American Finance Has Left Europe in the Dust. The Tables Aren't Turning(wsj.com)
wsj.com
American Finance Has Left Europe in the Dust. The Tables Aren't Turning
https://www.wsj.com/finance/investing/american-finance-has-left-europe-in-the-dust-the-tables-arent-turning-8c5fe07c
28 comments
If the "deep tech industry in Europe" refers to bloated, bureaucratic legacy enterprise software like SAP, European tech is doomed.
They only continue to exist because of cronyism, forced sales to large organizations through personal connections; and expertise at navigating the stifling local bureaucracies of their countries.
Those places aren't good at solving narrow problems. They are at best mediocre at addressing the problems of 40 years ago, at a price point far higher than smaller and more innovative companies could do so. They innovate approximately nothing in terms of product design or value added.
Nokia is another cautionary tale of what goes wrong with that model.
They only continue to exist because of cronyism, forced sales to large organizations through personal connections; and expertise at navigating the stifling local bureaucracies of their countries.
Those places aren't good at solving narrow problems. They are at best mediocre at addressing the problems of 40 years ago, at a price point far higher than smaller and more innovative companies could do so. They innovate approximately nothing in terms of product design or value added.
Nokia is another cautionary tale of what goes wrong with that model.
Just a hunch, but you and GP are probably partly talking past each other: “tech” for some essentially means software/SaaS/cloud/mobile, but for others, it includes a lot more, like all sorts of physical-world technology engineering.
I agree with you but there's a reason Nokia died and SAP and Accenture live on despite both not doing innovation well.
Nokia activated in the cut-throat consumer space and had insane competition. SAP avoids both these traps and is in no threat of going away anythime soon like Nokia did.
Nokia activated in the cut-throat consumer space and had insane competition. SAP avoids both these traps and is in no threat of going away anythime soon like Nokia did.
>the question how much this contributes to the building of successful and sustainable companies is still unanswered.
Is it unanswered though? Out of TOP 100 companies by market cap[1], 80% of those are from the US, with the wealthiest being tech. EU only has few companies there ranging from oil, luxury goods, cosmetics, drugs, with only Siemens, SAP, Accenture(?!) and ASML being the only major EU tech companies a large and wealthy continent could muster, with SAP and Accenture not being known for much innovation.
The US's 7 largest tech companies alone, Google, Apple, Microsoft, Tesla, Nvidia, Amazon, Meta, are worth more than Europe's entire tech sector combined including UK, Switzerland and Norway. It's not even a competition. It's like Muhammad Ali versus your kindergarten bully.
But hey, at least we get paid sick leave and free healthcare.
[1] https://companiesmarketcap.com/
Is it unanswered though? Out of TOP 100 companies by market cap[1], 80% of those are from the US, with the wealthiest being tech. EU only has few companies there ranging from oil, luxury goods, cosmetics, drugs, with only Siemens, SAP, Accenture(?!) and ASML being the only major EU tech companies a large and wealthy continent could muster, with SAP and Accenture not being known for much innovation.
The US's 7 largest tech companies alone, Google, Apple, Microsoft, Tesla, Nvidia, Amazon, Meta, are worth more than Europe's entire tech sector combined including UK, Switzerland and Norway. It's not even a competition. It's like Muhammad Ali versus your kindergarten bully.
But hey, at least we get paid sick leave and free healthcare.
[1] https://companiesmarketcap.com/
The word you’re looking for in narrow vs broad is scale.
The more heavily regulated and concentrated European capital markets and more challenging regulatory environments tend to make broad risks less attractive, leading directly to more entrepreneurs betting on readily available opportunities. This is simple incentive: the higher the risk the more you need a sure bet to take the risk or help just as importantly convince those with venture capital take the risk with you.
This risk management choke tends to encourage more specialized or “narrow focuses” as you have identified.
So, you see risk directly shaping the types of companies that are built, and the nature of the businesses that get created tends to be different.
