In a few decades, will Europe be good for anything beyond food and tourist experiences? With Europe lagging on innovation, productivity and with extremely costly decisions on the Energy side, and needing to defend itself, what is next?

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Our show: Tech DECIPHERED brings you the Entrepreneur and Investor views on Big Tech, VC and Start-up news, opinion pieces and research. We decipher their meaning, and add inside knowledge and context. Being nerds, we also discuss the latest gadgets and pop culture news

Nuno Goncalves Pedro

Welcome to Episode 60 of Tech DECIPHERED. Today, we will discuss European competitiveness. The competitiveness of all of Europe, not just the European Union, but the whole of Europe. It’s been in the news recently. There’s been a new report out from Mario Draghi a couple of months ago that really mentions what is happening in Europe, what are the things that need to be done for Europe to increase its competitiveness going forward.

Nuno Goncalves Pedro

There have been a lot of discussions around the world on Asia, in particular, and American dominance of the world economy. Europe is lagging behind. What do we make out of all of this? Maybe let’s start with the report out from Mario Draghi and the conclusions of that report.

Bertrand Schmitt

Yes, I think it was for once, a pretty interesting and pretty lucid report from a commission by the European Commission and written by Mario Draghi with a lot of support from many CEOs and also entrepreneurs to provide feedback to try to explain what’s happening, what’s going on. I would agree with everything in terms of analysis or conclusion, but I must say it’s a good read.

Bertrand Schmitt

Maybe a few points that he’s making is first acknowledging that there is an issue in European competitiveness and growth since the past 20, 25 years. This lack of competitiveness and growth has increased with a great financial crisis from 2008-2012. In 2012, there was a crisis around the euro. I think it is indeed time to try to look back at what happened and try to get some sense about what could be done differently going forward.

Nuno Goncalves Pedro

A couple of really astute observations. Obviously, the GDP growth of Europe has lag behind that of the US and China. The period of time from 2002-2023, the US has grown 2% and both on constant prices and constant PPP prices. China, 8.3% and the EU, 27 at 1.4%. Obviously this report is on the EU. Clearly lagging, and the lag is significant.

Nuno Goncalves Pedro

If we look at GDP at constant prices, there was a 17% delta in 2002 between US and Europe, and now there’s a 30% delta between US and Europe. It’s lagging you further behind. Even more seriously, China has outpaced it on constant prices. If we look at constant PPP prices, the EU was actually 4% above the US back in 2002, and it is now below 12% of the US.

Nuno Goncalves Pedro

China has outpaced both of them at constant PPP prices. This is worrisome. I think Mario Draghi makes, or the report makes a bunch of very significant and strong statements, which basically are saying, “We cannot, as the European Union, continue like this and have the social welfare that we put in place in all these countries.” something’s got to give.

Nuno Goncalves Pedro

He goes on to make a couple of proposals and what he thinks needs to be done in Europe. But very significantly, what he’s saying is this is a crisis. We need to address it. This is not just a nice report, please read it. It’s like we cannot afford the lifestyle that we’re having.

Nuno Goncalves Pedro

If Europe or European Union was a household, it would be going bankrupt, I think is what he’s saying. We can’t keep doing what we’re doing. Something’s got to break at some point. Either the social welfare construct that we have will not work any more, or we, as Europe, will need to really reassess how we behave, et cetera. Very interesting report. A lot of fear at the beginning of the report immediately. Then three areas that he recommends action on for Europe in order to reignite growth.

Bertrand Schmitt

Yes. First, I would like to say that, yes, some are doing analysis based on PPP, but there is a risk when you do that. Because PPP is cute when you try to estimate cost of food, if you go locally your food, for instance, or pay locally your services. But for anything you buy from outside your region, PPP doesn’t work as well. That’s a big issue for Europe, given that it’s manufacturing less and less of what it’s bringing. PPP can be providing some comfort in terms of things are bad, but maybe not as bad. I would be careful in terms of analysis where they push PPP so much.

Nuno Goncalves Pedro

But it’s on both, Bertrand. They are showing it at constant prices.

Bertrand Schmitt

It’s on both. It is just that the impact is way bigger when you did not choose PPP.

Nuno Goncalves Pedro

Just to tell those that don’t know what PPP is, is power purchasing parity. It’s something to your point that aligns the power purchasing parity across different markets. It’s an adjustment made to the numbers, basically.

Bertrand Schmitt

Yes, because what we see, for instance, is on a per capita basis, real disposable income has grown twice as much in the US since 2000. It’s an absolutely huge difference.

Nuno Goncalves Pedro

I always switch it, so I apologize. It’s purchasing power parity. Purchasing power parity.

Bertrand Schmitt

Yes.

Nuno Goncalves Pedro

Apologies again.

Bertrand Schmitt

I think one point that I believe is really important is the lack of innovation in Europe. That is, of course, very scary. They made a good point, it’s the lack of tech companies in Europe. One number shared in the report, only four of the world’s top 50 tech companies are European. Only four. How can you be one of the top three regions in the world and the future is not well represented in Europe?

Bertrand Schmitt

For sure, it’s a big issue. It has big issue in terms of R&D. The three biggest spenders of R&D in Europe are actually automotive companies. Guess what? None of them is Tesla. I’m not sure where is this R&D going, but I will guess it didn’t go in the right direction on top of it. But it’s not just a question of how much you spend, but how well you use it. That part is something to be fixed.

