Digitization has been a boon to the European economy. However, the Digital Single Market remains an aspiration rather than a reality, and European institutions and Member-State governments have to redouble their efforts in the next years to create better and larger space for the digital economy to grow. Even if there is a great deal of variation between the performance of different EU economies, the EU is trailing behind many other economies and could increase the economic outcome of digitzation. In this paper, we have focused on defining economic concern about the digital performance of Europe and outlining conceptual problems in work to create a Digital Single Market.
There are especially three conceptual problems. First, many of the policy factors that hold Europe’s digital performance back are not data or DSM specific. They are about the general conditions for entrepreneurs to do business across the border in Europe and build business models that include many national markets but don’t run into high regulatory barriers and costs. In the past five years, reforms under the DSM label have much been focused at digital-specific regulations, and – unfortunately – several of these efforts have added new layers of regulatory complication to data-based commerce in Europe. For the future, a real ambition to improve the speed of digitization and its economic outcomes will have to be combined with general single-market policies that knock down barriers between EU countries. Second, many of the regulations on data should be changed to give clarity rather than confusion and add more opportunities for experimentation and innovation. Third, the EU is in need of greater coordination of various data-regulations and there should be a clearer taxonomy of the specific ambitions of one regulation to avoid clashes with other regulations.
The real digital economy in Europe
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 digitization 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 European policy approach to the digital economy is falling desperately short on policies that deregulate sectors and make them more open to cross-border integration. 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 and the cost of digital commerce.
Many EU countries also believe that other economies, outside of the EU, would pocket many of the gains from a deeper digital single market in Europe. And to support their stance they often marshal evidence that correctly portrays Europe as a laggard in the digital economy. However, this evidence rather speaks to the conclusion that more reforms are needed at a faster rate – not the opposite.
Europe does not start from a bad position – but it should be better. Accenture, for example, 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). Again, there is a great deal of variation between EU countries. Yet 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
Chart 1: The Percentage of Digital Output as a Proportion of GDP
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 capitalization 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 capitalization of 930 billion US dollars. Both regions do not come close to the combined market capitalization of US-based digital platforms – about 3 trillion US dollars (Evans and Gawer, 2016).
Chart 2: The Platform Economy in the EU, the Asia-Pacific and North America
Source: Center for Global Enterprise
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 digitization. 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.
Chart 3: Major Sector Contributions to Productivity Growth in Selected Economies, 1995-2007
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.
Chart 4: Technology Diffusion globally and in the Euro Area – Services (Index: 2003=1)
Source: European Central Bank
Economics prospects for digital renewal in Europe
Digital convergers are already established in international value chains and, even if their endowments remain distant from the frontrunners, the output they create from current digital endowments is significant and contributes substantially to their economies. They are in competition with other economies in the world that have similar positions in international value chains and they are on a trend of fast acceleration of their digital competitiveness. This is illustrated, for example, by the fact that the digital economy has contributed to the centre of economic gravity shifting away from Europe to Southeast Asia in recent years. This trend is estimated to continue with the centre of economic gravity further shifting to the Asia-Pacific region until 2025 (Erixon, 2017).
Forward linkages, i.e. the domestic value added embodied in foreign exports, can be seen as a measure of integration into international supply chains. Chart 5 shows these linkages in international supply chains of digital convergers from 2001 to 2011. While their contributions to forward linkages were already significant in 2001, they have further increased in the case of all digital convergers. This shows that many of the convergers are generally creating more value-added in their economies by connecting their economies to the arteries of the value and supply chains of foreign companies. In other words, even if many countries in this group have few multinational companies that trade directly from their home country with the world, the countries have prospered by a smart use of endowments in international value chains. The same logic also applies to digital value chains.
Chart 5: Domestic Value Added Embodied in Foreign Exports as Share of Gross Exports for Digital Convergers, 2001 – 2011 (%)
 Business services include not only professional services (accountancy, legal, engineering, marketing, tax and management consultancy, architects), but also IT, software services, technical testing, and labor search services etc. Business services are mainly used as inputs by other firms.