Conclusion: Bridging the Digital Divide

Caption: The May 2022 meeting of the Trade and Technology Council in Saclay, France. Credit: Valdis Dombrovskis via Twitter.
Caption: The May 2022 meeting of the Trade and Technology Council in Saclay, France. Credit: Valdis Dombrovskis via Twitter.

July 12, 2022

The European Union (EU) is pressing ahead with sweeping technology regulations, a process that requires compromises among its 27 member states. A broad consensus exists that those new digital markets must be regulated, and unlikely allies are emerging to push forward with landmark pieces of legislation. On both the Digital Services Act (DSA) and the Digital Markets Act (DMA), dirigiste France teamed up with free-market-minded Denmark to force large tech companies to assume new responsibilities and obligations.   

But the two countries continue to spar on other key issues, such as how to define digital sovereignty. For France, the term often translates into protectionism, allowing Europe to build up competitive industries in areas now dominated by the United States. For Denmark, the term translates into an ordoliberal notion, combining high levels of regulation with open markets and skepticism of concentrated digital market power.  

If France avoids a lurch into protectionism, it possesses a powerful potential for being a powerhouse of digital innovation in Europe. The success of French tech, its high-skilled workforce, its strong infrastructure, and the high penetration rate of broadband contribute to demonstrating such potential. Positive results are already visible: France remains third after the United Kingdom and Germany among European countries for its ability to nurture tech start-ups. French President Emmanuel Macron has scored considerable successes — removing red tape, reducing taxes, easing immigration, and investing in universities and training.  Significant improvements are still required. 

Denmark starts with a strong competitive digital base. Its digital partnership recommendations, endorsed by the government, represent a solid strategy to tackle the main challenges for a successful digital transition. The open question is whether the government will unlock the needed resources to support this ambitious strategy. Denmark should continue to insist on building a true digital single market, opposing French efforts to torpedo it or build an EU digital iron curtain. On issues such as digital taxation, Denmark will want to find a transatlantic agreement, and it should work with its partners to forge a true transatlantic digital alliance. 

The other European countries profiled in this report bring different priorities to the negotiating table.  Italy, long a digital laggard that attempted to hold back the Internet revolution, is now embracing change. Although it still believes in strong regulation — its antitrust and privacy authorities have been aggressive enforcers against Amazon and others in recent years — Rome searches for middle ground between the French and Danish approaches. Italian Prime Minister Mario Draghi understands that his country must collaborate with US tech to build up its digital capacity.   

Whether Italy succeeds in implementing its digital agenda will be a question of timing and red tape. Besides the 2026 recovery fund deadline, parliamentary elections will be held in summer 2023. That means Draghi could have just 16 more months in office. Italy is famous for political gridlock and theatrics, but since taking over as prime minister in February 2021, “Super Mario” has been credited with bringing the necessary influence to cut through the noise and pass legislation in record time. But the clock is ticking, and the political infighting is as fierce as ever.     

Right-wing Poland promotes pro-digital policies with right-wing exceptions, exemplified by its proposed bills on social media “free speech” and the government’s use of Pegasus spyware. Both issues place the Polish government on a potential collision course with its European partners amid the debate on the EU rules governing digital platforms.  

The case studies include a series of domestic and EU-wide policy recommendations. These are designed to allow countries to benefit from the digital revolution and to play a constructive role in building a transatlantic digital partnership.   

ENCOURAGE DIGITAL DEVELOPMENT

European countries need to increase their public digital investments. They should target much of their COVID-19 relief spending to improve connectivity and research and development.  

