Former European Central Bank president Mario Draghi has said that regulatory burdens on European companies are constraining tech sector growth.
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Draghi’s landmark report, published today, calls on the bloc to boost productivity and revive its market, including by closing the innovation gap with the US and China.
Draghi is a major figure in EU policy and politics and a former Italian prime minister. European Commission president Ursula von der Leyen last year asked him to set out his vision on the future of European competitiveness.
Draghi today said digital technology has been the key driver of the widening productivity gap between the EU and US, noting that only four of the world’s top 50 tech companies are European. The region is lagging behind in breakthrough innovation such as AI that will drive growth in the future, he added.
“We are failing to translate innovation into commercialisation, and innovative companies that want to scale up in Europe are hindered at every stage by inconsistent and restrictive regulations,” Draghi noted in the report. He added that regulatory barriers are especially costly for smaller businesses.
Digital regulation has been an important part of the European Commission's policy since von der Leyen’s presidency began in 2019. The EU has since passed a slew of regulation including the AI Act, the NIS2 Directive, Digital Services Act, Digital Markets Act, Data Act and Data Governance Act.
But Draghi’s report today argued for the importance of simplifying rules – giving the GDPR as an example– in order to make the region’s regulatory environment more favourable for businesses.
Although the GDPR was intended to create a harmonised EU approach to privacy enforcement, the report said inconsistent enforcement by member states has added to companies’ administrative burden. It further attributed such fragmentation to ‘gold-plating’ by member states, the practice of imposing additional requirements or obligations in national law when transposing EU legislation.
“Estimates point to high GDPR compliance costs, up to €500,000 for SMEs and up to €10 million for large organisations,” the report said. “Furthermore, due to these compliance costs, EU companies decreased data storage by 26% and data processing by 15% in relation to comparable US companies.”
The report today noted that the EU now has around 100 tech-focused laws, many of which adopt a precautionary approach and regularly change over time. It said the regulatory landscape hinders innovation and that companies are also deterred from doing business in the bloc via national subsidiaries, as they face heterogeneous requirements and inconsistent adoption of laws by national authorities.
Draghi cited AI as an area in which EU companies still have an opportunity to “carve out a leading position.”
But he warned that the overlap and potential inconsistency between the AI Act and the GDPR “create the risk of European companies being excluded from early AI innovations because of uncertainty of regulatory frameworks as well as higher burdens for EU researchers and innovators to develop homegrown AI.”
To ensure that EU companies are not penalised in the development of AI, the bloc must develop specific rules, enforce harmonised interpretation of the GDPR and remove regulatory overlaps with the AI act, the report added.
Ashurst partner Gabriele Accardo told Lexology PRO that the report is “crystal clear” that the EU should not miss the AI-triggered digital revolution.
According to the report, the GDPR and AI act aim to protect fundamental rights but create challenges to innovation – particularly for startups and SMEs, Accardo said. “The regulatory burdens are not only costly but also self-defeating particularly for companies in the digital sectors,” he noted.
Linklaters partner Tanguy Van Overstraeten noted that it is often said that the EU tends to overregulate, and that too much regulation could kill innovation.
“Going forward it will therefore be essential to streamline the work done during the current [European] Commission mandate and make sure the many new rules may be applied in a combined, legible and understandable manner,” Van Overstraeten said.