Why Europe has stagnated

Europe is now much poorer than America. Is it because Europe doesn’t have a big tech giant? Can we blame the bureaucrats in Brussels? What happened to make Germany ban combustion cars? Should we turn Europe into a playground for American and Asian elites? Are the far right going to solve Europe’s energy problems by burning coal to own the libs? Pieter, Sam and Aria discuss why Europe hasn’t grown very much and what we can do to save it.

You can watch on Apple Podcasts, Spotify and YouTube.

Transcript

[00:00:00] Sam Bowman: I’m an ultra optimist. Almost always when people are depressed about something or think something is completely doomed, I tend to think they’re underestimating human being’s capacity to self-correct and for things to get better. But even I, when it comes to Europe, feel pretty glum. There is a sort of last chopper out of Saigon feeling about Europe where all of the talented people I know who are Europeans kind of want to get out or are already leaving, or have already left. And the people who are left kind of envy them and wish they could get out as well. It’s easy to understand why that would be the case. Europe hasn’t really grown in the last 20 years. Europe has very high energy prices now and the continent seems basically unable to defend itself against what is actually a much poorer and much smaller country, Russia.

[00:00:52] So I thought I’d talk with Aria and Pieter about the state of Europe, whether the continent really is doomed. Why it seems to be in such a bad way and whether there is any hope, whether there is any cause for optimism. Pieter, what do you think?

[00:01:07] Pieter Garicano: Well as a European who moved to America a few years ago, I think I might perhaps be one of these examples you’re referring to, Sam.

[00:01:15] I think in general I am perhaps slightly less, pessimistic in the story you’re describing now. I think we might discuss this in our conversation today. There are some tractable things we can do, kind of win-wins and there are models of European countries I think that are performing very well. And so I think perhaps when you learn from each other, there’ll be things we can copy and hopefully, free lunches at the European level, the national level, they might fix these problems we’re gonna discuss. So overall, maybe slightly more optimistic than you are at the moment.

[00:01:42] Sam Bowman: How about you, Aria?

[00:01:43] Aria Schrecker: I think I’m 50/50, I think in the nineties or early two thousands if you were choosing between living in Europe and America, I actually think Europe’s got a slam dunk win over America; almost all of the gap in wealth is about Europeans working shorter hours, and then you’ve got like extra health, extra longevity, less pollution, less crime.

[00:02:04] Basically I think Europe is a better place to live in the 1990s and 2000s. I think now it’s about 50/50. I think lots of Americans would pay a significant chunk of their wealth to have European health outcomes. But if you just continue looking at current trends, which I think is a good way of making predictions, I don’t think I’d wanna stay in Europe in 20 years time.

[00:02:21] Sam Bowman: There’s a simple and very compelling story. What’s the thing that the US has that Europe clearly doesn’t? A massive technology sector. This is something you’ve written a lot about Pieter.

[00:02:35] Pieter Garicano: People compare corporate performance in the US to Europe. They’ll look at, say, stock market returns and compare the German stock market to the American one. If you’d invested a hundred bucks 10 years ago the American one would’ve returned 400% more in profits. or things like corporate R&D. American corporate R&D is twice as high.

[00:03:05] Corporate investment it’s roughly also twice as high. But then, if you remove a very small share of outlier performers, we can call them superstar companies — just like the top seven companies in America, The Magnificent Seven — then a lot of these metrics suddenly change. The gap becomes basically zero.

[00:03:26] So stock market returns goes from like a hundred percent to barely 5%.

[00:03:31] Aria Schrecker: Is the magnificent seven all tech companies?

[00:03:34] Pieter Garicano: Yes.

[00:03:34] Aria Schrecker: Okay.

[00:03:35] Pieter Garicano: Right. And if you compare like corporate R&D, the gap shrinks about two thirds. If you compare investment, it shrinks away two thirds again. And so the idea is basically that all these huge, huge, enormous outsize metrics or gaps in outcomes are driven by very, very, very few companies. There’s more ways of thinking about this, right? So four companies in America; Metamazon, Google and Microsoft spend twice as much on R&D every year as the entire public sector of every European country combined. And you can also see this in, I think, productivity trends where, again, if you remove software and industry close to software, the gap in productivity growth the last 20 years between, the EU and the US is basically zero with the software industry and adjacent industries, then it’s like one percentage point per year. And so one story you could tell what’s happened in Europe is simply that the gap we’ve preserved in productivity, in returns and in investment is just a function of its software industry. And if Europe could have a software industry, then everything else would be fine. I think this is sort of the thing that people often think of as well, right?

[00:04:51] It’s like why Europe doesn’t have a Google. And I think people, notwithstanding Tesla, compare the American manufacturing sector to the European manufacturing sector and then it’s very hard to make the case that companies like BASF or Siemens or Ferrovial are any worse than the American counterparts.

[00:05:08] In fact, they’re better than American counterparts. And so one story you can tell about the US-Europe gap is that it’s just a software story.

[00:05:18] Sam Bowman: I’m not entirely convinced by that, but let’s stick with that for now. So, the way you framed that, kind of sounds as if it’s like America just got really lucky in having NVIDIA and Google and so on, but the companies that are now in the Magnificent Seven were not obviously superstar companies 10 years ago, some of them anyway. Microsoft was, although before five years earlier, Microsoft didn’t seem like it was necessarily the gonna be this kind of world beater.

[00:05:49] NVIDIA definitely didn’t seem like it was gonna be one of the most, if not the most valuable companies in the world. And yet America just repeatedly has been able to create these like ultra valuable companies. And so I wonder if I kind of think that that argument - and I don’t really know that you actually believe this, but I think sometimes I’ve heard that argument as a kind of excuse for Europe, it’s like “Oh Europe- America just got really lucky.

[00:06:19] They ended up with NVIDIA Europe didn’t. So, you know, tough luck.” But really the story there is two things. One, it’s the nature of these markets is that, I think because they’re IP dominated, a lot of those companies are platforms. They tend towards having a couple of very large, if not one very large player at any point in time.

[00:06:43] I don’t think that’s because they’re not competitive, by the way, but I think that’s for other reasons. So one thing is a single company manages to capture lots of the value in that given market. So in GPU Design, for example, in NVIDIA’s case. And the second is America is really good repeatedly at creating those companies. And so if somebody told us that there will be another magnificent seven, but it will be seven different companies in 10 years, you would be very, very, very well advised to bet that those companies will all be American. Maybe some of them will be Chinese, but like it would be a very good bet that none of them will be European.

[00:07:19] So it might be true that these seven companies have driven a lot of this stock market gap. And I do want to come back to that. But it doesn’t tell us very much. It just tells us “Yeah, there happened to be seven companies that have created a lot of this value.”

[00:07:39] Aria Schrecker: Also, if you compare those companies to their European equivalents, they start off by doing very well in one vertical. Google starts off with search, but now Google has so much more business outside of that. The same thing is true with Meta — Facebook originally. The same thing’s true with Amazon.

[00:07:53] Who would’ve thought that bookstore retail would’ve ended up being the biggest Cloud Compute Services. Spotify, on the other hand, didn’t do something like that.

[00:08:01] DeepMind ended up only the AI lab thing and was purchased. Estonia has something like 10 unicorns. None of them became mega Multi-Tech companies. So there’s probably something, I would guess related to tax, R&D and human capital, about not expanding into other verticals.

[00:08:19] Sam Bowman: Well, as Jack Wiseman, a friend of the show has argued to me, in a way these companies are kind of magic, right?

[00:08:29] They’re like the machines for turning capital into returns. It’s not the case usually that you can just put more and more money into a company and it’ll become more and more profitable, more and more lucrative. Something about, maybe not specifically these companies, but there’s something about the way these companies are run.

[00:08:48] That means that it’s like you can get above market returns fairly repeatedly over a really long period of time just by putting more and more capital into these companies. It might be that they’re really well run, it might be that they have some kind of- I mean I’m not convinced by this, but it might be they have some kind of monopolistic position that sort of allows ‘em to do leveraging.

[00:09:08] That’s obviously the European story, which we might come back to in a second. But it’s kind of unprecedented to have companies where you can just put money in and you would be really well advised to keep investing your money, even though they are several trillion dollar companies now. They’re utility monsters but for capital.

[00:09:29] Pieter Garicano: I think there probably is a lot of path dependence involved. It seems, seeing if you were the god king, you probably wouldn’t have all your tech companies in the Bay Area. The Bay Area seems a pretty bad place for a lot of reasons.

[00:09:47] It’s very hard to live there, the housing’s terrible, it’s controlled by interest groups. I mean, you and I have been frequently and there’s like clearly lots of quality of life downsides to being in the Bay Area. And I think many people perhaps if we all can agree more on this, maybe we’d agree to move it to Texas or Florida or whatever.

[00:10:02] Sam Bowman: Although I will say it’s not that bad, right? It’s very bad compared to what it could be, but it’s also got a great climate if you like hiking, which Americans do. All Americans, especially Californians love hiking. They get up at 5:00 AM and they go hiking.

[00:10:19] Aria Schrecker: That’s because they’re supplied with hiking.

[00:10:20] They don’t inherently love hiking.

[00:10:21] Sam Bowman: No, I think they love hiking. I think they actually have a genetic predisposition to liking hiking. Something to do with-

[00:10:28] Aria Schrecker: Surely California is like one of the most diverse places.

[00:10:31] It can’t be like-

[00:10:31] Sam Bowman: Yeah, yeah, yeah. Exactly. California’s the most bountiful place on earth, so it’s not that bad. Well, that’s all I’m saying.

[00:10:38] Pieter Garicano: Let me phrase it this way, you as a company. Even if you could come up with reasons why you didn’t want to be there, you can’t really defect.

[00:10:45] Sam Bowman: Yeah.

