© REUTERS/Fred Greaves

The coronavirus pandemic and its effects on politics, society, and the economy are a concrete example of what is meant by the still very abstract concept of disruption. In summary, “disruption” expresses the idea that the future will be completely different from the past. A radical break with everyday habits—as is the case with a pandemic—prevents an extrapolation of experiences from the past into the future.

“Disruption” in itself is not a new phenomenon. More than 100 years ago, the Austrian economist Alois Schumpeter identified “creative destruction” as the motor of economic growth. Now the coronavirus is destroying traditional business models and existing value chains. Suddenly, we can see how abruptly the old laws governing politics and society can be overridden.

Business has long been aware of the equally destructive and creative dynamics of disruptive processes. Long before the outbreak of the pandemic, digitalization and data, robots and algorithms, true auto mobility, and artificial intelligence had profoundly changed value-added processes.

A Hockey Stick Effect

Now, however, people are realizing how much can be achieved via distance learning, home office, online organization, video conferencing, and digital services. Emergency measure that prove to be a success in practice will be retained even after the pandemic. The coronavirus will accelerate digitalization across the economy, society, and politics.

New knowledge is being created in the search for effective responses to the coronavirus. This is not only useful in the fight against pandemics, epidemics, and diseases. Innovative findings from the battle against the coronavirus can be used later and elsewhere to save lives, prevent infection, and make people more active and productive.

It is therefore to be expected that there will be a hockey stick effect in this crisis, as in previous ones. At first, many things will get worse. The economy is collapsing, unemployment is rising. After a period of shock and suffering, however, there will be adjustments and counter-reactions. Innovations will lead to investments. New things will be created, the economy will recover, and society will enter a new phase of growth and prosperity at full swing. Things have always happened this way. There’s little reason not to assume it will happen again.

Viruses in Cyberspace

The pandemic has made globalized societies realize with horror how vulnerable they have become to unforeseeable, unpredictable shocks, against which they can do little, at least in the short term. The coronavirus has brutally demonstrated that the current economic and social model was geared far too much toward short-term success. By contrast, the long-term accumulation of resources for crises, disasters, or even pandemics has been massively neglected. There is a shortage of intensive care beds for the critically ill, of respiratory equipment and protective gear, as well as of medical and nursing staff.

This time—unlike with previous supply problems—globalization cannot help. In the event of a pandemic, similar shortages will become the rule worldwide. There aren’t any surpluses anywhere that could be quickly diverted, in part because in the coronavirus crisis, every national government is concerned most with its own people. Thus, national self-interest leads to the closure of borders, mothballing of airplanes, the halting of the global trade of goods, and the movement of people. Instead, digitalization is used wherever possible. Data transfer replaces the trade in goods. The home office replaces the business office. Video conferences make long-distance travel unnecessary.

Digitalization, which is now replacing globalization, also has its pitfalls. After all, the coronavirus is by no means the only—albeit frighteningly real and concretely visible—existential threat to the population and economy. There are also viruses in cyberspace that can cause immense damage and threaten human lives and societies. However, mischief and malpractice only become apparent when entire metropolitan regions are left without electricity, light or water, when the data centers of utilities, mobility, communication, or intensive care units in hospitals are no longer functioning because the Internet is paralyzed across the board, or when trade, stock exchanges and banks remain closed because online transactions cannot be verified.

An Agenda for Globalized Societies

Although not directly related, there are a number of other examples that illustrate how globalized societies have abandoned long-term protection for short-term benefits. The underspending in Europe on external security and counter-terrorism is one example. The long-standing failure to combat climate change is another. In the past, many costs that were incurred “externally”—either in other regions of the world or concerning the environment and climate—were not taken into account. However, disregarding the external costs at the expense of employees in low-wage countries, the extinction of species or global warming became impossible at last with the “Fridays for Future” movement. Even before the outbreak of the coronavirus, a rethink was underway.

The coronavirus only reinforces developments that were already evident. The perception, attention, and correction of these issues should have the highest priority on an “Agenda 2030” for globalized societies. Thus, after the end of the pandemic it will be neither desirable nor useful to return to business as usual. On the contrary, many things will have to change in order to hold on to the things that are truly indispensable. These include respecting individual fundamental rights and maximizing the chances of a long and healthy life and greater prosperity for all.

