The economic geography of Europe is undergoing a tectonic shift. As high-tax countries slow down, low-tax countries are quickly adding knowledge-intensive jobs. Institutional pressure for reforms has emerged in some of these once-dominant, high-tax nations. While in the U.S., policymakers often assume that European nations demonstrate that competitiveness can coexist with high taxes, Europe’s recent experience in fact points in the other direction.
Sweden has long been the leading knowledge economy in the European Union, but other nations, from Ireland to the Netherlands, are catching up. Since 2017, the Brain Business Jobs project has mapped out the geography of knowledge-intensive jobs in Europe. The index, published by our organizations, includes 31 nations and 277 regions in Europe and measures the share of the working-age population (aged 15–64) currently employed in highly knowledge-intensive companies. In 2022, the index found that 10.1 percent of Swedes have so-called “brain business jobs”: the highest figure within the European Union. In Europe, Sweden loses only to Switzerland (10.7 percent).
Change is upon us. Ireland, until a few generations ago relatively poor and underdeveloped, has caught up with Sweden. The Netherlands, a welfare state with moderate tax levels, is also reducing the gap with Sweden. Tax and welfare policies are driving this divergence in economic progress and shifting the distribution of knowledge-intensive jobs.
The trend becomes even clearer from comparisons between capital regions. In the first Brain Business Jobs Index, conducted in 2017, Stockholm found itself in second place in Europe, just short of Bratislava, the capital of Slovakia. In 2023, Budapest has the highest share of knowledge-intensive jobs, followed by Bratislava, Prague, Upper Bavaria, Paris, and then Stockholm.
Nations in Eastern and Southern Europe are catching up. The capital cities in Eastern Europe have twice as many knowledge-intensive jobs as the ones in the Nordic countries. The capital cities in Southern Europe together have more than 2.4 million knowledge-intensive jobs. This is far more than the 1.6 million jobs recorded in the capital cities in Western Europe. The study finds that the nations with the highest growth rates all seem to have relatively low tax rates, and vice versa. More than one-third of the variation can be explained by the variance in tax levels as a share of GDP. Between 2014 and 2022, the relative increase of these jobs was 62 percent in Lithuania and Cyprus. In addition, Portugal, Romania, Hungary, and Bulgaria all recorded growth rates above 50 percent. At the same time, some of the continent’s largest economies, all with rather high taxes, continued to struggle: Germany (28 percent), the U.K. (16 percent), and France (9 percent).
Different incentives explain disparate performance. Nations with high taxes offer little inducement to become an engineer or researcher. In Sweden, for instance, the financial advantages from climbing the ranks are small because of taxes. Eastern Europe’s success owes much to strong incentives and educational investment: high numbers of recent graduates within growing fields attract cutting-edge companies and pave the way for high concentrations of knowledge-intensive jobs.
In many ways, Sweden has a higher level of economic freedom than most other nations. The Index of Economic Freedom lists all the Nordic countries ahead of the U.S., for instance. Sweden remains Europe’s leading knowledge economy. Yet high taxes still impede economic vitality, the creation of brain business jobs, and GDP growth. What sets Sweden apart from other developed economies is that it spends a high share of total economic output on government administration. By reducing bureaucracy, Sweden could reduce tax levels and, accordingly, grow its tax base.
The European case study serves as a friendly reminder for American policymakers. In the U.S., prominent tech companies have departed famous innovation hubs to establish themselves in states with lower taxes; the risk of more government intervention also looms for countries considering overseas operations.
Cooperation and institutional competition have long been key ingredients in Europe’s success. But as growth shifts to the East and South, governments in Western and Northern Europe face pressure to adopt business-friendly policies and encourage more people to pursue careers in STEM. The U.S. can learn from Europe: progress will continue largely in those locales that offer the best conditions for future growth.
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