The European Union set out to make itself the global home of “trustworthy AI”, building the world’s first comprehensive rulebook for the technology.
But parts of the landmark AI Act, passed in 2023 have been delayed, and businesses are warning about the cost of compliance. The policy has exposed a familiar European dilemma: how to regulate powerful new technologies without slowing down innovation.
Philip Meissner, Chair of Strategic Management and Decision Making at ESCP Business School and founder of the European Center for Digital Competitiveness, argues the regulation may already be holding companies back in Europe.
“It has not made Europe stronger in AI,” says Meissner. “When you look at the frontrunners in the technology, it is still the US and China.”
[Regulation] has not made Europe stronger in AI. When you look at the frontrunners in the technology, it is still the US and China.
Regulation vs innovation
The divide has also taken on a political edge. U.S. President Donald Trump has criticised the EU’s approach, warning that action against American tech companies could amount to “a form of taxation”.
Under the AI Act, companies developing “high-risk” AI systems must explain how their models are built and used. The most powerful systems must also undergo risk assessments, and companies that fail to comply could face heavy fines or even be barred from operating in the EU.
The EU says the aim is to position Europe as a global leader in responsible AI. But large tech companies, including Meta, have warned that strict rules could discourage investment and stifle innovation.
Adoption gap
Europe has some momentum in artificial intelligence, Meissner says – with companies such as French start-up Mistral AI raising billions of euros to build large language models and compete with bigger US rivals – but that progress is happening “despite the regulation and not because of it”, he says.
For Meissner, the issue is less about companies building cutting-edge models than about how widely businesses use the technology. Adoption is low; only about one in five EU businesses uses AI, according to Eurostat.
Part of the hesitation comes from uncertainty over what the rules allow, Meissner says. The AI Act classifies systems by risk and imposes strict requirements on certain uses. But the complexity of the framework has left many companies unsure about what they can safely deploy, according to Meissner.
“There is still a large scepticism about what can be done with AI and what is allowed,” he says.
In many European companies, he adds, the discussion of AI begins not with engineers but with lawyers. He says: “In other regions of the world, it is often the other way around.”
The SME challenge
The debate reflects a broader pattern in Europe, where technology policy is often framed around rules and compliance. The EU’s General Data Protection Regulation, introduced in 2018, gave people more control over how companies collect and use their personal data. But businesses – particularly smaller companies – have long complained about the cost and complexity of complying with the rules.
“If you are a huge company, you can hire a team of 10 lawyers to deal with regulatory compliance,” Meissner says. “It is expensive and painful, but you can do it. If you are a smaller company it gets harder and harder.”
This matters because small and medium-sized enterprises form the backbone of Europe’s economy, making up around 99% of all EU businesses and providing roughly two-thirds of private sector jobs.
The European Commission is reportedly considering delaying parts of the AI Act as pressure from companies grows. Draft proposals suggest Brussels may give businesses more time to comply with some rules and postpone fines for violations.
For me, we need to stop this reflex of regulating everything first. Brussels should relax and take a more business-friendly approach.
Global competition intensifies
More broadly, Meissner argues Europe needs a more business-friendly environment – if it wants to remain competitive with the US and China in AI.
The largest AI companies and models – including those developed by OpenAI, Google, Anthropic and Meta – are based in the US, while China has made AI a national strategic priority. Europe has strong research institutions and a growing AI start-up ecosystem, but far fewer global technology leaders in AI.
“For me, we need to stop this reflex of regulating everything first,” Meissner says. “Brussels should relax and take a more business-friendly approach.”
That could include simplifying regulations and making it easier for companies to develop and deploy new technologies. “We cannot have more regulation than everybody else and expect to have more progress in AI,” he says.
Beyond regulation, infrastructure is also becoming a challenge for Europe’s AI sector. Training and running advanced AI systems requires huge computing power, which means building large data centres and using vast amounts of electricity.
Energy and infrastructure
That raises questions for Europe, where energy prices remain much higher than in the US. The issue has become more pressing as gas prices have surged following the recent conflict in the Middle East, raising fears of another energy crunch in Europe.
“When you look at what is driving the cost of AI, it is largely energy,” Meissner says. “If you have twice the energy prices of the US, it becomes very difficult to make the business case.”
That does not mean Europe cannot compete. The region still has strong research institutions, established companies and growing interest in AI. But success will depend on whether the region can create the right conditions for companies to develop and scale the technology.
“The broader question,” Meissner says, “is whether we really have the right business environment in Europe.”
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