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Europe’s Digital Emergency

Sep 23, 2020 Carl Bildt

Although the European Union already has a lot on its hands as it confronts a new wave of COVID-19 infections and seeks to position itself for a sustainable recovery, it must not ignore another crisis looming on the horizon. The bloc is rapidly and inexcusably falling behind China and America in the digital transition.

STOCKHOLM – EU Commission President Ursula von der Leyen offered an upbeat assessment in her first annual policy report (“state of the union” address) to the European Parliament this month. Clearly, the agreement this summer on an unprecedented €750 billion ($879 billion) recovery fund and renewal package has given the European Union a new sense of strength.

But now is not the time for complacency. While Europe can take pride in leading the world toward carbon neutrality and a “green recovery,” COVID-19 cases on the continent are spiking again, and the region remains at serious risk of falling behind in the global technology race.

In terms of the broader economy, there is now talk of a “K-shaped” recovery in which some sectors decline sharply while others boom, often by seizing on opportunities created by the crisis itself. The EU has every reason to worry that its economy comprises more sectors in the first category than in the second, which invariably centers on information and communication technology (ICT).

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Carl Bildt

Writing for PS since 2009
83 Commentaries

Carl Bildt was Sweden’s foreign minister from 2006 to 2014 and Prime Minister from 1991 to 1994, when he negotiated Sweden’s EU accession. A renowned international diplomat, he served as EU Special Envoy to the Former Yugoslavia, High Representative for Bosnia and Herzegovina, UN Special Envoy to the Balkans, and Co-Chairman of the Dayton Peace Conference. He is Co-Chair of the European Council on Foreign Relations.

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Tony van der Togt Sep 26, 2020

“Europe’s problem is not a scarcity of talent but rather a lack of appropriate institutional arrangements and leadership in this critical domain.” I fully agree. Europe needs to organise itself quickly, otherwise their ‘digital sovereignty’ will be lost forever.
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j. von Hettlingen Sep 24, 2020

Carl Bildt fears that Europe, being too preoccupied with the Covid-19 pandemic and seeing a transition to a carbon-neutral economy as the goal of its “Green deal,” it may overlook another priority that requires our urgent attention – the digital gap. When it comes to technological innovation, Europe is “rapidly and inexcusably” lagging behind not only the US and Japan, but also China. Recently China overtook the EU with R&D expenditure equivalent to 2.1% of GDP.
The author says EU leaders, grappling with a recession, believe that their “Green Deal” may have the potential of achieving a sustainable recovery, with lessons from the pandemic providing a blueprint for the “climate emergency” the European Parliament declared late last year. However, not seeing forest for the years, the EU has failed to declare a domestic “digital emergency,” that would prevent Europe from “falling behind in the industries that will be necessary for achieving all other development goals – including a green economy.”
Today, of the world’s 15 largest digital firms, not one is European. While there may be no shortage of innovative ideas, great minds or entrepreneurial spirit in Europe, most new European companies do not make it beyond the start-up phase. But even if they do, they move their business out of Europe. Cases like Skype, Beddit, Shazam or Minecraft – all bought up by the likes of Apple and Microsoft – are just a few well-known examples.
Tech leadership is important not only in terms of jobs and growth, it also has much wider ramifications, like being best positioned to shape standards and rules globally. Europe is known for being at the forefront of data protection. The EU General Data Protection Regulation (GDPR) ensures that personal data can only be gathered under strict conditions and for legitimate purposes. Organisations that collect and manage users’ personal information must also protect it from abuse.
While the ePrivacy Directive and the GDPR provide the legal framework to ensure digital privacy for EU citizens, tech companies call for an overhaul, so that Europe can be competitive in Artificial Intelligence (AI). Having cutting edge AI capabilities is critical to success. The author also points out that “the world is on the verge of upgrading from 4G to 5G.” Sadly, Europe’s “technological contributions are notably absent.”
It was not long ago that Europe was home to major ICT companies like Ericsson and Nokia. They could “proudly claim to have helped launch the era of mobile communications.” But a “new report from the European Round Table for Industry finds that the EU trails the US by three years, and China by nearly as much, just when it comes to implementing 4G, which is already yesterday’s technology. Needless to say, it is lagging even further behind in its rollout of 5G.”
The 5G technology is the next-generation of telecom networks that had started hitting the market end of 2018 and will continue to expand worldwide. Beyond speed improvement, 5G is expected to unleash a massive IoT (Internet of Things) ecosystem where networks can serve communication needs for billions of connected devices, with the right trade-offs between speed, latency, and cost. In this regard, “Europe’s slow adoption of 5G will have far-reaching implications for its future competitiveness.”
According to the author, “many of the industries that 5G could revolutionize are those in which Europe has traditionally demonstrated strength: manufacturing, design, and health care. Now, there is a high risk that China, through digitalization, will achieve dominance in these industries.” While universities and tech firms in the West still lead in cutting-edge innovation – from AI to 5G wireless technology – it is China that has deployed them, winning the commercialisation race against the West.
In order to catch up, Europe must get its act together. What it really lacks are “appropriate institutional arrangements and leadership in this critical domain. Fractured, old-fashioned governance frameworks are hampering the rollout of 5G infrastructure. Insufficient funding for basic research is hampering innovation. And the absence of deep capital markets is making it difficult for start-ups to get the financing they need to grow and scale up, leaving them to be snatched up by deep-pocketed US companies.”
Risk-aversion and the fear of failures may be an obstacle. “Though many start-ups eventually will fail, at least some of today’s highly valued companies will go on to become the giants of tomorrow’s digital economy, dominating our lives as much as today’s Big Tech firms do.”
The author says, “it’s no use complaining about Chinese state support or less-regulated US markets. The companies that succeed will be built on innovative business models that deliver what customers want.” Both China and the US are competing for global leadership in technology. They do not shy away from spending and investing. While Chinese companies can rely on the state to finance their projects and subsidise their exports, in the US, private investors play a crucial role in funding.
Critics say the GDPR poses an obstacle to innovation and progress. Europe has a strong academic base, some of the best universities and research institutions in the world, a skilled workforce, policies to support entrepreneurship and some very innovative companies. To keep up with relentless global competition and avoid falling behind in key industries that rely heavily on innovation, Europe has to do more.
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Emanuel Müller Sep 24, 2020

