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Why data localisation is not an ingredient for economic growth

September 22, 2020

The European Union should not undercut its initiatives to ignite startup-fueled post-COVID-19 economic growth with costly and ineffective data localisation measures. When Commissioner Breton argues that “European data should be stored and processed in Europe”, this could pose significant damage to startup ecosystems and undermine much of the positive impact of recent free flow of data measures.

New legislative proposals like Next Generation EU or the Startup Nations Standard have the potential to release the pressure on critical bottlenecks for startups, including in funding or relating to access to talent. Entrepreneurs, however, need to take into account the totality of all rules, and data localisation measures would be a significant financial burden, particularly for startups.

Ghosts from the past: Lessons from Free Flow of Data

Any entrepreneur is no more than an idea and a data-set away from a new startup.

We’ve been here before: In the last mandate there was a broad consensus for the Free Flow of non-personal Data. The legislation prohibits data localisation measures except in very few exceptional cases. This allows a startup in France to serve German businesses without having to rent servers there. It makes starting and scaling up in Europe simpler and cheaper.

Scaling up this recipe outside the EU is the next logical step. And why shouldn’t the same principle that leads to economies of scale in the European Union not apply outside? At its best, the EU is a technology-driven, global standard-setter for the digital economy. If you ask a startup entrepreneur, they are not focused on borders and walls but on where they can get the best offer for cloud services.

Startups in Europe are more successful if they have a barrier-free access to global markets where there are no data localisation requirements and if they can employ cheaper services that are not subject to these. This has enabled EU success stories like Glovo, Delivery Hero or Rovio to scale outside the EU. Moreover, startups from elsewhere also have a fair shot to compete with EU businesses if they are not subjected to additional data localisation requirements. 

Playing into Europe’s digital advantages

Data is a highly mobile, non-rivalrous good. These characteristics should be leveraged, not curtailed. Startups from outside the EU provide value for European businesses and consumers. If the first consideration of the startup is finding a European data centre, there will be a hurdle that disincentivizes doing business in Europe.

Startups are looking for more data, lower costs and a clear legislative framework. The EU, as a leading global tech regulator, is in a prime position to provide this. The Public Sector Information Directive and the Free Flow of non-personal Data Regulation show that positive improvements for startups are possible. Having more data available for startups has no connection to having to store or process data in Europe.

In the words of the European Commissioners, compare the change in tone from former Vice-President Ansip: “By removing forced data localisation restrictions, we let people and businesses make the most out of data in the Digital Single Market.” with Commissioner Breton’s “European data should be stored and processed in Europe”. What message does the EU send to young entrepreneurs in the EU and abroad if it calls into question the very principles it championed a few years ago? Instead of free flow of data the direction is European-Data-Centres first.

Data localisation is not an ingredient for economic growth. It adds a premium to doing business, especially for startups, and runs contrary to the principles the EU established not long ago. Ultimately, when considering the measures the EU is proposing to bolster the economy post-COVID-19, we should avoid the situation where entrepreneurs weigh off the benefits of a Startup Nations Standard and the costs of data localisation. Every legislation should set itself a target to make it a bit easier to startup and scale-up in Europe.

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