Why is Europe struggling to create its own digital giants?

Why is Europe struggling to create its own digital giants? This is the million-euro question that obsesses the European Commission. In an op-ed published last July in Le Figaro, the European Commissioner for the Internal Market Thierry Breton warned of the urgent need to “ensure Europe’s digital sovereignty” in a context where the rivalry between the major powers is intensifying.  

The budget granted to the policy of sovereignty by the European Union has increased by “20% compared to the previous budget, and even 30% after the departure of the United Kingdom”, Thierry Breton was pleased to report in Les Echos. The new DigitalEurope programme, he continues, “will allow additional investments of more than 20 billion”. The initiative aims to ‘encourage’ and ‘support’ digital technology industries-as can be read on the official website.  

At the same time, the European Commission is continuing its war against the GAFA (Google, Apple, Facebook and Amazon) and is considering taxing the American digital giants to finance its recovery plan. To justify this new tax, which will inevitably reduce consumers’ purchasing power, the EU argues that GAFA pay “half as much” tax in Europe as other companies. However, as the Institut Economique Molinari has shown in a recent study, GAFA pay as much tax as large European companies. In the light of this fact, the GAFA tax appears most unfair. 

Subsidising domestic companies on the one hand and taxing international competitors on the other: the European Commission’s approach seems to be inspired by the doctrine of infant industries advocated by the 19th century economist Friedrich List. However, this strategy does not address the fundamental problem of the European digital market-as well as being extremely costly. 

As Luca Bertoletti and Ryan Khurana, authors of a policy note on the subject for the Consumer Choice Center (CCC), point out, if the European Union is at a disadvantage compared to the United States or China it is because it does not have a true single digital market. Only 15% of Europeans, for example, shop online on a site based in another EU country. 63% of websites don’t even let consumers buy a product from another EU country.

So Europe’s digital market is far from being a single market as it is in the US and China. This is problematic because it limits competition on a national scale and prevents Europe’s most successful firms from gaining market share and achieving significant economies of scale. The authors of the note for the Consumer Choice Center therefore recommend removing the remaining barriers to competition in the European digital market.

The fragmentation of the telecommunications sector is particularly striking. While Romanian and Finnish operators are among the best in the world, both in terms of quality and price competitiveness, telecommunications services in Spain and Ireland are often of poor quality and excessively expensive. 

Spanish and Irish consumers would greatly benefit from increased competition in this sector. In order to allow the best services to gain market share, the European Union should encourage the cross-border provision of telecommunications services and remove protections for incumbent operators. Competition law should also be adapted to allow the merger of different national telephone operators and to ensure that small countries are not put at a disadvantage. Shareholder states should partially withdraw from the merger to encourage private investment and thus promote competition. 

In a true digital single market, users should also not be discriminated against on the basis of their IP address or the location of their bank account. We should, therefore, introduce cross-border licensing of digital media and freeing the purchase of digital content from geographical constraints. Such measures would allow consumers to have access to a wider choice and thus intensify competition between providers.

We should also note that the regulatory environment is still too unfavourable to experimentation and innovation in Europe. This is one of the reasons why the most disruptive technologies are often imported from abroad and rarely developed in Europe. To remedy this, we should increase the number of “regulatory sandboxes” that allow companies to derogate from regulations in order to test new products in a controlled environment.

We should also draw attention to the European Commission’s decision to use Wifi as an infrastructure to accommodate autonomous cars. While it is true that Wifi is faster to implement and less expensive, 5G technology is much more promising. Car manufacturers have already expressed their concern on this subject. To choose 5G rather than Wifi is to fall behind a technology which will surely be the basis of the fourth industrial revolution to come.

The challenge for Europe today is to avoid making the same mistakes as in the past. If Europe wants to play in the same league as the United States and China, it will certainly have to make the necessary investments in the infrastructures of the future, but also – and above all – harmonise and liberalise its digital market. 

Originally published here.

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