Canada should not adopt a European-style “regulate first, innovate later” approach to artificial intelligence, says the MEI

Montreal, January 8, 2026 – The pitfalls of overregulating AI could pre-emptively restrict the significant economic gains that would benefit Canadians, according to a new MEI publication released this morning.

“What Europe did was hit the brakes on innovation, thus reducing its global competitiveness,” says Gabriel Giguère, senior policy analyst at the MEI. “There is no proof that any of the proposed protections were well-suited to the purpose.

“What we do know is that they have stalled AI innovation and investment, which will have ripple effects throughout the economy.”

Some estimate that AI usage could raise worker productivity by 14 per cent for workers with few qualifications. The researcher adds that productivity is a key determinant of one’s standard of living.

In May of 2024, the European Union attempted to regulate AI with a special focus on the protection of health, safety, and the fundamental rights of citizens in their interactions with AI tools. Only part of this law is in effect, and the European Commission is proposing to push full implementation back to 2027.

The animating force behind the regulation was to impose obligations on AI companies based on their products’ presumed risk factors. However, the researcher notes how risk factors related to rights are difficult to ascertain in advance, and costing them before any damage has occurred is a complex process that most companies are ill-equipped to carry out.

Attempting to predict the kinds of uses to which AI tools will be put is similarly difficult, further complicating the task of foreseeing levels of risk and damage, explains the researcher.

Firms deemed “high-risk” under the proposed rules will be fined up to three per cent of their global revenues.

“A healthy digital ecosystem that benefits consumers and the economy is one with lots of competition,” says Giguère. “Unfortunately, erecting costly compliance obligations at the gate means only big business will be able to survive.”

The researcher notes a similarity between Europe’s AI regulation and its General Data Protection Regulation, instituted to protect personal data collection.

Research shows that the law favoured large platforms, which were better able to absorb the cost of these regulations, and that overall competition was thereby reduced. As a result, in less than five years, more than one in ten companies disappeared—mainly start-ups.

The regime has strengthened the market share of large digital companies and has led to a slowdown in innovation in the sector in Europe compared to the United States.

Private investment in AI has grown exponentially in the United States, while it has stagnated in Europe, so that in 2024, more than $29 billion was invested in the US, almost 20 times more than the $1.5 billion invested in Europe that year.

Since 2022, the creation of AI companies has accelerated sharply in the United States. In 2024, 1,143 AI companies were created in the US, nearly three times more than the 447 created in Europe.

The number of available applications in the EU has fallen by a third, and the rate of entry of new applications has fallen by 47.2 per cent. The researcher worries that history will repeat itself under a tightly regulated Canadian AI regime.

To avoid becoming a laggard in this sector, the researcher cautions against pre-emptive regulation and argue that current legislative consumer protections largely suffice for tools with little to no autonomy.

For less controlled products, risk sharing would be the best way to avoid the kinds of use-case damages legislators are concerned about, since shared legal accountability will encourage all parties to act responsibly.

“The harms Canadians are worried about must be addressed, but adopting a European-style approach risks being counterproductive,” says Giguère. “We need to address actual harms and actual risk; that’s the only way to keep up in this age of innovation and disruption.”

You can read the Economic Note here.

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The MEI is an independent public policy think tank with offices in Montreal, Ottawa, and Calgary. Through its publications, media appearances, and advisory services to policymakers, the MEI stimulates public policy debate and reforms based on sound economics and entrepreneurship.

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