Europe Regulates Its Way to Last Place

From mergers to AI, the EU’s aggressive rule-making hampers its ability to compete with China and the U.S.

By Greg Ip. Excerpts:

"For example, to preserve competition, European regulators have resisted mergers that leave just a handful of mobile phone carriers per market. As a result Europe now has 43 groups running 102 mobile operators serving a population of 474 million, while the U.S. has three major networks serving a population of 335 million, according to telecommunications consultant John Strand. China and India are even more concentrated.

European mobile customers as a result pay only about a third of what Americans do. But that’s why European carriers invest only half as much per customer and their networks are commensurately worse, Strand said: “Getting a 5G signal in Germany is like finding a Biden supporter at a Trump rally.” Putting European networks on a par with the U.S. would cost about $300 billion, he estimated.

This has knock-on effects on Europe’s tech sector. Swedish telecommunications equipment manufacturer Ericsson’s sales in Europe suffer in part because many carriers are too small and unprofitable to update to the latest 5G networks. “Europe has prioritized shorter-term low consumer prices at the expense of quality infrastructure,” chief executive Börje Ekholm told me in Davos earlier this month. “I’m very concerned about Europe. We need to invest much more in infrastructure, in being digital.”"

"U.S. regulators aren’t exactly hands-off. Still, they tend to act on evidence of harm, whereas Europe’s will act on the mere possibility. This precautionary principle can throttle innovation in its cradle.  

Starting in 2018, Europe’s General Data Protection Regulation, or GDPR, imposed strict requirements on websites’ collection and use of personal data with fines of up to 4% of global sales. A study by University of Maryland economist Ginger Jin and two co-authors found this depressed European venture-capital investment relative to the U.S. over the next two years. Investors might have shunned business models that weren’t in compliance with, or less valuable because of, GDPR, they said."

"Since 2021, AI-related venture-capital deals have raised $44 billion in Europe, roughly equal to China but just a quarter of the U.S."

"European startups rarely become giants, and even established companies are smaller than their U.S. counterparts. 

“I don’t think that the lack of winners in recent decades can be attributed to a single monocausal factor,” one European-born founder of a U.S. tech company told me. But Europe’s regulatory culture, including prosaic tax and labor laws, is near the top, he said. “Simply granting stock options, for example, is pretty difficult in most European countries. It’s famously difficult to part ways with hires that turn out to be misfits.”"

"Europe’s internal market is larger than China’s and almost as big as the U.S.’s. But when it compared companies with more than $1 billion in revenue, the U.S. firms spent 80% more on research and development, boasted 30% higher return on capital, and 1.3-percentage points faster revenue growth."

"As German economy minister Robert Habeck observed last fall: “If Europe has the best regulation but no European companies, we haven’t won much.”"