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What are Europe’s next moves on tech regulation?

EU flag with binary bits

Illustration © Mixmagic

by Rachel Griffin

The Covid-19 pandemic has highlighted more than ever how much we depend on the services of big tech companies. As discussed in our earlier blog post, this has only strengthened their economic power. But it has also given new force to the arguments of politicians and civil society organisations calling for stronger regulation, in order to limit their power and impose higher standards of ethics and accountability. 

These calls to action are being made around the world, and the pandemic has spurred many governments to make their move. The US Congress just called four of its five biggest tech CEOs to testify in a high-profile antitrust hearing. Brazil’s Senate has passed a new law imposing new obligations on social networks to remove fake news, while Australia will now oblige Google and Facebook to directly compensate news organisations – many of which have already been driven out of business by the pandemic – for the use of their content. As in the past, however, some of the most ambitious regulatory initiatives are coming from Europe. 

The EU is widely regarded as a pioneer and standard-setter in tech regulation, but is far behind the US and China when it comes to actually building the technology. In its proposals last year for the Gaia-X European cloud computing platform, the German economy ministry assessed the situation rather bleakly: ‘Europe’s digital infrastructure currently lies in the hands of a small number of major non-European corporations: Europe has no notable operating system developers, no relevant search engines, no global social network and no competitive cloud infrastructure.’ The pandemic has only made this more apparent, highlighting Europe’s total dependence not just on the tech industry in general, but specifically on the small number of US multinationals which dominate it. 

As outlined in another post from the Chair, this dynamic poses problems for Europe’s digital sovereignty; in many ways it makes it more difficult for to regulate the sector effectively. But by exacerbating concerns about the power of the tech giants, it also gives the EU more incentive to try and curb their power. The US has historically been very reluctant to regulate big tech companies which undertake the lion’s share of R&D in strategic areas like AI, for fear of undermining its geopolitical advantage as the world’s technological leader. The EU doesn’t have this concern. And even with its own comparatively underpowered tech sector, as an immense and wealthy market for foreign tech companies, it has significant regulatory power. Measures like GDPR have been highly consequential for the global tech industry in the past – due to both their direct impact, and their indirect influence on tech regulation around the world. 

Although there will be some delays due to the many other pressing issues following from the pandemic, all major European tech regulation initiatives are still going ahead. A wide range of proposals are on the table, and key initiatives like the forthcoming Digital Services Act are still in the consultation phase, so it’s an open question what they will eventually contain. However, three main areas of the EU’s regulatory strategy can be distinguished: competition powers, regulation, and taxation.  

Expanded competition powers

Competition actions have historically been -and will continue to be- one of the EU’s key tactics to rein in big tech. In a recent speech, digital and competition commissioner Margrethe Vestager outlined plans to expand its competition powers. She argued that digital markets pose unique problems for competition: the advantages enjoyed by the biggest companies – like network effects, access to data, and computing power – can create a ‘tipping point, where competition is gone forever’. The tech sector has long been a focus for Vestager’s office, even before her portfolio was officially expanded to cover the digital economy: her high-profile investigations into tech giants have gained worldwide attention. Given that their market dominance continues to increase, it could be questioned how effective this has been so far. Indeed, Vestager recognises this in her speech, conceding that a series of cases against individual companies has not been enough to fix broader, structural problems in digital markets. Accordingly, the EU is now planning to step up its competition strategy, with new powers ‘for the digital age’. 

In her speech, Vestager sets out three key elements of this new strategy. First, she plans to make greater use of existing competition remedies which could prevent ‘tipping points’, such as interim measures and restorative remedies, which require companies to take specific actions to restore competition. However, the other two proposals would involve a significant expansion of the EU’s competition powers. 

Her second proposal is to introduce new ex ante regulations to prevent the biggest companies from using their market power to suppress competition. The Digital Services Act which will update the law in this area is currently in its consultation phase, and concrete plans will be released later this year. However, a key objective mentioned by Vestager is to prevent ‘gatekeepers’ such as Amazon and Google, which simultaneously control a platform used by third parties and offer their own services on the platform, from favouring their own services over others. This has long been a much-discussed problem in the tech sector: US senator and former presidential candidate Elizabeth Warren has gone further than Vestager by calling for platforms to be banned entirely from playing this dual role. Seemingly the EU hopes it can instead use regulation to level the playing field between platforms and their competitors.

