Mr. Draghi’s American dream
by Henry McLoughlin
Every few years or so, European policymakers wake up after a feverish dream, a dream in which European capitalism suddenly resembles the successful characteristics of its American counterpart. Mario Draghi is the latest European leader to run down this rabbit hole in his recent report, imagining a Europe with everything that we like - low inequality, long holidays, free education and healthcare - and with what we seem to be missing: high growth driven by the animal instincts of the market.
It may come as a surprise to Mr. Draghi that there are a myriad of cultural, economic and historical reasons why European economies can never resemble their American peer. To give Mr. Draghi some credit, he does identify a lack of investment in productivity tools and the limitations of the European single market as major obstacles to greater growth. But when it comes to the state of deep technology innovation in Europe, he’s off the mark on the diagnosis - and more importantly on the solution.
As a venture investor focused on climate technologies on both sides of the Atlantic, the picture I see is actually quite different. It’s the United States that is leaning more heavily toward a European model with a whole slate of subsidies and tax credits, ranging across a wide range of sectors. The U.S. now gives preference to clean energy and labor union-led industries in most of its federal procurement and tax policy. This amounts to trillions of dollars over the life of the Inflation Reduction Act and the CHIPS Act, well into the 2030s. In this regard, Europe is indeed behind the US but more importantly behind its own stated principles.
The EU is still operating with a 1990s mindset: a world with a thriving global market economy, efficient supply chains (conveniently unperturbed by geopolitical crises) and with limited national barriers to trade. This world ended with the COVID 19 pandemic, the onset of the war in Ukraine and renewed rivalry between the U.S. and China.
The EU loves the free market and polices excessive concentration - therefore effectively preventing the rise of any dominant EU companies (another issue Mr Draghi identifies correctly). That needs to change. 21st century capitalism is very much a “winner takes all” game, and too few European companies play to win.
So Europe doesn’t so much need to resemble America, as it needs to resemble itself. We need state intervention with generous subsidies, incentives leading to fast decarbonization and growth. This should be fueled by borrowing, freely and liberally as interest rates go down. The EU market must be fully integrated, why can’t a Spanish company’s factory in France contract a Purchasing Power Agreement with a Polish wind farm through a Danish broker, while using a Dutch bank? An American business in New York would think nothing of contracting with a solar farm in another state, using lawyers, bankers and insurance companies from Florida to California. The same needs to be true in Europe.
As a result of its integrated market, the U.S. is able to align upward productivity, wages and geographic distribution of wealth. The fact that there are still significant arbitrage opportunities within Europe on wages reveals the shallowness of the single market. A proper single market would see Portuguese solar installers or Greek energy analysts make as much as their Dutch or Danish counterparts. That is simply not true today, with wages in different European countries sometimes differing by multiples - not by single or even double-digit percentage points.
Europe needs a single market for everything, but even more urgently for climate technologies. Energy transmission across the continent is actually well ahead of the U.S. (see Figure 1), so are electrified railway connections (see Figure 2). Doubling down on these areas of success and adding to them greater integration of the R&D ecosystem, battery and EV supply chains -- all this can happen fast and create trillion-dollar European champions.
Figure 1. European electric transmission lines. Source: Electricity Maps
2024 should be a year of celebration for the European economy. Call it the year Airbus won. Who would have thought it possible 50 years, or even 10 years ago, that a European company would come to dominate the aviation market. And ASML has achieved an even greater dominant position in the critical market of chip machine-tool manufacturing. We need to urgently build around these successes. America has the PayPal and Tesla "mafias", former employees of these revolutionary companies that left to pursue parallel technologies, building many of them into multibillion dollar businesses. Could Europe take the lead on electric and hydrogen aviation or in the production of Sustainable Aviation Fuel, building on the success of Airbus? And could Europe champion chip design and manufacturing, leveraging the incredible know-how in a 50-mile radius around the Dutch town of Eindhoven - where ASML is based - or the French town of Grenoble - where many of the world’s power electronic chips for EVs are manufactured?
As a starting point, let’s vastly increase the EU’s Energy Innovation Council (EIC) program which gives 2.5M euro grants to EU innovative companies. Currently the success rate for that program is only 3%. Let’s bring that rate to 30% or more. And let’s make it a 5M Euro grant. Surely every third idea brought forward by talented engineers and scientists deserves a few million euro, it might just lead to the next climate or technology breakthrough. And if grants are hard to finance, make it equity. A few percentage points of equity in the next European Tesla might just pay back the cost of the entire EIC program, several times over.
Europe needs to dream bigger and build on its incredibly talented base of scientists and innovators who are tackling complex problems at the intersection of technology and climate. The US is deploying hundreds of billions of dollars into manufacturing, hoping to compete with China. This is a very costly endeavor and the jury is still out on whether American industry can really compete with hyper-efficient Asian supply chains. For Europe, a better dime for the buck (better 10 cents for the euro doesn’t quite have the same ring to it!) would be to deploy equivalent amounts of money to deep technology and innovation, with some later stage funding for project finance. That way the foundations of the global champions of the 2030s and 2040s can be laid today.
To do this, think big, and add a 0 (or two!). A European Green innovation fund - run by technologists, not bureaucrats - of 100 billion Euro, or 1 trillion (dare I say 10 trillion? After all, that’s just the combined market cap of a few American companies), funded by a 50 or 100-year EU bond, would achieve many of our goals of growth, decarbonization and more. All it takes is a sense of possibility, and that, after all, might be the one thing Europe will need to learn from America.
Figure 2. European High Speed Rail Network. Source: EY