Stringent rules on competition, data governance, procurement and other matters are part of a big structural problem that is keeping European companies from growing into the kind of enterprises that can compete with U.S. and Chinese tech giants, a report from former European Central Bank President Mario Draghi says.
“The EU now has around 100 tech-focused laws and over 270 regulators active in digital networks across all member states,” Draghi says in The Future of European Competitiveness.
Big U.S. companies like Google, Apple and Microsoft know what it’s like to go up against the EU, which has moved ahead of the United States in regulating data privacy, artificial intelligence and digital markets, among other things. As recently as September 10, Google was made to pay a $2.7 billion fine after losing its appeal of an EU antitrust ruling against its search dominance.
Complying with the regulatory thicket that has grown out of the EU as it tries to shape what digital competition looks like in its member countries has increasingly become something only the biggest companies can manage.
“The net effect of this burden of regulation is that only larger companies – which are often non-EU based – have the financial capacity and incentive to bear the costs of complying,” the report says. “Young innovative tech companies may choose not to operate in the EU at all.”
A large percentage of tech companies that are able to grow to a relatively large size end up moving to the U.S. to take advantage of its more favorable regulatory environment as well as its mature private capital markets and talent pools.
Of 147 EU unicorns, the report says, “40 have relocated their headquarters abroad, with the vast majority moving to the U.S. The lack of growth potential in Europe is particularly relevant for tech-based innovative ventures, and even more so for deep tech ones.”
More than just their number, EU laws are often tilting at phantom problems, the report suggests.
“Many EU laws take a precautionary approach, dictating specific business practices ex ante to avert potential risks ex post,” the report says. “For example, the AI Act imposes additional regulatory requirements on general purpose AI models that exceed a predefined threshold of computational power – a threshold which some state-of-the-art models already exceed.
The regulatory thicket is made more complex by the way the EU rules sit above the rules of each country, creating a patchwork that isn’t cost-effective for companies to navigate when they can go to the United States and grow with less regulatory complexity.
Just two weeks ago, for example, the EU made Apple pay some $14 billion in back taxes to Ireland even though the country had given the company a tax break for that amount. The European Court of Justice said the tax break wasn’t allowed under EU rules and overruled the country.
“Digital companies are deterred from doing business across the EU,” the report says. “They face heterogeneous requirements, a proliferation of regulatory agencies and ‘gold plating’ of EU legislation by national authorities,” the report says.
The EU’s limitations on data storing and processing, which it imposes in the name of privacy and security, among other things, make it hard for EU companies to amass the kind of data sets that companies in the U.S. and China are able to amass, enabling them to create AI tools that rely on large amounts of data, the report says.
“EU companies [are put] at a disadvantage relative to the U.S., which relies on the private sector to build vast data sets, and China, which can leverage its central institutions for data aggregation,” the report says. “This problem is compounded by EU competition enforcement possibly inhibiting intra-industry cooperation.”
These and other regulatory hurdles are only part of the structural problem limiting EU companies ability to compete in the tech space, the report says. Among other things, researchers and inventors at EU universities don’t have as clear a path as they do in the U.S. to bring their innovations to market, the private capital markets aren’t as well developed and there’s a mismatch between the EU’s focus on climate targets and the plan it has to meet them. Put another way, the targets amount to a competitive drag against EU companies.
“There is a risk that decarbonisation could run contrary to competitiveness and growth,” the report says.
