September 08, 2021

More Courage! The EU and Tech Regulation

The European Union risks falling behind in the one space it has tended to lead: developing values-based digital policies.

Lights illuminate rack servers inside the data center of Equinix in Pantin, outside Paris, France, December 7, 2016.
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It is a fact that is both evident and widely lamented: The European Union lags far behind the United States and China in terms of digitalization and innovation in the digital economy. This includes everything from the digitalization of public services and education to the production of critical technologies, the investment in breakthrough innovations, and suitable broadband infrastructure. The EU is also bad at nurturing tech talent, and the number of digital companies that make up the top tier of the EU’s stock indices is minuscule; the list goes on.

Chancellor Angela Merkel has admitted that Germany has shortcomings, most recently stating “Germany can and should do better.” French President Emmanuel Macron has outlined ambitious objectives to drastically scale EU tech companies, so that France may stay in the tech race that seems to be taking place on a narrowing track. His aim among other things: to produce 10 French companies worth €100 billion by 2030. Smaller EU countries are at it, too. The Latvian Ministry of Environmental Protection and Regional Development, in 2020, announced digital transformation guidelines for 2021-2027 to deliver rapid growth through technological development. Across EU member states, a recognition of Europe’s position has set in and the impetus to grow the bloc’s digital capabilities and tech ecosystems is gaining traction. However, serious implementation and impact have thus far been muted.

The EU’s response to lagging innovation has been to study the European tech ecosystem carefully and address ecosystem challenges. Beginning in 2020, the European Commission digital and competition policy heavyweight, Executive Vice President Margrethe Vestager, and her team published a spate of policy proposals. The draft regulations are aimed at shaping an EU tech ecosystem characterized by accountability toward consumers and a level playing field for innovative business actors. The proposals on data sharing, online content, restrictive and anti-competitive business practices, and defining the application and safety of artificial intelligence (AI), albeit unfinished, are one strong step toward shaping a context in which EU start-ups and SMEs can thrive.

Tech Free Rein vs. Values-Based Standards

“Regulation stunts innovation and growth”; “it erects barriers for businesses”; “it’s costly.” So go the arguments made by opponents of regulation in general and digital regulation in particular. However, it is precisely the lack of regulation and the free-rein policy environment in the digital economy that contributes to lagging innovation, stilted growth, barriers for smaller businesses, and costs so high some businesses are forced to throw in the towel. The biggest digital companies—most often substantial in size before they entered the EU market—manage to flourish when they are given free rein to shape their businesses, the consumer reality, and the ecosystem for emerging businesses.

At the same time, free rein has proven ineffective for a digital ecosystem that seeks to deliver European growth and innovation. Ultimately, absent rules, the largest players—more often than not the US “Big Five”—tend to take the most advantage of the regulatory vacuum, while the harm resulting from free-rein behavior has a substantial impact on smaller business actors.

Thus, careful regulation is necessary both to prevent harm to consumers and businesses and to create a business ecosystem in which the largest companies cannot dictate the unwritten policy playing field in their favor at the expense of growth. Values-based standards can define the digital ecosystem the EU needs to foster digital growth and innovation. It goes without saying that the EU must increase investment on the one hand and develop more efficient business rules on the other to support start-ups and SMEs in the European digital ecosystem.

Designing the Tech Ecosystem

Values-based standards for the tech ecosystem should safeguard European ideals and limit harm to those ideals. These include privacy, independence and autonomy, fairness, democracy, preventing consumer and business harm, and fostering innovation based on these principles.

To design an effective tech ecosystem, the EU should use potential for harm as well as the magnitude of harm as determinants in each of its digital policies. Policies should be based on and scaled in line with the amount of harm a business’ violation of EU principles, and soon to be law, may cause. This would ensure companies whose business potential for causing harm is near negligible and that cannot fulfill certain costly requirements are excluded from legislation that specifically aims to mitigate harm.