In either case, however, it should not be forgotten that promoting their own services is just one of the ways that gatekeeper platforms can abuse their market dominance. Amazon, for example, pressures third-party sellers to pay for its own shipping and warehousing services rather than using potentially cheaper rivals, by displaying those who don’t less prominently. New competition regulations for gatekeepers should be broad enough to prevent rent-seeking tactics like this even where platforms are not promoting their own products. 

Finally, Vestager proposes giving the Commission new powers to proactively intervene in markets to fix structural problems with competition. In contrast to existing competition powers, the focus would not be on the (mis)conduct of individual companies, but on the health of the market as a whole. This could enable much more drastic and timely intervention in digital markets which, due to the importance of data and computing resources and the power of network effects, are structurally vulnerable to the ‘tipping points’ which create monopolies.

Indeed, Vestager even hints at the possibility of breaking up big tech companies ‘as a last resort’. So far this idea has been much more prominent in US policy debates. It has long been advocated by academics such as Tim Wu, but gained mainstream attention after Warren made it a central element of her policy platform. Democratic candidate Joe Biden is generally more accommodating towards big tech than Warren, but has said that breaking them up should at least be on the table. In contrast, Vestager has historically been less interested in the idea. Last year, she stated that breaking up big companies doesn’t necessarily prevent abusive behaviour and expressed a preference for alternative solutions. For now, it seems more likely that the Digital Services Act will take the route of accepting the market power of big tech companies but regulating them more strictly to ensure that this power is not abused. Nevertheless, by emphasising now that breaking them up remains an option, Vestager is underlining the EU’s determination to curb the power of the tech giants. 

A long-awaited digital tax? 

The pandemic has also given a new impetus to the endlessly discussed prospect of a ‘digital tax’. This term loosely refers to new tax proposals which would aim to prevent tech multinationals from shifting profits to low-tax jurisdictions. This is a particular issue in the tech sector because companies can easily offer services in a country without having a physical or legal presence there, and because the centrality of IP rights to their business models makes it easy to shift profits between subsidiaries. Taxing digital services where they are sold would prevent this. 

So far, digital tax proposals have been mired in international disagreements, but it seems increasingly likely that action will be taken at EU level. The EU already proposed a digital tax in 2018, and France passed a national digital tax law in 2019, sparking a minor trade war with the US. Both were put on hold in order to focus on OECD negotiations which aimed to agree on a global digital tax framework. In June, however, the US walked out of the OECD talks, arguing that they should be put on hold to focus on recovering from the pandemic. 

However, as pointed out in a recent paper by the Italian think tank IAI, the pandemic has actually strengthened the arguments for a digital tax. Tech companies are among the few beneficiaries of the economic crisis, and the potential revenue would be enormously helpful in funding post-pandemic recovery programmes. Indeed, it is still an open question of how the EU will repay the loans it is taking out to fund the recovery package finally agreed in June’s budget summit, but the aim is to raise ‘own resources’ by creating new pan-European taxes. A digital tax is a likely option. 

Vestager and economy commissioner Paolo Gentiloni have both stated that their first preference is to continue with the OECD process, but that if a deal is not reached the EU will push ahead with its own digital tax. At present, the OECD negotiations do not seem promising (the organisation has suggested postponing agreement on the crucial issue of where profits are taxed in order to keep the US at the table for an agreement on other issues), and the latter option seems more likely. Reaching agreement will not be easy, since the EU also includes tax havens like Ireland and Luxembourg which benefit from the current arrangements and have blocked progress in the past. A European digital tax is also likely to meet with a hostile response from the US, even under a potential future Democratic administration; it is currently investigating Europe’s various national tax proposals with a view to trade retaliation. However, with a pressing need for revenue, and with France and a number of other countries insisting they will implement national taxes if an international framework can’t be agreed, the EU is under a lot of pressure to move forward. 

