Joeri de Wilde: Europe doesn’t need a Silicon Valley
This column was originally written in Dutch. This is an English translation.
Europe’s obsession with US productivity figures is leading us down the wrong path. Europe should not try to imitate the US, but should learn to make better use of its own strengths.
By Joeri de Wilde, Senior Economist at Triodos Investment Management
When a debate between two leading economists makes it into *de Volkskrant*, you know the topic is widely discussed. Admittedly, both economists are Nobel laureates, but the debate between Paul Krugman and Philippe Aghion on the productivity gap between Europe and the US is quite technical. Essentially, it centres on the question of whether Europe is falling further and further behind.
According to many economists, this is indeed the case. This assumption also lies at the heart of the authoritative Draghi and Wennink reports, which warn of Europe’s eroding competitiveness. According to these analyses, there is only one solution: to boost productivity growth by catching up on our technological lag.
But Krugman offers a caveat. In his view, Europe has not fallen behind the US at all. If you adjust for differences in purchasing power between the two economies rather than for domestic inflation (the usual method), Europeans have not become any less prosperous than Americans.
Different measurement methods therefore lead to different outcomes. Krugman’s approach feels intuitively closer to reality. After all, Paris still feels considerably more prosperous to both residents and visitors than Alabama, whilst the method used by Draghi, Wennink and Aghion implies that France can now only compete with the poorest US states.
Europe has achieved more
That does not alter the fact that there is work to be done in Europe. Even if we are not structurally lagging behind in productivity, dependence remains a risk. When the US and China dominate digital infrastructure and AI, we are vulnerable. The question is whether analyses such as those by Draghi and Aghion are steering us in the right direction.
Anyone looking solely at productivity figures will soon be tempted to copy the model of the frontrunner. But this overlooks the fundamental differences between Europe and the US.
European prosperity relies, more so than that of the US, on the value of economic, social and institutional capital built up over a long period. These include tangible assets, such as historic cities, a solid industrial base and high-quality infrastructure, but also less tangible forms of capital: robust public institutions, reliable legislation, regulation and oversight, shared standards and a carefully cultivated international reputation.
The US economy, by contrast, is more strongly focused on continuous creative destruction, whereby economic value arises relatively more often from new companies, new technologies and new markets, such as in the field of AI today.
The Silicon Valley model is not suited to Europe
That is a crucial difference. An economy that runs on carefully built-up capital, and a society that values stability and deep-rooted traditions, is not suited to a Silicon Valley model characterised by a great deal of short-term venture capital and constant disruption. Moreover, we see that the American model leads to greater concentration of power and increased inequality, which in turn puts pressure on social and political stability. That is not something we, as Europeans, should aspire to.
What Europe needs is an innovation model that builds on its own economic structure, rather than working against it. In other words, innovation that is not detached from existing companies and institutions, but can, in fact, emerge from them.
In this light, academic and socio-economic researcher Sami Mahroum puts forward some interesting suggestions. Established companies could more frequently give rise to new ventures through corporate spin-offs. National champions could also pool their knowledge and technological capabilities to a greater extent. And family fortunes and foundations could provide start-ups with patient capital during their growth phase. In this way, innovation becomes embedded within the existing economic structure, rather than being entirely dependent on waves of venture capital.
The productivity challenge for Europe is therefore not to copy the US, but to make better use of its own economic strength. If Europe succeeds in transforming the enormous stock of economic, social and institutional capital that the continent has built up into the next generation of European companies, we will be innovating in our own way. Then the question of whether we are falling behind will become far less relevant.
More columns by Joeri de Wilde