Is Europe Dying?

The other day Someone prodded me for a “Destination bucket list”. Straight off the bat I named Chile, Borneo, South Africa, Morocco and a slew of other locales.

Someone (Cheerily): “Europe?”

Me (Aghast): “What?? No! A thousand times no! It’s boring and bland as hell’

Fast forward to a few moons later, and after being interviewed on CNBC Arabia re: European stocks, I breezily posted on social media that “Europe isn’t cool”. That drew a few sharp intakes of breath and a sprinkling of retorts, mostly defensive.

You can see a trend here.

So I decided to write a clarificatory piece on fading Europe (yes you know the conclusion but read on nevertheless).

Once upon a time

Europe USED to be King, reigning supreme for centuries. It explored, conquered, colonized, civilized, researched and innovated like crazy at a time when the rest of the planet was sitting on their collective asses.

The continent pretty much MADE the world as we see now, via a mind boggling array of geniuses, from Galileo to Newton to Fleming to Stephenson to Benz to Bohr to Whittle to Einstein to Watson to Tim Berners- Lee. It’s actually quite astonishing; they INVENTED the car, the steam engine, the computer, the tank, radar, rocket technology, jet engines, indoor plumbing, TV and almost everything we use now.  For centuries Europe was the Lab, the Factory, the Shipbuilder, the Bank and the Armory.

Today

Look at it now.

It’s a humdrum collection of museums, parks, palaces and eateries, either hugging its past (in the cases of England and France) or fearful of it (in the case of Germany with its grisly history), coupled with a reluctance to move on. Its biggest achievement in the past 70 years? The EU which even its most ardent supporter has to admit is a dysfunctional, rag tag collection of “nations” ranging from the utterly broke to the plutocratic, a true confederation of misfits mainly cobbled together to prevent another huge war.  

Markets

But let’s get to the raison d’être for this piece. which is the European stock market. And whether you like it or not I must compare it to its cousin across the Atlantic. And the European market has always disappointed.

2018 was supposed to be the moment when European equities finally caught up with the U.S. stock market. Instead, Europe has been the worst performer among developed countries in the first half of 2018. Disgusted investors have pulled out on concerns spanning from Italy’s political crisis to the damage from a trade war and the European Central Bank’s dithering on the interest rate outlook. The disappointment has been so strong that stock valuations have tumbled to near 2016 levels; the Stoxx 600 now trades at a price-to-book ratio that is almost half that of the S&P 500.

But this is nothing new. For the longest time, European stocks have been unable to compete with U.S stocks. One big reason: most of investors’ favorite tech stocks are listed on Wall Street.

I recently browsed through a list of the “best performing stocks” in the EU. What did I find? Nestle, Shell and Credit Suisse, among others, a list of mainly old economy companies, a feeble rejoinder to Amazon, Facebook, Google, Netflix, Apple or the dozen other hyper growth, globally respected giants. Disappointed was an understatement; it was also a revelation. The EU is way behind the US and even behind China (Heard of Alibaba, Tencent, Jd.com and Baidu?) in technological development.

Yes, European tech stocks are one of the region’s best-performing sectors this year. But their share in the Stoxx Europe 600 is a tiny 4.7 percent, compared with 26 percent in the S&P 500. And partly because of this, EU profit growth is seen at 6.1 percent this year and 8.6 percent in 2019 compared with 23 percent for the U.S. companies in 2018 and 11 percent next year. Overall, the S&P 500 is up about 120 percent over the past decade with the Stoxx 600 gaining a meagre 34 percent. And let’s not blame the usual scape goat (Trump) and his trade wars; that’s a recent development.

(Note: If you are a risk averse investor you may prefer the risk averse continent. After all, Europe has many mature, well managed companies with a very decent dividend yield)

Whatever measure we use for innovation, the US is more innovative than Europe. U.S. companies are younger. Of the 100 biggest companies in Europe, only 13 were founded after 1950 — compare that with 40 in the US. Also, Americans register more patents.

So what the hell is happening? Do you know why the lack of innovation and growth, the absence of Pizzazz? I will tell you why.

No risk no reward

To start something new requires an appetite for risk. But in Europe there is a strong risk-adverse mentality with a strong suspicion of innovation. The reason is they don’t feel qualified to really gauge a technology’s potential, so they are always looking for some external validation. By the time they realize how good it is, the investment opportunity has already been taken up by a US investor.

Schools of stagnation

One striking European shortcoming is the deficiency of its universities. Neither of the two rankings of the best research universities in the world, the Times Higher Education Supplement or the Shanghai List, ranks any continental E.U. university among the top 25. American universities dominate. Without a Stanford, a country cannot get a Silicon Valley.

The state dominates and stifles European universities. Professorial salaries in Europe are usually capped, incentivizing the best professors to move to the US. The state tends to spread its resources evenly rather than giving more to the best and brightest researchers. Politicians dominate university boards, imposing political objectives such as regional policy, mass education and egalitarianism but preventing the formation of a critical mass of elite research. Worse, the very idea of elite education is usually taboo.

Red tape continent

If you are in Boston, you can sell in Chicago, Miami, Salt Lake city, or even in Toronto. But if you start a company in Lisbon, the barriers to get to Berlin are incredible. Frist you have the language – there are 24 official languages in Europe, which means you need to prepare your product to be sold in all these languages. You also have 27 constitutions, and the myriad of laws and regulations that are country-specific, which creates a regulatory nightmare for a small company. The single market is often a joke.

 Show Me The Money

If you’re an entrepreneur you’ll need funding. And that’s where a venture capitalist might come in handy. In Europe, the majority of VC firms are in fact private equity companies where the partners are traditionally from the banking sector and have no start-up experience. Also, Europe’s strong reliance on bank financing puts EU companies at an innovation disadvantage since banks cannot, should not and will not fund high risk ventures.

There is some VC funding but , weirdly, 40% of all VC in Europe comes from state coffers — a bad sign, since governments are notoriously risk-averse.

Make It Work

The above all come together to form one of Europe’s biggest weaknesses. The issue isn’t a lack of European innovation. It’s a comparative weakness in marketing and accessing funding. Americans are more inclined to gamble monetarily on new tech ventures, and, frankly, nobody markets like an American can.

Turing may have invented the computer but Gates made it possible to take it home and Jobs made it into a phone. A lot of the time American innovation is not about making something new, it’s making something better and cheaper and faster. And Americans do it better because they have the money, the brains, the guts, and the SCALE of a single massive market.

The shortcomings are many and I don’t think these will change; there are far too many structural issues.

So yes as far as the markets are concerned, Europe is not just un-cool, it’s probably dying as well.