Everyone in Europe, and across the international competition-law sphere, seems to have their own interpretation these days of former Italian Prime Minister and European Central Bank President Mario Draghi’s recent report “The Future of European Competitiveness” (a.k.a., the “Draghi report”). And, of course, those various interpretations, unsurprisingly, inevitably match the interpreter’s policy preferences.
This is not necessarily the fault of those commenting on the report. As The Economist notes: “Mr. Draghi’s recommendations are so numerous that policymakers will be able to pick and choose from among them.” But despite these somewhat equivocal prescriptions, the report makes at least one thing crystal clear: the EU’s regulatory zeal is not the success story its proponents make it out to be.
This is most evidently true in the area of digital markets, where the EU has enacted several sweeping regulations in recent years: the General Data Protection Regulation (GDPR), the Digital Services Act (DSA), the Digital Markets Act (DMA), and the AI Act. As I explain below, the Draghi report ought to be received by other jurisdictions as an admonition to be cautious about following the European example when it comes to digital markets regulation.
Europe Is Falling Behind
The report begins with the sobering observation that Europe is falling behind, particularly in tech markets. If European leaders do not change course rapidly, Draghi warns, the continent will become an irrelevant player on the global economic scene. To his credit, Draghi is very clear about the stakes involved, declaring that “this is an existential challenge.”
Europe largely missed out on the digital revolution led by the internet and the productivity gains it brought; in fact, the productivity gap between the EU and the US is largely explained by the tech sector.
Indeed, as he notes, if one were to exclude the tech sector, the EU’s productivity growth gap with the United States is reduced significantly to just 0.2 percentage points. And there is little doubt that regulation has been one of the key barriers to growth and innovation in Europe. As the report explains:
Regulatory barriers constrain growth in several ways. First, complex and costly procedures across fragmented national systems discourage inventors from filing Intellectual Property Rights (IPRs), hindering young companies from leveraging the Single Market. Second, the EU’s regulatory stance towards tech companies hampers innovation: the EU now has around 100 tech-focused laws and over 270 regulators active in digital networks across all Member States. Many EU laws take a precautionary approach, dictating specific business practices ex ante to avert potential risks ex post. For example, the AI Act imposes additional regulatory requirements on general purpose AI models that exceed a pre-defined threshold of computational power – a threshold which some state-of-the-art models already exceed. Third, digital companies are deterred from doing business across the EU via subsidiaries, as they face heterogeneous requirements, a proliferation of regulatory agencies and ‘gold plating’ of EU legislation by national authorities. Fourth, limitations on data storing and processing create high compliance costs and hinder the creation of large, integrated data sets for training AI models.
In short, it is institutional failure, rather than market failure, that has hindered European growth and innovation. There’s an excess of regulations and regulators, and the cost of compliance with existing laws is exceedingly high.
Draghi’s Path Forward
In order to address these shortcomings, the report proposes a heterogeneous set of reforms that range from deregulation to strong state interventions aimed at “shaping” markets, as well as significant public investments to kickstart Europe’s economy.
While the report warns about the pitfalls of protectionism and avoids any explicit calls for “industrial policy,” it is far from a full-throated rejection of mercantilism or state intervention in the economy. The list of recommendations include several measures to subsidize (“finance”) strategic industries and to impose tariffs that would clearly serve to protect certain key industries. It also suggests expanded public research and development (R&D) spending (although, as Andrew McAffe notes, relative to GDP, European public R&D expenditure is already more than in the United States). The report also calls for maintaining Europe’s “social model” of a large welfare state, regardless of the drags that can impose on growth and productivity.
But the report does point to European competition policy as an area in need of reform. Draghi recommends that EU competition policy must “adapt to changes in the economy so that it does not become a barrier to Europe’s goals.” It should be noted, however, that this could also be construed as support for favorable treatment of “national champions,” which can serve to distort competition. (Although I think the report is correct about the need for consolidation in the EU’s telecom sector.)
The report also acknowledges that “since innovation in the tech sector is rapid and requires large budgets, merger evaluations should assess how the proposed concentration will affect future innovation potential in critical innovation areas.” It would be a net positive if EU policymakers took this advice to heart, since, as Nicolas Petit points out, the European Commission has been exceedingly tough on efficiency defenses.
The report does offer several clear endorsements of the DMA, with Draghi explicitly calling for “[i]ncentivising the adoption of open access, interoperability, and adherence to EU standards through State aid and other competition tools” and for applying “the new powers associated with the enforcement of the Digital Markets Act (DMA)” effectively. But Draghi does acknowledge that regulations like the GDPR have had a negative impact, and he cautions against the administrative burden that the DMA itself can impose:
…while the ambitions of the EU’s GDPR and AI Act are commendable, their complexity and risk of overlaps and inconsistencies can undermine developments in the field of AI by EU industry actors. (…) This calls for developing simplified rules and enforcing harmonised implementation of the GDPR in the Member States, while removing regulatory overlaps with the AI Act (…). This would ensure that EU companies are not penalised in the development and adoption of frontier AI. With the DMA and DSA, the EU has also adopted pioneering legislation to ensure that digital competition and fair online market practices are enforced. This aims to protect smaller innovators and players from the dominance of Very Large Online Platforms, and to safeguard citizens, creators and IP holders from lack of accountability by the responsible platforms. While it is early to fully gauge the impact of these landmarks regulations, their implementation must avoid producing administrative and compliance burdens and legal uncertainties as the GDPR’s and must be enforced within shorter timeframes and more stringent processes for compliance provisions.
