Public opinion and political attitudes have been less welcoming to new technology in Europe than in either the United States or China (and the rest of fast-growing Asia). Although many politicians have acknowledged the importance of fostering the digital economy, European countries have struggled to build a dynamic home-grown tech sector and have been wary of foreign—mainly U.S.—internet companies. There are a number of reasons for Europe’s reluctance to embrace the new technology of the digital era. These include an inevitably divided marketplace in a continent with different languages and cultures; Europe’s history of rules-based economic integration in the post-war period; some suspicion of free-wheeling American capitalism and its apparent disregard for Europe’s societal norms; and a relative weakness in the provision of risk finance and the openness to new consumer services that have powered the U.S. tech industry.
Governments, used to a large role in Europe’s economic life, have looked more to regulate and control the digital economy than to stand back and watch it flourish. But the impact on technology adoption of this more statist approach to the economy could be different in the future. The widespread acceptance of an important role for the public sector in economic life could facilitate the transition to a more automated world. Generous provision of income assistance and of public services, in particular high quality widely available education and training, should in theory ease the dislocations to businesses and workers that many predict will result from increased adoption of the newest technologies, including machine learning/artificial intelligence. The question remains: Will Europe take advantage of these strengths and succeed in spurring productivity and growth in the next phase of technological innovation, or will it remain a less than friendly environment for new companies and new ways of doing things.
The Economic and Political Context
Europe is not a monolith. In some of the smaller economies—from Sweden and Estonia on the one hand to Ireland on the other—governments have embraced the digital economy and welcomed technology companies, and internet use is high. The United Kingdom is high in the ranking of technology adopters worldwide, and Sweden and the Netherlands are not far behind. However, the core EU economies of Germany and France, and also Italy and Spain, have had a more cautious attitude to digital innovation. This may reflect pressures from heavy-weight incumbents fearful of disruption. There is also suspicion of the internet’s potential to disrupt society and governance.
The fact that the big successful digital companies operating in Europe are all American has only added to wariness. European businesses and politicians saw mainly threats, and not benefits, as U.S. tech companies grew enormously in size and scope over the past decade. They saw technology companies not only revolutionizing communications and our social interactions—with almost ubiquitous smart phones enabling virtual research, reading and conversations—but also moving to change more traditional aspects of the economy, even signaling an interest in making cars, a true strike at the industrial heart of Europe. Finally, the often-dismissive attitude of Silicon Valley to European concerns, whether about unfair competition, privacy, disruption of traditional industries, or the promotion of anti-social or terrorist behavior on internet platforms, reinforced European opposition.
While national governments and regulators differ across Europe, the 28 countries of the EU are bound by EU directives forged in Brussels that govern many aspects of the internet. Since 2015, the European Commission led by President Jean-Claude Juncker has been engaged in a major initiative—the Digital Single Market (DSM)—which has aimed at matching the single market in goods that flow freely across European borders, without barriers to trade. The EU decision-making process does not discriminate by size of member state and major decisions require consensus. But the views of the larger countries tend eventually to carry more weight, whether in decisions concerning sanctions on Russia, funding for countries in crisis, or crafting of new regulations. And in the development of the DSM, the power of the large, core economies has been evident.
Europe’s governance structure can be mystifying and frustrating to outsiders. Its bias towards inflexible rules, with slow and cumbersome decision-making, is blamed by many in financial markets for the near-collapse of the currency union, the Euro now used by 19 EU members, during the height of the Euro crisis of 2011-2012. As laid out below, the legalistic approach to new technology has also seemed to undercut the goals of the DSM. Reaching agreement in Europe on new issues can be drawn-out and messy. But another way to look at this is to recognize the complicated balancing act involved in reconciling the national interests of 28 nations (still including the United Kingdom). To the surprise of many in the United States, the European currency, the Euro, did hold together during the crisis. Even those countries that have suffered most economically from the tight budget rules enforced by Brussels—Greece, Ireland, and Portugal and most recently Italy—have preferred to swallow the bitter medicine of austerity imposed by Brussels and Berlin rather than to risk leaving the currency union or the EU itself.
The United Kingdom’s 2016 referendum vote to leave the EU has led to political chaos in the U.K., the depths of which have become ever clearer in recent weeks. The government and Parliament have struggled for more than two years over how to define Britain’s relation to Europe after Brexit. Yet just weeks before the March 29, 2019, deadline for leaving—which was triggered by Prime Minister May’s actions two years ago—there is no more clarity on the way ahead than there was just after the referendum. In January 2019, the government suffered an astonishing defeat in Parliament for May’s Brexit plan, negotiated painstakingly with the other 27 EU members. Perhaps even more perplexing, the Prime Minister—after eking out a victory in a vote of confidence just after her deal was voted down—did little after that to adjust it into something that could command majority support in Parliament. Brinksmanship rules. It is becoming clearer that the Brexit debate across the United Kingdom as well as in Parliament is not really about the economic technicalities that dominate negotiations, whether the rules and regulations governing business or the precise trade and customs arrangements. Rather, it illustrates a deep political divide about U.K. identity: the wisdom and value of being part of a European region, with open borders to others across the continent or, harkening back to the past, standing alone outside Europe.
