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“The main reason EU productivity diverged from the US in the mid-1990s was Europe’s failure to capitalise on the first digital revolution led by the internet — both in terms of generating new tech companies and diffusing digital tech into the economy. In fact, if we exclude the tech sector, EU productivity growth over the past 20 years would be broadly at par with the US.” This passage from Mario Draghi’s report on European competitiveness factors to a core a part of the agenda for the EU’s future.
Nonetheless very important, that is simply one of many strategic financial challenges the EU confronts. Others embody power vulnerability, the inexperienced transition and the rise of protectionism. Draghi gives each a framework and solutions for the way to reply. It will embody extra interventionist commerce and industrial insurance policies. The problem is to make these insurance policies focused and wise.
Within the defence industries, for example, the case for constructing on the instance of Airbus appears sturdy. In contrast with the US, the European defence sector is just too fragmented. Cross-border mergers would seem like important.
Not dissimilar issues exist in banking, capital markets and power provide. For various causes, governments are refusing to permit a lot wanted cross-border integration. This largely displays nationalist politics and particular pursuits. Because of this, regulatory obstacles persist. Fortunately, the historical past of the EU reveals that such obstacles might be overcome with political will. However will that may ever be forthcoming?
The shift to “clean tech” within the car and power sectors is a extra complicated problem. Because the Draghi report notes: “Owing to a fast pace of innovation, low manufacturing costs and state subsidies four times higher than in other major economies, [China] is now dominating global exports of clean technologies.” This creates each alternatives for accelerated adoption of latest applied sciences, but in addition disruption for necessary EU industries and the chance that they are going to be locked out of components of the availability chain, similar to batteries, as a result of they lack entry to essential uncooked supplies. In all, intervention is inevitable. Commerce regulation additionally permits it. Intervening successfully is one other matter. However, performed with care, it ought to be potential.
The digital revolution is one other matter once more. It will be ludicrous to think about that investing in “EU champion” variations of Google, Microsoft, Apple or Nvidia would work. Nor would normal commerce measures assist: how may one hinder Google searches with out introducing Chinese language-style restrictions? Nor does it appear believable that funds are unavailable for engaging tech alternatives, although reform of capital markets ought to assist to construct a much bigger EU enterprise capital business. However the truth that enterprise capital funding within the EU was a mere fifth of that within the US in 2023 just isn’t because of a scarcity of financial savings within the EU. It is because of a failure to create the required know-how ecosystem. (See charts.)
So, why has that occurred? It isn’t that the EU lacks the folks. Knowledgeable commentators argue that it’s largely because of overregulation. Two kinds of regulation are essential: regulation of the tech sector particularly and wider regulation of the financial system, particularly the labour market, that significantly impacts unpredictable new ventures. In the event you can’t hearth, you’ll not rent and so you’ll go elsewhere.
The well-known tech professional Andrew McAfee of MIT has made a robust critique of EU coverage. He agrees that the state of the EU tech business is dire. However the issue just isn’t lack of cash: EU governments spend a lot the identical quantity (and share of GDP) on supporting analysis and growth because the US federal authorities. Sure, the previous is fragmented amongst member states. However that’s not the principle downside, he argues: “It’s governmental intervention in that ecosystem not with funding, but with laws and regulations, and other constraints, restrictions, and burdens on companies.”
The tech coverage analyst Adam Thierer elaborates the purpose: “Several recent studies”, he notes, “have documented the costs associated with the GDPR [General Data Protection Regulation] and the EU’s heavy-handed approach to data flows more generally.” This imposes heavy prices on revolutionary companies and, inevitably, the smaller the agency, the larger the implicit tax. Given this, in addition to the fragmented EU markets, it’s little surprise that the US is to this point forward.
A paper by Oliver Coste and Yann Coatanlem, revealed by Bocconi College in Milan, makes one other necessary and nonetheless broader level about regulation: new and dynamic corporations have to have the ability to modify their prices shortly within the mild of market developments. Thus, observe the authors, the prices of restructuring, largely the results of employment safety regulation, are elementary. The costlier it’s to restructure, the extra cautious the corporate. Cumulatively, such protections are crippling. The UK’s Labour authorities ought to observe this potential hazard of their plans.
Draghi agrees that regulation is an enormous subject. Thus, he notes, “the EU’s extensive and stringent regulatory environment (exemplified by policies based on the precautionary principle) may, as a side effect, restrain innovation. EU companies face higher restructuring costs compared to their US peers, which places them in a position of huge disadvantage in highly innovative sectors characterised by the winner-takes-most dynamics.” He even recommends a brand new “commission vice-president for simplification”. Good luck with that strategy.
The problem is quite philosophical and political. The EU must discover a technique to regulate the tech sector that doesn’t concurrently throttle its development. Doing that shall be an enormous problem.
