Nonetheless, he believes the Old Continent has plenty to offer in this new frontier. “I am a fighting optimist,” says Aghion, who won the prize last year for economics together with fellow economists Joel Mokyr and Peter Howitt.
Aghion was sharing his insights at the Amundi World Investment Forum on June 12 across a plenary and a Q&A with the media. “In Europe, in the name of competition policy, we precluded industrial policy, and that was a big mistake,” he says, presumably not pulling any punches aimed at Brussels and European capitals.
Explaining why the region is lagging in AI adoption, he throws a jab: “AI is data and computing power. In Europe, we have very good data. We don’t have enough computing power. That’s why industrial policy is important. We need competition, but we also need industrial policy to build up computing power.”
As Aghion spoke, it is safe to say that the audience does not see him as an angsty Frenchman, a stereotype often perpetuated by Hollywood.
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Breaking out in occasional laughter and applause during the plenary, the audience is, presumably, hearing erudite, well-reasoned arguments, articulated with composure and calculated measure that infuse dynamism and determination to foster change.
In addition to being a Nobel Laureate, Aghion is an economics professor at not one, but three highly regarded institutes of higher learning: Collège de France, Insead and London School of Economics.
To Aghion, Europe already has some of the ingredients for success. He posits: “Europe has soft power. We have fantastic engineers, fantastic mathematicians, so we can harness this power to push for the next [AI] revolution.”
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The AI revolution is an industrial revolution to him. “I think we are witnessing the fourth big industrial revolution,” he says. “It’s what we call a general-purpose technology that spreads through all the sectors of the economy and has the potential to boost the overall growth of the economy.”
The first industrial revolution was brought about by the steam engine, roughly from the 1760s to 1840s; the second, by new sources of energy such as electricity and oil from approximately the 1870s to 1910s; and the third wave was the internet in the late 1990s.
“I always see the industrial [or the AI] revolution like a horse,” he adds. “The horse can take you to the wall and kill you, but the horse can take you wherever you want if you know how to steer the horse.”
The economics of AI — up to 1.2% per year more in productivity
From an economic perspective, the don believes that the marginal costs of AI will become so low that access to it will eventually become ubiquitous. “Once models are trained, access costs fall a lot,” he adds. “Democratisation of capabilities [means] small firms and individuals can obtain expertise previously available only inside large organisations.”
Widespread use of AI will thus deliver growth, he projects. In a 2024 paper, Aghion and his colleague Simon Bunel found that, depending on the scale and pace of adoption of the technology, AI could boost annual productivity growth in developed countries by between 0.1 and 1.2 percentage points per year over the next 10 years, with a median estimate of 0.7 percentage points annually.
“If we just look at AI as automating tasks in the production of goods and services, AI would increase growth by 0.7 percentage points per year during a 10-year period,” he continues.
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He also adds that AI would provide an additional 0.3–0.4 percentage points of growth “forever” and believes that it has employment creation potential.
Creative destruction and capital challenges
Aghion and Howitt won the Nobel Prize for their thesis of creative destruction, published in 1992. Under creative destruction, sustained growth occurs because companies, products and jobs continually disappear and are replaced due to innovation. This process is creative because it builds upon innovation, but it is also destructive because older products become obsolete and lose their commercial value.
One dimension of AI’s usefulness is its ability to help develop new ideas, says Aghion. “Many ideas are often the combination of old ideas, but with AI, you can recombine much more and much faster, and so there will be many new ideas, and new ideas are new jobs.”
Despite his positive view on long-term job creation, Aghion is cognisant of the immediate-term job losses arising from AI but believes this can be overcome by inventing labour market systems that can smooth out the transition from old jobs to new jobs. In this regard, he looks up to Denmark and its system that balances employer flexibility, income certainty and job retraining.
He says: “I’m very fond of the Danish model. I think Denmark is ahead of all of us because it invented something called ‘flexicurity’, which means a lot of flexibility on the firm side.
“But then whenever you lose your job, you are retrained by the state, and then you have a very high unemployment subsidy, and then you are directed toward new jobs, and I think this system works very well. We should have, more than ever, a good flexicurity system with the AI revolution.”
He adds that the continent also needs “good” human capital, labour market and education system to harness AI’s true potential.
Thus, in addition to re-training, education is critical to the successful adoption of AI to develop a talent pipeline, believes Aghion, who emphasises that everybody needs to learn reading and mathematics. “Children should be taught to reason on their own, to read books, to make calculations on their own without AI, because you learn to learn at school [and be] properly educated and trained.”
“So you need a whole part of school without AI, and then be acquainted with AI,” he adds. “And [what] we can do with AI — we can do a lot, and I think the future belongs to us.”
But Aghion sees headwinds in the development and implementation of these initiatives, citing his country as an example. He says the French education system, as evidenced by the Programme for International Student Assessment (PISA) scores, is in decline and investment is needed to reverse the situation. “Investing in human capital, in particular, is costly, and here in Europe, especially here in France, we are already suffering from a high level of public debt.”
To resolve the funding issue, he suggests that the region needs to ensure that public spending grows at a slower pace than GDP. “There are various ways to do that in France, but I’m sure it’s true also for other countries,” he adds, launching a hook. “If we [Europe] can just show seriousness in exchange for that, we can collectively use our borrowing capacity, and the Euro area has the borrowing capacity to invest in education, research, AI and defence.”
Balancing AI innovation and diffusion
Aghion also believes that a large market combined with free trade will support successful AI adoption by driving competition, knowledge transfer and innovation, while enabling firms to scale up and achieve economies of scale.
In Europe’s case, with fragmented markets in capital and goods and services, as well as each member country having its own regulation on top of European regulation, Europe is hindered from achieving breakthrough innovation compared to single unified markets such as the US and China, says Aghion.
At the same time, as companies scale up, Aghion acknowledges the possibility of concentration risk for AI, where only a few companies control AI.
Therefore, Europe needs to find a regulatory balance between enabling innovation and AI diffusion. “Very often, people oppose competition policy, industrial policy,” says Aghion. “AI is a good example where you need both.”
If there are too many regulations, not only is AI likely to move to countries with no or fewer regulations, but this will also erect barriers for new entrants. “You are talking about the danger of monopolies, of large firms dominating everything you know,” he adds. “So you need regulations, of course, but you need a minimal amount of smart regulations.”
Aghion believes positivity is needed to drive policy and regulatory change in order to resolve the challenges Europe is facing. He says: “I think we need to be optimistic. I think these days people are very pessimistic; they lose faith.
“You know, human power is fantastic; we’ve done great things. Imagine how people were living only 200 years ago; we have a much better life than we used to.”
With Aghion and presumably others with fire in the belly not backing down, Europe may still pack a punch in a global arena marked by great power rivalry.