Indeed, the European Union is best understood as a political project, even though its early manifestation was as an economic bloc. The European Coal and Steel Community was formed in 1952 by six European countries, led by Germany and France, in the aftermath of the tragic destruction across Europe of World War II. The forerunner to the EU—the European Economic Community—was set up in 1958, with the Treaty of Rome, with the same six countries.
For Germany, the European community was a critical mechanism to assure the peace and stability needed for its recovery from devastation. As the project took hold, deepening trade ties among EU member countries and a series of expansions, to include first the United Kingdom and eventually all the major European economies, has allowed Germany’s transformation into an economic powerhouse without concomitant fears from its neighbors of excessive power.
France has had similarly powerful motivations to make the EU succeed. A Franco-German (and Italian) strategic project intended to bind Germany peacefully was critical after the occupation during the Second World War. It also gave post-colonial France the promise of a place among the world’s great powers, with a Europe that could rival the United States economically and politically (even if dependent on U.S. force for defense). Italy, a founding EU member, and other countries outside the Franco-German core have looked to membership in the EU as a way to harness the economic and political power of a bigger bloc in an increasingly globalized world, dominated by the United States and U.S. companies.
Europe’s economic growth leveled out after the first several decades of rapid post-war recovery, but it still saw enormous gains in the second half of the twentieth century, when output per head tripled, leisure time rose substantially, and life expectancy grew. It is hard to imagine that such gains would have occurred without political and economic cohesion of Europe. The deepening economic and trading links came with increasingly detailed mandates from Brussels for companies and governments. Agreement and adherence to similar standards across diverse economies underpinned European willingness to open borders to fellow EU member nations.
The approach carried over to the treatment of new technology, with a presumption that the EU must develop a governance regime with regulatory standards and firm boundaries on private sector behavior. This contrasts both with the United States, where internet companies flourished in the absence of much government regulation or oversight until recently, and with China, whose government invested heavily in new tech and has giant companies that provide similar services to the U.S. giants, but developed behind the “Great Chinese Firewall.”
Europe’s recent growth and employment performance has fallen well short of that in the first decades of the EU. It has also been disappointing compared to the economic performance of the United States, in particular in terms of jobs. Over the past decade of rapid global IT innovation, as well as a gradual recovery from the global financial crisis, only Germany, among major European economies, has succeeded in bringing unemployment down well into single digits with a steadily positive growth rate. Other countries—from those like Greece, Ireland, and Portugal, that turned to the IMF and fellow EU members for financial aid during the euro crisis, to others such as Italy and even France, that avoided capital flight but at the cost of austerity—had dismal growth in jobs and living standards for much of the period. In France, Italy, and Spain, unemployment remains close to or above 10 percent, with extraordinarily high numbers of young people who have never found a full-time job.
Germany’s economy is now weakening. Although growth was slightly positive in the final months of 2018, after a contraction in the third quarter, analysts are downgrading expectations for this year. As the International Monetary Fund (IMF) forecasts released in January note, a weaker Germany, as well as renewed slowdowns in France and Italy, is contributing to reduced growth forecasts for 2019 for Europe as a whole. The European Central Bank (ECB)—the one European-wide instrument of economic policy—has recently adopted a more cautious outlook for future growth, even as it plans to pull back from the exceptional financing role that it finally took on in 2015, post-Euro crisis.
Unsurprisingly, perhaps, Europe as well as the United States is experiencing popular challenge to the post-war governing consensus in support of open borders, globalization, and a rules-based international order. The “No” vote in the 2016 Brexit referendum was one early sign. Demonstrations in France by the “gilets jaunes,’ or yellow jackets, are the most recent.
The crumbling of support for traditional parties and governments in Europe—notable over the past year in Germany, France, and Italy—has not been accompanied by a U.S.-style push-back against global trade and globalization. There are signs of political strains within the EU as newer members from the former Soviet bloc—notably Hungary and Poland—buck against the norms of Western democracy and institutional safeguards for civil liberties and democratic opposition that have been part and parcel of EU membership. But interestingly, there is not—at least as yet—a strong challenge to the EU itself or its economic rules, despite the strains now evident in France as well as Italy from adhering to the Brussels’ rules for fiscal discipline. These rules continue to be largely accepted, albeit grudgingly, as an essential part of the EU bargain for Germany, which fears ending up with the bill if others overspend. On trade, Europe remains open internally—with a question mark over its future relationship with the United Kingdom—and it negotiates as a single trading bloc with the rest of the world.
European nations have been an integral part of the global trading system and have gained enormously from expanding trade among themselves and with the rest of the world. The threat to globalization and global supply chains from rising trade tensions is thus a threat to continued prosperity in Europe, as is the risk to transatlantic trade from President Trump’s policies. Some 30 percent of European exports go to the United States. Partly in reaction to the new U.S. stance on trade, the EU has hastened discussions with other partners, recently completing trade agreements with Japan and Canada. The EU has also boosted ties with China, which has rapidly expanded foreign direct investment into Europe from €700 million in 2008 to over €30 billion.
Europe’s Approach to the Digital Era
Europeans gave the world the car, the radio, high-speed trains, and even the minitel, a forerunner of the internet. As recently as 15 years ago, Nokia and Ericsson were world-class technology companies. Europe at one point had its own space program. But so far in the digital age, Europe has not succeeded in spurring such innovations, or growing a digital giant. European technology companies comprise only 4 percent of the top 200, according to Atomic, even though Europe’s total economy is over 20 percent of global GDP. And the broad ambitions of the DSM are far from being met.