Bertrand Schmitt

Another data point maybe around tech companies, but there is no EU company with a market cap over 100 billion that has been set up from scratch in the past 50 years. While all six US companies with a valuation above one trillion have been created in the past 50 years. That for me is just incredible because it’s proof of a total lack of dynamism that is step by step self-fulfilling. I’m not saying individuals in Europe lack dynamism. I guess it’s not the overall European system that is creating so much ball and chains behind your back. You cannot run. At best, you walk. At worst, you crawl.  If you have your operations in Europe. That’s really probably the main issue.

Bertrand Schmitt

One could argue, has it been designed or proposed this way to help the incumbent? I don’t know. But for sure, the result is that all of these regulations, all of this lack of competitiveness, or all of these constraints and cost are creating issues. The end result, whatever you agree or not, the end result is that you don’t create with such a system highly successful companies. That’s it. They were created a number of years ago.

Nuno Goncalves Pedro

It’s even more significant than that. Obviously, if you look at startups, more recent startups, 2008-2021, close to 30% of the unicorns that were founded in Europe, so startups that went on to be valued over a billion dollars, relocated abroad, mostly to the US. It’s even worse. When there is innovation in Europe, these guys want to raise money from the US They want to raise money from US venture capital. They want to expand into the US markets in many cases.

Nuno Goncalves Pedro

In a significant amount, we just saw 30% of unicorns, from 2008-2021, relocated their headquarters to the US, or most of them to the US It’s incredible. It’s like even the innovation doesn’t stay in Europe. It’s not just that the industrial complex is totally stale. To your point earlier, in the last 50 years, it’s more than that. The new companies that are emerging are also not staying in Europe, or at least a significant part of them are not.

Bertrand Schmitt

Yes, that’s a very good point. That one is really scary because even if you say, “Oh, you know what? We have some good programs to help create startups.” At some point, the rational ones might discover that actually they better leave Europe because it would be more efficient for them to gain scale from the US. They will probably realize that most of their markets in the US in the first place, they will see that most of the exit opportunities, be it in terms of M&A or in terms of IPO, will probably be in the US if they are highly successful.

Bertrand Schmitt

There has not been a lot of successful acquisition of big tech companies in Europe or IPO of tech companies in Europe. There has been a few, of course, but certainly not to the level we’ve seen in the US. The US is still seen as the best path for exit for a lot of startups, especially the ones that have global appeal in terms of products and customer base and shareholder interest.

Nuno Goncalves Pedro

This is the first big thing, the first big area of change that the report proposes is innovation. We need to fundamentally shift innovation, R&D, the creation of European winners that stay in Europe. Then there’s a lot of conversation around articulation of policies, capital, diffusion, all of that thing.

Nuno Goncalves Pedro

The second piece is around energy. I think it mentioned it specifically as decarbonization and competitiveness. But it’s really the fact that the energy prices in the US are much, much lower than in Europe. Just to be clear, EU companies have electricity prices that are 2–3 times those in the US Natural gas prices are 4–5 times higher than those in the US. The price cap is because Europe doesn’t have many natural resources when it comes to energy.

Nuno Goncalves Pedro

I think the thesis here is, since we don’t have those natural resources, we can’t just pump oil, gas, whatever. We need to go somewhere else. Where we need to go is decarbonization and really shift power generation towards secure, low cost, clean energy sources. We need to figure out as well what we do with fossil fuels. Anyway, really complex issue for Europe because the price of energy is so uncompetitive.

Nuno Goncalves Pedro

Because of lack of resources, how do you sort it out? I know this is a pet peeve that you have. You’ve mentioned that in many episodes, the whole decision-making around energy in Europe and how it was flawed and messed up.

Bertrand Schmitt

To this point, to share some metrics, if we look at the average electricity price for industrial users in dollar per megawatt in 2023, the worst four countries for energy price are European companies. The worst is the UK at 400 bucks. The second is Germany at 270, maybe. Third is Italy, 250. Then France at 235, and then we have Japan. Everyone knows that Japan is not in a great place to get access to cheap energy. It’s a small island, it’s far, there is not a lot of oil and gas around. That one does make some sense.

Bertrand Schmitt

But I’m sorry, it doesn’t make sense in Europe. We say we don’t have source of energy. Of course, we have. It’s just that we banned them. We banned fracking in Europe. Why is US so cheap on oil and gas energy? Because of fracking. I don’t know if it is a US. invention, but definitely it has been used with huge success in the US It has created that high volume, low cost energy source that Europe has banned.

Bertrand Schmitt

No, we could use fracking and get a lot of cheap gas and oil in Europe. We just decided not to do it. Let’s not forget, and it’s the same with coal. We have coal in Europe. We just are not competitive bringing coal. It’s not as if I’m pushing big on coal, for instance, but oil and gas we need that. This is very efficient source of energy. The last piece for me, which is crazy, is, of course, nuclear.

Bertrand Schmitt

Germany used to have nuclear reactors. They closed all of them. The UK still have a few and was in the process of closing some. France, which has been the world leader for nuclear energy, has started closing some reactors. Countries are coming back on some of these mistakes and reinvesting. But the crazy part is that the price of energy in France, which is very high, close to Germany, makes absolutely no sense.

Bertrand Schmitt

What’s happening is that there is a crazy European scheme around electricity price that has been set up to serve German interest and has basically tried to make uncompetitive prices of energy based on nuclear. We have a situation where Germany depends on French nuclear energy. They don’t have enough energy, but they manage to make the French pay as much for electricity as the Germans for some reason, while, of course, French generation of electricity is much, much lower cost.

