Europe’s innovation problem:
Trying to regulate the future

 

Conventional wisdom holds that while the United States tends to embrace innovation, the European Union often holds it at arm’s length.

Recent events seem to support this: In September, the EU’s General Court ordered Apple to pay 13 billion euros in taxes to Ireland, then later that month the European Court of Justice imposed a 2.4 billion euros fine on Google for manipulating its shopping search results. Furthermore, new EU legislation – the Digital Markets Act and Digital Services Act – reverses the burden of proof for certain technological companies. And the upcoming Artificial Intelligence Act also presents new regulatory challenges for innovation. It does indeed seem the EU has a penchant for regulating innovation.

Then again, the EU likes to regulate everything, often seeking to squeeze new advancements into established regulatory frameworks. Fundamentally, there are two approaches to handling innovation: It can either be permitted or prohibited. While the U.S. has traditionally fostered an environment of permission, the EU appears committed to the prohibitive approach, in the nuanced form of regulation.

Two approaches to innovation

The permissive approach to innovation accepts that deploying new technologies inevitably creates challenges, but these uncertainties are embraced as opportunities for growth. This perspective supports the evolution of partial solutions, allowing diverse technological pathways to develop both in competition and in parallel. In fact, the approach thrives on the unpredictability inherent in innovation, viewing the future as undetermined and open to multiple possibilities. By acknowledging the open nature of innovation and the future, it encourages an organic coevolution of problems and solutions.

Conversely, the prohibitive approach is rooted in a fixed vision of innovation and the future. It assumes that regulators or bureaucrats have sufficient foresight to predict outcomes and identify societal needs and technological advancement. This perspective seeks to manage and preempt all potential problems with a comprehensive set of current solutions, often addressing scenarios that have yet to unfold. It subscribes to the belief that the trajectory of innovation development can be thoroughly planned and managed, suppressing uncertainty and the possibility of multiple competitive developments.

The EU’s regulatory strategies for Big Tech exemplify this forbidding approach. Initiatives like the Digital Markets Act illustrate the EU’s intent to dictate technology companies’ behavior, imposing extensive rules to forestall potential problems rather than letting these problems be resolved as they emerge. This philosophy assumes regulators clearly understand how technology will evolve – a deterministic view of the future whereby a central authority believes it knows the optimal path for technological development. With this approach, regulations enacted today are assumed to be capable of regulating all future states.

The EU’s aversion to risk and innovation

The EU’s stance on innovation reveals a preference for control over progress. Instead of harnessing the disruptive potential of new technologies, the EU is more concerned with regulating and restraining them, motivated by a bureaucratic focus on consumer protection and perceived fairness. This regulatory overreach can impede competition and stifle innovation, as the EU often imposes rigid frameworks that prioritize hedging against hypothetical risks over seizing concrete opportunities for advancement. Rather than cultivating a vibrant ecosystem conducive to experimentation, the EU promotes a culture of risk aversion with its emphasis on stability and uniformity across its diverse member states.

Such an approach is particularly problematic for innovation. The future of technology is inherently unpredictable; while new technologies inevitably create unforeseen challenges, they also lead to innovative solutions that regulators cannot possibly anticipate. The EU’s prohibitive regulatory approach stems from the misguided assumption that there is a “correct” path of technological evolution – one that regulators can control and manage. This mindset is fundamentally at odds with innovation’s unpredictable and often chaotic nature.

 

Facts & figures

Market capitalization of tech companies by continent, in billion dollars, 2020

Today’s tech giants mainly reside in the Americas, but Asia is fast catching up. Meanwhile, Europe lags well behind the rest of the world due to the prohibitive approach it takes to regulating innovation. © GIS
 

Furthermore, the EU’s all-encompassing regulatory stance hinders the development of alternative solutions that emerge from competition and experimentation. By dictating how technology companies must operate, the EU curtails possibilities for parallel development along different paths. Essentially, this strategy limits the horizons of innovation by assuming that regulators know the best path forward.

The Draghi report: A case of EU regulatory caution

report released in September 2024 by Mario Draghi, the former European Central Bank governor, titled “EU Competitiveness: Looking Ahead,” exemplifies the EU’s general aversion to risk and innovation. Although the report ostensibly focuses on improving EU competitiveness, its underlying assumptions reveal the same conservative mindset that shapes the union’s regulatory approach toward innovation. Mr. Draghi’s recommendations for steering innovation through regulation reflect a belief that policymakers can anticipate and manage the future of technology. This deterministic viewpoint, which sees bureaucrats and regulators defining a preset path for technological advancements, reinforces the EU’s inclination to stifle innovation through excessive regulation and attempting to control dynamic, inherently unpredictable processes.