Spies and Criminals

Replacing global value chains with digital processes, online trading, data transfers, and local 3-D production on site at the customer’s premises creates completely new dependencies. Until now, individual links in global value chains were at risk of being abused. This could be individual governments threatening to impose punitive tariffs, trade restrictions, or even nationalization and expropriation in case of conflict. Another risk consisted of criminals disregarding property rights, violating patent protection, producing pirated copies, or carrying out brand piracy.

If digitalization is now changing the face of globalization, political dependencies and criminal activities will also change in character. The switch from the global trade in goods to virtual data transfer will be followed by an increase in cybercrime.

On the one side, there are private big data companies which more or less legally and openly collect company-specific data. They spy on interdependencies and networks as well as companies’ internal behavior patterns, decision-making structures, processes, and secrets. On the other hand, there are cyberattacks with the sole purpose of harming companies, personalities, government representatives, or politicians. There, the goal is to paralyze them for a while, destroy the trust that partners have in them, or undermine their public reputation.

Preventing a Virtual Pandemic

Whoever dominates cyberspace will dominate the world economy. Europe, given the absence of products and services of its own with an similar price-performance ratio, currently only has the choice who it wants to depend on: the United States or China. In the first case, “big business”—i.e. private monopolies with huge market power—threatens to collect every conceivable information about people in order to rake in “big profits” at their expense. In the second case, it is “big brother”—i.e. the monopoly of an authoritarian state capitalism—which, without hesitation or regard for privacy, pries into the most intimate corners of people’s lives.

Digitalization as a response to globalization becomes a social risk when “bot” networks manipulate populations and falsify parliamentary elections. Fake news can sow hatred and mistrust and destabilize societies. In the same way, huge dependencies arise from the use of private data clouds, online shopping, electronic data traffic with banks and insurance companies, or e-government.

We must prevent the biological pandemic from being followed by a virtual one. People should not be forced to disclose private data to combat the coronavirus if this means opening the gates to virtual viruses. Security in cyberspace is one of the central state functions in the age of digital globalization. Good protection against big data, big business, and big brother is expensive. Insufficient protection, however, is far more so. It can destroy livelihoods and, in the worst case, call into question the stability of Western societies.

The coronavirus—as all disruptive processes—is likely to be an eye-opener for Europeans. It reveals just how vulnerable liberal economic and social models have become. At the same time, the pandemic will give an enormous boost to digitalization and the data economy. This, however, will create new risks. They need to be neutralized just as resolutely and forcefully as the original pandemic.

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Cover artwork: © Mitch Blunt

Dear Chancellor X,

Outgoing Economy Minister Brigitte Zypries is fond of saying: “In the age of the Internet of Things, the United States has the Internet. Europe has the things.” It is true that the top four publicly traded US companies – Apple, Alphabet, Microsoft, and Amazon – are all tech companies. But the largest German companies – Daimler, Volkswagen, BMW, Siemens, and Bayer – are tech companies, too. They just don’t act like it.

Digital policy featured prominently in all the parties’ manifestos, including yours. Germany has become more sophisticated in thinking about tech policy, moving beyond a focus on data protection toward areas like the industrial Internet, innovation, the sharing economy, and competition law. Your government will have the chance to position Germany as a global leader in international digital policy. Here are five policies that – among others – could help you do so:

Start with investment in digital infrastructure. Every party platform –  even the AfD – states that German broadband must be significantly improved to ensure future competitiveness. Presently, Germany ranks 26th in OECD broadband, behind Poland, the Czech Republic, and Slovakia among others – not a good place.

Create a digital ministry that unites tall the relevant responsibilities and budgets of the economy, interior, and transportation ministries. Bolster Bundestag digital literacy. Balance the interests of incumbent industries like telecoms or publishing houses and startups. Focus financial resources in efforts to advance university research; attract and retain talent and deepen the European market.

