Data localization in the EU: The threat from inside

As growth in the EU has remained low and the usual channels for recovery such as greater investment or an increase in the working-age population remains far-fetched, the omen is on creating higher productivity to restore economic recovery. Here, the EU finds itself in a difficult situation as it has been caught in a productivity slump now for many years.

Therefore, any measure that would further hurt EU’s productivity would be a reasons for great concern.

One example is the measure of data localization that is now threatened to be on the table again. Data localization concerns stem from the fact that citizens feel that their data is not sufficiently protected when sent and stored abroad. That concern is legitimate and policy makers should be aware of that.

Yet data localization is not the right answer. Although policy makers should strike the right balance between societal needs and economic benefits, data localization has proven to hurt the EU's economy more than it would protect European citizens. A few factors may explain this.

First, data localization and its associated regulations excessively hurts producers and users of data as they significantly hurt EU productivity, which is a measure of the way in which we effectively use our economic resources. Our research has shown that implementing regulations related to data will ultimately render prices higher of consumers and lower economic output.

Second, data localization as such does not provide more security per se. On the contrary, data localization brings together the many data of producers and consumer making it more interesting target for cyber security attacks. Instead, spreading data would be a better option so as to make it more difficult for hackers to target a so-called “honey pot” of data.

Third, spreading the storage of data also let the best suited servers to do the job of providing safe and secured data. Obliging each member state to store its own consumers’ data on its own servers is no recipe for best practise. Some member states are just better equipped to provide good storage of data than others because they are better endowed with the economic necessities of doing so.

Fourth, upfront short-term economic losses would have to incurred by everyone. Our study shows that assuming the existing explicit barriers on internal EU free flow of data are removed, it would result in GDP gains that are estimated to be up to 0.06% of GDP, equivalent to 8 billion euros.

In short, the EU has created a single market in great part to enhance economic wellbeing of its citizens. That has been done through abolishing burdensome regulations that otherwise would inhibit productivity, ultimately hitting on economic growth.

The EU’s future economic growth lies in the digital age in which data flowing across European borders is a crucial factor, just as services, goods, capital and people. Establishing a truly single European market now also demands one for data.