The European Union (EU) is facing a major dilemma: how can it stay relevant on the global stage while safeguarding its fundamental values? The EU has historically used its regulatory power for the protection of human rights, freedom, equality, the rule of law, and democracy. The European common market has been a driving force for the EU’s global power, but its growth and innovation are currently falling behind the US and China, causing anxiety. Particular concern has risen among experts regarding the consequences of new regulatory frameworks for technology and artificial intelligence. A lot is at stake, since those regulations could potentially make Europe an irrelevant player on the world stage if they turn out to be too stringent.
Since most other great powers are showing increasingly protectionist policies, many have voiced that it’s time for the EU to also become more strategic in the protection of its interests. The European Commission has realised this too, for instance with the launch of the Global Gateway to rival China’s Belt and Road Initiative. Similarly, US regulations concerning tax credits for electric vehicles generated a dispute over supply chains for critical minerals. However, buzzwords such as “strategic autonomy” and a “geo-political Commission” have failed to convince.
EU regulation vs innovation: how to find the right balance? We propose to approach this dilemma with a stick-and-carrot strategy that combines regulatory power and innovative strength to create a value-based innovation ecosystem. This will prove instrumental for what some have called “the New Digital Cold War”. Here’s how this article proceeds:
- The Stick: EU Regulations’ Protection
- The Missing Carrot: A Taste of Innovation
- The Balancing Act: A a Value-based Innovation Ecosystem
The Stick: EU Regulations' Protection
To protect its values, the EU has been brandishing a ‘stick’: an array of regulations covering various policy fields, from environment to trade. Some of the most well-known include the General Data Protection Regulation (GDPR), the Digital Services Act (DSA), the European Climate Law, as well as the incoming Data Act and AI Act. These rules protect the environment, citizens’ privacy and safety, and ensure fair business practices. They are the foundations of the fundamental values that the EU stands for. The “Brussels Effect” — the impact of EU laws on global industry standards and policies — has made a lot of noise, most recently regarding the regulation of technology such as artificial intelligence (AI). In their report for the Oxford Centre for the Governance of AI, Charlotte Siegmann and Markus Anderljung predict that the EU AI Act is likely to influence both the design of products across the world and the regulations that non-EU countries will adopt.
Despite their noble purpose, some regulations inadvertently also erect barriers to innovation.
Yet, regulations do not always yield the intended effects. In a quick poll conducted by Bloomberg, the majority of participants shared that their first thought when coming across the cookies pop-ups enforcing GDPR is “This is incredibly annoying, please make it stop”. Despite their noble purpose, some regulations inadvertently also erect barriers to innovation. Companies, particularly small and medium-sized enterprises (SMEs) and start-ups, face the daunting challenge of meeting the EU’s stringent standards, which can be financially and administratively burdensome. This year, Digital Future for Europe (a group of 100+ start-ups, scale-ups and tech associations) conducted a survey revealing that 53% struggle to comply with new regulation. In 2022, 139 start-ups waited for more than 12 months to receive EU funding money because of a disagreement within the Commission over how to manage the equity fund. In sum, bureaucracy casts a shadow on the competitiveness of European companies.
In September 2023, the European Commission unveiled a new recovery package for SMEs, which represent 99% of European businesses. The measures aim to close legal loopholes and simplify tax administration procedures and reporting requirements, for instance by allowing small cross-border companies to file tax reports in one state only — because no, that wasn’t the case already. The Commission also promised to boost investment for SMEs, which so far amounts to €200 billion for 2021-2027 under its various funding programmes. It proposed a new Strategic Technologies for Europe Platform (STEP) that would limit the EU’s strategic dependencies. The European Parliament voted favourably on this proposal, which is now due to be discussed in the Council.
The Missing Carrot: A Taste of Innovation
To effectively protect its values in a competitive global arena, the EU is missing a ‘carrot.’ While leading in regulations, Europe lags in financial incentives and support structures. Unlike Silicon Valley, European venture capital is more of a playground for bureaucracy than for bold ideas. Investors shudder at the thought of navigating EU regulations, fearing these rules as roadblocks to growth. Ultimately, those businesses often choose to conduct their activities elsewhere, indirectly contributing to Europe’s progressive loss of relevance in the world. To effectively compete with innovation and financial hubs in North America and Asia, the EU must present a ‘carrot’ to attract global innovators in addition to improving the ‘stick’ of its regulator framework.
EU policies and instruments facilitating funding for SMEs, start-ups, and high-growth enterprises are insufficient for the EU to retain a share in the global tech market, ultimately compromising its technological sovereignty.
Research shows that EU policies and instruments facilitating funding for SMEs, start-ups, and high-growth enterprises (for example, Invest EU and Horizon Europe) are insufficient for the EU to retain a share in the global tech market, ultimately compromising its technological sovereignty. “Europe risks to becoming an ‘incubator’ for other world regions, without being able to harvest the results of publicly funded research programmes.” wrote a group of economists in 2022 based on a study conducted with 117 experts.
