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“The main reason why EU productivity deviated from that of the US in the mid-1990s was Europe’s failure to capitalise on the early digital revolution led by the internet, both in terms of generating businesses and in the spread of digital technology across the economy. Indeed, if we exclude this sector, the bloc’s productivity growth over the past 20 years is almost equal to that of the US.” This passage from the report Mario Draghi on European competitiveness points to a central part of the agenda for the future of the group.
While vital, this is just one of the strategic economic challenges facing the bloc. Others include energy vulnerability, the ecological transition and rising protectionism. Draghi offers both a framework and suggestions on how to respond. This will include more interventionist trade and industrial policies. The challenge is to make these policies targeted and sensible.
In the defence industries, the argument for following the Airbus example seems strong. Compared to the US, the European sector is too fragmented. Cross-border mergers seem essential.
There are similar problems in banking, capital markets and energy supply. For various reasons, governments refuse to allow much-needed cross-border integration. This largely reflects nationalist politics and special interests. As a result, regulatory barriers persist. Fortunately, the history of European Union shows that these obstacles can be overcome with political will. But will this ever be achieved?
The shift to “clean technology” in the automotive and energy sectors is a more complex challenge. As noted in Draghi’s report: “Due to a rapid pace of innovation, low manufacturing costs and state subsidies four times higher than in other major economies, (China) now dominates global cleantech exports.” This creates opportunities for accelerated adoption of new technologies, but also disruption for important EU industries and the possibility that they will be left out of parts of the supply chain, such as batteries, because they lack access to critical raw materials. All told, intervention is inevitable. Trade law allows it, too. Intervening effectively is another matter. But, if done carefully, it should be possible.
The digital revolution is another matter. It would be absurd to imagine that investment in “EU champion” versions of Google, Microsoft, Apple either Nvidia It won’t work. Standard trade measures won’t help either – how can Google searches be hampered without introducing Chinese-style restrictions? Nor does it seem plausible that there will be no funds available for attractive technological opportunities, although capital markets reform should help develop a larger venture capital industry in the EU. But the fact that venture capital investment in the bloc was barely a fifth of that in the US in 2023 is not due to a shortage of savings in the EU. It is due to the failure to create the necessary technological ecosystem.
Why has this happened? It is not that the European Union is short of people. Informed commentators argue that it is due to an excess of regulation. Two types are crucial: that of the technology sector and a broader one of the economy, especially of the labour market, which affects unpredictable start-ups. If you can’t fire, you won’t hire and so you’ll go somewhere else.
Well-known technology expert Andrew McAfee of MIT has made a scathing critique of EU policy. He agrees that the state of the bloc’s tech industry is dire, but the problem is not a lack of money: governments spend almost the same amount on supporting research and development as the US federal government does. Yes, the former is fragmented among member states, but that is not the main problem, he argues: “It is government intervention in that ecosystem not with funding, but with laws and regulations, and other restrictions and burdens on companies.”
The Technology Policy Analyst Adam Thierer He elaborates further: “Several recent studies,” he notes, “document the costs associated with the General Data Protection Regulation and the EU’s heavy-handed tactics on data flows in general.” This imposes high costs on innovative companies, and the smaller the company, the higher the implicit tax. Given this, as well as the bloc’s fragmented markets, it’s no wonder the US is so far ahead.
An article by Oliver Coste and Yann Coatanlem, published by Bocconi University in Milan, raises another important point about regulation: new and dynamic companies need to be able to adjust their costs quickly in light of market developments. Thus the costs of restructuring, largely the result of employment protection regulation, are critical. The more expensive restructuring is, the more cautious the company will be. Taken together, these protections are crippling. The UK Labour government must take this potential danger into account in its plans.
Draghi He agrees that regulation is a big problem. Thus, he notes, “the EU’s extensive and strict regulatory environment can, as a side effect, restrict innovation. Companies in the bloc face higher restructuring costs compared to their US peers, putting them at a disadvantage in innovative sectors that are characterised by winner-takes-most dynamics.” He even recommends a new “European Commission vice-president for simplification.” Good luck with that.
The question is both philosophical and political. The European Union must find a way to regulate the technology sector that does not at the same time hinder its growth, and achieving this will be an enormous challenge.
