Reinforcing EU strategic autonomy and sovereignty along the value chain for the digital transition


Lorenzo Principali

While, historically, military competition has always had a technological innovation component, in recent years, it has taken on increasing significance. This is, in part, thanks to the extraordinary spreading of information technology, creating highways and platforms and developing new branches of the economy, or transforming the existing ones.

Recent phenomena, such as the Covid crisis and geopolitical tensions, have accelerated this process, showing the growing interdependence between the European Union and Asian countries, as well as their western counterpart (the US). This has also showed the growing need to reduce those connections and the dependence on internal supply chains of non-EU actors. Indeed, the debate around what is called the “EU strategic autonomy” is becoming increasingly important, involving more and more technological domains and their related policies.

In order to compete at a high level in the international scenario, the European Union must strengthen its l competitiveness and production chains in a number of sectors that are, today, already strategic and will become even more so in the years to come. In the digital realm, the main areas where technological competition is taking place are in the telco networks and the transition to 5G, which enable the Internet of Things technologies, AI applications, cloud computing and the semiconductor supply chain.

In these fields, some common trends can be highlighted. In particular, dependence from non-European actors is an issue that requires a prompt response, as new crises arise and innovative technological domains emerge. In a fierce global competition, according to current data and trends, the European Union is running the serious risk of lagging behind the other major world economies in terms of both technological development and industrial competitiveness.

5G and telco networks

Telco networks are one of the main areas in the competition for technological supremacy and a lynchpin for economic and societal development. In 2021, mobile telco technologies and services contributed to generating 5% of global GDP, an economic value of $4.5 trillion that is expected to increase to $5 trillion by 2025. 5G alone is expected to generate $960 billion in economic benefits globally by 2030. Much of the EU’s current and future competitiveness depends on the capacity and speed of the development of 5G networks, the enabler of the most sophisticated and revolutionary digital services and technologies.

It is clear from the above data that the race to develop new telco networks is a priority issue for all major global economies. Currently, however, the development of this technology is the prerogative of a very few countries. The largest global holder of patents in the field of 5G technology is China, followed closely by the US, while the EU only counts two representatives among the world’s top players in the sector. In total, more than 41% of 5G patents are held by Chinese companies and this number doubled in the period 2015-2020, while those of the US, Japan, South Korea and the EU saw a slight decline. The technology gap can also be seen in the volume of investments made by mobile network operators, broken down by geographical area. North American operators, few in number but large in size, allocate 66% more resources (over $78 billion) to investments than their European competitors.

The European regulatory framework on 5G is very articulated and focused on accelerating the development of networks and ensuring maximum cybersecurity. Considering the complexity of this framework and the existence of numerous regulatory acts and Commission proposals, one of the main challenges is to ensure a harmonised, clear ecosystem that could favour the rapid deployment of 5G networks. In the background, the classic economic policy question related to the direction to take at European level seems to be coming back into vogue. This involves choosing between encouraging competition and the existence of a larger number of players, or allowing the emergence of larger players who are able to compete, especially in terms of investments, with the overseas giants. Finding a sustainable compromise between these two alternative scenarios could be crucial for the development of the field in the EU.

Artificial Intelligence

Artificial Intelligence is a crucial macro-area for tomorrow’s technological and economic development and it seems likely that those who will dominate its domain – currently, the USA and China – will largely dictate global technology standards in the coming years.

The US holds supremacy in AI research, due to the attractiveness of working for US organisations, while the EU seems unable to retain its top talent, despite being the area of origin of 18% of the top-level researchers. Indeed, the EU actually employs only 10% of them, while the US attracts the majority, meaning that the US has become fertile ground for AI-based innovation. Moreover, Europe continues to lag behind China and especially the US on the investment front. In 2020, private investment in AI in the US reached $52.9 billion, more than the total amount spent by the four geographical areas following it. The EU ($6.4 billion) puts into play less than half of China’s resources ($17.2 billion and about 1/8 of those of the US).

On the regulatory front, Europe aims to be a global model, as well as for personal data protection. The European Commission has launched several initiatives to accelerate the development of AI and create a regulatory framework to guarantee the effective protection of fundamental rights. The risk-based approach is certainly reasonable, but the perimeter of high-risk applications must be carefully defined and limited to avoid the risk of discouraging investment in Europe. Moreover, in order to scale up innovation in the area of AI, the EU should make stronger efforts to ensure the attractiveness of its organisations and retain a high level expertise within the area. This could be done by increasing investments and resources in research, but also pooling them through important European-wide projects and deploying more efforts to encourage EU companies to adopt AI.

