The Digital Technology Environment and Europe’s Capacity to Act

Please note: Below you will find the executive summary of this report, assessments and recommendations for Capacity to Act, and the description of the “Ideenwerkstatt Deutsche Außenpolitik,” the project through which the report is published. For the full report – including all info graphics, footnotes, and citations – please refer to the PDF version here.

Executive Summary

Digital technology has become a key dimension of geopolitical, economic, and normative power with states like China and the United States racing to claim the mantle of technological leadership. Others like Canada, Israel, Japan, and the UK are following. The EU has recognized that the instruments at its disposal are increasingly limited to its regulatory power, leveraging the desire of technology actors to access the vast European market. But relative market-size decline and steady erosion of innovation vis-à-vis peer competitors – even on Europe’s own competitive turf (automobiles, appliances, and industrial Internet of Things (IIoT)) – are beginning to take a heavier toll on Europe’s strategic outlook toward 2030. This has significant – and often still underappreciated – geopolitical implications for Europe’s future.  

As the EU has moved from a narrative around the Digital Single Market (DSM) to one around digital sovereignty, leaders have seen a growth in defensive action aimed at managing digital spaces – particularly in information and communication technology services (ICT) – and a new jolt of tech-industrial policy activity, most recently seen in the pandemic-inspired Recovery and Resilience Facility (RFF). The European Union has begun to coalesce around the notion of “digital sovereignty” as the leitmotif of its efforts, but has yet to tackle shades of difference between key players. The quest for digital sovereignty, which combines narrative power with rhetorical ambiguity, can at times paper over hard choices about strategic policy objectives, particularly between France and Germany, for the sake of consensus building. 

Six realities frame the EU’s approach as it tries to forge unity for a more forceful, geopolitically-minded digital tech policy. First, Europe’s digital market remains fragmented. Second, technology itself has taken on a more general-purpose nature, with applications across sectors. Third, the geopolitical environment – particularly US-China tech competition – has raised the potential for the development of separate technology stacks. Fourth, the coronavirus pandemic has fueled the acceleration of Europe’s digital dependences on external actors and consolidated the dominance of Big Tech. Fifth, there has been a global renaissance in tech industrial policy. And finally, data governance is an increasingly contested space with the specter of digital localization looming large.  

Overall, the 2030 baseline scenario points to a stagnant, negatively inflected trajectory for Europe if the EU continues to rest on its standing as a regulatory power. For the EU to redirect this trajectory to the best-case-scenario, ten policy objectives are central: complete the DSM; guarantee supply-chain access and resilience at all layers of the technology stack; establish leadership and control of critical and emerging technology areas; develop deep, interoperable, easily accessible data pools; unlock state, institutional, and venture capital (VC) investment; attract global ICT talent; conduct and commercialize emerging technology research and development (R&D); broaden global regulatory and standard-setting leadership beyond personal data and competition; strengthen cybersecurity; and advance reliable tech alliances with like-minded states. 

The geopolitical environment – whether collaborative, hostile, or hybrid – is seen as an equally relevant factor in the EU’s ability to develop technological capacity. A benign geopolitical environment with consensus-driven, interoperable, and universally accepted tech standards, and governance would be most advantageous. Absent that, collaborative efforts with the United States, for instance in the Trade and Technology Council, could bolster Europe’s digital tech outlook.  

For Germany, this means addressing the willingness to approach tech industrial policy – with meaningful investments in artificial intelligence (AI), quantum computing, semiconductors, and elsewhere – as truly European, rather than German projects. Germany will still shape European – and global – digital regulation by anticipating the EU’s tech regulatory agenda and establishing national laws, regulation, and standards that can then be elevated to the EU level. It has already done so in in content moderation, digital competition, cybersecurity, and elsewhere.  

Ultimately, the EU’s policy success will be determined by its ability to shore up areas where it is weakest – namely, improving policy formulation, implementation, and impact at home; and establishing constant and interactive benchmarking, honest performance assessments – particularly of failures – and confrontations with tradeoffs, particularly around regulation in areas like data governance, platform regulation, and AI. The EU must set out clearly defined objectives that confront the tough questions of “what is essential” and “what is nice to have.” 