Unfortunately, narrow, more certain companies tend to work better in specialized markets, limiting their scale, so while you end up with many leading companies you also tend to miss out on broad transformational events and ground floor opportunities.
This is my own theory and learning, so very open to criticism.
The American system tends to be messy, wasteful and speculative with a great deal of highs and lows and a lot of failures. The high lubrication of liberal employment laws, liberal bankruptcy policies, and a culture of small angel investors in many cities encourages experimentation. The downsides are obvious, but the huge amount of experimentation is what drives the economy, as there also exists a massive and ready acquisition pool of large companies and private equity ready to exit those founders.
That generally creates a virtuous cycle that is much larger than its equivalents in Europe, furthering the advantage of scale (just look at ycombinator: blank checks and plug-and-play support for good ideas is almost taken for granted in the US). The cost is a huge, wasteful and messy system that tends to deprioritize labor and financial stability for its workers on the whole for this system, but that’s one of the benefits.
Of course all of this is later stages, as the sources of funding for most startups in the world in the earliest stages are in fact banks and personal savings:
https://www.ondeck.com/resources/startups-really-get-money-s...
So I really think a lot of the effect is in the amplification of early stage experimentation that gets traction not necessarily in the support of early stage experiments prior to investment worthiness. This whole question deserves and even deeper comparison.
I do not mean to advocate for deregulation, just make an observation of what is working (and what is not).
The more heavily regulated and concentrated European capital markets and more challenging regulatory environments tend to make broad risks less attractive, leading directly to more entrepreneurs betting on readily available opportunities. This is simple incentive: the higher the risk the more you need a sure bet to take the risk or help just as importantly convince those with venture capital take the risk with you.
This risk management choke tends to encourage more specialized or “narrow focuses” as you have identified.
So, you see risk directly shaping the types of companies that are built, and the nature of the businesses that get created tends to be different.
Unfortunately, narrow, more certain companies tend to work better in specialized markets, limiting their scale, so while you end up with many leading companies you also tend to miss out on broad transformational events and ground floor opportunities.
This is my own theory and learning, so very open to criticism.
The American system tends to be messy, wasteful and speculative with a great deal of highs and lows and a lot of failures. The high lubrication of liberal employment laws, liberal bankruptcy policies, and a culture of small angel investors in many cities encourages experimentation. The downsides are obvious, but the huge amount of experimentation is what drives the economy, as there also exists a massive and ready acquisition pool of large companies and private equity ready to exit those founders.
That generally creates a virtuous cycle that is much larger than its equivalents in Europe, furthering the advantage of scale (just look at ycombinator: blank checks and plug-and-play support for good ideas is almost taken for granted in the US). The cost is a huge, wasteful and messy system that tends to deprioritize labor and financial stability for its workers on the whole for this system, but that’s one of the benefits.
Of course all of this is later stages, as the sources of funding for most startups in the world in the earliest stages are in fact banks and personal savings:
https://www.ondeck.com/resources/startups-really-get-money-s...
So I really think a lot of the effect is in the amplification of early stage experimentation that gets traction not necessarily in the support of early stage experiments prior to investment worthiness. This whole question deserves and even deeper comparison.
I do not mean to advocate for deregulation, just make an observation of what is working (and what is not).
> the very healthy deep tech industry in Europe.
Is this a joke...?
Is this a joke...?
> This is visible in the very healthy deep tech industry in Europe.
How can it be deep if new ventures find it difficult to secure funding? If you can't continually grow new companies, you can't develop much depth.
> whereas American companies seem to be much better at creating consumer facing technology.
America's B2B tech sector is just as dominant.
Europe certainly has the population and wealth to be a major tech player, but they've underperformed.
How can it be deep if new ventures find it difficult to secure funding? If you can't continually grow new companies, you can't develop much depth.
> whereas American companies seem to be much better at creating consumer facing technology.
America's B2B tech sector is just as dominant.
Europe certainly has the population and wealth to be a major tech player, but they've underperformed.
I dare say this is an EU feature, not an EU bug. The financialization of everything under the sun is a blight on the landscape.