[00:10:45] Pieter Garicano: You can’t like say, “No, no, I’m going to be the company that’s based out of-” Let’s say Elon Musk.

[00:10:49] Sam Bowman: You can’t escape economic geography.

[00:10:51] Pieter Garicano: Exactly. And so that’d be one story for where luck would sort of play a role. The other thing is that if we believe this kind of ‘software outliers’ story is true, then it has like pretty important implications for which factors which knobs are going to dial to fix things.

[00:11:08] If you think the software superstar story is true,then the fact that American public universities on average are better than European public universities on average doesn’t really matter very much. Or then,perhaps you might be less, less concerned about energy inputs because the retail tariff for electricity in California is higher than the tariff for electricity in France.

[00:11:30]

[00:11:30] Pieter Garicano: Right? So a lot of the stories that, even if you think the US is very well constructed to encounter these superstars, I think the kinds of things that allow it to do it are not necessarily the kinds of things that many people commonly think about. Maybe they can think about what Europe is doing poorly.

[00:11:46] Sam Bowman: Some of the story you are telling, I think actually lends itself to quite a robust defense of the European Commission. Which, if you’re not familiar, you have the European Union, which is a kind of the super estate kind of thing that’s sort of layered on top of France, Germany, stuff like that.

[00:12:03] The European Commission is the executive body, it’s like the cabinet of, the European Union. And over the last, say 15 years, but especially over the last 10 years, the European Commission has really focused on big tech. It has really focused on regulating big tech and bringing cases against American tech companies. Overwhelmingly, the fines that are levied are levied against American tech companies, if we look at the actual amounts that are fined. I think that’s bad, but if you believe that the problem that Europe has is that it doesn’t have a domestic tech industry and it doesn’t have specifically a kind of big tech …

[00:12:45] It’s not just that you want lots of little startups. You want actual big Googles. Also if you believe, which I do not, that it’s good to protect infant industries, (Afterall, the most popular view right now in America is that it’s good to have protections for your domestic infant industries) then you need to give them a fighting chance against big competitors from overseas. They usually think anbout this in terms of manufacturing with respect to China. But I think if you believe this then you should apply that logic to other areas as well. So, isn’t there a defense of what the European Commission has done in that a) they want to and probably should want to have a domestic big tech industry and b) there is a really big tech industry from the United States that is stopping that from emerging in Europe. So I don’t really believe that, but the measures that the European Union has brought in are straightforwardly just regulating big tech companies.

[00:13:47] So the Digital Markets Act, which is the big blockbuster tech regulation that was introduced a couple of years ago, essentially, specifically targets the five biggest US tech platforms. So it uses, the size of the company and it uses the amount of turnover that the company has, and only five companies are affected by that. And those are off the top of my head, Google, Amazon, Microsoft, Meta and, Apple. And if you think that the problem is that they haven’t got a domestic industry, then maybe that makes sense. Like maybe you do want to curb Google’s ability to put Google Maps results on Google search pages, which is one of the things that’s happened from the Digital Markets Act.

[00:14:34] They believe that this idea that self preferencing is a really great evil. Isn’t that a fair position? Isn’t what they’re doing completely in line with the general belief, that is widely held now, that protecting infant industries from foreign competitors is a good idea?

[00:14:52] Pieter Garicano: So I think you’re basically right that the intent is from our perspective notwithstanding - if you buy the infant industry story, their intent is the right one and the focus, and they use political capital basically single-mindedly to - suddenly the first one they commission, single-minded lead to focus on the software industry is like really impressive.

[00:15:14] I think one story you can tell here specifically is that the weird way the sausage gets made in Brussels has led the outputs to be much worse than you’d expect. Because what happens , is that the EU makes- it can do regulations which are basically laws, and they can do directives. Directives are legally binding orders from the commission, past the commission the council, and then the parliament, which order the member states to create rules to enforce what the directive says. And all the big things you describe are directives. And so if you read things like the AI Act, the opening preamble of the AI Act says the AI Act exists to have a more predictable, more harmonized, more efficient regulatory system.

[00:16:02] So the whole point of the AI Act, is to create an extremely consistent and level playing field across all of Europe to allow like companies to face a much larger market straight away. The problem is that because of directives, the actual enforcement of a given law is left to the member state and the member states are ordered to create their own regulatory bodies.

[00:16:27] So for example, in the case of the AI Act, every single member state is ordered to have a notifying authority and an enforcement authority. Let’s say each member state’s ordered to create additional, the actual enforcement of the act is left to who can check your hire to be the AI regulator.

[00:16:45] These guys, these different regulators, they talk to each other, but they’re not necessarily forced to agree with each other. So you can have cases where, the Irish,the same story is true by the GPR for DMA, DSA. And so you have cases where the Irish regulations happened with GDPR,the Irish Data Protection Authority said to Meta, this is excellent. You can do X or Y. And then the Austrian and German data protection authorities disagreed and then fine Meta billions of euros. And so, this is a case where the law, even if you agree with the intent of the law, the way it’s currently being executed, which is through directives, makes it so that you’re going to always get an extremely high friction and fragmented regulatory system.

[00:17:29] They currently have, I think the count is between these four laws, they’ve created 270 different tech regulators.

[00:17:36] Sam Bowman: Hmm.

[00:17:36] Pieter Garicano: And that of course has really distortionary effects as well for what kind of basically very large fixed cost. And so if you’re a large company, if you’re a Google or a Meta, you have a thousand guys in your Brussels compliance office and they’re really good at this.

[00:17:48] But if you’re a smaller company, then you actually really struggle with figuring out what the 270 different bodies want you to do.

[00:17:55] Aria Schrecker: My prediction here is also that while there are several people who are thinking like the way Sam has been thinking about we need to create this infant industry, or we need to, we need to create like a mega-

[00:18:05] Pieter Garicano: The way Sam is pretending to think.

[00:18:05] Aria Schrecker: Is pretending to think.

[00:18:06] Sam Bowman: I’m going to give a counterargument to my argument in a second-

[00:18:10] Aria Schrecker: Yeah! But I suspect loads and loads of those people, if you read the journalism about big tech, if you talk to Europeans and British people who are involved in this regulation, they don’t think that at all. They actually do think there’s a problem with the size of these companies and a lot of these policies you would expect to hit any European company that was on the brink of becoming one of these big 10 companies, right? Like you would expect it to dry up venture capital investment. You would expect it most of these companies to say, “Oh, the domestic regulator is not very good. Let me go and run away to the US to build this.”

[00:18:43] Pieter Garicano: Very, very briefly. Before you say your counter argument to yourself,I’m not entirely sure I agree because.

[00:18:49] Aria Schrecker: You know more Europeans than I do.

[00:18:50] Pieter Garicano: No, I just think Germans love that Volkswagen is big and if up to them Volks can be way bigger and the French are so chuffed that Airbus is now like the largest aircraft manufacturer in the world.

[00:19:00] I don’t think it’s an aversion to big companies per se.

[00:19:03] Aria Schrecker: Maybe Brits are the only self-effacing people who throttle their own biggest companies.

[00:19:07] Pieter Garicano: Maybe self-effacing guys. But I actually think that if Google was like called Schmoogle and it came from like Bavaria, then we would have like pro Schmoogle subsidies.

[00:19:17]

[00:19:17] Sam Bowman: There is definitely a strand of thought influenced by the Neo-Brandeisian, the kind of Lina Khan, Tim Wu type people in Brussels at least that does think that big is bad. And yes, the German public would love to have, you know, Degoogle, and a trillion Euro search company would be great if it was based in, Berlin or something like that. But, you know, Margaret Vestager or other people like that who are more influenced I think by slightly more sophisticated, although I think wrong, theories of competition and antitrust, do have a sense that it’s bad to have big companies and a really well-functioning market is where you have lots of little companies and you have lots of entry and that’s how you get the kind of churn that you want from competition’s like that.

[00:20:06] An example being the European Commission blocking the merger of Siemens and Alstom, which make trains. And the justification for that merger was that there are gigantic, Chinese companies that have like scale that these two companies cannot have by themselves. And if they can merge, they’ll get massive economies of scale and so on.

[00:20:29] This is called a national champion theory of like why you would want to allow this, and she opposed it on I think like pretty standard ‘It’s bad to have a giant single company making all the trains in Europe.’ I actually think she’s probably right on that one.

[00:20:46] Can I make an argument against myself? So I think in fact, the infant industry’s argument is wrong and, basically not a very good argument. I’m not convinced it’s true in manufacturing, and I’m definitely not convinced it’s true in tech. And I think the timeline in recent history around technology makes this point, I think really, really well, which is; it was a few weeks after the Digital Markets Act came into force that ChatGPT launched right? By a company that didn’t have any prior OpenAI, didn’t have any prior services. It didn’t have any existing user base.

[00:21:20] It wasn’t connected to one of the big tech companies. It had some investments from them, but it wasn’t like part of Amazon or Google or something like that. And yet it was able to become the fastest growing consumer tech product ever. Anthropic another example of now an extremely successful company that came after ChatGPT had reached significant scale, Claude took quite a while to become as mature as ChatGPT was. And obviously Anthropic was a much smaller company having been founded by people who left at OpenAI. Both of them are now really, really, really important players. And again, both of them are American.

[00:21:58] You know,I think that that to me is a really strong argument that the kind of diagnosis that the European Commission and the European Union made of how the tech sector works was really, really broken because they assumed that you would only get kind of incremental change and it would come from the incumbents. And by far the most important technological change of the decade came from two new entrants that had no prior user base. That to me, really upends the kind of infant industry’s argument, at least as it works with tech, because it suggests that you don’t need to have a domestic, you don’t need to have like protection, you don’t need to have a certain amount of scale, if you have a good product. And it also implies that it’s not actually incremental. You know, that the main competitor for Google search is not DuckDuckGo or another search engine. It’s ChatGPT, obviously,and that’s important. It’s also, and again kind of cutting against the narrative I gave earlier.

