The EU is making itself an economic backwater

Regulation is not a real export

One of the most common challenges of good regulation is it’s surprisingly easy to screw it up. The list of regulatory interventions that either create some kind of horrible unintended effect or literally the exact opposite effect vs. your goal is quite long. The Law of Unintended Consequences, for literal centuries and in various formulations, generally is a reflection on social and economic policies that often wildly deviate from the goals of those who formulated them. It’s why libertarianism gains so much popularity periodically, going (in my opinion) frequently too far the other direction.

Now, as for the EU, it appears to be particularly adept at finding the most effective way of finding the right set of regulations to do the opposite of what they intend.

When Apple chose not to launch Apple Intelligence in the EU, I had considered covering this broad topic in my piece on Apple, but I figured it was complicated enough to deserve its own piece.

Now, between France’s probes/raids on NVIDIA (someone seems to agree with me that CUDA/software is really NVIDIA’s moat), the EU DMA fines/objections to Apple’s Core Technology Fee, and more discussion about all of this—most notably, Ben Thompson’s great piece on “The EU Goes Too Far” arguing that the EU is going from regulation to straight-up theft—I thought it’s the right time to talk about all of this.

The EU’s “Core Export”: Regulation

The idea that the EU can hang its hat on regulation has bounced around for many years. I think the core encapsulation was Anu Bradford’s book, “The Brussels Effect: How the European Union Rules the World” from 2020.

I’ll excerpt most of the description (my emphases) because it’s quite striking:

For many observers, the European Union is mired in a deep crisis. Between sluggish growth; political turmoil following a decade of austerity politics; Brexit; and the rise of Asian influence, the EU is seen as a declining power on the world stage. Columbia Law professor Anu Bradford argues the opposite in her important new book… By promulgating regulations that shape the international business environment, elevating standards worldwide, and leading to a notable Europeanization of many important aspects of global commerce, the EU has managed to shape policy in areas such as data privacy, consumer health and safety, environmental protection, antitrust, and online hate speech… The Brussels Effect shows how the EU has acquired such power… and why the EU's role as the world's regulator is likely to outlive its gradual economic decline, extending the EU's influence long into the future.

Talk about being damned by light praise. It’s a declining power that will keep declining… but it’ll be able to have some lasting legacy with its regulations when everything else is dust. Moreover, they don’t make anything, so their only real export is regulation.

It’s a bit of a parody, but not really that far off from the thesis of the author, and many others—who often talk about it with a triumphant, moralistic tone in terms of the EU’s “comparative advantage” in this area, and why they should become the world’s regulatory body.

On the other side, Ben Thompson identifies basically the same thing, though from the opposite perspective:

Here’s the problem with leading the world in regulation: you can only regulate what is built, and the E.U. doesn’t build anything pertinent to technology.

I’ve regularly criticized a lot of EU policy, but honestly, I feel like I’m much more positive, hopeful, and have more faith in the inherent creativity, intelligence, and capabilities of European people than the regulatory-export-triumphalism crowd. I don’t think Europe is doomed to be a continent of bureaucrats who don’t actually make anything, and just try to boss the rest of the world around and extract wealth from that. (Which, by the way, has an uncomfortable feel of colonialism to it…)

This is the same kind of fatalism that climate (and AI) doomerism seems to have. It’s too late to do anything about the circumstances we find ourselves in, so we do nothing about it.

The EU is not one entity

Many of the EU’s constant crises (Eurozone crisis post-2008, responding to Ukraine’s invasion, etc.) are fundamentally rooted in the fact that it is not a true fiscal and political union. The EU is a free trade zone with a single currency, with a complicated overlay of other regulations and a weird system of EU bureaucrats and regulators that are indirectly elected.

I think Ben Thompson’s piece is great and provocative, though I fundamentally disagree with two aspects of it:

1. He states that it is unlikely that existing companies (like Google or Apple) will pull out of the EU

2. He also asserts that EU regulation is basically theft/attempted state control of foreign (US) companies, and essentially has a somewhat moralistic argument about that

Beyond that, it’s vastly oversimplifying to say “EU” or even talk about “EU stagnation” in technology, productivity, and growth. The UK (not EU, but was), France, and Germany definitely have this problem. The “periphery” (Spain, Italy, Greece, etc.) have it.

Do the Nordic countries or the Netherlands have this issue? Absolutely not. Other than Novo Nordisk (which WeGovy/Ozempic have made into a global titan), these countries have a lot of continued innovation in technology—semiconductors, batteries, and beyond. They also have a history of partnering with the US on these kinds of technologies (and more broadly in policy), like with ASML.

Do Eastern European countries have this issue? Broadly speaking, no, especially not countries like Poland who are (… partly because of Russia) going full-steam ahead on growth, inviting US companies over, and trying to build up their technological and industrial bases.

That being said, keeping in mind that “EU” really is more about Brussels, France, Germany, and the like, let’s address those two points above.

Pulling out of the EU

The first assertion, even though the EU seems fond of regulatory fines on worldwide revenue, as Thompson acknowledges:

Meta has said that ten percent of its revenue comes from the E.U; for Apple it’s only 7 percent. In other words, the European Union is threatening to fine these U.S. tech giants more money than they make in the E.U. market in a year!

