The digital unification of Europe

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Sam Mealy's picture

The European Commission’s announcement in May of its proposal to create a Digital Single Market (DSM) to complement the existing Single Market in physical goods and services has been largely applauded.  Significant market fragmentation currently means that only 15% of EU consumers shop online in another EU country, whilst only 7% of EU SMEs sell to another EU member country.[1]  The EC has high hopes that the Digital Single Market can remove some of these obstacles to growth.  At a Brookings Institute event in May, Andrus Ansip, the EC’s Vice President for the Digital Single Market, stated that he believes the DSM can unlock €415 million in GDP growth and create hundreds of thousands of new jobs over the next few years.[2]

The DSM arrives during a period of digital transformation, in which digital and internet technologies are remaking our economy and our society.  Big data and advances in AI are aiding doctors diagnose and cure disease.  The emergence of an interconnected Internet of Things (IoT) is making our workplaces and transportation systems safer, our cities more liveable, and our domestic lives simpler.  Mobile platforms and their associated applications are transforming the way we communicate, socialise, shop and work, and are creating entirely new business models and markets.

Europe, however, has been relatively slow to capitalise on these trends.  We have been lagging behind the US in both ICT production – of the top 30 global IT services and software companies, only four are headquartered in Europe[3] - and ICT usage and adoption since the mid-1990s.  The relatively sluggish adoption and usage of ICT is a more concerning trend, as at an economy wide level, the majority of the benefits of new technology accrues from its consumption rather than its production. This is because the use of ICT boosts productivity by making both labour and capital more productive.  In a study conducted on behalf of the EC, Van Welsum, et al, found that ICT contributed 0.7 percentage points to the average annual growth rates of labour productivity in the EU-15 between 1995 and 2007, whereas it contributed 1.3 percentage points during the same period in the US.[4]  Furthermore, an OECD report on the Impact of ICT on Productivity and Growth showed that the ICT contribution to total factor productivity growth from 1996-2007 was higher in the US than in the EU.[5]  ICT is a significant driver of growth in modern service economies, a phenomenon that the US is making a competitive advantage.

There are several reasons for the EU’s laggardly behaviour when it comes to ICT production and adoption, including: low firm and government investment in ICT, onerous regulations on ICT-based companies and applications, and weaker deployment and competition in the broadband sector. The fragmented and highly regulated national broadband markets in Europe, for example, mean there are twice as many broadband providers in Europe as the US.  This means higher costs and less capital to invest in world class infrastructure.[6]  As such, it is more difficult for consumers to access digital services, for firms to exploit developments in data analytics and cloud computing, and for governments to digitalise service provision.

The Digital Single Market thus represents a positive attempt to begin reversing the EU’s ICT deficit relative to the US.   The EC proposes to build the DSM around three pillars: providing better access for consumers and businesses to digital goods and services across Europe; shaping the right environment for digital networks and services to flourish; and creating a European digital economy with growth potential. Undergirding these pillars are a series of policy measures, such as modernising copyright law, simplifying VAT rules, restructuring the telecommunications sector and developing pan-European IT security standards and interoperability.  One of the key challenges will be to avoid replacing preferential treatment for national digital providers and telcos with protectionism for European providers at the expense of the American firms that currently dominate the European market.  This would ultimately result in poorer consumer choice and dampen innovation.  Ansip assured the Brookings audience that the Commission would remove regulatory barriers, not create new ones or build a “Fortress Europe.[7]

User data privacy is another key focus area for the DSM.  72% of internet users in Europe are concerned that they are being asked for too much personal data online.[8] Data security, as well as privacy, is further complicated by the current market fragmentation. Cloud computing services that store data across multiple locations pose challenging questions around data ownership and security for national jurisdictions.  Three legislative initiatives under the DSM project are aimed at addressing these concerns: a review of the ePrivacy Directive, which regulates the use of personal, location and traffic data for digital marketing, and cookies; the establishment of a cyber-security contractual public-privacy partnership by the end of 2016; and initiatives on data ownership, the free-flow of data between cloud providers, and on a European cloud.[9]  What these latter initiatives will look like in practice remains to be seen but the Commission appears to be moving in the right direction on a highly fraught area.

The Digital Single Market clearly has far-reaching implications. One of those is for US-EU trade and the ongoing negotiations over the Transatlantic Trade and Investment Partnership (TTIP).  Talks began over two years ago but progress has been slow.  In liberalising the trade in digital goods and services, and removing regulations around data localisation that hamper mostly US-based cloud service companies, the DSM could accelerate progress on TTIP.  Whilst the Commission is bullish on the prospects of the Digital Single Market – and its numerous advantages are manifest – it will face significant political challenges from certain member states and industries exposed to increased competition.  How the Commission intends to navigate these challenges and actually implement the DSM over its proposed two year timeframe will be interesting to follow.  The potential upside for further deepening European integration and increasing Europe’s competitiveness is huge.

 

*The views expressed herein are my own, and not representative of the OECD.

 

References

European Commission, Why we need a Digital Single Market (2015), http://ec.europa.eu/priorities/digital-single-market/docs/dsm-factsheet_...

Van Welsum, D. et al., Unlocking the ICT Growth Potential in Europe: Enabling People and Businesses, The Conference Board for the European Commission (2013).

AT Kearney, Rebooting Europe’s High-Tech Industry (2015), https://www.atkearney.com/communications-media-technology/ideas-insights...

Atkinson, R. D., Getting Europe up to scale for the ICT-enabled economy (2015), http://www.policy-network.net/pno_detail.aspx?ID=4878&title=Getting+Euro...

OECD, The impact of ICT on productivity and growth (2011), https://community.oecd.org/servlet/JiveServlet/previewBody/33337-102-1-6...

Brookings, The Digital Single Market: Implications for the transatlantic relationship (2015), http://www.brookings.edu/events/2015/05/28-digital-single-market-sapiro-kerry

Webber, M., Finally, some certainty around Europe’s Single Digital Market Strategy (2015), http://privacylawblog.fieldfisher.com/2015/finally-some-certainty-around...

 


[4] Van Welsum, D. et al., Unlocking the ICT Growth Potential in Europe: Enabling People and Businesses, The Conference Board for the European Commission, 2013.