Europe on the Edge

I have spent the past week in four European cities: Madrid, Lisbon, Frankfurt and Munich. I spoke at the annual Santander International Banking Conference and then at Web Summit. I met with a group of German opinion formers at a dinner hosted by Burda, numerous CEOs, and officials from the European Union, and I listened to former British Prime Minister Tony Blair talk about making tech work for the masses. Here are some observations on the week:

1. Southern Europe Still Disconnected from Northern Europe Financially—The borrowing costs for Spain and Italy are significantly higher than for France and Germany. A Spanish company with the same creditworthiness as a German company can be denied a loan because of sovereign risk. Italy has not yet made significant fiscal reforms nor has the workforce endured the 30 percent cut in wages that resulted from the 2011-12 crisis in Spain. There is hope for true monetary union but that seems unlikely given German opposition.
2. Macron Is the Star Leader in Europe—His recent proposal for a more active military policy fell on deaf ears in Berlin. But the economic effect is palpable. For the first time, more venture capital money is invested in France than in Germany this year.
3. Fear About the Next Big Recession—There are negative interest rates in Europe. Monetary policy is nearly exhausted. Fiscal budgets are strained, with several NATO members already failing to meet the 2 percent of GDP commitment. One expert said, “Citizens will not give government another chance; they will not have the forbearance for a long and slow recovery.”
4. The Radical Labor Party Platform—Jeremy Corbyn will go to the voters with a return to 1970s ideas such as nationalized industry, special taxes on non-domicile residents (foreigners) and appropriation of private school property such as playing fields. But according to pollster MORI, 70 percent of British voters believe the economy is rigged in favor of the elites, and 65 percent want to nationalize the rail network. For the first time since 2002, the British are in favor of higher taxes if it means more public services.
5. Upcoming Elections—The Spanish seem likely to re-elect the Socialist Party as the first force over the weekend. Prime Minister, Pedro Sánchez, will need a compact to form Government in case PSOE wins. There are doubts about socialist´s potential allies. In the meantime, opposition led by People´s Party (PP) is increasing according to the latest polls. Risk of blocking again if there are not clear majorities emerging from the ballot boxes. Meanwhile, Boris Johnson, the UK Prime Minister, will need to gain a majority of seats to stay in office, as none of the opposition parties will join him in a coalition. There is a scenario in which Corbyn becomes prime minister by cobbling together all the other parties.
6. German Auto Industry—Issues of the past few years have rocked the most important industry in the country, which directly employs 1 million workers. The problems continue, with Mercedes now the latest under scrutiny. Auto production in Germany declined 9 percent last year and is on track to decline another 9 percent, due to trade issues with the U.S. and slowdown in China.
7. The Opportunity for Small and Medium Enterprises—Only 8 percent of European SMEs sell outside of their home market. There is renewed emphasis on getting financing to entrepreneurs.
8. German Niche Dominance—I met the largest producer of screws and bolts, still proudly family-owned and operated. I also met a representative of the largest brake manufacturer for cars and trains. These companies have expanded effectively to North America and Asia, in both cases serving nearly 100 markets.
9. The Potential of Artificial Intelligence—Europe is far underestimated in its capacity to compete against China and the U.S. I met one young entrepreneur last night who is collecting data from all of the 70,000 rail crossings in Germany in order to speed up the trains and ensure better and safer traffic flow in cities. Industrial AI will be the focus for many of the German startups. There is renewed emphasis on connections with universities, especially in the Technical University of Munich, which is spawning many new enterprises.
10. Relationship with America—I leave the best for last. There is grudging recognition that Europe is on its own; the period of postwar American leadership that was unstinting and unselfish is at an end. It is ironic that tomorrow marks the 30th anniversary of the fall of the Berlin Wall, and on Monday we mark the 101st anniversary of the end of World War I.

I leave the Continent convinced that the private sector has to step into the void left by distracted and dysfunctional government, to drive innovation and commit to reskilling of the workforce (an estimated 54 percent of jobs in Europe are at risk due to automation). I know this is contrary to the European model, which has been much more about public-private partnership. But when you consider that the German government has allocated only $3 billion to AI research from the 2020 budget, it is a signal that European giants such as Siemens, Philips and hundreds of startups will have to show the way. Europe has undeniable advantages in culture, living standards, education and respect for individual rights. But it is time for European CEOs to commit to growth in their home markets, instead of investing in the U.S. and Asia.

Richard Edelman is CEO.