How to improve the digital competitiveness of the European Union?

“The European Union stands at a pivotal moment regarding the regulation and advancement of technologies that are fundamental to the digital and telecommunications landscape,” pointed out Enrico Letta in his timely report ‘Much More Than a Market‘ published in April. The report analysed the future of the European Single Market and called for the EU to boost its competitiveness, highlighting the need for an effective Single Market for electronic communications networks and services as a key driver in industrial productivity and citizen well-being.

Already the COVID-19 pandemic demonstrated how the use of digital technologies can affect a nation’s ability to prosper. When used effectively, digital technologies not only make it possible for work and education to move online, but they also offer effective ways to coordinate business operations and governmental procedures. Many of the latest and most promising technologies, including AI, 6G, quantum computing, virtual worlds like the Metaverse, 3D printing, or robotics will have digital inputs or will be delivered through the Internet. Therefore, the growth of the digital economy, and its interplay with new technologies, is the prime force for new patterns of productivity and trade.

In this context, digital trade becomes a key determinant of competitiveness, providing faster and more opportunities for growth, innovation, and increased trade to companies of all sizes. The EU has already taken some steps in embracing the growing importance of digital trade. This is reflected in the EU’s trade policy communication, ‘An Open, Sustainable and Assertive Trade Policy‘, where supporting Europe’s digital agenda is made a priority for EU trade policy.

However, a parallel policy trend is that most countries have introduced new digital restrictions. The EU has been one of the first major economies to regulate the digital economy and digital technologies, and compared to many other Western economies, it has adopted regulations that are more restrictive and less predictable than elsewhere. Adding more regulatory uncertainty and confusion in the rules for the digital economy could stifle innovation and make European companies that compete in the global market less capable of working with frontier technological changes.

In this blog, we argue that in order to increase its digital competitiveness, the EU needs to refocus on competitiveness, to refocus on its neighbours and that it needs new leadership in European digital policy through greater ambition of the D9+ group of countries.

The EU needs to refocus on competitiveness

A first observation is that the EU is behind other advanced economies in digital trade agreements, and it remains all too defensive – which deprives the EU of strong economic gains. Further harmonisation of rules for digital trade across Europe and with partner countries can help facilitate faster and safer transfer of information for example via stronger engagement in the WTO.

The EU can also position itself at the frontier of digital trade by embracing Digital Economy Agreements (DEAs) similar to the one between Singapore and Australia, New Zealand, United Kingdom, and South Korea. A DEA is a treaty that establishes digital trade rules and digital economy collaborations between two or more economies. They also encourage domestic regulatory reforms and “soft” cross-border collaboration on issues as wide-ranging as data innovation, digital identities, cybersecurity, consumer protection and digital inclusion.

But EU policymakers need to do more than just open up to trade. Another critical component is that domestic digital regulations should support competitiveness and growth. While it is important to have rules protecting rights (such as data privacy), these laws should not be cumbersome for businesses to follow or impede the development of new digital technologies. The EU needs to simplify and streamline digital regulation, while EU policymakers need to improve their understanding of the effect new regulation can have on companies, data flows, knowledge, and competitiveness through better impact assessments (IAs).

In a recent analysis we found that reducing trade barriers is key for increasing digital competitiveness. Based on a gravity model analysis we found that a 30 percent fall in the DSTRI is equivalent to a 3.39 percent fall in trade barriers in digital services. This fall in EU trade barriers will lead to higher economic growth and employment in the EU. EU GDP is estimated to increase by 16 bn euros and this increase in economic activity would support 200.000 jobs in the EU.

There is also a need to encourage venture capital in digital technology. Less than 2 per cent of all investment funding in EU venture capital funds has come from pension funds. In contrast, up to 20 per cent of US venture capital investment funds come from pension funds, which have historically been the largest contributors. The gap between the EU and the US can be closed, or prevented from widening, if financial regulation at the EU level encourages investment by pension funds that are severely lacking. European businesses also have severe financial limits when it comes to AI compared to their American and Chinese competitors.

But this list is far from exhaustive. The EU also has an urgent need to attract talent and to improve infrastructure and connectivity if it aims to truly increase its digital competitiveness over the next years.

The EU needs to refocus on its neighbours

In recent years, the EU has taken significant steps to harmonise its data privacy laws. This includes the implementation of the General Data Protection Regulation (GDPR) in 2018, alongside the introduction of the Digital Markets Act (DMA), Digital Services Act (DSA), and the Data Act. These regulatory changes have not only unified the digital landscape within the EU but have also extended their impact beyond its borders. This posed significant challenges for neighbouring countries. These nations are now grappling with increased trade barriers stemming from complex data compliance and governance requirements.

The EU should modernise existing agreements with its neighbourhood when it comes to digital trade. EU policymakers should formulate digital policy agreements aimed at promoting increased trade and reducing obstacles for these countries. Existing provisions related to data and digital regulations are generally insufficient and agreements fail to keep pace with the rapid advancements in technology and the introduction of new regulations.

Modernisation of these agreements is key to better align them with the actual dynamics of cross-border digital integration. While it may be challenging to establish detailed operational rules for data regulations through broader bilateral agreements, there are basic concepts of digital trade that are still missing in many of these agreements. Some agreements are more robust than others, and harmonising the weaker ones with the stronger ones would improve the conditions for digital integration.

