On tech, the EU doesn’t speak for Europe – POLITICO

Alina Polyakova is the president and CEO of the Center for European Policy Analysis (CEPA). Matthew Eitel is a program officer for the Digital Innovation Initiative at CEPA.

The European Commission of President Ursula von der Leyen vowed in 2019 to make “a Europe fit for the digital age,” dubbing the 2020s Europe’s “digital decade.”

Building on the European Union’s flagship privacy law, the General Data Protection Regulation (GDPR), Brussels’s regulatory race to the top gained historic momentum over the past four years. And from digital markets to content moderation, artificial intelligence, cybersecurity, computer chips and data governance, the Commission has left little on the table in terms of regulation.

Bolstered by mended ties with the administration of United States President Joe Biden and increased coordination with the U.S. through the Trade and Technology Council (TTC), the von der Leyen Commission seems to have achieved the impossible in an often rancorous 27-member bloc — a unified Europe around a common digital agenda.

But this narrative of unity obfuscates a much more complex reality in which the Commission’s policies are dominated by its two largest — and most zealously regulatory — countries: France and Germany. In fact, Europe’s smaller but most tech-oriented members rarely feel heard in the halls of Brussels, even as they often disagree with the Commission’s agenda.

Privately, officials from these countries say the Commission’s strategy will hamper innovation by imposing complex compliance rules on smaller companies that can’t afford to implement them. They also worry that foreign investment — particularly from U.S. investors, which are responsible for a whopping 76 percent of foreign investment in European tech companies — will wane as the Commission goes after large American tech firms. And many lament that Brexit took away the United Kingdom’s counterbalancing voice, leaving a vacuum for France and Germany to fill.

While these concerns are rarely aired publicly, simply put, Central and Northern Europe know that when it comes to tech, the EU doesn’t speak for Europe.

And no wonder: None of the EU’s major institutions — the Commission, the European Council or the European Parliament — have Central Europeans at the helm, even as the power balance in Europe shifts eastward after Russia’s invasion of Ukraine. Proportional representation in the Parliament also means that the largest countries — France, Germany and Italy — have the most power in terms of votes. Even if all the Nordic, Baltic and Central European countries voted as a block — which they don’t — they would still have fewer votes (191) than just France, Germany and Italy (251).

As a result, smaller countries then need to prioritize focusing on the most critical issues — defense and security — and the Parliament’s ability to set Europe’s tech agenda is then hamstrung by the Commission’s sole power to propose legislation.

But just as the power balance on defense and deterrence is shifting to the east and north, so are the economic headwinds when it comes to tech innovation and investment.

For example, Helsinki, Stockholm and Tallinn have higher growth rates for capital invested in startups than London, Munich and Paris. And while unicorns — or firms valued at $1 billion or more and are still predominantly privately owned — in Western Europe still raise nearly double the amount of money as those in “new Europe,” the latter has the highest valuation-to-investment ratio on the Continent.

In short, tech companies in Central and Eastern Europe do more with less.

Estonia is a perfect example. A founding member of the Digital 5, Estonia has nearly four unicorns for every million citizens, and more than one startup per 1,000 citizens. Private sector innovation in Estonia is also matched by deft digital governance, as citizens are able to conduct most of their interactions with their government online, and the country joins other Baltic and Nordic nations at the top of Europe’s Digital Economy and Society Index (DESI).

Poland, meanwhile, is another top destination for tech investment in Europe. Microsoft invested $1 billion in the country’s cloud infrastructure in 2020, and Google invested $2 billion in similar projects that same year. Also, Amazon and Intel both run research and development facilities in Gdansk, the Intel facility being the company’s largest in Europe.

And while France and Germany still host over a third of Europe’s unicorn companies, out of the world’s top 100 companies ranked by market capitalization, only one of them — Germany’s SAP — enters the race as a tech company.

So, the problem is that the countries making the tech rules aren’t the nations leading on tech.

Europe’s tech-savvy nations thus need to speak up when the Commission’s agenda doesn’t serve their interests. After all, they’ve done it before — when the Czech Republic joined Nordic and Irish opposition to the French-backed Digital Services Tax in 2018; when Sweden, Denmark and Finland questioned the inclusion of ex ante obligations in the Digital Markets Act in 2020; and, more recently, when the Czech Republic, Denmark, Finland, Austria, Estonia and Slovakia rejected proposals for new EU funding for green tech subsidies.

The future of tech innovation in Europe isn’t in France and Germany — it’s in Central and Eastern Europe. The region’s digital ecosystems are already driving innovation, setting global e-governance standards and attracting investment in startups. But so far, these like-minded European countries haven’t spoken with one voice on the kind of digital decade they would like to see.

And as the Commission shows no sign of slowing down on its regulatory agenda, it’s these smaller countries that will then bear the greatest economic risk.

Additionally, it’s time for Washington to wake up and realize that tech policy isn’t solely in the EU’s purview, and work to engage with European countries bilaterally as well. After all, Nordic and Baltic countries are more aligned with the U.S. on the dangers posed by China in the tech space than, say, France, as underlined by President Emmanuel Macron’s comments on a recent trip to China.

Along these lines, earlier this year, the U.S. and the Netherlands reached a pivotal agreement on blocking chip exports to China — a significant step toward hampering Beijing’s aspirations to dominate tech innovation. Now, the U.S. should seek out other similar opportunities with like-minded countries to counter Beijing — and more such agreements will force the EU to start taking its smaller member countries much more seriously.