Who's Leaving Whom in the Dust?

A recent opinion piece claimed that "when it comes to regulating the Internet, Europe is leaving the United States in the dust, and that's unlikely to change in the foreseeable future." Conversely, we can note that when it comes to using the internet for innovation and economic growth, the United States is leaving Europe in the dust, and that is also unlikely to change. 

A few numbers highlight the problem. Company age is an indicator of economic dynamism—the ability to shift to new sources of income creation. The four largest European companies are more than a century old. The four largest American companies are less than 25 years old, and all are tech companies. Unicorns—startups valued at a billion dollars or more—are the engines of economic growth for the twenty-first century. The number of unicorns is a good predictor for national economic success. The United States has more than 400; the European Union has 132. Israel, with a population one-fiftieth the size of the European Union, has 94. The EU decision to regulate the tech industry in the 1990s cost it years of economic growth. Between 2008 and 2018, the United States’ real growth was 19 percent, Europe's somewhat more than 11 percent. This is trillions of dollars of lost income for Europe. 

EU tech regulation contributes to Europe's slow growth and its lag in innovation. Well-intentioned rules create regulatory obstacles that weigh heavily on small companies. While the European Union has tried to write its new regulations to avoid this problem, it remains to be seen if this will succeed. Of course, there is more to the story of European technological decline than regulation, of course, including European attitudes toward entrepreneurship and risk, rigid financial and labor markets, and the difficulties created by Europe's unwieldly governance structure—but regulation plays a central part. 

Privacy rules are the exemplar of EU regulation. Privacy changed dramatically with the arrival of the commercial internet in 1995. After privatization, the best business model to pay for online services like search and email was for companies to take customer data in exchange for services. 

Since 1995, online data collection and use has expanded well beyond a simple trade. Entire industries have grown up around exploitation of personal data. Most collection does not provide benefit to consumers—when you buy something online, this data is harvested for commercial (and sometimes anticompetitive) purposes, with negligible benefit to users. There is a lack of transparency. Data is used or resold for purposes that can be intrusive and objectionable. Privacy is a space that calls out for regulation, but not regulation that chokes innovation. 

European tech regulation creates a strategic problem for NATO, the European Union, and the United States. Aggressive authoritarian regimes will not be deterred by privacy or antitrust regulations. Defense requires more tangible forms of power, and U.S. economic growth supports military spending that affords Europe the luxury of regulation without concern for economic consequences. EU leaders hope to make Europe a "regulatory superpower," but this is faute de mieux, since after decades of slow growth, Europe does not have the means to be any other kind of superpower. It lacks military strength and has decreasing economic heft. A regulatory superpower is a hollow superpower when it comes to geopolitics, since it has authority only as long as other nations remain willing to accept the extraterritorial reach of rules written by a government they did not elect.

Europe has real advantages over the United States when it comes to social policy, and it could again be a strong innovator. It has influential strong research universities, accumulated wealth, and many entrepreneurial citizens. But tech regulation gets in the way, slowing economies and making it difficult for Europe to afford modern militaries. This is not a path the United States should follow, particularly in a contest with a powerful and growing China. 

Tech regulation is inevitable and necessary, but the price of getting wrong can be high. The United States faces two challenges. The first is it must write domestic legislation that avoids overregulation while meeting the legitimate public demand for a less intrusive and more responsible tech industry. The second challenge is to find collaborative mechanisms than can help accelerate European growth and innovation. A strong, democratic, and prosperous Europe is a fundamental interest of the United States. To achieve this, the European Union will need to rethink and reform its tech regulations. Europe may be leaving the United States in the dust when it comes to tech regulation, but too often it is running in the wrong direction. Changing this while developing a shared approach to tech governance is a fundamental task for this administration.

James Lewis is senior vice president and director of the Strategic Technologies Program at the Center for Strategic and International Studies in Washington, D.C.

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).

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