An Innovation Agenda For Europe

Paul Hofheinz

Any ‘economic growth’ strategy which ignores the all-important strand of promoting, encouraging and developing innovation is doomed to fail.

It has been more than a decade since Donald Rumsfeld, the hapless US secretary of defense, branded Europe’s most advanced economies as “old Europe”. The reaction at the time was merciless. German and French ministers decried the “polemics” as “unhelpful”. But what if it were true? What if Europe’s most advanced economies were truly ‘old’ in some fundamental way? What if Europe were in fact stuck in genuine stasis, rendered immobile by interest group capture, complacency and ongoing strategic collapse?

Indeed, you could make such a case. But the good news about clichés is that, while they sometimes bear an element of truth, they often tell you more about the shallow judgments a speaker has formed than the true nature of the subject described. And they miss important changes taking place beneath the surface – the subterranean currents, which, if encouraged to grow could yet become mighty waves, the obscure call in the back of a room which eventually becomes a movement, and can move a nation.

Indeed, history walks along precisely these lines, a battle between the powerful tug of backward-looking obscurantism and the sometimes frightening imperative of embracing the modern and new. Both trends are there at the same time. Politics is where we strike the balance – the place where women and men seek to mitigate a middle ground between future and past. And Europe is no exception. Judging from the stories you read, you’d think the ‘old continent’ to be a lost cause – unable to emerge from crisis, prone to discussions when action is needed, and hampered by a well-worn bag of economic policy tricks whose efficacy has long since passed its date of expiration. But what if the truth were more complex? What if the sometimes pointless debates in Europe were obscuring both real progress made and the potential for genuine leadership in areas where the modern will some day be truly defined? What if Europe actually had unheralded strengths in some areas, ready to be developed and unleashed with the right set of policies?

The thing Europe needs today is rather simple: an economic policy based on embracing the modern and a generation of political leaders capable of making the case for it – and winning. There are promising signs that this generation may be slowly coalescing. Consider the following:

1) In 2012, European Union governments and businesses exported $465bn of digitally deliverable services to the outside world, more even than the US ($383.7bn).

2) Four of the global top five mobile app-based gaming companies are European – an area of genuine market-leading expertise in the digital arena.

3) Since 2011, the 18-member eurozone has run a monthly trade surplus, reaching an all-time high of €23bn in October 2014, up from the low of -€16bn in January 2011 at the crisis peak. Most of the surplus comes from manufactured goods, such as machinery and vehicles. By the way, France, Germany, Italy and The Netherlands – old Europe – make up the lion’s share of this. Germany, for one, is the world’s second largest exporter, selling a staggering €183bn of goods and services abroad in November 2014, second only to China.

European policymakers need to do do more to help digital companies thrive.

So what then does Europe need? What would it take to translate these islands of success into broader social and economic progress? We propose an innovation agenda based on four principles:

1) Build. David Riccardo taught us long ago that trade isn’t based simply on one country selling things more cheaply than others. To the contrary, it’s about each country finding its “competitive advantage” – the area where that country is able to produce the best goods at the most competitive price. For Europe, with its high wages and generous social welfare system, this means high-value added products are a must. We won’t compete by making and selling low value-added goods. And high-end manufacturing is one area where Europe may indeed have a competitive advantage. Germany points the way and shows what is possible. They relentlessly focus on delivering goods and services that define the cutting-edge of what is modern in advanced engineering. And even today, Germany is focusing on tomorrow, developing a complex “Industrie 4.0” policy initiative based on embracing the digital revolution in manufacturing. By re-tooling European production processes around advanced technology, including information and communication technology (ICT), and adding value into already well-made goods, it embodies the best of both worlds, tying Germany’s strength in manufacturing around the powerful tools of the future.

2) Educate. All modern economies need skilled workers. The European Commission, for one, predicts that European companies will have more than one million unfilled ICT vacancies across all industries in 2020. How can this be possible when 24.4 million people – 5.1 million of them under the age of 25 – are today unable to find work? Clearly, our education system is not giving us the graduates we need. For starters, if, as is true, more than 50 percent of all jobs are created by new companies, we need many, many more individuals who want to be and can be entrepreneurs. Among the skills we need to teach are basic entrepreneurial skills, giving people the chance to create their own opportunity and to employ others as they grow and scale up. This is not a minor point. European industry will not return as the jobs engine it was in the trentes glorieuses, given our modern wage structure and the need to make existing production even more productive. Employment in Europe – when it does come – will arrive mostly in new fast-growing companies formed around new services, many of them based on the Internet and built around digital technologies. We need to educate for these new realities, starting with digital skills and entrepreneurship. People should not look only to large companies as a source of future employment. They should be prepared – and educated – to be able to take the future into their own hands, and perhaps even to give those large companies an innovation-driven run for their money as well.

3) Open. Too many leading European companies – Prezi, Spotify and Storify to name but three – move to Silicon Valley as soon as their products show promise. But talk to these entrepreneurs and you hear an interesting story: it’s not just about the easier access to capital they find in California, though this is undoubtedly an advantage. It’s the huge, seamless market for digital goods and services in the US that attracts them the most: 320 million consumers linked by a common regulatory structure and single market. There is a lesson in this for Europe – to any who care to listen. If you want to help European entrepreneurs to create jobs, the best thing you could do would be to open up the internal market, slashing through regulation that makes it hard to trade across borders (recent moves that dramatically complicate the cross-border VAT system are a case of movement in the wrong direction). To be sure, product standards in Europe must be high. But they should be standards that open markets, not standards that close or fragment them. Europe has the vision. But we must move to make this vision a reality by completing the digital single market and opening up a unified trading space where entrepreneurs can reach 507 million empowered consumers under one broadly-unified regulatory regime.

4) Learn. To be sure, Europe has embraced the rhetoric of the “digital single market,” but the words are often spoken with a shallowness that belies their effect. On copyright, for example, we remain consumed and bogged down with a useless tug of war between those who think the only reform copyright needs is tougher enforcement, and those who seek a more enabling environment where new businesses and business models can develop without threat of lawsuit or legal complications. We must develop a more open, pragmatic approach to policymaking in this key area, seeking to learn the lessons that market practice elsewhere teaches. The fair use doctrine in the US, for example, has made America a vastly easier market for digital goods than Europe – and rights holders have hardly suffered. And while fair use might or might not be the right policy for Europe, is there not scope for finding a similarly enabling mechanism within our copyright regime? Data is another area where politics triumphs over reason. Europe needs a workable data policy, where citizens receive the privacy protection they need and new data-driven businesses and services can also be developed. We must learn from evidence, and be prepared to move away from policy positions that have proven outdated or unproductive. The recent United Kingdom ‘non-paper‘ on the digital single market is a step in the right direction.

These days, voters are sending policymakers a message. They are tired of stagnation. They want growth. The question is, how do we move forward as a society built on social inclusion — which aims to deliver full employment, educational opportunity and social justice — and deliver sustainable economic growth? Towards that end, the evidence tells us some interesting things. For one, in advanced economies like ours, innovation is by far the most important driver of prosperity and productivity, contributing between two-thirds and four-fifths of all economic growth. Therefore, any ‘economic growth’ strategy which ignores the all-important strand of promoting, encouraging and developing innovation is doomed to fail. And the nature of innovation is itself changing. It is not just about a bunch of guys in white coats working in laboratories. It’s also about the companies, services and new business models that entrepreneurs are building and leading. And we have lots of them here in Europe.

We owe them a policy environment that works. And if we can deliver that, they will help us get where we need to be.

This column was first published by Policy Network