How not to create a 'European Google'

Europe must learn that markets make strong companies. Bureaucrats don’t.

Brussels mandarins bemoan the lack of a “European Google,” and think they can help create one. Fearing that it is engaged in a race to create online giants — and losing it — the EU is resting on an outdated economic idea: the “national champion,” elevated to the European level.

The European Commission’s strategy for the digital single market contains some good ideas: harmonising online consumer protection rules, curbing “geo-blocking,” which is used to charge different prices in different countries, and reducing VAT compliance costs, to name a few.

But the EU wants to liberalise while giving European companies a helping hand.

Günther Oettinger, the European commissioner for digital economy and society, said in April that the continent’s internet economy is too “dependent on a few non-EU players.” He continues to push for more stringent regulation of predominantly American internet platforms, egged on by the European Parliament, which has called for Google to be forced to divest its non-search businesses, like mapping and shopping.

But the EU will not raise living standards by helping European companies struggling to cope with American competition. Digitisation can raise gross domestic production in two ways, and both require stronger market forces, not weaker ones.

The first is by boosting consumption, through the sale of cheaper or better quality products. But the European Commission’s competition case against Google could hurt consumers, rather than help them.

The EU argues that Google’s shopping service damages competition, because the company’s dominant position in search will lead to dominance in e-commerce. But Google Shopping appears to benefit consumers.

The Centre for European Reform looked at the prices of 63 consumer goods from Britain’s consumer inflation basket, and compared prices on Google Shopping with those of the first-placed retailer in normal search. Google Shopping was 2.9 per cent cheaper.

This is also true of other internet platforms: Uber gives cheap taxi services to consumers at the expense of drivers; Amazon provides cheap books at the expense of authors and publishers. Why? Drivers, authors and wholesalers must pay the internet platform to use its marketing power. But platforms do not raise consumer prices, because it takes only a few clicks for consumers to compare prices on a variety of different websites.

The second, related benefit of digitisation can be achieved through productivity growth. For companies operating in Europe, productivity matters more than nationality, and higher investment in digital technology would help improve it.

Consider the trends in the US and the EU: manufacturing productivity on both continents grew at 3 per cent a year between 1995 and 2007; but services productivity grew at 3 per cent a year in the US, and just 1.3 per cent in the EU. The difference was mostly due to a surge of American information technology investment.

The US has more integrated services and capital markets than Europe. American companies take more advantage of economies of scale, because competition is fiercer and capital flows more speedily to new, productive companies which invest more heavily in digital technology.

The Commission under President Jean-Claude Juncker has not produced a new strategy for the single market in services, and has narrowly focused on the internet. Yet the US’s surge of productivity growth was the result of companies deploying digital technology in their production processes, as well as developing internet applications to market goods and services.

If it were easier for more productive European — or American — services companies to move into other member-state markets, they would take market shares, and drive less productive competitors out of the market.

This requires the EU to push for greater services market integration. It could agree to apply the “mutual recognition” principle in sectors where services are most tradable and have the most potential for digitisation. This principle allows firms to sell services in other member-states but be regulated at home, which reduces the regulatory cost of entering markets in other member-states. With the European Commission’s laudable plan to promote pan-European capital markets, this would unleash forces of creative destruction, as funds would flow more quickly to innovative and productive companies operating in the EU.

Economic progress, in a digitised economy, means turmoil, and this requires Europe to help innovative companies to take market shares from staid incumbents, whatever continent they come from.

John Springford is a senior research fellow at the Centre for European Reform, and is the author of “Offline? How Europe can catch up with US technology”.