In Europe’s digital policy, digital managerialists, digital frontrunners, and digital convergers have emerged as coalitions among EU member states. This paper lays a focus on their stances on digital-policy reform and on their own understanding of the costs and benefits of the growth of the digital economy. The paper also suggests new ways for countries to cooperate in current or new constellations, which will allow them to profit from other countries’ experiences, and to fully develop their own policy preferences as well as a clear understanding of appropriate digital reforms for them.
Digitisation has the potential to support growth in many different sectors and the growing digital economy will make positive contributions to the productivity of non-ICT sectors as well. This is especially true for the services sector. However, countries with smaller digital endowments (e.g. digital infrastructure like networks) often believe that they do not stand to profit as much from digitisation as countries with bigger endowments. That is a profound misconception. Here, it is crucial to note that economic success in the digital economy is actually not merely the absolute level of digital endowments, but rather the way in which these endowments are effectively employed.
Reaping the rewards in the digital economy is based on an exchange that exploits the comparative advantages of countries and here, digital frontrunners, but also digital convergers, are performing well. Digital convergers are well established in international value chains and they create significant output from their digital endowments. They have an interest in improved regulatory conditions as a result of their trade and economic integration that is shared with frontier economies.
The future task for digital convergers lies in both increasing their output from accumulated digital capital via climbing the value chains of the digital economy, as well as increasing their digital endowments. In order to do so, digital convergers require better market conditions and increased investment in digital capacities and skills. The ability of digital convergers to profit from digital value chains also depends on their trading partners and on their proximity to these frontier economies. Digital convergers can thus profit from a more rapid pace of digital economy growth by tying themselves closer to frontrunner economies.
In addition, they can profit from the experience of digital frontrunners in developing their digital economies both for benefiting from lessons learned in their process of doing so, but also for further identifying and clarifying their own policy needs and position. Accordingly, this paper suggests that digital convergers could join more closely in cooperation with digital frontrunners and potentially form a D16 group to articulate their policies and priorities, and to devise strategies to shape EU digital policy.
The authors gratefully acknowledge the research assistance by Nicolas Botton and Julie Richert
The European Union and its member states have clearly benefited from the growth of the digital economy. Yet political initiatives to progress Europe’s digital economy – to create a larger space and better regulations for digital entrepreneurs and innovators to thrive – are surprisingly often confronted by political resistance. While every member of the European Union is on a quest to improve digital skills and the capacity of its ICT infrastructure – and, generally, to become attractive places for digital entrepreneurs, innovators and investors – initiatives at the European level have often failed to achieve the targeted ambitions or goals. This is primarily (but not exclusively) because groups of members in the EU have taken a restrictive view of how large that space for the digital economy should be and what regulations should apply.
Neither the digital economy nor the European Union are alien to disputes about policy and how to reform policy. Just like in previous periods of technological change, the current one provokes aspiration as well as anxiety. For some, there is an underlying (but unsubstantiated) expectation that the digital economy will reduce the economic opportunity of a small or large part of the society. In the alarmist predictions about the effects of digitisation, it is professed that a significant share of the labour force is about to become members of a dispossessed digital proletariat, permanently demoted to low economic expectations. Likewise, there is controversy in the debate about policy details and the more obscure parts of digital regulations. Member states in the EU often differ about the right direction of policy and, just as in other matters related to economic affairs (e.g. international trade and the Single Market), the conflicting opinions follow a pattern.
