This time the world is turning its back on Europe. Meta is not releasing its multimodal Llama 3 AI model for video, audio and images in the EU, and has suspended its AI assistant, saying restrictions on the training of large language models make it unworkable.
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Apple Intelligence has suspended the European rollout of its generative AI tools, saying the EU’s Digital Markets Act compromises privacy by forcing them to let third parties into their systems.
The big beasts of US technology certainly need regulating but the question, as ever, is what ideology lies behind the rules. The UK, Japan, India and the Middle East are all going for light-touch regimes, judging the technology as it evolves and hoping to capture the economic prize. The US is letting rip. China has made AI the central plank of its bid for global technology supremacy.
The long-awaited report on Europe’s crisis of competitiveness by Mario Draghi, the man who saved Italy but lost Germany in the process, landed last week with a polite warning that the EU has shot itself in the foot.
“While the ambitions are commendable ... provisions of the AI Act create the risk of European companies being excluded from early AI innovations ... in global AI competition ‘winner takes most’ dynamics are already prevailing,” it said.
“Taking the top AI start-ups worldwide, 61 per cent of global funding goes to US companies, 17 per cent to Chinese companies and only 6 per cent to those in the EU. Innovative companies that want to scale up in Europe are hindered at every stage by inconsistent and restrictive regulations,” said the report.
The Eurozone economy has been stagnant for years. Credit: Bloomberg
Yet still the EU rules keep coming, the product of a Monnet priesthood in Brussels with the “right of initiative” and drafting monopoly on new legislation, but almost no collective experience of real life in the market. The laws are locked in stone by the near-irreversible character of the EU’s 180,000-page Acquis, designed to ensure that land conquered can never be yielded.
Fredrik Persson, head of the pan-EU lobby group BusinessEurope, said a further 850 regulations have been piled on European companies over the past five years alone, adding 5000 more pages to the Acquis. “There is a regulatory tsunami sweeping Europe. If you are a small SME, it’s going to put you out of business,” he said.
The refrain running through the Ambrosetti forum was that Europe urgently needs its own version of America’s Inflation Reduction Act to revive its broken industrial base. But that is impossible, because the EU has no money, no treasury, no permanent debt-raising powers, no unified fiscal or tax system. The job cannot be delegated to the national level without obliterating the EU’s state aid regime and setting in motion the disintegration of the union.
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Draghi says there is no way around this giant impediment. EU leaders must either create the machinery of an economic superstate or face the “slow agony” of a dying experiment. The current halfway house is an unstable equilibrium and cannot endure.
His report calls for an investment blitz of up to €800 billion ($1.3 trillion) to close the digital deficit and the productivity chasm with the US. This requires lifting the investment-to-GDP ratio by five percentage points, returning it to levels “unseen for half a century in Europe.” The scale would be twice as large as the postwar Marshall Plan.
Draghi said disposable income per capita in the EU had grown at half the pace of the US since 2000. The culprit is the technology sector. “The main reason EU productivity diverged from the US in the mid-1990s was Europe’s failure to capitalise on the first digital revolution,” he said.
Draghi said it is already too late to save cloud computing in Europe. America’s three cloud hyperscalers have achieved irreversible dominance, while Europe’s largest operator has only 2 per cent of the EU market. The EU could still keep pace in quantum computing and robotics if backed by a capital market capable of nurturing European champions. But the overall picture is calamitous.
“In software and the internet, EU firms represent only 7 per cent of R&D [research and development], compared with 71 per cent for the US and 15 per cent for China ... The single market is home today to only four of the 50 largest digital marketplaces worldwide, while the 10 largest platforms serving EU citizens are owned by US (six) or Chinese (four) companies.”
When you reach the chapter on cars, you want to weep. Europe does not know how to make 21st-century computers on wheels and cannot make the batteries needed to power them at competitive cost.
Chinese carmakers are “one generation ahead of Europeans in terms of technology in virtually all domains, including EV performance (range, charging time and infrastructure), software (autonomous driving levels two-plus, three and four), user experience (e.g. best-in-class Human Machine Interfaces and navigation systems), and development time (1.5 to two years, compared to three to five years in Europe).”