Stocktaking: Assessment of Capacity to Act as a Whole  

As the battle for digital technology competition heats up, the EU’s success in advancing its capacity to act will be determined along the following dimensions:  

• Regulatory power – the EU’s ability to establish rules governing the development and use of  technology at home and to effectively shape global tech governance in a way that advances Europe’s objectives. 
  
   
• Innovation power – Europe’s ability to both develop and, perhaps more importantly, commercially harness new technologies as a source of Europe’s global industrial competitiveness vis-à-vis peer competitors like the United States and China.  
  
   
• Market power – the means by which the EU is able to instrumentalize access to its market and  deepen unfettered access within its market as a means of bending non-European tech players to European rules and creating conditions to encourage cross-border digital services that support scalability and homegrown technology companies.  

Brussels is experiencing a sense of existential distress about what technological changes mean for Europe’s industrial base, external digital dependencies, and ultimately, its regulatory prowess. With an eye toward 2030, there is an acute awareness that the EU cannot “rest on regs.” As the baseline and best-case scenarios indicate, the EU’s regulatory position is a function of market size, a factor in relative decline. Its regulatory influence could slowly displace or break away suddenly in what evolutionary theorists call punctuated equilibria.  

The best-case 2030 scenario underscores that Europe’s capacity to shape its digital environment is ultimately dependent on a benign international order in which states and other multi-stakeholder actors work cooperatively together to set rules. But in light of the rising tech conflict between democratic and authoritarian states, such an era of cooperation seems unlikely. As such, Europe’s efforts must be predicated on the second-best operating environment: a confident, high-performing European digital economy embedded in an open, democratic, rules-based digital order. This need is particularly acute as the prospect of internet fragmentation, data localization, and greater instrumentalization of digital dependencies as political weapons become a more pressing possibility.  

Given these likelihoods, the baseline and worst-case 2030 scenarios enter more clearly in the realm of the possible. The European Union is often able to identify its deficiencies and set an agenda both strategically – as it has done in the Digital Single Market and quest for digital sovereignty – and specifically – as it has done in DESI and recently updated through the Digital Compass and national RFF plans. On the regulatory side, the Commission is moving forward with its “Digital Package” 40 broadly centered on digital sovereignty in three areas: data governance, algorithms (particularly AI/machine learning), and platform regulation, as well as coordination on issues surrounding secure 5G infrastructure, investment, exports, and cybersecurity; and on the industrial side, toward new, post-pandemic IPCEIs in areas like semiconductors, edge computers, and batteries.  

However, the EU’s hydra-like structure in tech policy formation and implementation often prevents coherent, timely action, due to the diffuse distribution of competencies across Commission portfolios, DGs, national ministries, and often highly independent (and narrowly focused) regulators. Without a strong executive and given the trend toward more interventionist tech policy, the Commission and its member states must determine which actors have the big picture in mind and are capable of pursuing it with consistent, effective action. 

Additionally, obstacles to completing the EU’s Digital Single Market will always continue to be present. Language, consumer taste, culture, online behavior, taxation, and registration models remain evident “non-tariff barriers to trade” in digital services. A glance at Europe’s fragmented e-commerce market – where big players like Amazon, eBay, and AliExpress dominate, followed by national champions (e.g., Otto and Real.de in Germany; Allegro in Poland; Bol.com in the Netherlands; Fnac and La Redoute in France) – demonstrates that limitations remain. In that way, the DSM will always be somewhat asymptotic – it will never cross the finish line.  

In areas of Big Data pattern detection, machine learning, and AI, network effects are a key factor in creating the economies of scale necessary for cutting edge applications. In the race for data access, Big Tech – be it Chinese or American – has been able to establish competitive advantages at home which have allowed them an indigenous data well from which to draw when developing technologies. Moreover, they have been able to expand their offerings over time, increasingly moving into new areas in media, artificial intelligence, smart home assistants, cloud infrastructure, and even internet cable infrastructure. The data access feedback loop is a function of market, capital access, talent availability, and regulatory environment which the EU has not been able to match.  

Europe will not be able to achieve its capacity to act alone, and any conception of digital sovereignty that attempts to wall off Europe’s market to provide space for indigenous players to dominate is unlikely to succeed. An alternative approach would be building resilience through strong alliances based on strategic interdependencies, and policy choices that strengthen incumbent commitments to shared democratic norms and values. Joining forces with like-minded actors would provide Europe an opportunity to reduce its weaknesses and advance its capacity to act.  

