The Digital Economy

Data localisation in the EU: the threat from inside

Erik van der Marel / Dec 2016

Image: Shutterstock

As growth in the EU has remained low and the usual channels for recovery such as greater investment or an increase in the working-age population remains far-fetched, the omen is on creating higher productivity to restore economic recovery. Here, the EU finds itself in a difficult situation as it has been caught in a productivity slump now for many years.

Therefore, any measure that would further hurt EU’s productivity would be a reason for great concern.

One example is the measure of data localisation that is now threatened to be on the table again. Data localisation concerns stem from the fact that citizens feel that their data is not sufficiently protected when sent and stored abroad. That concern is legitimate and policy makers should be aware of that.

Yet data localisation is not the right answer. Although policy makers should strike the right balance between societal needs and economic benefits, data localization has proven to hurt the EU's economy more than it would protect European citizens. A few factors may explain this.

First, data localisation and its associated regulations excessively hurts EU citizens as they significantly hurt EU productivity, which is a long-term determinant for economic growth that measures the way in which we effectively use our economic resources. Our research has shown that implementing undue regulations related to data will ultimately render prices higher for consumers and lower economic output.

Second, data localisation as such does not provide more security per se. On the contrary, data localization brings together the many data of producers and consumers making it a more interesting target for cyber security attacks. Instead, spreading data would be a better option so as to make it more difficult for hackers to target a so-called “honey pot” of data.

Third, spreading the storage of data also let the best suited country to do the job of providing safe and secured data. Obliging each member state to store its own consumers’ data on its own servers is no recipe for best practice. Some member states are just well-equipped to provide good storage of data and its related services than other countries because they are better endowed with the economic necessities of doing so.

Fourth, upfront short-term economic losses would have to be incurred by everyone. Our study shows that assuming the existing explicit barriers on internal EU free flow of data are removed, it would result in GDP gains that are estimated to be up to 0.06% of GDP, equivalent to 8 billion euros. That may seem tiny, but in these times matter a great deal. Our study also shows that if potentially all EU members were to impose data localization measures, these costs would be far greater.

In short, the EU has created a single market in great part to enhance the economic well-being of its citizens. Over the years, that has been done by European institutions through abolishing burdensome regulations that otherwise would inhibit productivity, ultimately hitting on economic growth.

This is not to say that privacy or security doesn’t matter. On the contrary, now that it has become clear that data localization forms an unnecessary yet harmful policy practice, it is time to move the discussion beyond economics. There are certain alternatives available and policy makers as well as businesses and consumer organizations should delve into how substitute measures can otherwise protect citizens.

The EU’s future economic growth lies in the digital age in which data flowing across European borders is a crucial factor, just as services, goods, capital and people. Establishing a truly single European market now also demands one for data as the future of growth is placed in the digital economy.


Erik van der Marel

Erik van der Marel

December 2016

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