The Brussels Defect
Europe prides itself on being a ‘regulatory superpower’. But as its economy declines, its eagerness to regulate may do more harm than good.
It’s not uncommon for grand theories of political science to crumble when the winds change. The End of History, liberal interventionism, Wandel durch Handel: These theories were not only wrong, but the world has moved opposite to their predictions, as if spiting the authors for their hubris.
These ideas did, at least, remain credible for several decades. But as the world spins ever faster, newer models risk being discredited even before their proponents have retired to the after-dinner circuit.
For those so inclined, there’s fun to be had in spotting which of this era’s ideas, which carried a sense of inevitability just a few short years ago, are on the way out. Wokeness is an obvious candidate and by some estimates has already peaked. Decarbonisation is also in doubt as its costs become apparent, even though the climate continues to deteriorate.
The Brussels Effect, which holds that the EU sets global standards by regulating first and best, should soon be added to this list. In defence of Anu Bradford, whose book gave its name to the theory, it was true when she wrote it in the misty depths of 2019. Most of us, myself included, failed to see how dramatically the world would change in the five years that followed.
Back in 2019, the world was largely peaceful and global trade was mostly harmonious. The EU had just imposed humiliating terms on a departing Britain, and its antitrust and privacy regulators were humbling American tech companies. Europe’s economy was beginning to lag behind America’s, but many predicted an American crash would restore the balance. Europe was in its pomp.
Since then America’s economy has powered ahead, driven by its mighty tech sector, and is now half as big again as the EU’s. China has continued to grow, as have a host of Asian and African economies, meaning that the EU accounts for a smaller share of the global market with each passing year.
Moreover, Europe is not well equipped to handle a fraying global order. Its militaries are fragmented and combat-ineffective, weaking European diplomacy. The EU controls trade policy but has a very small budget relative to its member states, meaning it can’t coordinate its industrial policy as effectively as the US or China.
Right to regulate
Compared to five years ago, the EU is now a smaller part of a more confrontational world. It missed out on the last wave of innovation that produced American and Chinese tech giants, and has made a slow start in AI. That will eventually undermine the only advantage it has left: its regulatory heft.
The central argument of the Brussels Effect is that it’s cheaper for companies to build a single product or business model for the whole world than to have separate editions for each market. Therefore, a big market that regulates faster or more comprehensively than others will see its standards become the global default.
For many years, the EU won this contest. Cars built for the global market meet European safety and efficiency standards. Consumer electronics around the world take a USB-C cable, after Europe decided that the cost and convenience benefits outweighed the harm to innovation. The GDPR, Europe’s ambitious but flawed privacy regulation, spawned copycats around the world.
Even a fading power can impose its will, from time to time. But for how much longer? Complying with European regulations is a burden for companies, and as Europe becomes less important in the world, more may simply choose to forgo its market rather than comply with them.
This is starting to happen in the tech sector, where Europe’s innovation-to-regulation deficit is highest. Apple said in June that it would hold back its latest AI tool, alongside two other features, from the European market due to “the regulatory uncertainties brought about by the Digital Markets Act”.
Last week, Meta made a similar announcement, indefinitely delaying the arrival of its flagship Meta AI product. It had previously held back the European launch of Threads, its rival to Twitter, for five months as it grappled with EU regulation.
Innovation deficit
The risk to EU leaders should be clear. If the regulatory burden they impose continues to grow, while their market continues to shrink relative to others, at some point a US tech company will decide simply not to offer a major product to Europe. In the absence of decent homegrown alternatives, consumers would miss out and likely turn their anger on the EU institutions.
What few people in Brussels can admit is that most European citizens would, if pushed, choose American apps over European governance. Most people don’t even turn their phone’s location tracking off. Are we seriously to believe that they would tolerate missing out on the next big tech trend because the EU decided it wasn’t compliant?
The regulatory burden doesn’t even contribute to industrial policy: European companies are not innately more capable of complying with regulations than American ones are. If anything, regulations harm European innovation by smothering start-ups in paperwork before they have the scale to hire the necessary compliance teams.
In other words, regulation is purely a way to impose European values on companies operating in our borders, and sometimes beyond them. That’s a fine thing to do, if you’re powerful enough. You might even say it’s the main reason to become powerful.
But Europe’s power is fading, and with it the ability to regulate credibly. If the EU wants to keep dictating how industry should operate, its first priority should be growing the economy and fostering innovation on the continent. If it fails to do that, its consumers will use AI and other new technologies in the manner decided by American companies – or not at all.
The image illustrating this article is AI-generated. (This is obvious, but might not always be. So I’m starting off with good habits).