European consumers are heavily invested in digital technologies—83 percent of people have access to the internet in their homes, and 76 percent say they use the internet regularly. But the reality is that Europe has a long way to go to fully tap the potential of digitization – according to a new report, the continent is operating below its digital potential, and accelerating digitization could add trillions of euros to economic growth in less than a decade.
The extent to which companies have used digital to redefine business processes and their labor forces is still relatively low. Digitization also varies greatly among countries, sectors, and companies within the region. If more is done to adopt, diffuse, and use digital, tremendous economic value could be captured. Although there are active initiatives to deepen Europe’s digitization, including moves towards removing barriers to a single digital market (that remains to be seen with the UK’s recent decision to leave the EU), proposals for the European Cloud Initiative, and a range of e-government initiatives, a further push is clearly needed.
According to the report from McKinsey Global Institute, Europe is in the midst of a digital transition driven by consumers, thriving technology hubs, and some world-renowned companies. But digitization is also about the extent to which firms and industries invest in and use digital. In these respects, Europe is much less advanced. Yet if its laggards double their digital intensity, Europe can add €2.5 trillion to GDP in 2025, boosting GDP growth by 1 percent a year over the next decade.
By digital intensity, it means the degree to which digitization drives sectors and firms. Its ‘Industry Digitization Index’ uses dozens of indicators to provide a snapshot of digital assets, usages, and workers. It finds that Europe operates at only an estimated 12 percent of its digital potential, compared with the United States’ 18 percent. In addition, there is enormous variation between Europe’s countries: while France operates at 12 percent of its digital potential, Germany is at 10 percent, and the United Kingdom is at 17 percent.
Image: The McKinsey Industry Digitization Index
The European digital frontier, represented by the ICT sector and its digitization of assets, uses, and labor, is only 60 percent as digitized as the US frontier. Some large sectors such as professional services, wholesale trade, and real estate are further behind the digital frontier in Europe than they are in the United States.
The continent is also a net importer of US digital services, running a digital trade deficit amounting to nearly 5.6 percent of total services trade between the European Union and the United States. Again, there is enormous variation among countries. The United Kingdom and the Netherlands are net exporters of digital services to Europe, while Italy is a net importer. Europe has not matched the United States as a producer of global content and a developer of major platforms, although it has had a measure of success in incubating Internet companies.
Europe has key digital strengths that it can exploit for economic gains. The ‘Digital Single Market’ (which is now threatened given the UK’s potential exit) could accelerate GDP growth, adding €375 billion to €415 billion each year and providing a common platform to allow domestic firms to achieve scale. Even this is dwarfed by the GDP impact if laggard firms and sectors became more digitized.
The report concludes that business leaders, national and European policy makers, and individuals all have a role to play in accelerating Europe’s digital transition. Companies must assess to what extent digital matters to them and how it might transform their business models. They must also adapt their organizations, digitize their operations, and promote open innovation along the way.
Governments should be active on three fronts: unlocking investment and access to capital, opening up data flows, and addressing issues surrounding skills and the labor market. Ultimately, they will have to manage the social and economic transition brought by digitization, including by mitigating its impact on job displacement. Finally, individuals need to develop their skills and embrace the flexibility and new opportunities that digitization offers them.
To download the full 64-page report, click here.
[Top image source: Estonianworld – Estonia is one of the most digitized countries in Europe]