Get behind the EU’s Digital Single Market project. The EU’s ambitious project to add open, free, secure movement of data as a fifth freedom to the four defining areas of goods, services, capital, and labor will be a precondition to a 21st century European single market. Germany has been a fair-weather partner in this ambitious project. Without German backing, it will not succeed. Provide the lift to the DSM starting at the Tallinn Summit on September 29. Immediately launch a joint Franco-German R&D and policy initiative to drive European AI. With the US, work within the EU to re-launch the Transatlantic Economic Council, but emphasize the importance of different philosophies of tech regulation, joint impact assessments on regulation, and increased usage of review clauses.

Shape global Internet policy with an eye to autocratic states. Germany’s digital policy debate has been inward-looking, with senior officials like Sigmar Gabriel speaking about “digital sovereignty” and the expansion of hate speech. German rhetoric and policy has often been used to give cover to authoritarian regimes in Russia and China. Both are eying German definitions of data localization, data protection, and the Maas Law as templates to limit Internet freedom at home. Embed German digital policy-making within an international context.

Lead on defining limitations for the use of artificial intelligence in warfare. Countries like Russia, China, and the United States are already thinking about lethal autonomous weapons; swarm drones; supercharged AI surveillance; and hyper-sophisticated fake information like forged videos and interactive electronic communication. Germany and Europe can lead on creating international law governing the use of AI in war. Beyond that, Germany should continue to build military and civilian cybersecurity policy around encryption, hack-back capabilities, resilience, recruitment, and critical infrastructure protection at state, federal, and European levels.

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© Airbus Group

How big of a problem – or challenge – are “Industrie 4.0” and the digitalization of Europe’s economy compared to, say, the refugee or the euro crisis? I wouldn’t call digitalization a problem or compare it with political issues. For sure, it is a challenge. But overall, it represents a huge opportunity. Over the past ten years or so, industry has witnessed an unprecedented level of technological advancement with the rise of digitalization. New and bold entrants in this field are challenging the status quo more than ever before, and are disrupting established business models. For instance, while it took 75 years for the telephone to reach 100 million users worldwide, it took only seven years for the World Wide Web. For Facebook, along with WhatsApp, one of the latest contenders on the communications market, it took a mere four years to connect the same number of people. We should be grateful to live in such an exciting era of change and opportunities.

Data – one of the key elements in “Industrie 4.0” – is doubling every five years. Yet its potential is still largely untapped. We estimate that less than one percent of the data available to companies is currently being utilized to its full potential. The same applies to data generated by our products. That’s why we are working together with some customers to better monitor aircraft during flight and process the enormous amount of data generated between take-off and landing. Again, I view digital transformation fueled by data growth as a true business opportunity.

You suggested recently that European companies are still in the “trial and error” phase – is this also true for competitors in the US or China? The issue at stake isn’t Europe versus the US or Europe versus China. Airbus, for instance, is a European company, but one with global operations. We have a significant industrial footprint in all three places. The issue is rather that the big industrial firms have to catch up with the “dot coms”. At Airbus, we’re on it, but we’re definitely still in a trial-and-error phase – and I am convinced many other companies are as well. However, the more we delve into digitalization, the faster we’re learning to tackle the steep learning curve. At Airbus, one of the big lessons we’ve learned so far is that speed and methodology matter. We have also seen that in our sector – there’s no “one size fits all” approach. Our philosophy is this: Learning by doing, trying hard and failing fast! We also firmly believe that data generation in itself is not enough to create value. To do so, you must combine data resources, business know-how, and analytical skills.

Do we have an innovation gap in comparison to the US and China, and if so, how can we bridge it? And is there something the others could learn from Europe? Europe’s biggest advantage is its diversity, and Europe’s biggest problem is diversity! Each country is home to many renowned universities and research institutions. They all have different traditions and profiles or cultural footprints. From one European country to another, we can see differences in industrial structures and approaches to collaboration between stakeholders. Our diversity is an excellent stimulus for innovation. Obviously, this in itself is not sufficient to succeed in the digital age if you look at where the growth is happening: Out of the five biggest smartphone manufacturers worldwide, four come from Asia and one comes from the US. Of the 100 top high-tech companies worldwide, 65 are based in the US and only eight in Europe. And, finally, out of the six biggest websites globally, five are from the US and one is from China – but none are from Europe.

