If Germany wants to remain a world-leading export nation by seizing opportunities in the digital economy, it must collaborate with other parts of Europe, not just to its west but also east and north, where many digital developments are taking place. As this blog explains, Germany is well placed to capitalize on these developments to stay globally competitive in digital trade The outcome would be good for Europe as a whole.
The future of globalisation is clearly digital: between 2005 and 2022, digital trade exports—mostly services delivered via ICT technologies such as AI—grew at an impressive 8.1% annually, or the fastest-growing category in global trade. Germany, number 3 exporting nation in the world in 2023, but struggling to retain that status, could, and should, capitalise on these changing patterns of globalisation.
Digital innovations are driving the growth in high-tech trade. Countries aiming to ride this rapidly accelerating worldwide digital trade boom would be wise to create an environment where industries can thrive and foster digital breakthroughs. Sadly, Europe—especially Germany—lags in digital innovation.
Germany is not alone here. Across the Eurozone, countries like France, Italy, and Spain are grappling with similar struggles to boost their digital trade competitiveness—what might be dubbed the "big country syndrome." Since the Global Financial Crisis, Germany's high-tech trade has grown by 63%, compared to 116% for the Eurozone as a whole. Italy has notched up a 72% increase, while France is lagging at just 36%. These manufacturing heavyweights, long reliant on scale, now face significant headwinds in adapting to the digital age in which smaller states tend to excel.
The EU's action plan, known as the Draghi Report, seeks to address this lack of digital competitiveness by coordinating industrial policy. The report by the former ECB President proposes better coordination of public investment in R&D among Member States. Such proposals often involve supporting projects of joint European interest through shared spending, effectively creating joint funding streams that amount to common debt.
Mario Draghi’s plans have raised eyebrows in Berlin. Daniela Schwarzer, member of Bertelsmann Stiftung’s executive board, recently argued in the FT that many in Germany view an EU-wide industrial strategy as merely propping up less competitive bloc members. Yet she also contends that this perspective is misguided: such a strategy offers Germany an opportunity to reclaim leadership in high-tech and innovation by collaborating with strong EU players. As an example, she points to a country like the Netherlands, a driving force in semiconductors.
But Germany shouldn't just look to the west; digital developments to its north may be more obvious, but major shifts in the digital economy are also taking place just across its eastern border.
For starters, as stated above, smaller digital players, many of them based in eastern (and northern) Europe, are powering Europe’s digital trade exports, with growth rates in the triple digits (except for Hungary). That signals a dynamic market. But it's not just the small players. Poland, much larger in scale, has seen a staggering 700% growth in high-tech exports since 1995. Its per capita high-tech exports are nearing those of Germany’s value. Together, eastern Europe's high-tech trade surpasses that of France.
Second, many eastern countries share a similar digital industry structure to Germany's. Czechia, Slovakia, and Poland, for example, have a higher share of R&D-driven industries, such as electronics or mechanical engineering, compared to other digital sectors like information services (in which the Nordics shine). This is partly due to Germany's traditional reliance on these eastern countries for outsourced supply chain production, but it also highlights a crucial complementarity within Europe’s urgent search for digital innovation. Moreover, countries like Poland are not far behind Germany in creating value-added in digital sectors. For instance, Germany’s high-tech and ICT services exports in GDP stands at 6.8%, that of Poland at 5.9%.
Third, geography works in Germany’s favour. Berlin is closer to many eastern and Nordic capitals than, say Paris or Madrid. Even Stockholm, a key hub for data suppliers, is nearer than several western capitals. Historically, Germany's key industries have been closely connected to many eastern European companies through their supply chain networks, facilitated by not only access to affordable labour but also geographical proximity. Germany should continue to build on this foundation. While digital technology is borderless, conducting business still requires managers and engineers to travel regularly for face-to-face meetings.
Fourth, several eastern countries have become destinations for Europe’s high-performance computing (HPC) and quantum computing centres, an area where the EU already appears to have built a strong international position. Three countries east of Germany—Czechia, Bulgaria, and Slovenia—host these HPC centres, while Poland has one under construction. Germany and Finland also have HPC centres, and Germany will soon host an exascale computer as well. The Draghi report identifies these advanced devices as key to Europe’s R&D success and industrial innovation (Chapter 3.2), particularly with the rise of AI and quantum technologies.
According to Draghi, a key aspect of these supercomputers is their growing collaboration with AI start-ups. This could be a timely opportunity for Germany, which lags behind in start-up rankings (on a per capita basis).
In contrast, many eastern countries are home to thriving markets. Alongside Sweden and the Netherlands, they boast some of the highest numbers of fast-growing firms in recent years, showcasing a dynamic entrepreneurial landscape. A significant portion of these “gazelle” companies are in tech industries, while they’re often credited as the biggest job creators. What’s more, when small firms scale up, they and other “unicorns” can become the primary drivers of nationwide productivity growth.
In short, Germany is well-positioned to capitalise on shifting digital dynamics across Europe, which will determine its success in riding the wave of digital-based globalisation. While many eastern countries lag in some digital rankings, due to their previous underdevelopment, the trends described above nonetheless highlight their status as emerging allies which could hand Germany a strategic advantage in the long run, boosting its role in global digital trade.
Daniela Schwarzer is right to suggest that the region west of Germany could well power Europe’s future digital competitiveness. Companies such as ASML and Nearfield are true digital pearls. But an industrial strategy worth its salts would also embrace upcoming EU players, many of them to the east (and north) of Germany.
Read more on this topic in the article Germany’s Industry Isn’t in Decline, It’s Changing by Erik van der Marel.
Photo by Christian Lue on Unsplash