The Future of European Competitiveness

> Europe largely missed out on the digital revolution led by the internet and the productivity gains it brought: in fact, the productivity gap between the EU and the US is largely explained by the tech sector. The EU is weak in the emerging technologies that will drive future growth. Only four of the world’s top 50 tech companies are European.

> Europe is stuck in a static industrial structure with few new companies rising up to disrupt existing industries or develop new growth engines. In fact, there is no EU company with a market capitalisation over EUR 100 billion that has been set up from scratch in the last fifty years, while all six US companies with a valuation above EUR 1 trillion have been created in this period.

> The problem is not that Europe lacks ideas or ambition. We have many talented researchers and entrepreneurs filing patents. But innovation is blocked at the next stage: we are failing to translate innovation into commercialisation, and innovative companies that want to scale up in Europe are hindered at every stage by inconsistent and restrictive regulations.

> For example, we claim to favour innovation, but we continue to add regulatory burdens onto European companies, which are especially costly for SMEs and self-defeating for those in the digital sectors. More than half of SMEs in Europe flag regulatory obstacles and the administrative burden as their greatest challenge.

Worth a read. Probably not what the self patting EU clowns were expecting. The disconnect between the introduction and the actual report is especially hilarious.

I suspect it is actually a great strength of Europe that the attitude towards regulation (to put it perhaps overly simplistically, favoring more intangible rights over economic growth) precludes hype and bubble phenomena like the mentioned "creation of large, integrated data sets" or "young, innovative tech companies". This means that business, at least to some extent, is forced to address real-world issues and work at a more local level. What is seen as "innovative" in the US is typically merely rent-seeking or parasitic on the broader society, and it seems likely that slower, more measured growth is consistent with better outcomes overall.

It is also curious to me that the US and China are seen as examples of what to aim for, rather than as cautionary tales of what can happen with an excessive focus on growth. It is not clear to me that the general happiness of people in the US or China exceeds that of people in Europe. On the contrary, it seems that those two countries are almost constantly dealing with some horrible externality of unbridled focus on stock prices, revenues, growth etc, to the detriment of the broader social good. Housing crises, homelessness, rampant privacy violations, the expansion of police states to maintain the boundary between haves and have-nots, debt crises, long working hours and bad conditions — these are all phenomena that seem more prevalent in countries with a higher focus on "competitiveness". What good does it do a middle-class worker to make twice the absolute salary when they are spending half of it correcting for the deficiencies of their society?

As an American, what I've seen, and what the statistics appear to show, is mostly stagnation for the majority of the population. Any modest post-pandemic wage gains have been offset by consumer product inflation. What we experience in the United States is the continuation of a trend going back 40-50 years: disparity of wealth, concentrating at the top. Of course those at the top have experienced spectacular growth in compensation and wealth, but it hasn't really trickled down much. Everyone else is experiencing outrageous costs of housing, education, and medical care that undermine what should be a comfortable, secure middle class existence (and retirement!), given the total wealth of the nation.

This may be the wrong crowd for such a message, though.

Europe's most fundamental problem appears to be the energy supply, which is dominated by fossil fuel imports - Russian gas and oil, Middle Eastern & North African gas and oil, and US LNG tanker gas. This puts Europe in a bind, as the document notes:

> "Even though energy prices have fallen considerably from their peaks, EU companies still face electricity prices that are 2-3 times those in the US. Natural gas prices paid are 4-5 times higher. This price gap is primarily driven by Europe’s lack of natural resources, but also by fundamental issues with our common energy market. Market rules prevent industries and households from capturing the full benefits of clean energy in their bills. High taxes and rents captured by financial traders raise energy costs for our economy."

These costs percolate through the rest of the European economy, affecting everything from data centers to manufacturing plants to household budgets and consumer spending. The only real long-term fix will be to construct an energy system not reliant on imports from the rest of the world, and while some progress is being made, it'll take decades of focused effort (with China in the lead) to get off fossil fuels entirely, with the established and politicially influential fossil fuel investor class fighting it every step of the way, as has been the case in the United States ever since the late 1970s.

We make B2B software that we sell in several EU countries, which interfaces with official systems.

Even though all countries are subject to the same EU rules, and follow the same underlying technical model, each country has its own laws and regulations, and separate implementations.

So even though our software does "the same thing" in each country, it's so different that a lot of code is per-country, over 50%.

So it's several times the job of doing it once.

However, that's the easy bit, it just takes more development time. The hard part is getting access to systems, coordinate testing and all those things which require national agencies to answer. And if they have to get an answer from some EU instance, well, it's usually blind luck if we get a response.

Just as an example, it took us over a year to get test access to a new system, because access was given centrally in EU, even though the endpoint was hosted nationally. And that was for the country where we managed to get access...

I get that US state laws differ, but from my understanding it's not nearly as different as it is between member countries in the EU.

And we're just doing B2B, which I assume is easy mode.

I just don't see how we can compete when at best you can access a fraction of the users without a nightmare of red tape and whatnot.