So why is Europe lagging behind? In my view, it is our risk-averse nature in Europe. We’re always looking at the safest path to success, but not necessarily the most innovative or best solution. The question driving European decision-making isn’t “how can we change today’s world?” but rather “how can we minimize risks and guarantee an acceptable standard of living for the foreseeable future?” And as long as we don’t change this attitude, we can’t fully benefit from our famous European diversity, and we won’t see the creation of a Google or Facebook made in Europe!

What does digitalization mean for a company like Airbus Group? Clearly, we are trying to capitalize on the opportunities that digitalization offers. In late November 2014, I led a fact-finding delegation to Silicon Valley. A few months later, I brought our entire management board to the Valley. Soon afterwards we decided to set up shop there with an innovation center and a capital venture fund. Both operations are now in full swing: Airbus Ventures has already made investments, and A³, our innovation center, is involved in various initial pilot projects, e.g. with Uber for on-demand air transportation. So, in only one year, we’ve made a lot of progress on the innovation side – not least thanks to our newly established presence in Silicon Valley.

One of the things that make Silicon Valley so special is its quick decision-making. Speed is of the essence. So we are ready to shake ourselves up and change our “way of doing things” before someone else does. In this special ecosystem, we aim to experiment with new products, business models, manufacturing, and other processes. But we’re not limiting ourselves to Silicon Valley. Our innovation center and the Airbus Ventures fund will serve as catalysts for our entire business worldwide. If we believe we have identified attractive business vehicles, we will make investments – be they in Berlin, Paris, Tel Aviv, Tokyo, or Shanghai. Internally, our Silicon Valley initiative has provided fresh impetus, and has been driving a new wave of innovation throughout the Group.

You said your own company has only “proceeded one percent” of the journey – what will the next 24 percent look like? Frankly, I don’t know. But I am convinced that digitalization and the transformation we’re seeing as a result of it will change the way we work. For example: Digitalization will certainly support our production system, especially when it comes to quality control. Our people on the shop floor will no longer be laboring away in isolation, but will instead be connected to the engineering team, with the possibility to make live modifications if necessary and save time. We’ll also be using 3D printers to manufacture much larger aircraft parts than now.

Therefore I’m convinced that in ten years our company will look very different from today. And I’m also convinced that digitalization will change the way we work and organize ourselves in the future. That will be the real revolution! We are experimenting already in several of our factories with new, shop-floor-based organization forms. For me, it’s fascinating to discuss this with the employees involved!

Do we need “European solutions” for handling “big data”? If so, what would those look like? Yes, I absolutely believe we do, and I can give you a very concrete example of what a European approach to handling big data looks like today: Airbus Group is working with academia and IT companies to harness the immense processing power of quantum computers. We’ve established a quantum computing cell at our Airbus Group Innovations site in Newport in the United Kingdom. Newport is one of our centers focused on cybersecurity R&D, and the quantum computing lab is currently in the early stages of development.

In a nutshell, quantum computing speeds up the computing process by using quantum physical phenomena rather than electrical transistors to process calculations. How does this apply to big data? Quantum computers will be able to process enormous amounts of data in a fraction of the time it takes for computers using transistors to do the same work. For some types of problems, to do the same task, it might take all the normal computers in the world working together for longer than the universe has existed. We’re not building a quantum computer ourselves currently. However, we are collaborating with academic and industry partners to define the algorithms necessary to utilize the immense potential of quantum technology.

What needs to be done by the EU and national governments? Which obstacles need to be cleared? Let me tell you what they should not do: They should neither “protect” companies nor push them in a certain direction. We also don’t need something like a “European Google”, funded by the governments in order to create the industrial structures or to define the strategy and the business areas. That’s the opposite of the creative atmosphere necessary for innovation in this sector.
I’m saying this as the boss of a European aerospace and defense giant which has challenged US dominance. However, there’s a big difference: The aerospace and defense business has very high barriers to entry. In the digital business, investment and size are not necessarily the main issues. It’s the entrepreneurial spirit we are lacking and that needs to be nurtured in lecture halls, classrooms, and start-ups.

