A Smart Europe: Digitalization and Regional Economic Development 

In the second of our three-part series on the future of European cohesion, we argue that the EU is facing up squarely to the challenges of the digital transition, with a set of far-reaching policies and large-scale funding in place. Yet the likely uneven territorial impact of digitalization remains both under-examined and insufficiently catered for.

Europe needs to become smarter – and the EU has kicked into action 

Europe is experiencing a process of full-scale digitalization. This process is underway in most areas of the economy, overhauling industries and business models whilst establishing new ones at the same time. Its impact is felt by individuals in all areas of their lives, be it in the workplace or in hospitals, in places of leisure or of learning.

Digitalization, by all accounts, underwent a major acceleration due to the COVID-19 crisis, when large swathes of the population found themselves interacting online both professionally and socially practically overnight, with the “new normal” heralded by the pandemic taken for many to be the “new digital”.

The response on the part of the EU to this megatrend, even before the pandemic, has been full-on. Building on a well-regarded strategy for a digital single market of 2015, which, in turn, stemmed from a decision by the Heads of State and Government to optimistically regard “digital technologies as an immense opportunity for innovation, growth and jobs”, the result has been a once-in-a-generation set of legislative packages, as varied as the twin bundle of DSA and DMA, which cover, respectively, market rules and content of digital service providers, a European Data Act, governing who can use and access digital information, a regulation on the use of Artificial Intelligence (AI), a 5G security toolbox and more.

The creation of a “Europe that is prepared for the digital age” is indeed one of the six strategic priorities of the European Commission. Its President, Ursula von der Leyen, declared in her State of the Union speech in 2021 that “digital is the make-or-break issue” of Europe’s future. The Commission duly designated the 2020s to be nothing less than the “digital decade.”

Clear European objectives are in place – and considerable funding is on its way 

For practical purposes, the Commission has broken down this vision into four areas – skills, government, infrastructure and business, and has underpinned each of these fields with measurable objectives to be achieved before the decade is out. Those that stand out for our purposes are the digital transformation of businesses, whereby 75% of EU companies use cloud/AI/big data-technologies; the support of scale-ups and finance to double the number of EU unicorns (that is, companies with a market capitalization of more than €1 billion), and, with regard to “late adopters”, to ensure that more than 90% of SMEs reach at least a “basic level of digital intensity”.

As for the crucial area of skills, the Commission wants to see 20 million information and communication technology (ICT) specialists in the European workforce, whilst at the same time achieving gender convergence in its makeup. Finally, it aims to bring about a level of basic digital skills for at least 80% of Europe’s population – up from a low 44% today.

Put simply, there is a consensus that digital solutions will be instrumental not only to the EU’s recovery following the pandemic but also to protect its global competitiveness. And this consensus is underpinned by substantial resources: A fifth of the EU funds earmarked under the NextGenerationEU recovery program and a minimum of a quarter of the EU’s next generation of cohesion funds are designated for the digital transition, with additional sources of funding coming from the EU’s research and development program, Horizon.

On European cohesion, digitalization cuts both ways

A recent in-depth assessment of the EU’s understanding of digitalization found that digitalization is framed overwhelmingly in the narrative of geopolitics, that of the green transition, that of the protection of individual rights and, finally, as a driver for growth and competitiveness. What remains arguably underdeveloped are the implications of digitalization for the overriding political goal of cohesion in Europe, thus drawing the latter two together.

For while the digital transition is – rightly and importantly – associated with opportunities for progress, there is no reason to believe that its fruits will in and of themselves be evenly distributed by nature. On the contrary, in much the same way that the pandemic had an uneven territorial impact on EU regions and evidentially deepened already existing inequality in individual member states, the same applies to the impact of larger transitional challenges – and here, digitalization stands out.

This concerns, above all, the threat to jobs. According to an impact assessment conducted by the European Investment Fund (EIF), digitalization will hit increasingly polarized EU labor markets hard, in that the types of skills required will change, and existing jobs will be destroyed. “Digitalization has changed ways people work, increasing flexibility for some but uncertainty for others.”

The EIF is clear in its prediction: “Some places in the European Union are more likely to experience larger-scale job losses linked to transitions.” Crucially, for our purposes, EIF data suggests that “…digitalization has added to growing spatial disparities” occurring, for instance, when both people and businesses cluster in popular urban areas, where innovation and growth then occur. A closer look at further key indicators, however, reveals an even more complex picture.