That's all well and good until your economy stagnates, GDP suffers, and all the vaunted social welfare programs are no longer affordable -- never mind covering the staggering actual costs of the EU's own defense against Russia, instead of offloading that cost to the US taxpayer via NATO.
Worry not, there will always be american companies for EU to tax via "fines"
As long as the economy grows as much as its population, and/or QoL keeps on improving, then I fail to see an issue.
Maybe not everything has to grow like a tumor.
Maybe not everything has to grow like a tumor.
That's the point. The economic growth rate that EU residents demand is NOT supported by its current economic structure and degree of financialization -- hence mass social unrest, which is getting worse every year. The current system cannot continue, one way or another.
Sure, the EU could turn into Cuba or North Korea and avoid financialization... but most people will not accept that sort of stagnation in their material conditions. They want a new iPhone, new clothes, new washer, new car, new coffeemaker, holiday in Spain, etc. All that costs money, and ever more money.
You also did not address the elephant in the room at all -- most of the costs of keeping the EU from turning into "Russia's westernmost oblast" fall on the taxpayers of the United States via NATO. Avoiding that outcome without what is essentially a large and ongoing annual donation from the financialized United States is not possible, at least without undergoing a similar degree of financialization in the EU.
It seems like you wish to enjoy the economic benefits of financialization (new iPhones, not living like Cuba, and also not being conquered by Russia next week) while at the same time morally disparaging those who make those benefits possible.
Sure, the EU could turn into Cuba or North Korea and avoid financialization... but most people will not accept that sort of stagnation in their material conditions. They want a new iPhone, new clothes, new washer, new car, new coffeemaker, holiday in Spain, etc. All that costs money, and ever more money.
You also did not address the elephant in the room at all -- most of the costs of keeping the EU from turning into "Russia's westernmost oblast" fall on the taxpayers of the United States via NATO. Avoiding that outcome without what is essentially a large and ongoing annual donation from the financialized United States is not possible, at least without undergoing a similar degree of financialization in the EU.
It seems like you wish to enjoy the economic benefits of financialization (new iPhones, not living like Cuba, and also not being conquered by Russia next week) while at the same time morally disparaging those who make those benefits possible.
Ngl I would root for a posts capitalistic Europe. Also there are reasons for Cuba's current economic stagnation; the US embargo :p
US banks have no CRS reporting. I would count that valuable, were I European, although it's only a partial explanation.
US banks have lot of things missing compared to European ones, like going personally to the US bank office so you can do SEPA payment.
But if all businesses really need is reasonable access to credit then isn't all this financial innovation merely amounting to highly developed parasitism that saps the strength of firms, thus the economy and society? Does finance genuinely help business or society in any of this?
It depends.
Finance genuinely helps, there's no doubt about that. But I think there are diminishing returns. A deeper market with a greater variety of lenders always helps, but it's not clear to me that a very large/varied market is much better than a large/varied market.
Anecdata: the founders/startups where I live had a lot more bad stories to tell twenty years ago than in the recent past. Just from hearsay in one sector of one city, Silicon Valley has a better financing environment than here today, but even if the graph in the WSJ article shows a bigger gap, the stories I've heard tell about a smaller gap. Maybe that sector has grown to pass a usability threshold here, and the US has grown more without passing a threshold. I wouldn't know and all I have is hearsay, but the hearsay is enough to make the doubt what the WSJ graph really shows.
I realise that there are fields where the US has no peer. If you want to finance a takeover as big as Twitter, then you really need big debt markets, and the US has by far the biggest. I feel, intuitively, that that may not be well connected to the greater economy or the health of median companies, though.
Finance genuinely helps, there's no doubt about that. But I think there are diminishing returns. A deeper market with a greater variety of lenders always helps, but it's not clear to me that a very large/varied market is much better than a large/varied market.
