by Dr Bruno Macaes, Secretary of State for European Affairs, Government of Portugal
The industrial internet – the network of intelligent machines, software analytics and people – would address the European productivity slowdown by providing a foundation for new businesses, new jobs and higher productivity.
While the new Digital Single Market (DSM) strategy makes a number of valuable contributions, it is predominantly focused on the consumer side of the digital economy. But this paradigm has now been substantially exhausted. We need to fundamentally change internet growth from the consumer side to the widespread digitalisation of industry. On this, the new strategy falls short and may be in need of some future development and revision.
This is in some way a missed opportunity to further connect the DSM with the EU’s agenda of structural reform, with a renewed emphasis on employment, growth and productivity. Such an ambitious digital strategy for Europe should encompass:
- A cybersecurity strategy, because maintaining a protected IT infrastructure is a vital requirement, particularly for the industrial internet.
- Investment in infrastructure as the shift from 4G to 5G could give Europe an opportunity to regain global leadership.
- Starting with data privacy, a common regulatory framework for data with favourable rules for ownership, transfer and storage of data is necessary – for both, European and non-European market participants.
- The majority of all current laws and standards were drafted at a time when many digital technology applications were still inconceivable. This is why a proper industry regulation needs to be flexible and technology neutral.
- Reskilling people for the thousands of job openings in the digital economy, which remain to be filled in Europe. If nothing is done, the Commission predicts there could be up to 825,000 unfilled vacancies for ICT professionals by 2020.
Digital trade and free flow of data – the Trans-Pacific Partnership, the Transatlantic Trade and Investment Partnership, the Trade in Services Agreement and the Information Technology Agreement together represent a critical opportunity to advance a modernisation effort.
 The author would like to acknowledge the contributions of Diana Correia and Joana Costa Pereira in researching and writing this policy brief.
Did Europe “miss the train” on ICT?
To understand why Europe “missed the train” of the ICT (Information and Communications Technology) productivity boom, it is useful to take a step back and briefly summarise developments in European labour productivity. In their insightful 2008 paper, Van Ark, O’Mahony and Timmer, identify three distinct periods: (a) during 1950-73 European productivity grew at a rapid pace, reflecting in part a catching-up process to the US’s higher levels of productivity and per capita incomes. Import and imitation of existing technology played an important role, similarly to that which is currently benefiting a number of emerging markets; (b) during 1973-95 productivity growth slowed down in both Europe and the US, but productivity growth in Europe outpaced that in the US, reflecting a European decline in both labour force participation and working hours; (c) during 1995-2006 European labour productivity plunged, at the same time as US productivity rebounded.
Structural rigidities in markets for labour, products and services appear to have played a very important role in hindering the rapid reallocation of resources that would have accelerated the adoption of new technologies and maximised the attendant productivity gains. According to Ark et al, the European productivity slowdown is due to the later emergence and smaller size of IT investment in European economies compared to the United States. There seem to be three main explanations contributing to this:
First, the combined contribution of the investments in information and communication technology, greater demand for skilled workers and the impact of intangible investments, such as organisational changes related to the use of information technology, declined from 1.6 percentage points in the period 1980–1995 to 1.1 percentage points in 1995–2004 in the EU. Conversely, in the US economy the contribution of these three knowledge economy components doubled from 1.3 percentage points in 1980–1995 to 2.6 percentage points in 1995–2004.
Second, whereas multifactor productivity growth (which can be viewed as a proxy for advances in technology and innovation) accelerated in the United States almost a full percentage point from 0.5 percent from 1980–1995 to 1.4 percent from 1995–2004, the same measure declined from 0.9 to 0.3 percent between these two periods in the EU.
Third, productivity growth rates in ICT technology–producing sectors are 0.4 percentage points higher in the US (0.9 percent) than in the EU (0.5 percent), which reflects somewhat the relatively bigger share of these sectors in the United States.
 Van Ark, Bart, Mary O’Mahony, and Marcel P. Timmer. “The productivity gap between Europe and the United States: trends and causes“, The Journal of Economic Perspectives, 2008. Available at: http://www.indexmeasures.com/dc2008/papers/vanark_productivity.pdf.