[00:22:58] I think important to note that with the GDPR — I don’t think there is a plausible argument that the GDPR was done in order to protect European tech companies. The actual effect of the GDPR has been, in the same way as the point you were making about the AI Act, to raise fixed costs massively. They have made it really difficult for small, new entrant companies to do things with data. Incidentally, it makes it really hard to use data for training of AI, so they’ve hurt themselves there as well, by accident. But the GDPR — which most people probably associate with cookies, banners — but those actually predate the GDPR but are now part of it.

[00:23:37] Like the really important part of the GDPR is to say you may not use data that you’ve acquired via, or like for the purpose of A, for purpose B. Yes. So you can’t cross pollinate using data that you’ve acquired,which is totally unheard of really in America. You know, that there’s some state level regulation in California that somewhat approximates it, but by no means as strongly. And that really, really holds back scale because it stops any company that has success in area A cannot use that to build up products in area B, and I think that’s been a massive, massive, inhibition to the development of companies that do the sorts of things that Big Tech does in Europe.

[00:24:20] Pieter Garicano: So, Sam, I think you’ve, you’ve convinced me, that both antitrust and GDPR are like problems and the things worth fixing and they, it seems. You can reason through the kind of micro, the price reasons why it would have a bad effect on, investment in tech and why it would tell people from entering and from trying to build big companies.

[00:24:46] I think if we’re trying to explain the lack of superstars in Europe, it kind of presents with a bit of a timing issue. And the timing issue is because Vestager and the the antitrust school kinda, she enters in 2014 with the second younger commission. And, in the case of GDPR, that is passed I think in 2018.

[00:25:08]

[00:25:08] Aria Schrecker: About then.

[00:25:09] Pieter Garicano: And so the point is that at this point,if you look at 2014, take that as a cutoff, at that point Europe is very far behind. There are no competitors in Europe to google.

[00:25:21] Aria Schrecker: It happens in response to America already having these like superstars.

[00:25:24] Pieter Garicano: That’s exactly right. That’s exactly right. It’s a response to America’s having superstars. And in fact, if you look at when should we actually, look at the divergence? it’s like in the nineties. It’s like 1995 roughly. It’s basically the moment you see software emerge in industry, that’s when Europe starts falling behind.

[00:25:41] And between like 1995 and 2005, there’s three times more capital investment in software in, the US than Europe. Well, it’s in ICTI which is software because also hardware counts as well here. And so if we want to have a first order explanation, we should try to think of something that was already a divergence in policies back in the nineties.

[00:26:02] And I don’t think antitrust or excess EU tech regulation applies there. I don’t know if one thing we get into here is culture, which I think people point to. I don’t have very strong views on whether culture matters. Maybe Aria you do?

[00:26:17] Aria Schrecker: Well, I was gonna throw out two other guesses.

[00:26:20] I suspect, tax rates and the amount that the single market is integrated versus the US market being integrated, I think the kind of investments that create that kind of tech, you basically expect to spend a while doing R&D or at least you expect to be the kind of investor who bets on lots of little things. So you’ve gotta have a lot of capital available and for that hit to go really big.

[00:26:43] I think this is a big part of the reason potentially why Estonian companies have all basically left Estonia, and they’ve gone to either Britain or other parts of Europe with slightly bigger markets or they’ve gone to the US. Which is that you’ve built something, you’ve got your market and if the regulation is slightly different from place to place, you’ve actually gotta have a new team, and scaling is much more expensive. Whereas if you create like a software company in the US, I think you can basically expect to be able to sell your services in every US state.

[00:27:09] So the returns of something that’s IP heavy are probably much greater in the US. And then with simple things like capital gains tax being slightly lower, you would expect the value of investments to be much higher as well. So I think that could probably explain almost all of that difference.

[00:27:24] Pieter Garicano: I think the single market explanation- I’m I think personally somewhat skeptical that it matters as much as people point to it. There’s I think two different ways we’re thinking about this. If we think of the best performing countries globally at R&D or cutting edge tech, they don’t often have a very large domestic market, right?

[00:27:46] Countries like Israel, countries like Singapore, even if you think of very advanced economies in East Asia countries like-

[00:27:54] Aria Schrecker: South Korea, highest number of patents in the world.

[00:27:55] Pieter Garicano: South Korea, Taiwan. these are like not very large markets. These are Netherlands sized markets or Sweden sized markets.

[00:28:02] They don’t necessarily need a very large domestic market to be able to have a very successful export oriented, tech industry. And so if I were representing the view of the Dutch or Swede or Danish kind of tech policy maker, what they tend to tell you is that they don’t really need a very large internal market to sell goods into.

[00:28:30] Because they think it’s basically if you’re a Swedish or Dutch - think of Sweden right? So they have Spotify, Spotify sells globally. Spotify doesn’t really live or die at whether like they’re selling very much in the Balkans. Their position basically is that they want to have a single market for capital, a capital markets union.

[00:28:49] This is something they think is lacking. So they wouldn’t be able to raise money from all of Europe, but they actually don’t really care about selling that much into Europe. Now the second thing I’ll say about the single market is that you often see tossed around, nowadays these statistics about how much of an internal tariff the friction single market represent.

[00:29:14] The common stat you see is 44% tariff equivalent for goods and 110% tariff for services. But if you actually look slightly under the hood, that specific estimate is sort of dodgy.

[00:29:26] Sam Bowman: It’s very dodgy. Actually, having cited it myself in the past.

[00:29:28] Pieter Garicano: I have cited myself as well. It’s extremely dodgy.

[00:29:30] Basically, they use a gravity model. So a gravity model, the way they calculate it is they try, basically they predict how much trade has been between you and a neighbor. If the only friction was distance, and then they calculate how large of a tariff you should have to achieve that, to actually explain the level of trade you have.

[00:29:52] Sam Bowman: But it doesn’t factor in differences in language preferences, differences in tastes. Exactly. It’s all it’s doing really is inferring how big the gap in trade is. It’s not actually saying that there is a tariff; the total barriers between, or a total gap between like perfect trade, perfectly frictionless trade and reality is this much. I think it’s a total misnomer to describe that as a tariff. And I, and I’m embarrassed because I have actually cited that myself in the past. because it comes from the IMF.

[00:30:24] Pieter Garicano: And if you actually look at like other estimates. More rigorous done like-

[00:30:28] Aria Schrecker: I guess you can do things that control for how willing people are to move across that barrier as like an explanation of like cultural-

[00:30:34] Pieter Garicano: Yes, exactly. And so if you actually look at the gap in like the cost of goods and the core - other thing by the way is the IMF stat is like they basically treat all of the EU as one block despite like countries like Croatia, Poland having joined very, very late. But if you actually look at the core EU countries, the ones which were there and like the very start with the coal steel community, the differences in price of goods in any case is like no greater than the difference in prices of goods between US states. And in fact the traditional example of like where like you had big single mark fixtures was cars because very strong national car preferences,the French drive renaults and peugeots and the Italians are fiats. Even there now, the price across borders basically the gap is zero. There are some areas in services where there are frictions, particularly in like old school occupations where you have licenses.

[00:31:19] 20% of Europeans work in industries where you have an occupational license that is like national.

[00:31:22] Aria Schrecker: Yeah.

[00:31:23] Pieter Garicano: Hairdressers, gymnasts and that kind of stuff.

[00:31:25] Aria Schrecker: Doctors.

[00:31:25] Pieter Garicano: Doctors, that kind of thing. Yeah. but it’s very case by case. And software incidentally is not one of those licensed areas. Right? Basically the licensed areas are usually ones with like very strong traditional like labor interest groups. And so for example, if you’re doing consulting or high-end service consultancy, it’s an EU wide market.

[00:31:40] Aria Schrecker: Banking as well. Right? People have like a strong national preference for banks.

[00:31:43] Pieter Garicano: That’s a capital markets union. That’s the separate thing.

[00:31:45] Aria Schrecker: Yeah.

[00:31:46] Sam Bowman: Even on let’s say the border between Austria and Germany where they speak the same language, in theory like a single market should mean that it’s just as easy to do business.

[00:31:56] If you’re a German company in Austrias in Germany, even like really basic things like tax reporting and stuff like that where you have to report your income to a different authority will just inevitably create frictions that don’t exist. Or maybe they do actually exist to some extent in the US but maybe to a lesser extent.

[00:32:13] Can we get onto, so Pieter, you’re building up to your grand theory - and I like your grand theory, so I want you to lay out, okay, so what is in your opinion, if the pointed divergence is in the nineties? And this very much undercuts the things that I want talk about around energy and around, financial regulation.

[00:32:36] So you’re really pulling the wool out, the rug out from under me, which is good. What is the proximate cause do you think?

[00:32:44] Pieter Garicano: After it’s like slashing and burning the other bogies.

[00:32:46] Sam Bowman: Yeah. Yeah, because you have a, you have an article in the next works in progress setting out this theory.

[00:32:50] So this is a good time to set out your store.

[00:32:53] Pieter Garicano: Basically. It’s mostly a labor market story. Let’s frame it through the timing, which is what happens in the nineties and what characterizes software and what makes it different compared to all the other areas where tech innovations happened previously, manufacturing, car making, combustion engines, even something airliners.

[00:33:13] The kind of innovation was taking place up until the 1990s was very incremental and because it was very incremental, it was relatively low risk. And so the companies that were rewarded are companies that are established, that are incumbents, that have workers, that have tons of human capital. They basically don’t have a very high risk of failure. Software has extremely high turnover. We see with, even biggest and most successful companies, that they have gotten egg on their faces so many times. Think of Meta and the Metaverse or Google with Google Hangouts.

