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Opportunities and risks of digitalisation in geopolitically difficult times
Presentation of the TARGION Science Award

27.09.2024 I Frankfurt am Main I Joachim Nagel

Check against delivery.

1 Words of welcome
2 Opportunities of digitalisation

3 Levers for boosting digitalisation

4 Risks of digitalisation

5 Concluding remarks

1 Words of welcome

Ladies and gentlemen,

Thank you very much for the warm reception-and I, too, would like to welcome you here at Villa Bonn in Frankfurt. Frankfurt is
Germany's data centre capital. Around two-thirds of the computing power available in German data centres is concentrated in the
Rhine-Main area.[1] Frankfurt is also home to the northern hemisphere's largest internet node.[2] In April, it set a new world
record for data throughput, namely 17 terabits per second. [3] 17 terabits. In the analogue world, that equates to around 3.9
billion pages of A4 text. Or a pile of paper 420 kilometres high-about 1,637 times as high as Frankfurt's Trade Fair Tower.
Approximately as much information flows through this internet node every second!

It is consequently difficult to think of any other location in Germany more suitable for presenting a digitalisation prize. Without
data centres, there is no further digitalisation and no artificial intelligence (Al).

The TARGION Science Award has, for almost two decades, been awarded for outstanding research work. It is presented to scien-
tists who, through innovative studies of practical relevance, contribute to digitalisation in their respective fields.

This year, the award goes to Professor Ekaterina Jussupow for her dissertation on the use of artificial intelligence in medicine.
Medicine, in particular, is an area in which Al will help bring about major progress. Are we ready to place more trust in Al in
medical questions than in a doctor's recommendation? And how will doctors handle the issue?

These are some of the exciting questions that this year's award winner is studying. However, as an economist I am probably not
best placed to pay tribute to the contents of her work. This is something that the next speaker will expand on.

Instead, I would like to discuss the economic opportunities and risks of digitalisation. Let me start by looking at the opportunities.
These can be particularly helpful in an area in which all developed economies currently have a weakness, namely productivity.
Productivity growth has been on the decline for several decades, in Germany and elsewhere.

2 Opportunities of digitalisation

That is worrying as productivity is central to our prosperity. Economic growth is a means of increasing material prosperity. As a
general rule, this can be achieved through more labour, more capital or higher productivity. In Germany, however, demographic
developments mean that more labour is unlikely to be available. And investment in a larger stock of capital is only worthwhile if it
also generates higher income-in other words, if productivity increases.

Nobel laureate Paul Krugman put it in a nutshell when he said that: "Productivity isn't everything, but, in the long run, it is almost
everything."

In Germany, however, productivity growth in many sectors of the economy has been fairly weak since the mid-1990s. [4] With the
exception of one area: the digital sectors. In recent years, the efficiency gains achieved there have been far higher than those
achieved in the other sectors of the economy. During the aforementioned period, average annual growth in total factor productiv-
ity in Germany was around 4% in the digital sectors as compared with 0.5% in the other sectors. As a result, the digital sectors
have significantly bolstered aggregate productivity developments in Germany, although they are comparatively not very large.

However, productivity has recently grown somewhat more slowly in the digital sectors, too. That is why digitalisation warrants par-
ticular attention. It could, by increasing productivity, help to compensate, at least in part, for the lower labour input resulting from
future demographic developments. Consequently, it is imperative for Germany, in particular, to exploit the opportunities presented
by further digitalisation!

Generative artificial intelligence is currently seen as a particularly promising area for productivity gains. It can create content that
we previously considered to be typically human: texts, images, even videos. It thus goes far beyond the results of traditional artifi-
cial intelligence, which processes and analyses existing data in order to solve specific tasks. This enhanced performance is made
possible not least by the exponentially increased computing power that I mentioned earlier-because training and operating large
language models requires enormous computing power. The current Al dynamics mean that the computing power needed doubles
every 100 days.[5] Al is now capable of solving increasingly complex tasks and achieving ever better results. It is said that consul-
tants can perform their tasks 25% faster using Al, and that the results are 40% better. [6]

However, assessments of the macroeconomic productivity gains that can be achieved through the use of Al vary greatly.[7] This is
because those gains hinge on a variety of different aspects. First of all, it depends which tasks are automated or supported by Al.
For example, there are tasks that Al can perform independently and in a profitable manner. Firms will tend to increasingly turn to

Al for such tasks. The employees previously tasked with those roles would be available for other productive work-elsewhere
within the company or at another firm.

