Tuesday, May 11, 2021

Europe’s digital economy needs analogue wings to fly

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There are many competing motives at work as the EU steps up its resolve to assert control over America’s internet giants. One is the anger they abuse their dominant position in the market. Another is the fear that they threaten the health of European democracies.

But more often than not, the strongest motivation is the feeling that Europe is very late in the race to build a 21st century digital economy and therefore needs a better digital industrial policy.

The feeling is justified. Europeans are not lagging behind in the use of digital technology, but the United States and more and more China have been at the forefront of innovation in the technology sector. This shouldn’t lead to “the envy of Google”. Settling for big cash extractors and high-tech manipulators, as long as they are European, would be a poor goal. Instead, the EU should aim to allow its technological innovators to grow easily at pan-European level, without stifling the growth of those who come after.

EU technology regulation is going in the right direction. It rightly focuses on open technology markets, portability and data sharing, and restrictions on gatekeepers. Everything could be strengthened. But there is a risk of confusion between ends and means. While digital industrial policy needs supportive regulation to be successful, the top two reasons EU tech companies have a harder time growing than their US competitors have little to do with it. with the digital sector itself.

There is a lack of capital. Funding in the EU is dominated by bank loans, which are poorly suited to the entrepreneurial risk of technological start-ups and their growth. Risky equity markets are much shallower and more fragmented than in the US or UK.

The second is that the markets for goods and in particular for services are not yet sufficiently integrated. An American tech startup that succeeds in a local market can almost effortlessly scale to mainland size. This in turn is a good basis for taking over the world.

This is not the case in the EU single market named by aspiration. For the most part, it’s not because of flawed digital rules. On the contrary, the ‘old’ fragmented markets in Europe make it more difficult for technological innovators to create new, cheaper ways of delivering, across borders and at scale, music, retail finance. , legal services or even direct sales of physical goods.

A strong European tech sector requires solutions to these two non-digital problems. The first requires EU-wide equity markets for businesses of all sizes. The second is best achieved through simple pan-European regulatory regimes alongside existing national regimes, though the latter are difficult to harmonize. This would allow more companies to sell their services across the EU from the start.

To pave the way for a thriving European digital economy, deeper capital markets and a fully functioning single market could be complemented by two other elements.

First, a programmable digital euro could be set up. This would open up opportunities for fintech innovators to develop new services around the execution of smart contracts. It could transform insurance, securities trading, clearing and settlement, and a host of consumer services that we can only begin to imagine. Companies that can do this first in their home market will have a head start globally. There is a huge first-come advantage to be taken.

Second, demand could be stimulated for native technology products suited to European conditions and preferences through development prices, standard setting, smart subsidies and public procurement. For example, confidentiality rules were widely seen as a burden. But it should have been turned into an opportunity for European tech companies to develop user-friendly methods of managing privacy. Europe needs a tailor-made policy to match technology regulations with smart standards and specifications for products, as well as public sector purchasing commitments or other financial incentives.

Another way forward would be “public options” for applications that effectively create markets. Given the controversies around Uber, why not order a rival carpooling app that any European city could voluntarily adopt? It could be designed to fit into local tax, labor and licensing rules, charging only enough to recoup the public funds needed for its development.

A third example: global web inventor Tim Berners-Lee’s Solid project with the Massachusetts Institute of Technology to develop privacy-friendly protocols for the social internet. The EU should aim to fund equally ambitious projects in Europe.

These challenges are to prepare the old economy to make the most of what new technology can bring. Paradoxically, Europe’s digital success depends on the rise of its analog game.

martin.sandbu@ft.com

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