[00:33:53] Sam Bowman: The Microsoft Windows Phone.

[00:33:55] Pieter Garicano: The problem in Europe is that very tight employment protection and employment protection is basically what governs whether you can, whether you can fire someone, let someone go means that risk taking is extremely costly because every time you could basically, every time you spin up a new division, you make a new investment and it fails? You have to presumably either let the people go or redeploy them internally. And those steps in Europe are overwhelmingly with a few exceptions to talk about in a second, or we can talk about in a second, is much, much, much more costy.

[00:34:29] To give you a sense roughly of of how this works - and the US almost without exception, you can fire someone at will. You decide one day this person’s no longer employed with us. There’s three big exceptions, but like the fact that you can do this everywhere. In Europe it’s almost never the case.

[00:34:44] There’s a few, basically the Germanic countries have exceptions to this. Scandinavian countries - overwhelmingly there are like extremely specific circumstances we can fire someone. You offer to show like a business need to do so. You have to be able to prove to the judge, say in France, or in Germany that in fact there was some reason why your company had to let someone go. So that’s a cost. And then once you can let them go, you have to pay them much more money. You have to pay them money in terms of severance fees, you have to pay them money oftentimes, perhaps to avoid a lawsuit, basically pay them off. You have to pay obviously your own lawyer’s fees. There’s often a waiting and negotiation period and all this, these various expenses add up to roughly forming a five to seven times increase in the cost of letting a given worker go in, let’s say Germany versus, the US.

[00:35:35] So to give you an estimate from two gentlemen, two Frenchmen who’ve worked in this very much and are pushing this issue in Brussels, [NAMES?] they basically, look at big tech restructurings or big company restructurings in Europe and US the last five years. And they say in the US on average, it costs you roughly if you’re a big, big company, seven months, of employee compensation, permanently let go.

[00:36:00] So you say the average seven months of average wage per person let go. In Germany costs you 39 months.

[00:36:06] Sam Bowman: 39 months?

[00:36:07] Pieter Garicano: Okay. And in France costs you 41 months. This crucially applies only to big companies I think, policy makers are aware of the problems this causes. And so they’ve been very nice about carving out, if you’re a smaller company, if you have say below 50 employees, you have to have like no restructuring obligations.

[00:36:33] If you’re below 250, you might not need to do like a works council, which is a special employee board. Above that, you do have to do that. But from our story, which is like success is driven by these big, big superstars doing things and growing the fact that you exempt small companies doesn’t help you.

[00:36:48] In fact, the only thing it does is basically puts a huge implicit tax on growing.

[00:36:52] Sam Bowman: The other point which you’re alluding to is that when you start a tech type startup, when you like most startups that are kinda venture capital funded, your goal is to be big.

[00:37:06] Like you’re not trying to make a company of 200 people. You’re trying to make a company that is worth billions of dollars or billions of euros. And you look at what it’s like to run a company worth billions of euros in Europe or wherever you are or in the United States, and if the environment is significantly more or less favorable in one place or another, you look at that and you say I don’t want to do this if there are other reasons to be in other jurisdictions, but the fact that a company will be heavily regulated or will be miserable to run in one jurisdiction if you actually succeed at what you’re trying to do, must be a deterrent or must be a nudge.

[00:37:47] One of the facts I think is very, very important when people talk about kind of culture being the reason that you don’t get much entrepreneurialism in Europe is that you do get loads of entrepreneurialism from Europeans they just do it in the US. Like one in 10 startups in the US has a European co-founder. And That’s been growing over the last decade. I think this is also true and I’m not gonna beat the antitrust horse too much, even though it’s like one of my favorite horses. But Europe has always had a concept called abuse of dominance that does not exist in US law, which says there are obligations on you, if you are a large, dominant company, there are obligations on you as to how you treat your suppliers how high your prices are. Really quite exacting and demanding rules that just do not exist in the US. In the US antitrust law is about the process of competition. And as long as you’re not frustrating the process of competition, you can do whatever you want.

[00:38:46] As a big company, you can charge as high prices as you like. You can be nasty to your suppliers and so on. Europe does not have that, Europe does not have that attitude. European law has the attitude that big companies have social and economic obligations. And I think that must be a thing that people look at.

[00:39:04] I don’t know how strong a factor that is. And the counter argument is like nobody thinks like that. People, when they’re setting up companies just try to think about the next five years, and they’re not thinking about what if my company is a trillion dollar company or not? I’m not convinced by that, but-

[00:39:21] Pieter Garicano: Two data points, right? One is that, I know of a big Dutch startup called Bird. It’s a messaging company. It’s like Slack, basically. It’s worth like billions of euros. It was like one of the biggest Dutch startups. They, in the Netherlands’, a law which is if you have more than I think it’s, 350 employees, you’re obliged to have a works council, which is like your employees get together and they have the right to decide certain things and basically inform decisions. And you have to negotiate them with the restructurings. And many Dutch startups don’t have them, they just ignore the law, and the government doesn’t really enforce it. But if you as an employee start suing, then of course they have to do it.

[00:39:55] And so last year an employee was ‘We have like 800 employees. Why don’t we have a works council?’ And then like within two months, the founder closed the Amsterdam office and moved everyone to Dubai and Bangkok. And that’s a small data point, but I think a telling one.

[00:40:13] Sam Bowman: Could you just explain exactly what a works council is? That’s not really a concept that is well known outside of Europe.

[00:40:22] We don’t have them in the UK and I’m certain they don’t exist in the US. So what’s the difference between a works council and a trade union, for example?

[00:40:32] Pieter Garicano: So a works council, and a trade union can coexist. Most companies have both.

[00:40:40] Sam Bowman: Mm-hmm.

[00:40:41] Pieter Garicano: The difference is that a works council, has the legal right to either be informed of certain decisions or has the right to veto certain decisions and these often are decisions around around employee compensation and restructuring. Now it varies very much by country and the country’s most famous for it’s works councils is Germany. And this example, I’ll give - the works council thing only matters, really, really matters in Germany much more so than elsewhere. because they have something called co-determination, where not just the works council have to be informed that you’re gonna do things with notice periods and heads ups and the like. But they also have to have the right to agree. Basically it’s for the company to do certain things like a change to pay scales or down factory restructure or to shut down a factory.

[00:41:31] The works council has to agree and if they don’t agree, then you get a process where you appoint an independent arbiter and it goes through the legal system. But importantly, the works council also gets a voice on the board. In the case of Volkswagen, for example, half the seats on the board are actually works council seats.

[00:41:48] Sam Bowman: Volkswagen is the largest company in Germany by revenue.

[00:41:51] Right. So it’s a very important example.

[00:41:53] Pieter Garicano: It’s also the largest employer in Europe. And that, of course distorts your incentives in a very important way because primarily you’re running the company to some degree, for the benefit of the people who currently work there. And so you saw, for example, Volkswagen, has had a jobs guarantee since 1994. If you, were hired in a German factory or if you’re a German employee of Volkswagen, you basically could never be let go for economic - you could only let me go if you like personally did something in violation of the rules. They guarantee to you there’s never going to be a reason why you’ll be made redundant.

[00:42:33] Aria Schrecker: Mm-hmm.

[00:42:34] Pieter Garicano: And so, last year Volkswagen wanted to close four factories because they’re facing very strong competition from China. And the works council just refused. The trade union in coordination with works council, threatened to do strikes, and de facto, they extended the jobs guarantee, for another, I think five or six years until 2030.

[00:42:53] Aria Schrecker: Yeah, so I guess it basically means a serious proportion of, I guess most European, big companies, their decision making is done by people who don’t own shares, right? So they’re not really profit motivated at all. They want the company to continue existing.

[00:43:06] Pieter Garicano: No, they’re salary motivated.

[00:43:08] Aria Schrecker: They’re salary motivated, which obviously massively changes the incentives of how businesses run.

[00:43:11] Sam Bowman: And also the workforce as a they have duties to their specific workforce. So even if you did a restructuring and you, the remaining workers were better off because the company was more successful-

[00:43:24] Aria Schrecker: -or even the extra workers that they hired were better off.

[00:43:26] Sam Bowman: Right.

[00:43:27] Aria Schrecker: Yeah.

[00:43:27] That wouldn’t matter as much.

[00:43:28] Sam Bowman: The duty is to the specific workers who are there right now, which is very much not aligned necessarily with the kind of long-term success of the company or even, future workers.

[00:43:40] Aria Schrecker: I’m not endorsing the East Asian model here, but it sounds a little bit like Europe is trying to do the sort of South Korean or Japanese like tribal kind of thing, where you have these large companies that are like kind of in bed with the government.

[00:43:52] I think the government in those countries, like in Singapore as well, they massively preference those companies, but because they’re so productive, because their workers are so good, because they export loads of stuff to the world, everyone kind of accepts that as being part of their economic system.

[00:44:07] Sounds like in Europe we want those companies to have those pro-social duties, but without the kind of government kickback element where they’re massively supported by the state as well.

[00:44:18] Pieter Garicano: I’d say in their defense, this system, I mean the people who came up with this probably was (unsure).

[00:44:28] But there are strong reasons why you might want to do this, which are that the theory behind like having the workers councils and having the duties towards your employees is that basically allows you to do way more human capital investment because you know that someone is almost certainly not to go be poached.

[00:44:45] Aria Schrecker: Yeah. If you train someone up for five years-

[00:44:46] Pieter Garicano: Exactly.

[00:44:47] Aria Schrecker: You get them for the rest of their careers.

[00:44:48] Pieter Garicano: Career. Exactly. Exactly. And so the theory for a very long time, and of course it’s like this was the explanation for why for a long time, and it’s even now, many European in companies that are incremental innovation industries like car making are just much better than American counterparts.