  • Denmark’s investments in digitization and technology research and development are modest.  The country should budget additional resources for research and development of digital solutions, for education and training, and for digitizing small and medium-sized enterprises (SMEs) and the public sector. It should build on its strengths in health care, renewable energies, and agriculture, ensuring that all these industries remain at the forefront.  
  • Italy plans to invest much of its resources from new EU COVID-19 recovery funds in digitization. To take full advantage of these funds, the country should pair investments with structural reforms of its sclerotic labor market and business red tape. It should also follow the lead of other EU member states, such as France, in encouraging the development of domestic unicorns and digital entrepreneurs.  
  • Poland should accelerate the digitization of public services and support for innovative start-ups. The Three Seas Initiative (3SI), of which Poland is a part, includes initiatives to invest in digital infrastructure across the 3SI region. Poland should take a leadership role in this format. The country’s right-wing government should be stopped from abusing surveillance technology, and a proper parliamentary Investigation into the government’s use of the Pegasus spyware should be launched. The country’s opposition to allowing platforms to moderate content needs to ease so the river of hate and illegal speech does not become a flood.  
  • France should embrace policies that drive rather than block digital success. The administrative nature of French universities represents a significant obstacle to the emergence of ideas, inventions, and vital collaboration with tech entrepreneurs. With the highest capital gain tax rate in Europe of 34%, French start-ups scale up by moving to the United States, reinforcing the anti-US sentiment. France should create tax incentives to retain, rather than lose, its best innovators.   

BOOST COMPETITION

The EU agrees that Big Tech monopolies must be loosened. But its antitrust policies must avoid targeting US companies disproportionately. Antitrust should remain based on careful economic analysis, not on political preferences. 

  • Denmark should strengthen its competition policy by injecting additional resources for the Competition Authority and in-depth market analysis. It should seek implementation of a DMA that targets all mega platforms, not just US companies.  
  • Italy, Poland, and others should avoid following other member states in the pursuit of digital sovereignty, if this strategy veers into protectionism and limiting data transfers or hinders transatlantic cooperation in critical areas.  
  • France should reform its antitrust policy to embrace dynamic competition, rather than static competition, where big companies (whatever their country of origin) represent not a market failure but a market necessity. The country’s allergy toward bigness can only drive out investments and deter innovation.  

RESET TRANSATLANTIC RELATIONS

The EU should rest its digital polices on EU values and tradition but remain open to international solutions.   

  • While European policymakers target US tech companies, Silicon Valley will be critical to the EU’s future. Italy needs to encourage US investment in its COVID-19 recovery plans.   
  • The relative French neutrality between US and Chinese tech platforms is unsustainable: values of democracy and mutual prosperity should lead French politicians to refrain from slogans such as “digital sovereignty,” which prevent French firms from embracing the already significant innovations made by US tech companies. 
  • Poland has been an indispensable partner in the transatlantic alliance on defense and security, especially since Russia’s invasion of Ukraine in February 2022. With its robust digital agenda and growing private sector investment, Poland has an opportunity to work with both Washington and Brussels to lead on digital issues as well, working to prevent the EU’s digital sovereignty push from undercutting transatlantic cooperation. 

FORGE TRANSATLANTIC DATA AND TAX DEALS

The EU and the United States have worked together to keep data flowing across the Atlantic Ocean. In early 2022, US President Joseph R. Biden, Jr. and European Commission President Ursula von der Leyen agreed to sign a new Privacy Shield deal before the end of the year. The two sides have also agreed on a corporate tax reform designed to set a minimal taxation on large companies, particularly large Internet companies.  

  • Denmark should remain firm in its opposition to a specific digital tax that would discriminate against its innovative companies.  
  • France should drop its own national digital tax that disproportionately hits foreign companies.   
  • Italy should encourage its European commissioner, Paolo Gentiloni, who is responsible for taxation, to push back against digital tax initiatives.  
  • Poland should use its influence to push both for transatlantic tax and data deals.  

CONFRONT CHINA

 The EU should become more cautious about its engagement with China on digital policy.   

  • Italian businesses benefit from strong trading relations with China, with many luxury brands using Alibaba to sell to the rising Chinese middle class. But Rome should become prudent about Chinese tech investments.  
  • France should be less naïve about China’s cybersecurity threats and its undemocratic model. As part of a transatlantic partnership, the EU will be more influential in shaping the Western vision of a free and open Internet.   
  • Denmark should be careful about Chinese investment in Greenland, including in mines for iron and uranium. It should also scrutinize Chinese plans to construct new airports in the territory. So far, the government has blocked these projects, citing security concerns.  
  • Poland should continue to crack down on Chinese industrial espionage. In January 2019, Huawei employee Wang Weijing was arrested in Poland on charges of spying. 

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Photo: The May 2022 meeting of the Trade and Technology Council in Saclay, France. Credit: Valdis Dombrovskis via Twitter.