The effects of Al on productivity depend in large part on how significant the tasks being performed or assisted by Al are for the
economy as a whole. And on how quickly Al is used. And in how many occupational fields. [8] According to surveys, in the United
States, where digitalisation is progressing at a faster pace, only around 5% of companies used Al applications to produce goods at
the beginning of 2024. [9]

Alcan also bring about opportunities for innovation and new products. Consider, for example, humanoid robots. They resemble
the human form. With the help of Al, they are able to identify their environment. And they can communicate too. As they also
learn at the same time, there is a broad scope of applications, especially for industry.

That's me looking into the more or less distant future. Sticking with the here and nov, it is good to see public authorities in
Germany already using Al and it being driven forward in various areas. Here in Hesse, Al is being deployed to respond to corre-
spondence from the public, for reformulating official texts into simple language and to aid in police investigations.[10]

And we at the Bundesbank are using Al too, for example to automate the process of drafting reports, to assist in producing our
very short-term inflation forecast and for analyses as part of preparatory work for monetary policy decision-making. Perhaps, in
future, Al may also write and deliver speeches. But we aren't at that point yet: this speech is the product of human intelligence
and is being delivered by a human made of flesh and blood. There is one thing that we always bear in mind: for us, Al is a tool. It

is used by us people. And we are responsible for how we apply its output and for any consequences that may arise from that.

The legal framework for this is provided by the EU (European Union)''s Al Act. The bulk of the provisions will be applicable in two
years' time.{11] From an economic perspective, the main test of its quality will lie in whether it provides the necessary clarity to
help increase Al's productivity potential. It is pleasing to see a broader international development against the backdrop of this reg-
ulation: more than 50 countries have drawn up a convention on the use of Al, which some countries have already signed. It builds
on a framework agreement drawn up by the Council of Europe together with other states and which is based on respect for
democracy, human rights and the rule of law.[12] At a time when geopolitical tensions are placing a strain on the international
community and in which the World Trade Organization (WTO (World Trade Organization), for example, has been struggling to
operate effectively for years now, I find this kind of international consensus on a topic so highly relevant to the economy encour-
aging and all the more valuable.

The use of Al is an important building block on the way to increased productivity. What can and needs to be done here in
Germany to boost digitalisation and thus productivity?

3 Levers for boosting digitalisation

An evaluation by the European Commission highlights an initial key area requiring action. It shows that the share of people in
Germany with basic digital competence is lower than the average for EU (European Union) countries, with 49% of the population
in Germany in possession of such skills versus the EU (European Union) average of 54%.[13] This means that digital skills need
strengthening in Germany-in the education system and in the world of work. This will improve the opportunities for productivity
growth-as well as the opportunities for each and every individual in the labour market.

The assessment carried out by the European Commission that I just mentioned also shows that, by European standards, Germany
is lagging particularly far behind when it comes to the EU (European Union)''s objective of full fibre optic broadband coverage. In
Germany, only around 19% of end users are connected, while the average for the EU (European Union) is 56%. There is a consid-
erable need for investment. And this is where the private sector, in particular, is called upon.

As for the public sector, it should, above all, work on digitalising its own administrative processes. This would speed up processes

for companies, alleviate staffing shortages, reduce bureaucratic re
agerial skills will also be needed to convert digitalisation into pro

d tape-and, in so doing, boost productivity. Lastly, specific man-
juctivity gains. Studies suggest that US (United States) firms' man-

agement practices in this field are better than those of their European counterparts.[14]

These measures could also lessen German scepticism towards digi
minority of respondents said that the term "digitalisation" made t

italisation. In a survey conducted just a year ago, only a small
em think of "future prosperity" -a mere 29%, in fact.[15] We

are in drastic need of a change in attitude here.
4 Risks of digitalisation

While digitalisation presents opportunities, it also entails risks- especially in terms of cybercrime. Opportunities and risks go
together like light and shadow. In its latest report on Germany, the Federal Office for Information Security concludes that "the
threat in cyberspace is higher than ever before" .[16] Overall, damage is increasingly being caused by attacks from abroad[17]-
some politically and some financially motivated, with the line between the two becoming increasingly blurred. Geopolitical ten-

sions have raised the risk of government-backed cyberattacks.[18] A recent study commissioned by the digital association Bitkom

found that China is becoming the main country of origin for attacks on the German economy, followed by Russia. [19] The study

reports that 45% of the affected companies traced at least one attack back to China, while 39% traced the origins back to Russia.