Clearly, Europe’s environment has not been friendly to the emerging new world of advanced information technology. But as public concerns about the internet have grown more widespread, including crossing the Atlantic to the United States, this is a good moment to examine Europe’s approach. Some in Europe hope to find a “Third Way.” Could a regulatory regime between laissez-faire America and state-controlled China support a democratic, better regulated internet that avoids the increasingly evident pitfalls of today’s models?
For many in the United States, in particular in Silicon Valley, European policy towards new technology has seemed short-sighted and contradictory. Niall Ferguson’s paper for an earlier session in this series, points to a tension, for example, in Europe’s policy approach of requiring companies to police the content on their platforms. Ferguson puts it critically thus: that Europe wants to “live off network platforms” by taxing and fining them, while avoiding government responsibilities in “delegating public censorship” choices to private companies. More broadly, while many in Europe pine for a “European Google” or “European Amazon” to demonstrate European achievement and success, their policies towards information technology companies have mostly been focused on regulation and restriction. Some EU policymakers seem to believe that taxing and regulating U.S. companies will help European challengers to emerge. But instead, so far, many European entrepreneurs and innovators have found their way to the United States to start or grow their companies.
The debate in the United States is now changing. In particular, the more vigorous antitrust actions of Europe’s current Competition Commissioner—one of the 28 Commissioners that lead the European Commission in Brussels—have drawn support outside Europe. Some academics see a connection between growing industrial concentration, including among a few large data-driven tech companies, and the wealth and income inequality that is a feature of today’s divided societies.
More broadly, it is becoming apparent that European criticisms about “Big Tech” foreshadowed concerns that are increasingly voiced in the United States, by politicians and commentators and even some tech leaders. The revelations of Cambridge Analytica’s harvesting and use for political purposes of personal data from millions of people’s Facebook profiles ignited concerns in the United States. But it just reinforced long held suspicions in Europe. Governments, particularly in the larger countries that dominate in EU-wide decisions in Brussels, had long been concerned that American tech companies are too big, too powerful, too intrusive in daily life, too careless of individual privacy, and insufficiently mindful of the impact of their content on democracy and society. In response, Europe has moved to curtail internet company freedoms, to impose a strict privacy regime in 2018 (the General Data Protection Regulation, GDPR) and to levy large fines on major American tech firms for what the EU regulator deems to be anti-competitive behavior. Now some U.S. commentators are arguing that there are useful lessons for U.S. policy in this approach.
Europe’s economic performance suggests a more nuanced picture. Despite perhaps prescient understanding of some pitfalls of new technology, European countries have not established a consistent or successful policy regime to foster “home grown” innovation, nor have they effectively clipped the wings of the large American (and sometimes Chinese) tech companies operating in Europe. No European company has yet made it into the list of top global technology companies, while American and Chinese internet behemoths dominate the top 15 and Japan, Taiwan, and South Korea also have major giants in the information and technology (ICT) sector.
This record is irksome for many governments in Europe, who have held out hope that advanced technology could boost productivity and raise living standards.
As long ago as 2011, former French President Sarkozy—host that year of the G-8 group of leading economies—called for an “E-8” forum of global technology companies to draw lessons for world leaders. At the forum, headlined “The Internet: Accelerating Growth,” Sarkozy declared that the internet had transformed the world and “yesterday’s dreams have become realities and the universe of possibilities grows broader around us every day.” Today’s President Emmanuel Macron, after taking office (and before the recent upheavals in the streets), called on entrepreneurs to come to France to start their businesses. In late 2018, he spearheaded a conference to encourage European “Govtech” companies. In Germany, the government-sponsored project “Industry 4.0” was set up to harness advanced technology to Germany’s traditional industrial strength. A task force published recommendations in 2012 intended to speed the transformation of Germany’s industrial machine and maintain it at the forefront of the global economy in the new digital age. President Merkel at Davos in January 2019 called for international ethical standards on data handling, artificial intelligence, and genetic engineering. But she acknowledged that for Europe to take a leading role in shaping standards it would have to become “an important actor” in the industry itself.
At an EU-level, as mentioned above, countries embarked on the ambitious DSM to break down barriers to the spread of digital services across the whole of Europe. And, recognizing the importance of financing for technology start-ups, the EU decided to boost public funding for venture capital through the European Investment Fund (EIF), an offshoot of the EU’s public bank, the European Investment Bank, which channels funds to European government projects. The EIF now supports an estimated 40 percent of European venture funds, with 10 percent of start-up funding directly attributable to EIF money.
Despite these moves, a gap has persisted between governments’ intentions to foster advanced technology and innovation and the results. This is unsurprising. Policymakers from the EU in Brussels to governments in Berlin, Paris, and elsewhere have focused more on how to regulate and, more recently, tax new technology, and less on identifying and removing constraints to innovation and growth of digital firms. In particular, their actions have been aimed at protecting consumers—and existing business models—from potential problems, notably in the realms of privacy, data protection, inappropriate content, and anti-trust (competition policy). They have been less attentive to concerns expressed by digital companies, including European start-ups, such as the lack of venture capital or deep markets for risk finance, high taxation, government red-tape for business establishment, inflexible labor laws that make it costly to fail—an integral part of Silicon Valley culture. Antitrust policy has been used vigorously, with record fines against Google and Apple (both of which are appealing) for what the EU’s competition authorities deem to be harmful use of market power and, in Apple’s case, access to tax deals that amount to unfair state subsidies (disallowed in the EU).