Bertrand Schmitt

But for some reason, the French government agreed to this scheme. That makes no sense. Some European countries actually left this scheme, like Spain, and decreased their energy cost as a result. We are in a very, very weird situation. Obviously, we can’t talk about energy prices in Europe; we are still talking about Russian gas. Again, thanks to Germany, Europe has become very dependent on cheap Russian gas imports. This is another piece of the puzzle.

Bertrand Schmitt

Europe wants to buy less gas, less oil from Russia. It is still buying some directly. But through all the sanctions and all the programs that have been put in place against Russia, in some situations we end up buying Russian gas through other countries because we do not want to buy directly any more.

Bertrand Schmitt

Some of it is from Russia, so we are buying, from India, for instance, Russian oil from India at crazy expensive price instead of buying directly from Russia. On the cover of not funding Russian war against Ukraine, we end up spending way more cost for energy price when actually we are still buying from Russia, not as directly. Some people feel better about that, I guess. But particularly, it makes no business sense, whatsoever.

Nuno Goncalves Pedro

Energy is number two, so innovation number one. Energy number two. Number three, not shockingly, security. The huge dependency on NATO, on the US, and the fact that there are only 10 countries in the EU that spend over 2% of their GDP on defence-related issues is of much concern. Here, I feel very vindicated. I was actually 18. It was 18 years ago, so it was before 2000.

Nuno Goncalves Pedro

I remember I was asking a former Prime Minister of Portugal, who later become a President, a question at an event. One of the questions I asked him is, is there a future for Europe that is not a federal Europe, in particular if we think about security and dependency on US and NATO and whatever?

Nuno Goncalves Pedro

I won’t tell you what the response was from the person, but I will tell you that it was obvious to me, 18-year-old, many moons ago, that this old dream of a unified Europe would depend also on unification of defence. Now Europe is not lagging behind. It’s like hugely behind. It’s not that Europe doesn’t spend money on defence. It does spend, if you put it all together, quite a lot. It just has very inarticulate policies among state members, duplicative expenditure, and no uniform optimization of what needs to be done and how.

Nuno Goncalves Pedro

A little bit the comment on the report is, before we even think about execution, we need to unify planning. There’s no unified planning in defence in Europe that I know of. There’s been some interesting efforts, but there isn’t really.

Bertrand Schmitt

Yeah, defence is also one of my pet peeves in Europe, but it’s so crazy when you look at it with a cold eye that for me, it’s unbelievable. You say they are spending quite well. Actually, I’m not sure there is a single European country that is spending 2% of their GDP, their NATO agreement on defence. First it’s below what it should be spending and below what the US is spending as a percentage of GDP.

Bertrand Schmitt

But at the same time, European GDP keeps growing slower than everybody else, slower than the Americans, slower than Russia, I guess, actually, for sure, way slower than China. These numbers are bad in terms of absolute number, percentage number. But if we go further, a lot of decisions are wrong.

Bertrand Schmitt

First, let’s remember, nuclear dissuasion in Europe, it’s coming mostly from the US. UK has some nuclear dissuasion, but they cannot press the button without American agreement. When we talk about nuclear weapon in the UK, it’s, yeah, sure, it’s in British soil, but it’s actually technically controlled by the US.

Bertrand Schmitt

Only France has a source of nuclear weapon that is truly basically there to support Europe if this was needed. Of course, France doesn’t have the level, the quantity of nuclear weapons that its enemies have, if you take Russia or China. That is the first thing that you could argue that, all the European nuclear defences today are assumed by France if the US is not supportive of their use. That’s one piece.

Bertrand Schmitt

But then everything else goes in a similar way. France has only one nuclear aircraft carrier. The British might have one as well. This is to compare to at least 10 in the US. This is a pretty poor position from that perspective. Let’s just take some metrics, for instance, to see how much of a joke have become the defence in Europe. Germany used to have 7,000 tanks to defend itself during the Cold War. Then it went to 3,000. Do you want to know how many they have to defend their territory?

Nuno Goncalves Pedro

I don’t know. Maybe 500?

Bertrand Schmitt

Three hundred.

Nuno Goncalves Pedro

Close, but no cigar. Wow. Shocking. One-tenth of what was already pretty poor; 3,000.

Bertrand Schmitt

One hundred twenty. This is bad. We have to be realistic that this is very bad. I remember a report just at the start of the Ukraine war in France. Suddenly people realized that it was a pretty high-intensity war, what was happening in Ukraine. A lot of munitions were used, and that is why there is actually a lack of munitions to fight properly, especially artillery shells, but mostly of everything; ballistic missiles and bombs.

Bertrand Schmitt

In France, they were on a report. They said, “You know what? We never predicted there would be such a hot war possible that we would be spending ammunition; we could be spending munitions so quickly.” basically, the analysis was if France was to fight on its own a similar high-intensity war, they will have one week of ammunition. One week. It reminds me the masks with COVID. We have a few days of masks.

Nuno Goncalves Pedro

We’re not prepared. We’re not prepared. We’re prepared for a week of war.

Bertrand Schmitt

All the masks in storage were actually not usable any more. They were gone or they cancel buying new ones. There was a scandal at the time. Here, you see the same. We have planes, we have stuff, but yeah, by the way, we have what it takes to fight modern war for one week.

Nuno Goncalves Pedro

It’s mind-boggling. It doesn’t make any sense, really. Lagging behind, huge dependence on the US.