For instance, similar to the approach applied in the draft Digital Services Act (DSA), which outlines different categories of content platforms—although still defined too broadly as it impacts many SMEs and start-ups—the EU should consider an approach that creates tiers for the applicability of digital regulation, based on the magnitude of potential harm. Such an approach would safeguard the EU values most under threat by the players that have the potential to cause the most harm, without exorbitant relative costs to start-ups and SMEs.

Germany’s Policy Groundwork

Over the course of the past five years, Germany has—after some initial hesitation—acted boldly to create a framework for preventing specific harms in the digital ecosystem. One of Germany’s focal points was defining the parameters for allowable content online and processes for removing it. The other focus, which took longer to hone, was on limiting digital gatekeeper powers, ex-ante, in order to prevent the systematic violation of competition principles—not yet codified for the digital age.

The Network Enforcement Act (NetzDG), Germany’s content law and the first and strictest worldwide, was passed in 2017; enforcement began in 2018. The law requires social media companies that have over 1 million Germany-based users to remove content they deem illegal within 24 hours. A recent law amending the NetzDG requires these social media companies to automatically share serious criminal content with the German Federal Criminal Police.

The NetzDG came in for staunch criticism prior to and following its passage from opposition policymakers, Internet activists, and above all the businesses forced to implement it. However, today, the NetzDG is recognized, even by former critics, as the right approach to mitigating harm online. It is unlikely, despite renewed criticism from businesses and liberty activists, that German policymakers will pursue another, less stringent approach to limiting harmful and illegal content online. Germany’s confidence—despite continued legal challenges—in designing and implementing the NetzDG laid the groundwork for the EU-level online content rules now prescribed in the European Commission’s Digital Services Act draft law.

The NetzDG’s scope, which focuses squarely on companies with a large usership (1 million) and the virality model that has the potential to cause greater harm (in targeting social media), is precisely the approach the EU should take when designing a values-based, pro-growth tech ecosystem.

Similar to its forward-thinking approach to the NetzDG, Germany passed the 10th Amendment to the Act Against Restraints of Competition (GWB Novelle) in January of this year. It includes a new competition principle (§19a) that allows for the preemptive identification of digital companies that are of paramount significance for competition across markets, before their behavior may be actively addressed through a combined white and blacklist of business practices.

Although the two-step process of §19a has not yet been fully implemented by the German Federal Cartel Office, the GWB Novelle is seen by many as the approach that should be followed when it comes to the European Commission’s draft Digital Markets Act, as this draft combines ex-ante regulation and new competition oversight. Here too, Germany designed a piece of legislation that targets the level of harm created in the digital business ecosystem, precisely to allow for increased growth among start-ups and SMEs, which are often dependent on large online platforms to enter the digital business ecosystem. The law received broad support from German policymakers and relentless opposition from digital businesses. Germany forged ahead anyway.

Wanted: European Confidence

This summer China, the United States, and South Korea all prescribed or proposed draft legislation to curtail the power of large online platforms (South Korea’s parliament approved theirs on August 31). Evidently, some dominant online platforms’ behavior is negatively affecting consumers in addition to other market actors; knowing this, countries see a need to act, even if their laws affect “their” companies.

At the same time, the EU, a leader in implementing values-based digital policy, is hesitating to implement growth-oriented versions of digital policies, including on AI and algorithms, data processing and sharing, content rules, and fair competition. The EU fears it will hamper growth, despite having every power to write growth-oriented legislation. It also fears being perceived as targeting American companies as it designs values-based digital policies. Note, in the process of drafting their regulations, the US and South Korea will not have questioned whether the rules they write may appear to disproportionately impact businesses headquartered on another continent.

As powerful companies seek to influence policymakers their argumentation has tended to gnaw at the EU’s confidence, doubling down on EU fears. Their red herring calls: The harmful impact of regulation on start-ups and small companies, security ramifications, and the appearance of targeting very large (often US) tech companies.

The EU would be remiss to give in to this argumentation. Instead, the EU should forge ahead with the same confidence the US and its companies harness while expanding their technologies and growing their companies worldwide, because the policies that are on the docket, are a vital component of EU growth.

Constance Chucholowski is Senior Director at 365 Sherpas, a corporate advice and public affairs consultancy in Berlin. She is writing in a personal capacity.