The DSM project is a good illustration of the tension in the EU approach so far. The scope for promoting economic activity and connection across Europe is clear. But the approach has been bureaucratically cumbersome and inordinately slow.
The European Commission in Brussels has predicted that reducing barriers to digital trade across borders could lead to gains of €415 billion a year for the European economy. Just to take one example, European consumers shopping online tend to focus on national websites, making only 15 percent of their purchases from websites in another country. A true single market could also help to drive success among European companies, including the small and medium enterprises (SMEs) which form the backbone of Germany and many other European economies. Today SMEs do not exploit the whole European market place, selling only 7 percent of their goods across borders, according to the European Commission, which argued that an ambitious DSM would open up opportunities for these companies to sell across Europe. As noted in a Forbes article comparing the U.S. and European environments for technology, based on a study by the American Enterprise Institute, “the reason that the US beat the EU in mobile and internet was because of a common set of American rules and standards. Once networks were built, devices, apps, and services could get national distribution on day one, all with a common language, currency, and light-touch regulatory policy. Such a dynamic was never possible in the EU with its 24 languages, 17 currencies and fragmented regulatory approach, which precluded the development of pan-European networks, services and apps.” Today’s innovative technology companies are built on delivering services via the internet—from streaming films to supplying goods to driving people more cheaply and conveniently. Companies based in the United States—or China for that matter—begin with a built-in advantage of a huge internal market.
Since the DSM initiative was launched in 2015, the EC has developed complex proposals to guide digital policy in as many as 25 different policy areas, ranging from copyright laws to privacy to regulations governing the provision of audio-visual content across borders and the rules around telecommunications companies. The focus on reaching agreement on detailed rules to govern fast changing activities has undercut success. Rather than opening up a large digital market, attractive to investors, of 300 million people across Europe, the broad range of regulatory proposals has led to contentious and difficult discussions and only a few instances where markets have actually been liberalized across Europe.
Successes include getting rid of unpopular data roaming charges on phones and making it possible to download content purchased in one country when traveling in another. European countries have also agreed on net neutrality—still a controversial and politically divisive issue in the United States—and a prohibition on data localization requirements, or the requirement to keep data (in data centers) in the country of origin. A code to support consistent spectrum use, to support adoption of 5G across Europe, is under discussion. Some argue that the May 2018 adoption of the GDPR has at least clarified rules around personal data protection requirements within the EU, thus reducing the uncertainty that inhibits business development, while also addressing public concerns about the misuse of personal data by internet companies.
However, agreement is still pending on an updated “e-privacy” regulation, which would lay out more detailed requirements, consistent with GDPR, for all digital services (including the Internet of Things) regarding personal data and communications. Technology advocates hope that these requirements will not forestall innovations—as yet unimagined. And many note that the costly investments needed to meet stringent privacy requirements may be easiest for large, established, and mostly U.S. companies. GDPR will meanwhile inhibit access from within Europe to services whose providers are unable or unwilling to incur the costs of ensuring GDPR compliance. Some non-European news outlets and gaming services have said they will withdraw from Europe rather than run the risk of heavy fines.
Most recently the complex “trilogue” process of coordinating across the European Parliament, the European Commission, and member states failed to produce final agreement on copyright reform, pushing the issue further into 2019 when a meeting in late January was pulled down because of broad opposition. The copyright issue is one that has again pitted technology companies against European policymakers and shown the power of incumbent companies. Changes to the law governing online use of copyrighted material garnered support in the EC as a way to counter the “value gap” between the pre-digital revenues of creative and media industries and the much-reduced revenues as consumers have switched to streaming and downloading versus buying books and records, DVDs, and CDs. “Old media” companies and representatives of the publishing and music publishing industries supported changes as a way to bolster their bargaining power when selling rights to digital platforms. Many artists joined them.
Technology companies such as Google and Facebook have meanwhile lobbied strongly against these changes. Stricter copyright provisions would require them to use costly filters or run the risk of fines as users upload and share billions of hours of content. These companies have argued that consumers are the ones that have benefited from the “value gap” as they have been able to access content through ad-supported platforms on the web, and that the main beneficiaries of the proposed EU changes would be intermediaries—publishers and recording studios—rather than artists, musicians, and writers. The big digital companies also argue that giving new rights to publishers of newspapers, reducing the ability of internet companies to post “snippets” of news, would also be against consumer interests.
Internet advocates fear a clamp-down on internet freedoms would result from increased liability for copyright infringement. Overly strict copyright provisions could ultimately hurt European consumers if the availability of content on the web shrinks as companies err on the side of caution to avoid fines. Perhaps unsurprisingly, the legislative and regulatory process for evaluating these competing claims and trying to “future proof” the law led to compromises that appear to have left everyone unhappy. It remains to be seen whether the powerful incumbent companies in Europe will win the changes that they want.
