Running Down the Wrong Road

Why Europe doesn’t produce innovative new companies

Image credit: San Diego Union-Tribune

Back in 1991, while I was still halfway through my MBA course, I left the U.K. and headed to California. As a very atypical U.K. passport-holder, I knew I wanted more from my life than merely to be one more cubicle slave among millions. And I knew, from the few years I’d spent in the U.K., that if I remained on the gloomy little island it would be impossible for me to create any commercial enterprise that could potentially grow to employ thousands of well-paid people.

I’m briefly back in the U.K. 30 years later and nothing at all has changed except post-Brexit Britain is going backward rather than merely stumbling along. Far worse is the fact that countries in the European Union have likewise learned nothing over the last 30 years. For all the hype about London and Berlin being hubs in which innovative technology companies are thriving, the hard truth is that Europe has created no equivalents to the hundreds of so-called “unicorns” churned out by Silicon Valley. Indeed, the height of aspiration for Europe’s tech founders is that their company should be acquired by one of the U.S. giants. No one dreams of building the next Apple or Amazon or Facebook in Europe.

The picture is the same wherever in Europe we look. There are no innovative companies being created in any sector. The few stars Europe used to have, such as Nokia, Skype, and BusinessObjects, have all ended up under U.S. ownership. Only SAP struggles on as a large independent entity. Airbus Industry is doing well against its U.S. rival Boeing and Siemens is doing well against General Electric, but aside from these two standouts (both aided by the fact they are very old companies and protected by a great many forms of local government and EU assistance), Europe is striking for its lack of global success stories. Mostly Europe does old: Hermès, Louis Vuitton, Burberry. The U.K. does even worse, with chronically inept management over decades ensuring that its supposed flagship automotive brands (Rolls-Royce, Bentley) are merely small subdivisions of large European companies (BMW and VW respectively) and its larger engineering firms are chronically mismanaged. Nestle, which is still gamely competing against Kraft and other U.S. purveyors of low-quality junk, struggles on but its highest aspiration is to sell 1% more cheap chocolate and 0.5% more undrinkable instant coffee next year. Danone relies on political support and restrictive legislation to ensure that competition is muted, as does Parmalat and countless other “national champions.”

Many Europeans shrug their shoulders at all of this, believing that profits are evil and relatively free markets are bad. This adorable posture reveals 1) a complete lack of any economic understanding; and 2) a complete lack of any understanding whatsoever. Without economic activity, there are no tax revenues, and without tax revenues, there can be no roads, schools, hospitals, potable water, and all the rest of the things someone has to supply. Privatizing these public goods leads to the U.S. outcome of high prices and abysmal quality; state provision of public goods enables slightly less distortion — but must be paid for from the exchequer. Simply printing money to compensate for lack of tax revenues leads to hyperinflation; Venezuela and Zimbabwe are hardly examples to which anyone would consciously wish to aspire.

So, despite the comfortable but supremely ignorant posturing of fashionable lefty-trendy types, it’s clear that a vibrant economy yields enormous public goods. The problem for Europe is that economies are far from being vibrant. Worse yet, there are multiple signs that under the influence of populism European governments are eager to hasten back to the 1970s in which government-backed “state champions” swallowed billions of dollars of taxpayer funds to produce walking dead companies that failed to produce anything of lasting value.

There are many reasons why Europe continues to fail, from an economic perspective.

The first and most important is attitude: Europeans are afraid of success. Ordinary people distrust and dislike anyone who has the temerity to stand out from the crowd, and they reserve a particular loathing for anyone who actually succeeds. Whereas U.S. citizens blindly worship the appearance of success and mistakenly conflate wealth with virtue, Europeans automatically assume wealth is a bad thing. This means very few European adolescents aspire to create innovative new companies which would generate new well-paying jobs.

The second problem is parochialism. No Californian startup would think of saying, “we focus primarily on the San Francisco Bay Area” but most European companies think almost exclusively in terms of their home market. Hardly any even contemplate global markets. Of course there are exceptions, but guess what? These are invariably old companies that are declining comfortably, or startups looking to be acquired by a U.S. giant. Many argue that the EU’s patchwork of languages and differing regulations impede such growth, and this is true. These are, however, hardly insurmountable obstacles because U.S. companies manage to succeed in Europe despite them. Starbucks, Apple, Google, Facebook, Kraft, Ford, Amazon, General Motors, Tesla, and hundreds of other U.S. firms have all done very well in Europe despite the supposed barriers to growth and success that European companies regularly bewail.

