Digitalisation of the euro area economy and impact on resilience

Raffaele Fargnoli and Eric Meyermans

Quarterly Report on the Euro Area (QREA), 2018, vol. 17, issue 2, 31-48

Abstract: This section examines how the ongoing digital revolution affects markets functioning and macroeconomic outcomes, in particular the capacity of euro area Member States to withstand shocks. In product markets, the digital revolution is expected to strengthen cross-border production and trade, increase the share of tradable services in total output as well as to lower administrative burdens and capital costs of starting and operating a business. Nevertheless, increased knowledge flows from technologically advanced economies to developing economies may change existing comparative advantages, thereby potentially adversely affecting Member States' economic resilience if they are not accompanied by adequate structural reforms and investments. In labour markets, the digital revolution is expected to have an impact on employment composition, work organisation, wage setting and contract types. While these labour market developments may improve economic resilience, increased labour market polarisation, skills mismatch and a higher structural unemployment are important risks triggered by the skills-biased nature of digital technologies. In financial markets, digital payment systems and FinTech credit are likely to strengthen the capacity to withstand shocks as they broaden funding sources. The increased role of data and technology in the financial sector value chain and product mix also puts new requirements on regulators and supervisors that will need skills and expertise in this field if they are to implement their mandates effectively, supporting the opportunities emerging from digitalisation, while mitigating risks that may occur. Given the potentially ambiguous impact of digitalisation, policies are needed to ensure that product, labour and financial markets function smoothly and efficiently and that Member States have the capacity to withstand macroeconomic shocks in an increasingly digital economy. It is also essential to promote wide-reaching innovation and investment. For the euro area, different rates of transition to the digital economy could prove a significant risk to convergence and macroeconomic stability. Due care is needed to ensure that the uneven distribution of the legacy of the crisis across the euro area does not hinder the smooth transition, as factors such as high indebtedness could limit Member States' capacity to adjust and innovate.

Keywords: economic resilience; ICT revolution; absorption capacity; structural reforms (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:euf:qreuro:0172-03

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