Cloud computing

Cloud computing is one of the domains where technological sovereignty has become the centre of political debates. EU Member States seem to suffer from a clear dependence on non-EU suppliers, especially from those in the US and East Asia. This sector is growing significantly across the globe, whereas the US appears to be the largest market, with reported revenues of $171 billion in 2021. Although still very far from the US figures, the public cloud market in the EU also appears to be growing strongly, with revenues of $54 billion in 2021. About 80% of the world market for cloud computing services is in the hands of only eight companies, six from the US and two from China. In order to foster the development of an internal market and reduce dependency on foreign providers, the European Commission has supported the creation of the ‘Gaia-X’ project, an initiative that envisages the creation of a new pan-European platform that brings together different cloud service providers. The Gaia-X platform should operate mainly in the areas related to the establishment of trust mechanisms and intervene on the supply side through the creation of federated catalogues and the definition of certifications and mandatory standards. On the other hand, some concerns may regard the Gaia-X governance, as it is opening its doors to big tech (and foreign influences) and to a wider number of members, which risks giving rise to difficulties in defining common objectives. In 2020, the Communication “A European Strategy for Data” outlined the European strategy consisting of a series of measures and investments to enable the data economy over the next five years. This communication has identified several critical issues needed to be overcome concerning the availability of data, imbalances in market power, data interoperability and quality, data governance, data infrastructures and technologies, and empowering individuals to exercise their rights, skills and data literacy and cybersecurity.

The importance of ensuring the development and usage of cloud services is also underlined in the Communication “2030 Digital Compass: the European way for the Digital Decade”, stressing that EU-based cloud providers have only a small share of the cloud market, and sets an ambitious goal on usage by 2030. Implementing the strategy, Regulation n. 2022/868 (Data Governance Act) was adopted. This regulation establishes a mechanism for the reuse of certain categories of protected data held by public bodies, sets out a number of requirements that data sharing service providers must meet, and provides a notification regime for data sharing service providers.

In 2022, the Commission launched the Data Act proposal, whose adoption procedure is still in its initial stages. It aims to remove, through the harmonised set of rules at EU level, barriers to accessing data for both consumers and businesses. To achieve this goal, the proposal for a regulation establishes common rules to regulate the sharing of data generated by the use of related products or services (e.g., IoT, industrial machines), to ensure fairness in data sharing contracts and to allow public bodies to use data held by businesses in case of exceptional need (e.g., public emergency). The proposal also introduces new rules to facilitate switching between cloud service providers and other data processing services and puts in place safeguards against the unauthorised international transfer of data by cloud service providers. This is a highly complex proposal that requires a series of reflections on the scope of its application, the conditions under which data should exceptionally be provided to public sector entities, restrictions on gatekeepers, and exemptions in favour of SMEs.

Semiconductors

The semiconductor supply chain is extremely complicated and segmented amongst several countries, therefore no country can consider itself as completely autonomous and independent. However, some play an especially crucial role in certain segments, making the extreme global dependence on the semiconductor value chain in the current geopolitical situation more evident. Global semiconductor turnover stood at $555.9 billion in 2021, with Asia as the main market for these materials accounting for $343 billion, while in Europe, companies traded semiconductors for a volume of $47.8 billion. One of the main semiconductor materials used in electronic components is silicon. The main producer of semi-finished silicon products is China, with about 6 million tonnes annually. The largest exporter of electronic integrated circuits globally is Hong Kong, with over $211 billion in value, followed by Taiwan, with $155.9 billion, and China with a further $155.3 billion. The EU appears to be lagging far behind the other major world economies in terms of both market and technological progress. This trend emerges quite clearly from the analysis of WIPO semiconductor patent data, which sees Japan leading the way this time, and the EU in last place also in this sector. In order to overcome the current situation, in which the EU plays a marginal role in microprocessor production (only 10% of global production), and with the ultimate goal of fostering the EU’s achievement of digital sovereignty, the Digital Compass set a very ambitious goal for 2030, raising European production of semiconductors to at least 20% of the value of global production. To this end, the Commission launched the “Chips Package”, including a recommendation defining tools for monitoring the chip ecosystem with immediate actions suggested for MSs, and a Proposal for a Regulation to build a Resilient European Ecosystem and Strengthen Europe’s Technology Leadership (Chips Act). The European chips strategy aims to strengthen European leadership in research and technology, build and reinforce European capacity for innovation in the design, fabrication and packaging of advanced chips and their transformation into commercial products, establish an appropriate framework to substantially increase European manufacturing capacity by 2030 through investment in new advanced manufacturing facilities, overcome the lack of skills and develop an in-depth understanding of global semiconductor supply chains.

Given the delicacy of the global geopolitical context and the complexity of the international chip supply chain, the Commission’s strategy has the commendable merit of trying to implement a European industry in the sector with a rather articulated series of interventions. If recent events (see the chip crisis) and possible future developments (above all, the tensions over Taiwan) show the appropriateness of an intervention in this field, a series of questions still remain on the table, concerning the amount of the budget, the possible timeframe for implementing the new ecosystem, and the complexity of the value chain, which risks remaining quite fragmented in any case. In addition, there are some doubts concerning relations with other superpowers (e.g. priority orders), the risks of possible supply chain disruptions, on the one hand and, in the medium term, the possibility of European products being uncompetitive, on the other.

Conclusion

The road towards a European strategic autonomy still seems long and full of pitfalls on these and many other technological fronts, and will be increasingly linked to the geopolitical and industrial position that Europe will decide on in the complicated international context, both present and future. In order to fine-tune the equilibrium of that position, shrewd foresight will be indispensable, also in view of the delicate relations with other states, and especially with controversial countries, which require finding a decent compromise between respecting European values and guaranteeing the grounds for a functioning supply chain in all these strategic high tech domains.