In Europe’s digital policy, there has gradually been a formation of coalitions among EU member states, often reflecting which sectors that are influential in the respective economies. In this paper, we will work with three coalitions and especially review the latter two: digital managerialists, digital frontrunners, and digital convergers. The first group, digital managerialists, is defined by its desire to balance a positive attitude to digital opportunities for societies with defensive economic interests that fear the competition that digitisation encourage. In addition, both attitudes are wrapped up in digital dirigisme, a general disposition and temperament supporting more rather than less regulation of the digital economy. Members of the second group, digital frontrunners, are generally small and open economies that rely heavily on trade and that have high digital readiness (defined by ICT infrastructure, digital skills, and digital use). This group tends to be on the side of the argument that favours deregulation rather than regulation of the digital economy – partly because of own economic interests; partly because of a political culture in those countries that embrace openness to new ideas, technology and societal change. Finally, countries in the last group – digital convergers – are catching up on other EU members, in terms of both economic prosperity and digital performance. While their ICT infrastructure is generally good, these countries are still trailing others in digital skills – and, with substantial digital inequality, broad-based economic benefit from digitisation are held back. Furthermore, a good part of their economy is based on the production of parts, components and services to multinational firms – and many digital convergers are uncertain about where in the digital value chain they stand and if greater openness to growth, competition and experimentation in the digital economy can allow them to climb that value chain at a faster rate.
While the policy character of these groups has gradually been articulated, it is less clear what two of the groups – the digital frontrunners and digital convergers – actually want to achieve in EU policy on the digital economy. It is obvious to any observer of digital politics where the source of resistance can be found and how the digital managerialists have maneuvered to slow down the pace of policy change. It is equally obvious why some of the countries in this group feel that things should slow down: they are articulating the politics of defensive corporate interests that want more time to adjust to new technologies and patterns of digital competition.
However, it is less obvious what the digital frontrunners are trying to achieve. While they are clearly supportive of a policy that releases the forces of growth in the digital economy, they are seldom taking positions that stake out future ambitions or set a path for where Europe’s digital economy should go. Until recently, they have been somewhat hesitant to seek coalitions with other countries. Generally, their strategy seems to have been focused at supporting most initiatives launched by the European Commission. Similarly, it is unclear what the convergers want to achieve, other than general ambitions to expand their ICT capacity. On matters of EU-based market and regulatory policy for the digital economy, they are often sitting on the fence, without a clear idea of where their own economic interest lies. While they often go along with soft digital reforms, they do not seem to have a policy for how they want to use EU policy to support their digital growth.
The purpose of the paper is to shed light on the politics, economics and political economy of digital-economy reform in Europe – and to delineate what should be the policy positions of various groups of countries. The paper will consider their stances on digital-policy reform and suggest various ways for countries to work with each other in current or new constellations – all with the purpose of reinforcing the understanding of their costs and benefits of the growth of the digital economy, and what should be appropriate digital reforms for them. Before we start that, however, we first need to set the scene for the discussion – and dive deeper into the various groups this study will work with.
Europe in the Digital Economy
The emergence and growth of the digital economy has been a boon for Europe. It is, by some distance, the fastest growing economy in Europe – and in the rest of the developed group of economies. According to the Organisation for Economic Cooperation and Development (OECD), digital output among its member economies has been growing at about 10% per year for the past five years. It is now an economy that also employs a lot of people and, despite fears about digital innovation disrupting incumbents and leading to a net loss of jobs, the reality is the opposite. In France alone, suggest a study by McKinsey, the digital sector has led to a net addition of 70,000 jobs.
These are impressive rates of growth – and all the more so when it is taken into account that the digital economy now has become sizeable and does not show high growth rates because it is small. Accenture, the consultancy, estimates that digital output already represents about 25% of Europe’s total gross domestic product (GDP) – or 3.6 trillion euros – and, consequently, that the share of digital output in Europe’s GDP is higher than the global average at about 22.5% (see Chart 1) (Accenture, 2016). Already achieved growth has emerged on the back of sizeable investments in creating good ICT capacities and digital endowments – telecom networks and digital skills among them. Governments have also promoted policies that have opened sectors up to new digital innovation.
Recently, member states have also given their approval of Europe’s flagship policy initiative for the digital economy – the so-called Digital Single Market (DSM) agenda. Undoubtedly, this is an initiative with great economic potential. If there would be a Digital Single Market, supporting openness to data and data services, there would be far fewer restrictions in Europe to digital entrepreneurship and commerce, and there would be better protection against future actions that would increase the regulatory burden on the digital economy. A fully integrated market for the digital economy would support the non-digital economy in many ways, and help producers and consumers to make the best of their limited resources. Rightly, EU leaders have used the example of e-commerce to drive home the point that the digital economy needs fewer regulatory barriers. For instance, the European Commission found in a study of a basket of 100 goods that consumers could save up to 745 euros (or 16% of total expenditures) if they purchased them online across the EU. In six out of 10 cases, however, such transactions could not be completed because of various barriers. If policies clogging the arteries of e-commerce were eliminated, total consumer welfare gains would exceed 200 billion euros per year.
