which to build. But we are collectively failing to convert these strengths into productive and competitive industries on the global stage.
First – and most importantly – Europe must profoundly refocus its collective efforts on closing the innovation gap with the US and China, especially in advanced technologies.
Europe is stuck in a static industrial structure with few new companies rising up to disrupt existing industries or develop new growth engines. In fact, there is no EU company with a market capitalisation over EUR 100 billion that has been set up from scratch in the last fifty years, while all six US companies with a valuation above EUR 1 trillion have been created in this period.
This lack of dynamism is self-fulfilling. As EU companies are specialised in mature technologies where the potential for breakthroughs is limited, they spend less on research and innovation (R&I) – EUR 270 billion less than their US counterparts in 2021.
The top 3 investors in R&I in Europe have been dominated by automotive companies for the past twenty years. It was the same in the US in the early 2000s, with autos and pharma leading, but now the top 3 are all in tech.
The problem is not that Europe lacks ideas or ambition. We have many talented researchers and entrepreneurs filing patents. But innovation is blocked at the next stage: we are failing to translate innovation into commercialisation, and innovative companies that want to scale up in Europe are hindered at every stage by inconsistent and restrictive regulations.
As a result, many European entrepreneurs prefer to seek financing from US venture capitalists and scale up in the US market. Between 2008 and 2021, close to 30% of the “unicorns” founded in Europe – startups that went on the be valued over USD 1 billion – relocated their headquarters abroad, with the vast majority moving to the US. With the world on the cusp of an AI revolution, Europe cannot afford to remain stuck in the “middle technologies and industries” of the previous century. We must unlock our innovative potential. This will be key not only to lead in new technologies, but also to integrate AI into our existing industries so that they can stay at the front.
A central part of this agenda will be giving Europeans the skills they need to benefit from new technologies, so that technology and social inclusion go together. While Europe should aim to match the US in terms of innovation, we should aim to exceed the US in providing opportunities for education and adult learning and good jobs for all throughout their lifetimes.
The second area for action is a joint plan for decarbonisation and competitiveness. If Europe’s ambitious climate targets are matched by a coherent plan to achieve them, decarbonisation will be an opportunity for Europe. But if we fail to coordinate our policies, there is a risk that decarbonisation could run contrary to competitiveness and growth.
Even though energy prices have fallen considerably from their peaks, EU companies still face electricity prices that are 2-3 times those in the US. Natural gas prices paid are 4-5 times higher. This price gap is primarily driven by Europe’s lack of natural resources, but also by fundamental issues with our common energy market. Market rules prevent industries and households from capturing the full benefits of clean energy in their bills. High taxes and rents captured by financial traders raise energy costs for our economy.
Over the medium term, decarbonisation will help shift power generation towards secure, low-cost clean energy sources. But fossil fuels will continue to play a central role in energy pricing at least for the remainder of this decade. Without a plan to transfer the benefits of decarbonisation to end-users, energy prices will continue to weigh on growth.
The global decarbonisation drive is also a growth opportunity for EU industry. The EU is a world leader in clean technologies like wind turbines, electrolysers and low-carbon fuels, and more than one-fifth of clean and sustainable technologies worldwide are developed here.
Yet it is not guaranteed that Europe will seize this opportunity. Chinese competition is becoming acute in industries like clean tech and electric vehicles, driven by a powerful combination of massive industrial policy and subsidises, rapid innovation, control of raw materials and ability to produce at continent-wide scale. The EU faces a possible trade-off. Increasing reliance on China may offer the cheapest and most efficient route to meeting our decarbonisation targets. But China’s state-sponsored competition also represents a threat to our productive clean tech and automotive industries.
Decarbonisation must happen for the sake of our planet. But for it also to become a source of growth for Europe, we will need a joint plan spanning industries that produce energy and those that enable decarbonisation such as clean tech and automotives.
The third area for action is increasing security and reducing dependencies. Security is a precondition for sustainable growth. Rising geopolitical risks can increase uncertainty and dampen investment, while major geopolitical shocks or sudden stops in trade can be extremely disruptive. As the era of geopolitical stability fades, the risk of rising insecurity becoming a threat to growth and freedom is rising.
Europe is particularly exposed. We rely on a handful of suppliers for critical raw materials, especially China, even as global demand for those materials is exploding owing to the clean energy transition. We are also hugely reliant on imports of digital technology. For chips production, 75-90% of global wafer fabrication capacity is in Asia.
These dependencies are often two-way – for example, China relies on the EU to absorb its industrial overcapacity – but other major economies like the US are actively trying to disentangle themselves. If the EU does not act, we risk being vulnerable to coercion.
