Vulcan View: The latest EU developments 9 September – 13 September

The harsh truth about the EU’s competitiveness in Artificial Intelligence and emerging technologies

Mario Draghi, the former Italian Prime Minister and President of the European Central Bank, presented his long-awaited report on “The Future of European Competitiveness” forcing the EU to accept some harsh truths regarding its competitive standing in cloud services, AI, and quantum computing. Without significant reforms to its private investment, labour, and regulatory strategies, the EU will likely fall behind the United States and China in the ongoing technology race.

The EU, estimated to reach a €200 billion valuation by 2028, accounted for a mere 16% of the market in 2021. The three U.S.-based cloud “hyperscalers”: Amazon Web Services, Microsoft Azure, and Google Cloud, account for more than 65% of this market. Why is this the case? EU providers offer only fundamental services like Infrastructure-as-a-Service (IaaS) and act as middlemen reselling hyperscalers’ platform services (PaaS), which are generally more profitable. Additionally, operating costs, energy and real estate are substantially higher in Europe than in the U.S. or the Middle East, and the EU lacks effective industrial alliances for cloud-based technologies and data exchanges.

Draghi describes AI as “an opportunity for EU industrial players to boost their competitiveness” if properly leveraged and rapidly integrated. In this light, the EU has made progress through the AI Innovation Package, which in part allows access to the EU’s high-performance computing (HPC) to AI start-ups, SMEs and the broader AI community. However, the light shines brighter on the EU’s shortcomings, with AI being adopted by only 11% of EU companies, and almost 90% of foundational AI models being developed in the U.S. and China. This situation opens the risk of the EU becoming dependent on AI models designed and developed by non-EU players for both general purposes and vertical uses dedicated to crucial EU sectors including banking, telecoms and transportation. The underlying issue is a lack of private investment. In 2023, the EU reported $8 billion in venture capital investment toward AI compared to $68 billion in the US and $15 billion in China.

Quantum computing will play a pivotal role in the next generation of digital innovation, potentially revolutionizing digital encryption systems underpinning today’s security and defence communication and business transactions. The EU must leverage its strengths, ranking second only to China for public investment in Quantum and leading the pack with the largest concentration of quantum experts. On the other hand, Europe is suffering from limited private investments, with none of the top ten tech firms globally ranked in terms of quantum investment headquartered in the EU. The EU’s firms attract only 5% of global private funding compared with 50% attracted by U.S. firms.

The EU faces a critical decision: to promote “stronger ex-ante regulatory safeguard for fundamental rights and product safety” or adopt light-handed regulation to entice private investment and innovation. Draghi’s recommendations boil down to leveraging the EU’s comparative advantage in skilled labour by tabling new legislation proposing more deliberate regulations to invite increased venture capital.

Apple’s ECJ ruling: What it means for the Irish Budget and Economy

Apple has lost its court battle against the European Commission’s ruling that it underpaid €13.1 billion in tax due to Ireland. The lower General Court’s ruling, which had in 2020 reversed the Commission’s decision, has been overruled by the European Court of Justice. After the commission’s initial decision, Apple was required to pay €1.2 billion in interest and €13.1 billion in overdue taxes into an escrow account managed by a separate third party.

According to Minister for Finance Jack Chambers, it will be approximately six months before Ireland receives its €14.3 billion Apple windfall and stressed this money will have no impact on Budget 2025, which is being announced Tuesday, 1 October. Furthermore, Taoiseach Simon Harris has reiterated that the money Ireland is set to receive from Apple cannot and will not be used for day-to-day spending and outlined how the Government will give careful consideration on what the most effective and efficient use of these funds will be. On the other hand, Sinn Féin leader Mary Lou McDonald has stated that the government has acted with gross recklessness and incompetence concerning the Apple case, while Sinn Féin finance spokesperson, Pearse Doherty, outlined how there is a “massive egg on their faces” when referencing Fine Gael and Fianna Fáil.

Ireland’s financial experts have weighed in on the conversation to outline what the €13 billion Apple windfall means for the Irish economy. Dermot O’Leary, Chief Economist at Goodbody Stockbrokers, outlined how this may have significant impacts on Ireland’s net debt levels, with net debt likely to drop to 52 per cent of GNI* to end 2024 in comparison to the 57 per cent initially expected. Kevin Timoney, Chief Economist at Davy, highlighted how €13 billion is not worth as much now as it did in 2016, especially given that corporation tax totalled less than €8 billion in 2016, in comparison to 2024’s approximate figure of €30 billion with annual windfall close to €13 billion. Trinity College Dublin professor, Brian Lucey, had a similar response to Mr. Timoney who stated that this is a relatively small figure and that it won’t really be that transformative at present.

What to expect from the European Parliament in the upcoming legislature?

A newly elected European Parliament is gearing up for an active agenda fresh with competencies and a renewed focus on budgetary oversight. Parliament is poised to play a more assertive role in the coming weeks. MEPs will delve into multiple legislative priorities, from bolstering European defensive capabilities to ensuring investor protection and confidence. Navigating these challenges will test Parliament’s ability to balance legislative and oversight functions.

An immediate task is the election of a new European Commission. MEPs have voted in favour of new competencies increasing scrutiny in the selection process, including the right to hold special scrutiny hearings questioning Commissioners on relevant political issues. These special scrutiny hearings, as well as ad hoc plenary sessions, can also be held with the President of the Commission or selected Commissioners without a predetermined subject, to be held only once per plenary session. In light of new competencies and coming off a month-long break from EU affairs, Parliament is in no hurry to vote on new commissioners. “The nominees want as many days as possible to prepare,” said a senior parliamentary official, insisting on the benefit of being patient in this regard.

The European Parliament is assuming a prominent role in budgetary matters. A newly integrated approach will see legislative committees working hand in hand with budget experts throughout their respective processes. In addition, future legislative proposals impacting the EU budget must undergo a budgetary assessment. Parliament will enhance its budget monitoring process to ensure funds are used efficiently after allocation. By the end of 2024, MEPs hope to reach an agreement to secure “robust funding of EU programs and sufficient money set aside for internal and external security and unforeseen challenges.” Next week, all parliamentary committees will vote on and submit their input for the Budget Committee’s draft report for the 2025 EU budget.

In terms of legislation, the Parliament has a challenge ahead. Earlier this year, the European Commission proposed the European Defence Industry Programme (EDIP) to ensure the timely availability and supply of defence products, which will undoubtedly be under discussion. Building on the AI Act, the new AI liability directive aims to ensure that people harmed by a system that utilizes AI software are afforded the same protections as people harmed by any other form of technology. Following continued negotiations with the Council since April of this year, Parliament will continue their work on a package of laws protecting retail investors by establishing a safer and more transparent investment environment.

With a packed agenda including oversight and legislative creations Parliament’s ability to balance these two tasks will shine the light of success on this legislature of the European Parliament.

For more information, please contact the Vulcan team here.

Compliments of Vulcan Consulting – a member of the EACCNY.