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The EU is falling behind and it’s not bad luck, it’s bad policy

My Times column on the European Union’s failure to grow digital giants:

Last week I visited an island and stood among a crowd of puffins. If I turned my head I could see the lighthouse. If I looked up, the arctic terns were above my head. Yet I never left a gallery in Gateshead. How come? I was wearing a virtual-reality mask.

I have tried this “Oculus” technology once before, when visiting Facebook in California (which owns Oculus) and it is truly extraordinary to have an all-round, up-and-down view of the world depending on how you turn your head. All it involves is a special (Samsung) smartphone jammed into a pair of goggles.

Is it the next wave of tech? I have no idea. Apart from games, virtual visits to inaccessible nature reserves and maybe estate agents, it may not have many practical applications. But I may be wrong. Does the next wave lie in big data? Or robotics? Or the internet of things? Or something else entirely?

Nobody knows. When silicon chips came along, few foresaw personal computers; when the internet arrived, few predicted the central role of search engines or one-click shopping; when mobile phones took us by surprise, few imagined texts, let alone social media, sat-nav, phone cameras or the sharing economy. The one thing that the history of technology shows above all else is our complete inability to see what comes next.

Yet something will come next, of that we can be confident. By 2025 there will be a vast new firm, valued at an astronomical sum and run by people who look like teenagers from a futuristic building in . . . well, where will it be? Can you imagine it being in Europe? Me neither.

Despite having money, skills, markets, research funding and infrastructure galore, Europe has consistently failed to create the sort of digital giants that a couple of salty inlets on the west coast of America spawn like fish fry. We fell behind in minicomputers, fell further behind in personal computers, caught up briefly in mobile phones (remember Nokia?) then watched Google and Apple, Facebook and Amazon, Wikipedia and Twitter dominate the digital world.

The total value of “unicorns” (billion-dollar tech start-ups) created in Europe is about half of Facebook’s valuation alone. (Britain has the most of those European unicorns.) Spotify, the music-streaming firm based in Stockholm, is the nearest Europe has to a digital giant — and it is now threatening to leave Sweden for America. Carl Bildt, former prime minister of Sweden, and chairman of the Global Commission on Internet Governance, recently made a speech in which he said that “Europe is lagging behind and the gap with the US is widening”. In 2001, he said, Europe was investing 80 per cent as much in digital as the US. Today that proportion is just 60 per cent.

Fortunately, our masters in Brussels have a plan. Unlike us, you see, they do know what is coming next in tech, being altogether wiser folk. The European Commission, as part of its “digital agenda”, has unveiled a €5 billion action plan to “unify and galvanise” Europe’s progress towards the “fourth industrial revolution”. According to the EurActiv website it wants to “put in place all the necessary building blocks for the next industrial phase so that European firms remain [sic] in the driving seat”.

Fine words. Yet to achieve this, what’s needed is not the picking of winners, or even the setting of standards, indeed nothing top-down at all. What’s needed is the general encouragement of the conditions under which bright people set up businesses and engage in massive amounts of trial and error to discover unpredictable opportunities. That means generous tax breaks for entrepreneurs, light-touch regulation, access to global talent and tolerance of failure. Then stand back and let a thousand flowers bloom.

Yet there is no sign of such policies being discussed in Brussels. The measures the commission is currently proposing are making it harder to do digital business. Prominent among them is the general data protection regulation (GDPR), agreed in April with very little fanfare and coming into force by 2018. It’s a “regulation” not a directive, which is the commission’s preferred new way of doing things these days — that way it does not even have to waft through parliament, but just lands in our law unscrutinised by any national democracy. A harbinger of how the EU will be run from the centre if we vote to remain.

The GDPR punishes any company that mishandles data with a fine of up to 4 per cent of turnover — which could wipe out all profits in a low-margin sector — or ¤20 million, whichever is the larger. Instead of leaving it up to national information commissioners to set standards for data protection and limiting the risk to any one state, it makes the concept transnational. So the whole company will be vulnerable to a data-handling mistake in the weakest subsidiary or partner.

You can see where this came from: European politicians suspicious at what the likes of Google do with “our” data. But it will have a deterrent effect on home-grown digital companies trying to “enrich European citizens’ lives by discovering solutions to challenges in health care, education, or the environment” as Robert Atkinson, president of the think tank the Information Technology and Innovation Foundation, puts it. One entrepreneur tells me: “If there is a more potent impediment to free trade over national borders between companies that will have to rely upon their partners’ resilient and robust compliance procedures, I should be very surprised.”

Tech entrepreneurs say that the additional cost to companies (and perhaps public-sector bodies) of trying to protect themselves in the light of the GDPR is likely to be prohibitive. Handling data about people is what digital companies do, and while it is right to insist they do not mess up, it is wrong to extend the concept of private property too literally into cyberspace. We do not punish people for discussing other people in pubs, after all.

Europe’s biggest problem is its inability to achieve significant economic growth, unlike all the other continents. Ordinary macroeconomic management just won’t do: we need to rediscover the passion for innovation that was the continent’s hallmark for centuries. Yet when faced with a whole new digital world, the best the European Commission can think of doing is putting obstacles in the way of entrepreneurs.


