Written by Dermot Hodson

Negotiations over the European Union Artificial Intelligence Act entered their end game this week after a vote in the European Parliament paved the way for a final round of negotiations with member state governments.

Some commentators have questioned whether the new law, which could be on the books by the end of this year, will keep up with ChatGPT and other rapidly-developing general purpose AI systems.

And yet, the European Union’s ambition to be a digital superpower stands in stark contrast to US policy-makers reticence about reining in tech companies. The bigger problem facing the European Union is that it remains far better at regulation than innovation despite decades of hand-wringing over Europe’s technology gap.

In February 2022, European commissioner Thierry Breton tweeted a clip from Sergio Leone’s The Good, the Bad and the Ugly and declared the European Union the “new sheriff…in town” which would ‘put some order in the digital “Wild West”‘.

It was not only a clever piece of political communication but a popular one. In a Eurobarometer poll published two years earlier, 83 percent of EU citizens agreed that fake news was a threat to democracy, with more than one-third coming across disinformation weekly. A survey conducted by Harris Interactive around the same time found that 64 percent of Europeans wanted the EU to do more to regulate the power of US tech giants.

The European Union has earned its golden sheriff’s star with two new laws that entered into force in November 2022.

The Digital Markets Act prohibits digital gatekeepers — online platforms with at least 45 million monthly active users or 10,000 annual business users — from engaging in unfair business practices, such as limiting access to third-party apps, app stores and payment systems.

The Digital Services Act threatens search engines and social media platforms which fail to report hate speech, terrorist content and images of child abuse with swingeing fines. The A.I. Act will add to this digital rule book with a risk-based approach to A.I. systems. Social scoring and dark pattern techniques will be banned. High-risk A.I. applications, such as those used to screen job applicants or determine eligibility for public services, must demonstrate due regard for transparency, security and human control and other essential requirements before they reach the market.

Warranted though such regulations are, the fact that most fall on non-European businesses should give policy-makers pause for thought.

Not household names

Among the top thirty tech firms by market capitalisation, only two are from Europe. ASML leads the world in chip production, but this Dutch firm is worth only a fraction of Alphabet, Apple, Amazon, Meta and Microsoft, and far less visible than the big five in most people’s daily lives.

The same is true of German giant, SAP, which is little known beyond the world of business software.

The EU’s technology gap has been blamed on a lack of creativity. But the success of European unicorns (start-ups that achieve a valuation of $1bn [€0.93bn]), including Estonia’s Bolt, Sweden’s Klarna and France’s ContentSquare, challenges this view.

A more serious impediment to European tech entrepreneurship is access to venture capital, especially late-stage capital, which makes it difficult for start-ups to scale up. Twenty years after its leaders promised to raise spending on research and development to three percent of Gross Domestic Product, the EU remains well below this target, unlike Japan and the United States.

The European single market, which celebrates its 30th anniversary this year, has fostered competitiveness in industries ranging from fashion to finance. This effect has been much less pronounced for European digital technologies, where significant barriers to cross-border trade remain.

This can be seen, for example, in telecoms, where the segmentation of markets along national lines has stunted investment. In 2022, 73 percent of people had access to 5G (the fifth-generation mobile phone network) in the European Union compared to 96 percent in the United States.

The EU has also struggled to create a genuine single market for e-commerce. While the 2018 Geo-Blocking Regulation makes it easier for European shoppers to access websites in other member states, delivery restrictions remain a major obstacle to cross-border trade.

The regulation also excludes audio-visual services and so leaves Europeans unable to watch the same films and football matches.

There are signs of fresh thinking from Brussels about the future of European digital technology. The Recovery and Resilience Facility, the European Union’s €800bn pandemic recovery fund, is providing grants and loans for digital transformation projects, ranging from the construction of 2,600km of 5G corridors in Italy to the creation of an A.I. strategy in Spain.

A new European Tech Champions Initiative will also channel €3.75bn to venture capital funds in support of European tech start-ups. However, without further financing and a redoubling of efforts to build the digital single market, the EU is destined to regulate American and Asian tech giants rather than fostering homegrown firms which are closer to European values.

This article was originally published in EUobserver.