Europe’s out-of-touch approach toward the technology sector is jeopardizing the continent’s future.
In a nutshell
- Tensions are high between big tech and government on both sides of the Atlantic
- However, the U.S. approach toward the tech industry is much more cooperative than the EU’s
- EU legislators tend to be downright hostile toward large, successful businesses
Over the past decades, Western governments have frequently been at loggerheads with big business. Officials argue that efficiency requires tech companies to spread high fixed costs on large quantities of output to exploit significant economies of scale. This situation, they claim, makes it difficult for new firms to enter the market. Thus, lack of competitive pressure from potential new entrants leads to unfair pricing behavior by giant incumbents, as well as weak incentives to innovate.
These arguments have entered mainstream economics, and are most often used to legitimize intervention in five areas: restrictions on mergers and acquisitions, the dismantling of large corporations that might be tempted to engage in unfair pricing practices, taxation of “excess profits,” legislation on unfair tax planning and subsidizing small and medium companies.
While these theories underpin regulations on both sides of the Atlantic, the United States tends to be much more lenient than the European Union. While there is much concern about tax avoidance, Americans often underscore the need to cooperate with big business, rather than demonizing it. By comparison, the EU appears openly aggressive toward entrepreneurial success in general, and to “big” success in particular.
European legislators often justify their policies by evoking the possibility of market failures, or by claiming that big business has captured American politics. In other words, the EU presents its interventions as a way to make voters and small competitors better off, contrary to Washington.
In fact, the U.S. model has been working relatively smoothly. Large corporations lobby the administration to obtain favorable legislation, and in turn guarantee stability, millions of jobs and innovation. Most taxpayers do not mind the privileges enjoyed by big business, perhaps because the high number of large corporations and well-developed financial markets have helped ensure competition. This attitude has also contributed to attracting many producers from abroad, providing additional sources of jobs, investments and tax revenues.
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By contrast, the EU experience has been much rockier. Intrusive and ever-changing regulatory frameworks managed by large and incompetent bureaucracies have weighed heavily on company performances. As a result, many firms either lag behind or relocate (partially or completely) to business-friendlier environments.
Over the last decade, production has become increasingly dependent on technology. In particular, the fourth industrial revolution – intelligent robots replacing traditional machines – has altered companies’ operations in fundamental ways: Investments in research and development account for a much larger share of corporate costs, the returns have become more uncertain, and the time horizons longer. In other words, successful companies need to incur large expenditures for long periods of time and wait five to 10 years before investments start generating revenues.
Scenarios
Most likely: Sticking to old policies
In the U.S. case, this would mean ensuring that high-tech companies from all over the world are encouraged to migrate to America. Its current strategy to promote fast technological progress – the Inflation Reduction Act, for example – promises a vast, protected market. This approach has worked in the past and will probably work in the future.
In the EU, however, a continuation of current policies would lead to disaster. Brussels could give up on its aspirations to become a front-runner in technology, and accept its dependence on the U.S. and certain Asian countries. The EU could also try to buck the trend by engaging in aggressive protectionism, but the consequences for consumers and firms relying on high-tech inputs would be devastating: access to second-rate products at exorbitant prices. Another possibility could consist of creating European “champions” financed and run by European agencies.
These developments are not mutually exclusive. Both would eventually lead to the semi-nationalization of the tech industry in the EU. Large private companies would be replaced by even larger and heavily protected state companies managed by technocrats.
Less likely: Greater reliance on the free market
In the American context, geopolitical concerns will play a key role. U.S. authorities are not hostile to large tech companies per se, but they feel the need to intervene because of security concerns. However, it is faulty reasoning to assume that national security requires government intervention in the high-tech production sector.
Instead, the government could transition from directly managing or subsidizing high-tech companies to acting as a strategic buyer. This would mean acquiring the specific technology needed for defense, rather than getting involved in the entire production process.
There are several ways this could be achieved. The government could purchase existing, readily available technology on the open market. Alternatively, it could commit to future purchases of products meeting specific requirements at a predetermined price, potentially including an additional premium to account for development risks. Or it could enter contracts with specific companies, guaranteeing the delivery of future technology with pre-defined capabilities. These contracts could include clauses ensuring control over technology transfers, requiring companies to seek government approval before sharing their advancements with other entities.
This approach would lead to several benefits. By focusing on buying rather than intervening, the government could gain greater cost transparency and avoid potential inefficiencies in directly managing production. Additionally, fostering competition among companies vying for government contracts would incentivize innovation, ultimately benefiting all buyers, including the government itself. Leading tech companies would provide defense technology, but with a strong emphasis on efficiency while staying at the forefront of technological advancement.
This option is feasible in the U.S, but it would require far-sighted leadership. It could also result in a confrontation with big tech, which would likely go more smoothly in the current protectionist framework of easy profits and low entrepreneurial risk. But in Europe, the prevailing approach in several countries, including France and Germany, is that big tech are enemies of the people. It is therefore highly unlikely that the old continent would opt for this approach.
Lack of leadership and deep-rooted ideology likely ensure that America continues to treasure its tech leaders, while Europeans become ever more dependent on external high-tech suppliers. The speed of European decline will depend on taxpayers’ willingness to subsidize weak, possibly fragmented tech champions. Not surprisingly, the current failure to appreciate the virtues of tech giants will negatively affect Europe’s future and stoke transatlantic tensions.
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