Bertrand Schmitt

For me, it’s very surprising because you just pick step by step. You look at the metrics, you look at the numbers, and it’s public information. The picture you make out of this is truly scary, to be frank. Imagine that, for instance, if you look at what’s happening in Ukraine, at some point, I remember reading that the US was asking South Korea to transfer some of their ammunition to Ukraine because Europe was not producing fast enough, US was not producing fast enough. Actually, only South Korea was producing fast enough ammunition.

Nuno Goncalves Pedro

I’m pretty sure China is as well, but you’re not going to ask China.

Bertrand Schmitt

Yes. Fair point. On the contrary, if you look at how Russia adapted to the war, they moved after 6, 5 months to a more war economy in the way, and they started prioritizing manufacturing ammunitions, weapons, and particularly they are taking this strategy, while in Europe it’s like, “What? Increasing productions of ammunitions when we need them? Why? Should we plan for what’s next? Why?” I don’t know. I read stuff about like it would take years to increase manufacturing production. This is a joke. There is no word for it. It’s a lot, and that is my worry, reading this report.

Bertrand Schmitt

There is some analysis, there might be some conclusion that doesn’t make sense, but my expectation looking at the past 20 years of European restriction is that it will probably do nothing. Or maybe it will generate some additional spend, but will it be wisely spent? That I’m not sure.

Nuno Goncalves Pedro

Again, read the Mario Draghi report. There are a couple of different reports out there with different levels of details, the executive summary, backups on all of these things, and his actual speech to the European Commission. Very, very interesting.

Nuno Goncalves Pedro

I will mention something. I think I’ve mentioned this in the past in one of the prior episodes. Recently, I watched Ray Dalio at a conference in Singapore, and he was avoiding the whole topic around talking about Europe. He was talking about US, Southeast Asia, Middle East, US. But he didn’t really talk about Europe. The person who was leading the fireside chat with him did end up asking him that question. “What about Europe?” He gave an answer that was, shockingly enough, very similar to an answer that Lee Kuan Yew, who was the Prime Minister of Singapore and has now passed away, gave at a conference many years ago that I was in as well, of senior leaders. Very similar answer.

Nuno Goncalves Pedro

His point is saying, “I love Europe, history, all these amazing places, tourism, food, incredible,” whatever. “But there has to be something dramatic happening in Europe or Europe is lost. It’s really not going to be the engine of economy that it needs to be for even itself.” The point, again, Lee Kuan Yew went a little bit further back in the day where you said, “I love Europe for tourism and food, but that’s about it. I don’t see it becoming a global power to the length of what we’re seeing with China developing and with the US developing, etc.”

Nuno Goncalves Pedro

Not great from two people that one can have some respect for because they do have a macro geopolitical view of the world at very different moments in time.

Bertrand Schmitt

Yes, to this point, we are both Europeans, born and raised in Europe, so we say that from a position of love for Europe. We love Europe, we like Europe, we have roots in Europe. At the same time, when we probably left is that we spent time in China. We are now both living on the US West Coast, and it seems that Europe is stuck in its models that are not really working. We are glad when some try to do analysis, make some proposition.

Bertrand Schmitt

At the same time, it’s not the first time we hear about analysis. EU looking into it. It’s not the EU, it’s France, it’s Germany, it’s the UK. At the end of the day, it is not words but facts that matter on the ground. It is metrics that you see coming out of it, and it is not there. It’s not there.

Bertrand Schmitt

I think that, when I was reading this report, they are trying to do the quadrature of the circle. It is like they tried to make that circle square. You cannot have everything. You cannot have on one side, you want a protective system; on one side, you want to manage retirement in a specific way; on one side, you want independence from the US for your defence, but you do not want to do the work. You want to do stuff to get elected, and to do that, you support the green movement demands that are destroying energy manufacturing.

Bertrand Schmitt

You have to make a choice at some point. If you don’t make these hard, tough choices, you can talk as much as you want. You are not going to deliver the goods.

Nuno Goncalves Pedro

If you don’t make those hard choices, someone else would make it for you. In this case, the US will make it for you, China will make it for you, et cetera. They’ll become more competitive, and they’ll become more aggressive, and they’ll build the next wave of amazing companies, and they’ll have the more liquid labour markets. Maybe a great segue to start with another pet peeve that we have; labour laws in Europe.

Nuno Goncalves Pedro

The protection for employees in Europe is silly. It’s incredibly difficult to fire people after they’ve gone through their initial contracts with you. There’s all these real rules around it. People try to fudge it and go around it, but it’s silly stuff. There are countries where you can take literally up to two years of sick leave, like the Netherlands or Switzerland. If you go and Google it and look for it, it will show, “Oh, it is maybe up to 70% of salary.” There are some extenuating circumstances by which you could actually get 2 years of fully paid sick leave, 100% of your salary.

Nuno Goncalves Pedro

It’s like, “Are you kidding? How does that work?” You have difficulties firing, the regulatory environments of most countries. It’s difficult to fire in Germany. It’s extremely difficult to fire in France, extremely difficult to fire in Portugal, Spain. You would have to do lay-offs, which is the removal of the position that the person was hired for, for you to let the person go. Then you can’t rehire for that position for a significant amount of time.

Nuno Goncalves Pedro

It’s incredible. People in the US listening to US right now is like, “What are you talking about? Two-week notice, you go, right? What 2 weeks notice, right?”

