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It’s Time for Pro-Innovation, Atlanticist European Leadership

It’s Time for Pro-Innovation, Atlanticist European Leadership

The European Union (EU) is at a strategic crossroads when it comes to techno-economic policy. As the new Commission and Parliament take office, they must choose between fidelity to the transatlantic alliance or “strategic independence,” as well as between maintaining regulatory hostility toward large tech companies and unleashing innovation in Europe. For its own benefit and the good of the free world, the EU should privilege the scale and market-based policies needed for innovation to flourish, as well as double down on the transatlantic alliance that is essential for the West to avoid losing to China in the 21st century.

The EU has consistently gone down the path of heavy-handed competition policy and regulations in recent decades. The latest iteration of this trend is the Digital Markets Act (DMA), which imposes excessive limitations and costs primarily on large U.S. technology firms. DMA proponents suggest it is necessary to police anticompetitive abuses and protect Europe’s smaller digital firms. However, in the face of Europe’s continuing productivity crisis, some political leaders appear to be taking a different view. For example, in his landmark April 26 speech at the Sorbonne, French President Emmanuel Macron expressly stated that Europe should “take responsibility for the evolution of our competition policy,” which he described as the “ordo-liberal model of competition,” and called for softer competition rules to support EU growth and create European techno-industrial champions.

Regulations like the DMA implicate not only key issues concerning how Europe will foster the innovation it needs to drive long-run productivity growth, but also core questions about Europe’s position as a leading global power. Since World War II, U.S.-EU relations generally have been defined by a philosophy of Atlanticism—close transatlantic relations built upon, among other things, a common heritage of Western and liberal democratic values. However, the DMA’s targeting of large U.S. technology companies has already begun to place strains on the U.S.-EU relationship, which follows longstanding calls from European leaders like President Marcon for greater strategic independencefrom the United States in the face of a rising China, perceived American decline, and concerns about the waning of the rules-based international order.

As such, Europe has four paths it can take as it charts its course in the 21st century. Think of them in a four-square matrix with different combinations of either Atlanticism or strategically independent “third-poleism” on one axis, and either ordoliberal competition policy or an innovation-driven national-champion policy on the other axis. (Figure 1.)

Figure 1: Four paths for techno-economic competition policy in Europe

The first path—ordoliberalism and Atlanticism, shown in the top-left quadrant—stays with the status quo: On the competition policy front, Europe will continue imposing antitrust rules aimed at protecting small firms and, as European Commission President Ursula von Der Leyen (2019–2024) has made clear, view regulations like the DMA as setting a global standard “for ensuring fairness with clear responsibilities for big tech.” At the same time, the Commission can double down on Atlanticism, which has only been reaffirmed by the strong transatlantic coordination in response to Russia’s invasion of Ukraine, and was reflected late last year in a joint U.S.-EU statement endorsing the “commitment to a transatlantic partnership that delivers for all our people” and expressing a desire for “deepening our cooperation to reflect the pressing challenges and opportunities of our time.”

A second approach—Europe as a “third pole” with its own national champions, in the bottom-right quadrant of the figure—would follow the lead of French President Macron and look to relax European competition policy and regulations to unleash European techno-economic power, but also view the United States, like China, as first and foremost a competitor before a partner. As President Macron explained in his speech at the Sorbonne: “We need to adopt different rules for industrial policy and competition policy… Who has seen the U.S. Department of Defense or the U.S. Department of Energy finance an emerging European player? I have seen many American start-ups, supposedly the result of spontaneous entrepreneurial genius, massively subsidized by American Institutional policy. We should do the same. We are in competition.” In other words, rather than Atlanticism, Europe would see itself as unaligned in the context of the broader U.S.-China rivalry.

A third paradigm—the bottom-left quadrant in the matrix—would continue with the status quo regarding European competition policy and hostility to large firms, especially American ones, but similarly seek more strategic independence from the United States in favor of a more neutral posture toward the U.S.-China rivalry. This might be preferred by segments on the European center-left and the Party of European Socialists, who not only view the DMA as “an important piece of legislation that aims to increase competition and fairness in the digital marketplace by regulating large technology companies” but argue that there may be a need for “new policies and regulations” to create “a more equitably digital landscape for all.” Additionally, some important leaders in this party like German Prime Minister Olaf Scholz last year called for “reactivating” the EU-China Comprehensive Agreement on Investment, which would constitute a fundamental challenge to an Atlanticist geoeconomic model.

A final option—the top-right quadrant—would combine both pro-innovation EU competition and industrial policies with a prioritization of Atlanticism and the U.S.-EU partnership. As former Prime Minister of Italy and former EU Central Bank President Mario Draghi recently explained in a speech accepting the Carlos V European Award, a more economic and less ordoliberal approach to competition policy is preferable to drive European innovation and dynamism: “Competition policy needs to facilitate scale by weighting innovation and resiliency criteria in tune with the evolving market and geopolitical contexts” while condemning behavior that “raises consumer prices and lowers the quality of service.” At the same time, as recognized by the Atlantic Council, both Draghi as well as Italian Prime Minister Giorgia Meloni have been respectively characterized as “Atlanticists” and “clearly demonstrat[ing] a pragmatic and unambiguous values-based commitment to the transatlantic relationship.”

Of these four choices, Europe should embrace the latter: large, innovative firms and Atlanticism. This requires abandoning the ordoliberal theory of competition that contributed to its failure to produce any leading digital firms of its own by stifling the Schumpeterian and scale-driven innovation competition that characterized so much of the success of Silicon Valley. Indeed, in the words of Draghi in that same speech, “if we were to exclude the tech sector, EU productivity growth over the past twenty years would be at a par with that of the U.S.,” and “that gap could widen further with the rapid development and diffusion of artificial intelligence.” It should also entail scaling back enforcement of problematic regimes like the DMA which are targeting America’s leading technology firms.

Moreover, concerning the need for Atlanticism, it has never been more paramount in view of the challenge posed to the West by China. As ITIF President Rob Atkinson has warned:

“even if the EU and U.S. develop a broad-based consensus on the real nature of the China challenge, domestic action along will not be enough. We need to join forces. And that has to start with real transatlantic cooperation…. At a lunch in Beijing with a high-level Chinese government official I asked how the Chinese government would handle increased resistance to Chinese unfair economic and trade policies. The official said they were not worried about individual countries or even the G20. What really worried them is the G2: a strong alliance between the EU and U.S. It was the threat of the G2 ‘ganging up’ on China that kept him awake at night.”

At bottom, with the new Commission taking shape, Europe finds itself with fundamental decisions to make. Facing a stagnant economy, a productivity crisis, and China’s relentless pursuit of techno-economic dominance, the choices made today will determine the future of both Europe and the West more broadly. Now is not the time for the EU to either continue the competition policy status quo or embrace a “third pole” worldview that sees China and the United States as equal challenges to Europe. This is Europe’s moment to prioritize policies that unleash innovation and recommit to the transatlantic partnership that is essential for Western leadership in the 21st century.

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