1 Introduction 5

1.1 Europe’s productivity problem: innovation and diffusion 5

1.2 Outline and key insights 6

2 Europe’s Shifting Position in the Global Productivity Landscape 8

2.1 Europe’s productivity problem: concepts and measurement 8

2.2 Structural composition or within-sector productivity growth? 12

2.3 Sub-national productivity divergence 14

Box A: Has productivity measurement become more difficult? 18

3 Innovation, Diffusion and Adoption 21

3.1 Why innovation does not automatically raise productivity 22

3.2 Does Europe have an innovation problem? 23

3.3 How widespread is AI adoption? 25

Box B: The innovation and diffusion system 31

4 An investment approach to innovation 34

4.1 Does Europe have an investment problem? 34

4.2 The role of intangible capital in growth and innovation 37

4.3 Is AI on track to deliver productivity in Europe? 42

Box C: Growth Decomposition and the Problem of Endogeneity 45

5 Rewiring the policy framework 48

5.1 Connecting productivity policies to investment, innovation, and diffusion 49

5.2 The role of monetary policy in investment, innovation, and diffusion 56

5.3 Productivity, innovation and diffusion for inclusive growth 59

Box D: A framework for pro-productivity policies 63

6 Conclusions and Recommendations 65

References 68

Appendix Tables 85