Europe is contending with powerful and overlapping forces: a live war on its soil, a legacy of lagging technological progress as AI-driven change accelerates, and persistent questions about its productivity and competitiveness. These pressures have renewed debate over how the continent can invest, integrate, and innovate at the scale required to power its future.
KKR, one of the world’s largest investors in European businesses, has a front-row seat to that discussion. In this interview, Philipp Freise, the firm’s cohead of European private equity, explains how Europe can turn reckoning into renewal: for example, by reforming its capital markets, scaling its innovation, and applying technologies such as artificial intelligence across its industrial base. With urgency and coordination, Freise says, the continent can again convert adversity into progress.
This interview has been edited for length and clarity.
A pivotal moment for Europe
McKinsey: What makes you optimistic about Europe at a time when the continent faces so many challenges—from security threats to technological shifts to demographic trends?
Philipp Freise: Europe is at a pivotal moment in its history. We’ve had multiple wake-up calls. Last year’s report penned by Mario Draghi—the former prime minister of Italy and former president of the European Central Bank—made it clear that Europe should invest more, and more intelligently, in its future.
The report came in the context of a reckoning. Since the Second World War, Europe has taken for granted certain institutional frameworks: our reliance on the US for security, the international monetary system, even the safety of our pension systems. Now those assumptions are being questioned. Europe knows it’s in a critical period. And if history is any guide, that’s when Europe moves.
McKinsey: What lessons do you take from past moments that have sparked reform in Europe?
Philipp Freise: In 2005, Germany had a similar wake-up call when high unemployment and weak growth threatened economic stagnation. In response, it implemented important reforms, and those reforms lifted Europe for the next decade.
We’re in a similar situation now. We have populations who doubt the future of their countries and of their savings. We have security challenges, a live war on the continent, and a revolutionary new technology—AI—that’s changing almost everything.
All of this is driving reform. Germany’s constitution has already been changed to allow new investment; a trillion euros has been committed. But everyone knows that capital alone isn’t enough. We need to reform how we save, how we spend, how we innovate, and how we scale innovation.
The response to COVID shows what Europe can do when it’s under pressure. When the pandemic was declared, hospitals were freed up within days, populations protected, and innovation encouraged—and the winning vaccine was developed here in Germany. We shouldn’t underestimate that power. Hopefully we don’t need another pandemic or a war in NATO territory to spur action, but the resolve is already there. Europe is mobilizing.
AI and defense as catalysts for change
McKinsey: Do you think the rapid advance of AI could provide that same kind of pressure today, to innovate and catalyze future reforms?
Philipp Freise: In some ways, yes—and it’s linked directly to what’s happening in defense. If you look at what helped Ukraine withstand the initial assault, the power of AI and new-generation technology played a significant role, including the work by innovative companies like the German start-up Helsing. That’s very much an AI-enabled technology that helped repel some of those early advances.
A fundamental technological revolution is unfolding at speed, and Europe has to ask whether it will play a role or not. The positive news is that, unlike earlier technological revolutions, large language models don’t create a permanent first-mover advantage. The advantage from deploying AI through massive capital spending is mostly in building foundational models. But the real impact—the part that can transform our economies and address low productivity growth—will come from the application layer.
If we have access to the advances made possible by those foundational large language models, then we’ll benefit. The tide can lift all boats. Of course, there are concerns about not owning the core models—issues about data and privacy—but the bigger question is whether we see the chance to apply what exists at scale.
Scaling innovation in Europe
McKinsey: When it comes to innovation on the continent, what will it take to turn local heroes into global champions?
Philipp Freise: Europe needs to direct more capital into ecosystems, not just incumbents. Look at what’s happened in the US with companies like Anduril. The government deliberately spends a share of its defense budget on the innovation ecosystem: start-ups, R&D, new technologies. China does the same. That’s where much of the breakthrough innovation is coming from.
Europe is beginning to learn that lesson slowly. As we scale up through the capital I mentioned earlier—Germany’s trillion-euro commitment, broader European defense spending, and private investment—we have to make sure that funding reaches IP [intellectual property]–driven start-ups, not just established operators. That can even be mandated from the top down.
McKinsey: So you’re arguing for a different kind of public–private partnership?
Philipp Friese: Exactly. We’ve seen this work before. SpaceX didn’t succeed because it had more experience; it succeeded because NASA took a chance and gave it large-scale contracts. That’s how ecosystems grow: by bringing innovative private companies into the national agenda.
