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In an era of digitalisation, the Single Market needs a software update

This blog post is part of a series following the 2019 Bruegel annual meetings, which brought together nearly 1,000 participants for two days of policy

Publishing date
19 September 2019

The digital age will be an era of winning and losing firms. If Europe doesn’t act fast it seems likely that the winning firms will be in American and China. Why is this happening and what does Europe have to do to maximise its digital potential before it’s too late?

It is evident to everybody that digitisation is changing every industry in Europe. But European policymakers are struggling to keep up, and the disparity between regulations in different member states is making Europe an unattractive place to scale up innovative ideas. And so, it’s no wonder that the Europe Union only has 47 so-called “unicorns” (unlisted startups valued at over $1bn), while China has 97 and the USA boasts 194.

The European Single Market has been very instrumental in the facilitation of trade in goods across borders and allowing manufacturers to sell products without fear of national regulatory barriers. But as European firms and countries transition into service economies (eg car manufacturers:  from cars to mobility), the single market toolbox has failed to keep up because, so far, it hasn’t been able to synchronise the rules and regulations that dictate the use of services. For instance, it is often said that data is the oil of the 21st century because companies can use it to better understand their processes and customers and to train their AI algorithms. And the more data they gather, the more powerful they become. The combination of size and incumbency are becoming a formidable competitive advantage,  creating “winner-take-all” dynamics. According to Claire Bury, Deputy Director-General for Communications Networks at the European Commission, network effects like these are estimated to be responsible for 70% of the value created by tech companies since the birth of the internet in 1994. While there is nothing to stop companies in America gathering data across 50 states and little to stop Chinese firms hoovering up data from over a billion users, those operating in Europe must navigate 28 layers of laws and regulations while their international competitors disappear over the horizon.

An often made retort is that these national regulations exist for a reason and reflect the historic values of a continent where privacy is considered sacred. For understandable reasons, many Europeans often think of tech firms as monopolies and associate their innovations with intrusion,  worrying that their market dominance will result in more restricted,  less attractive, more expensive choices while fearing that their jobs could be at risk in the years to come. Meanwhile, there is also a risk that tech firms will become sceptical of government efforts to facilitate their growth if they perceive it as an excuse for excessive taxation and the increased possibility of prosecution from competition policy authorities. Therefore, it is vital that both business leaders and policymakers extoll new technologies as a clear benefit to society.

To create a better habitat for unicorns, as well as for smaller beasts, Europe’s member states and Commissioners will have to work together on a policy that spans every sector, every region and every industry without alienating the public. Because digital technologies touch everything, no pan-European digital strategy will be able to succeed in a vacuum. And because digital technologies also have already disrupted so much, no policy will survive without reassurances that technology will serve the people instead of the people serving technology.

About the authors

  • Reinhilde Veugelers

    Prof Dr. Reinhilde Veugelers is a full professor at KULeuven (BE) at the Department of Management, Strategy and Innovation.  She is a Senior Fellow at Bruegel since 2009.  She is also a CEPR Research Fellow, a member of the Royal Flemish Academy of Belgium for Sciences and of the Academia Europeana. From 2004-2008, she was on academic leave, as advisor at the European Commission (BEPA Bureau of European Policy Analysis).  She served on the ERC Scientific Council from 2012-2018 and on the RISE Expert Group advising the commissioner for Research.  She is a member of VARIO, the expert group advising the Flemish minister for Innovation.    She is currently a member of the Board of Reviewing Editors of the journal Science and a co-PI on the Science of Science Funding Initiative at NBER.

    With her research concentrated in the fields of industrial organisation, international economics and strategy, innovation and science, she has authored numerous well cited publications in leading international journals.  Specific recent topics include novelty in technology development,  international technology transfers through MNEs, global innovation value chains, young innovative companies, innovation for climate change,  industry science links and their impact on firm’s innovative productivity, evaluation of research & innovation policy,  explaining scientific productivity,  researchers’ international mobility,  novel scientific research.

    Websites:
    https://feb.kuleuven.be/reinhilde.veugelers
    https://bruegel.org/author/reinhilde-veugelers/

Related content

Working paper

Raising EU productivity through innovation

A better overview of which firms are most likely to adopt digital technologies and to innovate, and to turn these investments into productivity growth

Reinhilde Veugelers and Frederic Warzynski