Here is an example(ragebait) rule from where I am in EU. Regulation dictates that, as an employee(FT contract), if I make something on my free time even, my employer can legally claim it as their IP/property.

While there are not many examples of employers doing it, but you will notice a pattern that many tiny innovations are born when people are unemployed or self-employed ;)

Apparently, Draghi asked Pieter Levels (@levelsio on Twitter) for some input: https://x.com/levelsio/status/1833126426142179653, pretty cool.

I'm reading the document a bit different. It is not so much about lack of competitiveness as it is about centralizing policy making and power in the EU organization, aka "all problems can be solved by giving EU institutions dictorial power over everything".

E.g. making sure all military purchases are done centrally (aka EU army).

All the text about GDP, R&D and AI is just window dressing for this goal.

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The summary on page 2 give the reasons: 1) Lack of focus (regulatory burdens + single market not implemented fully), 2) (military) spending power not made centrally, 3) policies are too cordinated and should be set top-down instead for quicker decisions.

The details on page 11 argue: 1) energy prices too high (doesn't specify why this is important in high-tech production and if this is a problem for all the datacenters in EU, just states it as a fact) 2) "pipeline from innovation to commercialisation" doesn't work 3) reduce supply line dependency from countries outside EU.

Page 12 says it almost directly: "To move forward, Europe must act as a Union in a way it never has before". I.e. EU should no longer be a union of countries but be more like union of states, likely even less power than the states in the US.

Page 21 (and 27-30) talks about AI as a silver bullet that will magically improve car production etc.

While it talks about reducing regulatory burden, it completely overlooks how difficult it is to find out what laws applies to a given area. Lack of transparency is a huge overhead.

It also thinks that patents and revenue sharing with researches will increase innovation while completely ignoring how research is hampered by "publish or perish".

It should talk about how to get Germany to invest in better internet connections for homes and how to modernize hospitals etc so the no longer use FAX machines.

It feels like America innovates and the EU regulates.

Personally I’d like to see each do more of the other. But would that hamper the thing they’re doing better at? If America regulates more will there necessarily be less innovation?

For example, there are a number of bills in the CA legislature aimed at regulating the gen ai. I know that if CA makes these things illegal, they’ll just move to jurisdiction where it’s not.

For those who want a quick reference to options we have in Europe for tech solutions:

https://european-alternatives.eu/alternatives-to

edit: updated url to be more relevant/specific.

This is an astonishing document in the sense that you rarely see frankness like this coming out of the EC. It raises strong criticisms of a number of high-profile "core" regulatory initiatives, including the GDPR, DSA, and EU AI Act. There clearly is a fight building between the Thierry Breton camp and the Mario Draghi camp.

For a taste of what is in here, see e.g., page 26 of the first document:

>Regulatory barriers constrain growth in several ways. First, complex and costly procedures across fragmented national systems discourage inventors from

filing Intellectual Property Rights (IPRs), hindering young companies from leveraging the Single Market. Second, the EU’s regulatory stance towards tech companies hampers innovation: the EU now has around 100 tech-focused

lawsxi and over 270 regulators active in digital networks across all Member States. Many EU laws take a precautionary approach, dictating specific business practices ex ante to avert potential risks ex post. For example, the AI

Act imposes additional regulatory requirements on general purpose AI models that exceed a pre-defined threshold of computational power – a threshold which some state-of-the-art models already exceed. Third, digital companies are deterred from doing business across the EU via subsidiaries, as they face heterogeneous requirements, a proliferation of regulatory agencies and “gold plating” of EU legislation by national authorities. Fourth, limitations on data storing and processing create high compliance costs and hinder the creation of large, integrated data sets for training AI models. This fragmentation puts EU companies at a disadvantage relative to the US, which relies on the private sector to build vast data sets, and China, which can leverage its central institutions for data aggregation. This problem is compounded by EU competition enforcement possibly inhibiting intra-industry cooperation. Finally, multiple different national rules in public procurement generate high ongoing costs for cloud providers. The net effect of this burden of regulation is that only larger companies – which are often non-EU based – have the financial capacity and incentive to bear the costs of complying. Young innovative tech companies may choose not to operate in the EU at all.

Canada also suffers from lack of competitiveness, productivity, etc and I always wonder if we actually have the political constituency for a pro-growth agenda. I don't think we do it seems the group that would vocally back this is likely <10% of the population and probably low-engagement/apolitical. Europeans seem to give off the same vibe, if not more so.

For example the governing Liberals have been pretty bad on the economic file and will most certainly lose the election next year, but the alternatives are: 1) A Russian-propaganda fuelled Conservative party led by an obsessive culture warrior who's never known life outside politics (a 45 year old who has been an MP for 20 years) 2) a leftist party that thinks more regulation and taxes is what we need.

The "Abundance Agenda" types just don't fit in anywhere, except perhaps as a small faction of the Liberals.

> The EU is entering the first period in its recent history in which growth will not be supported by rising populations....We will have to lean more on productivity to drive growth.

