Europe

Only a fully digital Europe can keep up with China and the US

While Europe’s vaccination campaigns are only just getting into full swing, the global race towards post-Covid economic recovery is already underway – and as usual, the European Union is lagging behind. While the European Commission estimates the Eurozone will need another year to return to pre-pandemic growth levels, a surging US economy has reclaimed its former mantle as the engine of global economic activity, while China’s record 18.3% growth rate in the first quarter shows Beijing is well on its way to making up for 2020’s losses.

With his characteristic bluntness, France’s economy minister Bruno Le Maire laid out the stakes of the moment when he asked his EU counterparts this month whether they “want to play in the first league” or otherwise “lag behind China and the US.” While trillions of dollars in stimulus spending have already buoyed the US economy, Europe is still months away from disbursing the €750 billion in recovery funds it promised last year. Commission officials like Paolo Gentiloni and European finance ministers like Le Maire are thus rightly concerned that a simple ‘return to normal’ won’t be enough to keep Europe competitive in the post-pandemic global economy.

Digital silver linings

And yet, as EU leaders prepare to debate the terms of the post-COVID recovery with their new US counterpart at this month’s G7 summit, they can take heart in the progress Europe has made towards a fully digital economy in the midst of a public health catastrophe. Faced with an urgent necessity, European economies made years’ worth of progress in digitalization in mere months. Some of Europe’s least digitalized countries, such as Greece, were able to move the majority of their services online practically overnight, using the pandemic to overcome inertia in the span of just a few weeks.

By insisting EU member states allocate a minimum of 20% of their shares of the EU recovery package to digital investment, Brussels has sent a clear message to European governments that their chronic failure to implement future-minded reforms and invest in the latest generation of digital technologies, exemplified by 5G, is no longer tenable. Even if China and the US enjoy an advantage in pure growth, the EU’s “green and digital” approach to the recovery can still shape the global conversation – but only if the EU’s national governments get serious about implementing the digital pledges they have signed up for.

Looking beyond the numbers

A careful look at the national recovery plans submitted to the Commission – and particularly that of the recovery package’s largest beneficiary, Italy – illustrates how the 20% target for digital investment looks much more modest once broken down into individual budget lines.

Italian Prime Minister Mario Draghi’s “epochal” recovery plan for his country, for example, dedicates €42 billion out of €204.5 billion to digital investment, including the digitalization of Italy’s notoriously analogue public administration as well as €6.7 billion of investment in ultra-fast connectivity, covering broadband and 5G networks.

Less than three years ago, however, Italy’s previous government charged nearly that much – €6.55 billion – just to auction off 5G frequencies. That exorbitant rate is still blamed for the lack of private capital available to invest in Italian 5G networks today, together with a labyrinthine bureaucracy and a maze of permit requirements that vary between local municipalities and preclude any hopes of a smooth nationwide rollout.

The cost of 5G lies

Beyond financing issues, multiple European governments have come to understand that allowing misinformed or disingenuous voices to dominate the terms of the connectivity debate can cost their economies as a whole. In a number of EU countries, delayed 5G rollouts have been further hampered by conspiracy theorists who seize upon the novelty of the technology by trotting out baseless falsehoods linking them to the pandemic. In countries like the Netherlands and the UK, those conspiracies have even given rise to spates of physical attacks on 5G towers.

Last October, more than half of the countries in the EU wrote to top Commission officials – including Margrethe Vestager, Thierry Breton, and Vera Jourova to demand action on disinformation against 5G, an urgent problem to which Europe has yet to find an effective solution. In fairness to Europe, this is an issue that faces governments across the Western world; including the United States and Australia, both of which will take part in the G7 summit. They also have large and vocal anti-5G movements of their own.

Playing with the big boys

Even with all of these challenges, the progress Europe has made in catching up on digitalization will allow EU leaders to speak with a certain measure of credibility when they sit down with their G7 counterparts in a few weeks’ time. The digital investments outlined by the recovery package are clearly insufficient to make up for years of underinvestment on their own, but they are an overdue step in the right direction.

Over the longer term, if Le Maire and his counterparts truly want to see Europe “play in the first league,” there are several more lessons they can learn from the Asian markets currently setting the pace for 5G adoption. Those include the benefits of consolidation: while EU policy has, until very recently, made a point of keeping the European telecoms space fractured along national lines, US operators are merging to form companies of sufficient scale and capital to make the intensive 5G investments their EU counterparts are currently failing to match.

Secondly, the EU has failed to create incentives to foster the emergence of Internet tech giants, a space that is currently heavily dominated by US or Chinese companies such as GAFA (on one hand) or Tencent, ByteDance and Alibaba (on the other). Even Indonesia, the 5th largest country by population (counting the EU as a whole) has allowed the merger of Gojek and Tokopedia to give birth to GoTo, a company with world-class potential. Instead of creating layer upon layer of inefficient policies (GDPR comes to mind), EU lawmakers should instead focus on this critical problem.

If the EU succeeds in leveraging this crisis to fully embrace the disruptive new technologies indispensable to realizing its “Digital Decade,” its green and digital vision for the recovery can and will make a lasting impact on the digital economy worldwide. If not, however, this year’s G7 could prove to be nothing more than a high-water mark before an inexorable digital decline – one for which European leaders will have no one to blame but themselves.

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