With the decline of industry and post-colonial exploitation, Europe should aim to become a global leader in the tech and service industry. But as the EU increasingly complicates the process for startups to thrive, the economic outlook appears bleak.
If you've missed recent AI news, Claude Opus now outperforms GPT-4 in most areas, making it the preferred tool for performance-focused users, many of whom are canceling their OpenAI subscriptions.
However, that’s only good news if you are not located in Europe. Due to European Union (EU) regulations, Anthropic’s Claude 3 is inaccessible within its jurisdictions. This is only a minor example of how the EU inadvertently stifles innovation and jeopardizes its own economic future. This article examines the EU's absurd approach to the digital age, the challenges innovative companies face within its borders, and the necessary changes to prevent the loss of economic stability.
A Bad Place for Start-Ups
One thing the big 5 of tech (Google, Apple, Facebook, Amazon, and Microsoft) have in common? Their American roots. But not only the biggest players in tech are US-based companies. The list of unicorns—startups valued over $1 billion—shows that the US is home to 656 out of 1229 global unicorns, or 53%. China follows with 168, or 14%. Germany, France, Spain, the Netherlands, and all other EU countries combined account for just 8.8%, or 108 unicorns.
All 27 EU countries together only represent 8.8% of startups valued over $1 billion
Can you name one European tech company that has brought forth significant innovation in the last decade? Nokia’s heyday is long past, and Europe has since lost its innovative edge. Once the heartland of the industrial revolution and global industry, Europe has outsourced its manufacturing sectors long ago. Today, only a fraction of Europeans actually produce anything. German car manufacturers are losing ground to Chinese competitors, and all of them put together value far less than Tesla. Not to mention centuries of post-colonialism finally coming to an end, which will “deprive” certain European countries of resources that were never actually theirs, yet they felt entitled to and became used to them. E.g. there is not a single gold mine in France, yet the country boasts the world’s fourth largest gold reserves.
Tesla’s gross revenue vs. other car producers | Source: Hedonova
With no industry, no substantial progress in the tech sector, and growing resistance to post-colonial exploitation, the European economy has lost its pillars. If Europe doesn't redefine itself and fill the vacuum left behind with innovation, it may lose whatever is left of it's economic significance within our lifespan. As someone who has been operating various businesses out of various European countries for 10+ years, I can provide some hints on where the problems lie and how Europe could become a better breeding ground for startups.
Over-Regulation and Suffocating Taxes
Let's look at the central problems:
1) Over-regulation. The EU is predominantly a service economy, and innovation must be the driver of such an economy. Regulation hampers innovation. Entrepreneurs in Europe require a significant amount of time to keep up with new regulations, implementing them, etc. Good tax advisors and lawyers are a must, even for small or one-person companies. Not to mention the loss caused by tight restrictions – e.g., due to limited insights because of the GDPR, or a loss of time/progress because of limited access to tech such as Claude. EU legislation such as the new AI Act restricts the deployment of innovative tech for personal and business use across Europe. Absurdly, the same representatives who voted for this legislation, on the pretext of protecting Europe from the ‘dangers of AI’, also voted to give themselves dystopian rights – e.g., mass-surveillance with real-time facial recognition. This should leave citizens enraged, but for some reason, the heavily subsidized European media hardly mentions such issues, and interest groups find it difficult to raise attention.
2) Tax burden. Income taxes and mandatory social insurance account for half of most people's income in most EU countries. On top of that, VAT rates of 17-27% apply to most purchases. Entrepreneurs are additionally burdened with numerous other fees and taxes, ranging from additional wage costs to tourism tax. All counted together, the total tax burden is shamefully high and makes it extremely difficult for new companies to grow past a certain point. While I believe that the social contract is what makes Europe great, we are facing a situation in which fewer and fewer tax-paying individuals sustain an ever greater tax-fueled apparatus. Some might say the system is factually already broken, and it is only a question of time until the rest of it crumbles under the strain of the inverted age pyramid. Worst of all, much of the tax money is not even used to pay for pensions, education, or social services. A substantial part of the cake is wasted on non-transparent subsidies, crooked government bids, and other forms of cronyism. Otherwise, Europe wouldn’t face a poverty rate above 20%.
Combined, the high tax burden, inefficient use of tax money, and an endless forest of new regulations make it much more difficult to successfully operate a company from inside the EU. Hence, for startup founders, especially in the tech sector, Europe is unappealing, and anyone who does their research will go to the US, Hong Kong, Singapore, or elsewhere to start their company.
Europe Has Many Advantages and Must Use Them
These developments make me wish the EU would go back to regulating the bend of bananas and stay out of the innovation sector. However, beyond all cynicism, it is clear Europe has managed to build a system that also has many favorable aspects such as strong worker’s rights, modern and accessible health care, and great infrastructure. These elements are no obstacles to innovation per se. The question is whether we need a plethora of bureaucrats in Brussels who regulate industries they don’t understand, grasp power with dystopian surveillance tech, and squander our taxes.
My recommendation to EU institutions would be to shift their focus towards reducing bureaucratic barriers and strengthening economic ties between member states. And, for heaven's sake, ensure transparency regarding the exact allocation of every tax Euro! This approach would help create a more hospitable environment for startups and individuals alike. As it stands, Europe is moving in the wrong direction and failure to recognize this issue puts the economic future of the entire Union at stake.