[00:45:04] The European like combustion engine is a 20th/21st century miracle. In fact, every single year, without fail, the Volkswagen guys would do a press conference and say “we’ve squeezed out an extra kilometers proficiency out of this thing.” And it’s tiny. And so the idea was that, as long as the patient, incremental, efficiencies were gained, then this system is working. And it kind of did work. The problem is with taking big risks.

[00:45:27] Aria Schrecker: This strikes me as the explore, exploit, trade off, basically like with current technology, if you knew that we were never going to invent anything else ever again. And actually this is like a very reasonable system. You just want like the best human capital. You want people to have very stable lives. But, I think you could have predicted quite easily that we were going to keep inventing things and having a very stuck economy, was a problem. Like I remember having this argument like 10 years ago, I think before, before it was quite clear this was a crisis that you could predict this was gonna be a problem.

[00:45:55] Sam Bowman: Yeah, and people have been highlighting the problems with European labor market laws for a very long time. It’s, it is not an original thing to say that these are a problem. What is original or what has changed is that certainly when I was first getting into the game, the big problem was unemployment rates in France and Germany, especially in the two thousands.

[00:46:18] The big story was France and Germany have persistently high unemployment rates, especially among young people. And this is because it’s difficult to hire people, it’s difficult to fire people, which makes it difficult to hire people. Right. then you kind of also think, okay, maybe this functions as a bit of a tax where, in exchange for safer protection, things like that, you get paid less.

[00:46:41] All of those things equilibrate in a way that’s sort of maybe not perfect for the worker, but shouldn’t have like really massive long-term effects. What I think is interesting about what you are saying and what I find very compelling about what you’re saying is it’s actually much less of a kind of static issue and it’s much more of a problem in this dynamic way because It’s actually stopping the companies from changing. And like that, that fits very nicely as you are arguing with the idea that there was actually a long period where innovation was not the hallmark of the global economy. In the post-war era, being able to build really great cars was like not particularly driven by massive amounts of R&D or massive amounts of experimentation.

[00:47:24] It was driven by like really incremental, just like engineering, human capital accumulation, things like that. And then your point is something actually fundamentally really changed. We moved from the kind of tangible economy where human capital maybe was like the tale of human capital manage that mattered a lot. And just like having good people in your company was really valuable to a much, much, much more outlier dominated model where like a couple of companies doing really well and having the best people working for them could just explode and become what are now trillion dollar companies?

[00:48:01] Pieter Garicano: The best argument in favor of this explanation is that there is a huge amount of variation in Europe in terms of labor market policy. In this area, Europe is misleading because it’s not a EU-level thing at all.

[00:48:20] The labor market policy in Sweden and Spain couldn’t be more different. And what you see is the countries that have much more flexible systems. Have much motivation, right? So if you were to name to me what you think the most like innovative countries in Europe, every single one of those would be have a very flexible system.

[00:48:38] Countries like Switzerland, countries like Denmark.

[00:48:41] Aria Schrecker: This was what I was gonna throw in where, so like we’ve said, we talked about the tech story and that that actually doesn’t explain like some of the difference. And now, this story I think explains some of the difference.

[00:48:50] But as far as I can tell, and like only in the past few years has the UK started to develop this kind of like European style labor market. But, still not completely, but we’re starting to see the first signs of it.

[00:49:04] Sam Bowman: So I’m obviously talking my book here, but I don’t think labor market laws so far matter that much to the UK story.

[00:49:13] I think it’s much, much, much more of the kind of standard line that I always give about not building enough houses, not building enough, infrastructure. Energy supply, stuff like that, which I do actually think coincides pretty neatly with the rise of software and with the fact that we do have some really high productivity places.

[00:49:34] They just haven’t been allowed to grow. But we talked almost exclusively about technology for good reasons. You set out the reasons, Pieter, but it’s also the case that, the Buc-ee’s, the convenience store kind of gas station pays managers like $150,000 a year. Now I’m told by the way, that being a  Buc-ee’s, manager is a horrible job, it’s really hard.

[00:49:56] They stretch people to their absolute limits and the turnover is massive. So It’s not actually necessarily indicative. And like gas station managers and other companies get paid a lot less, but probably have like less demanding jobs. So  Buc-ee’s, has a very particular business model.

[00:50:10] Pieter Garicano: I don’t know if you’ve seen a  Buc-ee’s, but these things are enormous. They might have 200 employees working for you. Like you’re a pretty big boss.

[00:50:16] Sam Bowman: Yeah.

[00:50:17] Aria Schrecker: I have another example that I recently saw, which is Taylor Swift’s dancers get paid 150,000 a year. And that’s like normal for dancers in the US.

[00:50:24] Pieter Garicano: It’s a lot or little.

[00:50:25] Aria Schrecker: I think that’s a big salary.

[00:50:27] Pieter Garicano: Taylor Swift’s dancer. I mean-

[00:50:29] Aria Schrecker: You’re at the top of your game.

[00:50:30] Pieter Garicano: Talk about a superstar returns.

[00:50:32] Sam Bowman: I don’t think comparable West End performers  get paid, anything like that.

[00:50:36] Aria Schrecker: I was going to say, I have a friend who’s on the West End, she gets paid like 40K..

[00:50:40] Sam Bowman: But the point is that even if we take out the technology sector, doctors are much more- Basically every major city has much higher wages than London does, for example, or Paris does, or Berlin does. Any comparable part of the US does significantly better than a comparable part of Europe or Western Europe.

[00:51:09] Let’s exclude the Eastern block for obvious reasons. Like even if we’re comparing, I don’t know, there are probably pockets of the US like the Rust Belt and so on where that isn’t true. But kind of generally speaking, almost anywhere you go, people are better off than their counterparts in Western Europe. And that can’t possibly be explained by, Technology. I think you’d have to tell an incredibly strong story about diffusion of technology which I just don’t think actually matches with the reality of what these places are for that to matter.

[00:51:50] So why is it that, let’s say South Carolina, why is it that like people who live in Charleston, South Carolina are significantly richer than people who live in Brittany in France, or people who live in, Tuscany in Italy? That is not explainable by the rise of the software industry, I don’t think.

[00:52:12] Two examples that occur to me are, and these do coincide pretty well with the divergence, not since the 1990s, but since mid-2000s, are energy and financial regulation. So. in the early 2000s, electricity prices for business users and industrial users were roughly the same.

[00:52:34] In Germany, the us, France, Spain, Britain, they’re basically the same in in the US and Western Europe. Italy is a weird outlier. Italy’s had like really high electricity prices for a really long time. But the other countries-

[00:52:46] Pieter Garicano: Do you know why it is?

[00:52:48] Sam Bowman: No, no. In the two thousands, a few things happened.

[00:52:54] The price of gas and oil rose significantly around the Iraq war. The US has quite significant domestic reserves of those things. Europe has not tried to exploit whatever domestic reserves it has. It may have domestic reserves of gas via shale, but it just hasn’t exploited them. So the price of gas rose significantly, which basically I think co coincided with, energy prices rising in Europe.

[00:53:21] But that can’t be that big a part of the story because the price of gas in nominal terms, so not even inflation adjusted terms was lower in 2015 than it was in 2005. So over that 10 year period, the price of gas was falling while electricity prices were rising in Europe. And roughly flat in the US, it was slightly rising, but basically just in line with inflation.

[00:53:44] Aria Schrecker: How much does that vary between European countries? Because my guess is Britain doesn’t exploit its natural gas and also makes a bunch of policy choices to not import very much, but the story is that Germany was importing loads and loads of natural gas until Ukraine.

[00:53:56] Sam Bowman: Yeah, so Europe does actually have basically a single market in gas.

[00:54:03] Pipelines exist between Britain and Norway and Britain and France. I think, there, there, there is essentially a single price for natural gas in Europe. Electricity obviously is not just determined by the price of gas, it’s the price of gas is a component of the price of electricity, but, It’s less for a third of the overall price.

[00:54:26] So one, so one part of the story that is important and I think is really, I’m not trying to downplay, is that the price of gas rose quite significantly in the two thousands. However, as it was essentially flat or even falling electricity prices kept rising and rising. And when we talk about, and this is one of my big complaints with the Draghi report, which we haven’t really mentioned, but if we - most I think most Europeans having this conversation would start with the Draghi report and sort of, okay, well Mario Draghi’s made all these interesting observations. There is some really interesting data in that. But actually I think it’s a pretty incomplete report. And one of the things I think is really incomplete is the stuff that it has on energy because it takes the kind of important moment of divergence as being the Ukraine war where Russian gas supplies dried up.

[00:55:11] We all know that electricity prices and gas prices spiked massively. we all know that they rose gigantically at that period-

[00:55:19] Aria Schrecker: Four times or something.

[00:55:19] Sam Bowman: Yeah. And I mean, anybody who lives in Europe will have personally felt that in a way that is actually pretty unusual except for, petrol prices to actually feel like macro effects in your electricity bill.

[00:55:33] So my view and my kind of somewhat, I guess, controversial claim is that it was Europe’s taking climate change much more seriously than the rest of the world, and building that into policy much more responsibly, you might say, than the rest of the world. That has been one of the big drivers of the rise in energy prices.

[00:55:53] So, something like 80 gigawatts worth of coal production plans have been shut down. There’s been a huge shift away from coal towards, mostly towards, wind and solar, but obviously to some extent towards gas. Because you need gas. If you’re building wind and solar. Now that might be a good thing to do.

[00:56:13] Coal is, coal is awful. Very, very few people want coal. Even if you were a climate change like skeptic.

[00:56:21] Aria Schrecker: You don’t want the little particulates in the air.

[00:56:21] Speaker: Yes. Coal is terrible for

[00:56:22] Sam Bowman: people’s health. It’s dirty. It’s unpleasant. but it is cheap. Right? And one of the, and one of the effects of moving away from coal, to wind and solar and gas has, I think, been a very, very high increase in, electricity prices.