Bertrand Schmitt

We did not even go to the 35-hour work week in France, so it feels like that is such a visible measure that… It became an insult anywhere else in the world about, “What? Are you working 35 hours a week, like the French?” I feel so sad when I saw this measure being put in place in the late ’90s, early 2000s, people’s mindsets changing in real-time in front of me.

Bertrand Schmitt

Then it was not about doing your work, doing stuff. It was how to organize your three-day weekend. That was it. People lost interest in doing their job, doing their work, and productivity went to a cliff. It has been very, very surprising. Of course, there are also additional rules. If you are above 55, and suddenly, you are very difficult to fire, or you will cost way more to fire.

Bertrand Schmitt

There are other things. Employees might think, “Oh, I’m not so well paid. This is my gross salary, and this is my net salary.” They think, “Oh, it’s very little.” But what people don’t see in Europe is that there is an insane cost on top of their gross salary that the company has to pay. Actually, the company is typically spending way more, way more than people see in their bank account. I’m not even talking about taxation on top of it.

Bertrand Schmitt

But to give you an example, in France, for a take-home after-tax of €75,000, and €75,000 in France is already a pretty big salary, to be clear, companies have to spend €175,000 to enable the employee to get that amount of money back home, €75,000. That gap is pretty insane.

Bertrand Schmitt

I know, when you do financial modelling from the US, you do this quickly. It’s not a big multiple to have the total cost a company has to pay for an employee. Then they look at Europe, and they look at France, and they’re like, “What the hell? I thought it was cheap.” No, it’s not so cheap. Yes, when you include everything, it’s not so cheap any more.

Nuno Goncalves Pedro

Just to be clear, just to reflect on your numbers, Bertrand, you were talking about someone taking net home, €75,000, the gross salary for that person would be €120,000, and the cost to the employer is €173,000 at the top. There’s a €53,000 cost to the employer on top of the gross salary just to be able to cover that. It’s €53,000 on top of the €120,000 gross for you to take home €75,000. That’s ridiculous. It’s just silly.

Nuno Goncalves Pedro

It’s not just taxes. It’s not the net after taxes. It’s not the 120K gross to the 75K net. There’s the cost to the employer, which are 52K on top or 53K or something, it’s ridiculous. On top of all of that, social securities and all this stuff, it’s incredible. It’s totally mind-boggling. It doesn’t work. It can’t work like this.

Bertrand Schmitt

Yes, it doesn’t work. That’s one of the big problem. It is a very bad spot because employees are not happy getting paid loans, and at the same time, they do not understand what is really going on and how much is being spent by the company on top of it. The company is not happy because it believes it pays employees too much. Employees believe they are paid too little because they do not see the whole cost, or they do not care about the whole cost. I don’t know. But that’s an impossible situation to be.

Bertrand Schmitt

Of course, there is such a big gap because all of these nice government programs around universal health care, pensions, and other services have to be paid for from somewhere. That’s what’s happening is that this stuff is paid from your salary.

Nuno Goncalves Pedro

Social welfare costs money.

Bertrand Schmitt

Yes, unemployment insurance. All of these nice programs that you feel are so important have a totally insane cost. Guess what? From my perspective, a lot of this is actually abused. The system is being abused. But when you build in place such a system, you generate incentives for bad actors, people who are going to try to abuse the system.

Nuno Goncalves Pedro

There’s a side effect of this, which is in some ways why the far right is taking such ridiculous positions in elections, where they’re number one in Austria, they’re third in Portugal, and whatever, coming out of nowhere in many cases, for example, in Portugal, because people are significantly unhappy, and they’re like, “There’s all these abuses. There’s all this immigration. We’re covering this immigration with costs, et cetera.”

Nuno Goncalves Pedro

We know actually immigration is net positive in many of these markets. But there is this impression, this impression that is created in citizens that, “Oh, my God, we are becoming insolvent because we are taking care of all these people that are coming in.” “No, no, no, guys, it is not because of that. You are becoming insolvent by yourselves.” Because there is no increase in productivity that is dramatic at the level of what the US has seen over the last two decades because effectively, these markets are becoming uncompetitive.

Nuno Goncalves Pedro

What we are seeing is all of this taxation, to your point, the abuses where there are people who are staying at home and not working. In many cases, the people that are staying at home are not the immigrants. They’re the locals. They’re the citizens. They’re the people like, “You know what? I’m not going to work. I’ll get paid minimum wage, or I’ll get paid some unemployment fee, or I’ll pay minimum guaranteed payment, or whatever it is that exists in my country, and I don’t need to do it.” Yeah, guess what? That doesn’t work. We can’t cover the citizens of those countries and the immigrants can’t cover for everyone else.

Bertrand Schmitt

I’m not sure about what you say. I would actually disagree. There are a lot of metrics analysis now that shows that if immigration is coming from Europe, then yes, it might be a net positive. Even then, you have to really look at from a long period until retirement. But it’s actually not true from countries outside Europe. If you exclude the US and maybe a bit of East Asia, all the rest from Africa and the Middle East is actually a net negative for the few countries in Europe that have shared the matrix. I think it’s more of a legend that immigrants are a net positive financially because it looks like it’s not if you exclude the ones from the Western world.

Nuno Goncalves Pedro

That would be because of welfare in general, just taking over the system? Because in the US, it is true. That is net positive, the immigration in US.

Bertrand Schmitt

I don’t know. Again, I think you might want in the US to split between countries of origin, which are bringing positive net result to the country or not. It’s a mix of they are not earning enough and early retirement and a lot of welfare. But the numbers, just to be clear, are very bad. If you exclude the Western world countries, the numbers are extremely bad. It’s very clear net negative. But unfortunately, there are too many, too few resources and analysis because most countries try to hide this fact. It is more convenient for them to just provide some high-level metrics that, “Hey, immigrants are net positive.”

