The Draghi report’s emphasis on hardware and telecoms is out of touch with modern digital developments
Most of the slowdown in productivity growth in the European Union, compared to the United States, is because Europe is falling behind in the digital revolution. Europe does less well than the US in creating tech companies, deploying digital services and R&D investment in digital innovation. High regulatory compliance costs, weaknesses in leveraging digital data as a production factor and insufficient private investment in start-ups are additional contributing factors.
Former European Central Bank president Mario Draghi’s report on the future of EU competitiveness, commissioned by the European Commission and published on 9 September, goes straight to the heart of these woes. But his policy recommendations – which will inform the Commission’s strategy for the next five years – are less convincing.
His analysis starts from a very narrow measure of the digital industries, representing only 5.5% of EU GDP. That fails to recognise that digital is a general-purpose technology that is not confined to a particular sector. Consequently, Draghi’s recommendations focus on digital hardware and infrastructure, including telecoms, chips and cloud infrastructure – despite the fact that the report actually presents evidence that growth in digital content services (euphemistically labelled as “over-the-top” telcos) are a far more important economic driver.
Draghi recognizes that EU telcos do not have the financial resources to keep up with their US and Asian counterparts, largely because of the EU’s own telecoms rules. Reducing regulatory constraints in pricing, national segmented markets and cross-border merger restrictions would help significantly to overcome this disadvantage and enable catching-up with the US. But most US digital R&D and investment comes from a handful of big-tech firms, not telcos.
On cloud computing services, for which the EU market is dominated by US hyper-scalers, Draghi blames high EU electricity and real-estate costs. But US players pay the same costs when they build server farms in the EU. Draghi’s report eventually concedes that the main disadvantage for EU players is poor offerings of complementary platform services, including software and business services.
He proposes consolidation of small EU cloud providers into larger entities, and additional financing to expand cloud capacity, but that will not solve the lack of complementary services. It would be better to learn from successful privately financed US start-ups such as SnowFlake and Palantir, which have succeeded in carving out significant market shares in data value-added services, building on top of hyper-scaler cloud infrastructures. Their EU counterparts could try something similar, without public money or policy changes....
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