Europe: Asleep at the wheel

Europe has been missing the economic plot for quite some time now. It has been eaten away by America at one end since World War II, and it's getting eaten by China at the other end. It's been eating itself everywhere else with a focus on regulation and standardisation while up to 60% of GDP funds government, instead of innovation and commercialisation.

This is now starting to show up in one area where Europe is deficient (defence) because Russia is on the attack. However, defence is only one symptom of the problem, and across the board, Europe doesn’t seem to have big enough plans or strategies to change. I'm a European; in this article, I'm going to try to break down a number of issues I'd like to see resolved along with some ideas for how Europe can thrive in a multi-polar world alongside the US and China.

History: Post-war order, and US dependency

Since World War II (and before that, World War I) Europe was in a relatively cosy place. We've had our own domestic manufacturing industries, especially building high quality and high margin products in Germany, fuelled by cheap energy from Russia. The US has given us military protection as part of NATO, we've had London as a strong financial centre (with a great deal of money laundering) in between the Far East and the US, and much like Uncle Sam, we've been able to buy cheap products manufactured in China to improve our quality of living.

We haven't innovated much in technology, especially software, nor in financial services or other areas. I'll go so far as to say in these areas, we've been almost entirely dependent on America. In the UK, around 25% of all GDP goes to US companies according to The Guardian; 38% of turnover of non-financial businesses go through foreign-owned companies.

Our computers use American processors. We use mobile phones running software from US companies (Apple or Google Android). We connect to services running in American Clouds from Amazon, Microsoft and Google, using American software from Oracle, Microsoft, Adobe or similar. Much open source that we use comes from American companies. We browse social media and get our news on American networks such as X, Instagram, Facebook or Chinese TikTok. We search the web using American Google, and go shopping primarily on American Amazon, eBay, Etsy, Shopify or Wayfair, with a bit of Chinese Temu, Shein or Ali thrown in. We book travel on American Expedia and travel on American Uber. We drink coffee at American Starbucks and eat their health-destroying fast food. We consume most of our media on American Netflix, Amazon prime or from Hollywood studios. Amazon even owns James Bond now.

Is it any wonder that Americans can easily influence European elections and promote fascists to tear us apart? Wake up!

Furthermore, we pay for our purchases with American Visa, Mastercard or American Express. Most international trade is settled in US Dollars. We settle small payments with American Paypal and Venmo. We use American McKinsey, BGC, Bain and others for our business consulting. The list goes on and on.

To say that Europe is also dependent upon the US for defence is now stating the obvious, but the other areas highlighted above are perhaps less obvious. America has not been Europe's economic friend for a very long time and its corporations and technology have become absolutely critical to the daily lives of our citizens.

The rise of China

China, compared to Europe, has been far better managed and funded to encourage innovation and compete internationally with the US and others. Through investment and luring talent, Chinese universities are starting to dominate many established Western institutions in the US and Europe in advanced high quality research, according to Nature. China has acquired a number of key European technologies and has moved up the manufacturing value chain, from making cheap durable goods to high value, innovative manufacturing. China now creates the best robot vacuum cleaners in the world (sorry Dyson and Miele), the best drones (DJI), the best electric vehicle batteries and power trains (BYD, CATL etc), among the best industrial robots (KUKA, acquired from Germany), the best solar panels, the most advanced and prolific high-speed trains and railways, construction equipment, arguably the best telecommunications and 5G equipment (Huawei, ZTE), great consumer phones and electronics (Anker, Xiaomi, Oppo, Vivo), appliances and TVs (Midea, Haier, HiSense, Gree, TCL), scooters, the list yet again goes on and on.

Electronic payments in China feel more advanced than anywhere else in the world and are more efficient for consumers and merchants thanks to lower commissions than the American firms that take a slice of so many European transactions.

China are now making aircraft, have great mass-market electric cars that challenge the Europeans and Americans everywhere except the high end (far nicer to sit in than Tesla or other American vehicles) and in the next few years they will be making competitive jet engines and lithography machines. Unitree is as advanced as the US in humanoid robots; trip.com is as good as Expedia; and firms such as DeepSeek, Alibaba and others are head-to-head with the US in artificial intelligence. China's drive to actively exclude the US from their domestic markets forced them to build domestic equivalents of so much key technology that they avoided American dominance in most sectors that Europe succumbed to.

The playing field isn't level

Europe has trundled along for the last few decades I've been alive with all sorts of odd assumptions about the world that don't hold up to greater scrutiny. Europe believes that there's such a thing as "fair competition" across the EU and internationally. They believe Europe should be protected against unfair subsidies by governments, market access should be equal, and regulations should be standardised. These "level playing field" rules were brought to bare most recently against Chinese EVs, which they claim received unfair state subsidies, making competition unfair for EU automakers. Interestingly, German manufacturers (which owns the high end) didn't agree with the tariffs, but still, given the list above, the madness of this view is obvious. Here are some examples going back over time.

