Europe’s Cautious AI Strategy May Be Its Competitive Edge

Europe’s data‑center market has long been portrayed as a laggard compared with the United States and China. Fragmented regulations, limited access to cheap power and a cautious investment climate have all contributed to that perception.

Yet those very constraints may become Europe’s competitive advantage as the continent looks to future‑proof the critical infrastructure that underpins the AI boom.

“The world is on a race to double or even triple the data‑center capacity that has been built over the past four decades,” said Pankaj Sachdeva, senior partner in technology at McKinsey. McKinsey estimates that the global build‑out could exceed $7 trillion by 2030. While the United States is expected to capture the lion’s share of that spend, Europe is projected to nearly double its existing capacity, keeping pace with the global surge.

To achieve this, the region must navigate two major choke points: reliable access to electricity and a regulatory environment that can keep up with rapid infrastructure demand.

The primary bottleneck for European data‑center growth is electricity. Energy cost and availability dictate where investors commit capital. The Nordics and Spain, buoyed by abundant hydro and renewable generation, have become hotbeds for new facilities. By contrast, Germany and the United Kingdom face tighter supply constraints that make them less attractive for large‑scale builds.

Grid congestion also varies widely. Italy stands out with a connection lead‑time of up to three years—shorter than the European average of four years, according to the Ember energy think‑tank. This faster timeline can translate into a decisive edge for developers seeking to bring capacity online quickly.

On the opposite end of the spectrum, Germany, the United Kingdom, Ireland and the Netherlands are grappling with either insufficient grid capacity or an outright moratorium on new connections. “We simply don’t have the grid bandwidth right now,” explained Jags Walia, head of global listed infrastructure at Van Lanschot Kempen.

Even with these regional differences, European data‑center counts remain modest—most countries host between 200 and 300 sites, compared with roughly 5,400 in the United States. The disparity underscores the faster pace of deregulation and massive private investment that the U.S. enjoys.

Developers are therefore looking beyond the traditional “FLAP‑D” hubs—Frankfurt, London, Amsterdam, Paris and Dublin—and shifting toward locations where power is abundant and grid congestion is low.

“From an investment standpoint, Europe feels like a much safer bet,” said Seb Dooley, senior fund manager at Principal Asset Management.

Seb Dooley

Senior Fund Manager, Principal Asset Management

Policy makers are also stepping in. In the United Kingdom, the central government has occasionally overridden local planning decisions to fast‑track data‑center approvals, and last year designated data centres as Critical National Infrastructure to emphasize their strategic importance.

The International Energy Agency projects that data‑center electricity demand could rise from 460 TWh in 2022 to over 1,000 TWh by 2026, driven largely by AI workloads. Power costs therefore represent the single largest operating expense for any facility.

Europe’s energy landscape has been reshaped by the geopolitical shock of Russia’s invasion of Ukraine, which pushed wholesale electricity prices in the United Kingdom to roughly 75 % above pre‑conflict levels. High costs can deter new builds, especially in regions where grid congestion further delays connection.

Speculators have also entered the power‑allocation queue, seeking to purchase capacity and resell it at a premium without any intention of building a data centre. “Those actors make the queue more congested and drive up prices,” noted Kevin Restivo, European data‑center research lead at CBRE.

Regulatory reforms are beginning to address these inefficiencies. The UK is moving from a pure “first‑come‑first‑served” allocation model to a “first‑ready, first‑connected” system, allowing projects that have secured all permits to jump ahead in the connection queue. Similar initiatives are being considered across the EU to prioritize critical infrastructure over speculative demand.

In practice, many developers are repurposing sites with existing grid connections—often former industrial plants that are now in decline. This “brownfield” approach shortens lead‑times and leverages already‑built transmission assets.

While Europe is unlikely to become a primary location for AI‑hyperscaler training facilities—those projects are already dominated by the United States and China—the continent can carve out a niche in AI inference and edge‑focused cloud services. McKinsey estimates that roughly 70 % of AI compute demand will be for inference rather than model training.

This creates a market for high‑density, low‑latency data centres that combine massive fiber connectivity with advanced cooling solutions. Inference workloads often require power densities exceeding 20 kW per rack, well above typical cloud standards, and benefit from proximity to end‑users to minimize latency.

European sovereign‑AI initiatives are further bolstering the case for local inference capacity. Regulations aimed at data sovereignty will likely compel AI providers to keep inference workloads within EU borders, driving demand for purpose‑built facilities.

Investors see this as a lower‑risk play. “AI inference can be co‑located with existing cloud infrastructure, giving us upside without the speculative bust that sometimes follows pure AI‑training builds,” said Dooley.

The slower, more deliberate pace of European development also allows operators to design flexible facilities that can adapt between traditional cloud and AI inference workloads, incorporating modular power and cooling architectures that future‑proof the sites.

Rapid AI advancement has sparked concerns about a potential “AI bubble,” where over‑provisioned data centres could become stranded assets. To mitigate that risk, developers are increasingly pre‑leasing capacity to anchor tenants before construction begins, locking in 10‑ to 15‑year contracts that reduce exposure to obsolescence.

However, newer “neo‑cloud” players—often start‑ups with innovative service models—typically negotiate shorter, five‑ to seven‑year terms. While these customers bring higher growth potential, they also increase the risk profile for developers willing to finance such leases.

European policy adds another layer of scrutiny. Many member states now require detailed reporting on a data centre’s energy and water consumption, as well as the socio‑economic impact on local communities. Spain, for example, is drafting sustainability mandates that would compel developers to disclose job creation and regional development metrics.

These regulations, while adding compliance costs, are viewed as a long‑term advantage. “Tighter rules ensure that data centres become integrated parts of their neighborhoods rather than eyesores,” Dooley observed. This community‑oriented approach aligns with Europe’s broader push for sustainable, socially responsible infrastructure.

Ultimately, the scarcity of suitable grid capacity and the rigor of environmental standards may create a more resilient, higher‑quality data‑center ecosystem in Europe—one that delivers durable returns for investors while supporting the continent’s AI ambitions.

“Europe stands out because it’s harder to build, which means each asset that does get built carries more long‑term value,” concluded Dooley. “The market is still figuring out the exact mix of power, cooling and connectivity it needs, but that very uncertainty is driving innovative solutions and a more sustainable path forward.”