The urban legend of the EU’s digital economy: Where do we go from here?

It is not strange to think that the digital economy is made by and for American companies. Google is the window to the Internet, we buy through Amazon, and send messages via WhatsApp. According to the most common narrative the train of the digital economy left long ago, leaving Europe at the station. This pessimistic narrative has had real policy implications. Assuming that the EU lacks competitiveness and suffers from technological dependence in the digital economy, the EU concluded that regulating its digital economy will not generate a cost for its companies.

Like any urban legend, this narrative is in part true. In global rankings it is difficult to find more than a couple of European companies in the top twenty. In addition, Europe has not developed any of the main social networks, so the assumption is that, with the possible exception of Spotify, the costs derived from the European Digital Markets law will basically fall into companies outside the Union.

However, the day-to-day activities of the Internet are only the tip of the iceberg of the digital economy. Behind every click, email, publication, or online video there is a digital infrastructure in which millions of companies participate, many of them European companies. Those who argue that Europe is a passive subject of the digital economy underestimate not only the sheer size of this sector, but also the capabilities of the European companies that work in it.

According to data from the OECD, the European Union is the world’s largest exporter of computer and telecommunications services, ahead of the United States, China or India. In 2021, European exports of computer services reached a trade surplus of 129 billion euros, a figure higher than the trade surplus of some subsectors of the machinery and automobile industry. It is a fact that surprises those who, following the traditional narrative, do not take into account that European companies are an essential part of the technological architecture that sustains the digital economy. In fact, 28 percent of the members that are part of 3GPP – the organization that develops the technological standards behind 5G – are European. A higher percentage than the United States and China, whose companies constitute 21 and 15 percent respectively.

Continuing with the legend, there are those who propose reindustrializing Europe, forgetting that Europe is not deindustrialized. In 2020, the value added of the manufacturing sector as a percentage of the Union’s GDP was 14 percent, still above the 13 percent registered ten years ago. The industry fetish made economic sense when productivity growth and technological change were faster than in other sectors. However, thanks in part to digital technology, certain service companies accumulate higher levels of productivity and innovation than industrial companies.

The European Union is a commercial giant, with comparative advantages in exports of tangible goods, such as chemical products or automobiles, but also in exports of information and communication services. Understanding the scope of this data is critical to telling the story well. The EU digital economy is valuable, and the narrative behind Europe’s economic strengths should not be overly dominated by industrialists.

Refocusing on competitiveness

In the coming years, the European Union will approve a legal framework that will regulate its digital economy and its exchanges with the rest of the world. Some of these policies reinforce the urban legend characterising the European digital sector as dependent and handicapped. Not only is this a vision that does not correspond to reality, but it is counterproductive. It ignores the fact that, in addition to foreign ones, European companies will also be affected by the costs of poorly focused policies.

In addition to direct compliance and administrative costs of policies and regulations, indirect and long-term costs that result from dynamic and downstream economic effects are typically ignored, neglected or downplayed in EU regulatory impact assessments. As firms and investors change their current and future behaviour because of the regulations, these indirect effects are actually the most important ones. Europe’s environment for digital regulations needs to become more growth friendly. All too often, Europe’s regulations increase costs and unpredictability for businesses.

In addition, guaranteeing the competitiveness and prosperity of the European economy requires building regulatory bridges between the European digital market and that of the rest of the world, which allows companies to continue being part of global chains of digital services. Every company that is dedicated to exporting knows that to be competitive it must work with the best suppliers. The digital economy is no exception. To enhance its competitiveness, Europe needs to maintain a technology policy that allows companies to access cutting-edge and disruptive digital technology, regardless of where it was produced.

Not doing so would result in another set of costs for European companies. Regulations in the digital economy should facilitate openness and allow European companies to have access to the best suppliers and services from the rest of the world. Such open regulation is necessary for European companies, across all sectors of the economy, to be competitive exporters globally. For example, the institutional framework of the AI act should include a mechanism to grant adequacy status to other countries.

The need for digital leadership

A key question is how Europe makes digital policy and how its digital economic performance can be improved. Unfortunately, there is a dearth of policy leadership by key EU member states on emergent technologies and what is needed to make them powerful in the European economy. This is why the D9+ group should raise its profile. Launched in 2016, 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. Since its founding, the group has expanded^[1], and now also includes “guest countries”, but it remains fundamentally an initiative of small and mid-sized open-oriented economies with a strong interest to exploit the economic power of digitalisation and new emerging technologies.

D9+ countries should 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 table when policy is decided in Brussels. D9+ countries also have a clear role in establishing better frameworks in the EU for sharing experiences and learning from each other. EU countries have different experiences in technological specialisation and 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 bring economic and political experiences that are relevant for the general EU policy direction. 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.

To do so, the D9+ also needs to update its processes and take concrete actions to further improve the way in which the D9+ works. For example, the group could prepare more comprehensive protocols including an agenda for its meetings as well as a long-term work programme providing a clear link between individual D9+ meetings. This could be supported by the establishment of a permanent Secretariat for the D9+ Group with the capacity to evaluate the group’s policy and performance, and to propose ways to improve EU performance.

[1] The current membership of the D9+ group includes Denmark, Finland, Sweden, the Netherlands, Luxembourg, Belgium, Spain, Ireland, Estonia, the Czech Republic and Poland.