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The EU is stepping up efforts to become a digital power

Olivier Marty / Dec 2021

Photo: European Union, 2021

 

It is widely known that NextGenerationEU, the EU’s unique 750bn EUR recovery plan adopted in July last year, will be a powerful tool to support the bloc’s green transition, given that 30% of the Recovery and Resilience Facility (RRF) - the key component of the programme - will finance “green” investments and reforms across member states. However, the digital dimension of the package tends to be less analysed, although it benefits from a substantial 20% of the same envelope. This is a welcome step, as the EU strives to promote its own cutting-edge digital technologies, deepen its single digital market and compete with the US and China.

Digital spending forms a key component of the recovery plan

EU member states have been prompt to embrace the opportunity presented by the recovery package to digitalise their economies and societies: according to Bruegel, which examined the first 23 “national recovery and resilience plans” (NRRPs) received by the Commission last July, some 127bn EUR of spending will be devoted to digitalisation from 2021 to 2026, an average of 25.9% of countries’ recovery spending sprees. A third of the resources will be devoted to the digitalisation of administrations, 21% to skills development, and 18% to the digitalisation of businesses. Digital capacities, advanced technologies, connectivity and digital R&D will benefit from roughly 10% each.

National digital spending disparities evidently appear. On the one hand, countries for which EU recovery funds represent only a small share of GDP (Germany, Austria, Luxembourg) plan to invest a significant proportion, and sometimes large volumes of their recovery spending, in support of digitalisation. On the other hand, countries whose EU envelopes make only a small part of national income (e.g. Croatia, Poland) have made digitalisation less of a priority. According to the Commission’s DESI index, countries which are overall less digital seem to prioritise elsewhere. These indicators hint at a broad correlation between a country’s level of income and national digitalisation efforts.

It is also interesting to note that EU countries have differing priorities when it comes to spending their digital recovery and resilience budgets: Italy, for example, will spend 18% of its envelope to prompt the digitalisation of businesses, whereas Spain will bank 26% of its cash to support this goal. Romania, for its part, spends 60% on technologies and capacities whereas Greece will devote 60% to the digitalisation of public services. Across member states, the link between investments and reforms is also more or less strong. In short, member states have very different digital starting points and, therefore, disparate digital needs.

The EU is really stepping up its efforts in digital

Such diversity in spending volumes and priorities need not be a worry. What really matters here is that the Commission is clearly stepping up EU efforts to achieve the “digital sovereignty” Ursula von der Leyen called for in her State of the Union speech in 2020. Building on commendable initiations by Jean-Claude Juncker to integrate the digital single market, to boost investment, and to curb unfair competition, the NextGenerationEU initiative prompts public investment and fosters a series of reforms to promote the digital modernisation of the EU. Cross-country peer reviews, pan-European projects in the field of cloud and data, 5G, or connected public administration, for example, are also strongly promoted.

The bloc is right to have this level of ambition, for several reasons. For one, despite notable progress in the latest DESI survey, the EU is glaringly lagging behind on the four indicators set out in the “digital compass” which was recently adopted as part of the EU’s 2030 “digital decade” reform path. This is notably the case for infrastructure, skills, and the digitalisation of businesses. If Europe continues to move too slowly, it risks becoming a bystander to global transformation.

More importantly, countries’ digital spending over the period 2021-2026 is not anywhere near the total public and private digital investment needs estimated to amount to 125bn EUR a year by the Commission. True, the Recovery and Resilience Facility allows impressive progress. A Spanish scheme, for example, will use 3bn EUR to provide bonuses to small businesses, which is an excellent blueprint for other member states. But much more needs to be done across technologies and countries.

A recent study by Deloitte, which examined 20 NRRPs engaging 154bn EUR of digital spending, confirmed EU countries are unlikely to reach their targets as financing envelopes are too modest. This gap is likely to be very large for the less digitalised countries, which are often located in Eastern and Southern Europe. Hence, there is a risk of growing divergence in the post-crisis period between low-digitalised countries, which are engaging in less spending towards digital technologies, and those likely to take the opportunity of NextGenerationEU to modernise thoroughly.

The EU must amplify its efforts to become a true digital power

For these reasons, the EU must really amplify its efforts to make the digital transition a reality. The paradigm shift has occurred, but the scaling is not (yet) quite right. This raises a series of challenges. Firstly, the efficient and swift execution of the NRRPs – not an easy feat given the Commission will be particularly attentive to the soundness of national budgeting processes. Secondly, it’s fair to question the ability of countries to actually absorb such large sums over five years. Finally, capitals must avoid restricting investments as pressures on the reduction of budget deficits will mount in the coming years.

For its part, the European Investment Bank Group recently identified three overarching policy goals to help the EU achieve a higher digital status.

The first, to modernise its whole digital ecosystem. This objective hints at the development of people’s digital skills, which vary across the EU and often act as an obstacle to firms’ digitalisation (small EU firms tend to be far less digital than their US counterparts). It also suggests that digital infrastructures should be developed and mutually reinforcing. More importantly, a deepening of the EU’s single digital market must provide more competition and concentration (and thereby leverages to firms to invest), not forgetting the deepening of the EU’s single service market, given many firms operate in these sectors.

The development of appropriate financing tools is a second priority. Although finance is not generally an obstacle to support investment in the EU, the EIB notes the hurdle exists when it comes to support the development of small, persistently non-digital firms, which are prominent in some service sectors. Building on the success of the European investment plan, which has recently been transformed into InvestEU, the development of risk-sharing instruments and advisory services are relevant operational priorities in this respect.

Finally, an all-encompassing vision which aims to reduce the digital divergences that will inevitably arise amongst countries, regions, sectors, firms and employees as a result of the crisis must be deployed. Such divergences occurring in the post-crisis period risk becoming unsustainable in specific areas and could hamper the digital single market in its entirety. Appropriate coordination of national and local authorities, as well as social partners, on riskier reforms and investment priorities, as well as the development of investment support and appropriate financing tools, is therefore vital.

 

 

Olivier Marty

Olivier Marty

December 2021

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