To some extent, the European economy has been left in the dust over the last 15 years, as both China, until the pandemic, and the US have forged ahead, in terms of both economic leadership and economic growth. Since 2009, labor productivity has grown by less than 10% in Europe and the UK, which is less than one third of the productivity growth in the US during this same period. Adding insult to injury, close to 30% of successful European start-ups have relocated headquarters abroad, mostly to the US.
There is an old joke that says, “there is no French word for entrepreneur.” That is obviously wrong, but unfortunately there is an element of truth in the core meaning of this. The pure animal spirits and the risk tolerance of American start-ups are not present in Europe. As the Financial Times said this week, “when you’re drifting sideways in a fog it’s hard to get your bearings….” (FT 12/1/24)
Further, the European economy is now facing a triple threat. The future of the defense shield that America has been providing is now in doubt. The cheap energy that had been coming from Russia is in jeopardy, given the Ukraine war. Third, the insatiable demand from Chinese consumers has waned with the weakness of the Chinese economy.
How did Europe lose its way and fall so far behind? What are European authorities doing about it? Mario Draghi, the former head of the European Central Bank, in a comprehensive report to the European Commission about the lack of growth, has attributed it to over-regulation as well as insufficient and misdirected research and development. Most of the spending on research in Europe has focused on traditional industries like healthcare technology and automotive technology, some of which has been quite successful. But the productivity improvements in the US that have been derived from R&D spending on information technology, robotics and AI have had more impact. As Draghi has noted “…there is no EU company with a market capitalization over €100 billion that has been set up from scratch in the last 50 years, while all 6 US companies with a valuation over $1 trillion have been created in this period”.
Draghi has called for a new industrial strategy to restore Europe’s competitive strength “in a world that has become more hostile and complex.” The first of December 2024 was the start of the second term for the President of the European Commission Ursula von der Leyen. She has vowed to follow the approach prescribed by the Draghi report. Is this enough? Can Europe be saved by top-down industrial policies and strategies or are more fundamental cultural changes and educational reforms needed to produce the productivity improvements so necessary for greater economic growth?
Many investment professionals expect European stocks to outperform US stocks over the next five to ten years. Others worry that this is a crisis in confidence that is more existential in nature. Will the Eurozone survive?
Baldwin investment professionals believe that, despite all these obstacles, there are many European companies that are or can be industry leaders, and that a European Commission aware of these problems can provide a tailwind rather than a headwind going forward. Further, we are certain that the prudent selection of individual European companies or an active, astutely managed mutual fund or ETF can provide robust returns over the next decade. However, for Europe to catch up with the US in both productivity advances and economic growth might take a generation.
SOURCES
Barrons, 12/1/24
Financial Times, America’s soaraway economy, by Valentina Romei, William Crofton and Colby Smith 12/3/24
EXECUTIVE SUMMARY, Draghi Report on European Competitiveness
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Richard K. May, Managing Director (RKM), Business Development
Richard founded his financial advisory firm in 1980, which was one of the early fee-only advisors in the industry. He received his B.A. from Princeton University and his M.B.A. from the University of Michigan.
In 2007, Richard founded the West Chester LLC, a private equity company that promoted and funded business start-ups and public projects in the Borough of West Chester. In 2011, he co-founded the Uptown! Entertainment Alliance and the Uptown! Bravo Theatre, LLC. Together they purchased and rehabilitated the National Guard Armory, and then opened the Uptown! Knauer Performing Arts Center in 2016. Richard also serves on the board of Chester County OIC and is currently working on starting a live performance venue in Kennett Square, PA for 2025.