Europe has the same opportunity now in defense and other strategic sectors. When we rearm or rebuild infrastructure, we should be deliberate about including the innovation and start-up scene. That’s how we’ll foster the next generation of European champions.
Reform, regulation, and the common market
McKinsey: What are the market priorities in Europe right now from your perspective?
Philipp Freise: The first is completing the single market—for services, for capital, and for technology. If you’re a robotics company in Germany, you should be able to expand across Europe without facing 28 different tax systems or insolvency laws. Harmonization can and should happen.
We also need a common regulatory framework that makes scaling easier: consistent rules for how technologies are governed, how businesses can fail and restart, and how taxes are applied. If we can create those conditions, a company that wins in one country can compete across the continent.
McKinsey: Draghi’s report highlighted this as a priority. What will help to make harmonization happen?
Philipp Freise: The good news is that the road map already exists—we don’t need to reinvent the wheel. Much of it is in the Draghi report, which has been out for a year. We just need more political will.
This will only work if the public and private sectors move together. We have to treat competitiveness with the same urgency as we did with COVID: a coordinated effort across nations, industries, and institutions. If we think of this as a “war footing” moment for growth and innovation, we can overcome the inefficiencies that still hold Europe back.
Culture, creativity, and technology
McKinsey: Why do the arts and creativity matter to Europe’s competitiveness?
Philipp Freise: Culture is Europe’s magic. I was in Paris yesterday, and after reading all the doom and gloom about politics, you expect a gray, worried atmosphere. But when you arrive, the city is beautiful, restaurants are full, people are out. That’s the energy and diversity that define Europe.
Our 28 countries, including the UK, are all sources of inspiration. Our theaters, opera houses, and concert halls, the art created over centuries, give us something uniquely European. When I’m down about technology or the future, I often go back to that heritage. Even early innovators like Steve Jobs were inspired by it—the “Think Different” campaign at Apple was built on the idea of great cultural and social leaders who changed the world.
McKinsey: How do you see technology influencing the arts and other creative industries?
Philipp Freise: AI is already revolutionizing film and television. I recently watched E.T. with my kids and then compared it with The Matrix and with Dune today. The evolution of visual storytelling is staggering. AI gives humans new tools for creativity.
Of course, there’s debate—my children read less than I did at their age—but they also have incredible creative tools that didn’t exist for us. When I was their age, we could go for a walk or watch Tom and Jerry if we were lucky. There was no YouTube, no Instagram. Now a teenager with an imagination can make and share art instantly. That’s a huge expansion of human creativity.
McKinsey: What’s technology’s relationship to culture?
Philipp Freise: Technology and culture are closely intertwined. Throughout history, technological advances have always influenced cultural expression. Today, AI is a massive opportunity for human expression. It democratizes creativity. Everyone now has access to knowledge and tools that let them focus on what’s essential: deploying imagination. That’s a deeply human thing.
Investing in Europe’s future
McKinsey: You’ve said that Europe has great research and engineering talent but struggles to scale. Why does that gap persist?
Philipp Freise: Europe has an abundance of talent, IP, and great universities—even patents—but the bottleneck is capital. We simply don’t invest enough in scaling ideas into companies. Mario Draghi’s report calls this out clearly: around €750 billion a year of investment potential isn’t being deployed.
It’s not that the money isn’t there. Much of our pension and savings system is built around low-yield, low-growth products. In contrast, countries with deep capital markets, like the US or Australia, channel that savings base into innovation. That’s the gap we have to close.
McKinsey: What would it take to unlock that investment for innovation?
Philipp Freise: We need to reform pension regulation and create a true capital-markets union. The Norwegians have shown how it works with their sovereign-wealth fund. Australia offers another model: 25 years ago, it required every employer to contribute a share of workers’ salaries to a capital pool that invests across the economy, including in innovative ecosystems.
Imagine if Germany had done the same: for 20 years it’s run current-account surpluses of around 10 percent of GDP. If even part of that had gone into a sovereign fund investing in European or global tech champions, we’d have our own Alphabet by now.
McKinsey: Are you seeing signs that investors’ sentiment toward Europe is shifting?
Philipp Freise: Definitely. For the first time in our history at KKR, we’re seeing record levels of interest in Europe. Stability, the rule of law, and quality of life—things people once took for granted—are now valued again.
The opportunity is real: reform pensions, deepen capital markets, attract global private capital. With those foundations, Europe can fund its innovation at scale. The ingredients are there, but it’s all about execution.
