The Brussels Effect

Introduction

The Brussels Effect is a complex concept that stems from the European Union’s (EU) unique position as a large market with a strong regulatory system. This combination gives the EU the power to extend its regulatory influence worldwide, beyond its member states. The EU’s ability to shape global standards is built on several key factors: its large consumer base requires companies worldwide to comply with its rules; it has a well-developed legal and regulatory infrastructure; it upholds strict regulations that protect consumers, the environment, and personal data; and it targets industries where companies cannot easily move operations to avoid EU laws. Thus, the Brussels Effect is not just about the EU’s economic size. It’s about a deliberate strategy to set regulations that companies around the world often choose to follow, as it makes more business sense to comply with one set of rules rather than juggle multiple different regulatory requirements.

    What is the Brussels Effect

    Only powerful economies with considerable market sizes can set worldwide regulatory standards, but simply being a large market is not sufficient to exert global regulatory power. This is evident from the lack of a dominant regulatory effect from other large economies like the United States or China, compared to the prominent regulatory role of the European Union (EU).

      The Brussels Effect arises because of the EU’s:

      • Large Market Size: The EU has an extensive consumer market that attracts companies from all over the world. These companies tend to align themselves with the EU’s strict regulatory frameworks to secure a place in the European market.
      • Regulatory Capacity: The EU possesses the institutional structures and the necessary expertise to create and enforce regulations effectively.
      • Stringent Standards: The regulations accepted by the EU are often more comprehensive and demanding than those in other nations, demonstrating a strong commitment to safeguarding consumer interests, environmental integrity, and societal well-being.
      • Inelastic Targets: The EU focuses on regulating sectors, such as consumer protection, where the entities subject to regulation have limited ability to relocate and thus avoid EU regulations. Compliance is necessary for companies aiming to penetrate the European market.¹

      Examples of the Brussels Effect 

      The Brussels Effect emerges from the legal regulations and directives implemented by the EU. These binding laws directly influence both member states and businesses within the EU’s jurisdiction, alongside court decisions and non-legally binding measures such as recommendations and codes of conduct.

        1. One prominent example of the Brussels Effect is the General Data Protection Regulation (GDPR), which sets standards for data protection and privacy rights. Even though primarily applicable within the EU, the extraterritorial reach of the GDPR requires companies around the world to comply with its provisions if they handle the personal data of EU residents. It prescribes strict data handling requirements and imposes hefty penalties for non-compliance, thus demonstrating the EU’s regulatory capacity and its willingness to enforce it. Given that the European Union (EU) represents one of the most important consumer markets in the world, many multinational corporations have recognized the urgent need to accept the conditions imposed by the EU as a necessary cost of entry into this lucrative market. To avoid the burdens associated with complying with multiple regulatory frameworks in different jurisdictions, these companies often choose to extend the applicability of EU regulations such as GDPR to their operations on a global scale.²
        1. An illustration of the Brussels Effect through non-obligatory laws is the European Code of Conduct on Countering Illegal Hate Speech Online³. Even though it’s not legally enforceable, this voluntary code encourages online platforms to actively address hate speech. The Code of Conduct, agreed upon by the European Commission and platforms like Facebook, Microsoft, Twitter, and YouTube in 2016, aims to counter illegal hate speech online. Its impact extends beyond the EU as platforms often adopt similar measures globally. Over time, more platforms, including Instagram, Snapchat, Google+, Dailymotion, Jeuxvideo.com, and TikTok, joined the Code. Currently, the Code encompasses 96%⁴ of the EU market share of platforms that encounter hate speech.
        1. The EU Data Act is a legislative proposal aimed at fostering a fair and innovative data economy within the European Union. It focuses on creating a single market for data, ensuring that both businesses and individuals can access and use data generated across the EU more efficiently, under clear and fair conditions. This proposal is part of a broader European strategy to enhance digital transformation and leverage data as a key asset for the economy and society. The EU Data Act may contribute to the Brussels Effect by setting standards for data access, sharing, and use that could influence global data practices, pushing international businesses to adapt to these regulations to access the European market.⁵
        1. THE CASE LAW OF THE COURT OF JUSTICE OF THE EU (CJEU) Case C-311/18: The CJEU’s “Schrems II” decision on July 16, 2020, invalidated the EU/US Privacy Shield, profoundly impacting international data exchange laws. This judgment was considered a constitutional judgment and had far-reaching implications in the realm of data protection.⁶ It led to global reevaluations of similar data transfer agreements, as seen when Switzerland scrutinized its own accord with the US⁷. The reach of the CJEU’s rulings extends globally, prompting countries outside the EU to adjust their data protection regulations to match the EU’s robust standards.

