Europe's push to build a sovereign artificial intelligence chip factory through its new Chips Act 2.0 faces a fundamental obstacle: European companies simply aren't buying enough advanced AI chips to justify the enormous investment. The European Commission's Digital Sovereignty package proposes pouring taxpayer money into a state-backed foundry for cutting-edge semiconductor manufacturing, but industry leaders and policy experts argue the continent should focus on boosting AI adoption instead of chasing an expensive manufacturing dream.

Why Is Europe Pursuing a New Chip Factory?

Europe's first Chips Act, launched in 2022, aimed to increase the European Union's global semiconductor market share to 20 percent by 2030, up from 10 percent at the time. The results have been mixed. Taiwan Semiconductor Manufacturing Company (TSMC) invested billions in a German fabrication plant to supply automotive chips, but Intel withdrew from a planned investment in advanced AI chip manufacturing in 2024, citing financial difficulties and insufficient demand.

The new Chips Act 2.0 prioritizes subsidizing a foundry for advanced semiconductor manufacturing, but this approach overlooks a critical mismatch. European chip demand comes primarily from the automotive sector and industrial applications, which rely on older 28 and 22 nanometer technology. The cutting-edge two-nanometer AI chips that the new factory would theoretically produce are in high demand almost exclusively in the United States.

What Do Industry Leaders Say About the Plan?

Christophe Fouquet, CEO of ASML, which manufactures nearly all the machines used to produce advanced semiconductors worldwide, offered a stark warning about the economic logic of the proposal. "If you had a fab like this in Europe, all the wafers that would be manufactured would be exported to the United States," he stated. "So, then you'll be in a situation where Europe subsidizes a big project, and the output of this project goes somewhere else".

"If you had a fab like this in Europe, all the wafers that would be manufactured would be exported to the United States. So, then you'll be in a situation where Europe subsidizes a big project, and the output of this project goes somewhere else," warned Christophe Fouquet, CEO of ASML.

Christophe Fouquet, CEO of ASML

Fouquet and other industry leaders have begun questioning whether the EU AI Act itself is part of the problem. ASML recently joined Airbus, Ericsson, Mistral, Nokia, SAP, and Siemens in warning that the EU AI Act risks hampering European companies before they can compete with rivals in the United States and China. In Fouquet's view, watering down the AI Act would be a better first step than building a new factory.

What Are the Structural Challenges?

The semiconductor industry for advanced AI chips operates as a global oligopoly dominated by a handful of players with massive scale, decades of experience, and proprietary manufacturing knowledge. According to Jan-Peter Kleinhans, a semiconductor expert at the Organization for Economic Cooperation and Development (OECD) Science, Technology and Innovation Directorate, Europe cannot simply purchase its way into this exclusive club, especially in the AI era where learning curves are steep and capital requirements are enormous.

A state-backed European chip factory would realistically become a German chip factory, since Germany is the only EU member with the financial capacity to subsidize such a massive project. This raises a politically sensitive question: should EU taxpayers fund a flagship manufacturing facility that primarily benefits one member state.

The two American companies NVIDIA and AMD currently dominate the AI chip market, and their largest customers include American tech giants Google, Amazon, and Microsoft. Without strong European demand for advanced AI chips, a new mega-fab would be extraordinarily expensive, politically contentious, and likely dependent on permanent government subsidies to remain viable.

How Should Europe Approach AI Chip Strategy Instead?

• Boost Domestic AI Demand: Rather than subsidizing manufacturing capacity that would primarily serve American customers, Europe should focus on increasing demand for AI chips among European companies. This would create a genuine market incentive for advanced chip production on the continent.
• Support Fabless Design Companies: Europe should move away from subsidizing "national champions" like Germany's Infineon or Franco-Italian STMicroelectronics and instead use tax breaks, research and development incentives, and growth financing to create a dynamic ecosystem of fabless AI chip design firms. A pan-European "AI Chip Growth Facility" could co-invest alongside venture capital firms in regions like the Netherlands, Poland, or the Baltic states, where talent is strong but capital is limited.
• Leverage Existing European Strengths: Europe excels in chip design talent, specialized intellectual property, research depth, and optical imaging tools. Belgian-based Imec is the world's leading independent nanoelectronics research hub, and ASML, Zeiss, and other European optical companies dominate chip imaging technology. Public funding should help researchers spin out AI chip design firms with shared design tools and resources.
• Partner With Global Leaders: Rather than insisting on a purely European answer to a global industry, Europe should remain open to partnerships with world-leading foundries like TSMC and Samsung, which already possess the scale and expertise to manufacture advanced chips efficiently. This approach would give Europe a real manufacturing foothold without pretending it can instantly become an independent leader in the most capital-intensive segment of the industry.

The model Europe should emulate is Arm, the United Kingdom-based design leader whose intellectual property powers nearly all of the world's mobile phones. By focusing on high-value design and intellectual property rather than trying to compete in capital-intensive manufacturing, European companies could build a sustainable competitive advantage.

Without addressing the fundamental demand problem, a new Chips Act 2.0 factory risks becoming a permanent subsidy sink that benefits a single member state while producing chips destined for American customers. Europe's path forward lies not in outspending China or the United States into a sovereign AI chip future, but in strengthening its existing ecosystem of design talent, research institutions, and specialized manufacturing capabilities.