When the European Commission spent €387,000 on a party in the metaverse to promote its €300-billion Global Gateway investment plan, the aim was to showcase Brussels as forward-looking and tech-savvy. Instead, the event became infamous for other reasons: reports suggest that at one point, only a handful of avatars were swaying on the virtual dancefloor.
What was meant as a celebration of Europe’s global ambitions turned into a symbol of its uneasy relationship to emerging technology. But while the metaverse flop grabbed headlines, another challenge is equally consequential — and often overlooked: the EU’s own single market.
The barriers within the “single” market
The single market, lauded as the crown jewel of integration, is riddled with barriers that make it costly and hard for companies to grow. The International Monetary Fund (IMF) estimates these structural obstacles equate to tariffs of around 44% for goods — three times higher than between states in the US. For services, the figure rises to 110%.
“We're a unified market, but not really, because if you have a barrier from raising capital within Europe, then how are you going to scale it?” Riccardo Fredro, the co-founder of AI-powered creative agency Anima Studios, told The Parliament. “There is a huge difficulty in having 27 different regulations on how a company should work.”
This article is part of The Parliament's latest policy report, "Regulating technology without stifling innovation"
To Fredro, the problem is tangible. Because Anima is registered in Italy, he loses significant time researching tax systems in other countries where he does business, sometimes losing customers in the process. At pitching events in Belgium, investors told him they could not feasibly back an Italian-registered firm due to regulatory and taxation hurdles.
Such barriers limit the success of European startups, and help explain why the US and China remain more fertile ground for tech. In 2024, American tech startups received $190 billion in venture capital, while Chinese counterparts raised $38.5 billion. With national legislation designed to enable growth, these ecosystems have produced some of the world’s biggest tech players.
But some see the comparison as unfair. “When you talk about the US and China, you're comparing countries to a regional power where there are different ecosystems in play,” Siddhi Pal, a senior policy researcher in AI at the Berlin-based think tank interface, told The Parliament.
Europe regulates first and innovates second
The challenge is not only market fragmentation. “We have the US and China really competing and trying to acquire talent and play the game. I feel like we [the EU] are the old geriatric referees of the game,” said Fredro.
Europe has built a reputation as the world’s strictest tech regulator, moving fast to rein in risks before they take hold. That protects citizens and sets global standards, but it also slows innovation, pushes startups abroad and leaves Europe trailing the US and China in shaping the digital future.
The stories are well known: Stripe, now one of the world’s largest privately-owned fintech companies, was founded by Irish brothers John and Patrick Collison who had already relocated to Silicon Valley when they received a $2 million investment in 2011. Talkdesk, a Portuguese AI customer service platform, launched in Lisbon in 2011, but its CEO Tiago Paiva soon moved to the US to access stronger funding programmes.
Manuel Bolognesi, founder of Enrapture, an SME selling experiences in the metaverse, believes the EU needs a shift in mindset. “There needs to be a stronger emphasis on getting things done and started before we debate,” he told The Parliament, “because innovation tends to get stopped before it begins because of standards and ethical problems.”
Europe’s pride in tech regulation
Brussels shows little appetite to pull back. The EU is proud of its role as a global rule maker — from the General Data Protection Regulation to the Digital Services Act, Digital Markets Act and the AI Act — and sees regulation as a way to shape technology worldwide.
Pal argues this is not a weakness but a strength. “The EU is building its own definition of success that is more holistic and more sustainable without trying to fit into this race that might lead to running off the cliff,” she told The Parliament.
The US and China has made trade-offs, from surveillance to weakened press freedom, to secure their growth, and the EU is reluctant to follow that path.
Still, the costs of its model are evident: Google and Meta have openly pushed back against EU rules, even lobbying Donald Trump to retaliate with tariffs, which was most recently suspected to have prompted a delay in a €2.95-billion fine against Google for unfair advertising practises.
Former competition chief Magrethe Vestager, meanwhile, was nicknamed the bloc’s ‘tech cop’ for daring to act against them.
Troubles with talent
Europe’s strength is talent, but the bloc faces challenges here, too. Namely, struggling to keep it. According to interface, the EU hosts a higher proportion of AI specialists in its workforce than the US, with foreign nationals making up 37% of that group.
Europe’s universities and academic freedoms attract global students, but only 10% of the world’s top AI researchers chose to live in Europe — a poignant figure considering 18% of the world’s top AI talent is European.
“Post-graduation, these people either choose to move back to home countries or to the US,” said Pal. Key reasons for this, she added, are visa issues, difficulty moving between member states and limited well-paid opportunities.
Fredro also noted that regulators themselves often lack technical know-how. “The people that are regulating don't understand fully the implications of these technologies and how it works,” he said. Bolognesi urged policymakers to involve industry experts earlier in the regulatory process: “The difference between getting a million-euro investment and no investment can be one word in a proposal.”
Can Europe catch up?
The Commission is trying. Funding schemes like Horizon and Creative Europe aim to support innovation, but many startups say the bureaucracy is overwhelming. “The paperwork is so complicated that most of the times you cannot do it by yourself,” said Fredro, adding that “the procedures to access and the timelines to access those funds are completely irrelevant to a startup that needs to move fast.”
Bolognesi noted some improvement. “European funding has become a little bit simpler in the last few years, but we're still far from what the standards are in other places.” However, he added that Europe has an inadvertent upside: “In San Francisco, there is millions of companies like mine. In Brussels, there is only me.”
To Bolognesi and Fredro, the Commission’s push to reduce barriers across sectors, including reforms tied to the Draghi report, could help. And Pal sees an advantage if Europe can finally keep the talent it attracts: “If you're able to retain the talent that we are attracting in Europe, because people are what makes these startups and make innovations, then that could a big advantage,” she said.
Sign up to The Parliament's weekly newsletter
Every Friday our editorial team goes behind the headlines to offer insight and analysis on the key stories driving the EU agenda. Subscribe for free here.