Implications and Recommen­dations Derived from the Monitoring Exercise  

Europe aspires to attain peer status both in innovation capability and rule-setting with the United States and China by 2030. Achieving this aim will not be easy. It will require sustained high-level engagement, investment, and hard choices. As an overarching goal, Europe should strive to address some of the policy cycle deficiencies identified in this study. They include the need to:  

PROVIDE HONEST ASSESSMENTS OF PREVIOUS TECH INDUSTRIAL AND REGULATORY POLICY FAILURES, TRADE-OFFS, AND MEMBER STATE SHORTCOMINGS.  

The European Union should engage in an open stocktaking of successes and failures in past tech policy choices and initiatives. Confronting where and why state-backed projects like Euronet, Quero, DeMail, the Andromede cloud project, and others fell short will be essential for successful implementation of new IPCEI projects, Gaia-X, and RRF digitization initiatives. Even the GDPR, the EU’s signature rule-making achievement, which has transformed global data protection, has confronted Europe with trade-offs and disadvantages that policymakers are often reluctant to acknowledge. This should include ex-post, ex-ante, and real-time iterative monitoring and benchmarking iterative monitoring and benchmarking processes that accompany new projects and regulatory implementation in real time. The Digital Compass is a good start. It will be important for not only identifying laggards (as the DESI does), but also identifying why lags in implimentation arise.  

FOCUS ON THE EU’S INCUMBENT TECH STRENGTHS IN SHAPING INNOVATION INDUSTRIAL POLICY.  

Europe has incumbent strengths in sensors, smart industrial machinery, B2B capabilities in areas like logistics, and robotics – strengths it should leverage to secure a more substantial production role in IoT. It should direct a combination of government-funded R&D, incentives for commercialization, and investment screening intended to keep and build out innovation capacity in Europe, especially in areas like artificial intelligence, quantum computing, cloud computing, and semiconductors. Europe must also continue to capitalize on its market, which solidifies its status as a dominant regulatory power and allows it to export European values through both its technology and rules. 

ALLOW FOR HARD-NOSED PRIORITIZATION IN SETTING STRATEGIC OBJECTIVES.  

A central tension at the heart of Europe’s approach to digital policy is that tension between external competitiveness and internal cohesion. One can see it expressed in the AI White Paper, for example, which speaks of Europe as an aspiring “ecosystem of excellence” that leads in R&D, value chain development, and small and medium-sized enterprises (SME) competitiveness. On the other hand, it speaks of an “ecosystem of trust” which preserves and expands fundamental rights, consumer rights, and sustainability. The EU and its member states must be more capable of creating priority hierarchies in tech regulatory and industrial policy objectives. Setting effective and consistent policy remains tied to the ephemera of secondary and tertiary objectives like local economic development, untargeted R&D, politically difficult decisions about roles of non-European actors, sustainability, and social cohesion. This might require even greater tightening of portfolios falling under the digital tech policy umbrella within the Commission and a greater willingness of member states, particularly large ones, to elevate narrowly defined policy effectiveness above other objectives. 

EMBED EUROPE’S DIGITAL TECHNOLOGY STRATEGY MORE EXPLICITLY IN THE CONTEXT OF SIMULTANEOUS – AT TIMES  

COMPLEMENTARY – ACTION WITH LIKE-MINDED PARTNERS.  

Buoyed by the Biden Administration’s entry into office, the EU has already embraced that trajectory: “The EU can only succeed in its digital transformation if it builds its Digital Decade in an outward looking manner…. [it] needs to strengthen its capacity to project its digital goals into its international cooperation promoting its human-centric, rules-based approach. This requires the development of partnerships and alliances that can underpin European investment in infrastructure, capacity building and the enabling environment, as well as fostering regulatory cooperation notably with like-minded partners.”41 The EU-U.S. Trade and Technology Council, in particular, will be an early test for Europe’s ability to leverage its relationship with a like-minded power to shape both the global regulatory landscape and bolster its tech industrial resilience.  

Europe must use the next ten years to close the existing gap in innovation, digital regulation, and tech industrial capacity to make it a trendsetter, a co-equal digital power with the United States and China. This vision of Europe as a trendsetter is ambitious, but achievable.