Europe’s Path to AI Leadership by Balancing Regulation With Innovation

Olaf van Haperen, Senior Technology Partner and Lead of European TMT, Eversheds Sutherland

The world’s first AI Act has set a global benchmark for regulation, but it raises a pressing question: is Europe’s focus on oversight limiting its ability to innovate?

Mario Draghi’s recent EU competitiveness report highlights the challenges and opportunities here well: “with the world on the cusp of an AI revolution, Europe cannot afford to remain anchored in the “middle technologies and industries of the previous century.” But can matching the US’ level of innovation be delivered through Europe’s desire to regulate?   

Balancing innovation, risk, and reward

The EU AI Act reflects Europe’s tendency to place ethics and human rights at the centre of policymaking. But to stay competitive, regulation should also focus on rewards and incentives, such as targeted investment and streamlined skills programmes that equip workers for the AI era. Principles can set the direction, but incentives will power the journey. 

The AI Act, paired with support mechanisms such as regulatory sandboxes, certification schemes, and knowledge centres, can create a safe environment for experimentation and growth. 

The AI Liability Directive will also provide clearer rules for responsibility, while the Data Act will create new opportunities for data-driven growth. Europe must choose whether to remain a rule-setter, or pair regulation with measures that actively stimulate innovation and scale. Nearly a third of European unicorns founded between 2008 and 2021 have since relocated abroad, mostly to the US, in search of a more dynamic environment – a lesson Europe must heed to strike the right balance for the future.

Many research initiatives have relocated abroad, leaving Europe reliant on imported technologies. Yet, when innovation outpaces regulation, as with social media platforms in the 2010s, policymakers are left scrambling to catch up. Without early, thoughtful frameworks, governments spent years reacting to issues of data privacy, content moderation, and competition that clearer rules could have addressed sooner.  In the US, a wave of lawsuits now fills that legislative gap.

A blueprint for business success

Businesses will play a crucial role in shaping future frameworks to their advantage. By viewing regulation as a partnership, organisations can gain first-mover advantage, and build lasting trust with customers and stakeholders.

For businesses, the task is to adapt to a regulatory environment that is still taking shape while preparing for the opportunities that AI presents. Navigating this landscape alone can be complex, which is why partnering with experienced legal advisers is becoming essential. Law firms can help organisations interpret evolving legislation, anticipate forthcoming obligations, and design compliance strategies that support innovation rather than stifle it. Strategic legal guidance can also help companies make the most of the transitional compliance period by testing modular commitments to the GPAI Code, identifying potential risks early, and ensuring they are well positioned when enforcement begins.

Finally, actively involving employees in this process and maintaining transparency around AI deployment strengthens trust, eases transitions, and fosters a culture of responsible innovation. By coupling strong internal governance with trusted legal expertise, businesses can confidently navigate Europe’s AI landscape and turn compliance into a competitive advantage.

Driving progress through values

Europe’s strength lies in principled leadership and now is its moment to prove that those principles can drive real progress. By pairing its trusted governance with bold incentives, strategic legal partnerships and a supportive regulatory framework, Europe can turn regulation into a springboard for innovation. The two are not at odds with each other and Europe now stands in a position to show the world that responsible AI can also be world leading. If Europe actively backs its innovators, it can shape a distinctive regulatory model that others can follow.