A region’s “digital readiness” determines its future prosperity 

To master the digital transition for the economy, the Digital Economy and Society Index (DESI) Digital Economy and Society Index (DESI) of the European Commission sets out three levers that must be set correctly. First, people must be adequately skilled, thus enabling them to work in a digital environment. Second, excellent ICT infrastructure must be broadly available to connect people and firms with the internet.

And third, firms must be enabled to integrate digital technology into their business model. Today’s figures show that Europe needs to step up in all three of these areas: 54% of Europeans lack basic digital skills, 8% of all European households have no internet access at all and many firms are struggling with the integration of digital technologies in their production processes.

But the overall picture only tells part of the truth. Zooming into EU regions points to a more nuanced picture, revealing substantial disparities across regions. Starting with digital skills, it is particularly apparent that the regions of Southern and Eastern Europe need to catch up. Yet when looking at the share of people who have never used a computer and therefore appear to lack any sort of digital skills, it is regions in Southern Italy, Greece, Bulgaria and Croatia that exhibit values of 29% and more.

In contrast, the corresponding share of people in all regions in Scandinavia, the Netherlands and in some parts of Germany is 4% and less. Also, it is noteworthy that capital regions all over Europe perform better on digital skills, as the examples of Budapest and Paris demonstrate.

As for digital infrastructure, a different picture emerges. The availability of broadband internet as an indicator of the most basic ICT infrastructure is particularly advanced in Scandinavia, Spain, Poland and the Netherlands. Strikingly, more than 94% of all Spanish households have high-speed internet access, while in Greece and Portugal, the share is just above 75%.

But some regions in France and Germany also lack broadband internet connectivity. Insufficient internet infrastructure not only hinders people from using digital services (and may backfire on digital literacy), but also limits the possibilities of regional businesses to employ digital technology and the settlement of new businesses in these regions.

The third readiness factor enabling a region to profit from digitalization is the ability of firms to integrate digital technology into their business models. The adaption to digital technologies requires innovative capacity and investments. But regions differ in their gross expenditures for R&D, reflecting different adaption abilities of firms. While Central and Northern regions in the EU exhibit R&D spending of 300 EUR per capita and more, the equivalent for various regions in Eastern Europe is 20 EUR per capita and less. Again, regardless of geography, R&D spending in capital regions is higher than in rural areas.

Taken together, there exist substantial disparities in the readiness factors needed to tackle the digital transition across EU regions. The better a region performs along these levers today, the likelier it stands to benefit from the digital transition in the future. The differences in digital readiness will materialize sooner or later in terms of future economic prosperity. Ultimately, this will determine whether the digital transition will lead to more convergence or divergence across European regions. Investing in readiness is arguably a matter of priority since, on current trends, the digital transition is contributing to increasing spatial disparities.

Digitalization is and will remain political

Digitalization is nothing new: investment in mobile internet, automation, AI, cloud computing, virtual reality or blockchain has been well underway since the beginning of the 21^st century. What is new is that slowly but steadily, digitalization has become the subject of political decision-making, owing largely to the growing realization that it produces both opportunities as well as considerable risks and must thus be handled with care. On the upside, digital capacities are heralded by many as the key to progress and prosperity – so much so that access to computers, fast-speed internet and digital training is considered by many to be the equivalent of the old development adage of building wells rather than providing water.

Dampening such optimism, however, are the emerging drawbacks, of which the most discussed lie in the fields of security and innovation capacity, a set of concerns that must be understood in the context of Europe’s struggle for more sovereignty as it is outpaced by international competitors. Of equal importance, however, will be the hitherto little examined but complex – and above all heterogeneous – nature of digitalization’s impact on European cohesion. For it is precisely this promise of rising prosperity for all member states that underpins the European project. Understanding who will bear the costs and rewards of digitalization and how exactly they will materialize will be one part of the challenge. Making the relevant policy adjustments with a view to channeling them towards more cohesion will be the other.

This article is the second of a series of articles on the future of Europe’s cohesion. Stay tuned for our upcoming posts on the opportunities and challenges for regional economic development and cohesion arising from the Twin Transition.

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About the Bertelsmann Stiftung’s work on cohesion in Europe’s economy

Jake Benford, Nathan Crist, Sabine Feige, Katharina Gnath, and Thomas Schwab are the team that drives forward the Bertelsmann Stiftung’s work on Europe’s economy.

They investigate which economic, social and territorial disparities matter for Europe. They analyze how structural changes that come with decarbonizing and digitizing Europe will affect its economy and its cohesion. This will include identifying the resources, potentials, but also the vulnerabilities of European regions. And they develop proposals on how to strengthen the EU single market and how the EU can better use its policies and resources to strengthen cohesion across Europe.