His argument (which is long) is around marginal cost of delivery of goods, etc. and he does say that new companies (or old companies with new products, i.e., Apple Intelligence) might not enter the EU, but the old ones won’t pull out. Companies are economic maximizers. The EU is certainly a market, and a large one, but not essential enough to jeopardize rest of world revenue.

Although Microsoft’s merge with Activision-Blizzard was finally approved by UK regulators (who, yes, I know are not EU, but still have a similar philosophy), I did some hypotheticals of what it would take for Microsoft to pull all of its products—Windows, Office, etc.—out of the UK. It wasn’t going to be over Activision-Blizzard or even Microsoft Gaming as a whole, given how anemic the entire thing is to Microsoft as a whole. However, for an individual country (or zone) to make regulation that binds a global company, the calculus will eventually lean towards pulling out if the blockage is over a big enough deal.

Who wins and who loses here?

Well, everyone loses. As said, not that their gaming division would have ever spurred Microsoft to pull out, but assume it did. Microsoft is not happy because now it doesn’t get UK income on its products. UK consumers should be very unhappy, now that they’re banned from the Office ecosystem.

Who wins? No one. But certainly Microsoft, if, for some reason, they pulled out for a big enough deal to justify it, wins a little, and the UK just does nothing but lose.

The EU is in the same circumstance, though has a higher barrier for pull-out given its larger size. However, that threshold can be reached—or, enough new products withheld that the companies might as well have pulled out.

One aspect that Thompson might not appreciate is that some EU policymakers see this as a good thing.

I’ve had conversations with various EU policymakers and policy centers. There is a line of thinking that by banning US companies, the EU can form its own domestic tech ecosystem.

This isn’t an entirely crazy idea. Industrial policy along this line has traditionally worked. The big Japanese electronics and auto companies did this. Korea did this to make Samsung and its own auto industry. Shielding domestic champions from international competition to subsidize them until they can compete in that international competition is a tried-and-true formula. I suggest the book Bad Samaritans: The Myth of Free Trade and Secret History of Capitalism by Ha-Joon Chang on the topic, which covers Korea’s journey in great detail.

China obviously did this to great effect… in basically most all of its currently dominant and growing industries, including in EVs.

However, the EU is not actually seeing much growth in this aspect, largely because the policies they enact are also imposing so much in costs to home-grown technology players that they never get off the ground. If it costs hundreds of millions of dollars to run, say, a social network that complies with the GDPR, no one except Meta, Alphabet, and the like can absorb that cost and have the scale to attempt it. Even if these regulations are mainly targeted at “large” companies, a growing company will eventually trigger it.

If growing domestic champions was the goal, the EU is blowing it in their actual implementation of policies. In reality, I don’t actually think it is. It’s more this moralistic triumphalism that, in my opinion, will eventually cause the EU to actually go too far and cause major companies to pull out—but also leave relatively little to replace them.

Regulation as Theft

Ben Thompson’s outrage as to state dictation of policy eventually being state control or theft just about jumps off the page. It’s “unfair.”

But, honestly, as discussed in my conversation with Jordan Schneider about China, fairness doesn’t come into play for nation-states and national policy interests.

China has successfully executed “theft” of many technologies in all sorts of industries. Outside the US, Germany is a frequent target (that never seems to learn), with coercive joint-development agreements or joint-ventures that effectively hand technology over to domestic Chinese companies. Tesla effectively helped build up China’s EV infrastructure, which is now helping China’s EV companies beat Tesla.

But that’s just an example of a successful national strategy. All is fair in love and war (on a national scale).

As such, perhaps this isn’t a disagreement on the regulation being theft, more that there isn’t a moral reason for the EU not to enact the theft.

I would say the EU’s problem is not that they’re stealing, it’s that they’re not succeeding at it.

Even Ben Thompson (who I disagreed with on other big tech pulling out) actually thinks NVIDIA might pull out.

I don’t, for the record, think that either Meta or Apple or any of the other big tech companies — with the exception of Nvidia above — are going to leave Europe.

If that happens, Mistral either dies or becomes not-a-French-company, France will scream, and they won’t be able to do much about it. Well, they might complain to the EU, who might decide to use the same vague regulatory authority they’ve been using now to try to compel NVIDIA to come back, and might even up forcing NVIDIA out entirely. That seems like an unlikely outcome to me, but, again, not impossible.

In any case, this comes down to the actual goal of the regulation being the misguided moralistic view that the EU is good at regulation, despite all evidence to the contrary. That’s why it might drive a lot of tech and innovation from its borders, and why (if its goal is state control or theft) it’s so very terrible at stealing.

Again, the EU is not a single entity

I don’t think the future of Europe is a dark, depressing place where no tech companies exist, and it slowly stagnates into nothingness, with nothing left except crappy legislation.

I have a lot of faith in the European people, even if I have very little in European policymakers and regulators.

Besides that, different entities within it have wildly different motivations, and the EU functioning requires that they at least passively have a unified front.

Given the very different interests (Nordics/Netherlands are very aligned with the US, as are the Eastern European countries, if nothing else due to national security), I doubt the EU will actually present a unified front when push-comes-to-actual-consequences. And I think that’s a good thing.

The EU’s circumstances look grim now, but I think that’s a necessary transition to a better place as it figures out what isn’t working (which, admittedly, is a lot of things), and is forced to reckon with its actual vs. imagined place in the world—which is still an important one, but not for the reasons the moralistic-triumphalist-regulators think.