Anecdata: the founders/startups where I live had a lot more bad stories to tell twenty years ago than in the recent past. Just from hearsay in one sector of one city, Silicon Valley has a better financing environment than here today, but even if the graph in the WSJ article shows a bigger gap, the stories I've heard tell about a smaller gap. Maybe that sector has grown to pass a usability threshold here, and the US has grown more without passing a threshold. I wouldn't know and all I have is hearsay, but the hearsay is enough to make the doubt what the WSJ graph really shows.
I realise that there are fields where the US has no peer. If you want to finance a takeover as big as Twitter, then you really need big debt markets, and the US has by far the biggest. I feel, intuitively, that that may not be well connected to the greater economy or the health of median companies, though.
Yes. You can argue that it shouldn’t pay so well, or that there are bad actors, but the financial industry DOES genuinely help society. Like all businesses, they provide services that people want.
The easiest example is insurance (e.g. home or auto insurance). Paying premiums sucks, but losing your house is an unimaginable loss for most people. Finance as a whole is a risk transfer mechanism. You transfer the risk of your car getting totaled to State Farm. You might even own some State Farm stock; probably you own some exposure to the risks of American companies, and they pay you for that risk (in expected stock growth).
The other easy example is mortgages. Ask anyone from Europe or even a third world country how easy it is to get a 30-year ARM or 10-year fixed like is common in the US. Lenders might have caused the financial crisis (no disagreement here) but post-crisis Americans are able to buy homes because the financial industry is ready to evaluate and lend.
The easiest example is insurance (e.g. home or auto insurance). Paying premiums sucks, but losing your house is an unimaginable loss for most people. Finance as a whole is a risk transfer mechanism. You transfer the risk of your car getting totaled to State Farm. You might even own some State Farm stock; probably you own some exposure to the risks of American companies, and they pay you for that risk (in expected stock growth).
The other easy example is mortgages. Ask anyone from Europe or even a third world country how easy it is to get a 30-year ARM or 10-year fixed like is common in the US. Lenders might have caused the financial crisis (no disagreement here) but post-crisis Americans are able to buy homes because the financial industry is ready to evaluate and lend.
You are dodging the issue with this. These financial services you name have been available throughout my nearly 60 year life. In the past they were no where near as profitable and represented a much smaller slice of the economy. In the last 10-20 years there has been huge growth in the financial sector such that it is taking in much more money and represents a much larger portion of the economy. Was there really any genuine growth in service, or is this just a tumor on markets growing as it can? Looks a lot more like that latter.
And there appears to be a considerable amount of damage being done. Socially debt is considered an important obligation such that walking away from a loan is terrible not only for credit but also social standing and status. Yet financial services have grown to the point that they have a great ability to predict ability to pay and to use that to make loans that they know quite well will very likely never be paid back. Exactly what percentage of recent financial growth is essentially fraudulent activity?
And there appears to be a considerable amount of damage being done. Socially debt is considered an important obligation such that walking away from a loan is terrible not only for credit but also social standing and status. Yet financial services have grown to the point that they have a great ability to predict ability to pay and to use that to make loans that they know quite well will very likely never be paid back. Exactly what percentage of recent financial growth is essentially fraudulent activity?
I’m not dodging the issue. You asked if finance played a useful role in society, and I gave concrete examples where it did.
Those services are more profitable because they are more valuable, because they are now better at transferring risk. Sure, you can say that you don’t understand the value that a derivatives product provides, and some people are buying them when they shouldn’t, but that hardly describes the entirety of an industry. Just because you can’t imagine why someone would want borrow money in a complex way doesn’t mean it doesn’t make sense to them.
Let me give you another example where financial innovation has made people’s lives (slightly) better. Many people of my parents generation bought strange investment products with very high management fees from people like Fidelity and Morningstar. Today they’re more likely to buy a low fee index fund like Vanguard. Or a target retirement fund that reduces their risk as they get older.
I argue that the financial products still existed 40 years ago, but they were more obtuse and a worse deal.
Those services are more profitable because they are more valuable, because they are now better at transferring risk. Sure, you can say that you don’t understand the value that a derivatives product provides, and some people are buying them when they shouldn’t, but that hardly describes the entirety of an industry. Just because you can’t imagine why someone would want borrow money in a complex way doesn’t mean it doesn’t make sense to them.