Does Europe need a cultural shift – a sort of “mental reboot” – to accompany policy changes, and what would it entail? Yes, indeed. In Europe we tend to see threats instead of opportunities in every change. Big data is one example. This is why others reap the benefits of change rather than chase behind it. While we’re sitting idle, our competitors in other regions are coming up with new ideas and solutions to the challenges of the present – and implementing them quickly. For a continent and culture that once drove global innovation, Europe has declined into the 21^st century’s “late adopters”. But change will happen anyway, like it or not, so we better accept this fact and seize the new opportunities it creates.

Read more in the Berlin Policy Journal App – January/February 2016 issue.

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Artwork: Dominik Herrmann

The United States also has an advantage when it comes to energy. The US produced more natural gas in the last year than Russia’s Gasprom, and more oil than Saudi Arabia. But Europe? We are still on the hunt for a reasonable energy strategy – one that envisages wind farms where there is wind and solar panels where there is sun, while creating a functional energy transfer network to ensure that the energy produced is available where it is needed. Until something changes: US 2; Europe 0.

Next up for consideration: capital resource strength. Microsoft, Google, Facebook, Amazon, and Apple are downright young companies, all between just 15 and 40 years of age. But their total stock market value in New York is twice as high as that of the top thirty German companies combined. Here we speak of € 30-90 billion capitalization; there, it is $300-600 billion. Sorry, Europe – 3:0.

How about digital superiority? It is a category where we have our strengths: Sweden’s Ericsson, France’s Alcatel-Lucent, and Germany’s own SAP, based in Walldorf. Bosch was producing mobile telephones 15 years ago, Siemens just ten. Global leader Nokia held a 50 percent worldwide market share just five years ago. (The company has since been purchased by Microsoft.) The cell phones of yesterday, however, have morphed into the smartphones of today, produced by Samsung, LG, or Apple. They use data from across the planet, and today whoever has the data has the power. Germany may have SAP, good universities, and a roaring Berlin start-up scene, but we have lost the IT leader race.

With a score of 0:4, then, Europe is desperately in need of a comeback – a push for “Industrie 4.0.” The wrestling match to establish a decisive role in industrially significant digital platforms has already begun, and the winner could walk away with market dominance similar to what we are already familiar with on the web. Europe’s industry has no choice but to contribute substantially to the development of the next generation of digital platforms – the ones that will replace today’s search engines, operating systems, and social networks.

Such digital technologies will change existing business models significantly, upending established industries like the automobile industry along with the cultural and artistic industries. Value-added chains will continue to evolve; the borders between products and services will blur. So-called intelligent products with internet connectivity will become significant not only for their functionality, reliability, and adaptability, but also for the way in which they will change the behavior of consumers themselves – the automated car will likely prove an excellent example.

The Americans have a clear strategy: they want to push this reindustrialization forward on the backs of low energy prices and existing digital services, thereby carving out an overall economic leadership role from a place of digital superiority. And nothing against our allies, but this strategy ultimately harms Germany.

Take the auto industry as an example. The worst-case scenario in ten years would look something like this: car bodies are no longer produced from sheets of steel or aluminum, but rather from carbon produced in the US. This alone would result in a loss of a serious amount of demand for German machine tool manufacturing. Batteries are produced in Asia. And an electric motor doesn’t need gears – further bad news for the German auto parts industry. Finally, the digital components are naturally produced in Silicon Valley. German industry is facing a terminal diagnosis – it just doesn’t know it yet.

All of Europe Is Afflicted

The links in today’s value-added chains connect all of Europe; combined with advancing industrial digitalization, this means no single country can solve these problems alone. Yet massive gaps exist between various EU member states, between high-tech industries and traditional sectors, and between large corporations and small and medium-sized enterprises when it comes to the use of digital technologies.

Just 1.7 percent of all businesses in Europe use digital technologies to their full extent, and 41 percent of companies do not use them at all. The former number needs to rise at least to 30 percent should European industry hope to be any match for its international competition. And we need a wave of digital innovation – and not only in high-tech fields, but also in traditional sectors like agriculture and food production.

