The Digital Economy
Speeding the pace of digital change in Europe
Fredrik Erixon and Philipp Lamprecht / Oct 2017
Estonia recently threw down the gauntlet about Europe’s digital future. At the EU Digital Summit in Tallinn, it asked what should be an obvious question for all countries, but one that most have avoided for quite some time: what aspirations do EU member states actually have for the digital single market (DSM)? Obviously, Estonia wants other countries to join the club of believers in the benefits of digital economy. But behind Estonia’s efforts, and those of many others, is a frustration about the slow pace of digital change in Europe. They feel, rightly, that all the promises about creating a digital single market are – as Shakespeare would put it – honoured in the breach rather than the observance. And they suspect, also rightly, that things aren’t about to improve.
It is not surprising that countries like France and Germany routinely delay and block reforms to create a digital single market. After all, they tend to hesitate every time there is a proposal to spur deregulation of Europe’s protected sectors and unlock competition against incumbents. Together with a few other countries, they form a group that can be called digital managerialists. While they aren’t against digitization, managerialists balance positive aspirations about digital opportunities for individuals with defensive economic attitudes based on fears that the competition that digitization encourage may disrupt their controlled markets. For some of them, digitization is much of a battlefield of technology and business models. Just like in Jean-Jacques Servan-Schreiber 1960’s treatise about managed competition – Le défi Américain – they are both in awe and fear about the big tech firms from the United States, and in the battle, they don’t think Europe is victorious.
What is surprising, however, is that other countries all too often let the managerialists get their way. Digital frontrunners – like Estonia, Ireland, the Benelux and the Nordics – all come with an embracive view of digital market reforms. They are small and open economies that rely heavily on trade and that have high digital readiness (e.g. world-class ICT infrastructure and widespread digital skills). Frontrunners have also had greater digital change in their economy. And that combination, a culture of economic openness and achieved digital change, often puts them on the side of the argument that favours deregulation rather than regulation of the digital economy. But they offer little in terms of policy leadership for Europe’s digital economy. In EU policy, they routinely hide behind the positions of EU institutions and hope that someone else will do the hard work behind spurring reforms. Sometimes, they just wander around in no particular direction.
There is also a third group, one that can be described as digital convergers, and in the debate about the digital single market, they are mostly sitting on the fence. Countries like the Czech Republic, Hungary, Poland, Portugal, Slovakia, and Spain are catching up on other EU members, both in economic prosperity and digital performance. Yet many digital convergers are uncertain about where in the digital value chain they sit and if greater openness to growth, competition and experimentation in the digital economy will allow them to climb that value chain faster. With smaller digital endowments (e.g. digital infrastructure like networks), these countries often believe that they won’t profit as much from digitization as countries with bigger endowments. For that reason, they applaud initiatives to help expanding their telecom infrastructure and invest in digital human capital, but there is no equivalent assuredness in their positions on the key task of the digital single market: improving the market conditions for faster growth in the use of all the capital plowed into digital infrastructure.
If the EU should be able to accelerate its digital economy, both the digital convergers and the digital frontrunners need to take up the gauntlet threw down by Estonia. For the convergers, there is a misconception right at the heart of their absenteeism. Obviously, economic success in the digital economy requires that a country has good digital infrastructure and widespread digital skills. But it is not an issue about exporting more than a country imports. Convergers shouldn’t fear faster digitization coming from digital technologies and services from abroad. Just like for others, the economic benefits from new technology comes from its use, not its creation, and convergers like Poland and Spain should focus their policies at getting firms and individuals to adopt new technologies faster. Just like in other forms of exchange, countries with small endowments prosper from a policy of openness as much as countries with big endowments. In other words, neither the digital single market nor other initiatives to expand the digital economy should be seen as beauty contests. Reaping the rewards in the digital economy is about infusing the production of goods and services with new technology and better ways of doing business.
This shouldn’t be news to the Visegrad countries. They have boosted output and productivity remarkably in the past two decades, and much of their success in the manufacturing sector has been a consequence of strategies to plug themselves into European and international value and supply chains. All these economies are densely integrated in production networks, with lots of parts and components crossing their borders before they end up in final assembly somewhere in Europe. None of these economies had industrial endowments comparable to Germany’s, but the tight business cooperation they built with German firms allowed them to prosper. The digital economy is no different, and the best way for convergers to get a better economic payoff from all the investments they are doing in digital skills and infrastructure is to link themselves closer to countries at the frontier.
It has dawned on frontrunners that they need to become far more active for DSM initiatives to go in their preferred direction. Lately, the Swedish government has invited some countries to joining the D9, or Digital9, a group if nine EU countries at the frontier of digitization. That is a worthwhile initiative, and it should be deepened and supported by ideas and proposals for how to accelerate digital growth in Europe. But it is equally important that these nine countries build new structures of digital policy cooperation with convergers. Convergers may not be as digitally advanced as the frontrunners, but they have shared economic interest in advancing the digital single market and foster more cross-border value chains in Europe’s digital businesses. And they add voting power in the EU, which is needed for the frontrunners to have a greater say over the digital single market.
All EU economies would benefit if the growth of the digital economy would accelerate and the DSM became real rather than aspirational. But just like in other fields of commercial policy, e.g. trade policy, some countries resist the temptation of better economic outcomes because they are protecting incumbents. And it is for that reason that the frontrunners and convergers now need to show greater leadership. They can’t expect digital policies to reflect their desires if they outsource all the policy work to EU institutions, because the Commission and the Parliament will inevitably pursue policies that reflect the wider membership. There is a growing battle of ideas over what type of future Europe should have in the digital economy. It is high time for frontrunner countries to now join it.