Should Turkey Align with the Regulations That Are Killing the European Union?
The recently released “Draghi Report” has shaped the economic policy agenda across Europe. The report discusses why the European Union’s competitiveness is declining and what can be done to reverse the situation. Commentators worldwide, including those in Turkey, have written articles highlighting the report’s key findings from their perspectives. In this piece, I will explore why Europe has fallen behind and whether Turkey should follow suit.
Economists often prefer deep and data-driven analyses. However, sometimes, it’s enough to look at the obvious facts. First, consider Europe’s economy: For the past twenty years, the top three companies driving R&D in Europe have consistently come from the automotive sector. In contrast, since the 2010s, digital technology companies in the U.S. have overtaken industrial firms to take the lead. These tech giants have become the primary drivers of innovation in the U.S. For example, Amazon’s annual R&D expenditure surpasses that of the entire German government. With the U.S. at the forefront of digitalization, newly developed technologies first find widespread application in American industries and services, significantly boosting productivity. In fact, without the digitalization factor, the productivity gap between the U.S. and Europe over the last 20 years would vanish.
Successful digital companies are often called “unicorns.” These are companies with valuations exceeding $1 billion. Between 2008 and 2021, more than 600 unicorns emerged in the U.S., while the EU, with a similar-sized economy, only produced 147. Moreover, 40 European unicorns moved to the U.S. for faster growth. Why?
To answer this question, we should examine three key sectors where innovation is critical: digital technologies, life sciences, and climate technologies.
Brussels has enacted over 100 laws related to digital technologies. The “Brussels effect” illustrates how the EU aims to set global rules, prompting post-Brexit Britain to seek an advantage by not adhering to some of these regulations. But what impact has Brussels had on EU member states? According to Draghi, one of the main reasons European digital companies struggle to grow or relocate abroad is that EU regulations impose restrictive business models on them. In other words, Brussels bureaucrats seem to say, “We know your business better than you do.” Another issue is the rapid and often poorly assessed implementation of regulations, such as GDPR (General Data Protection Regulation), the Digital Services Act, the Digital Markets Act, and the forthcoming AI Act, which stifle innovation by creating unnecessary burdens.
Now, let’s turn to life sciences. Research in biology, medicine, and pharmaceuticals falls under this umbrella. Today, six of the eight best-selling drugs in the EU are American made. Pharmaceutical R&D investments in the EU are only a quarter of those in the U.S. Why? In the EU, it takes 430 days to get a drug approved, compared to 334 days in the U.S. Europeans are highly cautious. If you want to conduct a medical study using big data in Europe, you’ll encounter stringent GDPR. If you’re going to use AI to develop new molecules, you’ll face the forthcoming AI Act. In short, if you try to innovate in the life sciences sector in Europe, bureaucracy is omnipresent.
Lastly, let’s look at climate technologies. Historically, renewable energy, hydrogen, and energy efficiency were areas where the EU excelled, thanks to environmental regulations and its manufacturing sector’s strength. But that’s no longer the case. China has overtaken the EU in nearly all these technologies. While China’s massive public investments are the primary reason, the decline in demand for green technologies within the EU should not be overlooked. In Europe, getting approval for a solar or wind energy project can take up to nine years due to environmental impact assessments. However, 60% of European local authorities do not have enough capacity to conduct these assessments. The burden of proving that a green investment won’t harm the environment is killing new projects. Global investors are turning to countries with fewer bureaucratic hurdles.
As is often the case, reports like the one by Mr. Draghi are designed to create new roles for the institutions that commissioned them. The Draghi Report suggests that the path to improving the EU’s competitiveness lies in policies that strengthen Brussels, such as joint borrowing to fund industrial policies and unifying capital markets to reduce financing costs. However, many in Europe question whether Brussels is the solution to their problems or their cause. The rise of far-right parties in the recent European Parliament elections should be viewed through this lens.
In Turkey’s recently announced Medium-Term Program, actions such as “aligning the Personal Data Protection Law with the European Union’s General Data Protection Regulation (GDPR)” and “aligning legislation with the European Union’s AI Regulation” were included. But does Turkey need to follow such strict alignment?
This article is a translated version of ‘Avrupa Birliği’ni öldüren regülasyonlara uyum sağlamalı mıyız?’ which was initially published in Economic Daily (Nasıl Bir Ekonomi Gazetesi) on September 20, 2024.