The chronic parochialism of Europe extends even to its supposedly forward-looking sectors. A couple of months ago, I talked to a senior member of a top European venture capital fund and she spent most of our conversation explaining to me how each European country was so entirely different that no business could possibly succeed with a generalized marketing/benefits approach. This VC firm is supposedly leading the charge to fund innovative health-oriented European startups; their prize exhibit is a small investment in a Belgian company that makes ice cream with slightly less sugar than is found in the offerings of larger competitors.

I wasn’t surprised by the argument — I’ve heard European VCs and university-oriented incubators give countless reasons over the last 30 years why something can’t be done, why something won’t work, why something is too early/late for the market. Europeans are full of reasons why things can’t be done. Culturally, Europeans are afraid of failure and afraid of success. It’s a paralyzing posture and it is why Europe doesn’t produce world-scale innovative new companies.

What’s sad is that Europe should have a competitive advantage. While in the United States the appetite for risk is infinitely greater, the U.S. employment model is a disaster and U.S. education (except at the top universities) is a catastrophe. Every time measurements are made, Northern European workers turn out to be more productive than their U.S. counterparts. This is because Northern European workers in general aren’t constantly overworked and constantly stressed. European workers aren’t terrified of being bankrupted by a medical bill or losing their precious but largely ineffectual medical coverage by being fired and thereafter unable to afford the premiums themselves. Exhausted and anxious U.S. employees are too depleted to make consistently adequate decisions and aren’t as productive as they would otherwise be, regardless of how many caffeinated beverages they desperately swill in a vain attempt to compensate for perpetual fatigue. This is why U.S. per-person productivity numbers are worse than their Northern European equivalents. Furthermore, in general, Northern Europeans are better educated and healthier than their U.S. counterparts, which again should give Europe another advantage.

Sadly, Europe does nothing to capitalize on these competitive advantages. While the United States prospers despite its manifest failings, Europe fails to leverage its advantages because culturally so many people are dedicated to self-limiting.

Now that populism has thrust into power a motley collection of halfwits and incompetents around the globe, we see European governments returning to the bad old ways of the 1960s and 1970s. One of the major steps that could significantly boost European growth and opportunities would be to continue to extend freedom of trade; dull-witted populists however want only self-defeating “buy national” campaigns and so expansion of trade is a nonstarter despite the wealth it would create. Governments are instead investing taxpayers’ money to build “national champions” even though this failed spectacularly the first time it was attempted, and there’s zero sign anyone has learned anything at all from the lessons of the past — guaranteeing the mistakes will be repeated and billions more will be poured down the drain.

The proudly non-European British, now very much committed to decline thanks to the mindless self-harm of Brexit, are seeing the government of Boris (“everyone’s favorite party clown”) Johnson throwing taxpayers’ money at everything from building rocket launching stations to overpriced and very unimpressive boats, in a desperate attempt to pretend that populism isn’t really as bad as chewing off one’s legs and arms. The French are busy propping up old sectors like agriculture, convinced that dirigisme can, one day, magically work while the Italians continue to funnel cash to Mafia-controlled businesses. Meanwhile, European banks refuse to lend to companies in need of growth capital (European banks have the attitude that one should lend money only to companies that have cash flows sufficient to demonstrate they don’t need extra cash) and European VCs are so risk-averse they may as well be actuarial desk-jockeys.

Europeans enjoy a quality of life unimaginable to their U.S. counterparts, and unreachable by the hundreds of millions of Chinese who live under increasing surveillance and heavy-handed state control. Unfortunately, Europe’s enviable quality of life can’t be sustained by clinging to outmoded attitudes and it will be actively eroded by the fiscal drain imposed by populist policies. Meanwhile U.S. quality of life will never improve because far too many simple-minded U.S. voters equate adequate education and available health care services with “socialism,” which in their tiny ignorant minds is akin to cannibalism or perhaps the horror of attempting to learn a foreign language.

All in all, it seems we’re all desperately eager to run as fast as we can in precisely the wrong directions. It’s just another glorious benefit arising from our absurd attachment to representative democracy, which guarantees that policies are crafted to appeal to the ignorant and foolish (or to appease special interests) and thus reliably yield low-quality outcomes that make nearly everyone’s life a little worse than it need be.

Sic transit gloria mundi

Anyone who enjoys my articles here on Medium may be interested in my books Why Democracy Failed and The Praying Ape, both available from Amazon.

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