Europe’s Tech Curbs Are a Double-Edged Sword. By Jeremiah Johnson

By Jeremiah Johnson, the cofounder of the Center for New Liberalism

The continent’s eagerness to regulate global tech companies could backfire on its own.

An attendee tries out a virtual-reality Meta Oculus Quest 2 headset during the Mobile World Congress, focused on artificial intelligence and other technology, in Barcelona, Spain, on March 3, 2022.

An attendee tries out a virtual-reality Meta Oculus Quest 2 headset during the Mobile World Congress, focused on artificial intelligence and other technology, in Barcelona, Spain, on March 3, 2022. Joan Cros/NurPhoto via Getty Images

In July, the European Commission released a new strategy agenda for the so-called metaverse. The metaverse is a broad grouping of immersive virtual reality worlds, where everything from work to gaming to socializing could take place. It’s widely seen as a giant flop right now, with only a handful of users registered even on the most popular platforms like Meta’s Horizon Worlds, and few practical applications.

Still, many in the industry are convinced the metaverse will dominate tech’s future, and it’s no surprise that states are jockeying for influence. But as with other technologies, Europe doesn’t seem capable of—or even interested in—leading in the actual technology around the metaverse. Instead, it is interested in leading the policy discussion, or the regulation of that new technology.

That’s a common dynamic on the continent—and in the United Kingdom. The U.K. is hosting a summit on AI safety this year, and British Prime Minister Rishi Sunak wants the country to be a world leader in “the governance of AI.” Of course, few of the most important AI firms—except Google’s DeepMind—are located in the U.K. The U.K. has little to no chance to lead in AI development, but it is eager to lead in AI regulation.

The European Union’s General Data Protection Regulation (GDPR), Digital Markets Act (DMA), and Digital Services Act (DSA) are all regulatory bills aimed at internet commerce and technology companies and have been described as leading efforts in their respective legislative areas. The EU is also trying to become the first entity to comprehensively regulate AI with its upcoming Artificial Intelligence Act. The EU’s practice of aiming for and achieving global regulatory dominance is so common it even has a name and Wikipedia page—the Brussels effect.

These regulatory efforts are shaped by the reality that Europe’s leading tech companies are essentially a rounding error compared to U.S. tech giants. The social media companies, retailers, software providers, and platforms that define our online existence are overwhelmingly American. This naturally raises a series of questions: Will Europe’s approach to tech regulation stop the continent from ever successfully building its own tech sector? And with bill after bill strictly regulating every area of the field, has Europe given up on even trying to succeed in tech?

It’s well known that the U.S. tech industry is larger and more influential than its European counterpart, but the scale of that dominance can be surprising. Of the 50 largest tech companies in the world, 36 are American. Ten are East Asian, and one—Shopify—is Canadian. Only three are European: France’s Schneider Electric, Germany’s SAP, and the Netherlands’ ASML. That level of dominance is just as stark in unicorn startups. Of the 51 global unicorn startups valued at $10 billion or higher, 30 are American and 12 are East Asian. Four are headquartered in the U.K., and only a single one is located in the EU.

It’s not for a lack of talent. There are plenty of Europeans who’ve founded successful tech companies—Stripe’s Collison brothers are Irish, WhatsApp’s Jan Koum is Ukrainian, Google’s Sergey Brin hails from Moscow. But all those founders moved to the United States before starting their companies. It’s not hard to figure out why. Atomico’s “State of European Tech 2023” report sizes the entire European technology industry at $3 trillion. Apple, at the time of publication, is by itself worth $2.7 trillion.

To be sure, the United States’ relatively laissez-faire approach to regulation has produced some disastrous results—from illegal collusion to hold down worker salaries to Facebook becoming implicated in genocide in Myanmar. There’s plenty of appetite in Washington for greater tech regulation.

But even then, Europe doesn’t offer a tempting model. The EU’s history of major tech legislation is littered with poor implementation and shoddy legal principles. Take the GDPR, implemented in 2018, which has been a disaster in practice. It’s best known for maddening cookie pop-ups that make little practical difference for privacy but annoy web users all around the world. Its “right to be forgotten” is a bizarre principle used to cover up crimes and remove bad reviews. And the GDPR’s regulation of data transfers borders on ex post facto punishment of previously legal practices. Meta was fined $1.3 billion under the GDPR for data transfer standards that were legal under the EU-U.S. Privacy Shield Framework but became disallowed after an EU court struck down that agreement.

Europe’s more recent bills don’t inspire confidence, either. Civil society groups are already sounding the alarm that the DSA could restrict freedom of speech with ambiguous and authoritarian “crisis mechanisms” for blocking content. French President Emmanuel Macron has already asked whether the DSA would allow him to block access to social media in response to civil unrest. European business leaders have also warned that the forthcoming AI Act could lead to an exodus of investment and talent and restrict economic growth, and industry experts have expressed concern the legislation may not even define AI properly.