[00:56:38] Related to that is the emissions trading scheme. So Europe is basically the only jurisdiction that like actually prices carbon. And China has a carbon price, but it’s mu, it’s a fraction of what it is in Europe. It’s like a fifth of the level that it is in Europe. Obviously the US doesn’t have a national carbon price, but it does have kinda state level attempts at doing carbon pricing.

[00:56:59] Europe also has net zero laws. Every European country has a, Europe has a net zero law, which requires that everything that the government does be in line and like be part of a long, of an overall strategy to get to net zero, emissions reductions by 2050. And I think it feels very, very likely, although It’s really hard to say these things with any certainty by the way, as very, very likely that the high increase in energy prices in electricity prices in particular in Europe, has been driven by.

[00:57:32] I think climate minded laws, which may be good laws, are difficult to sustain if you’re the only person doing them. The question for me is how important is that? And how much does it actually matter, if you’re a continent like Europe, to have high electricity prices? That’s what I’m un unsure about.

[00:57:51] Pieter Garicano: I think, because this often the high energy prices obviously matters a lot for like very energy intensive industries. the kind of paradigmatic country here, of course is Germany, which has like a generally very elevated level like manufacturing GP for a country, if it’s like wealth and if you look at the German economy, it makes sense to date the slowdown 2022.

[00:58:16] I mean, COVID, I mean they certainly didn’t recover from the COVID shock very well. But through 2020 until then, the German economy is, I think you would be hard pressed to make the case they was performing very badly. They were growing at 2% per year. They were growing much faster than Southern Europe.

[00:58:31] They were basically diverging despite being like the frontier. And so Germany’s your energy intensive country, it’s the one where price rise the most. It’s hard to say that pre, pre Ukraine war shock that made such a big difference.

[00:58:46] Aria Schrecker: Yeah. How do French energy prices compare to, the rest of Europe?

[00:58:49] I would assume much, much cheaper.

[00:58:51] Sam Bowman: Well, they’re a bit lower, but they export a export lot of electricity.

[00:58:54] Speaker: Exactly. Yeah. This

[00:58:56] Sam Bowman: is, I think that’s actually quite important because, I don’t think that it would be better if France had autarky for electricity prices.

[00:59:04] Because the implication there would be that you should subsidize your electricity prices.

[00:59:07] Pieter Garicano: Yes.

[00:59:08] Sam Bowman: So this is a point that, Ben (Southwood) and Samuel (Hughes) and I have made in the past, which is the question shouldn’t be ‘Why is France struggling economically?’ It’s obvious why France is struggling economically, right?

[00:59:19] Like it’s a very, very, very heavily regulated economy. We’ve already talked about some of those regulations. It’s very highly taxed; for a worker to bring home a comparable amount of money in Britain versus France, so about 60,000 euros. In Britain, the employer will have to pay a total of about 97,000 euros, in France the employer will have to pay a total of about 137,000 euros.

[00:59:41]

[00:59:41] Aria Schrecker: That’s insane.

[00:59:42] Sam Bowman: So, absolutely, yeah, gigantic, because social insurance contributions are absolutely enormous, in France, compared to the UK at least. So they have a very low retirement age. they’ve only raised it very, very recently.

[00:59:57] Pieter Garicano: They’re going to bring it down again. Unwinding reforms.

[00:59:59] Sam Bowman: They’re probably going to bring it down again.

[01:00:00] Aria Schrecker: But young people don’t work.

[01:00:02] Sam Bowman: They also have very, very high, rates of unionization. They have lots of strikes as we know. But they’re roughly as rich as the UK is. Right? And this could be a real repudiation of the idea that economics is true.

[01:00:20] It could be well you could do whatever you want and you could still be roughly as rich as each other. Why wouldn’t you have a highly regulated economy with everybody retiring at the age of 62?

[01:00:32] Aria Schrecker: What’s really galling to me is how many- if you go down the sort of world’s richest people, there are so many French people before you hit a British person.

[01:00:40] It really upsets me.

[01:00:41] Sam Bowman: Well, France has some amazing companies actually, but, the argument that we make is that they can afford to do all those things because they get the basics right. Because they have built much more freely, they have millions more homes in France than the UK does.

[01:01:00] Aria Schrecker: I guess you would say, in the places of France that are most productive as well.

[01:01:02] Sam Bowman: Not- yes.

[01:01:03] So Paris has like significantly grown since the war compared to London, which just has not grown since the war. Paris has tripled in geographic extent since the 1940s whereas London just hasn’t changed at all. they built vastly more motorway. they toll their motorways, so they’re free flowing,all the, all the things like that.

[01:01:25] They build much, much, much more, mass transit infrastructure. People all know, everybody know about. Yeah. French trains are great. Roads are great. Houses are great. they’ve built like 27 Tramways, I think in the last 30 years, whereas like the UK has built three. And obviously as we wrote in a good Works in Progress article a few months ago, they nuclearized to absolutely like an astonishing degree.

[01:01:48] They, France gets something like 65%, 66% of its electricity from nuclear. It built 50 reactors in 10 years, in a period between the 1970s and the 1980s. This was a state led program, by the way, I’m not telling a kind of, oh, France is a free market country kind of story. Yeah. the point is that they actually built this stuff.

[01:02:07] They actually got this stuff. And our argument is that this sort of allows them to spend down, this has given them loads of wealth that they have chosen to spend down via having heavily regulated economy and stuff like that. France does also have some really impressive companies, like Air Airbus is to a large extent a French company.

[01:02:29] Pieter Garicano: I was going to ask, which is that if you look your French people rich list, if you look at what they actually do-

[01:02:34] Aria Schrecker: I they’re mostly the inheritors of fashion houses.

[01:02:39] Pieter Garicano: No, but that’s important, right? The very rich French people are in industries which are very heavy intangibles. All their wealth intangibles. And in this case, it’s not ideas to like and tech, it’s like brands. Brands are like the ultimate form of tangibles. It’s quite surprising actually, that this kinda like very material input story notwithstanding the way you have this like really crazy French long tail and where they totally trump Britain for example.

[01:03:03] Aria Schrecker: That’s got to be culture.

[01:03:04] Sam Bowman: Yeah, and history, right? Like France for a long time was the like superpower of Europe. They also have an incredibly bountiful land, they have lots of different climates. They have incredibly fertile farmland, France is an amazing country especially if you are in a kind of pre-industrial world.

[01:03:22] France is an amazing country and for a really long time, all of European culture was downstream of French culture. Italy is another example of a country that is spending down like the Renaissance or maybe even the Roman Empire, there is a huge amount of accumulated, inherited capital, human capital, whatever.

[01:03:40] In some cases It’s like literally the land is the way it is and is beautiful because there have been people there for thousands of years and they’ve been relatively rich for thousands of years. Like Florence obviously is just like a thing that is left over from the Renaissance and it’s still an amazingly great place and productive place and culturally important place.

[01:03:59] But anyway, yes all this is a kind of getting away from the point about energy where, remember that most of the energy intensive industries that people talk about use gas, not electricity. Like energy intensivity usually means you are gas reliant and gas prices did only spike around COVID, and around, not COVID actually, but sorry, the Ukraine war.

[01:04:24] Like there it is correct that the spike in price coincides with the Ukraine war and the Draghi report does have, I think, some pretty like incredible charts showing certain industriessteel and like very energy intensive industries have had like gigantic contractions since the beginning of the Ukraine war.

[01:04:46] The question for me is electricity, which has not tracked gas prices. Electricity has been rising and rising and rising for 20 years. And there, I think there’s a plausible story that electricity is a very important input to everything; electricity is a thing that all businesses require and like often spend quite a lot of money on them.

[01:05:04] Like they spend it on air conditioning, they spend it on just general activities. And there I can imagine like a fundamental input that every business is reliant on, although not relatively energy intensive businesses being something that rises and rises and rises in cost over this period - that being an important factor. But actually, I don’t know. I don’t think there is good evidence as to like how important electricity prices are to growth or to output.

[01:05:32] Pieter Garicano: I think especially if you’re comparing like Charleston to Lille.

[01:05:37] Where it’s I can’t imagine that spending on electricity is more than like low single digits of GP.

[01:05:45] Sam Bowman: Yeah.

[01:05:45] Pieter Garicano: And so I’m hard pressed, even if it doubles or I think in Britain’s quadrupled the last 20 years is my understanding, but even if that quadruples, it’s like it’s not going to explain the - I wonder if - one story you could tell is - story would be something - a syncretist story would be that for some parts of the US there is a big priority to gap.

[01:06:07] But actually if you’re comparing like Charleston or Savannah or Dallas to Lille, there, you’re actually, if you adjust for purchasing power and then adjust for like hours worked, you actually end up with a remarkably similar economy. That would be my intuition.

[01:06:23] Sam Bowman: One. So one other, theory before we move on to I think kind of, so what is to be done?

[01:06:30] What’s actually, what, what is to be done is one that I heard from Tyler Goodspeed, who’s an economist in the US and his argument is that, the culprit or the smoking gun in terms of timing is after the financial crisis, the Basel three, the Basel three Accords, which are a series of financial regulations that are applied globally by all developed countries, sign up to these bit in a much more important way in Europe than they did in the United States.

[01:07:01] Because what these did was say that larger banks have to be more prudential about how they lend. And that mattered a lot more in Europe than it did in the US, because number one, Europe has much more large banks. It’s got a much more consolidated banking sector. The US has like thousands of local banks as well as some really big national banks.

