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“During the mid-1990s, the gap between the productivity of the European Union and the United States widened, as a result of Europe’s inability to benefit from the first digital revolution led by the Internet, both in terms of creating new technology companies and spreading digital technology throughout the economy. “In fact, if we exclude the technology sector, productivity growth in the European Union over the past two decades is almost identical to that in the United States.”
This paragraph is extracted from Mario Draghi’s report on European competitiveness, and it really sheds light on a pivotal aspect of the EU’s future agenda. Despite the importance of this aspect, it represents only one challenge among many strategic economic challenges facing the Union.
Other major challenges include: weakness in the energy sector, slow transition towards a green economy, and the high pace of protectionism. Draghi presents a framework and proposals for how to confront these challenges, which will include comprehensive trade and industrial policies, but the challenge lies in making these policies “targeted and rational.”
In the defense industry, for example, the case for building on the Airbus model is compelling. Compared to the United States, the European defense sector suffers from “extreme fragmentation,” making cross-border mergers seem necessary.
Similar problems are emerging in other sectors such as banking, capital markets and energy supplies, where governments, for various reasons, refuse to allow much-needed cross-border integration. This rejection largely reflects national politics and vested interests, resulting in the persistence of regulatory barriers. Fortunately, the history of the European Union shows that such obstacles can be overcome with political will. But the question arises: Will this will exist in the near future?
The transition to “clean technology” in the automotive and energy sectors represents a more complex challenge. As the Draghi report notes: “Given its rapid pace of innovation, low manufacturing costs, and government support four times greater than other major economies, China now dominates global exports of clean technologies.” This creates opportunities to accelerate the adoption of new technologies, but also leads to disruptions in important European industries and their potential exclusion from other parts of the supply chain, such as batteries; Due to lack of access to vital raw materials for it.
In general, government intervention has become inevitable, and commercial law allows it. But intervening effectively is another matter. However, if done carefully, it should be possible.
But the digital revolution is another matter, as it is illogical to imagine that investing in European versions of companies such as Google, Microsoft, Apple or Nvidia may succeed, and that traditional commercial measures will not work. How can searches on Google be obstructed without imposing restrictions similar to what is happening in China? It also does not seem plausible to say that funds are not available for promising technology opportunities, although capital market reform may help build a larger venture capital industry in the EU. But the reality is that venture capital investment in the EU in 2023 was one-fifth of what it is in the United States. This is not due to a lack of savings within the Union, but rather due to a failure to create the required technological ecosystem.
So, why did this happen? The reason is not due to a shortage of human competencies in the European Union. Informed experts point out that the main reason is largely due to over-regulation. There are two basic types of regulation that must be taken into consideration: regulation of the technology sector specifically, and broader regulation of the economy, especially in the labor market, which particularly affects new and unexpected projects. If you cannot lay off workers easily, you will not be hired and will therefore turn to other places.
The famous technology expert Andrew McAfee of the Massachusetts Institute of Technology has made strong criticisms of the European Union’s policies. McAfee agrees that the state of the technology industry in the European Union is very bad, and the problem is not a lack of funding. European Union governments spend almost as much money (as a percentage of GDP) on supporting research and development as the US federal government spends. It is true that this funding is dispersed among member states, but McAfee believes that this is not the main problem. He explains: “The problem is that governments intervene in this ecosystem not through financing, but through laws, regulations and other restrictions that impose heavy burdens on companies.
Technical policy analyst Adam Theurer provides further clarification of this point, noting that “several recent studies have documented the costs associated with the General Data Protection Regulation and the European Union’s hard-line approach to data flows in general.” These regulations impose high costs on innovative companies, and the smaller the company, the larger the implicit tax. In light of these challenges, and with European markets fragmented, it is not surprising that the United States is far ahead.
Also, in a paper published by Bocconi University in Milan, Oliver Coste and Yann Kotanlim make a broader and more important point about regulation: new and dynamic companies need the ability to quickly adjust their costs in response to market developments. The authors note that restructuring costs, which are largely due to labor protection laws, are a key factor.
The more expensive the restructuring, the more cautious companies become. Cumulatively, these protections cripple economic activity. The UK Labor government should note this potential risk in its plans.
Draghi agrees that regulation is a big issue. He points out that “the EU’s comprehensive and stringent regulatory environment (manifested in policies based on the precautionary principle) hinders innovation as a side effect. European companies face higher restructuring costs compared to their American counterparts, which puts them at a severe disadvantage in sectors characterized by a “winner-take-the-largest” dynamic. Therefore, he proposes the creation of the position of “Deputy Chairman of the Commission for Simplification of Procedures.” Good luck with this approach.
Overall, the problem here is more philosophical and political, and the European Union needs to find a way to regulate the technology sector without stifling its growth at the same time. Achieving this will certainly be a huge challenge.