In the end, is the Draghi report a call for more intervention in the economy, or less? I think it is important to remember that Draghi is not just a respected technocrat, but also a politician. As such, understandably, he wants to deliver his message without creating too much political resistance, even if it would be better to be blunt about some uncomfortable truths.
It’s also important to underscore that, where the report is critical of EU regulations, it offers evidence of their negative impact, while where it is more sanguine about those regulations, it alludes only to their purported goals. While Draghi begins his report with sober reflections on the growth and innovation gap between Europe and the United States, he never quite acknowledges just how central a role regulation plays in creating that gap. As McAfee points out:
…regulatory differences feel larger and more significant to me than cultural or labor force ones. Laissez-faire America vs. dirigiste Europe is an old chestnut, but a valid one. And recently Europe has discovered a special passion for tech dirigisme. Within the EU GDPR came into force in 2018, the Digital Services Act in 2022 the Digital Markets Act in 2023, and the AI Act earlier this year. That’s a lot of major regulation to hit any sector in such a short time.
At the very least, the Draghi report represents a call for Europeans to be more careful about the impact of regulation—in other words, to embrace “regulatory humility.”
Draghi and the Brussels Effect
While the Draghi report’s intended audience is the European Union, it should also be considered a warning to other jurisdictions tempted by the so-called “Brussels effect” to be cautious in following the EU’s approach. Why rush into regulating digital markets if Europeans themselves are still figuring out the real and potential effects of such regulations?
My colleagues and I at the International Center for Law & Economics (ICLE) have been warning about the DMA’s potential negative effects on competition and innovation since before the law was even enacted (see Lazar Radic on the DMA’s dubious premises and potential unintended consequences here). Now that it is fully in force, we have some confirmation about its shortcomings.
As Dirk Auer has pointed out, “(t)he DMA was designed both to be self-executing and to foster a more collaborative form of enforcement.” In other words, it was supposed to be an enforcement system with low administrative costs. That apparently, will not be the case:
The DMA required gatekeeper firms—Apple, Amazon, Alphabet, ByteDance, Meta, and Microsoft—to prepare compliance plans and share them with the Commission and stakeholders by March 7, 2024. This was to be followed by a series of workshops where gatekeepers could discuss these plans with stakeholders.
These proceedings presumably aimed to reduce the litigation typically required for enforcement, thereby also achieving faster compliance (because litigation is an inherently lengthy process, especially before European courts). Unfortunately, it is increasingly clear this is not how things are going to pan out.
A day before the final workshop, the Commission launched several noncompliance investigations against Apple, Meta and Alphabet. Though these are officially only “investigations,” it appears highly unlikely that the Commission will ultimately conclude that the gatekeepers were compliant, after all.
In the related field of European competition law, investigations almost invariably lead to infringement decisions—especially in tech markets. (…)
Unless the Commission approaches these investigations with an uncharacteristically open mind, the road to DMA compliance will almost certainly have to go through the European Court of Justice in Luxembourg. If so, resolution will take years, not months, to achieve—precisely what the DMA sought to avoid.
It may be too soon to offer a definitive assessment of the DMA’s net impact, but the negative effects are already well-documented. The first, and perhaps most important concern, is how it may compromise online safety:
Apple has warned that it will not be able to guarantee the safety of rival app stores and payment systems that can now access its ecosystem. If this sounds abstract, it is worth noting that these sorts of security flaws facilitated the Oct. 7 attacks carried out by Hamas. They also increase more mundane risks of identity theft and fraud.
Similarly, Amazon will struggle to exclude nefarious goods, sellers, and shippers from its online marketplace. Commenting on similar issues in the United States, the company surmised that it risked losing “customer trust by advertising something that is not a good deal for them.” This loss of consumer trust would, in turn, harm the bottom lines of the roughly two million businesses that rely on the platform.
Let’s not forget that the DMA’s vaunted promises of “openness” and “interoperability” also create risks. This was arguably evident in the Microsoft/Crowdstrike outage that crashed 8.5 million Windows devices on July 19, causing flight cancellations and other problems. Part of the blame may be attributed to the fact Microsoft was forced by a 2009 settlement with the European Commission to allow third-party providers access to the kernel of its operating system.
The DMA may be also affecting business users, as it favors big intermediary aggregators (like, e.g., Booking.com) while harming smaller businesses like hotels and restaurants. Several European small and medium-sized enterprises have complained that their websites are receiving less direct traffic. Still, aggregators think platforms like Google are not doing enough to comply with the DMA’s new mandates.
Finally, consumers themselves are affected directly, as companies have to offer a less-integrated (some would say “degraded”) version of their products, or to delay deployment in Europe due to compliance concerns. Google Maps is the most-cited case. While consumers liked that Google’s search results for a restaurant or a museum offered immediate and direct directions via Google Maps, such integration has been disabled to avoid running afoul of the DMA’s ban on self-preferencing. Meta’s Threads wasn’t initially available in Europe, due to similar concerns. More recently, it was announced the iPhone’s Apple Intelligence features won’t be available either.
Even if one thinks that ex-ante regulation of digital markets is necessary (I don’t), the facts—and assessments like the Draghi report—are sending a strong signal to other jurisdictions: it won’t hurt to wait and see what happens with the DMA before rushing headlong into regulating digital markets.