The European Union faces two simultaneous crises. There’s the slow-burning loss of competitiveness vividly illustrated in former Italian Prime Minister Mario Draghi’s recent report. Facing a shrinking workforce and structurally high energy costs, Draghi argued that EU firms must drastically improve their use of technology to boost the bloc’s productivity.
The second crisis is the decline of the rule-based international economic order on which Europe’s economy relied, which was made urgent by US President Donald Trump’s trade war. As a trade-intensive economy that punches below its weight militarily, Europe is much more vulnerable than the US and China in a world dominated by raw power rather than internationally agreed trade rules.
These two crises create a dilemma. Europe has fallen behind the US in high-tech sectors key to future productivity growth. The continent can only catch up, at least in the short run, by increasing its technological dependence on a country whose policies are unpredictable and capricious.
This dilemma is acute in cloud computing, which allows firms to access storage and computing processing ‘on demand’ without making expensive up-front equipment purchases. Cloud computing provides businesses with cost-effective, cutting-edge tech services. For this reason, the European Commission has long encouraged European companies to deploy the technology.
But a small number of US firms – primarily Amazon, Google, and Microsoft – dominate the sector. European cloud computing companies remain minnows, with much more limited offerings than the so-called ‘hyperscalers’ can provide.
Reliance on US cloud services has long provoked European fears. Some EU member states and parts of civil society have for years raised concerns about US laws, which can force US cloud firms to hand over Europeans’ data to law enforcement authorities. Now, concerns are growing that Trump might weaponize Europe’s tech dependence. Since US cloud computing companies are integrated into large parts of the European economy, and no full-service alternatives exist, Europeans fear the US president could wreak economic havoc if Europe does not adapt its policies to reflect the US president’s preferences.
Europe is right to be concerned about overreliance on a volatile international partner, one who wants to undermine the EU. While many US tech CEOs seem close to the US president and would presumably attempt to block any policy decision undermining European trust in US tech firms, this offers little reassurance. Those CEOs’ influence has limits. Trump’s appointees to the Federal Trade Commission and Department of Justice have, for example, continued to pursue antitrust cases against the large US tech firms.
Yet the EU’s past efforts to support European cloud computing alternatives have achieved little. GAIA-X, a much-feted attempt by European cloud firms to support interoperability so customers can mix and match between different smaller providers, has little to show for its efforts. Under the last European Commission, some EU member states also tried to use Europe’s cybersecurity laws to stop US cloud computing firms’ ability to win sensitive contracts. The Commission looks poised to boost demand for European cloud services by setting standards for cloud computing in its upcoming Cloud and AI Development Act. The precise mechanism by which these standards would support European businesses – and whether it would be more successful than past ones – remains unclear.
Before discriminating in favour of European cloud services, Europe should consider three countervailing facts.
First, one reason why EU tech firms move to the US is that American businesses are faster to take up and exploit the new technologies these tech firms bring to the market. Increasing demand for new tech, even if in the short term US firms benefit, will create a more promising environment for European innovators in future, helping convince EU tech start-ups to stay in Europe.
Second, some US cloud computing firms have taken significant steps to insulate themselves from future US government policies that could harm Europe. US hyperscalers have long-standing joint ventures with EU cloud computing companies. Microsoft recently went a step further, making commitments to put European data centres under the oversight of a European board of directors that consists exclusively of European nationals, to fight any order to cease its cloud services in court, and to construct contingency arrangements so its cloud services can be handed over to local partners. Rather than a vague hope that the hyperscalers would dissuade the US president from harming Europe, these actions provide a robust and significant set of protections from potential American government demands.
Third, Europe needs to be clear about what a digital industrial policy can achieve. US hyperscalers succeeded by having their global tech services and building their computing capacity to support those services. As excess capacity became available, they rented it out to external customers at low marginal costs. That is not a business model in which many European firms can be cost-competitive, since Europe has no globally successful tech services of the scale offered by the hyperscalers. If European business customers are forced to use more expensive European cloud computing, their competitiveness will be lower. Recognizing this, the EU should focus any ‘sovereign’ cloud requirements, if they exist at all, on narrow use cases where the data being processed, or the services being provided, are particularly sensitive, just as Draghi recommended in his report.
This does not mean Europe should pursue modest ambitions. The opposite is true. The EU should accept that no full-service European options will exist at every point in the tech value chain. Instead, it should focus on leveraging the areas where the EU has — or could have, with realistic levels of public support — an enduring and sustainable advantage over its global rivals. That would involve maintaining, expanding, or developing a technological lead in parts of the tech stack where the EU enjoys both scientific expertise and experience in highly sophisticated manufacturing processes. Good examples are chipmaking equipment (think the Dutch company ASML), B2B services (think Siemens and other companies building online industrial exchanges), and quantum next-generation computing.
Europe’s goal should be to become a world leader in a few indispensable technologies, which could prove as strategic as cloud and artificial intelligence. By controlling key tech choke points, the EU would boost its leverage vis-à-vis international partners, including China and the US. At the same time, Brussels could continue to be a beacon of open trade, boosting the bloc’s competitiveness and giving its firms an opportunity to succeed globally.
Zach Meyers is Director of Research at the CERRE, the Centre on Regulation in Europe, and an Associate Fellow of the Centre for European Reform. He was previously a competition and regulatory lawyer in private practice and has consulted to governments, regulators, and multilateral institutions on competition reforms in regulated sectors.
Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions expressed on Bandwidth are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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