BRUSSELS—The European Commission’s proposed Artificial Intelligence Act (AIA) would impose the world’s most restrictive regulations on the development and use of AI, costing the EU economy €31 billion over the next five years, according to a new report from the Center for Data Innovation. A typical small or mid-sized enterprise that deploys an AI system deemed “high-risk” would face compliance costs of up to €400,000.
The Commission has stated it wants 75 percent of European businesses to use AI by the end of this decade—a nearly tenfold increase from current levels—but working from the Commission’s own impact assessment, the Center finds that the deterrent effect of the AIA’s compliance costs would reduce AI investments by almost 20 percent.
“The Commission has repeatedly asserted that the draft AI legislation will support growth and innovation in Europe’s digital economy, but a realistic economic analysis suggests that argument is disingenuous at best,” said Ben Mueller, senior policy analyst at the Center for Data Innovation and author of the report. “The rosy outlook is largely based on opinions and shibboleths rather than logic and market data.”
The AIA is a horizontal law that would apply to any product that uses AI. It sorts AI systems into three categories: prohibited, high-risk, and limited risk. Any system that could affect people’s fundamental rights or safety is considered “high-risk.” That designation sweeps in a broad swath of potential applications—from critical infrastructure to educational and vocational training—subjecting them to a battery of requirements before companies can bring them to market.
Using the Commission’s impact assessment as a starting point, the Center calculates that these compliance burdens will cost European businesses €10.9 billion per year by 2025, adding up to €31 billion over the next five years—and this excludes opportunity costs of foregone investment into AI, such as lower productivity growth and a likely brain drain as start-up innovators find it easier to set up shop elsewhere.
The Center notes that only about 7 percent of non-financial businesses in Europe currently use AI. Yet the AI Act will designate more than one-third of the economy’s non-financial sectors (by value) as “high risk,” making it more costly and complicated for those businesses to invest in AI. Indeed, a small business with an annual asset turnover of €10 million would face up to €400,000 in compliance costs for a high-risk AI product, which would eat about 40 percent of its profits.
“The AIA will damage Europe’s digital transformation before it is properly under way, clearing the way for foreign competitors to take market share from European businesses in a variety of sectors,” said Mueller. “The EU’s regulatory environment continues to let down European entrepreneurs who want to make risky investments to innovate. However well-intended, the AIA will extract a heavy price from an increasingly uncompetitive EU economy.”