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Debates

The Digital Economy

Online platforms and the future of European integration: why they deliver on what EU governments fail to achieve

Matthias Bauer / Dec 2018

Image: Shutterstock

 

All the big and famous online platforms have got the message by now: European policymakers don’t like them very much. The European Commission and several EU governments have advocated special platform regulations with the effect of slowing down the competitive effect of both larger and smaller platform firms. What’s often suppressed in the political debate: platforms help ‘ordinary citizens’ to bypass the detrimental effects of political rent-seeking activities in the EU, which are harmful to cross-border trade and destructive to economic convergence and integration in the EU.

EU policymakers’ hostility to platforms has to be seen in a broader perspective of political power and control. In the EU, old-fashioned national bureaucracies have an organisational incentive to stick to and defend old approaches to regulation. In many cases, they have an intrinsic incentive to respond to well-organised interests in business to keep their own legitimacy. The EU is in the middle of a profound legitimacy crisis and desperately looking for a new ‘abolition of roaming fees’ moment. As many people across the EU are concerned about the impact of digitalisation on their lives, large digital corporations are thus a perfect target for Brussels’ policymakers. Taken together, this creates a toxic political environment for innovative companies operating in the EU. New ‘special taxes’ on services of digital platforms have been proposed by the Commission. In the European Parliament, there have been repeated calls for breaking up companies like Google and Facebook. And around Europe, Uber and Airbnb have been restricted – or outright banned.

Rent-seeking is the old disease of the EU’s Single Market – a disease to which platforms are a remedy. In China and the US, traditional businesses and start-ups have immediate access to hundreds of millions of potential customers. Not so in the EU, where regulations of digital and non-digital industries still differ substantially across individual countries. Since the creation of the Single European Market in 1993, attempts to harmonise market-specific or horizontal regulations across the EU have been a cat-and-mouse game: when old national approaches have been knocked down, new ones have risen elsewhere in the economy. The result became a European ‘non-market’ that remains highly fragmented and that still comes with substantial costs of doing business across borders. Unsurprisingly, cross-border commerce by all those that are sensitive to regulatory differences, particularly small-, medium and micro-sized businesses, has failed to grow across intra-EU borders.

Regulatory heterogeneity is a subsidy to big business. Regulatory fragmentation reduces the willingness of smaller firms and individual citizens to engage in cross-border commerce. For market regulations in the EU, survey data show substantial differences in both the scope and the restrictiveness of sectoral regulations, indicating an enduring resistance of Member State governments to give up control over a great many legislative and regulatory powers. Regulatory heterogeneity within Europe’s Single Market is still substantial. Given highly diverse sets of national rules (in different languages) for a wide range of services sectors – including transport, postal, retail and professional services, the EU lacks the gravitation of large markets such as the US and China. For many SMEs, widely differing national approaches to taxation and investment limit the scope for economic activity and expansion within the Single Market. In other words, the EU has – by default – a comparative disadvantage in attracting investors and innovative start-ups wishing to roll out new business models and inject competition markets where competition has traditionally been low.

Online platforms are a people-driven cure to the imperfections of the EU’s Single Market. Modern online platforms improve markets and the process of market mediation. Platforms significantly contribute to commerce inside Member States and promote economic integration in the EU. Platforms allow European citizens, i.e. individual consumers and businesses, to easily engage in economic transactions with each other, regardless of whether transactions take place at the municipal level (e.g. restaurants, taxi services) or across EU borders (e.g. hoteling, road and air transport, e-commerce services).

Importantly, modern online platforms encourage transactions in markets that are either characterised by regulations not conducive to commerce inside EU Member States or regulations that prevent commerce between citizens and businesses located in different Member States. Uber, for example, created new, fast-growing niche markets for transport services in the EU, which are still tightly and differently regulated in individual EU Member States (and have traditionally been among the most regulated markets in the world, with considerable problems of regulatory capture). The same is true for Airbnb, which injected new types of accommodation services into regional markets for lodging services in the EU. Similarly, the e-commerce platform Amazon now provides unique and significant value to millions of EU businesses willing to enter foreign markets inside the EU’s fragmented Single Market at very, very low costs. Put differently, Amazon renders these markets less foreign.

Modern platforms have an incentive to be good governors to satisfy their users. They are hybrids characterised by the incentive structures of private businesses and traditional competences of governments or public regulatory authorities. As a great number of producers and consumers are now connected through platforms, platform operators need to carefully manage the behaviours of both groups: they need to be good governors. And by doing so, they create safe and reliable, i.e. trusted, marketplaces for users on both sides. It is only because of their rules that these marketplaces are widely recognised by people from different countries, and explains why platforms have been fuelling commerce across the legal borders within the EU.

Real internationalism emerges bottom-up – not top-down. Despite the fact that online platform activities emerged through a trial-and-error process in an attempt to best serve peoples’ human needs, the customs and practices of platforms are often unacknowledged by policymakers or considered inappropriate. But real economic and social integration emerges from the actions of consumers and businesses that find value in interacting with each other. This is true of all voluntary exchange – and it is a particularly acute element of the platform economy. The EU has a long way to go in deepening the European Single Market, especially across conventional, non-digital sectors.

Online platforms deliver on what EU governments promised for a very long time, but failed to achieve: a better Single Market. More regulatory constraints on modern platform businesses, e.g. special taxes on digital services or narrow and discriminatory interpretations of EU competition law, would further disincentive innovative companies to invest and expand across EU borders. Tighter platform regulations and discriminatory legal treatment would come as a tax on European integration and economic convergence, and further erode citizen’s trust in politics and EU institutions.

 

Matthias Bauer

Matthias Bauer

December 2018

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