Instead of cultivating an environment that supports experimentation and embraces risk, Mr. Draghi’s report proposes building regulatory frameworks intended to “guide” innovation. This implicitly assumes that regulators know the best path forward, mirroring the EU’s broader culture of risk aversion. In this mindset, hypothetical risks are given more weight than real opportunities, and innovation is treated as something to be managed rather than allowed to evolve freely. The EU’s emphasis on stability and harmonization across its member states further exacerbates this problem by encouraging uniformity and limiting the diversity of approaches that typically spur innovation.

While Mr. Draghi’s approach is perhaps more moderate compared to the EU’s stringent regulatory stances, it still overlooks the inherently unpredictable nature of technological innovation. By trying to steer technological development with preemptive solutions, Mr. Draghi and the EU risk stifling the creativity and adaptability essential for competitive markets and technological breakthroughs. Instead of encouraging competition and allowing multiple innovation pathways to emerge, the report advocates for a vision of centrally planned innovation, which fundamentally contradicts the decentralized and often chaotic nature of technological progress. This vision, rooted in a deterministic and risk-averse philosophy, will likely hinder rather than enhance the EU’s long-term competitiveness.

Opportunity-based innovation

In contrast, the opportunity-based approach to innovation allows for the emergence of a range of solutions as new problems present themselves. Recognizing the unpredictability of the future, this perspective accepts that innovation cannot be meticulously planned or controlled. Rather than imposing rigid rules, it promotes an open environment in which multiple solutions can develop in competition and collaboration. Emerging problems are addressed with incremental, evolving solutions, rather than comprehensive, preemptive ones.

This approach embraces the often messy and unpredictable nature of technological innovation. It accepts that mistakes are inevitable, but views them as potential catalysts for discovery and breakthroughs. By promoting experimentation and competition, it creates an environment where innovation can flourish.

A hallmark of the opportunity-based approach is its emphasis on diversity and competition. Instead of assuming there is a single, correct path for technological development, it allows for multiple paths to emerge and compete. This competitive environment leads to the development of more robust and diverse solutions to the challenges posed by new technologies. But which approach will the EU take in future?

Scenarios

Most likely: The EU retains its current approach

The EU will probably continue to strictly regulate innovation and technological advancement. This will limit the market to highly standardized products and services, losing out on the core strength of innovation, which is creating tailor-made, non-standard solutions. As a result, the EU risks a gradual erosion of its competitive edge, with its enterprises either not innovating or opting to innovate outside of the bloc. This stifling of new ideas will lead to fewer entrepreneurial opportunities and a decline in the productivity of capital, which goes hand-in-hand with declining labor productivity, and diminishing overall welfare. In this scenario, innovation will continue to come from the U.S. and other similar economies, with Asia poised to overtake the EU in terms of both welfare and technological dynamism.

Less likely: Islands of innovation emerge in the EU

In an optimistic scenario, “islands of innovation,” emerge within the EU, despite its overarchingly forbidding regulatory climate. Some member states might adopt more innovation-friendly policies, or certain business models could evolve outside the scope of EU regulations and outpace efforts to regulate them. In this best case, these “islands of innovation” could tap into the human capital and knowledge of the EU workforce in entrepreneurial projects that offset the union’s general economic lag. Although welfare would increase in this scenario, it would likely benefit only some countries or segments of the economy. Nonetheless, these innovation islands could sustain the EU in global international competition.

Likely: The EU’s approach becomes the global standard

With hints of similar regulatory tendencies emerging in the U.S. and China – particularly regarding antitrust actions against Big Tech – this scenario appears almost as probable as the continuation of the status quo. The global economy could experience a decline in innovative impetus, reverting to more standardized products. This shift would stifle entrepreneurialism, lower the productivity of capital and labor, and ultimately lead to diminished welfare.

The ever-increasing regulatory costs would be passed on to consumers, resulting in lower per capita income. With the abandonment of an opportunity-based mindset, the forbidding approach could establish itself globally, significantly hampering innovation and economic growth worldwide.

 

This report was originally published here: https://www.gisreportsonline.com/r/innovation-regulation/

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