Nuno Goncalves Pedro

Then the whole social welfare thing in Europe is, I do not know how they solve it without solving that, just having to eliminate it massively.

Bertrand Schmitt

It’s pretty clear.

Nuno Goncalves Pedro

Shall we move to regulations? We love regulations. US invent, China manufactures, Europe regulates.

Bertrand Schmitt

I’m very sad to see that, to hear that, but at this stage, it’s probably true in some ways. When you see how proud are some European regulators to invent out of nowhere some new regulations on AI, or it’s a digital market act, or it’s GDPR regulations. This stuff, just to be clear, I’ve done nothing of what they claimed they would have shift. Does it have improved a bit of privacy and stuff? Yeah, maybe, but so what? However, they have certainly improved the situation of the incumbent, typically the US incumbent, by the way.

Bertrand Schmitt

Instead of creating competitions, instead of creating more levelling competitive ground, instead of improving opportunities for European companies, it’s pretty clear it has done anything but that. It has probably also make it worse for European consumers because all these regulations have a cost. The cost is borne by European consumers. You can’t use the data, you can’t share the data. Guess what? Then it’s one less source of revenues, one less source way you can optimize advertising, for instance. Guess what?

Bertrand Schmitt

As a result, companies will have to increase costs, and that’s what they are doing. They are increasing cost, stopping some operations in Europe, not selling some products in Europe, not bothering.

Bertrand Schmitt

Take AI, for instance. The latest is that the most advanced models from Meta are not available in Europe now. You cannot use them in Europe. Good luck with that. A trade-free product is not available. Apple is not launching Apple Intelligence in Europe for now. This is crazy. This makes absolutely no sense. Guess what? No one is copying US. There’s no equivalent in the US.

Bertrand Schmitt

Actually, you could argue in the US with the new Trump presidency with others from Vivek to Elon Musk, I would expect a big decrease in regulations. Actually, during the first Trump presidency, that was one of the first time there was a significant decrease in regulation in the US, that would make the US even more competitive than it is today versus Europe because there would be an active mindset to reduce unnecessary and costly regulations. People will say, “Oh, yeah, but it’s good to have regulations and stuff. Yeah, sure, a bit.” But the problem is that we have way too many, way too much.

Nuno Goncalves Pedro

Way too early. Way too early. That is what I think we are the most to share.

Bertrand Schmitt

On top of it, way too early. It has a direct cost. People don’t want to think about it. They just see the first-order effect. But the indirect cost is you destroy competition, you destroy your own economy, you limit your own economic competitiveness. At the end of the day, you don’t grow as fast. A big reason, from my perspective, why the European economy is growing so slowly is regulations. Regulations are the ball and chains you are dragging constantly, trying to run a sprint, a marathon, when others, the Chinese, the Americans, don’t have that. They can run. They are free to run. They are free to move fast, while in Europe, you are not free to do any of this.

Bertrand Schmitt

That has a real cost. I think that at some point, Europe will have to realize that. I don’t know when it will happen. To be frank, I guess we thought a much bigger crisis. It will not be taken seriously. We will see a new report in 20 years from now analysing why we do not grow as much.

Nuno Goncalves Pedro

In 20 years from now, this is insolvent. I don’t see how if we believe the report we discussed earlier from Draghi, et cetera, countries will be insolvent and things will not be working. This is like a situation. If this again was a household or let’s say a company, maybe the analogy is easier. This is like the most hardcore of turnarounds, maybe even almost, “Let’s go into chapter 11 to protect ourselves from creditors and try and see if we can turn around this thing.”, this mess. I still see all this demagogy at the European Commission level, local countries doing whatever they’re doing and fighting their own in-house fights because they need to politically. I don’t know how you solve this.

Nuno Goncalves Pedro

Let me ask this in a more aggressive way. Do you see something that would look more like, again, this federal Europe that it seems that the report is alluding to because it had more unified planning of defence, more unified policies for innovation, more unified views on energy, and our energy gets deployed and all that stuff? More federal Europe, do you see it happening over the next 5 to 10 years?

Bertrand Schmitt

I think it has raised a question. A lot of people are saying, usually, the conclusion of this report is, “Let’s do more Europe. It didn’t work, but let’s do more.” It feels a bit like communism. “It didn’t work, but let’s do more communism. Maybe it will work better.”

Bertrand Schmitt

I’m actually worried. I used to be pro-EU, pro-Euro 20 years ago, looked like a nice common dream. At the time, we also had the UK in the EU. Now the UK left. I think the UK was actually a good source of energy for Europe and liberalism and capitalism. We don’t have that any more in EU. We are just happily all together, European continental countries. I’m actually worried. I will actually ask a question given you could argue everything got worse with the increased power of the EU with the start of the Euro.

Bertrand Schmitt

I might have to think that we might actually be better off without the Euro. The Euro has brought a very, very big lack of competitiveness for Southern European countries, from Spain to Greece and even France. I’m not sure Euro has been a good thing. It has helped German exports, but for other countries, I am not sure it has been so good.

Bertrand Schmitt

In terms of EU, I think it should go back to something way smaller where, yes, there are some practical benefits to unify some stuff, bring some ease of movement, but at the same time, I think it went way too far at this stage. I don’t think more is the answer. I don’t know your take on this.