[01:07:23] All the store European countries have like a handful of big banks. By the way, as a kind of consumer, that’s much better, right? Like the US banking sector is notoriously primitive and terrible, horrible to use. You have to send checks to your landlord to pay your rent and stuff like that. People using credit cards, to like do basic transactions and the credit card margins are huge and stuff like that, blah, blah, blah.

[01:07:45] Whereas in Europe, it’s really easy to do cash transfers between people. Venmo doesn’t exist. There’s nothing like Venmo in the US in the UK because we just don’t need it.

[01:07:53] Aria Schrecker: We just don’t need it.

[01:07:53] Sam Bowman: We just do bank to bank transfers. Yeah. so that’s one part where you just have more big banks.

[01:07:59] So the regulations bite on a much larger fraction of the banking sector. The other is that, much more lending or much more business financing in Europe comes from banks than it does in the us. So in the US a much smaller fraction of lending is kind of clamped down on and made to be prudential than in Europe.

[01:08:19] In Europe you get much, much, much more, a much bigger share of like where businesses get their money from becomes cracked down on. Now. I think this is a really interesting argument. I don’t know, I’m not able to assess it in terms of like how big the effect size is, but I think it’s like quite interesting and I do think that the one thing it really has on its side is timing. It does seem to coincide like really nicely with the, I think your point is well taken, Pieter, but it’s pretty clear that Europe, if we were sitting here in like 2004, we’d be talking about France and Germany’s unemployment problem. We wouldn’t be talking about-

[01:08:54] Pieter Garicano: And in Britain talking about the incredible growth story. 3% growth would be remarkable.

[01:08:58] Sam Bowman: Exactly. We wouldn’t be talking about the massive productivity, slow down. Certainly not that Europe was experiencing.

[01:09:02] Pieter Garicano: No, and the bank story is striking. Right? I think 35% of all, European savings are in current accounts.

[01:09:09] Sam Bowman: Yeah.

[01:09:09] Pieter Garicano: Which is just, really remarkable. And the other remarkable thing is that, policy makers kind of treat the fact that more money isn’t in these current houses a problem. Right? So the dragging report has a sister, a forgotten sister called the letter report, by Roberto Letter. another big, European grandee, and the letter report’s about supposed to be a single market.

[01:09:31] It generally contains like less information, interesting information in graphs than Draghi. So that’s why it had no impacts. But one very telling section is that, in the preamble it talks about the fact that, Europeans have 300 billion euros. I think it’s roughly 1% of European savings.

[01:09:49] No, should be less than that, but 3 billion Euros exposed to the American equities markets. And rather than being like ‘Wow, this is great that you still like get to transfer over some surplus and the returns flow back to Europe’, this is like a big problem. He’s like ‘This is a big issue. Why are the savings flowing to the US versus, staying here?’ And so I think both the actual regulation, also the attitudes of capital markets are really alien. If you see this as like an American, where you think like it’s excellent to have lots of exposure to capital markets and have a very unfettered capital.

[01:10:20] Aria Schrecker: I wanna synthesize our conversation of what the problem is, where it seems we are basically on the same page. I think if Europe had only made one of these mistakes, it wouldn’t be so big of a deal.

[01:10:34] But it’s the regulations in general mean that it’s harder to develop tech. The labor markets mean that it’s harder to take risks. The energy markets mean that manufacturing is punished, but also probably lots of other businesses are punished. There’s there’s an attrition of like several different things which together have combined with like a slowdown over the past, three decades or so.

[01:10:51] Pieter Garicano: Yes. And certainly if you look at the last like 10 years, there has been like a huge proliferation of like European rulemaking, which must impose significant drag. And firms report this, right? Firms also report your energy story a lot.

[01:11:08] Sam Bowman: Good for them.

[01:11:09] Pieter Garicano: It’s remarkable.

[01:11:10] If you asked founders about my - when I asked startup founders about my lead market story, they’re like ‘No, it doesn’t really matter. It’s mostly culture. People don’t wanna work very hard,’ but they’ve had a problem with firing anyone.

[01:11:21] Sam Bowman: Yeah.

[01:11:21] Pieter Garicano: And inversely, your energy story shows up - you get every year you have a survey, what’s inhibiting investment? And like a 6% all company survey in Europe, no matter the size, literally could be, not even manufacturers of 6% all coming surveyed, report high energy costs are inhibiting investment.

[01:11:38]

[01:11:38] Aria Schrecker: What are we gonna do about it?

[01:11:40] Sam Bowman: So there two questions actually. One is what should be done? I think a more interesting question because I can tell, I can infer from what we’ve all been talking about, what we think should happen. I am more interested in why nothing is happening.

[01:11:56] Like I am very, very confused. And this is a general point. We’ve spoken entirely about economics for this conversation, but if we were talking more broadly, we’d be talking about immigration, we’d be talking about Islam and Europe. We’d be talking about maybe freedom of speech, things like that.

[01:12:13] All of which are like very important live issues in Europe. The Ukraine war is another one, where large parts of the electorates of these countries are very much out of step with the mainstream political elites and political parties.

[01:12:29] Pieter Garicano: Maybe not Ukraine War, but the other ones.

[01:12:30] Sam Bowman: Maybe not Ukraine War.

[01:12:31] What I find constantly very confusing is why it is or why it appears to be the case that, European leaders seem to be either paralyzed in the face of all of these problems and we can just stick to the economics. Because we haven’t gone into the other issues at all in this conversation.

[01:12:54] Like, why do they seem totally paralyzed here? Or even oblivious, it’s not even clear to me that they are aware of the problems as we believe that they exist. do you have a good story for that?

[01:13:08] Pieter Garicano: So, one extremely simple story you could tell is it’s just a representation gap story, or a firewall story.

[01:13:18] The Brandmauer. The Brandmauer basically is the commitment of European center right parties to exclude the far right from governing. And this is a commitment for like very, I think sensible and understandable reasons, which you might have lots of reasons why you disagree with the far right and think they are both not just that they often hold, bring reprehensible views, but also that like they’re just not, haven’t shown themselves to be very competent in governing. And so you just basically exclude categorically and that basically means that you as a center right party, which might have perhaps slightly like more like derogatory instincts, are committing yourself to perpetually govern center left not nec- doesn’t mean that like not, and it doesn’t just mean oh, your, your policy -

[01:13:57] You get like a weighted average of your views, but like you are negotiating hand going into that it’s greatly weakened if your counterpart knows that in the end it’s take it or leave it.

[01:14:09] Sam Bowman: Yeah.

[01:14:10] Pieter Garicano: So that’d be one story. But I think the reason why I don’t think this works for the EU overall is because in countries where you see a kinda grand coalition form of governing very consciously - like Germany, like much Northern Europe now, is that you actually love paralysis.

[01:14:30] Like the net result of putting together like the center right and center left is that like they count each other out and nothing happens. But for the EU I think the story doesn’t work as well because the story of the EU for the last 10 years is that they’ve been insanely productive. People love to tell like how oh, the Americans have these checks and balances paralysis by design.

[01:14:49] But like the American system is like basically extremely like majoritarian. It’s almost like 50 plus one compared to how the EU is designed. We have to like align the European Parliament with the council, which represents for instance the governments of 27 different sovereign member states,

[01:15:07] Sam Bowman: All of which have a veto right?

[01:15:08] Pieter Garicano: All which to a veto. Yeah.

[01:15:11] Aria Schrecker: And yet it’s still able to throw directives out all over the place.

[01:15:14] Pieter Garicano: They - five times higher - This is a stat from driving reports kind of dodgy, but they basically say it’s like four times more relative acts per day compared to the US

[01:15:23] Aria Schrecker: This I guess implies that, European elites are actually much more aligned than you would expect their equivalent American counterparts to be.

[01:15:32] Pieter Garicano: So I think it just happens to be the way the Brussels system is designed.

[01:15:36] Aria Schrecker: Okay.

[01:15:36] Pieter Garicano: And last thing I say about the Europeans, which even more surprising is the Grand Coalition in the EU is like four parties ranging from the greens, the liberals - it’s so unwieldy and they’re constantly doing things. So, and this in the EU story, it’s quite interesting and this, I don’t think something was widely understood or known is that the formal way laws used to get made is that the commission proposed something and then the council and parliament go back and forth in four different rounds with like public votes where you have an amendment, it’s like basically the way you expect the house to work or the parliament to work.

[01:16:10] You have different readings and then at the end everyone publicly votes in the final package. That’s the way it’s supposed to work. But since the crisis, they’ve adopted the financial crisis, a system known as a trialogue. The trialogue is basically that you as the parliament, empower a person rapporteur to represent you.

[01:16:28] The council empowers the council presidency, which is a country which rotates randomly every six months, empowers a representative and the commission sends their team. And what happens is that these three people meet in a room, none of them have necessarily very strong incentive to press on the breaks because in the commission - the commissions don’t have very much power anyway.

[01:16:48] So the only way you can do things is make new laws. It doesn’t have much money to spend. So if you’re a commission civil servant, your incentive is law making. The council presidency only has six months. And so ,basically it’s your only chance to affect this issue. And so you’re much better off like doing - you also want to have a big win.

[01:17:06] Usually the council president is represented by a civil servant. So it’s just some guy who would like to have a big win on his CV. And the parliament, the person who becomes rapporteur, is almost always someone who really cares about the issue and has been selected through by a specific committee and the people on that committee are the people who really care about the issue. Why did the German CDU vote in favor of banning all combustion cars in Europe by 2035? It’s hard to imagine. The reason is that the EPP people —the CDU people who are on the environmental committee — happen to be much more out of step with the rest of the party. And the incentives for the people who are actually making the laws are just the incentives faced by the parties back home. And then, the final step of the sausage making, is when the bill is created. When it comes to parliament for a vote, the Grand coalition dynamic matters a lot.