Such results from the DSM are unlikely to spur innovation or to foster a home-grown European FANG or GAFA (common—and not complimentary—acronyms respectively for Facebook, Apple, Netflix, and Google, or Google, Apple, Facebook, and Amazon). And despite four years of intense work the DSM is a long way from meeting the goals set out in May 2015 of creating a true digital knowledge-based economy in the EU, where Europe is “a place that nurtures investment and entrepreneurship,” where businesses using digital technology flourish and can “become global leaders in sectors of the future.” Time is now running out. The current European Commissioners, led by Commission President Jean-Claude Juncker, will leave office in the spring of 2019. It is not clear whether their successors will take up the mantle of the DSM.
A long-standing debate over taxation has also alienated U.S. tech companies and at the same time tarnished their reputation in Europe. Citizens in the United Kingdom and many other European countries—aware of the large penetration in their countries of companies such as Facebook, Google, and others—complain vigorously that these companies do not pay their “fair share” in taxes. Their complaints are typically focused in particular on the platform companies that make their money by advertising.
Such complaints have two elements. The first concerns the ability of sophisticated global companies, including those based in Europe, to exploit complex and overlapping tax treaties around the world to minimize their corporate tax payments, booking profits in welcoming jurisdictions with little or no tax. Reforms to the international tax system are now slowly taking shape, under the aegis of the G-20 group of major economies, supported by the OECD (Organization for Economic Cooperation and Development). Some reforms are falling into place, based on the notion that profits should be taxed according to the jurisdiction where value is created. But while this notion may be easy to agree in principle, it is much harder to agree to specific changes. The heart of the debate is highly political: which nations’ coffers should get the benefit of taxing the profits of which global companies, and to what extent.
The web of bilateral and multilateral tax treaties has built up over years. It is lucrative for many intermediaries as well as for companies, and some wealthy individuals, that use complex corporate structures to shift profits from one jurisdiction to another. It is worth noting that as long as these schemes are legal, shareholders (including institutional investors who are managing pension assets etc.) also have an interest in companies using them. Why pay tax that is not legally required? Companies with much of their value in “intangibles” whether brands—such as Starbucks or Louis Vuitton, or software companies such as Facebook or Google—have been able to do this “profit shifting” more easily than many. Until U.S. tax law was changed in 2017, it both rewarded and facilitated schemes for U.S. companies to keep as much of their profits as possible overseas, untaxed until repatriated. This has now changed, which should facilitate global agreement.
However, the second element to Europe’s complaints about American tech giants will not be resolved by international agreement over corporate income tax. It concerns what is a “fair share” of tax for global companies to pay, and whether or not this should be based on profitability i.e. corporate income after costs and investments, or simply on gross income—which would be a major shift in international tax practice with many ramifications. Google, Facebook, and Amazon seem ubiquitous in Europe, given widespread consumer use of their services. These companies—especially the first two—also have large advertising revenues in the continent. But the services that they provide to consumers are largely created in the United States, where the bulk of costly software engineers and data centers are located. European revenues are only possible because of costs incurred outside Europe, costs which should be offset against revenues when calculating profitability. The value actually created in Europe is analogous to the value created by sales and distribution offices for automobiles or other goods made in one country but exported and sold in another.
This analysis is not accepted by many in Europe, who have now turned instead to proposals for taxing gross revenues rather than profits—at least for certain activities. The European commission put forward proposals in 2018 to impose a special tax on digital revenues of large companies. The Europe-wide move has been dropped for the time being after U.S. complaints and fears in some European countries of potential retaliation against their profitable companies that produce at home but sell overseas. However, individual countries, including France and even the United Kingdom, have plans to go ahead with a special tax on gross revenues under certain circumstances. The specific aim—to collect more from U.S. digital giants however justified under traditional tax practices—is clear. Germany decided to back an EC move once this was narrowed to a tax on digital advertising revenues.
The European reaction to the digital age has been a reflection of different societal norms and historical experiences. Europe of course does not have a First Amendment guaranteeing free speech, which has so influenced the development of the internet in the United States. Historical events have conditioned commonly accepted legal restraints on speech and actions that violate societal norms, such as denying the Holocaust, which is illegal in France for example. Other differences abound. In Germany, there is enormous resistance to incursions of privacy as memories persist of an intrusive state, with Stasi agents in the East penetrating everywhere. Concerns about privacy, also coming more to the fore in the United States now, are particularly resonant in Europe when private profit-making companies are seen to benefit from invading privacy. In France, for example, people are generally more comfortable with the notion of a powerful centralized state than with powerful private companies that have also led to enormous private wealth. The extensive use of CCTV for policing, as in the United Kingdom, would probably horrify Americans. Conversely, while in the United States and many other countries there is easy acceptance of the need for a national ID (such as a Social Security card), attempts to introduce one in the United Kingdom have foundered on outraged public opposition.
European caution towards internet companies has been compounded by actions of some of the largest tech companies as they expanded into these markets without first understanding their societies or explaining carefully their own business models. The “move fast and break things” mantra of Facebook’s Mark Zuckerberg and the widespread “fail fast” slogans, together with the focus on disruption that many California companies espoused did not sit well with European policy makers. Mistakes included digitizing French literature and mapping German streets without publicizing and consulting with governments and other stakeholders first. Both Uber and Airbnb discovered that disrupting at scale unites opposition from existing industries and governments and often citizens. The death of high street shops is an emotive issue in England, tempering enthusiasm for Amazon. European governments were also less impressed by declarations of good intentions (“do no evil” from Google’s founders) and more likely to look for the profit motive behind companies’ actions. Today, many believe that developments from the uncovering of Russian influence in the U.S. elections via internet platforms, to the data breaches belatedly being recognized as a result of GDPR, suggest they were right.