National authorities and civil society organisations have also voiced their dissatisfaction with current efforts. Oxfam lamented the Commission’s failure to meaningfully tackle big multinationals’ tax evasion. The German government has asked to raise the threshold of SMEs qualification from 250 to 500 employees to “restrict the burden on them to what is really necessary”. The French and German finance ministers concurred in saying that the EU’s sustainable finance framework leaves much room for improvement and that “we need to make sure that requirements are manageable”. In a recent report, Members of the European Parliament (MEP) called for harmonised definitions of start-ups and scale-ups, to reflect their differences from SMEs, and for their greater access to public procurement, loans and venture capital. “Start-ups are the driving force of innovation and are worth around €2 trillion in Europe, they have to be properly defined as an active player in the economy.” said MEP Tsvetelina Penkova.
The EU’s commitment to its values must be matched by an emphasis on making finance and markets more accessible for investors, SMEs, and start-ups. A significant boost in incentives like grants, tax breaks, and easier access to venture capital should be the luscious ‘carrot’ that offsets the weight of strict requirements. It would not only compensate businesses for their regulatory endeavours but also draw in global investors and innovators, turning Europe into a value-based hub for entrepreneurs. Creating this well-balanced environment is the key to preserving Europe’s relevance on the global stage while maintaining its unequivocal commitment to human rights, environment protection, and fairness.
EU Regulation vs Innovation: The Balancing Act
The days in which the EU could play of its normative power are over. The lingering inequality from its imperial and colonial past, its failure to meet expectations, and its double standards have been largely documented and analysed. Europe’s reckoning is looming on the horizon. It’s high time for the EU to find new ways of exercising geo-political power if it wants to keep a seat at the table. The EU should create a value-based innovation ecosystem that goes beyond offering recovery packages and closing legal loopholes.
Much research has been conducted on this subject, which the EU should systematically take into account and widely disseminate so that it reaches all corners of the ecosystem. To quote economists Quas and others (2022), the EU must put in place: “measures to build supportive entrepreneurial ecosystems, ensuring the presence of favourable framework conditions, such as enhancing the competences of workers, promoting relationships with academia, and other grass-roots measures that nurture the ‘pipeline’ of start-ups with flagship innovative projects and technologies.”
Revising current regulations to reduce barriers to international expansion, recruitment, and investments were also cited as measures of the utmost importance. The European Commission’s Science Hub (also known as the Joint Research Centre) has analysed the massive impact that better start-up support would have on the EU’s economy. Progress is noticeable; however, work remains to be done.
How to create an competitive value-based innovation ecosystem:
- The EU must foster collaboration with entrepreneurs. The European Commission should instil a culture of partnership with venture capitalists, business owners, and innovators. In accordance with its Better Regulation Agenda, it must put in place modern and effective means of dialogue, building on ongoing efforts to improve participatory and deliberative democracy (e.g. Level Up uses gamification to optimise public consultation).
- The EU must champion accountability. The European Commission must put marginalised groups, poorer regions, and developing partners at the forefront of its value-based innovation ecosystem. This is essential to remain a credible geo-political power and to rebuild trust with its long-time partners. Civil society will play a crucial role in the decolonisation of the EU’s rules and practices, including for businesses.
- The EU must harness its diversity. EU institutions have to foster a variety of thoughts, ethnicities, knowledges, abilities, and identities in developing and implementing policies that will determine the future of their agency on the global stage. Scholars have extensively demonstrated the power of inter-disciplinarity for global politics.
- The EU must be effectively transparent. The EU’s innovation ecosystem must be made more accessible and visible to all. While initiatives supporting SMEs and start-ups have flourished, they remain largely buried under bureaucracy and poorly designed webpages. The European Commission must fight a fierce battle against its jargon and actively modernise its communication and advertisement practices, especially when it comes to capital access.
- And last but not least, the EU must substantially boost investment in innovation. If the European Commission is serious about the protection of its values, it must be ready to pay for their price. There is an urgent need for more funding for SMEs and start-ups. The EU must act as a fast-paced incubator supported by private investment, which can be attracted by “improving the risk-return profile for private investors using non-pari passu strategies”, (Quas et al, 2022). This strategy, also recommended by the European Court of Auditors, allows for parties to not share the same profits and losses, thereby attracting more venture capital.
Conclusion
In sum, the European Union has serious work to do if it wants to remain a credible and influential actor in an increasingly competitive global world. If it truly wants to provide an alternative market for value-based products, for example with European digital platforms and Large Language Models, it must make it impressively competitive. Make no mistake, the EU is currently losing the growth and innovation race and it must make tremendous efforts to come back in a leading position if it wants to continue preserving its values on a global scale. A competitive value-based innovation ecosystem is the only way to save the EU from global irrelevance, and much work remains to be done to achieve balance between regulation and innovation.
This article was written by Sophie Vériter, Oxford-graduate researcher specialising in European democracy and security, in collaboration with Nils Beers, Venture Capitalist passionate about the freedom and quality of life that Europe has to offer.
