The EU regulates, the US rules Factors of European backwardness

The European Union prides itself on the fact that its internal regulations ultimately regulate the world. The Brussels Effect, Anu Bradfor called it. Now, with its new set of laws on the Digital Market, Digital Services, Artificial Intelligence (AI), and Data and Data Governance, the EU intends not merely to regulate all these new fields within its borders but also – given the size of its market –outside itself. Still, as they say, referees don’t win games, even if the EU makes the call ahead of others. There is considerable debate about whether too much regulation stifles innovation. According to the latest European Innovation Scoreboard (2023) of the European Commission, the EU often finds itself in fourth place, whether in terms of business processes, product innovations (third place), international scientific co-publications, or new doctorates. The great innovating powers are the U.S. and China, followed by Canada.

Meanwhile, Washington continues to impose prohibitions or limitations on Europe. For example, the export to China of extreme ultraviolet photolithography (UVE) machines by the Dutch company ASLM – the most sophisticated machines for manufacture of the most advanced chips – proves that Europe is indeed capable of innovation. China and Russia are likewise making remarkable advances in that technology. Still the fact remains: the EU regulates, but the U.S. rules.

Europe (the EU plus the United Kingdom, significant in R+D+i) could develop a greater range of digital innovation by addressing five factors: the human factor; the construction of a single market for new times; the creation of a capital market, for venture capital in particular; the current lack of a European defense industry; and the lack of European champions, beyond national players.

Regarding the human factor, in STEM subjects (science, technology, engineering, mathematics) Europe trains its students well, but not in sufficient numbers. Once trained, too many depart for the United States and especially Silicon Valley. Few scientists and technologists from abroad come to work on the Old Continent. 

The United States is a powerful magnet attracting talent not only from Europe, but from China and elsewhere. It is no coincidence that the CEOs of IBM, Alphabet (Google), Microsoft, Tesla, and NVIDIA all hail from outside the U.S. Meanwhile, China, which leads the world in numbers of STEM students (Russia also pulls its weight, in relative terms), counts about 30,000 STEM scholars or postdoctoral researchers operating in the U.S. (2020 data). Despite the fact that both the Trump and Biden Administrations have tried to complicate this for the Chinese, the majority of international students in the U.S. have come there from India and China. Innovation in the world’s first power is in large part the result of imported brains. The brain drain from Europe and other countries favors this, to the detriment of Europe and especially the Global South.

The example of France is illustrative. Already by 2017, nearly 70,000 French imports lived in California, in Silicon Valley – still the world’s leading point of reference in innovation. A few weeks ago, California Governor Gavin Newsom suggested that French was becoming the official language in Silicon Valley, thanks to the growing influence of French Tech and the increasing presence of French startups. 

The second factor – the lack of a genuine single market in the EU – was clearly indicated by former Prime Minister of Italy Enrico Letta in his report for the European Commission, significantly titled ‘Much more than a market’. The United States and China have both been able to take full advantage of Europe’s market. As Letta rightly notes, the Single Market was a product of a time when both the EU and the world were “smaller” and simpler and less integrated, when many of today’s protagonists had not yet entered the scene. What is needed now is not merely to complete, but to update and adapt the single market to a much wider global world, without limits imposed by the Cold War or the subsequent unipolar period. For this, Letta proposes adding a fifth aspect to the EU’s four freedoms (free movement of capital, goods, people, and services), in order to boost research, innovation, and education within the EU. Letta’s report and a subsequent one by Mario Draghi on how to boost the competitiveness of the European economy are relevant if Europe seeks to be sovereign, and to extricate itself from the technological vassalage of the U.S. (and of China, to some degree), and yet be able to preserve its social model.

The third factor, also underlined by Letta, is the EU’s lack of a genuine capital market, especially for venture capital, as well as the imperative need to facilitate the creation of new companies. Too many frustrated entrepreneurs and investors in the EU end up leaving for the U.S., where launching a startup and finding investors is much easier, and where failure itself is valued as a learning tool. These entrepreneurs also constitute part of the first factor (the human factor) – the brain drain or entrepreneur drain that works in favor of the U.S. and against the EU. Europe needs to overcome national interests and build that market.

The fourth factor is the absence of a European defense industry of sufficient size. While the development of civilian uses has been central to recent stages of the technological revolution, the defense industries – largely driven by the Pentagon – have been decisive for investment and as a catalyst for U.S. innovation. This was the original force behind the Internet, and today it is pushing for dominance in Artificial Intelligence. Europe has had some success and learned some lessons from programs extending to a few countries, as in the case of Airbus, in both the civil and military sectors. Still, in spite of what it spends (which is not a little, even in comparison with the U.S.) Europe lacks a defense industry on a Union-wide scale. It doesn’t even boast its own DARPA (Defense Advanced Research Projects Agency), which could drive a lot of innovation. This industry is at present excessively national, especially among the largest Member States, causing concern in others. Today, even these big players are not enough – they need a European dimension. Although progress is being attempted in this field, there is no single strategic or geopolitical vision within the EU; meanwhile, Washington supports European defense so long as it means buying American weapons. 

Which brings us to the fifth factor: the absence of European (and not only national) champions to rival the giants of the U.S. and China in terms of digitization and other related developments, such as Deep Tech. There is no European Google – perhaps none is needed – no European Amazon or Meta or Microsoft. There are Chinese contenders, but nothing from Europe, even as western neoliberalism is being transformed by large injections of public money. And even here, the European states have lagged behind the U.S. in terms of economic contributions.

It’s laudable that the EU has imposed a single charging-port model (USB Type C) for mobile phones, tablets, and other devices. Consumers are very grateful. This forced harmonization, which the market failed to achieve, is now being imposed as a global norm. But Europe no longer manufactures mobile phones, despite having been a leader in early generations of mobile tech. There was a time at the dawn of the digital age when Europe claimed an innovative edge in the digital field. But next opportunities were missed, and conclusions weren’t drawn. The challenge now is for Europe not to wind up a loser or see its innovation paralyzed by the ongoing technological rivalry between China and the United States.