Such initiatives already exist to a certain degree, they simply need to be Europeanized: Germany’s “Industrie 4.0”, the Netherlands’ “smart industry”, France’s “Usine du Futur”, the UK’s “industrial strategy”, and Sweden’s “Produktion2020”. The problem now is less about integrating more digital technology on a national scale – within German or Swedish industry, for example – and more about pan-European adoption. The consolidation of these initiatives under an EU roof would not only ease the exchange of valuable experience while minimizing the risks for each country individually, it would also lead to the creation of a single EU standard that would enjoy worldwide acceptance. In fact, Europe is already well-positioned to play a leading role: it is already a market leader in industrial robot technologies and automated manufacture (30 percent global market share), in embedded digital systems and product design software (33 percent), and in 3D- and laser-based manufacture (25 to 40 percent).

Comprehensive Broadband Coverage

For a European Industry 4.0 strategy, we first need a reliable digital infrastructure, and that means comprehensive broadband coverage. Connected cars, automated driving – these can function only with 5G networks and a pan-European infrastructure, one that spans from large cities to villages. Any small town without broadband is doomed. Its demise lies not in the opening of the nth bypass road, but rather in its lack of invisible investment: satellite, wireless, and broadband networks. This will be our generation’s challenge.

It does not matter whether we are talking about eHealth, digital surgery, automated driving, machine-to-machine communication, or factory 4.0 innovations; the amount of data we will need to transport is poised to explode – and not on a linear basis, but rather an exponential one. We need speed, we need quality, we need capacity. We shouldn’t talk in terms of 3 MB/sec, nor even of 30 or 50, but rather 100 to 1000 MB/sec. We do not have 30 years to achieve this, either – we must be ready in the next five to eight years.

Here we must also include targeted investment in research and development. On the EU level, we have budgeted € 1.5 billion per year for digital technologies and industrial digitalization. Yet if we want to digitize industry Europe-wide, we will need the support of the member states. They must invest on a massive scale in the expansion of their digital competency and knowledge centers, as well as open the door to digital integration in small- and medium-sized enterprises. Investment by member states and regions must reach at least ten times the level of EU funding in order to bear real fruit.

In the end, it is not only the production of information and communications technology itself whose value is significantly influenced by digital technologies; in the digital factory, investment releases stifled potential, creating space for creativity, productivity, and greater resource efficiency.

Digital Competency Gaps

This leads us to the second point: education. Digitalization will create new, highly specialized jobs, while at the same time eliminating many others – in administration and management, for example. The need for new, well-trained workers in industries like big-data analysis, cybersecurity, and cloud computing is growing massively at the moment. Yet the digital skills gap in Europe is increasing: this year alone 500,000 expert positions will go unfilled. Creativity, communication skills, and the ability to learn new production methods are becoming increasingly important, and it’s high time that they appear on university syllabi.

The Germans, on average eight years older than Americans, are burdened by nearly an additional half-generation of non-digital natives. Continuing education would help – Germans already in the workforce may never become IT specialists, but the CEO, the toolmaker, the factory foreman, the bookstore owner, and the master butcher could become more productive with the acquisition of digital skills. This is the only way we can ever overcome our deficit compared with the US in the medium or long term.

Warnings, Punishments, and Expulsions

Third, we need comprehensive, systematic data security. We created and saved as much data in the past two years as in the entire history of mankind until that point. We must expect that data volumes will continue to increase by 60 percent annually. In Germany, this has led to (justified) greater concerns over data security, but we must remember that any location prioritizing perfect and comprehensive data security is no longer an attractive location for data use and storage. Big data and data security are not necessarily mutually exclusive, but a pragmatic balance of their interests must be achieved.

Furthermore, this balance must be a work of pan-European cooperation – while many things can be resolved nationally, the idea of national digital policy is absurd today. When I took office in Baden-Württemberg’s state parliament in 1984, we had just negotiated our first statewide data security law. Does anyone today still believe that such a law can protect their data? Baden-Württemberg’s data security law will neither be observed by Facebook, nor translated, nor applied, nor utilized as precedent – it will land in the trash bin. As long as Europe has 28 fragmented data security silos, Apple, Facebook, and Amazon will continue to shop around and settle for the country with the laxest data security laws available. They will suck up European data, save it, and sell it.