Some example US government-funded initiatives

Semiconductors and computers: From the transistor being developed at Bell Labs, through NASA and the DOD and funding by DARPA (the US Department of Defence Advanced Research Projects Agency), the US developed computers and operating systems. DARPA funded time-sharing systems and file-sharing, (Project MAC, 1963), operating systems with user mode and paging (Project Genie, 1964), the mouse, hypertext and GUI (ARC), Computer Assisted Design tools and methodologies for semiconductors (VLSI, 1978), for example. BSD UNIX was funded by DARPA, and UNIX at AT&T was created by a government monopoly revenue. Wind the clock forward and we have the CHIPS act of 2022 spending $52bn on semiconductor manufacturing, R&D and workforce.

The internet: The ARPANET, TCP/IP and packet switching were publicly funded by DARPA. The researchers at Stanford, MIT and UCLA were funded by government grants for their salaries and equipment. The first widely used browser was NCSA Mosaic, at the National Center for Supercomputing Applications at the University of Illinois, funded by the National Science Foundation (NSF). DNS, E-mail protocols (SMTP and POP) were also government funded. Likewise, Berkeley sockets, Usenet, FTP, Telnet, all that stuff. This technology led to the commercialisation and growth of the internet and the web in the 1990s and was almost entirely government funded.

Venture capital: The SBIC programme - the small business investment act of 1958 - essentially created the venture capital industry as we know it, especially in technology. The way it worked is that an SBIC raised some private capital and in return the government loaned up to 2x the private capital, via low interest long term debt. Kleiner Perkins, Sequoia Capital, Venrock, Greylock, NEA, all received or managed SBIC-backed capital in the early years. Tens of billions of dollars of leveraged investment came from SBIC-backed firms that launched the likes of Apple, Intel, FedEx, Sun Microsystems, AOL in the formative years, that then compounded into the venture capital industry we know today.

Although state-owned companies (except for some monopolies) didn't actually commercialise and scale the technologies above, essentially research budgets and huge contracts from the government assisted commercialisation by venture-backed firms who themselves, in early days, were assisted by government loans and leverage through SBIC.

Tesla EVs: Tesla was a company funded massively by indirect US subsidies in the US such as EV tax credits, factory incentives and tax breaks, loans. The US government actively forced other car manufacturers to buy EV tax credits from Tesla to meet emissions rules, to date banking over $11bn dollars from such credits. That's in addition to government loans to build their Fremont factory, other local tax credits and incentives, and $1.3bn of tax incentives to build their factory in Nevada. Given the company went through $247m of private funding rounds, it's clear that the government put far more money into Tesla through loans and rebates than the private investors did.

Key European government-funded initiatives

In the era where the US was funding the internet, GPS, Semiconductors, Graphical User Interfaces, Cloud Computing, Autonomous Vehicles and mRNA Vaccines that spawned entire new industries, Europe created some new businesses such as Airbus (aircraft) and high speed railways, and funded CERN and renewable energy technology. ASML was backed by EU-supported R&D, the ARM processor partially by UK government then listed in the US, but I'm struggling to find many other really true recent commercial success stories out of Europe; ventures such as Volkswagen (the people's car, started by the Nazi government), Renault, Siemens, Thales, Airbus, BAE, Sanofi were all from the previous century.

70% of Europe's largest firms were created before World War II, and most were from the last century. Contrast that with only 30% in the US, and the US firms are worth 6x as much. Clearly Europe's industrial policy is broken.

While the US was innovating, Europe put substantial effort into standardisation and regulation, for example GSM phones (cellular technology was developed and commercialised by the US, but standardised by Europe for the world) and the GDPR framework. Ironically, Ericsson and Nokia had the early lead in GSM phone technology, which was standardised in Europe, but they were both companies founded in the previous century (1870s) who rapidly had their market shares eaten by the American innovation machine, and subsequently the Chinese one.

No wonder Europe ended up being just a large consumer of American innovation, and a more successful regulator than innovator.

Case study: The World Wide Web

The World Wide Web is a particularly interesting example, given the highlighting of the browser and the Internet above. Tim Berners-Lee built the first WorldWideWeb browser at CERN in 1990, along with the HTTP protocol which we see at the top of every web browser. However, CERN lacked the skills and funding to develop a user friendly application, since it was a physics research lab and the app was built to share physics documents. So instead, a supercomputer research lab in the US (NCSA) took parts of the code and made Mosaic; which was then funded by SBIC-created VC firm Kleiner Perkins, which then spawned a whole ecosystem of internet companies funded by other venture firms, and the rest is history.

Europe had no government incentives or assistance to commercialise this key technology it had invented, nor a venture capital industry to fund it or the derivative firms and businesses created from it – from online retail to SaaS to cloud computing – and even Tim Berners-Lee himself ended up moving to the US to run the W3C consortium afterwards. Unlike China, Europe also chose to be dependent upon the US for almost all the applications, clouds and associated technology that resulted.