Policies that establish open and predictable rules for the digital economy will reinforce the positive economic impact of digitisation. Rules that open the economies for more digital competition and innovation, from home or abroad, will raise growth and give consumers better value for money. Such rules are important because, across the world, there is always a temptation to introduce detailed and granular restrictions, many of which fail in the implementation. Part of the temptation comes from the undeniable fact that some issues around the digital economy have been politically controversial and sometimes prompted opposition because of fears that the digital economy may erode the competitiveness of some of its leading firms. Obviously, hesitant reactions often reflect the unpreparedness for digital renewal in non-digital sectors. While sectors and companies close to the digital frontier have been quick to embrace new opportunities to raise competitiveness and productivity, others have been lagging behind, especially in countries with a high share of small and medium-sized enterprises (SMEs) that are struggling to catch up with the technological frontier.
A fully integrated digital market in Europe would help SMEs to profit on the back of digitisation. In countries like Italy, for instance, there is a high share of non-frontier SMEs – more than 50% of all firms are non-digital and just a little more than 1% of all firms are fully digital (see Table 1). For Italy to catch up economically, it is important that its firms get closer to the technological frontier. All too often, however, SMEs in Italy and elsewhere find it difficult or expensive to access necessary technologies and skills, especially when there are restrictions on platforms or cross-border access to digital services. A great asset in the Digital Single Market is that it would help to converge SMEs to the frontier by easing the diffusion of digital technologies and services in the economy through reduced barriers to get the digital capacities they need in order to compete.
Source: European Commission, Digital Entrepreneurship Scoreboard 2015
Reducing the barriers to the digital economy would also boost Europe’s platform economy and create better conditions for domestic platforms to grow. In recent years, the rise of online platforms has been viewed by some in Europe as problematic, partly because restrictions to digital business in Europe are high. Europe trails behind both the United States and the Asia-Pacific region in encouraging successful platform enterprises. According to the Center for Global Enterprise, while 27 digital platforms, with 109 000 employees and a combined market capitalisation of 181 billion US dollars, were created in Europe, the Asia-Pacific has seen the creation of 82 digital platforms with close to 350 000 employees and combined market capitalisation of 930 billion US dollars. Both regions do not come close to the combined market capitalisation of US-based digital platforms – about 3 trillion US dollars (Evans and Gawer, 2016).
Source: Center for Global Enterprise
Despite fears about job-losses to follow on the heels of digitsation, there is a strong and positive case for digital innovation that often gets lost in the debate: technological transformations create new firms and jobs. And that is badly needed in a Europe that has high unemployment, not least among young generations, and that has witnessed declining churn rates of firms over the last decade, if not longer. Today, the rates of firm entry and firm exit are lower than before, which suggests that the problem confronting Europe is not one about galloping technological change in the real economy. The consultancy Accenture estimates that Europe’s digital economy will have grown by one trillion euro by 2020, leading to new business creation and jobs. In Europe as a whole, a Digital Single Market would add almost four million new jobs, according to the European Parliament’s Research Service.
Europe’s exposure to digital innovation in other areas of the world is a key part of the current and future success. Not only are many European innovators and companies supplying services to the American digital firms, but access to the services offered by these firms have helped to create a more productive European economy. While it is impossible to distinguish the effects of foreign ICT firms on Europe’s productivity growth, ICT sectors have represented between 35 and 50% of Europe’s total factor productivity growth in the past 15 years. Furthermore, foreign ICT providers give European firms greater capacities to compete and raise revenues. For Europe’s businesses, having undisrupted access to digital services is key to their ability to compete. Closing Europe off from the digital world would have serious consequences, especially for Europe’s community of small and medium-sized firms that cannot afford to build up their own digital services.
