Comment

The EU’s new digital and data strategy: condemned to fail

Matthias Bauer / Mar 2020

Margrethe Vestager and Thierry Breton. Photo: Shutterstock

 

It is hard to make sense of the EU’s new “Digital Strategy”. The three White Papers published by the European Commission – on Data, Artificial Intelligence and Europe’s Digital Future – are rife with political jargon. The papers are poorly drafted, indicating that the Commission’s new executive board acted under some self-imposed pressure to overcome its protracted political and budgetary crises. The Commission’s visions for Europe’s digital future remain vague. Its ideas for regulatory action are confusing, pregnant with inconsistent notions and conflicting goals. The authors seem to believe that the socio-economic challenges from the collection and use of data are exclusively European.

The Commission’s initiative distracts political capital away from the EU’s chronic disease: thousands of national laws which impede cross-border commerce in the EU and prevent EU companies from scaling to international competitiveness. Europe’s supranational entity believes that tighter European regulations and EU-orchestrated subsidies to “politically-picked winners” would help the continent to overcome its significant innovation and productivity gap vis-à-vis larger and more complete Single Markets like China and the US. Measured against the EU’s stated policy objectives, the initiatives are condemned to fail.

On February 19, the date of the official release of the EU’s new data strategy, Commissioner Margarethe Vestager told reporters: “[o]ne of the reasons why we don't have a Facebook and we don't have a Tencent is that we never gave European businesses a full single market where they could scale up.” On this point, Commissioner Vestager is right. Countless reports have outlined that regulatory fragmentation is at the heart of the underperformance of European businesses. Compared to the US, Europe’s largest companies are smaller, the number of SMEs (per capita) is lower and European businesses are lagging behind in the adoption of new technologies and technology-enabled business models. It is no coincidence that the commercially most successful technology companies originated in the US and China. In their early years, they could scale rapidly because of easy access to a huge B2C and B2B customer base.

Commissioner Vestager’s concerns about the poor state of the EU’s common market are barely reflected in the Commission’s new White Papers for the digital economy. They convey the message that Europe can only give birth to similarly successful companies through EU-mandated data sharing, EU-mandated technology licensing, and EU taxpayer money funnelled to large incumbent companies, of which most are headquartered in Germany and France. The Commission fails to recognise that innovation and commercial success require economic freedom, not overly restrictive regulation, let alone policies that oblige companies to give away for free their most valuable knowledge, eroding their incentives to compete and innovate.

Take the White Paper on data: It is argued that “data should be available to all”. Julian Assange, facing a charge of 170 years in prison for sharing government sensitive data with the rest of the world, would certainly cheer such an initiative. However, the Commission doesn’t take its own claim too seriously. A few lines below its radical vision of an open data space, it is argued that data should be “as open as possible, as closed as necessary”. It is difficult to make sense of these conflicting statements. Even more so, if one takes into consideration the importance of industrial data protection for knowledge-intensive industries in the EU, where many businesses are global innovation leaders in machinery, chemicals, environmental and healthcare technologies. And it is hard to imagine how the Commission could align such policies with those of EU trade policy, which aims to strengthen trade secrets and intellectual property rights globally.

Similarly, the White Paper on artificial intelligence suggests introducing ex-ante conformity assessments for software and data, i.e. the requirement of an EU licence before a system can be marketed in the EU. It is framed as an initiative to address high-risk technologies and to “mobilise resources to achieve an ecosystem of excellence [in AI]”. Yet, such a system would provide ample opportunities for Member States to deny market access for AI applications from other countries. It has long been established by economic research that a license procedure has negative consequences on competition and dynamic market behaviour. A process of ex-ante testing of AI applications would become a time-consuming affair. It would slow down the market entry of technologies that would help European firms to improve their performance and international competitiveness. Moreover, due to shortages in skilled IT staff in Member States’ public institutions, the Commission wants foreign technology be tested by private companies – a measure that would seriously undermine trust and investment in the EU, and empower non-EU countries to follow suit.

Finally, the EU’s idea to grant billions of subsidies for a “European Cloud” marks the return to an old form of industrial policy, that is based on policymakers’ dream to pick the right winners. The Commission considers the reliance on foreign platforms and cloud providers to be a source of instability for data integrity. European firms and agencies are considered victims. It is often said that they are forced to use foreign technologies and services because there are no European options. Little is said about the reality that EU companies and EU citizens benefits tremendously from cheap access to cutting-edge Internet applications.

Like France’s Quaero, a government-pushed search engine and multi-million money pit for EU taxpayers, the Commission’s state aid endeavours will end in tears. Winners are already picked: Large German and French companies with a poor track record of ICT innovation and investment. France and Germany have taken the lead in shaping the design for unprecedented industrial policies at the EU level. Europe’s debate about Technology Sovereignty, for example, is to a large extent rooted in both Member States’ desire to safeguard existing economic clusters and some of their largest traditional companies. Germany’s recent cloud data initiative aims to become the “cradle of a vibrant European ecosystem”. It was conceived by Deutsche Telekom, SAP, Bosch, Festo, the Germany’s Mechanical Engineering Industry Association (VDMA). France’ Finance Minister Bruno Le Maire recently stated that he also enlisted tech companies Dassault Systemes and OVH to “break the dominance of U.S. companies in cloud computing”.

To sum up: Designing new data and industrial policies at the EU level is considered a welcome opportunity by the new Commission to expand its contested policy portfolio. However, forced data-sharing, data localisation policies, subsidies and other isolationist approaches will generate negative market responses from other parts of the world. European firms – beyond those that that operate in technology or digital services – will be at risk of losing market access abroad simply because others will retaliate. For Europe’s high technology and data-intensive businesses, the EU’s White Papers should be a warning sign.

Autarkic policies would reduce both Europeans’ future autonomy and prosperity. EU policymakers should recognise that Europe’s perceived problems with data and digital technologies are not exclusively European. Concerns over data protection, cybersecurity and future industrial capacities are shared by governments outside the EU, including the US. Rather than paving the way for isolationist policies, the Commission should aim for closer market integration and regulatory cooperation with trustworthy international partners such as OECD countries. Policy making towards a European technology sovereignty should aim for a regulatory environment in which technology companies and adopters can thrive, with a seamless “Real Single Market” at is core and a corporate tax environment that encourages investment in and the adoption of innovation, irrespective of where the innovation is coming from.

 

 

Matthias Bauer

Matthias Bauer

March 2020

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