Europe’s competitiveness gap with the world’s innovation leaders is widening*. Both Eastern and Western European countries’ competitiveness performance slipped further, despite the continuing political focus on the issue across the continent. Two notable exceptions might be showing the way forward – Ireland and the Netherlands improved their competitiveness largely due to an influx of foreign investment. Ireland experienced a record 38% increase in Foreign Direct Investments (FDI) in 2025, while the Netherlands had a much smaller but marked recovery after a decade of decline. Bulgaria’s competitiveness position continued to largely stagnate with no new signs of strength factors.
One explanation of this divergence relates to a country’s economic agility, or a country’s ability to develop and deploy critical technologies quickly, reallocate resources, absorb shocks, and mobilise enough private capital to match ever-shorter innovation cycles. This year’s biggest gainers – Singapore, Hong Kong, Taiwan, the US and China – have mastered exactly this playbook, and their innovation and technology policies are now widely held up as models. The Gulf States also advanced, backed by years of infrastructure spending, megaprojects and low corporate tax rates – though this progress has notably not contributed to the democratization of human rights.
EU’s single market has suffered heavily from prolonged exogenous shocks that have undermined economic performance. Tariffs under the so-called Liberation Day were the first major shakeup. The United States is the EU’s main export destination, resulting in Trump’s tariff war having critical effects on the EU’s economy. It has depressed demand from foreign US companies, disrupted international supply chains, squeezed out margins due to higher costs, and sustained inflationary pressures for businesses and consumers. Fears of a trade war caused EU exports to sharply increase in Q1 2025 and then decline the rest of 2025. For comparison, the EU decreased from a trade surplus of €80 billion in Q1 2025 to €34 billion in 2026. This signals an already pronounced shift in the trade patterns with a negative footprint, visible in the EU’s -0.1% GDP contraction between Q4 2025 and Q1 2026.
What holds Europe back: demography and capital shortages.
The overarching negative trend in European competitiveness can be further narrowed down to internal common structural issues across the single market. First, demographic challenges continue to be the core issue undermining growth. Eastern and Southern Europe are expected to face the sharpest declines, due to both natural population decrease and net negative migration rates. Furthermore, the share of the 65+ population was 22% in 2025, up from 19% in 2015, decreasing working hours by 9 percent and infringing on companies’ ability to grow and innovate. Altogether, this creates additional economic costs of aging (e.g. expenditure on pensions and long-term care infrastructure), which is expected to rise by 1.9 percentage points in 2070. Second, the European ecosystem for the development of advanced technologies and successful scaleups faces a fundamental problem of risk capital shortage. For comparison, the Venture Capital (VC) market in the US is nearly six times larger than the EU’s. The breakdown of the VC investor base differs significantly– pension funds and foundations are the largest actors in the US, while government entities dominate in Europe. The low allocation of institutional capital to risk finance remains one of the central constraints on the depth of Europe’s VC market.
As a result, across 3000 unicorn companies worldwide, over 50% are based in the US, while Europe hosts only 10% of them. To address this gap, the EU should continue its targeted interventions for improving the attractiveness of the local ecosystem such as the launch of the Scaleup Europe Fund, which though would need to dramatically leverage in large pension funds and easing the regulatory environment to attract cross-border skilled human capital.
Bulgaria’s competitiveness – a slow recovery looks like stalling.
Bulgaria moved up one spot to 56th place in the overall rankings of IMD competitiveness ranking, yet is way below the position that it held in 2022. On the positive note, the country ranks in the top 30 for inward FDI, unemployment, and GDP growth. This showcases an overall attractiveness to investors explained by the country’s Eurozone membership, low corporate and dividends tax rates, and relatively cheap human capital, amongst others. Yet it points to a long-term vulnerability of innovation-based competitiveness.
Figure 1. Bulgaria Competitiveness Trends, provided by the IMD.
As a step forward, Bulgaria needs to build on several strategic recommendations for the challenges which the country is facing in 2026, including:
- Reducing political volatility to leverage Eurozone entry for investment and long-term capital formation.
- Preserving low public debt creating fiscal space for AI, defense, and dual-use investment under relaxed EU state aid rules.
- Focusing aggressively on quality-of-life measures and targeted immigration to reverse demographic decline and skills shortages.
- Adapt the national innovation and tech transfer system to boost budding youth entrepreneurial dynamism.
- Design policies to aid AI and IT excellence spillovers into the broader economy.
Since May 2026, Bulgaria has a full majority government, which can guarantee effective economic reforms that could boost investment. The provisional value of the Gross Fixed Capital Formation (GFCF) in 2025 stands at 20.1% of GDP, which government policies need to sustain and improve to at least above the 10-year EU-27 average (2015-2025) of 21.3%, for Bulgaria to exit the competitiveness stalling. In its first proposed budget adopted in July 2026, the government has projected a deficit of 5.7% of GDP, and the issuance of a new public debt of 3.8 billion – a notable risk to the sustainability of public finances, which can only be offset by highly efficient strategic spending in critical industries, infrastructure and technologies. Moreover, the current economic uncertainty in Europe is also a function of the continents’ extreme vulnerability to geopolitical events. The latter have weighed down on economic sentiment of businesses and consumers and have broken in the beginning of 2026 the feeble Bulgarian recovery (Figure 2).
Figure 2. Economic Sentiment Indicator (index), provided by Eurostat
Note: *This analysis draws on the IMD World Competitiveness Center’s annual flagship World Competitiveness Yearbook 2026, released in June 2026, which ranks 70 economies across four pillars — economic performance, government efficiency, business efficiency and infrastructure. The Applied Research and Communications Fund (ARC Fund) is IMD’s partner institute for Bulgaria.
