Analysis: What Europe (still) doesn't get about tech

Declan McCullagh, from silicon.com's sister site CNET News.com, offers his perspective on why the US is a more attractive option than Europe to technology entrepreneurs and start-ups.

One unsung benefit of the internet is how beautifully it illustrates why the technology climate in the United States is superior to the one in Europe.

A recent exhibit, the Council of Europe's cybercrime treaty, is available for review at the group's website. The treaty was debated last week by the US Senate, which may choose to ratify it. The United States is a nonvoting participant of the 45-member quasi-governmental Council of Europe.

A key section of the treaty should shock Americans. It would criminalize using a computer to "insult" someone based on national origin, race, religion and so on.

That's right. If you forward a Mick-and-Paddy-in-a-bar Irish joke to your friends through email, the Eurocrats have concluded that you're a criminal who should be locked up, pronto.

To the credit of the Clinton and Bush administrations, the United States has said it won't ratify that portion of the treaty. But the Europeans believe it's just swell.

European censorship is hardly new. Every European country bans the advertising of prescription drugs. Nations such as Germany prohibit comparative advertisements, in which BMW might claim its new coupe is better than a Mercedes. Europe outlaws tobacco advertising, too.

In 1998, Germany convicted a CompuServe executive on child porn charges merely because illegal material flowed through the company's network. A French court fined Yahoo for permitting Nazi memorabilia to be auctioned on its US site. And the Council of Europe is busy trying to regulate anyone with a web log who has the temerity to criticize anyone else.

Anti-business regulations
These are all aspects of the broader truth: European governments tend to be more invasive than their American counterparts. Brussels bureaucrats with taxpayer-funded sinecures undoubtedly benefit. But this approach doesn't foster the high-tech industry vital to a modern economy.

"Europe is a more regulatory and higher-tax area than we are," says Richard Rahn, a fellow of the Discovery Institute and a former chief economist at the US Chamber of Commerce. "That's one reason their economic performance has suffered relative to ours. There's more micromanagement and regulation than we have... The Brussels bureaucracy has really taken over."

Antitrust is a good example of Europe's regulatory mindset. The US Justice Department scrutinized Microsoft's business practices, sued and then inked a consent decree. Intel was investigated by the Federal Trade Commission and settled out of court.

Now the European Union alleges that both companies somehow violated antitrust rules. The odd thing is that the purported victims - Sun Microsystems and RealNetworks (Microsoft) and Advanced Micro Devices (Intel) - happen to be US companies.

If US regulators don't see a problem, why does EU Competition Commissioner Mario Monti? One explanation is that it's a protectionist ploy to slap prominent US companies with huge fines, distract their executives and worry investors. No wonder William Kolasky, the former antitrust chief at the Justice Department, suggested that Europe has a more statist tradition.

Europe has another problem: Its taxes are higher than in many other places in the world. But instead of reducing taxes, the EU is trying to, in all seriousness, coerce overseas companies into collecting taxes when Europeans buy digital products like software or music online.

Other examples abound. French internet providers are in more danger of being sued for what their subscribers publish than their counterparts in the United States, where the 1996 Telecommunications Act cleared things up early on. A 2001 law review article by Xavier Amadei concludes that French law has "developed inconsistent answers to whether an ISP has an independent duty to control the contents to which it provides access". Germany is no better.

Start-up environment
Europeans' addiction to regulation means fewer entrepreneurs founding start-ups. In 2003, venture capital firms invested $16.9 billion in US start-ups, 81 per cent of the total dollars spent in Europe, Israel and the United States.

A report released last month by the European Private Equity and Venture Capital Association shows that the usual heaping helpings of taxes and regulations continue to hurt the growth of stock markets and funds available for start-up companies in Europe. It rates the United Kingdom, Luxembourg and Ireland as the most attractive for investment.

That should be no surprise. Statistics compiled by the European governments bear this out. The total tax burden for the average worker is 48.3 per cent in France, 50.7 per cent in Germany, and an astonishing 52.6 per cent in Hungary. Compare this to a total tax rate in Ireland of just 25.8 per cent and the United Kingdom of 29.7 per cent - the two countries that are most like the US in political temperament.

Thomas Hellmann, a professor at Stanford Business School, said in a paper on developing a venture capital industry that the US history "did not involve heavy-handed direct government intervention".

"Indeed, US government took a market-enhancing approach, with policies designed mainly to enable private actors to develop new firms, markets and institutions," his paper said. "Most important, the government did not try to influence the specific course of development."

One result is that the average American is wealthier than the average European, and far more likely to have a job. France's socialist government, thanks to its unwillingness to relinquish control of companies like France Telecom and Air France, enjoys a per capita GDP of $27,500. Germany's economy is moribund, with a growth rate of approximately zero and a GDP per capita of $27,600. Thanks to high taxes and weighty labor regulations, Italy's per capita GDP is $26,800.

Compare those figures with a US growth rate of around 4.2 per cent, and a per capita GDP of $37,800 last year.

Senate Majority Leader Bill Frist put it well in a floor speech in March when he said: "European economies are buried by public-sector debt; European economies are drained of their vitality by excessive taxation; and European economies are strangled by excessive regulation from bureaucrats sitting in Brussels."

It's important to acknowledge that the US legal and regulatory system has its own set of serious problems. But to attract entrepreneurs and tech start-ups, it doesn't need to be ideal. It only needs to be better than Europe.

Declan McCullagh writes for CNET News.com