14 May 2015

The EU’s digital protectionism will cost Europe dear


What’s not to like about a digital single market in Europe? British shoppers would benefit from a wider choice of better-value products from online retailers across the European Union’s 28 member states. Start-ups in Tech City would immediately have access to a bigger market of 500 million Europeans. Fiercer competition would spur internet companies across Europe to up their game. Thanks to those economies of scale and increased innovation, Europe might even finally develop a technology hub as successful as Silicon Valley and an internet giant as all-conquering as Google or Facebook.

Unfortunately, the Digital Single Market (DSM) strategy announced by the European Commission on 6 May will scarcely achieve any of that. Much of it is a mishmash of minor proposals that may do some good, such as reducing the administrative burden on businesses from complying with different national VAT rules. But alongside those small liberalising steps is a big protectionist stick.

The Commission is launching a “comprehensive investigation” into the role of internet platforms, such as search engines, online marketplaces, social networks, app stores and services in the sharing economy. Almost all of these happen to be American: think Google, Amazon, Facebook, Apple and Uber. And while an open-minded inquiry might highlight legitimate concerns that ought to be addressed in a fair and impartial way, that does not seem to be the Commission’s intent. As the EU’s digital commissioner, Günther Oettinger, put it at the launch of the DSM strategy, the EU needs to regain its “digital independence”. Really?

Whereas his predecessor, Neelie Kroes, was a Dutch liberal who championed the potential of disruptive new technologies to shake up cosy cartels, benefit consumers and boost economic growth, Oettinger is a German corporatist who unabashedly advances German business interests. Worse, he does not fight for the German digital start-ups stunted by domestic red tape, underinvestment and a risk-averse culture, but rather for the dinosaurs from the analogue age who feel threatened by American competition and are looking to Brussels for protection.

Traditional media companies, such as the Axel Springer group, resent their reliance on Google to drive traffic to their sites and its ability to sell advertising based on snippets of their content. Part-state-owned Deutsche Telekom hates that its customers use its network to make calls on Skype, send messages on WhatsApp and watch videos on Netflix and YouTube, without it earning additional revenues from those services. TUI, the world’s largest travel agency and tour operator, feels threatened by TripAdvisor. Retailers fear Amazon’s ever expanding empire. Germany was the first EU country to introduce a national ban on Uber, the ride-hailing app, at the behest of local taxi firms. Last but not least, Germany’s mighty industrial lobby frets that American tech companies could eat their manufacturing lunch. As Oettinger himself put it: “If we do not pay enough attention, we [sic] might invest in producing wonderful cars but those selling the new services for the car would be making the money.”

It is widely believed in Britain that the German government is a natural ally in pursuing a single market in services. But that isn’t true. Germany’s mercantilist establishment is all in favour of free trade in manufactures, where it has a comparative advantage, but not in services, where it is often a laggard.

Germany is an internet also-ran. There is no German equivalent of Google or Facebook. The most successful German entrepreneurs are in Silicon Valley. Outside Berlin, broadband internet speeds are often slow. And instead of upping its game to try to compete, Germany wants to hobble its American rivals.

Since Germany’s clout in Brussels has never been greater, the Commission’s agenda for the “digital single market” reflects that protectionist agenda. It is no accident that Oettinger got the digital portfolio.

The eurozone’s debt crisis has thrust Berlin, the creditor-in-chief, into the driving seat, at a time when Paris is distracted by domestic issues and London has one foot out of the door. The new European Commission that took office last November reflects that. Commission President Jean-Claude Juncker, a former prime minister of Luxembourg, owes his position to the European People’s Party (EPP), the centre-right political grouping dominated by German Chancellor Angela Merkel’s Christian Democratic Union (CDU), which in turns holds sway over the European Parliament. Juncker is also indebted to the Axel Springer group, the publisher of Bild, Germany’s best-selling tabloid newspaper, which strongly backed him last summer when Merkel was wavering. Juncker’s German chief of staff, Martin Selmayr, ensures his country’s concerns are heeded across the Commission.

Thus the comprehensive investigation of the role of online platforms that Brussels is due to launch before the end of the year is hardly an impartial inquiry. It comes at the behest of Germany’s economics minister (and Merkel’s Social Democratic deputy), Sigmar Gabriel, who believes that the EU needs to regain its “digital sovereignty”. As he argued in a letter to the Commission last November: “The European Union has an attractive single market and significant political means to structure it; the EU must bring these factors into play in order to assert itself against other parties involved at the global level.” Oettinger echoes those sentiments. He recently spoke of the need to “replace today’s web search engines, operating systems and social networks”. Pre-empting the results of the Commission’s investigation, a leaked position paper for Oettinger proposes a powerful new EU regulator to clamp down on these online platforms.

For sure, platforms often benefit from powerful network effects: the more people use Facebook, and the more it knows about them, the more others want to be on it, and the more it can charge for advertising. But the digital world is evolving so fast, with upstarts continually challenging previously dominant firms – Myspace once seemed invincible until Facebook displaced it – that what the EU really ought to be promoting is competition, enterprise, investment and impartial regulation that does not stifle innovation. The EU needs a genuine digital single market that benefits consumers and enables start-ups to flourish, not a backdoor industrial policy to favour Germany’s digital flops.

Philippe Legrain, who was economic adviser to the President of the European Commission from 2011 to 2014, is a visiting senior fellow at the London School of Economics’ European Institute and the author of European Spring: Why Our Economies and Politics Are in a Mess — and How to Put Them Right.