In this setting, we will need a genuine EU “foreign economic policy” to retain our freedom – a so-called statecraft.
The EU will need to coordinate preferential trade agreements and direct investment with resource-rich nations, build up stockpiles in selected critical areas, and create industrial partnerships to secure the supply chain of key technologies. Only together can we create the necessary market leverage to do all this. Peace is the first and foremost objective of Europe. But physical security threats are rising and we must prepare. The EU is collectively the world’s second largest military spender, but it is not reflected in the strength of our defence industrial capacity.
The defence industry is too fragmented, hindering its ability to produce at scale, and it suffers from a lack of standardisation and interoperability of equipment, weakening Europe’s ability to act as a cohesive power. For example, twelve different types of battle tanks are operated in Europe, whereas the US produces only one.
The Draghi report and the EU Cloud and AI Development Act.
For quantum, cloud and AI (albeit to different degrees) the virtuous circle driving innovation is weaker in the EU than in the US or China on three fronts, all to be urgently addressed: capital and financing; skills and human capital; and ease of access to a large Single Market.
• The financing model for technological innovation – based on a flywheel of public and private research funding, angel investing, public development investment, private venture and growth capital, debt funding and long-term institutional and pension investors – is not developed enough in the EU. Specifically, the absence (or limited size) of pension funds exacerbates the challenge of operating without a fully-fledged Capital Markets Union, while the EU’s prudential regulation – not replicated elsewhere – limits the EU capital available to finance innovation.
• Available human capital with STEM skills applicable to development and deployment of innovative technologies is of high quality but limited quantity compared to other blocs. Talent is in fact more limited with the EU, with only 203 ICT graduates per million habitants, compared to 335 per million in the US. Similarly, the EU has only 845 STEM graduates per million inhabitants per year compared to 1,106 in the US. Most importantly, the EU’s talent pool is depleted by brain drain overseas due to more and better employment opportunities elsewhere.
• The fragmentation of jurisdictions and diverging regulations across Member States is the third barrier to EU innovative tech companies’ growth and ability to scale up.
Therefore, the EU should as a priority adopt a new ‘Tech Skills Acquisition Programme’ [as recommended in the Closing the Skills Gap Chapter] which is urgent to enhance the EU’s competitiveness in advanced technologies.
Objectives and proposals.
The EU must have the ambition to be a leader in developing AI for its sectors of strength, regain and retain control over data and sensitive cloud services, and develop a robust financial and talent flywheel to support innovation in computing and AI. To achieve this, the EU should aim to:
• Secure a strong position during the next five years in AI embedded in key industrial sectors, such as advanced manufacturing and industrial robotics, chemicals, telecoms and biotech based on a set of EU-developed sectoral Large Language Models and Vertical Models.
• Expand the EU’s computing capability and capacity of the Euro-HPC network across Europe to serve both science and research, as well as to business ventures.
• Retain control of security, data encryption and residency capabilities within EU companies and institutions and facilitate the consolidation of EU cloud providers.
• Develop research excellence in quantum computing and couple EU HPC installations with quantum testing labs.
To achieve these objectives, the EU should adopt a new ‘EU Cloud and AI Development Act’, aimed at enhancing European HPC, AI and quantum capabilities and infrastructure, harmonising cloud architecture requirements and procurement processes, as well as coordinating priority initiatives to scale-up private involvement and financing. Specifically, it is recommended to:
HPC / AI / QUANTUM.
1. Develop and fund a strategy to rapidly enhance the EU’s computing infrastructure and AI capabilities, connect private and public computing nodes, and reinvest returns of this public ‘computing capital’ in new capacity. This requires a Euro-HPC upgrade program to:
• Regularly increase computational capacity dedicated to the training and algorithmic development of AI models in existing EU HPC centres, and for the development of tomorrow’s exascale and post-exascale computing.
• Finance the expansion of Euro-HPC to additional cloud and storage capabilities to support AI training and extend their activity to AI fine-tuning and inference.
• Validate hosting in ‘regulatory compliant’ infrastructures as a key EU advantage for start-ups. Additional cloud and storage capabilities should be physically distributed throughout Europe, also to favour multi-location AI training (see below).
• Open up Euro-HPC to a ‘federated AI model’ favouring cooperation of public-private infrastructure to provide AI training power, leveraging the joint capacity of public computing and private resources and increasing the EU’s competitive scale.