Hasn't the second part always been the case? Is there any advantage to boosting raw GDP without also increasing GDP per capita?

As for the difference in tech, especially software, I think the US has a black hole effect going on. A massive concentration of risk capital in one place that has snowballed into an enormous powerhouse. A gravitational force in particular for software companies that want to make it big.

For Europe to replicate that is as difficult/impossible as it is for the US to undo the gravitational pull of Asian manufacturing.

As for regulation, tech is grossly under-regulated in many ways. Europe is not wrong to try and regulate it, but it is true that if the US and China don't, you get left behind.

And then we can connect the dots: capital concentrates and does so in places with the fewest hurdles.

Patrick Collison posted a summary of the results on Twitter in case you don't want to read the whole report: https://x.com/patrickc/status/1833127988512305352

TL;DR: "Mario Draghi's new report on EU competitiveness doesn't mince words."

Competition is for losers, and (some?) American leaders got it in mind for a long time https://www.wsj.com/articles/peter-thiel-competition-is-for-... but we don't need to stop faking like the rules of the game are useful and fruitful in the American way.

As Europeans, we don't need Europe to compete or even out-compete other actors. We need strong will and operational effectiveness to foster social, economical, technological and ecological progresses all together.

> Europe has abruptly lost its most important supplier of energy, Russia

That's a very short and simplistic way to put it. We didn't lose Russia as a supplier. We chose to largely cut our economic ties with a nation that commits war crimes on a massive scale and that threatens the security of Ukraine and other European nations.

> To digitalise and decarbonise the economy and increase our defence capacity, [..]

> If Europe cannot become more productive, we will be forced to choose. We will not be able to become, at once, a leader in new technologies, a beacon of climate responsibility and an independent player on the world stage. We will not be able to finance our social model. We will have to scale back some, if not all, of our ambitions.

At some point you need to make sacrifices, you can't have everything. The very nature of politics is to trade-off ideals. The EU has been far too used to getting its own way on everything.

The joke is that the decarbonisation never really happened, it ended up being a "anywhere but here" policy. So all of the manufacturing prowess is lost, technology is greatly dependant on dictators wanting to destroy Europe and security sacrificed as a result. The irony is, the most energy efficient manufacturing method is not to ship materials multiple times around the planet, it's to create and manufacture close to home. Supermarkets know this best.

> The problem is not that Europe lacks ideas or ambition. We have many talented researchers and entrepreneurs filing patents. But innovation is blocked at the next stage: we are failing to translate innovation into commercialisation, and innovative companies that want to scale up in Europe are hindered at every stage by inconsistent and restrictive regulations.

It is made as difficult as possible for companies to be innovative in Europe. Speaking on behalf of a UK company that wanted to trade with Europe, they made it so difficult we gave up. Now we trade in other markets and there is far less restrictions.

> As a result, many European entrepreneurs prefer to seek financing from US venture capitalists and scale up in the US market. Between 2008 and 2021, close to 30% of the “unicorns” founded in Europe – startups that went on the be valued over USD 1 billion – relocated their headquarters abroad, with the vast majority moving to the US.

In exactly this situation now. US venture capital is offering double with less strings.

The rest of this is definitely a read for tonight. The problem is that in order to fix all of this they should have started 10 years ago.

tl;dr The United States and the European Union isn't even remotely comparable.

Private investment in the European Union is just a fraction of what's seen in the United States. Investment across country borders, especially in Software, is practically non-existent.

Businesses in Europe often prefer to work with local companies within their own country, so the "common market" doesn’t operate as seamlessly as it does in the US. You can't scale to as many users as you could in the US.

Hiring across country borders is still pretty rare, except when companies set up subsidiaries to tap into cheaper labor markets. Oh, and each country has it's own complicated labor code. Complicating matters further, some countries have insane job-protection law (i.e. France) making it less attractive to hire there to begin with. Contrast this with the United States where a company operating out of California can easily (or more easily) hire in Minneapolis or any other US state.

Regulations in the United States can also be quite a headache. The main difference is that in the EU, you’re dealing with multiple legislative environments, which adds another layer of complexity. It's not that the regulations themselves are so terrible, but the variety across countries makes it more complicated.

Taxes are significantly higher in the EU. For example, in Lithuania, 39.5% is deducted from your salary—this includes 20% income tax, 6.98% for mandatory health insurance, and 12.52% for social insurance and pensions. On top of that, there's a 21% value-added tax (VAT) on all purchases. So, if you earn €5,000 per month, you end up with just €2,390 to spend.

Utilities are also more expensive than in the United States. In Lithuania, I pay €0.25 per kWh for electricity. Gasoline costs €1.4 per liter, which is roughly $5.67 per gallon. For businesses, it is even worse; Lithuania is considered to be one of the cheaper countries.

Software-based products mainly took off in the United States, creating a large talent pool and a high level of maturity in the field. In contrast, in many EU countries, people either concentrated on industrial applications or only began focusing on software engineering in the past 20 years.