Matt Ridley: Why Europe cannot grow digital giants

The EU is falling behind and it's not bad luck, it's bad policy

Last week I visited an island and stood among a crowd of puffins. If I turned my head I could see the lighthouse. If I looked up, the arctic terns were above my head. Yet I never left a gallery in Gateshead. How come? I was wearing a virtual-reality mask.

I have tried this “Oculus” technology once before, when visiting Facebook in California (which owns Oculus) and it is truly extraordinary to have an all-round, up-and-down view of the world depending on how you turn your head. All it involves is a special (Samsung) smartphone jammed into a pair of goggles.

Is it the next wave of tech? I have no idea. Apart from games, virtual visits to inaccessible nature reserves and maybe estate agents, it may not have many practical applications. But I may be wrong. Does the next wave lie in big data? Or robotics? Or the internet of things? Or something else entirely?

Nobody knows. When silicon chips came along, few foresaw personal computers; when the internet arrived, few predicted the central role of search engines or one-click shopping; when mobile phones took us by surprise, few imagined texts, let alone social media, sat-nav, phone cameras or the sharing economy. The one thing that the history of technology shows above all else is our complete inability to see what comes next.

Yet something will come next, of that we can be confident. By 2025 there will be a vast new firm, valued at an astronomical sum and run by people who look like teenagers from a futuristic building in . . . well, where will it be? Can you imagine it being in Europe? Me neither.

Despite having money, skills, markets, research funding and infrastructure galore, Europe has consistently failed to create the sort of digital giants that a couple of salty inlets on the west coast of America spawn like fish fry. We fell behind in minicomputers, fell further behind in personal computers, caught up briefly in mobile phones (remember Nokia?) then watched Google and Apple, Facebook and Amazon, Wikipedia and Twitter dominate the digital world.

The total value of “unicorns” (billion-dollar tech start-ups) created in Europe is about half of Facebook’s valuation alone. (Britain has the most of those European unicorns.) Spotify, the music-streaming firm based in Stockholm, is the nearest Europe has to a digital giant — and it is now threatening to leave Sweden for America. Carl Bildt, former prime minister of Sweden, and chairman of the Global Commission on Internet Governance, recently made a speech in which he said that “Europe is lagging behind and the gap with the US is widening”. In 2001, he said, Europe was investing 80 per cent as much in digital as the US. Today that proportion is just 60 per cent.

Fortunately, our masters in Brussels have a plan. Unlike us, you see, they do know what is coming next in tech, being altogether wiser folk. The European Commission, as part of its “digital agenda”, has unveiled a €5 billion action plan to “unify and galvanise” Europe’s progress towards the “fourth industrial revolution”. According to the EurActiv website it wants to “put in place all the necessary building blocks for the next industrial phase so that European firms remain [sic] in the driving seat”.

Fine words. Yet to achieve this, what’s needed is not the picking of winners, or even the setting of standards, indeed nothing top-down at all. What’s needed is the general encouragement of the conditions under which bright people set up businesses and engage in massive amounts of trial and error to discover unpredictable opportunities. That means generous tax breaks for entrepreneurs, light-touch regulation, access to global talent and tolerance of failure. Then stand back and let a thousand flowers bloom.

Yet there is no sign of such policies being discussed in Brussels. The measures the commission is currently proposing are making it harder to do digital business. Prominent among them is the general data protection regulation (GDPR), agreed in April with very little fanfare and coming into force by 2018. It’s a “regulation” not a directive, which is the commission’s preferred new way of doing things these days — that way it does not even have to waft through parliament, but just lands in our law unscrutinised by any national democracy. A harbinger of how the EU will be run from the centre if we vote to remain.

The GDPR punishes any company that mishandles data with a fine of up to 4 per cent of turnover — which could wipe out all profits in a low-margin sector — or ¤20 million, whichever is the larger. Instead of leaving it up to national information commissioners to set standards for data protection and limiting the risk to any one state, it makes the concept transnational. So the whole company will be vulnerable to a data-handling mistake in the weakest subsidiary or partner.

You can see where this came from: European politicians suspicious at what the likes of Google do with “our” data. But it will have a deterrent effect on home-grown digital companies trying to “enrich European citizens’ lives by discovering solutions to challenges in health care, education, or the environment” as Robert Atkinson, president of the think tank the Information Technology and Innovation Foundation, puts it. One entrepreneur tells me: “If there is a more potent impediment to free trade over national borders between companies that will have to rely upon their partners’ resilient and robust compliance procedures, I should be very surprised.”

Tech entrepreneurs say that the additional cost to companies (and perhaps public-sector bodies) of trying to protect themselves in the light of the GDPR is likely to be prohibitive. Handling data about people is what digital companies do, and while it is right to insist they do not mess up, it is wrong to extend the concept of private property too literally into cyberspace. We do not punish people for discussing other people in pubs, after all.

Europe’s biggest problem is its inability to achieve significant economic growth, unlike all the other continents. Ordinary macroeconomic management just won’t do: we need to rediscover the passion for innovation that was the continent’s hallmark for centuries. Yet when faced with a whole new digital world, the best the European Commission can think of doing is putting obstacles in the way of entrepreneurs.

Matt Ridley, a member of the British House of Lords, is an acclaimed author who blogs at www.rationaloptimist.com.