[01:18:16] Because what you say, when you come back to your fraction, to your parties who say, look, this is the best deal we’re going to get. This is a deal between us, the center right, the center left, the greens, the liberals, is extremely fragile. And it’s take it or leave it. It’s like you, the CDU might not want to do combustion car ban, but if you don’t vote for this, you’ll never get anything else.

[01:18:36] Aria Schrecker: So your story here is something like the policy makers are extreme technocrats and also single issue people who really care about things. So we end up in a sort of ‘everything is a thing where you get the privacy people get their GDPR, the green people get all of their little habitats regulations’ and they’re like, right.

[01:18:57] Sam Bowman: It’s like government by hobbyists,

[01:18:58] Pieter Garicano: Government by hobbyists. Yes.

[01:19:01] Sam Bowman: So that’s pretty depressing. That’s pretty bleak, because I don’t see how that changes. I want to be optimistic.

[01:19:10] It is worth noting a few things, a few reasons to be somewhat upbeat about Europe. First of all, and it’s easy to forget this, Europe is much richer than almost anywhere else on earth, right? Like its growth rate is not that good, but its level of output is really, really, really impressive. It is much, much, much richer than almost anywhere else.

[01:19:29] That’s really important. People,

[01:19:31] Aria Schrecker: I’m still on the fence about whether I’d rather live here or America.

[01:19:33] Sam Bowman: Yeah. I mean, okay. That’s great. I think that’s a really important point actually. Sorry, I’m being, I’m being jokey. European cities are much safer than American cities are.

[01:19:46] The level of squalor that you get in American cities is much worse than it is in European cities. And the cities themselves, the towns and cities in Europe, because of when they were built, often are a lot more beautiful, a lot walkable, a lot more livable, stuff like that. Europe also has really, really, really precious valuable things like, basically very strong rule of law. Basically very strong private property rights. Basically very strong freedom of speech rules, despite the problems that it does have, I think with freedom of speech, it has things that are really hard to will from nothing. And if you’re looking at somewhere like a Latin American country, for example, all of those things are a lot weaker and a lot harder to build.

[01:20:27] Although, there are people who are trying to build those things, but it’s much harder. It’s an uphill struggle to do that. Europe also has some really impressive companies, right? We’ve got a piece coming soon on ASML, which is essential to the, global semiconductor industry.

[01:20:42] It has Airbus, it has the most impressive and important airline manufacturer, which you mentioned earlier. there are some impressive tech companies, especially if you include pharma and biotech. We don’t need to go into them. DeepMind is based in London, which is sort of in Europe. There are like plenty of -

[01:21:02] Pieter Garicano: It is in Europe. Britain’s moving away...

[01:21:05] Sam Bowman: well, I think the UK is a special case, but yes, it’s geographically in Europe for sure. And it’s adopting European labor laws, which is great. So there are all sorts of things that I also, by the way, think as as a video gamer, as a self-identified gamer, I think it’s notable that European video games are really good.

[01:21:28] Like Baldur’s Gate three, just on the games that I play personally, Europa Universalis V, brilliant. Baldur’s Gate three, brilliant, Belgian game, Kingdom Come Deliverance Two, brilliant. The Witcher three, the Witcher series, even Cyberpunk, which is a bit of a disaster- Europe in one area of tech, European companies do absolutely brilliantly and I think are at least as good as, if not better, collectively than their American and East Asian counterparts. So like it isn’t completely a dead zone, it’s just that these are pockets of success around the continent rather than being the sort of big giants that we talked about.

[01:22:10] Pieter Garicano: And I think these things are probably going to become more important over time as we become wealthier. The people, these things are basically things that are like luxury goods that we demand as we get more free time.

[01:22:25] Sam Bowman: Your argument is that Europe should just become a holiday destination.

[01:22:27] Pieter Garicano: No, no, no, no, no.

[01:22:28] My argument is that like you- the lower bound-

[01:22:32] Sam Bowman: Yeah.

[01:22:32] Pieter Garicano: The flaw is set by the fact that worst case scenario, everyone in the world will still wanna come here. And many countries don’t have that. Don’t have that to say for themselves. Right. Basically as a iron law since the dawn of modernity, basically as people have more free time, they just spend more time in Europe.

[01:22:49] This started with the British going to Greece,, the grand tour, the Americans in the eighties and nineties. And now of course, we’re recording this in London and you see lots of people from all over the world coming here and that’s gonna stay.

[01:23:03] Sam Bowman: Okay. So on policy, what, if anything, is the reason to be optimistic? It’s hard to imagine Europe performing its labor laws.

[01:23:12] Aria Schrecker: I think the consensus on nuclear power is probably going to break at some point. I think like the-

[01:23:17] Sam Bowman: The anti nuclear power?

[01:23:17] Aria Schrecker: The anti nuclear power consensus.

[01:23:19] Yeah. I think France’s success compared with, data centers and people, everyone does want data centers in their country, and I think people are going to start to make policy decisions that make that happen. I think that probably means like we are going to get more nuclear power across Europe.

[01:23:34] Not every country.

[01:23:35] Sam Bowman: I actually suspect that it’s more likely on energy for what it’s worth, that, one of the consequences of the populist right of the far right come to power is that there is a big shift towards fossil fuels again, because the cultural like valence of gas at least, and maybe coal is like it’s anti-woke basically.

[01:23:56] And I suspect that that’s more likely than nuclear, but we’ll see.

[01:24:00] Pieter Garicano: Interestingly, the Dutch, right and far-right are very pro-nuclear. It’s a huge thing for them. They love nuclear and they wanna build 10 new power plants. I think my answer would be that it’s extremely - it’s gonna be very member state dependent.

[01:24:14]

[01:24:14] Pieter Garicano: I don’t see why - what the Dutch want or the Swedish want, the Nords want basically is for the EU to set the basic punition in place to protect a single market, to create a single amount of capital. And I think in those countries specifically, I don’t think we have that much evidence that the ability of policy to self-correct is as broken as it is, for example, in Britain. And we see now the Dutch recently received their version of the Draghi report. The Wennink report, the former ASML CEO wrote, published last week his report for how the Dutch should fix the country.

[01:24:47] Sam Bowman: So many reports!

[01:24:48] Pieter Garicano: But the coalition agreements, the incoming government agreed with all the recommendations.

[01:24:54] Yeah. They just want to do it.

[01:24:55] Sam Bowman: Yeah.

[01:24:56] Pieter Garicano: I think members of a members state it’s very different. I think French endowment’s much worse. The other story, which is worth mentioning is that there are like some like win-wins here on labor markets, for example. There are models which exist that protect the workers or at least compensate the workers in the case of insecurity, but also allow for much more flexibility on public companies.

[01:25:14] Denmark has more complex system where you are insured with a union, an ‘a-kasse’, you pay some fixed fee every month, and then if you are let go — and the Danish employer has the right to let you go for basically any reason at any time — you receive up to 90% of your income for up to two years. And along with that come really strong requirements from the Danish government for you to find new work. They spend roughly 2% of GDP on what they call active labour market policy, which is where they basically match you and then subsidize future employers to hire you. They subsidize universities to take you on as a student. And the net result is that Danish workers are still very protected and very compensated, but also, Danish companies are much more agile. And like other countries — the Swiss, the Austrians, and to a lesser degree the Dutch — have variations of this. And that might be, for example, the kinds of policy we can think of.

[01:26:10] If we think of things that are both going to protect the European social model, which people clearly want, is very important, but also might add the necessary dynamism we need to innovate.

[01:26:22] Sam Bowman: Well, I-

[01:26:24] Pieter Garicano: Your answer?

[01:26:25] Aria Schrecker: Yeah. What are you optimistic about?

[01:26:26] Sam Bowman: What am I optimistic about?

[01:26:28] I’m not really that optimistic, to be honest. I’d like to say that I was, I think that the idea that you could kind of flex security in some places, that sounds great. I feel like the kinda near term political prospects, for Europe just feel very- the thing that I feel when I look at the UK or the US there are like clusters of people who are very actively working, trying to change things and I think they’re doing, relatively well actually, at spreading good ideas and things like that.

[01:27:07] Now, possibly because I’m only an English speaker, but I see that much less in Europe and I’m much less like aware of who those groups are in Europe. And so maybe it’s just because of who I am. Maybe it’s just because where I’m standing. I just don’t see as much kind of energy and urgency around changing things in any specific groups. And the people I do know in Germany, for example, feel pretty desperate and I feel like pretty glum about the situation. I could be totally wrong. I think I am a lot less pessimistic about Europe in terms of the actual level, I don’t think the place is gonna fall apart. I don’t think there’s like a European civil war coming on or anything like that, but I think that it’s much harder to imagine any major European country doing like a massive course correction the way I think like the UK might do a massive course correction, or the way I can see America kind of trying to with not a lot of success so far has to be said.

[01:28:12] To me, it feels like Europe is still at the kind of denial stage. There is a fairly cliched point that I think is true, that countries need like external threats to get their act together. And you look around the world and a lot of the most highly functional states are countries that have a scary neighbor that is threatening them. And even the US during the Cold War, I think is an example of that, where like the external threat does really help you focus the mind. Doesn’t always work, didn’t work for Poland for or for the Polish Lithuanian Commonwealth, but it does help and the more Europeans feel that from Russia may be the more impetus and opportunity there is for the reformers to get things together.

[01:28:58] Aria Schrecker: So on that almost optimistic note...

[01:28:59] Sam Bowman: On that nearly optimistic note, thanks guys. This has been very interesting. If you’re watching at home or listening at home and you want more conversations like this, check out the Works in Progress print edition. Our next issue has a piece by Pieter on the labor market rules that he was talking about. And we also have in a forthcoming issue, a really interesting deep dive into ASML, which is probably the most important company in Europe right now, and certainly one of the most important companies in the world. So thanks very much for listening or for watching, and see you next time.