How will the economic, financial, and regulatory issues, and structures that have been important in shaping the environment in Europe for technology adoption, play out over the coming period?
It is worth looking separately at EU member states and the United Kingdom. First, the likelihood of some form of Brexit means that the United Kingdom may make different economic and regulatory choices going forward. Secondly, the two areas have historically had different economic structures and approaches to business and finance. The U.K. economic system is closer to that of the United States with a more heavily finance- and services-dominated economy, and a bias for less regulation. The United Kingdom also has by far the largest advertising industry in Europe, with digital advertising accounting for more than €15 billion, or over 40 percent of all advertising spent in the United Kingdom in 2017, according to studies by the IAB and Zenith. This compares to digital advertising spending of €5–7 billion in France and Germany respectively.
These factors have combined to make London something of a tech hub—with a strong startup community, particularly around fintech. But the cosmopolitan and globalized nature of the city and its industries could be threatened by Brexit, in particular if a chill on immigration impacts companies’ ability to hire top global talent and a shift in the investment climate cuts funding. (For the first time since 2011, London was toppled (by the Netherlands) from number one in Europe for private equity deals in 2018.) At the same time, under Theresa May’s government, there has been growing political support for more regulation, both to spur home-grown competition and to deter terrorist content on the internet, which Prime Minister May has singled out as a possible cause of terror attacks in the United Kingdom.
One interesting recent development in the United Kingdom is the government’s decision to commission a study of competition and the use of data in the digital economy. The government has chosen an American academic and policy maker, former adviser to President Obama, Jason Furman, to lead a small expert panel which will report with policy recommendations in the first part of 2019. The review is expected to consider whether «big data» creates barriers for smaller players and if artificial intelligence may alter the way collusion can take place between the big players. Broader competition issues, including how OFCOM, the U.K. competition regulator, should handle digital mergers and acquisitions, will also be covered.
The U.K. Finance Ministry heralded the study with a combination of praise for the potential of new technology—which it estimated could contribute £60 billion a year to the U.K. economy by 2020—and a warning that concentration among big players—for which read GAFA—could stifle innovation. As Chancellor Philip Hammond put it: “Our digital economy is one of the UK’s great strengths, employing two million people across the country. But people are concerned that the big players could be accumulating too much power in our new digital world. The work this panel is doing will help ensure we have the right regulations so that our digital markets are competitive and consumers are protected.” The study was generally greeted in the U.K. press as a shot across the bows of the big U.S. tech companies.
But the government is also looking for ways to make the U.K. economy attractive for technology innovators at a time when Brexit fears have dampened business investment—which fell for three consecutive quarters in 2018, the first time since the 2008/09 crisis—and threaten growth more broadly. It has noted potential ways that fast developing artificial intelligence improving data analytics and computing can solve public problems—from traffic congestion, measurement of air quality, diagnosis of medical conditions—as well as improve business productivity. In sum, the balancing act continues. On the one hand, the government is welcoming innovative companies, whose clever use of “big data” has funded much-loved consumer services from Google’s search to Instagram to YouTube. On the other hand, it wants to choke off inappropriate or “creepy” business practices that depend on using personal data, reserving a special concern for “ad-funded” models.
Turning to the EU, it is likely that Europe making rules without the United Kingdom will tend to be even less like the United States in its approach to business, finance, and technology. Four key characteristics of the political economy, apart from the bias to legislate and regulate to bind together disparate polities, have inhibited the development of large IT companies so far. As technology advances in years to come and is incorporated more widely across industries and economies, the impact of these factors may be different.
The first, and most important, factor is the structure of Europe’s economy, particularly in the large core nations. The focus in the first wave of the digital revolution on consumer services powered by software does not play to Europe’s industrial strengths. Services account for the largest share of EU GDP and employment, as in all advanced economies. But their proportion is 10 percentage points less in EU than in the United States. In Europe, in particular Germany (which accounts for a fifth of EU GDP), traditional industry plays a bigger role than in the United States (or the United Kingdom). The wave of new technology and the big U.S. tech companies have been mostly characterized by “intangibles:” search, social media, ridesharing, e-commerce. All of these depend for success on advances in software and provision of services. Many are funded through advertising—on-line advertising doubled in the EU between 2010 and 2015—finely targeted by analyzing data on their customers. Even Apple, in many ways a hardware company, has succeeded through the clever software that enabled it to make superbly designed “smart” phones, that have just got smarter over the years.
This is not the sweet spot for European industry, whether the quality craft goods manufactured in Northern Italy or the cars and heavy machinery of Germany’s industrial machine. A European phone manufacturer, Nokia, used to be a world leader. But it did not adapt well to the software-powered shift to mobile smart phones. After being sold to Microsoft, the brand lost further ground and is now licensed by a third party to make a fraction of the number of phones. In 2018, the most popular phones across all European countries came from Apple or South Korea’s Samsung (which uses Google’s Android operating system). The small businesses that dominate employment have also been slower to take up new technology than their consumers. In France, a study showed that fewer than 20 percent of businesses sold their products online, while French consumers buy more than 50 percent of their goods online. Clearly there is a space here for retailers to exploit.