From a central bank perspective, cyber risks at financial institutions are particularly relevant. They can spread far beyond the insti-
tution and industry concerned and have a systemic effect-with considerable damage to the real economy. A European regula-
tion-the Digital Operational Resilience Act or DORA (Digital Operational Resilience Act) for short-now establishes significantly
higher requirements for the operational resilience of financial market players in the European Union, including in terms of their
robustness to cyberattacks. If you would like more information on DORA (Digital Operational Resilience Act), I recommend our
latest Monthly Report, which includes an article on this topic.[20]

Cyber resilience likewise plays a prominent role in banking supervision by the Federal Financial Supervisory Authority

(BaFin (Federal Financial Supervisory Authority)) and the Bundesbank. From 2025 onwards, banks' critical

IT (information technology) service providers, cloud operators or software providers say, will also be continuously monitored at
European Union level with regard to their robustness. This is a very welcome development because the importance of

IT (information technology) service providers for the financial sector has continued to grow in recent years. Their cyber resilience
should therefore be strengthened just as much as that of banks.

5 Concluding remarks

Ladies and gentlemen,

Further digitalisation will strengthen our economy. However, further digitalisation also entails risks, especially cyber risks, which
need to be kept in check. But one thing is certain: one of the biggest risks is missing out on the opportunities presented by further
digitalisation. At present, these lie mainly in the application of generative artificial intelligence.

For me, there can be no doubt that all parties involved should play their part in strengthening further digitalisation in our society:
in the education system, in enterprises and within public authorities. As President of the Deutsche Bundesbank, I am committed to
ensuring that we actively seize the opportunities offered by digitalisation-in the interests of society as a whole.

Footnotes:

1. Theisen, P., Rechenzentren-Boom: Fluch oder Segen
[https:/www.zdt.de/nachrichten/wirtschaft/rechenzentren-rhein-main-gebiet-fluch-segen-100.htmil, zdf.de, 9 August 2024.

. Rasch, M., Der grdsste Internet-Knotenpunkt der ndrdlichen Hemisphare ist in Frankfurt
[https:/www.nzz.ch/wirtschaft/groesster-internet-knotenpunkt-was-waere-nach-einem-atomschlag-ld. 1703243], Neue Zurcher
Zeitung, 15 October 2022; Wacket, J., Frankfurts Rechenzentren boomen
[https:/www. tagesschau.de/wirtschaft/rechenzentren-boom-frankfurt-101.htmi], tagesschau.de, 25 September 2020.

. DE (Deutschland) CIX (2024), Neuer Rekord an Europas grofstem Internetknoten
[https:/www.de-cix.net/de/unternehmen/medien/pressemitteilungen/neuer-rekord-an-europas-groesstem-internetknoten-de-
cix-frankfurt-bricht-schallmauer-von-1 7-terabit-datendurchsatz-pro-sekunde]

. Deutsche Bundesbank (2023), The impact of digitalisation on labour productivity growth
[https:/Avww.bundesbank.de/resource/blob/9066 16/6 1 9cb6633927dc5d02c45 9fc3c5ate60/mL/2023-03-arbeitsproduktivitaet-
data.pdf]

, Monthly Report, March 2023.
. Ammanath, B. (2024), How to manage Al's demand-today, tomorrow and in the future

[https:/vww.weforum.org/agenda/2024/04/how-to-manage-ais-energy-demand-today-tomorrow-and-in-the-future/], World
Economic Forum.

6. Dell'Acqua, F. et al. (2023): Navigating the Jagged Technological Frontier
[https://papers.ssrn.com/sol3/papers.cfm?abstract_id=457332 1]: Field Experimental Evidence of the Effects of Al on Knowledge
Worker Productivity and Quality (September 15, 2023). Harvard Business School Technology & Operations Mgt. Unit Working
Paper No. 24-013, The Wharton School Research Paper.

7. Acemoglu, D. (2024), The simple macroeconomics of Al /https:/Avww.nber.org/papers/w32487],
NBER (National Bureau of Economic Research) Working Paper 32487, May 2024; McKinsey (2023), The economic Potential of
Generative Al
[https:/www.mckinsey.de/~/media/mckinsey/locations/europe% 20and%20middle%20east/germany/news/presse/2023/2023-
06-14% 20Mmgi%20genai% 20report%2023/the-economic-potential-of-generative-ai-the-next-productivity-frontier-vf pdf]
; Goldman Sachs (2023), The Potentially Large Effects of Artificial Intelligence on Economic Growth
[https:/www.gspublishing.com/content/research/en/reports/2023/03/27/d64e052b-0f6e-45d7-967b-d7be35tabd16.htmil.