Nuno Goncalves Pedro

I am at the opposite end. I believe Europe was always half-baked. It was half-pregnant, or “Let’s do the Euro thing, but let’s not unify on decision-making Brussels, and let’s not think through how you unify tax regimes, and let’s not think through how we unify defence and all that stuff.” I think this only works if Europe fully unifies. I don’t see countries like Portugal or Spain, whatever doing better because there’s no Euro or because now we have our own currency again back, and we can do stuff with it. I don’t see it getting better.

Nuno Goncalves Pedro

I feel either we embrace a fully European project, et cetera, or we just say, “Look, Europe has failed miserably. Let’s forget about it. Let’s go back to our own countries and figure out what’s our competitive advantages.” For a country like Portugal, to be very honest with you, tourism, nomad living, digital people, we have the great advantage of sun and weather, I don’t know, I do not see how Portugal is going to thrive dramatically by going away from all these things.

Nuno Goncalves Pedro

My view is the opposite of yours. I feel we just went half-baked into this. We never really evolved into a system that we believe that we could have representatives at European level that took care of US. I believe the solution for Europe, if it wants to be competitive, is to be fully federalized. To my point that I was asking before, I don’t see it happening politically in any chance in hell in the next 5 to 10 years for sure. If we’re serious about a competitive Europe, that’s what would need to be done.

Bertrand Schmitt

Yeah. My worry at this stage is that so many things done by Europe have been wrong, that I don’t see how More Europe will bring it right. I can see the point around More Europe. I’m just extremely worried it will just get worse.

Bertrand Schmitt

Maybe one ray of sunshine. Company structure. There is a new initiative called EU Inc trying to push for a pan-European tech company-type of structure to simplify how you build companies, to simplify stock options programs, to improve them. You have to take that with the mind that actually in Europe, it’s complete madness. From one country to the other. the regulations are very different, and I’m talking more about company type of regulations, of company structure.

Bertrand Schmitt

For instance, in some markets, you cannot have individual shareholders without them putting tens of thousands of  euros. It’s not easy to sell or change your ownership. It can take months, years, There are absolutely horrible stock options program in most European countries. France is just getting better. UK was not too bad. Germany, Austria were totally horrible. It’s complete madness, and all of them are worse than in the US.

Bertrand Schmitt

Guess what? When you are in competition for global talent, global talent is going to want to be compensated the best possible way, and that include in high-tech, high-growth companies, stock options. So if you’re stock option program is not competitive, then they are going to customers who are more competitive like in the US. The difference are huge.

Bertrand Schmitt

I think Europe is coming from a position of inherent weakness, because small countries, language barrier. It’s not easy. In a way, they should be working overdrive to be better than the competition. Not just to match it, to be better because you have to face that competition and you have inherent issues. You cannot soar. We are not all going to speak German or French in Europe anytime soon.

Bertrand Schmitt

For me, it’s always very surprising to see that because, to be frank, these are problems that have been discovered by multiple reports and committees the past 5, 10, 20 years, 30 years. Why has it not been solved by today? I don’t know. But it’s good to see that there is a push, and maybe next year, this is something that the new EU Inc might come to fruition.

Nuno Goncalves Pedro

Just to be clear, part of the issue with stock options in Europe, and actually treating of shares like investors having an investment in a company, is there’s this tendency of the tax authorities to tax, and so tax authorities are going to tax you even on unrealized gains. They’re going to tax you on your options, and options haven’t been even exercised yet. That’s the problem with options. Now it is being treated… It’s this trigger-happy… Which, by the way, Vice President Harris was trying to come to through the program that, obviously, President Biden had for the election back in time, which was then semi-thrown away.

Nuno Goncalves Pedro

But this whole notion of you can’t tax stuff preemptively because this has huge impact on ecosystems. Otherwise, I can’t take stock options in the company. I can’t take shares that I have not exercised yet, and you are going to be taxing me on them? How does that work? I don’t have the money to give you for the taxation because I need to sell the shares to give you the tax money. I haven’t done it. It’s not liquid.

Bertrand Schmitt

It makes no sense. When you know the level of risk of startups, of being in a startup, of startup not making it, you are actually making people poor, potentially by pushing for this. People who took a risk. And guess what? The next time, they won’t take a risk.

Nuno Goncalves Pedro

They won’t take a risk, yeah.

Bertrand Schmitt

They will go join that bigger, slower, corporate giant and won’t try to change the world.

Nuno Goncalves Pedro

Or they’ll move to the US and do the company in the US.

Bertrand Schmitt

Yes.

Nuno Goncalves Pedro

Which is what many Europeans do. Yes.

Bertrand Schmitt

Yes, that’s totally true. The UK, I mean, a European country, certainly not part of EU anymore. They added some pretty bad… I don’t know if they added new laws or if they started to implement them more recently, but anti-free speech laws under their latest new Prime Minister, a Labour Prime Minister. It’s very sad to see that some people complaining on X or some other social media platform can face a risk of jail, a real jail time, over some comments that might be inappropriate. But some of them, when you look at it, look more like clueless or maybe inappropriate, but not like hate crimes.

Bertrand Schmitt

But that’s the thing with regulations. It’s pretty easy to transform what they started with, probably starting with a good intent. Then they are manipulated and used, and surprise, surprise, what was considered a hate crime 5 years ago is the lower standard or whatever. It is becoming very, very shocking, actually.