Let me give you another example where financial innovation has made people’s lives (slightly) better. Many people of my parents generation bought strange investment products with very high management fees from people like Fidelity and Morningstar. Today they’re more likely to buy a low fee index fund like Vanguard. Or a target retirement fund that reduces their risk as they get older.
I argue that the financial products still existed 40 years ago, but they were more obtuse and a worse deal.
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I recall the breathless praise of the wizardry of the finance departments in GE and IBM back in the 2000s, and their wunderkind revenue production.
Of course it was a house of cards, but small fry compared to the contemporaneous castle of cards that was the mortgage crisis. GE basically imploded from becoming a finance-first company, IBM kept their toes a bit more grounded.
Cue the next government bailout in about 2-3 years.
Of course it was a house of cards, but small fry compared to the contemporaneous castle of cards that was the mortgage crisis. GE basically imploded from becoming a finance-first company, IBM kept their toes a bit more grounded.
Cue the next government bailout in about 2-3 years.
You're asking a couple different things here and it's not clear how or if they relate to the article posted.
The second question is does finance help business or society. As answered, yes, it definitely does. Your response to that answer was to say the person was dodging your question, but they didn't. They just only answered one, not both.
Your first question was is all this financial innovation merely amounting to highly developed parasitism? This question isn't near as clear. What is "all this financial innovation" you're referring to? To be fair, the article itself isn't super clear on all the factors that make the author think the US is so far outpacing Europe. But there are three things specifically named. First, offering low-fee passive investments like ETFs. Second, less banking system fragmentation because all of the United States speaks a common language and uses a single regulatory system, and obviously the one country in the union controls its own currency. Third, it mentions greater public sector investment. The US government has injected a lot more money into its economy and financial industries than Europeans governments have.
I would not think any of those things qualify as parasitism, so presumably you're referring to unrelated things to bring up a personal hobby horse that has nothing to do with this specific article or discussion. I'm guessing you mean broader financialization of all industry (i.e. automakers are more banks than automakers) and the development of increasingly sophisticated high-risk, high-yield derivatives and securitization of things that used to not be tradeable that has happened since the 1980s. If that's what you mean, it's reasonable to ask if those things are positive, but why here? Does every discussion need to turn into the same discussion?
The second question is does finance help business or society. As answered, yes, it definitely does. Your response to that answer was to say the person was dodging your question, but they didn't. They just only answered one, not both.
Your first question was is all this financial innovation merely amounting to highly developed parasitism? This question isn't near as clear. What is "all this financial innovation" you're referring to? To be fair, the article itself isn't super clear on all the factors that make the author think the US is so far outpacing Europe. But there are three things specifically named. First, offering low-fee passive investments like ETFs. Second, less banking system fragmentation because all of the United States speaks a common language and uses a single regulatory system, and obviously the one country in the union controls its own currency. Third, it mentions greater public sector investment. The US government has injected a lot more money into its economy and financial industries than Europeans governments have.
I would not think any of those things qualify as parasitism, so presumably you're referring to unrelated things to bring up a personal hobby horse that has nothing to do with this specific article or discussion. I'm guessing you mean broader financialization of all industry (i.e. automakers are more banks than automakers) and the development of increasingly sophisticated high-risk, high-yield derivatives and securitization of things that used to not be tradeable that has happened since the 1980s. If that's what you mean, it's reasonable to ask if those things are positive, but why here? Does every discussion need to turn into the same discussion?
Having a stronger financial industry lets companies (both new and established) get funding more easily and more cheaply. That leads to more investment and development in those other industries. American companies are much better financed than European ones.
The fact that European companies can't afford to burn through cash for decades might lead to better resource/talent allocation. This is visible in the very healthy deep tech industry in Europe.
Right now European companies are very good at solving narrow but difficult problems, whereas American companies seem to be much better at creating consumer facing technology.