8. See, inter alia, Brynjolfsson, E., D. Rock and C. Syverson (2017), Artificial Intelligence and the Modern Productivity Paradox: A
Clash of Expectations and Statistics /https:/Avww.nber.org/papers/w2400 1], NBER (National Bureau of Economic Research)
Working Paper 24001; Gmyrek, P., J. Berg and D. Bescond (2023) Generative Al and Jobs: A Global Analysis of Potential Effects
on Job Quantity and Quality (https:/papers.ssrn.com/sol3/papers.ctm?abstract_id=45842 19] (August 21, 2023),

ILO (International Labour Organization) Working Paper 96 (Geneva, ILO (International Labour Organization)); Pizzinelli, C. et al.
(2023), Labor Market Exposure to Al: Cross-country Differences and Distributional Implications

[https:/Avww.imt org/en/Publications/WP/ssues/2023/10/04/Labor-Market-Exposure-to-Al-Cross-country-Differences-and-
Distributional-Implications-539656]

, IMF (International Monetary Fund) Working Paper No 2023/216; Acemoglu, D. (2024), op. cit.

9. Business Trends and Outlook Survey, U.S. Census Bureau. According to Eurostat (European statistical office) data, which are
also drawn from surveys, around 8% of firms in the EU (European Union) used Al in 2023. However, these figures are not
directly comparable with the data for the United States, as there was no query as to the explicit reason why it was being used
(for example, whether it was for the production of goods). See also ifo (economic research institution) Institut (2024), Many
enterprises are hesitant about artificial intelligence-Germany nevertheless performs well in a European comparison
[https:/www. ifo.de/en/press-release/2024-09-06/many-companies-are-hesitant-about-artificial-intelligence-germany], press
release, 6 September.

10. Hetrodt, E., KI (KUnstliche Intelligenz) soll Briefe von Burgern beantworten, Frankfurter Allgemeine Zeitung, 11 September
2024.

11. European Parliament (2024), EU (European Union) Al Act: first regulation on artificial intelligence
[https:/vww.europarl.europa.eu/topics/en/article/2023060 15T093804/eu-ai-act-first-regulation-on-artificial-
intelligence%23next-steps-7]

12. Council of Europe Framework Convention on Artificial Intelligence and Human Rights, Democracy and the Rule of Law
[https.//rm.coe. int/1680afae3c] (2024).

13. European Commission (2023), 2023 Report on the state of the Digital Decade
[https.//digital-strategy. ec. europa. eu/en/library/2023-report-state-digital-decade] and European Commission (2023), 2030
Digital Decade- Annex Germany/https://digital-strategy.ec. europa.eu/en/library/2023-report-state-digital-decade].

14. Bloom, N., R. Sadun and J. Van Reenen (2012), Americans Do IT (information technology) better: US (United States)
Multinationals and the Productivity Miracle/https://pubs.aeaweb.org/doi/pdfplus/10. 1257/aer. 102.1.167], American Economic
Review, Vol. 102(1), pp. 167-201, p. 169.

15. European Center for Digital Competitiveness (2023), Digitalreport 2023
[https://digital-competitiveness.eu/wp-content/uploads/ESCP014_Digitalreport-2023.pdf], p. 28.

16. Federal Office for Information Security (2023), The State of IT (information technology) Security in Germany
[https:/Avww. bsi.bund.de/SharedDocs/Downloads/EN/BS//Publications/Securitysituation/IT-Security-Situation-in-Germany-
2023.pdf?__blob=publicationFileév=9]

17. Bundeskriminalamt (2024), Bundeslagebild Cybercrime 2023
[https:/www.bka.de/SharedDocs/Downloads/DE/Publikationen/JahresberichteUndLagebilder/Cybercrime/cybercrimeBundeslagebild2€
nn=28110]

18. Branson, M., Eine tiefe Rezession ware fur die Branche problematisch, Interview with the Handelsblatt, 4 September 2024.

19. Bitkom (2024), Angriffe auf die deutsche Wirtschaft nehmen zu
[https:/www.bitkom.org/Presse/Presseinformation/Wirtschaftsschutz-2024], press release.

20. Deutsche Bundesbank (2024), DORA (Digital Operational Resilience Act) from the perspective of on-site inspections
[https://publikationen.bundesbank.de/publikationen-en/reports-studies/monthly-reports/monthly-report-september-2024-
939206 ?article=dora-from-the-perspective-of-on-site-inspections-939088]

, Monthly Report, September 2024.