The only thing that could help in such a case is Europe-wide data security regulation. If the basic data security ordinance introduced by Viviane Reding two and a half years ago were finally enacted, then we would have the ability to go after those skirting our data protection laws in the name of competitiveness with warnings, punishments, and ultimately expulsions. Microsoft already knows this drill, and Google will soon learn it.

Digital infrastructure and digital networks are per se porous. The question is whether the gaps are so large as to allow data theft or even industrial espionage. Industry 4.0 cannot function without cloud computing, but small and medium-sized enterprises will not load their data onto the cloud until they can trust that no one can access it without their permission. For this reason Brussels has made its first attempt at a European standard for data security, the so-called Network and Information Security Directive. So far, only small member states like Malta and Cyprus have signed on – they know they are too small to protect their own data security interests. The large member states have yet to understand this.

It is also a matter of sensitivity. In Europe, we enjoy a high level of job security, as well as a sensitivity to the requirements of workplace protections. But when it comes to data, our sensitivity drops to zero. Every one of us can do more to prevent data theft. Our energy infrastructure, our traffic control centers, our airspace control: every single one of these is highly vulnerable without requiring the bodily sacrifice of a single terrorist. To avoid becoming the Achilles’ heel of our democratic, free market, liberal economies, public infrastructure will require the highest level of data security. Only a Europeanization of digital policy offers the level of defense needed in order to reestablish competitiveness with the US and South Korea. In making this happen, German industry and German politics will play an important role.

Read more in the Berlin Policy Journal App – January/February 2016 issue.

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REUTERS/Staff

Read the complete article in the Berlin Policy Journal App – January/February 2016 issue.

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REUTERS/Michaela Rehle

The notion of competitiveness currently en vogue applies business concepts such as profits and competition to countries and international trade. For firms, competitiveness is relatively simple to explain: companies compete with each other, in part on price, in part on quality and innovation. The winners of this competition make a profit, while the losers rethink their strategy – or go out of business.

False (and not so False) Analogies

For countries, almost none of this applies. Countries do not make profits. A trade surplus, often understood as a kind of national profit, is not a profit at all: First, a trade surplus simply means that a country has consumed and invested less than it has produced – some of the production was shipped abroad without a direct compensation in the form of imports. The revenue from the export surplus was thus reinvested abroad. Instead of a profit, a trade surplus simply represents a capital export. Second, by definition all trade surpluses in the world need to sum to zero, because the world as a whole cannot run a trade surplus. Treating trade surpluses as “profits” would imply that world profits are zero, which is absurd.

As for price competition, the analogy between a country and a firm is misleading. Prices matter for competition, and countries can help their export industries with an undervalued currency, for example, or by suppressing wages. But both approaches carry costs. Lowered exchange rates and suppressed wages reduce real domestic incomes and hence the economic well-being of citizens. Second, such a strategy is founded upon depressed demand at home, for which the rest of the world needs to compensate, often through unsustainable booms in consumption, investment or credit. The last few years clearly show how costly this strategy is over the medium term, for a supposedly “competitive” country. Since the early 2000s, Germany’s economy has relied increasingly on foreign demand – financed by German capital exports. It has lost almost half a trillion euros on its foreign investments since the onset of the crisis. Gaining price competitiveness is therefore not a winning strategy, and can hardly be at the core of any reasonable definition of competitiveness.

The final analogy between a country and a company concerns quality: producing better or more goods and services with fewer inputs. Economists call this productivity, and it is a well-defined and important concept. A competitive country in this sense is a productive country that manages to combine the factors of production in the most efficient way possible, thereby also creating incentives for more investment. As a result, its citizens are economically better off. To define competitiveness as productivity thus comes closer to a proper definition of the term competitiveness, as it could be applied to countries.

The World Economic Forum (WEF) defines competitiveness as “the set of institutions, policies and factors that determine the level of productivity of a country.” State institutions, labour and financial markets, infrastructure and education, and many other things interact to make a country productive, and hence competitive; and it is in all of these areas that countries need to invest both money and political effort to become more competitive.