Digitisation supports growth in many different sectors – and the general case for the digital economy is that it will make positive contributions to the productivity of non-ICT sectors. However, this is where Europe has a clear challenge, especially in the services sector. Benchmarking the general composition of productivity growth in the EU with the U.S., which has a similar balance between manufacturing and services in its economy, is instructive, and gives an indication about how the European economy could grow faster by expanding the digital economy. It is not just a matter of investment in ICT, but also what happens in the broader services sector when the economy gets transformed. Obviously, the European services sector growth has trailed the expansion in U.S. services. The same is true for productivity growth, and what contribution the services sector gives to general productivity growth.
The McKinsey Global Institute has estimated the productivity gap in business services between the EU and the U.S. to be as high as 43%. Chart 3, below, gives further evidence to that observation. It shows the contribution of major industrial sectors to aggregate productivity growth in the U.S. and the EU for the period between 1995 and 2007. The difference between market-service contributions is striking: 0.6 percentage points for the EU against 1.8 percentage points for the U.S. Similarly, other estimates show that between 1995 and 2005, business services contributed 0.7% annually to productivity growth in U.S. commercial services and -0.1% annually in the EU. In other words, that sector drained the economy of productivity, and that is remarkable given how it has been supporting productivity in other countries through digitisation. It is all the more remarkable when it is taken into account that business and commercial services include a wide range of highly diversified ICT services (such as programming, data facilitation and storage) and digital marketing services.
Source: Timmer et al. (2011). In this study, “market services” include a wide variety of economic activities, ranging from trade and transportation services, to financial and business services, but also hotels, restaurants, and personal services.
Another way of looking at the same issue is to consider the diffusion rates of technology in European economies. Obviously, frontier firms – usually larger and internationally competitive enterprises – adopt new technologies and grow their productivity faster than other firms. What defines the scope of productivity for the entire business sector is what happens in non-frontier firms. In the manufacturing sector, firms in the Euro area have faster rates of productivity growth than non-frontier firms in the OECD as a whole. In services, however, it is the opposite relation (as shown in Chart 4 below). While there are several explanations behind Europe’s trailing services sector, it has been known for a long time that a key problem is related to the rate of technology diffusion in the sector of services SMEs. This is why a chief ambition for Europe should be to raise the level of technological and digital intensity in its entire economy – and to ensure that the restrictions to technological diffusion are reduced.
Source: European Central Bank
Digital Performance and Politics in the European Union
Initiatives in Brussels to reduce the barriers to digital enterprise in Europe – and to establish a Digital Single Market – have generally conformed to the desire of accelerating digitisation and raise its positive economic impact. While many of the initiatives taken have encouraged such change, it is equally important to note that several initiatives have fallen short of the ambition to create a Digital Single Market. Furthermore, it is equally clear that many policy initiatives did not deliver in accordance with their initial plans, primarily because policy reforms were weakened and ambitions reduced once the initiatives became the subject of member-state political haggling. In particular, the DSM initiative is falling desperately short on policies that deregulate sectors. As countries have agreed on establishing new digital regulations, but not opened sectors up for more digital opportunity, the reality on the ground – felt by many companies, especially small entrepreneurs – is that the digital economy is increasingly depressed by heavy-handed regulations that have raised the total level of digital restrictiveness.
Generally, positions taken by member states in those matters tend to follow the three different coalition formations that were outlined above – digital managerialists, digital frontrunners and digital convergers. These groups, in turn, broadly reflect how member economies perform in various indicators of their digital intensity – and their general pre-disposition to policies of regulation and openness to market-led structural economic change. Let us consider some of these indicators – especially for the two groups that we chiefly are focusing on in this paper: digital frontrunners and digital convergers. As we are talking about policies that affect EEA countries and Switzerland – and the soon-to-be departed United Kingdom – we have divided the frontrunner group in two categories – EU and non-EU.
