Will European Union recovery spending be enough to fill digital investment gaps?
The recovery facility will boost digital transformation, but questions remain whether it will be sufficient to achieve Europe’s digital ambitions.
The digital transformation has the potential to make our lives smarter, more productive and more comfortable. To name just a few examples: citizens can save time by using digital public services, save costs by using smart devices at home and by having access a greater number of sellers via the internet, enjoy entertainment online and staying in touch with friends and family has never been easier. Digitalisation allows businesses to optimise internal processes, use artificial intelligence to perform certain tasks, teleconference, while electronic commerce allows access to more customers. Working from home, remote learning and the use e-health systems have surged during the pandemic and demonstrated the opportunity that digitalisation offers. The effects of digitalisation on the quantity of work are mixed: while the use of big data and artificial intelligence may make some tasks and even whole jobs obsolete, new research suggests that it create many new jobs and opportunities.
A global overview
Notwithstanding the difficulties in making even basic comparisons, overall, the EU ranks reasonably well on average when compared to the United States, the United Kingdom and Japan in terms of adoption of the internet, but falls behind in terms of the speed of deployment of high-speed broadband services, in ICT task intensity and in artificial intelligence research (Table 1). The deployment of newer very high-capacity (and therefore faster) fixed broadband, such a fibre, is much lower in the EU than in Japan (though it is higher than in the US and the UK), while the share of relatively slower DSL services is high. The EU’s deployment of newer 5G mobile coverage likewise lags behind many it’s global competitors. A report by the European Investment Bank shows that European firms currently lag behind US firms in adopting digital technologies in all major sectors, the report also concludes that digital firms tend to be more productive, have better management practices and are more likely to grow and create jobs.
Fulfilling the ambitions of the EU’s Digital Decade
In March 2021, in recognition of the digitalisation gaps across the EU, the European Commission launched the ‘2030 Digital Compass: the European way for the Digital Decade’ strategy. It will be followed by a proposed Digital Policy Programme and a Declaration of Digital Principles later this year. A particular strength of the strategy is that it provides key goals in the form of concrete, objective, measurable targets (so-called SMART indicators), in order to make the most of the Digital Decade. Many of these targets are far from being reached (see Figure 1).
The gap between the current number and the Digital Decade target is the smallest for online public services while the largest is for 5G coverage in the EU as a whole (there are further indicators for which the current gap is not known; see the note to Figure 1). There is substantial cross-country heterogeneity within the EU (Figure 2). Gigabit-capable networks are available for all households in Malta, but for only 10% of households in Greece. 80% of population is already covered by 5G in Denmark and the Netherlands, while 5G is not available at all in 15 EU countries. There are large cross-country differences in the other indicators as well.
Figure 4 in the annex compare the gaps in various indicators for each country.
Digital priorities of the recovery and resilience plans
Digitalisation is one of the main priorities of the Recovery and Resilience Facility (RRF), the largest component of Next Generation EU (NGEU), the European Union’s landmark instrument for recovery from the coronavirus pandemic. EU countries have to spend at least 20% of the funds available from the RRF on digitalisation or on dealing with its impacts. According to our recovery plan dataset, the first 23 countries that submitted their plans allocated €127 billion, or 25.9% of their combined recovery spending, to digital transition. These funds will be spent over a six-year period from 2021 to 2026. It should be noted we do not examine whether spending plans constitute new spending, or also cover spending that was planned before the pandemic.
This amount alone will not be enough to reach the Digital Decade targets, as a study by Deloitte has observed. In May 2020, the European Commission estimated the digital transformation investment gap at €125 billion per year, the total €127 billion digital amount over 2021-2026 thus barely exceeds the need for a single year. While the Commission did not break down the public versus private shares in the annual €125 billion digital investment gap, it is likely that the digital component of the recovery money will be insufficient to cover the public investment need.
However, the recovery money is not the only source of digital public investment. The EU’s multiannual budget and national and regional budgets are also cover digital spending. Unfortunately, it does not seem to be possible to collect comparable data across countries on their non-EU financed national digital investment plans.
We thus focus on the recovery money, and in particular on eastern and central European countries that are set to receive large amounts. Western and northern European countries will receive comparatively small amounts and hence the national component of their digital spending can be larger than their recovery plan digital spending.
We categorised digital recovery spending plans according to the six of the seven main intervention areas defined in Annex VII of the RRF Regulation, which does not fully match the Digital Decade indicators, but has a rough correspondence.
Countries spend the most, about one-third, of their digital allocation on digital public services (Figure 3), even though the gap to the Digital Decade target is smallest in this area (Figure 1). The preference for digital public services might be explained by its fully public nature, while improvements in other areas of the digital transformation require investment from both the public and private sectors, or just the private sector. The second largest category is digital skills and inclusion with a share just over one-fifth. The third largest digital spending category is digitalisation of businesses, which can help remedy the low share of businesses using cloud, big data and AI solutions (Figure 2), as well as boosting the digital intensity of SMEs. Digital capacities and advanced technologies combined will have a share of slightly over 10%, while the shares of connectivity and digital R&D are below 10%.
EU countries allocated their RRF digital spending plans very differently (see Figure 5 in the annex). Italy, the country receiving the largest amount of recovery money in absolute terms, allocated 28% to digital skills/inclusion and digital public services, followed by 18% to digitalisation of businesses. Spain, the second largest recipient, allocated the most to digitalisation of businesses, followed by the digital public sector and digital capacities/advanced technologies. Croatia, the country receiving the largest share of recovery money as a fraction of GDP, allocated almost half of its digital component to digital capacities/advanced technologies, with another third to the digital public sector. Greece, another large recipient in terms of GDP, allocated more than 60% of its digital budget to the public sector, while business digitisation gets 15% and connectivity 12%.
Digital transformation is, rightly, a top priority of the EU’s recovery facility. It will be boosted by the facility, though the overall amount to be spent over six years is just slightly over the estimated digital investment gap for a single year. Further research should assess the contribution shares of public and private digital investment needed and collect data on the digital spending plans from other EU funds and national and regional budgets, in order to assess if the overall public spending on digital priorities will be sufficient to fill the digital gaps.
Darvas, Z., J. Scott and A. Tzaras (2021) ‘Will European Union recovery spending be enough to fill digital investment gaps?’ Bruegel Blog, 20 July
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