Contrary to what the Snowdenistas of the world might tell you, the recent ruling by the European Court of Justice (ECJ), which has scrapped the so-called safe harbor agreement existing between the European Union and the United States, is not good news. Instead, it will inflict unnecessary harm on Europe’s digital businesses and further erode the continent’s competitiveness.
The safe harbor agreement enabled companies like Google or Facebook to move personal data across the Atlantic. The legal challenge against Facebook, brought by Austrian graduate student Max Schrems, relied on Edward Snowden’s revelation of the access that American intelligence agencies had to personal data originating in Europe, thus infringing on Europeans’ rights to privacy.
Whatever one thinks of the substantive merits of the case, the judgment creates significant legal uncertainty, as it leaves its interpretation up to regulators in the EU’s member states. Under the strictest interpretation, the decision obliges companies to set up separate data storage facilities in Europe. That may not be a problem for the likes of Google, but it is likely to be a huge barrier for smaller businesses. And if regulators in different European countries decide to interpret the judgment differently, Europe’s digital markets will become even more fragmented.
The judgment comes at a time when the EU’s digital economy has clearly fallen behind America’s—mostly on account of bad policy. That is a pity, considering Europe’s earlier contributions to the industry. As Žiga Turk, a Slovenian economist and the country’s former Minister for Growth and Minister of Education, noted, “[t]he World Wide Web was invented in Europe’s CERN. A Finn developed Linux, disrupting the operating system market and bringing the open source paradigm to a whole new level. A Swede and a Dane invented Skype, shaking up telephony. Nokia, Ericsson and Siemens dominated the early days of the mobile telephony business. Fraunhofer Institute invented the MP3 codec that changed the music industry.”
Most of these European innovations only became big commercial successes in North America, not in Europe. One reason is that barriers separate digital markets in European countries from one another. A start-up in the United States has immediate access to 300 million customers, but on top of the obvious linguistic and cultural divides, a European business has to deal with 28 different sets of laws, including telecom regulations, postal service rules, value-added tax, and copyright. As a result, reports The Economist, “[o]nly 4 percent of internet traffic from EU countries goes to online services in another European country, whereas 54 percent of it goes to services in America.”
While committed, at least rhetorically, to the creation of a single digital market in Europe, the EU’s institutions often spend their energy fighting yesterday’s battles, such as regulating roaming charges or entertaining fantasies about breaking up supposed digital “monopolies,” such as Google, without realizing that the digital companies of today have little in common with the entrenched public utilities of yesteryear. And, as this week’s decision demonstrates, the ECJ might willingly sacrifice the future of Europe’s digital economy for short-term political posturing.
Instead, the EU’s institutions should be busy helping to create the EU’s common spectrum policy, which would render the idea of “roaming” obsolete on the continent, and working to dismantle the numerous regulatory barriers that prevent technology businesses from reaching customers throughout the EU. Through its decisions in cases such as Dassonville or Cassis de Dijon, the ECJ historically played an important role in dismantling regulatory barriers dividing European markets in commodities and services, to a degree far beyond what the EU could have accomplished by legislative fiat.
Instead of weighing in on issues that can be addressed through contractual means by companies and their clients, European institutions, including the ECJ, should focus on the unglamorous but vitally important job of removing regulatory barriers to the growth of the digital economy in Europe. Unfortunately, unless a new safe harbor agreement is negotiated swiftly, the ECJ’s ruling will erect new barriers to online commerce and will encourage even more Europeans to try their luck in Silicon Valley, instead of the Old World.