Enough About Regulation

Get Over Yourself, Europe

Regulation, especially at the EU level, can give advantages by forcing market convergence and pre-empting regulation at the national level, allowing for innovation and greater flexibility on the part of European startups. But of late the European Commission under Competition Commissioner Margrethe Vestager has been on a mission to regulate companies worldwide, far beyond the legitimate concerns of the EU. Rather than making Europe more competitive, this approach has made it more vulnerable and weakened the European startup ecosystem.

The EU needs to refocus and develop policies and regulation that give European startups a more open playing field in the region, in order that companies have the space to become big enough to compete worldwide. Culturally, Europe is always going to be more inclined to regulate, but focusing on regulating to win – strengthening European startups rather than overwhelming them with bureaucracy – can be an improvement over the 50-state regulatory scene in the US or a CCP dominated China.

Market-Opening Regulation Empowers Startups

The EU’s financial regulations, particularly PSD2 and SEPA, have played a crucial role in modernizing digital banking across Europe. PSD2’s open banking mandate has enabled fintech startups to build innovative financial products by leveraging banking data, fostering a more competitive ecosystem. SEPA has further streamlined cross-border payments, reducing transaction friction and making financial services more accessible across the EU. These regulations have created a more harmonized, innovation-friendly environment, allowing neo-banks like N26 and Revolut to scale rapidly across multiple countries avoiding the complexity of multiple licensing regimes.

This pro-innovation regulatory landscape has produced numerous European fintech startups (many founded in London prior to Brexit, but still benefitting from the EU-wide regulations. Though none have have yet approached the scale of Stripe, which has a global payment volume of over $1 trillion, a valuation of $65B and net annual revenue of $3.8B, there are many European startups that have thrived under this regulatory regime, such as Klarna, WIse and the above mentioned neo-banks. The success is such that the US monster bank JPMorganChase has opened a consumer bank in the UK and is opening another here in Berlin.

It is the case that the U.S. market is so large that it easier for high-growth startups like Stripe to scale quickly. Other US advantages like a deep capital market with strong venture funding contrast with European fintechs facing smaller, nationally-oriented consumer markets and a more risk-averse investment environment, limiting their ability to scale in the same way. But PSD2 and SEPA have fostered an efficient and modernized banking infrastructure, which has led to the emergence of successful fintech startups able to succeed in Europe and compete in other markets.

But the Commission Wants to be a Nanny

However, the EU’s focus on stability and consumer protection, while beneficial in some aspects, has limited the breakout success of highly scalable and competitive startups. Lacking a more aggressive, investment-driven approach, Europe is falling behind the U.S. and Asia in the race to dominate the next wave of technology innovation.

An example of how Europe regulates with clear benefits but ultimately detrimental results is the the EU AI Act. Notable benefits include legal clarity and standardization, ensuring a harmonized framework across all EU member states and preventing regulatory fragmentation, making it easier for companies to navigate compliance and scale their AI solutions within the region. Furthermore, the introduction of regulatory sandboxes allows startups and SMEs to test AI applications in controlled environments, reducing initial regulatory burdens and encouraging experimentation. These elements can enhance trust in AI technologies in sectors like healthcare and finance, where transparency and accountability are crucial.

However, the stringent compliance requirements of the Act create significant barriers for startups and new entrants, for example the classification of AI risk levels imposes heavy documentation and auditing costs on businesses developing high-risk AI applications such as biometrics, predictive analytics, and automated decision-making systems. This bureaucratic overhead makes it difficult for small AI firms to compete, limiting the diversity and competitiveness of Europe’s AI landscape and ultimately favoring large, well-funded corporations that can afford legal and technical compliance teams. Without clear exemptions or financial support mechanisms, compliance costs alone could deter the next wave of AI startups from launching in the EU. Anecdotally, I have spoken with many European AI startups who benefit from being in Europe at the early stage, but expect to decamp to the US as they are forced to comply with the EU AI Act.

Beyond regulatory burdens, the EU AI Act places European AI companies at a global competitive disadvantage, especially against the U.S. and China, where there is little AI regulation. U.S. tech giants like OpenAI, Google, and Microsoft continue to dominate AI research and commercialization without the same level of restrictions. Meanwhile, China aggressively invests in AI innovation with state-backed funding and strategic policies, allowing domestic firms to scale rapidly. The potentially ground-breaking development of DeepSeek illustrates the sophistication of Chinese AI progress. European companies, constrained by regulatory approvals and compliance requirements, may struggle to keep pace, leading to talent and investment flight to more AI-friendly markets. Even Mistral AI, a clear European winner, is largely financed by Silicon Valley and will no doubt have a US IPO, diluting the story of European success.

As with most European initiatives, the EU AI Act sets an ethical gold standard for responsible AI, but its restrictive framework risks stifling the very innovation it aims to protect. Europe’s focus on risk mitigation over AI acceleration will lead to fewer startups and slower commercialization, making it harder to compete in the global AI economy. Like most other technological breakthroughs, Europe will become a consumer of AI technologies rather than a leader in their development, ceding ground to the U.S. and China in a race that will increasingly define technological and economic supremacy.

Get Over Yourself, Europe

Europe’s response to becoming an also-ran in the technology race has been to try and impede successful companies, particularly American ones, through extra-territorial regulation. Europe's regulatory self-regard might be relevant in a world where it was a serious technological competitor or where technological development was regional and not global.

This is not our world. The European Commission will experience serious pushback from the Trump administration regarding regulatory overreach and digital taxes targeted at American tech giants. The idea that the EU can impose fines on American companies worldwide income when its market only accounts for a small fraction of that income is arrogant and counter-productive in an increasingly mercantilist world, a world where European technology companies are second and third tier.

Europe’s attempt to control and punish foreign companies through regulation in industries in which it doesn’t compete risks becoming a double-edged sword. If the technologies Europe is determined to regulate are developed elsewhere, in markets that are large enough to make the European market an afterthought, all the meticulously thought out regulatory planning and its implementation will be mere posturing with no practical effect since the tech giants can abandon the European market with little cost. And for cutting-edge industries like AI, the prospect of being a target for American counter-penalties will force European startups to relocate elsewhere.

Fortunately, the replacement of Margrethe Vestager and the realization of bigwigs like Mario Draghi that the only path forward for Europe is to become competitive rather than obstructive points to a more hopeful future for the European Commission regulation. Moreover, intelligent market-opening regulation can be an advantage to European companies gaining scale and strength in the common European market.

Conclusion

When it comes to regulation, Europe must regulate to win. While incorporating European values such as responsibility, sustainability, and cultural risk-aversion, European regulators can balance these with increased focus on competition, startup flexibility and an eye to ensuring a level and obstacle-free playing field for early-stage startups. EU financial regulation is a good example of balancing values with practical concerns which has accelerated development of strong global competitors. Conversely, by creating an expensive, time-consuming bureaucratic regulatory maze in the AI space, regulators are hobbling development of a crucial technology where Europe has traditionally excelled. European regulators need to remember they exist in a competitive world where internal regulation can empower European startups but their power to impede other global competitors will be shown to be counter-productive and limited.