What they don't tell you about the "Brussels effect"

Just because international standard setting may happen doesn't mean it will happen

Photo: Christian Wiediger / Unsplash

European news portal Euractiv writes that regulators in Europe become increasingly concerned about Twitter’s ability to comply (or not) with the Digital Services Act, the EU’s flagship regulation for online safety. Yet it seems they draw the wrong conclusions from it:

If Twitter, by corporate decision or negligence, ends up pulling out of the EU market, it would be an important first time. (…) Still, tech companies seem increasingly making cost-benefit analyses on whether Europe’s regulated market is worth the trouble, increasing the importance of establishing EU rules as the international standard via the ‘Brussels effect’.

The last sentence hints at a severe misunderstanding of how the “Brussels effect” works.

What is the “Brussels effect” – and what it is not?

The Brussels effect is described in Anu Bradford’s book (2020) of the same title. In essence, Bradford argues that in many cases, European rules and regulations become de-facto global standards because of the importance of the European market. It is often simply easier to roll out European standards globally, especially if they are higher than other national standards.

But the Brussels effect is also an example of a concept that seems simple and easy at first sight and is therefore often misunderstood because the reality is more nuanced.

It' it just like the butterfly effect: just because the flap of a butterfly’s wings in Brazil may set off a Tornado in Texas does not mean that it will do so. Likewise, not all European laws become a global standard.

In fact, Bradford herself highlights a few preconditions that must be met so that the Brussels effect kicks in, namely a large enough size of the European market for a specific product, the ability to enforce rules and impose sanctions, the political will to regulate, a lack of ways to “circumvent” regulation (e.g. by re-directing capital flows), and an inability to customize products or services to different regulatory standards.

In reality, therefore, the Brussels effect requires a complex set of conditions to come into effect. This explains why the Brussels effect is clearly visible in the privacy world: The EU’s General Data Protection Rregulation is a horizontal regulation that applies across industries (i.e. the market is huge). On the other hand, the Brussels effect is less likely to emerge automatically in online safety bills such as the Digital Services Act where cultural norms (i.e. the “political will to regulate”) play a bigger role.

Why regulation does not always translate into a competitive advantage

Which brings us back to the original claim of the Euractiv article: If a company’s cost-benefit analysis concludes that compliance with European regulation does not lead to a return on investment, the Brussels effect becomes irrelevant. Only when Europe is an attractive market and companies want to sell (or produce!) their goods and services here, companies have an inventive to comply with European regulation. If compliance costs become too high, companies will simply leave for more attractive markets.

That’s the message that a representative of German chemicals giant BASF recently shared with the Financial Times: “The regulatory burden that’s building up might be manageable for global players but I don’t know how a midsized company of 100-200 people is supposed to digest it“.

Despite what some European lawmakers may think: the Brussels effect is no regulatory silver bullet. As beautiful as the European butterfly may be, the flap of its wings does not always create a regulatory storm.