Why Europe needs a digital single market

Innovation isn’t easy. It takes courage to experiment and advance a new idea and determination to ensure its widespread use. Europe has always excelled at this. Radio, television, and the standard for second-generation mobile communications, GSM, all originated in Europe. But past success won’t ensure Europe’s long tradition of innovation continues.

New technologies require more risk-taking and the ability to launch new products with speed and scale. There is no doubt that Europe is poised to embrace the new, digital world. Its citizens have the education, skills, and ambition needed to create great technology companies that will drive economic growth and employment.

At the same time, Europe needs to reform and forge a true digital single market. This will give European entrepreneurs, who have all the right building blocks, the incentive to invest and the ability to achieve global scale at greater speed. Significant political will needs to be mustered to support these changes and ensure Europe’s startups succeed.

It’s time for action. Instead of riding the wave of technological change and innovation, inaction will put Europe’s economy at risk. This requires strong leadership. As European Commissioner, Neelie Kroes had the courage to take promote new ideas, even if they disrupted existing industries. When a Belgian court banned the taxi sharing service Uber, she cried foul. “We cannot address these challenges by ignoring them, by going on strike, or by trying to ban these innovations out of existence,” she tweeted.

The opportunity
Let’s look first at Europe’s digital opportunity.

On a continent in search of economic hope, the Internet represents the main motor of growth. According to the OECD, the online world accounts for up to 13 percent of economic output and is driving the creation of new companies, new jobs, and new opportunities. While many traditional industries are facing tough times, Internet companies are pouring billions into new offices, development centers, and research laboratories.

The Internet lowers costs, increases access to markets and makes starting a business easier than ever before. It allows, with a few clicks of a mouse, a Greek B&B owner, a French fashion designer, and a Swedish candy maker to reach a global marketplace. Small and medium-sized enterprises with websites and online marketing are growing four times faster than those without.  Companies that embrace digital, on average, generate 9% more revenue through their existing assets, and their profitability outperforms that of their non-digital peers by 26%.

If Europe’s single market becomes truly and thoroughly digital, the macroeconomic benefits would be enormous. Reform could raise the EU’s GDP by at least 4% by 2020, and generate up to EUR 250 billion of additional growth (see European Policy Centre). Europe’s digital businesses no longer would have to get individual licenses to operate in 28 different countries.  If regulatory barriers are removed, startups could directly access half a billion European consumers, a market that’s larger than the US, where technology companies have the ability to achieve scale before they expand internationally.

Bits and bytes having an impact beyond the established Internet sector, too. Think of energy. Smart thermostats from Nest and Honeywell are already giving people unprecedented opportunities to use energy more efficiently. Since Nest launched its first thermostat in 2011, its customers have already saved about 2 billion kilowatt hours of energy compared to what they would have used if they left their thermostats at a consistent temperature. That’s enough energy to power more than 180,000 homes for a year. A combination of technological advances will make it possible for Europe to transition away from intensive consumption to a more sustainable and efficient digital-powered energy model.

Getting Europe back to work
Perhaps Europe’s most pressing problem is its high unemployment rate, which seems stuck at twice the U.S. level.

Digital entrepreneurship is central to helping get Europeans back to work.  Conventional wisdom says that small businesses are the source of new job growth. It’s important to distinguish between new firms and small businesses. They are not the same thing. The truth is, studies show, new jobs are not created by small businesses. They are created by new businesses -and in particular, fast-growing new businesses.

Fortunately, the Internet making it easier and easier to start new companies. In order to solve its jobs crisis, Europe must encourage the risk takers. High-tech jobs pay better than low-tech ones and promote higher wage growth more broadly. Best of all, they have a multiplying function: every high-tech job creates four other jobs in Europe.

Bright signs
Both the EU and national governments have shown a commitment to understanding the potential of data-driven innovation and to supporting digital startups and entrepreneurship. Europe’s startup scene is vibrant and growing: Shazam and King in the UK, Criteo and BlaBlaCars in France, Spotify and Skype in the Nordics. Soundcloud in Germany.

Silicon Valley-style high-density hubs of talented thinkers are emerging. Policymakers are encouraging startup density by creating physical startup centers that drive awareness in the media, foster networks with mentors, and reduce barriers that make it difficult for academics and research networks to connect with businesses. This type of density is already visible in parts of Europe, notably in Berlin and in London’s Tech City.

Imagine if this vibrant European entrepreneurial scene could benefit from a digital single market, which would end the need for obtaining different national licenses and reduce regulatory red tape.  High-growth firms and technology-intensive startups suddenly could scale-up and compete more vigorously in the global marketplace.

Much hard work remains
Where does Europe fall short and what else does Europe need to do to embrace a dynamic information society?

Traditional European companies and industries have lagged in adopting new technologies, disadvantaging them in an increasingly competitive global marketplace. A recent study completed by the Lisbon Council and the Conference Board found that a Information and Communications Technology represented a much smaller share of total investment in Europe than in the US, and that this had a significant impact on economic growth.

Labor markets are another key area for reform. Most of Europe has the skills and experience necessary to build new products, services, and businesses. There’s always more to be done in terms of expanding these attributes, but what is equally important is ensuring employees can repurpose their skills, training, and expertise in new firms and new sectors. In Europe, flexible labor markets are a particular challenge that deserve serious consideration.

Another important challenge is accepting failure. Entrepreneurs are risk-takers, and emerge more readily in cultures where risk-taking is encouraged. Talented and skilled Europeans must see starting their own business or joining a startup as a viable career path.

A thriving startup ecosystem relies on easy access to capital. Europe needs tax incentives and other proactive measures that make it easier for startups to get funding. Governments should think carefully about the balance between driving growth and taxing capital.

Most of all, Europe needs to accept and embrace disruption. The old ways of doing things need to face competition that forces them to innovate. Uber, for example, is shaking up the taxi market — for the good. It offers riders convenience and cheaper fares. Understandably, the incumbent taxi industry is unhappy.

The new European Commission president Jean-Claude Juncker understands these priorities. In the Wall Street Journal, he recently called for the completion of Europe’s digital single market, called for tearing “down our regulatory walls and finally move from 28 national markets to a single digital market. For this to happen, we have to get serious: We have to end the regulatory silos in telecoms and copyright regulation, in data protection and in the application of European competition rules. This requires political determination. There will be resistance, as the current fragmented regime has created very convenient, well-protected comfort zones for some players. But Europe would miss a historic opportunity if we fail to tackle this challenge head-on.”

I agree completely. If everything stays the same, innovation will be stifled and startups strangled. New businesses promoting new ideas should not be held back by bureaucratic or regulatory hurdles. Success is never guaranteed, especially in an area that is as competitive and fast-changing as technology, but Europe has all the right ingredients. It must redouble its commitment to the single market and steel its nerve to permit disruptive innovations. If the new European Commission manages to introduce effective reform, Europe will play a leading role in the global digital economy and be a better place to work and live.

Published in collaboration with the European Commission, as part of a series on “Digital minds for a new Europe”.

Author: Eric Schmidt, Executive Chairman of Google.

Image: A man types on a computer keyboard in Warsaw in this February 28, 2013. REUTERS/Kacper Pempel.