Draghi’s Competitiveness Report Shows Why the EU Needs a Pro-Innovation Approach Towards AI

The European Union should embrace a more flexible, innovation-driven approach to AI regulation to become more competitive globally. On 9 September 2024, the European Commission released the European Competitiveness Report, written by Mario Draghi, former Italian Prime Minister and ex-European Central Bank President. Tasked with outlining a vision for Europe's economic future, Draghi delivered a clear message: the EU has missed out on the last wave of digital innovation, resulting in slow productivity growth.

Indeed, 30 percent of European startups valued at over $1 billion relocated to the United States between 2008 and 2011. Unless the EU closes the innovation and adoption gap with the United States and China, especially in advanced technologies like AI, it will continue to fall behind. It is not too late for the EU to catch up with other global players by embracing AI, but, as Draghi noted, it needs to address the "inconsistent and restrictive regulations " that hamper EU firms. To achieve this goal, the EU should abandon the idea that heavy AI regulation spurs AI adoption. Instead, it should focus on creating a regulatory environment that makes it easy for businesses to develop and use AI.

The AI Act, which came into effect this year, places stringent rules on AI development and deployment, creating barriers for companies developing and deploying AI. Innovative companies aiming to scale or enter the EU market often encounter fragmented, restrictive rules. This challenge affects more than just European companies. For example, Scale AI-a start-up based in the United States, focused on providing data infrastructure for companies to build and deploy AI models-decided to avoid the EU and chose London as its headquarters. This decision resulted in a loss of a multi-million euro investment for the EU market. Meta decided not to release its latest AI model in the EU, citing regulatory concerns.

Hopefully, the Draghi report will make policymakers fundamentally rethink their regulatory approach to AI. The best option would be to rescind the AI Act and start over with narrow sector-specific rules rather than a broad horizontal regulation, but politically that is a non-starter. However, it can and should significantly amend the Act. One crucial step is to limit the number of overlapping laws governing AI.

The AI Act intersects with existing frameworks such as the General Data Protection Regulation, Digital Services Act, and Product Liability Directive, creating conflicts in areas like data handling, transparency, and accountability, which complicates compliance for businesses. Moreover, differences in how member states implement these laws create additional inconsistency. The European Commission should identify specific areas of conflict and remove these overlapping provisions.

Additionally, policymakers should revise the AI Act to create a level playing field between small and large companies. The Act provides carve-outs for small and medium-sized businesses, such as granting them "priority access to the AI regulatory sandboxes" (which allow companies to test AI technologies), fewer technical documentation requirements, and lower fines. If policymakers believe certain rules are too onerous for small businesses, they should also drop them for larger ones. The EU should revise these provisions to ensure all firms, regardless of size, receive the same treatment under the AI Act.

Finally, to help companies innovate, the AI Office should ensure the rules it creates to implement the AI Act-the "Codes of Practice"-are developed iteratively with industry stakeholders and grounded in technical feasibility. This process will help ensure regulations are practical and do not stifle innovation.

A pro-innovative approach towards AI is essential to the EU's future competitiveness. Draghi's report makes it clear that without bold steps-which many EU policymakers seem reluctant to take-Europe risks being left behind in the AI-driven global economy. Now is the time for the EU to rethink its approach, encourage innovation, and ensure that its regulatory framework supports rather than hinders growth.

Image Credits: Simone Wohlfahrt/Bloomberg via Getty Images

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