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Advisor Draghi sees the danger for the EU of "becoming completely dependent on AI models developed abroad". He is also calling for reforms in the telco sector.

Around a year ago, EU Commission President Ursula von der Leyen asked former Italian head of government Mario Draghi to compile a report on Europe's competitiveness. On Monday, the Commission published its several hundred page-long description of the current situation along with recommendations [1]. Von der Leyen is unlikely to like much of what it contains. Particularly in the area of key technologies, the work reads like a merciless reckoning with the countless failures of politics and business on the old continent. The former President of the European Central Bank (ECB) puts his finger in the wound: there is a lack of money and financing options, skills and human capital, as well as easy access to a large domestic market.

Take artificial intelligence (AI), for example: "AI developments are an opportunity for industrial companies in the EU to increase their competitiveness," writes the 77-year-old. However, it is crucial to integrate the technology quickly. Only 11% of EU companies currently use AI. 73 percent of the basic models developed since 2017 come from the USA, 15 percent from China. Draghi warns: "For Europe, there is a risk of being completely dependent on AI models designed and developed abroad." This applies not only to general AI applications, but also to vertical solutions intended for important EU sectors such as the automotive, banking, telecommunications (TC), healthcare, mobility and retail industries.

The few companies developing generative AI models in Europe, such as Aleph Alpha and Mistral, require large investments to become competitive alternatives to their US counterparts, according to the report [2]. This need is currently not being met by the EU's capital markets, forcing local players to look abroad for funding opportunities. Looking at the world's leading AI start-ups, 61 percent of global financing went to US companies, 17 percent to Chinese companies and only 6 percent to companies in the EU. Furthermore, the EU has "a small total number of new data scientists" compared to the US and China. The relevant talent pool is comparatively small and highly qualified specialists are often lured away by high salaries abroad.

AI Act and GDPR – too much of a good thing?

"The EU's weak position in the development of AI means that it may not be able to fully exploit its competitive advantage in several industries in the future," Draghi points out. A weak AI ecosystem would in turn be an obstacle to the digitalization and productivity gains of EU companies and a threat "to Europe's current leadership in advanced robotics".

The central banker describes the ambitions that EU legislators have shown with the General Data Protection Regulation (GDPR [3]) and the AI Regulation [4] as praiseworthy in principle. "However, their complexity and the risk of overlaps and inconsistencies could undermine the EU industry's developments in the field of AI." The EU must now find a compromise between stronger protection of fundamental rights and product safety and less stringent requirements to promote investment and innovation, for example through regulatory freedom. This requires simplified regulations and harmonized GDPR implementation. Overlaps with the AI Act must be eliminated.

Draghi attributes the USA's strong position in AI mainly to the size of the cloud hyperscalers Amazon Web Services (AWS), Microsoft Azure and Google Cloud, close partnerships between them and specialized companies such as OpenAI, as well as the availability of venture capital. As a result, the expert states: "The EU market for cloud services is largely lost to players based in the US." The demand for computing power and the volume of data is growing rapidly in all sectors. However, the three hyperscalers already account for 65 percent of this market. The share of EU cloud providers fell to less than 16 percent in 2021. Economies of scale and the high real estate and energy costs in Europe argue against a trend reversal.

Expanding the "sovereign" cloud

The EU has tried to counteract this with several relevant industrial alliances, including those focused on data exchange, such as Gaia-X [5], the Commission advisor explains. "However, the results so far have been minimal." Recently, several member states have promoted "secure" cloud set-ups. In these, the EU's own infrastructure providers work together with the distribution of hyperscalers, but retain control over sensitive security and encryption elements. Such cloud solutions are not completely "sovereign" in technological terms either, as the technology core is not developed in the EU and vulnerabilities remain. However, they are now "Europe's second-best option for data security and territorial sovereignty".

Draghi also describes the telecommunications sector as fragmented and internationally uncompetitive. – like his colleague Enrico Letta in his recent internal market report [6] – he is therefore flirting with the much-vaunted "European champions" in this area. Draghi thus calls for a reform of regulatory policy "to complete the digital single market for telecommunications". In this context, "cross-border mergers and operations" should be encouraged. Requirements that apply from the outset to top dogs such as Deutsche Telekom at country level should be abolished, as they discourage "investment and risk-taking".

Telcos as champions

Draghi also brings into play the shopworn idea of big tech cost sharing in network expansion [7]. He calls for contractual agreements to share infrastructure costs between network operators and very large online platforms. If such negotiations fail within a reasonable period of time, "provision should be made for protection through mandatory final arbitration offers by the national competition authorities". Draghi's vision: "The EU will provide its citizens and businesses with state-of-the-art communication services provided by strong and successful EU companies that are not overly dependent on providers of critical equipment and software from outside the EU." Open technologies such as Open RAN [8] are crucial for this. In addition, spectrum licensing must be standardized throughout the EU.

The former Prime Minister sees it as positive "that the EU has secured a strong international position in high-performance computing". In the race to build quantum computers, the EU can also "rely on important strengths such as major public investment, outstanding skills and research capacities". Nevertheless, it is still a long way from achieving its goals in this area. In the chip market, the EU has "important strengths" and leads in selected segments. However, its position in this area is also hampered by a strong dependence on third countries and a low presence in innovative areas.

Divided opinions in the economy

Draghi advises EU bodies to secure a strong position in AI in key industries such as advanced manufacturing and industrial robotics, chemicals, telecommunications and biotechnology over the next five years, based on a number of locally developed models. Another tip: "Maintain control over security, data encryption and storage capacities in EU companies and institutions and facilitate the consolidation of EU cloud providers."

The Federal Association of German Industry (BDI) emphasized that the report makes it clear that there can be "no business as usual in economic policy". Instead, what is needed is "deeper integration of the internal market to increase efficiency and strengthen growth, including in defense, infrastructure, telecommunications and pharmaceuticals". The German Broadband Association (Breko), on the other hand, does not share the diagnosis and therapy proposals: Draghi has left open why a "more consolidated telecommunications market with a few large players would lead to more investment". The industry still needs strong regulation in Germany to enable fair competition. It was Telekom's competitors who got [9] the fiber optic expansion rolling with their investments [10]. Von der Leyen emphasized: "To be competitive, we need to get to grips with ecological and digital change."

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[1] https://www.heise.de/news/EU-Bericht-sieht-grossen-Nachholbedarf-im-Tech-Sektor-9861816.html?from-en=1
[2] https://commission.europa.eu/topics/strengthening-european-competitiveness/eu-competitiveness-looking-ahead_en
[3] https://www.heise.de/thema/DSGVO
[4] https://www.heise.de/news/AI-Act-Countdown-zur-Umsetzung-der-KI-Verordnung-laeuft-9800084.html?from-en=1
[5] https://www.heise.de/news/EU-Plattformprojekt-Datenraeume-basierend-auf-Gaia-X-sind-real-9606882.html?from-en=1
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