China was smarter and required the growth of web applications and the internet within its borders, explicitly excluding US technology companies to make sure there was no foreign dependency as well as to make sure the narrative aligns with national intent (as we now see happening with X, Truth and the biased news outlets). The outcome is that China has alternatives to almost all US software tech, from applications and payments to social media and cloud infrastructure. Some of the Chinese applications are even more capable than the US equivalents.

The whole point

Innovation in almost all cases requires government policy and involvement, whether it's to seed the R&D that creates new industries and technologies or assist the industries directly or indirectly to commercialise it. Governments should also be aware of the national security implications of being technologically deficient. Government assistance to a country to seed innovation, encourage entrepreneurship, give grants, loans, subsidies or incentives to build successful industry – directly or indirectly – is what's needed to help countries develop world-class products and build and ship them at scale as well as to minimise foreign dependencies for critical infrastructure and applications.

Reforming Europe

Here are a handful of suggestions as to how Europe can start to become self-sufficient, more cohesive and more relevant.

Unite, don't divide

We can start uniting by having a second official language which must, of course, be English simply because it's the most common language in the business world and already taught quite widely. A common language (Mandarin Chinese) helped unite the Chinese people as a common nation. It also simplifies business, making it far easier for firms to do business in other countries by avoiding time translating, and allows people to understand each other as neighbours rather than feeling different.

This will help us avoid the forces that divide us; some have been trying to tear Europeans apart, starting with Brexit, and progressing through the rise of the Far Right in countries such as France, Germany, Italy, Hungary and others. If we stand alone, and turn against each other, not only are we defenceless in the face of Russia, we are unable to unite economically to compete with the US and China.

Collectively defend

If we have common values to defend, such as democracy, social services, freedom of speech, the rule of law, trade and whatnot – and common enemies from which to defend them, then we should have a common defence force. It makes no sense for the UK to be using one standard for nuclear defence (serviced by the US) but France, 21 miles away, uses a different standard, procured differently, managed differently and deployed in isolation.

For any military to be effective, the chain of command must be clear, coordinated and straightforward. When there are 27 different armed forces, defending against a common enemy (e.g. Russia) this doesn't happen. Furthermore, countries further away in the EU, such as Spain or Portugal, might think they don't really need to spend money to defend themselves against a threat as far away as Russia, causing individual countries' interests to get in the way of the greater good. A recent example of this was the desire of a country to tie fishing rights to a defence pact. If we realise our fate is intertwined, such spend becomes far easier to justify.

Lower taxes, de-regulate, encourage immigration

Lower taxes and deregulation make a territory more attractive to set up and build businesses. This recipe has been proven to work well in China, Dubai, Singapore and other areas to attract foreign direct investment and capital. Removing red tape across business areas such as startup formation, cross-border digital services, R&D licensing, investment, IPO processes and uniform, balanced labour laws would go a long way to making Europe more attractive to entrepreneurs. Certain areas can be designated as special economic zones for tech, biotech or other forms of industry, with lower tax rates and from where adoption can be fast-tracked across the continent.

Europe can be an attractive immigration target for top-tier talent in the US and China. By increasing research spending and designating areas that are attractive to entrepreneurs to start businesses, we can take the best talent from both worlds. The Chinese would love a place to raise their kids that values freedom of speech, free thinking and safety, away from their oppressive government, and Americans would love a place that values democracy, the streets are safe without guns, people aren't arrested and deported illegally, and universal healthcare and public transportation function as expected.

Europe could also consider legalising low-cost migrant labour to help build out manufacturing as well. If executed properly, in a manner that allows legal work visas without human rights abuses, and special economic zones for businesses that can accommodate such workers, Europe can compete in manufacturing with China and other South-East Asian countries.

Invest in sovereign industries

Many of the industries cited earlier in this article – payments, technology, business applications, consumer applications, online shopping, cloud computing, AI, microprocessors and semiconductors – need to be encouraged to grow successfully within Europe. To continue to innovate, Europe needs a venture capital industry that's functional and not excessively risk-averse; the US has shown us how to build one, and we can do the same.

We have the technical talent, from ARM to ASML on the hardware side, Deepmind to Shazam on the software side, Revolut and other financial companies, and plenty of great software developers. When Europe is an attractive place to build business, and investment has encouraged the growth of sovereign European technology companies, we can start to incentivise procurement from sovereign technology providers rather than foreign ones.

Some closing thoughts

This blog has gone on far longer than I originally intended, but hopefully it demonstrates how Europe has gradually fallen behind, becoming far too dependent upon foreign technology and infrastructure, and needs to change its ways to grow stronger and compete with China and the US to effectively form a united "third pole" in the multi-polar world.