As robotics, additive manufacturing, and AI increasingly change the way that goods are produced, the efficient industries of Europe are likely to transform more readily than their societies embraced the consumer-oriented products of FANG/GAFA. Engineering is famously strong in Germany. Europe also has companies that excel in the bio-sciences. Artificial intelligence—or machine learning—will expand the scope for digital software to be incorporated into manufacturing “smart” hardware. European policymakers anticipate success for their companies in the expected world of the internet of things, with everything from smart fridges and heating systems to smart factories with reinvented manufacturing processes that rely on artificial intelligence and robotics. Auto manufacturers in Europe are already including many lines of code in the latest Mercedes or Peugeot. At the same time, tech companies that followed their software innovations into investments in self-driving cars have realized that manufacturing, distributing, and selling vehicles is a very different business. Google joined with Fiat/Chrysler to develop autonomous vehicles that require not only digital smarts but engineering prowess and an understanding of how to design, produce, and distribute a successful car.
Another development that may favor European companies in the future is the development of “Govtech” or companies built to support government operations. The large role played by European governments in their economies, from the provision of public health and medical services to building and maintaining fast and modern train services, opens opportunities for companies to sell new technology solutions to the public sector. Government payments systems are also much more extensive than in the United States, from payments to individuals for pensions, unemployment assistance, housing support, and so on, to regional and local government transfers. As elsewhere, citizens and politicians alike can see considerable scope for improvement in public services. Advanced technology—particularly driven by machine learning and artificial intelligence—can surely help. Indeed, a study by Accenture and PUBLIC (which organized the 2018 Paris summit on govtech) found that there are over 2000 European start-ups already working on “govtech.” PUBLIC argues that governments, already spending more than €20 billion in Europe on new technology solutions to old problems, are increasingly open to using smaller firms—startups and scale-ups—to provide the ideas and technology that is required. Areas ripe for innovation include core operations, such as managing personnel and modernizing welfare payments systems, to the more efficient provision of public services such as transportation.
Europe’s less than adventurous financial sector—which has also been burdened post-financial crisis by a weight of poor performance lingering from the crisis—has slowed start-up development. This is likely to remain a drag on the adoption of new technology, due in particular to the relative scarcity of risk finance and private equity investors. The debate across the Atlantic (and the English Channel) about whether a bank-centered or capital market-centered financial system is better for economic growth has continued for years. Europeans deplore the short-termism and over-financialization of London and New York and of the U.K./U.S. economies, and attribute volatility and occasional collapses to that difference. But Europe’s smaller financial sector, dominated by banks rather than capital markets, has made it harder to finance new ideas and new ventures in Europe. The deep relationships in Europe between industry and finance—as well as the less-discussed but also very close links between the state and banks large and small—have supported existing companies at the expense of financing new and unexplored ones. This phenomenon is self-reinforcing.
As we can see in the United States, venture capital is highly contextual and localized. Investors in risky new ideas tend to have a deep knowledge of the sectors they are funding, forming a part of a highly localized ecosystem of innovators and developers. Successful entrepreneurs in turn become funders of others with new ideas. They typically hear about, and then support, entrepreneurs in their vicinity. There is some evidence that Brexit will push more innovative financiers and financial institutions across the Channel and help provide financing to new ventures in Europe. But a welcoming business environment will also be critical.
This leads to a third characteristic of Europe’s economy that has made investors in new markets and products chary of Europe: inflexible labor markets, high levels of taxation to pay for extensive social safety nets and in some countries—as evidenced in France at the end of 2018—suspicion of a system that promotes business success and allows extreme wealth, while also permitting failure with relatively easy bankruptcy provisions and an openness on the part of investors (especially in new technology) to financing entrepreneurs who may have stumbled in an earlier venture but have learned from that. Less flexibility in the economy, both in labor markets and in the ease of opening and closing businesses, makes it harder and more expensive for companies to unwind mistakes. In turn, this discourages experimentation—an essential part of the innovation economy.
There is a flip side to this traditional criticism of Europe, however. Even confirmed free marketers such as The Economist magazine and middle-of-the road American economists have voiced concerns that dysfunction and persistent inequality in advanced Western democracies are undermining social and political consensus. A renewed interest in antitrust policy, some of it aimed directly at tech giants, is evident in the United States. And, more broadly, there is growing interest in the potential role of government to address these issues. Globalization of trade, production supply chains, and capital has been blamed for declining industrial cities, growing geographic disparities and a rural-urban divide in America and other advanced economies. But studies suggest that rapid technological changes have played a more important part than trade.
Looking ahead, such changes are expected to come even more quickly with the spread of advanced technology, in particular artificial intelligence (AI). Some argue that future advances in AI and robotics will allow companies in richer countries to economize so much on their use of labor that wage costs will diminish sufficiently in importance to allow them to bring manufacturing and production back home, rather than relying on today’s global supply chains to outsource to cheaper overseas labor. Of course, this raises concerns about whether there will be sufficient employment to provide jobs in advanced countries, including Europe, for those who want and need them. As economists such as Jason Furman have pointed out, such concerns have arisen many times in the past and been proved wrong. Demands for goods and services rise as they become cheaper (think how different our consumption basket is from that of our grandparents). And over the past seven decades, governments have managed economic and business cycles with considerable success to balance employment and inflation goals through macroeconomic budget and monetary policies. However, just as the influx of Chinese workers into the world economy—via Chinese-made goods—is one factor that has held down real wages globally, it is possible that dramatic advances in technology also hold down wages as companies can use “intelligent” machines to carry out many tasks now done by humans. Concerns about this impact on inequality are behind work being done now by economists and policymakers to see how best to improve the bargaining power and incomes of disrupted workers.
