Editor-in-chief James Mawson takes an in-depth look at what the Horizon Europe budget needs to achieve.

Pascal Lamy, the so-called “gendarme” of the European Commission (EC) in the 1980s and 1990s, might have passed on the mantle of most powerful chief of staff and controller to Martin “the monster” Selmayr, now secretary-general of the world’s second-largest economy, but his influence remains on important areas of policy, particularly innovation.

In his influential report on innovation policy and funding for the EU’s next seven-year budget, Lamy laid out the case for more funding of research and development, and the fabrication and application of ideas in society, as “innovation dynamics are changing big time”.

In the working group’s interim evaluation of current funding of research and innovation (R&I) – called Horizon 2020, the year the seven-year budget runs out – Lamy identified that an additional €62.4bn ($84.7bn) would have been required “to fund all the high-quality proposals evaluated” even if the current funding – about €70bn in constant prices – will create at least €400bn in socio-economic returns by 2030 – about €350bn of potential returns were lost by underfunding in the current economic cycle.

In some ways it is a surprise that the argument still has to be made. In its economic rationale, the EC said two-thirds of economic growth in Europe from 1995 to 2007 derived from R&I, broadly defined, and so an increase in research of 0.2% of gross domestic product (GDP) would result in an increase of 1.1% of GDP – five times as much in absolute terms.

And potentially more seriously, Lamy’s report said: “Horizon 2020 is making progress, albeit slowly, in spreading excellence and widening participation and is making slight progress compared to FP7 [the previous seven-year budget] in generating science with and for society.”

But slight progress is probably insufficient. Lamy’s report noted the “celerity of change, increased complexity and higher concentration of benefits in key innovators radically influence the impacts of R&I investments and can lead to ‘negative externalities’ in the form of extraordinary network and scale effects, erosion of human capital, and fast and creative destruction”.

Probably Lamy’s most important recommendation was for the EC’s next seven-year budget – called Horizon Europe – to think about the issues that most affect EU member states. “Our society should increasingly become a living laboratory for innovative solutions to the many challenges we face in Europe – be they economic, environmental or social. Through broad-based impact-focused research and innovation policy and investments, we can turn these challenges into innovation opportunities.”

European commissioner Carlos Moedas, who asked Lamy to chair the working group, has taken this recommendation and commissioned Mariana Mazzucato, professor at University College London, to produce a report, Mission-Oriented Research & Innovation in the European Union – A problem-solving approach to fuel innovation-led growth. Moedas described this mission-oriented approach as “a valuable vision at a crucial point in the drafting of the next EU research and innovation program”.

He added: “Her report provides clear insight in how research and innovation missions can create impact with societal relevance and how to design and implement such missions. I believe this will be another important step in the evolution of how we invest in research and innovation at the European level.”

In her report, Mazzucato talks about the structural issues around setting “missions” out of societal challenges rather than fixing existing problems and then using hundreds of bottom-up experiments to fulfil the goals set over the long term. Choosing who is in the room setting the goals to maximise impact, building capacity, picking the willing and holding those in charge accountable then become important. Risk, return and impact become the measuring tools.

The EC has recognised the need for experimentation and using small companies as a way to achieve this. In May’s impact report on the EC’s accelerator for small and medium-sized enterprises (SMEs), called the SME Instrument by the bureaucrats, set up in 2014, the results have been encouraging. The SME Instrument has taken the model of US accelerators, such as Techstars, and applied public grant funding and business coaches to improve a startup’s chance of success.

Each €1 invested by the SME Instrument generated €1.6 of private investment and the companies funded with a second phase of money have experienced a 118% increase in turnover and a 158% increase in employment, which is higher than for a control group of peers analysed for the report in the period to the end of 2016.

This year, the SME Instrument, which has budget for €3bn until 2020, became part of a European Innovation Council (EIC) pilot as a “one-stop shop to bring the most promising ideas from lab to real-world application and support the most innovative startups and companies to scale up their ideas”.

Under the planned budget for Horizon Europe, the EIC will have €10bn from 2021 to 2027 to provide funding through two instruments, one for early stages and the other for development and market deployment. The requirement for both is “excellence”, according to venture capitalist Hermann Hauser, chairman of the working group setting up the EIC.

This builds on the main requirement for those seeking funding from the European Research Council (ERC). The ERC will have €16.6bn for “frontier research projects defined and driven by researchers” between 2021 and 2027. Under the “missions” mandate, the EC plans to commit €52.7bn under its Global Challenges and Industrial Competitiveness pillar.

Adding in collaboration with other European programs, and leveraging the money with private finance, the EC expects to compete more successfully in the winner-takes-most competition for new markets under development.

Certainly, something needs to be done for the continent to challenge the first and third-largest economies, China and the US, respectively, as the EU has been overtaken over the past decade through China’s faster growth rates.

Europe has also-ran status in a number of core areas, particularly in the rise of digital companies over the past two decades that have driven growth and productivity in the world.

Mary Meeker, venture capitalist at Kleiner Perkins, in her internet trends report found the US and China hosted the headquarters of the 20 largest companies by valuation. Meeker gave one example of Europe’s failing performance in innovation relative to its peers – digital payments. She said the transaction value in Europe’s “mobile POS [point-of-sales] payments” segment was estimated at $43bn this year, according to Statista, compared with nearly $16 trillion in China last year.

But with about $5.4bn of cash on European corporate balance sheets, according to Capital IQ, the EC has correctly identified promise in matching events focused on connecting SMEs to large companies.

As Fabian von Gleich, Airbus’s head of strategy and development at Hamburg, said: “When we organised the Airbus Corporate Day with the SME Instrument business acceleration services, initially we wanted to meet 15 companies, but so many attracted our attention that, in the end, we ended up inviting twice as many. Many are ideal candidates for corporate venture capital (CVC) investment.”

More broadly, the European Investment Fund’s 2017 report claims: “CVC investment could contribute to the scaling up of European companies with high growth potential to become global leaders.

“However, Europe’s corporations are not benefiting from the success of European scaleups. Only a comparatively small share of high-growth companies’ finance is provided by CVC investors in Europe.”

And whether by corporations, or the management or owners that control them, the cash is available. This is driving a higher number of large rounds.

The moon landings were called the greatest technological feat of the 20th century and required 4.4% of US GDP at its peak in the mid-1960s, and political rivalry between the US USSR as a catalyst.

Now, we are on the cusp of singularity and artificial intelligence changing human civilisation, but Europe is struggling to put 3% of its GDP into R&I.

And with technology impacting the three big drivers of human evolution – health (living longer and better), transport and communications (with each other and computers and robots) and energy (with solar pricing below coal and other fossils without subsidies) the consequences now of falling behind in innovation could mean the sort of second-class economic and political status that followed those that missed the first industrial revolution.

The Horizon Europe budget, therefore, is easily the continent’s most important and, thanks to the choices made after the Brexit referendum, is being prepared without the effective input of the UK, the country that instigated the first revolution.

Given the EC’s thoughtfulness so far, however, having one fewer cook in the kitchen has yet to affect the innovation recipe.

Editor’s note: This is the follow-up piece to notes prepared for a talk to the European Commission in Bulgaria in June – thank you for feedback