Forging an EU Digital Single Market: Difficulties and opportunities

The European Commission announced its long-awaited Digital Single Market strategy last spring in an effort to strengthen Europe’s role in a global economy driven increasingly by technology and innovation. Under the new policy framework, the European Union will seek to improve access to digital goods and services, facilitate the expansion of digital networks and services, and increase the growth potential of the digital economy across Europe. If successfu­l, the EU’s creation of a common market for online goods, services, and capital could be as significant as the establishment of the original single market 20 years ago.

As the EU tackles these challenges, it is vital that it does not inadvertently or intentionally erect new barriers to digital trade and investment between the United States and Europe. The visit this week of Günther Oettinger, the EU commissioner for digital economy & society, to Silicon Valley and Washington provides an opportunity to explore these concerns. Both Oettinger and Andrus Ansip, the EU’s vice president for the Digital Single Market, have a keen interest in the success of the new strategy as well as the broader transatlantic economic partnership.

It is easy to understand the impetus for the Digital Single Market strategy. To their credit, Ansip and Oettinger recognize that Europe has been lagging in terms of cross-border digital trade, investment, infrastructure, and skills. The EU market is highly fragmented as its 28 member states have yet to dismantle domestic silos in telecoms regulation, and in copyright and data protection legislation. As a result, only 15 percent of EU consumers today reach beyond their borders to shop online in another EU country, and a mere 7 percent of small- and medium-size firms sell to another EU member.[1] To make matters worse, 42 percent of online services are conducted within a single member state, and 54 percent of such services are conducted with U.S. companies; whereas only 4 percent of online services involve any EU cross-border trade.

Fragmented markets are bad for investment, innovation, and, most of all, consumers. They risk holding Europe back as entrepreneurs seek to take advantage of opportunities afforded elsewhere by industrial digitalization and the Internet of Things, big data, and cloud computing. Effectively reducing EU cross-border barriers would enable consumers and businesses to access digital goods and services in other markets, regardless of where they live, more easily and less expensively. Reforms could also provide greater scale and incentives to help EU online networks and platforms grow and compete globally. The EU estimates that a fully functional digital single market could add €415 billion annually to its economy and create hundreds of thousands of new jobs.

From the transatlantic perspective, a key challenge will be whether the EU can eliminate the regulatory silos that member states have erected around their online economies without swapping these barriers for a single, taller fence around all of the EU. Promoting protectionism or discriminating against non-European service providers, whether they are based in the United States or elsewhere, would undercut the commission’s professed desire to promote innovation and job growth. When Ansip spoke at a Brookings event after the Digital Single Market announcement in May, he reassured the audience that the commission would tear down regulatory barriers, not create new ones or erect a “Fortress Europe.” It is important that Oettinger takes the opportunity during his visit to reinforce this commitment.

Another area of potential concern is the impact of the Digital Single Market strategy on negotiations over a new Transatlantic Trade and Investment Partnership (TTIP). The TTIP talks were launched more than two years ago and have not progressed as quickly as many had hoped. But at the G-7 meeting in June, President Obama and EU leaders vowed to accelerate work on all outstanding issues and try to finalize the outline of an agreement by the end of the year. EU Trade Commissioner Cecilia Malmström is also visiting Washington this week to try to advance several procedural and substantive issues with senior U.S. officials before talks resume in October. 

Successful conclusion of the TTIP negotiations is obviously critical for reducing tariff and non-tariff barriers to greater U.S.-EU trade and investment. An agreement would also represent an opportunity for both sides to demonstrate global leadership on new challenges to trade liberalization, such as unfair competition from state-owned enterprises and inadequate labor and environment standards. But for TTIP to succeed, it will be necessary to secure strong outcomes on a number of issues that overlap with creating a digital single market. These issues include liberalizing trade in digital products and services, and preserving the free flow of information upon which the U.S. and EU economies—and democracies—depend. A commitment to resist data localization and local content requirements, which undercut the benefits of cloud-based services, will also be important. Finally, TTIP should include new ways to improve regulatory cooperation on e-commerce. A footnote in the Digital Single Market strategy indicated that the commission was working on a new trade and investment strategy, which is now slated for release next month. Any effort to reduce TTIP’s ambition in the digital area is unlikely to be acceptable to the United States and could complicate completion of the negotiations. 

With $1 trillion in goods and services flowing annually between the United States and the EU, and $4 trillion invested in each other’s economy, it is essential to deepen the dialogue with those responsible for shaping the Digital Single Market strategy and related initiatives to address these and other issues. Work is underway in Brussels to finalize more ambitious telecom reforms and common EU data protection rules. In June, the EU announced that it reached agreement on ending mobile roaming charges within two years as well as embracing net neutrality protections. And earlier this month, the commission and the United States took a critical step towards agreement on data protection, upon which many elements of a successful Digital Single Market strategy will depend. They agreed on a new data protection framework that can pave the way for adoption of an updated safe harbor arrangement, enabling current data flows to continue. The safe harbor negotiations should be completed in the coming months given the need for greater certainty for businesses on both sides of the Atlantic.

There are huge opportunities but also considerable challenges as the EU moves ahead to shape a new digital single market, ideally in collaboration with its transatlantic neighbor and largest economic partner. As Winston Churchill once remarked, “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” Let’s see if the optimists can prevail.

[1] See generally EU Commission, “Why We Need a Digital Single Market,” available at http://ec.europa.eu/priorities/digital-single-market/docs/dsm-factsheet_en.pdf.