I’m sharing this as a British person, now living in Europe, who is currently working through reading theough the recent Euro stack report closely. I am dashing this post out, in response to a question in a private chat where an American person reading about this Euro-stack idea for the first time, very reasonably asked: is this not a bit protectionist? I think I’ll likely refer to this answer a few times, so I’m sharing it here for now.
Pretty much every country is protectionist in one way – they all like to back their champions. This image I found via Jenny Chase is a good literal illustration of this idea:
You can look at the last 4 years of US policy (IRA, Chips Act, etc) as being all about reducing exposure to supply chains the US didn’t have control over, as much as climate, and China’s EV dominance now might be good for reducing oil demand (good for climate), but it was also sold internally as a way to reduce dependence on one commodity it was extremely dependent on from foreign producers (China has lots of coal, but not much oil, so as you develop powering vehicles on electricity, means you aren’t as reliant on oil).
The European economic context
Anyway, I’ll try giving a bit of European economic context I’ve learned in the run up to reading this report. From a European POV, there are ‘state aid’ rules that effectively control how much a country is allowed to subsidise their own industries to give them an unfair advantage in a shared market place, and I think this can act as a useful lens to think about ways the playing field might not be seen as a level one.
Energy costs
Even if we only looked at the economics of the underlying energy you can see a bunch of distortive things happening in cloud and tech would likely piss off folks in Europe, even if in isolation it might look like a good thing.
The big US tech firms companies have been leaders in making a bunch of green energy deals, which sound great on paper, but from another point of view, these effectively amount to half their energy costs being picked up by the state via clean energy subsidies.
Energy is already cheaper in the USA than Europe on average, so if you are a european cloud provider working in a global economy, this is going to make competing harder. This Green Web Foundation blog post from a few years back, “who pays for Greener Energy on the Web”, touches on the kinds of deals we’ve seen through the 2010’s.
Tax
You can also look at how tax is paid. I’ll share a piece from a friend, Max Shulze gives an idea of how companies outside the EU, running infra on mainland Europe, and using infrastructure funded by those local states, effectively pay tax at around half the rate of companies based in those same countries.
This is because any taxes on services delivered in those countries, using local datacentre infrastructure to customers in those countries, at best often end up being paid in Ireland, with a tax rate of around 12% vs the more common averages of 20-25% in the rest of the EU.
The article in question talks about this in the context of AI, but the arguments still apply here it is Is Artificial Intelligence a Heist on the European Economy?
To make this a bit clearer, I’ve also uploaded a 2 minute long video from a recent documentary, Tax wars, that also gives a worked example of companies making how goods and services made in one place, can route the profits via a technique called ‘transfer pricing”, to minimise how tax is paid. You can see it on youtube (I put it there to make it easy to access the subtitle translation).
Again, if you were hoping to compete on a level playing field, having a competitor in the same country as you, selling to the same people as you, but paying a much lower tax rate than you do would really suck.
Even if all the tech was the same, these would be distortive.
Does this mean the only thing going for hardware, software and services, made outside of Europe is cheaper energy and tax dodging?
No, of course not.
There are obvious cases where there are awesome services and software being made in the US. I am typing this on a macbook designed in the US, and the chat I was in when we discussed this in the first place was using a US product, Slack.
However, I hope this can give an idea of why folks in Europe are a bit miffed about the current state of affairs, and why they keep talking about digital sovereignty.
What about climate? Isn’t it good that tech companies use government schemes to use greener energy than they would otherwise?
To be clear, I am not saying that governments should not provide support for clean energy. I’m saying that the reasons for tech firms to use clean energy are not solely tied to a love of nature, or some deeply felt intergenerational responsibility, and the economic context is relevant in discussions about digital sovereignty.
You can also argue that relying on a handful of US tech companies to do the right thing for climate out of the goodness of their own hearts is not a good strategy.
With recent developments we can see many cases where climate has taken a back seat in favour of AI expansion, and or even spending money on share buybacks to boost share prices. Where I work, we have a whole report on the environmental impact exploring this in the introduction, and this post here also gives extra context to how much large tech firms are spending on share buybacks compared to buying clean energy.
Back to the Euro-stack report
Anyway, this was the preamble. I’m hoping to write a blog post about this report once I’ve finished it, and I’m curious about if it will have anything to say about these two items. I think it’s likely to be important in Europe, and it will ilkely influence how a recently announced 200bn EUR pot of cash in Europe referred to as InvestAI will be spent in the coming years.
Hope this was helpful!