        Potential Brussels Effect on the Crypto Law

        The Markets in Crypto-Assets (MiCA) regulation is a key example of the potential Brussels Effect in the crypto space. As EU regulators set a precedent with MiCa Regulation, consumers worldwide may begin to demand similar protections, leading to a universal uplift in consumer rights and security standards within the crypto industry. Here’s how MiCA could exemplify the Brussels Effect:

        • Licensing Regime: MiCA introduces a mandatory licensing regime for crypto-asset service providers (CASPs) operating in the EU. This approach could incentivize global CASPs to adopt the EU regulatory framework as a baseline to ensure seamless operation across borders.
        • Stablecoin Oversight: In response to the financial stability concerns posed by stablecoins, MiCA puts forth rigorous requirements for issuers, such as maintaining sufficient reserves and mechanisms to stabilize value. These measures are designed to mitigate systemic risks and protect the financial system, potentially serving as a blueprint for other jurisdictions.
        • Transparency and Disclosure: The regulation underscores the importance of transparency for investors, mandating comprehensive disclosure of information on crypto-asset issuers and the risks associated with investing in these assets. This level of transparency is crucial for informed decision-making by consumers and could become a global norm as markets outside the EU seek to maintain the confidence of investors.
        • Operational Resilience and Security: MiCA demands robust operational resilience, including cybersecurity and risk management procedures. These standards ensure that CASPs can withstand a wide range of operational shocks, potentially setting a high benchmark for crypto security practices worldwide.
        • Sustainability Standards: The framework also acknowledges the environmental footprint of crypto-asset operations, signaling a move towards sustainable practices within the sector. This is a significant step, as it may drive the adoption of green blockchain technologies globally.

        Conclusion

        The concept of the Brussels Effect explains how and under what conditions one jurisdiction’s standards can extend beyond its borders. Even though market size plays an important role, jurisdictions also need the capacity to create and enforce robust regulations effectively. Furthermore, the standards set must be rigorous, reflecting the preferences of the stakeholders within the jurisdiction. A jurisdiction’s global regulatory power is more effective when it targets markets that cannot easily avoid the regulation (inelastic targets) and when there is an advantage to having a single standard across various markets rather than complying with multiple different standards (non-divisibility).

        While the Brussels Effect is a concept closely associated with the EU, the principles behind it are universal and can be applied to understand the potential for any jurisdiction to independently set global regulatory standards. These principles are influenced by a range of external factors, such as economic changes or technological developments, which could potentially alter the landscape of global regulatory influence in the future.

        ¹ A.Bradford – The Brussels Effect: How the European Union Rules the World
        ² A.Bradford – The Brussels Effect: How the European Union Rules the World
        ³ The EU Code of conduct on countering illegal hate speech online, EU Commission
        ⁴ European Digital Sovereignty’: Successfully Navigating Between the ‘Brussels Effect’ and Europe’s Quest for Strategic Autonomy
        ⁵Link to our position paper
        ⁶ After Schrems II : Uncertainties on the Legal Basis for Data Transfers and Constitutional Implications for Europe
        FDPIC considers CH-US Privacy Shield does not provide an adequate level of data protection