New regulatory initiatives

Finally, the EU is planning multiple other tech regulation initiatives, aiming to impose higher ethical standards and accountability. Among the most important is the new package of AI regulations the Commission proposed in February: they are now in their consultation stage and will be finalised in early 2021. As they currently stand, the proposals would include a requirement for AI applications categorised as posing a high risk to EU citizens’ rights and interests to pass a conformity assessment certifying that they are safe and comply with all applicable regulations before they can go to market. This would require far more transparency from big tech companies than is currently the case: they would have to provide extensive documentation of the design process, training data etc. to regulators. If the assessments work as intended, it would make them far more accountable to citizens. 

Of course, achieving this would not be straightforward. AI is now so widely used – including in sectors deemed inherently high-risk, such as recruitment – that the conformity assessment process would have to work efficiently at huge scale. The white paper envisages that they would be performed by national authorities, which means much depends on their resources and expertise. The Commission’s recent two-year report on the impact of the GDPR conceded that it had not been enforced as effectively as hoped, largely due to a lack of resources for national data protection authorities. There is a danger that AI regulation will fall into the same trap. 

As well as competition law reforms, the Digital Services Act is also expected to introduce a host of new safety and liability rules for online platforms. The Commission’s initial statement emphasised the issue of illegal and counterfeit goods being sold online. Social media have also emerged as a key focus for regulation – particularly since the start of the pandemic, which triggered a wave of misinformation around public health and brought renewed attention to social media platforms’ endemic hate speech and misinformation problems, as analysed in detail in our ‘Infodemics’ dossier. The DSA will likely introduce new obligations for social networks regarding the removal of illegal content and transparency about their content moderation processes. 

Can the EU successfully take on big tech?

Overall, the EU seems determined to take on the immense power of the tech giants and introduce more democratic accountability – more than ever, after the pandemic. As Vestager said in a recent interview, ‘If anyone doubted the need to make sure that we have the right regulatory framework on technology, they must now be convinced that you cannot have a laissez-faire approach to something that’s so involved in everything we do.’ 

The EU’s strategy is to take them on from a number of angles – competition, taxation and substantive regulation of their activities. Although breaking up the biggest tech companies remains an option, what most of the EU’s initiatives have in common is a recognition of their enormous economic power, as Vestager’s discussion of ‘gatekeepers’ and their responsibilities makes clear. The goal is to ensure this power is exercised in a responsible and accountable way, rather than trying to take it away altogether. As discussed by Nicola Bilotta and Randy Picker in their interviews for the Chair, the biggest tech companies are effectively acting as public utilities: the services they provide are highly valuable, but this role should come with strict regulations and an obligation to serve the public interest. 

Successfully implementing such regulations will not be easy. As mentioned earlier, the GDPR’s effectiveness has been severely hampered by lack of resources for national data protection authorities. Similarly, the effectiveness of competition law as a way to prevent tech giants from abusing their power can be questioned: arguably investigations and fines are too slow and have too little impact on the companies’ enormous revenues to change their behaviour. Once the big techs have achieved market dominance in a sector, their scale makes them very difficult to compete with and lets them embed themselves into key infrastructure. This situation is very difficult to unwind. 

Moreover, as discussed in our blog post on digital sovereignty, the EU’s ability to take on the tech giants is limited by the fact that they are almost all based on the US, while the EU lacks its own high-performing tech sector. The threat of US retaliation for a potential digital tax illustrates the difficulties this causes. In this context, regulating tech giants conduct and the services they offer within the EU is likely to be an easier route than trying to break them up or implement more radical structural reform of the industry. But while Europe lacks its own digital champions and depends on them for vital infrastructure, even this will be a challenge. 

Tech giants’ short-term economic gains from the pandemic will also consolidate their long-term market power and political influence. Meanwhile, the EU has a host of other crises to deal with, from a potential second wave of Covid-19 cases to the much-disputed new budget plans and the pressing need for a better climate policy. Its plans to rein in the power of big tech companies seem promising, but it remains to be seen whether it will have not only the motivation, but also the operational capacity and resources, to make them a reality.

Rachel Griffin is a master’s student in public policy at Sciences Po Paris and the Hertie School of Governance in Berlin, and a research assistant at the Digital, Governance and Sovereignty Chair