I don't mean to state the obvious but the enemy here seems to be social-democracy itself. As long as the European populations will have the possibility to vote in favor of their short term, ethno-parochialist interests there will be no drive to support european level digital companies, be it privately owned or publicly owned. Each nation, each ethnic group and each generation has its own genius, its own flavor that can't be voluntarily exchanged against fake unity derivative from some fossil remnants of archaic political or cultural ambitions.
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Prashant Kotak Sep 23, 2020

"...difficult for start-ups to get the financing they need to grow and scale up, leaving them to be snatched up by deep-pocketed US companies..."

So some salutary illustrations of this problem, examples of innovative tech that started life in Europe, but now enriches the US or the far-east: ARM - in the hands of SoftBank (Nvidia soon); MySQL - owned by Oracle; Skype - owned by Microsoft; YouTube - in Alphabets' stable. Nokia and Ericsson are nowadays comparative minnows, with over-expensive products. Both are now behind Huawei, Cisco and other US companies at the cutting edge, a lead the European countries have surrendered in telecoms tech over the last decade.

But it's not just telecoms. It's the entirety of tech, software and hardware. No one in Europe making Search engines (the only sizable competitor to the US engines is Baidu). No European enterprise Cloud Services providers - no AWS, no Azure, no Anthos. No equivalent of chipmakers Intel/AMD/Nvidia etc. No Europeans making Operating Systems. No DB companies like Oracle or SqlServer. Most enterprise grade workflow applications eg Excel, Word, PowerPoint, Jira, Salesforce, and so on originate from the US. No Europeans making Cloud automation infrastructures - Virtualization makers like VMware, Containerisation products eg Docker, Orchestration products eg Kubernetes. No one making phones like ZTE, Xiaomi, Samsung etc. No one making PCs and Laptops like Asus, Lenovo, etc. I could list a hundred more.

So take the ARM Cambridge facility. Is it now just a 'bodyshop' of talented engineers making high end tech? None of the profits of the billions of ARM chips in mobile devices ends up in the UK - the design facility is just a cost center which quite possibly runs at a loss. The company has 'value', £40 billion or so, because of its intellectual capital, IP etc. The translation of that IP into physicality ie into mobile devices etc), the monetisation, likely benefits mostly Japan (although there could easily be an intermediate chain of arcane corporate structures straddling multiple countries for tax chicainary reasons, as there often are with the tech giants, and god only knows where the profits and the tax disappear).

Unless European tech companies start to rise, grow, and thrive in Europe, and crucially, sell out of Europe to the rest of the world, this is no longer any different from the industrial scale bodyshopping India does, and the tech talent in Europe won't ultimately benefit Europe.
- Prashant Kotak Sep 23, 2020
  
  Correction: YouTube did not originate in Europe, rather, DeepMind did.
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Prashant Kotak Sep 23, 2020

The thing to acknowledge if you can bear to face the truth, is that notwithstanding the huge pool of top end tech talent that still exists across Europe and especially in the UK, the EU, for various reasons, has already as good as lost the tech war. As in, it can rescue itself if it acts immediately and ruthlessly, but in truth is too much of a slow moving technocratic dinosaur to actually manage this.

This then leaves questions hanging about something I doubt the author cares too much about, viz, the attempts by the UK government to break out of the losing spiral and buy some independence for itself, and also about who the UK eventually aligns with: the US, China, or the grouping of still-independent second tier countries (Japan, India, Russia (yes I know), potentially S. Korea, Israel, the commodities heavy Anzac and Canada).

And a question for author of this piece: can you bring yourself to support the actions of seemingly brigandish governments in the US and the UK, because in truth, ultimately your bread is not buttered on the Chinese side?
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Prashant Kotak Sep 23, 2020

First, a well done to the author, it looks like some people at least, are beginning to wake up, although it's late in the game, and Europe is going to need to take some short-cuts, and make some 'Hail Mary passes' to catch up. The author is not gonna like what I'm gonna say next, but I'm gonna say it anyway.

There is an inherent contradiction at the heart of EU state-aid and state-subsidy rules. The EU doesn't prevent state involvement in industries but the rules are about as useful as a chocolate teapot. The EU insists, in the situation where a state takes a stake in a business, it must behave exactly like any other company in the free market, lest non state actors (potentially from other countries) are at a competitive disadvantage. That is, state involvement mustn't distort the free market. But there are two huge problems with this.

1) if state-backed action into an industry doesn't distort the free market, then what exactly is the point of any state government taking such actions?

2) The EU has become so concentrated on preventing companies from each others countries from disadvantaging each other that they've become oblivious to the fact that they are getting stuffed by developments outside Europe. Example: no tech giants originating from the EU. No European tech companies in the global top 20 and in fact only a tiny smattering in the top 100.

Which entails total tech dependence on external tech, primarily US and to a lesser extent Far Eastern. Which in the 21st century is a recipe for powerlessness. The EU has in effect formed a circular firing squad. Contrast this with the privately created US tech giants and the (covertly) state backed Chinese tech giants and you have your answer why Europe is fast losing the tech war, which soon enough will determine if you have control over what social models you can create. The EU nations are living on the borrowed time of past wealth, they just don't know it yet.
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