In addition, extending the initiative of digital partnerships to the EU’s neighbourhood countries could bolster and expedite the aforementioned modernisation process. Expansion of this initiative to the EU’s neighbourhood should be tailored to the specific regulatory framework, level of development and capacities of each neighbouring country.

EU policymakers should also consider adequacy, other mutual recognition mechanisms and collaboration on standards with the neighbourhood more closely. GDPR stands out as one of few data regulations featuring a specific mechanism that enables other countries to “dock” with the EU regulation and market standards. Most other regulations lack such mechanisms.

Evidence of trade losses can be drawn from the rise in digital trade, which has shown an increase ranging from 6% to 14% among countries that have obtained adequacy status from the EU. This trend implies a potential reduction in trade costs of up to 9%. Moreover, a network effect is discernible, as countries with adequacy status also benefit from the EU’s adequacy decisions with other countries such as the United States. Research shows that approximately 7% of digital value-added trade has been redirected from countries lacking adequacy status or from domestic markets towards those integrated into the EU’s adequacy network.

As the EU contemplates new digital regulations and important regulations related to embodied data flows (e.g. through the AI Act), it is crucial to devise policies and mechanisms that make it easier for neighbours to rely on EU data and digital service markets. To gain a better understanding of their readiness to align with EU regulations, the EU should engage these countries more actively in the policymaking process from the beginning.

New Leadership in European digital policy: the D9+

However, these initiatives outlined above are not enough by themselves. Europe also needs a new ambition in its leadership in European digital policy. Here, the so-called D9+ group of countries should play a greater role.

Launched in 2016 on the initiative of former Swedish trade minister, Ann Linde, nine countries with a particular interest in matters of the digital economy met to learn from each other and seek common ground on policy issues. The Digital Nine (D9) is now the D9+ group. The original group of nine countries (Sweden, Finland, Denmark, Netherlands, Luxembourg, Belgium, Estonia, Ireland and the UK) is now a group of twelve, having added Portugal, Spain, Poland, and Czech Republic.

The D9+ initiative is important and its work should focus on expanding the scale and scope of digital technological change in the European economy while addressing risks that an over-powering regulatory approach to digital policies in Europe reduces the benefits of the digital transformation. Importantly, the D9+ Group has a special interest to promote digital openness and avoid the agenda for technology sovereignty and strategic autonomy sliding into digital protectionism. Finding the right direction of policy is of fundamental importance for Europe’s long-run economic growth, and the D9+ Group should take a stronger leadership role.

EU governments have different positions on matters of digital openness, and those differences typically reflect how the digital sector sits in national economies and the capabilities of countries to thrive on the back of faster digitalisation. The differences between EU countries are substantial but they are rarely outlined – not even by the D9+ countries. Old challenges remain. While many D9+ countries understand that the wave of digital restrictions in Europe is problematic for their economic interests, they rarely know how and why it is problematic.

D9+ countries need to shape a much better understanding of how and why the recent wave of digital restrictions is especially problematic for them, and to outline basic principles and policy recommendations that could serve as the core of new policy advocacy from the D9+ group and its individual members. There are five key arguments we put forward.

First, all countries in the EU stand to benefit from digital openness – an approach that deepens the single market while keeping borders open for deep digital integration with other countries. In fact, this is of central importance for Europe’s future competitiveness.

Second, a restrictive regulatory environment will depress activity in the digital economy and reduce the positive effect of digitalisation on productivity and prosperity. Notwithstanding big differences between EU countries, there are worrying gaps between the EU and other economies at the frontier of technology and digital change – for instance on metrics like equity investments in Artificial Intelligence (AI) – and the risk is that future developments will agglomerate to regions with better conditions for technological change than Europe.

Third, D9+ countries have a lot in common – digital and general economic characteristics that should prompt them to be far more ambitious in promoting Europe’s digital competitiveness. The group is based on small and mid-sized open-oriented economies that all think it is crucial for Europe to run an open digital economy with large space for entrepreneurial experimentation and intensive integration with leading digital regions in the world.

Fourth, D9+ countries should take on greater leadership for the development of digital regulations and the broader policy for an open digital economy in Europe. In the last decade, the voice of small and mid-sized open-oriented economies in Brussels has been challenged by a changing global landscape and new policies have increasingly reflected the economic interests of larger European economies. D9+ countries have a key task in front of them: to be more proactive in developing new ideas for how European policy should evolve, advance the economic reforms that are necessary for deep digital integration, and ensure that the voice of digitally open economies is heard around the negotiation tables when policy is decided in Brussels.

Fifth, the D9+ countries have a clear role in establishing better frameworks in the EU for sharing experiences and learning from each other. EU countries have made different experiences in technological specialisation and they all have important knowledge to share – and lessons to learn. Some of the D9+ countries are consistently ranked very high in global league tables over technology, innovation and digital competitiveness and have economic and political experiences that are relevant to the general EU policy direction. Therefore, these countries have a special responsibility to carve out a new function in EU digital policy-making that provides for positive examples to be imitated.

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This blog is based on the presentation prepared by Philipp Lamprecht for his keynote speech during the Digital Competitiveness in the European Union conference organised by the Central European Lawyers Initiative on 12 June 2024 in Vienna. Check it out by clicking the button below: