In Brussels last month for the annual European Business Summit, I heard a lot of familiar complaints about the EU’s persistent failure to develop a digital economy to match that of the United States and Asia. But with Europe’s industrial economy finally showing signs of recovery, regulators are now turning their attention back to the deferred information revolution — for better and for worse.
The EU’s latest effort, part of an overall Europe 2020 initiative, is the creation of a “Digital Single Market,” announced with fanfare at the conference.
The need for harmonization is acute. Due largely to confusing and complex national regulations, it’s easier for Europeans to buy and sell online with non-member countries, especially the United States, which accounts for more than half of all the EU’s digital business. According to EU President Jean-Claude Juncker, only 4 percent of the Europe’s digital trade today involves companies in other EU countries.
Europe, it seems, has an innovation deficit. But can they acknowledge and overcome its true source?
On the one hand, Europeans are justifiably proud of the work-life balance they enforce as a matter of law, limiting hours, guaranteeing vacation, constraining employers from laying off workers even when market demand changes. France recently considered outlawing work emails after normal work hours.
That tightly and often inconsistently regulated economy, however, comes at a high cost to innovators. As Consumer Electronics Association President Gary Shapiro recently noted, Europe has plenty of innovative ideas and entrepreneurial companies. What they don’t have, he says, is the “right atmosphere to grow and prosper.”
In addition to restrictive labor laws and a revenue model that “strenuously taxes those who are successful,” entrepreneurs face systemic problems when forming new companies, collaborating with academic institutions, or gaining easy access to early-stage capital.
As a result, the EU has yet to produce a multi-billion, game-changing, Big Bang Disruptor.
Only a few European Internet companies, such as Skype, Spotify, have even made it into the major leagues. According to the last week’s annual report on Internet trends from Kleiner Perkins partner Mary Meeker, the fifteen most valuable Internet companies today have a combined market value of nearly $2.5 trillion. None of them are European. Eleven are from the U.S.; the other four are Chinese companies.
Even more telling is the fact that every one of these companies, with the exception of Apple, was founded after 1995, well after European governments began making enormous investments in the kind of engineering and entrepreneurial environment that has driven the IT revolution in the United States and Asia.
Another major obstacle for Europe’s innovators, Shapiro says, is a culture that resists “game-changing business models.” While disruptive start-ups in the sharing economy, for example, have faced plenty of regulatory backlash in the United States, the problem is even more acute in the EU’s 28 member states. Uber and Lyft, for example, continue to face existential threats in much of Europe, with France and Italy recently passing laws that restrict or ban ride-sharing services in an effort to protect “traditional” taxicabs.
Though attendees at the Summit were loath to acknowledge it, Europe’s digital decline is accelerating. Earlier this week, researchers at Tufts University published findings from their Digital Evolution Index, comparing countries on their “readiness for a digital economy.”
While many EU countries rank high on overall digital capacity, their momentum has slowed, or worse. Most of the EU now ranks as “rapidly receding” or “slowly receding.” Ireland and Estonia are “slowing advancing.” But not one member nation is ranked as “rapidly advancing.”
These findings explain the urgency behind the DSM, and there is much to recommend the program. The EU can certainly improve its digital readiness by lowering internal trade barriers and loosening regulation on infrastructure providers. In particular, as the EU has acknowledged, it must reverse decades of counter-productive policies that undermined incentives for private investment in high-speed broadband networks. (The EU is the only major economy to experience declining investment in broadband.)
While some of the DSM is devoted to tearing down pointless regulatory barriers to intra-European trade, there are also dangerous indicators of continuing failed strategies that have crippled the efforts of European entrepreneurs to build a digital economy. Taken as a whole, the DSM presents an awkward balancing act between remedial market corrections and prospective market interference.
Many of the DSM’s initiatives would insert EU bureaucrats even more deeply in the flow of digital commerce, for example, creating new standards and enforcing new consumer protections, continuing the impossible goal of micromanaging how Internet businesses operate across Europe. That will only serve to establish more complex regulatory regimes that will once again prove impossible to implement across the member states.
Worse are the warning signs that the EU hopes to close its innovation deficit by erecting new trade barriers aimed at punishing or disqualifying U.S. companies, an escalation of a longstanding information trade war between the EU and everyone else.
In April, for example, European regulators launched a far-reaching antitrust action against Google, accusing the company of adjusting search results that favored Google or its partners.
The DSM plan coyly includes calls for continued antirust actions against “potential competition concerns affecting European e-commerce markets,” a not-so-subtle reference to other dominant U.S. companies including Facebook, Amazon and eBay.
The DSM goes farther, nothing that “Some online platforms have evolved to become players competing in many sectors of the economy,” an imbalance that may require even broader solutions. “[T]he way they use their market power raises a number of issues,” the plan notes, “that warrant further analysis beyond the application of competition law in specific cases.”
There are also hints that the DSM will provide cover for European regulators to leverage hot-button issues such as privacy and cybersecurity to close their borders to U.S. companies, who are seen on the one hand as offering insufficient protections to European consumers, and on the other, of being too easily manipulated by the U.S. government and its far-reaching surveillance programs.
For one thing, the EU would like to see all companies adhere to its expansive privacy protections. But as the DSM acknowledges, these requirements, including the nebulous “right to be forgotten,” have been inconsistently implemented across the EU. Indeed, they are a major source of friction among member states, the kind that limits intra-European digital trade in the first place.
Other privacy rules, such as a requirement for Web sites to get affirmative approval from users to use browser cookies, have proven both expensive and pointless.
And there are calls for a European-only cloud infrastructure that would keep EU data on-shore and, not incidentally, disqualify U.S. cloud service and big data providers.
The EU repeatedly refers to these goals as establishing a “level playing field” for European businesses.
But that seems to be a euphemism for efforts to force non-EU companies to play European rules. If the DSM succeeds, users worldwide will end of paying the same high price EU citizens already incur for regulations on privacy, security, labor and industrial policy, and more.
Many consumers may support the EU’s lofty social aspirations. But the DSM fails to take into account their cost, especially for start-ups. Or the impact they have already had on Europe’s digital economy. Achieving the DSM’s vision of a “level playing field” would simply slow everyone down to Europe’s lagging pace of digital evolution.
If Europe really wants to achieve its true potential in the digital economy, its regulators must learn to trust that consumers increasingly have the tools to make their own decisions and enforce their own values on digital businesses, in whole or in segments. They need to exercise, as the Federal Trade Commission’s Maureen Ohlhausen puts it, “regulatory humility.”
I heard little support in Brussels for a policy of regulating innovators less. The DSM seems doomed to become another good idea that either fails implementation, or which will generate significant unintended negative consequences for Europe’s consumers and technology-based businesses. Which is to say all of them.
Larry Downes is co-author with Paul Nunes of “Big Bang Disruption: Strategy in the Age of Devastating Innovation” (Portfolio 2014). He is a project director at the Georgetown Center for Business and Public Policy.