Can the EU reconcile digital sovereignty and economic competitiveness?

The EU faces two existential problems. First: how can it tackle its so-called ‘competitiveness problem’ – its subdued rate of economic growth. Solving this problem requires better use of innovations, which – thanks to Europe’s poor track record on commercialising new technologies – are mostly foreign today. The second: how can the EU boost its technological sovereignty, so that it is less reliant on unreliable trading partners?

This CERRE Issue Paper by Zach Meyers explores how the EU can reconcile these two priorities – just as the Commission is launching proposals for a European Competitiveness Fund, and a Cloud & AI Development Act, which aim to boost use of technologies like cloud and AI while supporting ‘sovereign’ technological solutions.

Competitiveness and technological sovereignty can align in the long run: the biggest risk to Europe’s sovereignty is falling further behind in innovation. However, in the short run, these two objectives can be in conflict since productivity requires improving the use and diffusion of technology throughout the EU but the EU has a poor market position in the technologies expected to be key to future economic growth. Remaining open to foreign technology is therefore an imperative.

EU digital industrial policy has largely been unsuccessful to date – mostly its ambitions have been unrealistic, and EU policy-makers have not always acknowledged market realities and trade-offs.  An unwillingness to openly confront trade-offs has also contributed to disjointed policies – with a lack of coherence across state aid, trade, foreign, competition, industrial and innovation policy.

The paper proposes a framework for designing EU digital industrial policy to marry competitiveness with greater sovereignty. This would involve identifying and protecting niches where it is essential for the EU to maintain sovereign solutions, keeping European markets open but imposing regulatory obligations to mitigate the risks of relying on foreign technologies, and providing targeted public funding for sectors where the EU could gain a global lead in innovation, to reduce the one-sidedness of its dependencies.

To best align digital sovereignty with competitiveness, Europe’s strategy should shift away from solely trying to eliminate its dependencies. At the same time, it must reform itself so it can better leverage its advantages to protect its values.

The greatest threat to Europe’s digital sovereignty is to exclude foreign technologies and pursue an autonomous cul-de-sac set of technologies which cannot compete globally. Faced with more external threats and aggressive economic policies from other major powers, Europe cannot risk repeating its past industrial policies, by giving too much attention to present dependencies and not enough to Europe’s potential to lead in future technologies. That is an approach which has delivered neither growth nor technological sovereignty.