What an Index Cannot Tell Us

An index such as the one used in the WEF’s global competitiveness report is a useful starting point for measuring competitiveness. But taking the WEF’s approach to competitiveness as a policy guideline for Europe has three important drawbacks.

First, the best mix of policies to make a country more productive may vary from country to country, even when these countries are at similar stages of development. The reason is that no country will ever have a perfectly competitive, first-best set of institutions, policies, and factors – if such a first-best even exists. Becoming more competitive therefore means changing a highly imperfect and country-specific set of institutions, rules, and constraints. In such a “second-best” world, it does not automatically follow that a policy to move towards, say, a more liberal product market automatically leads to a more productive economy. Other constraints could stand in the way, for example a lack of funding for expanding firms that could make use of more liberal product markets. In such a second-best setting, it is very difficult to determine the correct sequence of reforms, and whether they are compatible with other institutions in an economy.

The second drawback is that the macroeconomic context matters for the success of reforms, and hence their impact on productivity. The most well-intentioned structural reforms, implemented at the wrong time, can fail to generate economic growth or even make matters worse. For example, labour market liberalizations in the midst of a downturn can exacerbate a drop in demand unless exports pick up the slack. Conversely, minor structural reforms, such as Germany’s labor market overhaul in the early 2000s, can work very well if implemented just before a worldwide economic boom. This notion is particularly relevant for the eurozone: the current lack of demand requires a laser-like focus on structural reforms in areas that can immediately unleash investment without hurting demand further and thus reinforcing deflation.

Finally, improving competitiveness is not a goal, but rather a process. A country needs to constantly reassess its policies and institutions and target reforms at the most binding constraints limiting productivity growth, whatever those might be at the time. The best forum for this constant deliberation is a well-functioning, pluralist democracy.

Steps to Be Taken

Such a comprehensive concept of competitiveness would suggest certain steps in Europe as a whole and in the individual member states.

At the European level, the acute lack of demand, especially in the eurozone, makes it hard for structural reforms to pay off; the European Central Bank needs to be bolder in its monetary policy, and Europe needs to rethink its fiscal policies to ensure sufficient aggregate demand.

Moreover, companies need access to a deep pool of financing, both equity and debt, that only a Europe-wide capital market and banking system could provide. Without adequate funding, firms cannot easily invest to take advantage of newly opened markets or new innovations. Firms that grow strongly (and thereby create the most jobs) and innovative new firms often have particular trouble financing their expansion in Europe, as they lack the collateral to convince banks to fund them, and equity financing and venture capital markets are underdeveloped in Europe.

To increase productivity, European policymakers should focus on areas where a larger market size and increased competition between firms can boost investment and innovation – and thus productivity. One example would be tradable services. Here, Europe has lagged the US in terms of productivity growth for more than a decade.

Finally, the EU should agree on stronger democracy-enhancing reforms and initiatives, such as common enforceable standards for a fair and transparent justice system and support for a free and pluralistic press, areas in which the member states vary dramatically at the moment. The EU could also use its competition and consumer protection tools more aggressively to tackle national vested interests.

At the national level, European countries need to ensure that their tax systems support a meritocratic and risk-taking society. For example, taxing inherited wealth or land more strongly to finance favorable tax treatments for start-ups and proper entrepreneurial risk-taking would boost Europe’s innovative capacity. Member states should end the favorable tax treatment of debt relative to equity to encourage more innovation-friendly equity financing of firms. Tax incentives for private investment should also be stronger during a downturn to encourage investment when the economy most needs it.

In addition, states should invest more in research and development with the explicit aim of maximizing innovation Given current low interest rates and weak demand, it is also in most countries’ interests to spend more on public investment like infrastructure. In combination with other reforms, such investment would generate high returns for many European countries, particularly those that have invested very little in recent years, such as Germany.

In order to become more competitive Europe should stop using the word competitiveness; it is a nebulous concept, too vague to guide policy and easily misused by interest groups to push for policies that serve the few rather than the many. Instead, Europe should focus on productivity growth and ask how best to achieve it. The answer will be much more complex than the word competitiveness suggests.

N.B. A slightly longer version of this original article can be found on the Center for European Reform’s (CER) website.

Read more in the Berlin Policy Journal App – January/February 2016 issue.

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