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Playing Digital Catch-Up with the US—The Wrong Way

By / 5.3.2015

If you are losing a race because of a pebble in your shoe, do you take the pebble out, or do you trip your competitor?

European digital entrepreneurs have a problem, a big one. The so-called single market—the biggest economic achievement of the European Union—has turned out to be anything but single when it comes to digital goods and services. A wide variety of outmoded national rules and restrictions hamper cross-border ecommerce within Europe. It’s as if a resident of New York couldn’t buy online from a website based in New Jersey, or had to pay a higher price, or couldn’t get packages shipped.

As a consequence, European digital start-ups have struggled to gain critical mass. Indeed, old-line incumbent European firms have often lobbied to keep these restrictions in place, fearing, quite correctly, that European digital competitors would force down prices and undercut their cozy control over national markets.

But now many European politicians and business leaders are realizing that this defensive strategy was short-sighted. American firms such as Google, Apple, Amazon, and Facebook have leapt ahead in the digital race, fueled by a combination of innovation, better access to capital, and a larger home market.

So what’s the solution? The European Commission, lead by President Jean-Claude Juncker, is mounting a full scale effort to create a “Digital Single Market”. On May 6th the Commission will come out with its proposals for removing the barriers that stop European firms and startups from offering digital services across European borders—in effect, removing several of the pebbles hobbling European digital competitors.

Unfortunately, recent news articles indicate that the European proposals will also make an attempt to trip competitors—in this case, US tech giants. Rumored measures, which may not make it into the final proposal, call for starting the process of regulating large digital platforms–such as Google search, Facebook, eBay, Etsy, Skype (owned by Microsoft), Amazon shopping, and the iTunes store–as public utilities.

It’s not hard to understand the motivation of European politicians here. They see the success of the American tech companies, and want to make sure their tech sector companies have a chance to catch up. Moreover, they fear, with little evidence, that unsupervised digital platforms will exercise market power.

The problem is that by combining the Digital Single Market with intense regulation of the most innovative and successful companies, European bureaucrats are sending a message to their own companies and startups: “Innovation is not welcome in Europe. Success is not welcome in Europe.”

The Digital Single Market is essential for the success of the European economy. But it should be built on the principles of openness and encouragement of innovation, not higher levels of regulation that will discourage growth.