A series of economic shocks poses an additional obstacle for European businesses and policymakers, at a critical moment in the continent’s transition to a greener and more digital economy. After 20 years of moderate economic growth, Europe must catch up with other global players, making progress in smart technologies and the digitalization of business and industry.
The current context creates a difficult environment for macroeconomic policy in Europe. After a period of substantial spending during the pandemic and a surge in inflation, monetary policy has entered a phase of drastic tightening. High uncertainty and a deterioration in the economic outlook could dampen investment. This could delay essential investments in energy, digitalization and innovation, which are key enablers of sustainable and competitive growth.
Europe is closing the digital divide, albeit slowly
While European companies are rapidly gaining ground on their American counterparts in the use of advanced digital technologies, the continent continues to lag behind in digital innovation and remains dependent on critical technologies from third countries. More than half of EU businesses responded to the pandemic by investing in digitalization, according to the EIB investment report. However, this figure remains well below US levels: in the European Union, the number of employees working for a company that has not yet adopted advanced digital technologies or invested in digitalization is still around one in three , compared to one in five in the United States. States.
So, despite the digitalization boom triggered by COVID-19, the digital transformation of the EU economy still requires the adoption of more advanced digital technologies: things like 3D printing, advanced robotics , Internet of Things, big data analytics and artificial intelligence. drones, online platforms or augmented reality.
For example, only 14% of companies carried out data analysis in 2020, while the European plan on the road to the digital decade calls for more than 75% of EU companies to adopt big data. here 2030. European policymakers continue to emphasize the importance of digitalization, lest EU companies fall into the trap of dependence on rare and strategic technologies.
On the positive side, the share of European companies implementing advanced digital technologies actually increased between 2021 and 2022, reaching 69%, compared to 71% in the United States. Yet when considering business size, only 30% of micro businesses have taken steps to improve digitalization in 2022 (compared to 63% of large businesses).
A winner-takes-all dynamic
Digitalization also varies significantly across sectors. For example, 83% of companies in the transport machinery and equipment sector use advanced digital technologies, much more than in the construction sector (52%). The trend towards digitalization is particularly strong in the chemical and pharmaceutical sector and in public services (electricity, gas and water companies), but also in digital sectors such as IT and electronics, machinery and transport equipment, as well as IT and telecommunications. While greater digital adoption in these sectors has enabled them to advance their businesses, non-digital companies are falling further behind.
Differences in digital adoption also persist when it comes to exports. The rise of the Internet and digital technologies has improved the flow of trade-related information and reduced communication costs. Exporters and importers are more likely to adopt advanced digital technologies than non-trading businesses. A third of non-trading businesses have invested in boosting digitalization during the pandemic, compared to 40% of exporters and importers and more than half of bilateral traders.
Business digitalization practices also depend on adequate digital infrastructure and pro-competition regulation, as well as management’s propensity to invest in human capital. To optimally design and manage these factors, a coordinated policy framework is crucial.
This is particularly evident when it comes to reorganizing personnel training systems. Labor productivity is closely linked to the use of advanced digital technologies; therefore, policy should not only seek to embrace them, but should also ensure the training needed to unlock their full potential. This may be particularly important, for example in sectors where new material technologies are often hailed as substitutes for human labor.
Digital transformation in the Western Balkans
According to the latest EIB business survey in the region, companies well integrated into global value chains, as well as those that had been more innovative and digitalized in the past, were better able to adapt during the pandemic. They expanded their online presence, shifted to remote working and adapted their production. The opening of the global economy has been essential for Western Balkan countries to increase their comparative advantages and competitiveness. Digitalization is an important part of this process, as it enables higher productivity and human capital development.
As one of the main contributors to the digital transition in the region, the EIB Group has allocated almost €200 million to digital projects since 2020. This has helped businesses to digitalise and improved capacity, the coverage and quality of 4G and the deployment of 5G mobile services. BEI Global loans have also supported the digitalization of more than 1,500 schools and provided teachers and students with access to digital skills. Broadband will also be deployed in remote areas with the aim of bridging the digital divide between urban and rural areas and creating equal learning and employment opportunities for rural residents.
Transform challenges into opportunities for change
To help the region reap the benefits of a digital economy, the European Union launched a Digital Strategy for the Western Balkans in 2018. agenda assessmentProgress in 2022 indicates that although the Western Balkans have a high internet penetration rate of between 75% and 96%, digital literacy remains low among the general population, but also within administrative government . Digital public services have yet to reach their full potential and the region is still struggling to address the pressing issue of cybersecurity. In this regard, adopting targeted strategies to promote digital skills is certainly the right way forward.
To support businesses, a new EU Guarantee Facility for the Western Balkans has been created to help finance the green and digital transition of SMEs, local municipalities and public infrastructure. To leverage private sector investment, the mechanism makes increased EU funding available to businesses in the form of grants, through blended finance and substantial allocations for guarantees.
Through these innovative financing tools combined with traditional grants, this EU support is expected to mobilize investments of up to €20 billion over the decade, as part of the Comprehensive Economic and Investment Plan for the Balkans Westerners.
When it comes to digitizing Europe’s sectors and regions, there is a long way to go. But with appropriate policy support, human development goals and appropriate financial instruments, it is clearly possible to foster an enabling environment for improving digital infrastructure, skills and processes.