Europe may provide a more friendly environment for the policies needed to manage the coming industrial changes and address the “Future of Work” in an age of intelligent machines. Many new ideas about how to cope with the consequences of automation coming from AI look to the state to play a bigger role. One set of ideas emphasizes a government role in providing safety nets and income support for those whose livelihoods are threatened or lost because of technology-driven change in the workplace. Government regulations around working hours and paid leave policies transformed the balance of power between employers and employees during the industrial revolution and could do so again.
Another set of ideas for managing the consequences of the next wave of technology involves scaling up education and training to smooth potentially difficult transitions from old to new industries. Business has an interest in well trained workers, although new, smaller companies may not be well-prepared to support training initiatives. Public funding of educational infrastructure is better in Europe, and produces better outcomes, than in the United States. The apprentice system in Germany and Switzerland, for example, is an already tried and tested way to train workers in skills that employers want. In addition, excellent research institutions in Europe (AI in France and Switzerland, engineering in Germany) may support more made-in-Europe companies in the new areas being opened up in the next wave of innovation. Some of the large American tech companies are exploring ways to work with European governments to build on these research skills. In sum, Europe’s social policies, healthcare provision, unemployment insurance, and cheaper education and training may prove an advantage for the take up and absorption of future new technologies.
A final important characteristic of European economies and regulatory systems is the power of incumbent businesses. Anti-trust regulation in Brussels—which acts for all EU countries—incorporates a role for business complainants, who are able effectively to block a negotiated agreement between the regulator and a company accused of anti-competitive behavior. Whereas in the United States the standard for antitrust has been consumer welfare, Europe’s competition regulator commented, when fining Google for anti-competitive behavior in the recent Android case, that manufacturers of phone equipment had been damaged by Google’s linking free access to its attractive Play Store to inclusion of its search engine on phones. As some commentators have noted, the outcome so far of the case—that Google has changed its practices but is charging a license fee to manufacturers to make up for potential ad revenue losses from search—may end up raising phone prices for consumers.
More generally, the interests of many existing European businesses who fear competition from American disruptors and have close links to their governments are behind the push in Europe for more copyright protection, for restraints on competition for telecom companies and publishers, for restrictions on Airbnb and Uber, and for rules for e-commerce. Again, these differences reflect political choices and may play out differently in the future. Few believe that the very lengthy European process where antitrust cases may take years to resolve is the best way to promote innovation and stop monopoly behavior. This is particularly true in a market place of rapid change where competition can come from unexpected places, business models shift, and new inventions can disrupt apparently dominant companies. But there is increasing interest worldwide in checking the market power of big tech companies, or at least ensuring that it is being used appropriately.
As technology disperses throughout businesses and economies, more local European companies could see it as in their interests to develop policies and an environment that supports rather than inhibits tech. As the stake of European companies in new technology increases, this may impact government and societies’ attitudes more broadly. It will be interesting to see, for example, how European views on data “ownership” and taxation of digital revenues may change when the major data using companies include French retailers or German car manufacturers, as well as U.S. tech giants and U.S./U.K. financial institutions. At the same time, the revelations about the widespread dissemination of personal data shared—perhaps unwittingly—by consumers using internet platforms are changing attitudes even in Silicon Valley.
As in the rest of the world, European leaders and citizens look to new technology to boost productivity, improve lives, and support growth and jobs. Europe is the largest market for American digital companies after the United States. Unlike in poorer areas of the world, where internet access is limited by poor infrastructure, Europe has high penetration of broadband and Wi-Fi and broad adoption of smart mobile phones—similar to the 70 percent figure for the United States.
Nevertheless, the impact on Europe’s economy of advanced technology has been curbed so far by its still-fragmented market, despite the efforts of the European Commission to establish a digital single market, and a bias toward regulation, legislation, and taxation. At the same time, some of the traditional characteristics of Europe’s economy—notably its provision of high-quality public services and mechanisms for income support, as well as its engineering prowess—could be to Europe’s advantage in the next phase of advanced technology.
As public attitudes towards Big Tech have cooled more generally, concerns outside Europe have grown about the opaque and perhaps abusive use of personal data, security breaches, political manipulation through social media, and excessive concentration of market power in a few large companies. In this light, Europe’s regulatory approach may have some appeal. That approach has almost certainly put pressure on tech companies to improve their business practices and take more care to safeguard the privacy and welfare of their consumers. As governments worldwide, including in the United States, grapple with these issues in the next phase of technological advance, they can learn from Europe’s experience. One thing is clear: a deeper understanding on both sides—governments and technologists—is needed to craft a sensible policy regime, one that fosters innovation while being clear-eyed about the need to curb its potential costs.
Caroline Atkinson is the former head of global policy for Google, Inc. and served as deputy national security advisor for international economics in the Obama administration. She now sits on the board of the Peterson Institute for International Economics.