Europe Needs to Stop Building Regulatory Moats and Start Building Markets
This regulatory burden may boost the compliance industry, but it will undermine innovation, startups, and venture capital. Every certification requirement that large incumbents absorb may put a challenger out of the market by acting as a barrier to competition rather than a security measure. Perversely, regulatory complexity does not slow incumbents proportionally: The unintended consequence is to kill European challengers and strengthen the position of large international incumbents.
Europe should expect digital sovereignty to be the result of resilience through choice and competition, not of control through mandates. It should, therefore, focus on the fundamentals that markets need to thrive: infrastructure, talent, access to private capital, and easing the regulatory burden.
European Infrastructure
Europe has a relatively good connectivity infrastructure in terms of access to fiber, 4G, and 5G, compared to other areas or regions of the world. Similarly, it is home to some of the top research institutes and universities, signaling that talent is not scarce. Some elements that are scarce include land and energy. Specifically, data center hyperscalers and AI increasingly seem to rely on large data centers which need space for their construction. Space is relatively scarce in Europe, and while brownfields offer an opportunity, achieving permits for construction can still be painfully slow.
Large data centers are also energy guzzlers, and Europe will need to accelerate deployment of renewable energy if it wants to compete in the cloud and AI space. Faster permitting and the deployment of renewables could be key for the EU to achieve more digital sovereignty.
Regulations are not all bad, but they do need to be flexible and expertise-driven, so they do not raise barriers for smaller players and end up stifling innovation. For example, the “sovereignty score” mechanism in the EU Cloud Sovereignty Framework is well-intentioned, but is likely to become a bureaucratic moat: eight dimensions and four assurance levels administered by contracting authorities with neither the expertise nor the incentive to apply it rigorously. Reinforcing the compliance labyrinth does little to improve security or innovation.
Currently, the EU holds roughly 5% of global AI compute capacity against the U.S.’s 75% (“EU to RAISE a Unified AI Engine for Science”; vastdata.com/blog/eu-to-raise-a-unified-ai-engine-for-science). This gap is not caused by insufficient regulation: It is caused by permitting delays, grid congestion, and energy cost disadvantages. The Special Compute Zones, pre-permitted sites with fast-track grid connections, are a step in the right direction, as they give investors clear, simple, and rapid paths to expansion. Investors need speed, certainty, and returns, not more regulation.
For Europe to cultivate world-leading AI companies, it needs to build the foundational conditions that have made ecosystems such as Silicon Valley so productive. This also means attracting and retaining talent through easier immigration, greater mobility across borders, and simpler equity compensation structures that make joining an early-stage startup genuinely rewarding. Without people willing and able to take risks on new ventures, there is no growth or innovation.
A deeper structural challenge is capital. Europe’s pension systems generate little investable capital compared to the funded systems in the U.S. and Canada that pour billions into private equity and venture. Transitioning from unsustainable pay-as-you-go systems toward funded pension models, completing the Capital Markets Union, and actively incentivizing institutional investors to allocate to venture capital would go a long way. Alongside this, universities need to build endowments that can fund long-term research and spinouts and become themselves economic players in the venture capital ecosystem. Finally, scaling a company across Europe still means navigating 27 different legal systems, so a unified EU corporate structure would remove one of the most practical and underappreciated barriers to building and growing a truly European tech champion.