Not to be outdone, the U.K. government has for years flirted with the absurd idea of banning encryption and recently passed the Online Safety Bill attempting to do just that. Banning encryption is one of the worst ideas regularly floated by legislators—universally opposed by technical experts and described as a “threat to human rights” that would “lower the security of the product” and “create more vulnerabilities that endanger the rights of all users.” The bill’s original legislative text was so untenable that major tech firms vowed to simply leave the U.K. market rather than comply, forcing a hasty rewrite and leaving the legislation a muddled mess.

The optimistic outlook is that Europe is simply overzealous in an understandable urge to regulate new technologies, and that poorly written laws will be refined over time in both practice and legislation. The more cynical, pessimistic outlook is that Europe has simply given up trying to win in tech and now only seeks to regulate and fine the United States’ tech giants out of a sense of ressentiment. After all, who do these EU bills largely target? The EU recently designated 22 “core platform services” under the DMA to be subject to strict oversight. Twenty-one of those services are American, with Chinese-owned TikTok as the sole exception.

There’s a chicken-and-egg dynamic here—American companies are the ones targeted by regulations because they are the firms that have succeeded and grown large enough to matter. The lack of significant European tech giants, then, is also one of the reasons the EU’s regulations are as harsh as they are in the first place.

Read More

Ukrainian President Volodymyr Zelensky is applauded by members of the European Parliament after delivering a speech in Brussels.

Europe Is Paranoid About Data But Does Nothing About Spyware

Hungary, Poland, and Spain snoop on politicians, activists, and journalists. Brussels has no answer.

Report

|

Clara Gutman-Argemí

An illustration shows a data storage cloud over a semiconductor chip

The Cloud Can Solve America’s AI Problems

Washington doesn’t have to restrict chip exports to control the technology’s future development.

Essay

|

Tim Fist, Paul Scharre

The TikTok logo is displayed in front of a TikTok office in Culver City, California.

Is This TikTok’s Huawei Moment?

As bans of the video app pile up around the world, the question is how far the U.S.—and its allies—will go.

Report

|

Rishi Iyengar

And who gets fined for violating EU rules? Eight of the largest fines in GDPR history have all been levied against American tech firms such as Meta, Google, and Amazon, with more than $3 billion in collective fines against those firms just in the last three years. And that’s just fines under the GDPR. EU antitrust enforcers in three separate cases fined Google $2.7 billion in 2017, $5 billion in 2018, and $1.5 billion in 2019. Amazon has faced billion-dollar fines from Italy, tens of millions in fines in Spain, to list only a few countries. Apple, Microsoft, Meta, and virtually every other American tech giant have all taken turns forking over millions or billions of dollars in fines to both the EU and its constituent states. There is no comparable tidal wave of enormous fines for European tech companies.

In some of these cases, the American firms engaged in clear rule-breaking or unethical behavior. But the staggering sums involved and how squarely they fall on non-EU companies suggest some cynicism is in order. Europe has enacted a wide range of highly complex, shoddily implemented regulations for the tech sector. These regulations are sometimes expressly written to apply only to American companies, such as the DMA’s designation of “core platform services” that hits almost only American firms as well as China’s ByteDance. And even when they’re written more universally, by far the harshest investigations fall on those U.S. companies. And while the EU sits with essentially no tech giants or platforms of its own, it is happy to collect billions in fines every year from American companies. If not in intent, in practice this seems like straightforward rent extraction.

This approach has real consequences. Europe’s own industry leaders worry that EU legislation drives away investment and talent. Research shows that the gap between European and U.S. tech firms is one of the core reasons Europe has lower capital returns, lower investment in research and development, and slower economic growth than the United States. And regulatory barriers could mean that rather than the internet bringing the world closer together, we move further toward a Balkanized “splinternet” that widens rather than narrows the gap between the continents.

That Balkanization has already begun in small ways. Google News left Spain in response to Spain’s link tax. Hundreds of U.S. news sites blocked access to European users because they deemed the costs of GDPR compliance too high. Meta has thus far declined to release its new platform, Threads, in the EU due to legal “complexities,” and Elon Musk’s X—formerly known as Twitter—is considering leaving the EU market. Major U.S. tech firms have also threatened to completely quit the U.K. over the Online Safety Bill.

There are two paths forward for Europe. The continent can continue its role as the world’s most aggressive regulator, as is certainly within its rights as a collection of sovereign states. But that approach will hamstring the continent’s tech industry and Balkanize its internet in the long run; it leaves Europe as a place whose greatest tech ambitions are to free-ride off American and Asian innovations while annoying foreign firms with annual fines.

Economic growth is not always top of mind for EU parliamentarians, who earlier this year infamously hosted a de-growth conference. But if Europe wants to compete with Silicon Valley instead of being known as the “Silicon Valley of regulation,” it’ll need to take a leaner and more growth-focused approach to technology.