Summary
DOWNLOAD PDFThe European Union (EU) has pursued an ambitious agenda for regulating the digital economy, and it is now planning to establish a new package of regulations, including the Digital Markets Act (DMA), the Digital Services Act (DSA), and a new regulation of Artificial Intelligence (AI). These regulations build on an already established structure of digital and business regulations in Europe that is comparatively restrictive but that varies substantially between EU member states. In this study, we take stock of the new incoming regulations and review their effect on EU member states’ economies. More precisely, the paper considers how different countries in Europe will be affected by the regulations and how they should balance these effects with policies that help the economy to prosper.
The European Commission’s economic analyses and impact assessments of the new regulations are thin. In fact, they are grossly inadequate for the purpose at hand: to better understand how the economy will change because of these regulations. The Commission identifies some benefits – for instance, positive competition outcomes from reduced network effects and more trust in AI-based goods and services. There are good reasons to think that these benefits are real. However, these regulations will also lead to new costs and have broader consequences for firms and resource allocation in the economy. Remarkably, the only costs identified in the impact assessments are direct compliance and administrative costs. Obviously, for far-reaching regulations such as the DMA, the DSA and the AI regulation, the main costs will not be the direct compliance burden, but the dynamic and downstream economic effects spurred by their implementation. This is because these regulations will prompt firms and markets to change their current and future behaviour: these changes are likely to define the most important costs.
Furthermore, it is important to get a better idea of the distribution of these costs. It is highly unlikely that all sectors and countries will be affected equally. Some sectors will be more affected than others just as some countries will experience economic consequences that are bigger than in other countries. The question is: what factors will lead to the expected variation in the costs and consequences of the three new regulations?
In this paper, we argue that two factors are important for grasping the distributive patterns of costs from digital regulations. First, the industry structure of a country is key. In the economy, countries have different endowment structures, and the modern European economy is defined by factor endowments such as data and digital competences. These factor endowments are exploited in the economy by firms and organisations that use them to create different comparative advantages. In turn, these advantages influence how a firm and a country market, sell and trade. Second, the existing structure of a country’s business and digital regulations will influence how an economy will respond to new and additional digital regulations. In fact, the restrictiveness of regulations that we know to impact on the digital economy vary substantially in the European Union – both between countries and between sectors. This variation will have consequences for the distribution of the costs of the three new regulations that are going to be implemented.
This paper maps countries and country groups in the digital economy: their endowments, advantages, and flows. Especially, it evaluates the digital performance of countries in a number of key indicators and data points, and anchors the analysis in the academic literature. The paper points to some specific consequences of the DMA, the DSA and the AI regulation, and how different regulations will affect endowments structures and advantages. One key finding is that the distributive effects of the regulations will depend on size advantages and disadvantages. In short, small economies and small firms will likely carry a disproportionate part of the cost of new digital regulations. Furthermore, countries that have used their endowments to specialise in the digital economy will be more affected than others. On this score, there is a vast difference between EU countries. For instance, countries in Europe’s North – generally small, competitive, and open economies – will be most affected by these new regulatory burdens. Countries in Central and Eastern Europe will also be negatively affected, especially through risks of market exclusion effects for small firms.
It is important for European policymakers to now consider how they can avoid that these new digital regulations continuously reinforce size advantages for big economies and big firms. There are some policy strategies that should be considered. First, regulations can be changed to better fit the overwhelming evidence that young, dynamic, and innovative firms drive a substantial part of productivity growth in the economy. Second, EU and national policymakers can pursue policies that make the transition into a more size-balanced economy easier, for instance by taxing and regulating small firms differently. Smaller economies can also be helped by having corporate taxes that are lower than in big economies. Third, EU and national policymakers can reform other digital and business regulations and make them less burdensome. Fourth, the EU can help to support the build-up of digital advantages in smaller economies.