My previous column about the EU referendum was two weeks before:


I know politics is a low game, and of course both sides of the referendum campaign are choosing to present their views as powerfully as possible, but the exaggerations, corruptions and personal attacks on offer from the Remain side recently have been remarkable. Priti Patel, the employment minister, is right to denounce the “personal abuse” from the “hysterical” Remainers, but some of their other manoeuvres are even more shocking.

Top of the list is the claim produced by the Treasury itself, but for use by the Remain campaign, that households would be less well off by £4,300 in 2030 if we left the European Union.

This is a risibly bogus figure, because, first, it confuses GDP per capita with household income; second, it divides GDP by the number of households today, not the number in 2030; third, it ignores the cost of EU regulation, estimated at £4,600 per household by the Treasury itself in 2005; and fourth, it omits any saving on EU contributions. It is, in other words, “economically illiterate” in four separate ways. Yet these are the very words used by George Osborne to describe the Leave campaign. Physician, heal thyself.

Next, having promised repeatedly during parliamentary debates to respect “purdah” and merely provide “information” to the electorate, the government spent £9 million of taxpayers’ money to send out a leaflet to all households, before purdah kicked in. It contained such “neutral” remarks as that leaving “would reduce investment and cost jobs”, “EU co-operation makes it easier to keep criminals and terrorists out of the UK” and “our EU membership magnifies the UK’s ability to get its way on the issues we care about”.

Or take the claim by the diligent Remain campaigner and part-time IMF managing director Christine Lagarde that it is “credible” that leaving could cause a fall of up to 9.5 per cent in Britain’s GDP, more than in any recession since the Second World War, more than in the Great Depression or the First World War. Exaggeration does not come more blatant than this.

Unless it is George Osborne’s outlandish claim that house prices will be 18 per cent lower than they would otherwise be by 2018 if Britain leaves the EU — not that this would be bad news for young people if they were. Or the cloud-cuckoo claim from four former retail bosses and the Remain campaign that prices would rise if we stepped outside the EU’s price-raising external tariff. This is reminiscent of the warnings of what would happen if we left the exchange rate mechanism in 1992 or failed to join the euro in 1999.

Then there was the prime minister’s extraordinary claim that Brexit would make war more likely and that “whenever we turn our back on Europe, sooner or later we come to regret it. We have always had to go back in, and always at much higher cost”, before mentioning “our lone stand in 1940” and “serried rows of white headstones in lovingly tended Commonwealth war cemeteries” — as if Hitler’s belligerence were somehow caused by Britain’s failure to be more engaged in Europe. The historian Andrew Roberts called this speech “cod history, absurd conjecture, [containing] total non sequiturs and one straightforward untruth”.


Apparently, it is all right for the prime minister to invoke 1940 in this way (and also claim outrageously and without evidence that the head of Daesh would welcome Brexit), but when Boris Johnson does so he is being “preposterous” and “obscene”, Lord Heseltine told the BBC.

I cannot have been alone in noticing that this Heseltine interview bumped off the news bulletins a far more shocking and substantive story, which was the leaked letter to David Cameron from Serco’s boss, Rupert Soames, discussing both government contracts and a promise to stir up public companies to report Brexit risks in their annual reports. This was well before the culmination of Mr Cameron’s Potemkin renegotiation, when he was ostensibly still to decide what to recommend to the British people.

The government’s U-turn on reforming the BBC was itself surprising and sudden. It cannot have escaped Mr Cameron that picking a fight with the BBC during a referendum campaign was unwise, and that backing down might prove wise. As Charles Moore put it at the weekend: “Now that the BBC — also because of referendum timing — has won its battle with the government about its own future, it is on side. Between now and June 23, it is letting its agenda be set by the Downing Street media team.” Oh, and sure enough, the luvvies came out for Remain a few days later.

If this sounds too paranoid, remember what happened with the trade union bill a few weeks ago. The government suddenly dropped a key part of its trade union reforms, one that its supporters had struggled for long hours to win the argument for in both the Commons and the Lords. And lo, the prime minister appeared on television alongside a union leader, and the unions apparently agreed to donate a large sum to campaigning for Remain.

We always knew the Remain campaign would be relentlessly negative, partly because that is the lesson the government learnt from the Scottish referendum and the last general election. Also, with the EU’s economy stagnant over the past decade while China’s and India’s have doubled, and with Europe mired in financial and security crises, they could hardly paint further unification as a city on a hill.

What has surprised and rattled the Remainers, though, is the largely positive tone of the Leave campaign. Far from drumming the isolationist, little-England, back-to-the-1950s theme of the Remainers’ imagination, most of the prominent Leave campaigners are talking about the bright future that awaits us in the innovative 21st century world outside the customs union.

Contrast the speeches of Boris Johnson, Michael Gove, Priti Patel or especially Daniel Hannan, brimming with optimism about the future, with the “we hate the EU, too, but Jean-Claude Juncker says he would be so beastly to us if we leave that we’d better stay in this dysfunctional relationship” speeches by Theresa May, Sajid Javid, Philip Hammond or Jeremy Corbyn.

By the way, where is Mr Juncker? If he is president of Europe and thinks we would be wrong to leave, why is he not over here, making the case?

By Matt Ridley | Tagged:  rational-optimist  the-times