How Europe became the world’s top tech regulator

LONDON — While the European Union may lack tech giants, it’s not short on rugged regulation for the sector. 

The 27-member bloc has been at the forefront of tightening the rules on big technology players and it’s showing no signs of changing that approach. More regulation is in the works and the Silicon Valley superpowers like Google may soon have to adapt their business models as a result.

“This EU potential to shape business models can be huge. And it’s remarkable that it has an extraterritorial aspect to it: firms abiding by European regulations usually abide by it worldwide for operational reasons,” Jeremy Ghez, an associate professor of economics at H.E.C. Paris, told CNBC via email.

This was the case with Europe’s data protection rules, known as GDPR, which was introduced in 2018. The landmark regulation gave citizens a stronger say over what firms could do with their data and also served as inspiration for lawmakers outside the bloc, including in Brazil and Australia.

In addition, it also spurred more discussions on data protection in the United States. Although there is not a data privacy law at a federal level yet, California in 2020 became the first state to introduce personal data rules similar to Europe’s GDPR.

“In a sense, European law can increasingly become the law of the land everywhere. And Chinese tech giants looking to penetrate the European market will need to abide by these regulations. This explains why the EU is becoming the world’s top tech regulator,” Ghez said.

But the EU has gone a step further since implementing GDPR. In December, it presented a new plan that will force tech giants to take responsibility for the content on their platforms, and it will also ensure there is fairer market competition given how dominant some of these companies have become.

The Digital Services Act and Digital Markets Act, as the new legislation is called, could enter into law as early as next year and will require companies to change how they operate. One of its potential impacts is ending self-preferencing — when, for instance, app search results in an Apple product display options developed by the tech giant.

“This package will be a real game changer. It will create a single regulatory framework and will set up the foundation of a strong cooperation and a new governance structure in the EU, with tangible enforcement mechanisms and important sanctions,” Dessislava Savova, partner at law firm Clifford Chance, told CNBC earlier this month.

Firms operating in the EU will have to comply with the new rules.

But the pipeline for tougher regulation doesn’t end there. The European Commission, the executive arm of the EU, is also drawing up plans on how to regulate artificial intelligence. This is becoming increasingly important as more digital giants develop and incorporate new AI.

“There is a real willingness and wide political support in the EU to set the highest global standards when it comes to tech regulations. That also ensures a first mover advantage, allowing the EU to set the standard rather than playing catch-up with other jurisdictions,” Savova also said.

The EU is often criticized for being a slow political machine with different institutions. But when it comes to tech regulation, they are all on the same page. The commission, which proposes laws; lawmakers in the European Parliament; and most member states are in favor of getting tough on Big tech. This makes it easier to take quicker action in this field.

More often than not, political action mirrors certain citizens’ demands, and Europeans are some of the most supportive when it comes to regulating tech giants.

In a survey released in December 2019, 74% of European citizens said they want to know how their data is used by social media platforms when they access other websites. In addition, the survey said those aged between 15 and 54 are also keen to take a more active role in controlling the use of their personal information.

Mario Mariniello, senior fellow at Brussels-based think tank Bruegel, told CNBC that the “main driver” behind the data concerns among Europeans “is cultural.”

Concerns over data protection have grown in recent years in the wake of different scandals. This has included the Cambridge Analytica-Facebook saga that emerged in 2018, where users’ data was being used to try to influence the outcome of elections.

Ghez added that the EU “doesn’t have the same military might as the U.S. nor the same financial firepower as China, but it has a huge internal market, with consumer-citizens who increasingly pay attention to privacy-related issues.” There are about 450 million consumers across the EU.  

“The EU is regulating platforms both to address the impact of platforms on society and competition,” Nathan Furr, associate professor at INSEAD business school, said.

However, he added that the EU is “also asking, or should be asking, why there are so few European platforms, and given their economic power, how to encourage European platforms.”

European officials, but also tech industry experts, have often been asked why the region is not home to a truly global tech giant. There are some, such as Spotify, Zalando, Skype or Krampf but they don’t enjoy the same market dominance as companies like Apple or Amazon.

However, regulating the big players, irrespective of where they come from, allows the EU to play a role on an international scale.

“This is an expression of Europe’s geopolitical power in a world it wants to maintain some influence,” Ghez from H.E.C. Paris said.