Has Europe Lost Both the Battle and War over Its Digital Future?

Digital technologies are not new, but policymakers have woken up to the fact that they will drive economic growth. European Union officials are the latest to awaken. The European Union’s release of yet another strategy is ambitious, but short on detail, accompanied by statements that "Europe may have lost the battle to create digital champions capable of taking on U.S. and Chinese companies . . . but it can win the war of industrial data."

The first step in solving any problem is acknowledging that the problem exists. Europe has indeed lost the battle to create digital champions. But have they lost the war? Our answer is an unhappy yes. The European Union wants "technological sovereignty" but does not offer to explain how it will achieve this without the politically difficult "creative destruction" of existing businesses and jobs that innovation and technology inevitably bring. Or how Europe—the world’s largest exporter of commercial services and critical infrastructure—would suffer most if its notions of sovereignty took root in other countries.

And this is where the war begins to be lost. In announcing the new EU digital strategy, European Commissioner for the Internal Market Thierry Breton stated that “Europe is the world’s top industrial continent," (blithely ignoring China) and asserts that the United States has lost its industrial know-how. Europe was indeed the world’s industrial continent—but in the nineteenth century. If the United States has lost know-how, it is for the industries of the last century, like textiles, or steel, politically painful, to be sure but also necessary for growth. To emphasize this point, of the top 10 companies in the United States, five are less than 20 years old, while all of the top 10 companies in Europe are more than a century old.

The disparity indicates larger challenges. The fundamental problems for European innovation policy may be structural. It begins with overregulated markets that eliminated risks, but no longer reward innovative and risk-taking entrepreneurship. This, in turn, led to a shortage of venture capital and investments, where even the cash-rich European multinationals are unwilling to invest in their stagnant home markets. Some problems are also cultural, including an aversion to risk and resistance toward adopting new technologies, especially if they were invented abroad. Europeans should not expect to become more innovative by using their knowledge to resist change to the status quo, or by embracing dirigiste (government-directed) solutions that even Chinese industrial planners are desperately trying to give up.

The European Union has strengths and weaknesses when it comes to technology. Europe has strong capabilities in basic R&D (albeit weakened by the United Kingdom's departure). But the regulatory approach it applies to the commercialization of the internet and data has become its weakness. The European Union was successful as a first-mover regulator, which has shaped global data protection rules, but it is nonetheless failing to spawn European digital champions. While the European Union has legitimate concerns over the risk to privacy from U.S. tech giants, attempting to apply overly legalistic solutions for non-existent market failures (in areas like AI) will only harm their own data economy without necessarily impeding the growth of U.S. tech firms in Europe.

The European Union focuses enormous energies on white papers, forward-looking economic agendas (remember Agenda 2010?) and strategies, but these do not ensure market success, particularly when unaccompanied by resources. A perfect example is Quaero, the EU-backed search engine, which was meant to be a competitor to Google. Today, you must use Google Quaero to find it. Without significant restructuring, Gaia-x, the European Union’s concept for a European super cloud, risks suffering a similar fate. It will be poorly equipped for ever-shorter product cycles of cloud and data-mining business. It will take very different policies to squeeze U.S. tech firms in ways that create sufficient market space for a European competitor.

Both examples illustrate how Europe is stuck in a 1950s approach to innovation that emphasizes the supply-side and oblivious to how innovation has become user-centric, focusing on demand-side. Breton's argument seems to be that by controlling access to European data (Colbert's mercantilism made digital) and by abandoning the European Union's "laissez-faire approach" of the 1990s (we missed the laissez-faire period, apparently), the European Union can use regulatory pressure to protect its businesses in the cloud. The European Union can regulate privacy, but regulating data in ways that do not harm businesses is a more complex challenge where privacy, competitiveness, and economic growth must be better balanced.

Let's compare Europe to China. The economic story of the last 20 years is not China displacing the United States; it is China displacing Europe. Chinese regulation can be "flexible" and risk-based, except when it comes to protecting the interests of the Chinese Communist Party. China uses investments, protectionism, and subsidies to create national champions. Where Europe falls short in comparison is in not spending enough on capital formation and letting EU and national rules over-regulate the tech sector. Said another way, China's model produces economic growth at the expense of the environment, public health, and the individual. The U.S. model produces growth at the expense of social equality. Can Europe find a balanced approach that reinvigorates growth without unacceptable social sacrifices? The answer so far is no.

The data economy—for that is what we are talking about—will need policy flexibility to define how best to achieve both economic gain and the greater public good. Entrepreneurs and companies are experimenting with how to maximize returns from 5G, cloud computing, artificial intelligence, and data analytics, the cluster of technologies that is reshaping business. For Europe, the battle for its digital future requires making difficult decisions about balancing economic growth and innovation against industrial protection and privacy.

Access to data will power innovation, and Europe has an opportunity to find ways to provide this access without sacrificing the public interest. It will not be American style laissez-faire, but it also cannot be a rigid blend of industrial strategy and regulation (even calling a digital strategy "industrial" points to misunderstanding). As Vera Jourova, a vice president of the European Commission and commissioner for values and transparency, recently and rightly noted, innovation and fundamental rights can go hand in hand. But today, the European Union prioritizes data protection, localization, and sovereignty over economic growth. And in that approach, it will likely lose any "war" over its digital future.

James Andrew Lewis is a senior vice president and director of the Technology Policy Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Heather A. Conley is a senior vice president for Europe, Eurasia, and the Arctic and director of the Europe Program at CSIS. Hosuk Lee-Makiyama is the director of the European Centre for International Policy Economy.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2020 by the Center for Strategic and International Studies. All rights reserved.

James Andrew Lewis
Senior Vice President; Pritzker Chair; and Director, Strategic Technologies Program

Heather A. Conley

Hosuk Lee-Makiyama

Director, European Centre for International Policy Economy