Where did it all go wrong? Exorbitant energy costs are part of the story, as are the shallow pool of venture capital and the failure to create a genuine EU capital market (that was in London). But the rot goes back further and has much to do with the coddling of vested interests.
The report concluded: “Europe is stuck in a static industrial structure with few new companies rising up to disrupt existing industries or develop new growth engines. The top three investors in R&I [research and innovation] in Europe have been dominated by automotive companies for the past 20 years.
“With the world on the cusp of an AI revolution, Europe cannot afford to remain in ‘middle technologies and industries’ of the previous century.” Ouch.
“America innovates, China replicates, Europe regulates. It is an extraordinary picture of our situation, because it’s true.“: Italy’s prime minister Giorgia Meloni. Credit: Bloomberg
The turn-around task is too big for private investors alone. It must be funded in large part by joint eurobonds. There lies the rub. This is tantamount to a debt-union and would require changes to the EU treaties, which is almost unthinkable after the electoral earthquakes of the last year.
“Europe needs more integration but the politics are going in the opposite direction. France and Germany have become politically dysfunctional, and Macron is dead,” said Professor Nouriel Roubini from New York’s Stern School of Business.
The €800 billion COVID Recovery Fund agreed in 2020 did entail joint debt issuance but that was a one-off emergency, and the evolving saga has since confirmed the fears of critics in Germany, the Netherlands and the frugal North. It ended up having almost nothing to do with COVID, degenerating into a Brussels slush fund used for empire-building and pet projects.
The Germans and the Dutch are tightening their belts at home and are determined not to share their credit cards with Brussels and the southern debtors’ cartel. The instant verdict of Christian Lindner, the German finance minister, was lapidary. “Germany will not agree to this. There must be no further blurring of member states’ responsibility for their own budgets,” he said.
The long-awaited report on Europe’s crisis of competitiveness by Mario Draghi, the man who saved Italy but lost Germany in the process, landed last week with a polite warning that the EU has shot itself in the foot.
“Joint debt issuance does not solve any structural problems. Companies don’t need subsidies: what is holding them back is bureaucracy and economic planning,” he added.
His Free Democrats and the Christian Democrats are leaking votes to the eurosceptic AfD (Alternative for Germany) on the far right. Both are taking a harder line on Europe. There is no conceivable combination in German politics today that could deliver Draghi’s Hamiltonian eurobonds. Even if there were, such a change would eviscerate the budget sovereignty of the Bundestag and require amendments to the German constitution. Dream on.
The Dutch coalition, under the thumb of arch-eurosceptic Geert Wilders, would veto any plan that smacked of shared liabilities, and so would East European states wary of being ensnared into a bail-out of Club Med legacy debt. “We don’t need common debt or fiscal union at all. Forget about it. We need fewer bureaucrats,” said Hungary’s leader, Viktor Orbán, in Lake Como.
It is possible that some of Draghi’s plan could be smuggled through as military rearmament, given the terrifying state of EU defences revealed by Vladimir Putin’s war. “Our industry could only come up with 20 per cent of the arms purchases for Ukraine. We had to buy 80 per cent from outside the EU. That was great for creating jobs in South Korea and Turkey,” said one EU veteran acidly. But the sums are never going to add up without a great leap forward to real fiscal union.
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Draghi is a lifelong evangelist for European integration and always sees the answer as more Europe. But it is hard not to notice that Europe’s decline coincides exactly with the launch of monetary union at Maastricht – and the convulsions that this later entailed – followed by treaty inflation (Amsterdam, Nice, Lisbon) and EU encroachment into every nook and cranny of national life.
The sovereign states of East Asia are prospering nicely without locking themselves together in a tight union. One might legitimately ponder whether Europe would be healthier today if it had let nations be nations, and had never launched the European project along Monnet lines in the first place. The EU itself is the elemental problem.