Europe has no hope in AI race without a unified energy market: Martin Vladimirov

By Martin Vladimirov

SOFIA, Sept 16 (Reuters) - Former European Central Bank President Mario Draghi warned Europe two years ago that it faced a “slow agony” unless it revived investment and productivity. The continent is now in danger of proving him right, one data centre at a time.

Europe is falling further and further behind in the AI race.

Just look at the difference in scale. The European Commission in July announced plans to create seven giant AI computing hubs. Eighteen of the European Union’s 27 governments are bidding for at least one of these sites, pledging around €3 billion ($3.5 billion) in future compute purchases. Meanwhile, the combined capital expenditure of six largely U.S.-based hyperscalers is expected to exceed $1.3 trillion by 2027, according to S&P Global Ratings.

While these spending commitments are not directly comparable, they highlight an enormous – and seemingly insurmountable – investment gulf.

To begin to close this gap, the EU will need to address its fragmented energy market. The bloc's energy transmission system currently lacks the ability to move electricity from where it is available to where new industrial demand is emerging. Weak interconnections, large differences in power transmission fees and complicated permitting procedures divide what is supposed to be a single market.

This has enormous economic ramifications. In 2025, large energy-intensive industrial users in the EU faced an average final electricity price of around $107 per megawatt-hour, according to estimates by the International Energy Agency. That was more than twice the U.S. level and roughly 57% above China’s.

The impact of these high costs on traditional industries has been devastating. Overall production in Europe in 2025 was only around 1% above its 2021 level, according to an analysis of Eurostat data by the Center for the Study of Democracy (CSD) senior analyst Marius Köppen. More worryingly, chemicals manufacturing fell by 19% during this period, while output of basic iron and steel, cement and aluminium dropped by 16%, 14% and 11%, respectively.

Energy is not the only explanation for these manufacturing declines. Weaker global demand, the relocation of EU facilities to the U.S. and China, and rising competition – particularly from Asian firms – have also had a significant impact.

But while most other parts of Europe’s economy have recovered from the COVID-19 pandemic and the energy crisis following Russia’s full-scale invasion of Ukraine, Europe’s energy-intensive industrial base has not. The latest surge in energy prices following the U.S.-Iran war isn’t helping either.

With Europe now looking to join the new AI industrial revolution, access to reliable, affordable energy has become more important than ever.

ENERGY GEOGRAPHY

Europe’s struggles to take advantage of the AI boom highlight the unfinished business of the bloc’s energy integration.

Around 40% of EU power distribution grids are more than 40 years old. The European Commission estimates that €584 billion of investment is needed by 2030 to modernize and extend electricity networks across the bloc. While a data centre can be developed in roughly two years, connecting it to Europe’s outdated transmission network can take up to seven.

As a result, the AI infrastructure currently being developed is highly concentrated. Since 2024, 68 major EU data-centre projects have been announced, according to a CSD analysis of company announcements and national investment-agency records. Four countries — France, Spain, Finland and Sweden — account for 43 of them.

One of the main reasons for the concentration in these member states is their access to affordable, low-carbon electricity and credible grid connections.

A 100-megawatt data centre produces an annual electricity bill of approximately €254 million in Germany and €153 million in Spain, but only €91 million in Finland, where the electricity mix is dominated by nuclear and renewables, based on CSD estimates using comparable national electricity price data.

LIMITING FACTOR

To create an integrated electricity market, Europe will need to change the economics of the system.

The first step would likely be to increase flexibility by making it easier to move energy across borders. Additionally, expanding nuclear and hydropower could help reduce reliance on expensive imported gas, while investments in battery storage could improve reliability for industrial consumers.

Grid operators would also benefit from having a bloc-wide map of credible future demand, so Brussels and national governments could consider planning grids and overseeing renewable generation and industrial demand together. European multilateral financial institutions such as the European Investment Bank, alongside national governments, could also finance grid development proactively instead of waiting for customers to arrive.

Finally, Europe could introduce a common framework for building AI infrastructure that accelerates grid connection and construction permitting. Building an AI gigafactory in every member state makes little economic sense, but the Commission could select sites according to credible demand, placing major infrastructure where power system fundamentals are strongest. All EU nations could then potentially gain access through interconnected computing nodes.

There are many hurdles that would stand in the way, of course, including bureaucracy, competing national interests and the rise of political parties with little interest in deeper EU integration.

Moreover, fixing the power system would not erase Europe’s other AI weaknesses. The EU produces less than 10% of the world’s semiconductors and lacks cutting-edge fabrication capacity. While Europe is a leader in advanced chipmaking lithography, led by Dutch equipment maker ASML ASML.AS, the EU market otherwise depends heavily on U.S. chip design, Asian manufacturing and non-European cloud platforms.

But even if energy reform alone is insufficient to help Europe close the gap in the AI race, without it, the continent has little hope of even making it to the starting line.

(The views expressed here are those of Martin Vladimirov, Director of the Geoeconomics Program of the Center for the Study of Democracy (CSD))

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