• Create an EU-wide framework (a legal, financial and operational model, including revised state aid rules) allowing the ‘computing capital’ of public institutions to be provided to innovative SMEs in the EU in exchange for financial returns. Under this model, public HPC facilities or research centres could competitively offer free computing capacity to innovative entities developing AI models, in exchange for equity options, royalties or dividends to be reinvested in capacity and maintenance.
• Develop quantum labs or nodes attached to all EU HPC centres and launch public-private partnerships – involving large EU tech leaders as a priority – to co-invest in the whole frontier tech stack, including neuromorphic and quantum chips.
2. Launch an ‘EU Vertical AI Priorities Plan’. Within these priorities, the plan would fund key vertical AI models across industrial sectors, built on EU data sharing, safeguarded from anti-trust enforcement. This would encourage EU companies to participate in and accelerate European AI developments, across the following ten strategic industries where European know-how and value capture should be safeguarded:
• Automotive industry and mobility platforms for autonomous driving [see the box];
• Advanced manufacturing and robotics;
• Energy, for both grid optimisation, as well as the production and integration of sources
• Telecom networks, including edge computing and IoT;
• Agriculture, including space-generated Earth observation data;
• Aerospace;
• Defence;
• Environmental forecasting;
• Pharmaceutical, with a focus on drug discovery, personalised and more efficient treatments of rare diseases, more precise immunotherapy, radical shortening of clinical trial processes;
• Healthcare, including early disease detection, autonomous robotics to integrate healthcare professionals work, and data management to define public prevention policies.
This effort would be fed with data freely contributed by EU companies and supported within open-source frameworks in data-intensive industries, duly safeguarded from EU anti-trust enforcement, to encourage systematic cooperation between leading EU companies for generative AI and EU-wide industrial champions in key sectors.
Depending on each sector and the solutions being targeted, the specific initiatives could be tendered as ‘challenges’ to support disruptive R&D in AI – guided by granular technological foresight – or financed as ‘quasi-pilot lines’ for defined ‘industry fist-of-its-kind cases’. The implementation of the ‘EU Vertical AI Priorities Plan’ will require a clear separation of the governance – necessarily independent of individual businesses and research centres – from the actual development of solutions – decentralised and involving EU private and academic institutions of excellence.
3. Harmonise national ‘AI Sandbox regimes’ across all Member States to enable experimentation and the development of innovative AI applications in the selected industrial sectors and ensure harmonised and simplified implementation of the GDPR. Regular assessments should be carried out of potential regulatory hindrances deriving from EU or national legislation, with feedback from research centres to regulators and the EU.
On this basis, it is recommended to introduce regular and fast review process of the main AI-related regulations (e.g. every three years), as technological developments can make regulations rapidly obsolete in this sector. In this context, develop simplified rules, particularly for SMEs, and enforce harmonised implementation of the GDPR in the Member States, while removing regulatory overlaps with the AI Act [as detailed in the Governance Chapter].
CLOUD
4. Develop homogeneous and mandatory EU rules for sensitive areas of cloud services. In particular, the EU and Member States should adopt:
• A single EU-wide policy for public administrations’ procurement of cloud service and data residency requirements, requiring as a minimum EU sovereign control of key elements for security and encryption. Public procurement should be aligned across Member States, standardising tenders and facilitating/promoting collaboration between EU companies to scale up commercially and support consolidation in the EU, with exceptions allowed only in nationally sensitive areas (e.g. defence, home affairs and justice).
• EU-wide sensitive data security policies for collaboration between private EU cloud providers with US hyperscalers – given the valuable role of the latter to support adoption by European companies and due to their current scale and market presence – allowing access to hyperscalers’ latest cloud technologies, while preserving encryption, security and ring-fenced services to trusted EU providers.
5. Guarantee a Single Market passporting regime for all EU-provided cloud services, eliminating the possibility for Member States to ‘gold-plate’ protection requirements beyond the requirements of the GDPR and the AI Act.
6. Support data brokers (ex Data Governance Act) as ‘pre-approved’ data intermediaries, certifying ex ante compliance with the EU acquis and guaranteeing regulatory clearance for instance via an ‘EU Data Ombudsman’ mechanism. This would help to favour industry-specific solutions promoted by EU companies.
7. Step up the cooperation between the EU and the US to ensure access to cloud and data markets. As part of a low-barrier ‘digital transatlantic marketplace’, it is crucial to foster common standards for procurement and cooperation between US and EU, to guarantee supply chain security and favour industrial and trade opportunities for EU and US technological companies on fair and equal conditions –for both the US equipment and software needed by the EU’s cloud industry as well as for trusted equipment and software originated in the EU.