The next three tables lay out the performance of groups and countries in different measurements and indexes of digital intensity. The general conclusion is clear: digital frontrunners are ahead of digital convergers in all scores. They have better ICT infrastructure – or connectivity; they have better digital skills and use the Internet more frequently. They have a greater digital “deepening” in their economy – digital output plays a greater role for them. If we would compare these performances with a country like Germany – in our view, a digital managerialist – it would be somewhere between these two groups, often closer to the digital convergers than the frontrunners.
Source: European Commission
Sources: World Bank; World Economic Forum
Sources: World Economic Forum; International Telecommunication Union
The measurements displayed in tables 2-4 concern tangible – and often material – aspects of digital performance. Obviously, they are important; the better the digital endowment of a country, the more that country is likely to generate high economic growth on the back of digitization. Yet economic indicators alone do not give the full picture. Arguably, there are good reasons to add two countries to the group of digital frontrunners that usually are not found in that category, and that show a digital performance that is trailing frontrunners and, in some indicators, is closer to digital convergers. These countries are Latvia and Lithuania.
There is a simple reason for this choice: both Latvia and Lithuania have made substantial progress in their digital performance and – more importantly – they are generally economies that support the policy ambitions of digital frontrunners. Moreover, these two countries are generally very open and trade-dependent economies with little choice to substitute imported technology adoption by domestic technology creation. Importantly, the policy culture in these two countries is generally progressive on matters related to technology and technological change. Like other digital frontrunners – such as their neighbors Estonia, Finland and Sweden – it is likely that Latvia and Lithuania would favour a larger space for the digital economy even if they were uncertain about its economic benefits. And this is a distinguishing hallmark of all digital frontrunners – they have a “policy instinct” in matters of the digital economy that is based on openness to technological change and its ensuing effects on the society.
Policy and Strategy for the Digital Economy
In this chapter, we have argued that the growth of the digital economy has generated strong benefits for the European economy. Despite that, new initiatives to advance the digital economy are often confronted by resistance from some countries – and that resistance often comes from digital managerialists that fear reforms to either be misdirected or encouraging new forms of competition at a pace which is too fast.
While it gradually has become clear what digital managerialists fear, it is less obvious what digital frontrunners and digital convergers desire – or what they want from new policy at the European level. Frontrunners usually give their support to efforts by the European Commission to cut the barriers to digitisation and digital commerce in Europe, but they seem to take for granted that most proposals conform to that agenda and that there is not a need to raise the level of ambition for what the EU should aim for and at what speed. Moreover, few of the frontrunners seem to have an idea of what defines a Digital Single Market and how current proposals score in that context. Importantly, digital frontrunners do not carry an idea for how their group could expand – and how they could join forces with digital convergers that aspire to become frontrunners.
In the next two chapters, we will examine how countries define (or not) their policy strategy and form coalitions in matters related to digital policy. While digital managerialists can exercise influence by virtue of their economic size (and voting power), digital frontrunners and digital convergers do not come with the same economic and political power, and consequently have a greater need for policy collaboration. The question is – are they acknowledging that need for greater collaboration and, if not, what should they do about it?
These chapters address two essential questions. First, they aim at answering why certain countries form coalitions in matters related to digital policy? What is the purpose of forming such coalitions for the countries involved in them? Second, they address the question of how different groups of countries can make use of such coalitions and related initiatives to exert influence and to promote their interests regarding digital policy. These questions are relevant both for the group of digital frontrunners as well as for the digital convergers. The analysis of these questions for both of these groups is structured in two parts: narrative and initiative. It firstly focuses on the narrative of the country groups, how they are positioned within the digital economy of Europe and how they could benefit from greater integration in and openness towards it. Secondly, it drafts ideas for specific initiatives and forms of collaboration going forward.
 One of the authors of this paper examines this issue in Erixon and Weigel, 2016.
 Digital managerialists have, for example, supported platform regulation and the break-up of US tech firms, and they have been skeptical of – if not hostile to – digital single market reforms like the free flow of data. They are also hesitant about creating a single market for services in Europe that would allow for more digital competition in non-digital sectors.
 Business services include not only professional services (accountancy, legal, engineering, marketing, tax and management consultancy, architects), but also IT, software services, technical testing, and labour search services etc. Business services are mainly used as inputs by other firms.