Bertrand Schmitt

They managed to add a huge new taxes. Basically, in the UK, if you are qualified as a non-dom, non-domiciated, you could pay very, very little taxes. It has brought a lot of millionaires, billionaires to the UK, because if their earnings were coming from outside the UK, it would not be taxed or taxed very little. So it created a safe haven for wealthy people, which, of course, these wealthy people are going to start more businesses in the UK, to move headquarters to the UK. They will spend their money in the UK. There was a lot of inherent benefit, and that was a rational trade-off. Come here, we don’t tax you too much, and as a result, you will spend your money, you will create jobs here. That’s what happened.

Bertrand Schmitt

The problem is that the new labour government, and it started changing with the previous government, decided to go all in to remove this. It will be impacting UK, non-dom regime in the UK in the coming few years. I’m starting hearing about some people considering leaving.

Nuno Goncalves Pedro

It’s the end of the UK then if that happens, of expat UK filled with foreigners, etc, in high-paying positions. At some point in time, I don’t know. But it certainly will have a huge impact on the very wealthy bracket. The non-dom thing is always having a huge impact on the totally wealthy bracket, where the famous, even famous, Brits would go around the world and for a year, they’d be doing something somewhere else, somewhere in the world, so they could move income into the country and all that stuff or money into the country. It is a big deal. It’s something that’s very deeply entrenched in how not only foreigners, but also Brits see their relationship with the country in terms of, again, the very wealthy bracket.

Bertrand Schmitt

Yeah. You know, this rule was like 100 years old now. It’s not like something new that wasn’t experimented with for a few years. No, it was very deeply entrenched into how the UK was working, how the UK was seen, and how the UK was seen as a destination, so it will have an impact. It’s clear. I think that, of course, this lack of growth, this lack of success for different European countries, many are going to take that direction, especially the leftist government, socialist government, labour government. They will think that their way is to try to take their way out of their problem. But history has proven it never works. You don’t take your way out of trouble. You enable entrepreneurs, you unleash capitalist spirit. That’s the way China moved itself out of poverty. That’s the way US has been forever. At least from my opinion, that’s really the right way to solve the problem.

Bertrand Schmitt

The other piece of the puzzle is to reduce regulation, reduce that state full of bureaucrats. I mean, if you take France, 57% of GDP is spent by the state, 57% of GDP. Basically, you have a minority of private business that are generating the wealth for everybody else. Because the government is not a wealth creation machine, just to be clear. Can spend GDP, but this is not GDP that compounds. This is GDP that is just spent, not invested. So yeah, it’s a scary place on my tech unless they really change all the way to less spend, more cuts in the bureaucrats-run system, decreasing regulations. It’s not going to work. It will be actually a doom loop. You tax more people, the best minds are leaving, the more wealthy are leaving, and it is not going to help your country.

Nuno Goncalves Pedro

What percentage of the US, the contribution to the GDP is done by private sector? What percentage?

Bertrand Schmitt

Private sector is much higher. Yes, it’s much higher than 50%.

Nuno Goncalves Pedro

Eighty-eight percent.

Bertrand Schmitt

Yes.

Nuno Goncalves Pedro

Eighty-eight.

Bertrand Schmitt

To be clear, it got worse under Biden government or the Obama government. It’s pretty recent. It used to be not that bad.

Nuno Goncalves Pedro

Eighty-eight percent private sector. Eighty-eight percent private sector contribution in the US. It’s incredible.

Bertrand Schmitt

It’s tough to comprehend. No other country in the world actually is like this, I forgot to say, except that France. Sorry, maybe North Korea is different.

Nuno Goncalves Pedro

That’s a great comparison.

Bertrand Schmitt

You might have North Korea number one, maybe 95%, 99%, and then you have France. That’s pretty nuts. For sure, in term of OCD countries, it’s the worst.

Nuno Goncalves Pedro

Well, a couple of rays of sunshine. At least there is a good report from Mario Draghi, which, by the way, Ray Dalio mentioned as well at that event that I saw him in a few months ago. At least we know what the problems are, so hopefully we can start working on them. A lot of work to do. A lot of work to do in Europe, and a lot of work to do in figuring out if this is going to be a more unified Europe or a less and less unified Europe. A lot of work, Bertrand.

Bertrand Schmitt

Yes, Europeans are great at writing reports. I hope it move from writing reports to really generating action and generating the right action. I think the Europe is still biased in its understanding in the sense that it’s still making some assumptions about the right model. It’s full of if Europe wants to support the Green Initiative, if Europe wants to keep its protection system, this and this and that, which at some point I take offence. I think, no, you guys have to change this as well.

Bertrand Schmitt

But overall, there are a lot of good points, a lot of good analysis, some good ideas. Hopefully, some of this gets implemented. I am not personally super optimistic, having seen previous reports, commissions, and similar efforts in Europe or in France. But I really hope this time the crisis is too big. The lack of competitiveness is so big. It might become a time for action.

Bertrand Schmitt

Anecdotally, in France, there is a lot of factories and industries that are announcing some closures, maybe tire manufacturers like Michelin. In Germany, Volkswagen is going to close its first factory ever on German soil. I think anecdotally, I’m pretty worried we are going to see more and more something pretty bad happening to at least European more heavy industries where energy cost and cost of labour are starting to be such a weight that it’s totally uncompetitive.

Bertrand Schmitt

Interestingly, many of these businesses are actually moving factories to the US. Regulation, cheaper prices of energy, make it more attractive as an alternative. So hopeful, praying for the best, but at the same time, fasten your seatbelt.

Nuno Goncalves Pedro

Thank you, Bertrand.