As an American who used to live in Europe, it has been frustrating to see the stagnation in Europe over the last two decades. Europe seems to have the mindset of retirees who are willing to accept that their best years are behind them and just want to enjoy a comfortable retirement. As you said, this can only go on so long.
As for the causes, do not underestimate the importance of energy policy. Europe has extremely expensive energy prices and this takes a huge toll on everything else. This is largely due to government policy. Importing Russian natural gas papered over the problem for a while, but I think the results of trying to force a Green energy transition while phasing out nuclear are becoming obvious to all.
Given the recent EU election results, it is clear that voters know something is going wrong, but it is not clear to me that any political leaders are offering a new model based on economic growth.
I agree, energy policy is probably one of the most important but relatively neglected areas for the EU to focus on. People only care when the energy prices increase, but other than that there is only room to talk about in terms of climate change or the net-zero goals etc, which as you have pointed out in your writing, is probably a bad goal to strive towards (on the time frame that has been set). The right-wing (far-right populist) parties in Europe don't oppose nuclear energy but tend to care far more about the culture wars and immigration questions which animates a large part of the electorate. The center-right coalition that makes up the largest share of the EU parliament is generally pro nuclear and probably more pragmatic in supporting natural gas, for example, so I have some hope that they can push a better EU wide energy agenda.
I found your essay to be informative, however one disagreement I have with its contents is your suggestion for the EU to become more innovative it should move even more towards a unified market. But I actually think that the current example of China and the historical context of the USA, two nations you compared the EU to disfavorably, suggest otherwise.
Among advanced economies, China has the most politically and economically decentralized system on earth. Local governments in China engage in partial trade protectionism, even against the rest of China. This decentralization includes fragmented capital markets and local spending that constitutes two-thirds of government spending, the inverse of the USA and EU. Local operations of state owned companies are controlled by city governments, effectively making them partially many different companies.
Similarly, the USA had a highly decentralized system for its first 150 years, with significant capital flow inhibitors between states until they began to phase them out in the late 1970s and early 1980s, fully eliminating them in the 1990s. This decentralization boosted competition, scientific advancement, technological innovation, real growth, and improved social and cultural conditions.
Historically, Europe also benefited from a less integrated market, where diverse regulatory environments spurred localized innovation and competition. Therefore, while some harmonization to reduce barriers might be beneficial, the EU should consider the advantages of reducing overall market integration. This could generate more diversified and competitive industrial ecosystems
Thanks again for the good writing, I hope you have a great weekend!
Thank you for a thoughtful and interesting comment!
I've read a bit about China's decentralized governance system (which is contrary to what many suppose), but I have to profess my ignorance on the details. Overall I'd echo what I replied to JK Lund; China may not be perfectly unified from an economic perspective. But there has been no European version of WeChat or Alibaba, and the (fragmented) market has to be one of the major reasons. I think the pivotal difference is just that there must exist a really big market that companies can grow into without too many hurdles. The US and China seem to have provided that, the EU hasn't.
That said, you make a good point about the benefits of decentralization and diverse regulatory environments. The fact that there are places like Luxembourg in Europe, or that US startups incorporate as a Delaware corp, show that legal differences create opportunities for regulatory arbitrage that companies can take advantage of in various ways. I wonder what the optimal balance is?
Great reply! Yes indeed, "what the optimal balance is?" is the multi trillion dollar question. The devils are in the details! But from my extensive research into the economic, science/education/research, and political history of the USA (I actually now refer to the USA prior to the late 1970s* as the Old Republic :)) and my partial research into China's, it should be thought of less as specific details and more as the characteristics and features of a different socio-economic organizational paradigm. The simplified version is that the USA's Old Republic, over its first decades, with the gigantic exception of banking, eliminated most protectionist measures that truly stopped competition. It actively took measures such as legal harmonizations and standardizations of parts and components. It was conceived of as an economically and politically decentralized democratic republic that wanted to fully integrate while maintaining the variability in public policy requisite for grassroots participation in governance. Our two parties used to be mass member parties, and the variability in policy, along with the fact that most economic, fiscal, regulatory, etc., policy happened at the state and even city levels (cities used to do antitrust! China's cities do antitrust in 2024!), meant that the publicly accessible parties were effectively many different parties. We no longer have a Democrat and Republican party; we have a technocracy and conservative party, neither of which care much for democracy or republicanism. It achieved this through a broad societal consensus that redundancy, economic diversification, and the ability of local areas to meaningfully affect policy were not only necessary for a democracy but also generated more competition over the long run because there were more firms, far more opportunities (including in areas like science and engineering), far more diversified industrial ecosystems, and their associated scientific and research ecosystems. These all feed into, inspire, and enable each other, and make it so that there is true heterogeneity in decision-making while also preventing capital concentrations and the sorts of financialization that steer significant amounts of the nation's aggregate resources into FIRE industry type growth and away from real economy investment. In short, the reason they were able to have the benefits of integration while maintaining geographic inhibitors that generated redundancies, more firms and labs, more opportunities, etc., isn't due to any set of details but rather because it was a whole different paradigm. The paradigm could be rebooted, and also done in the EU, but it would require significant amounts of re-decentralization. Whatever the details are, they generate interaction that also has geographic membranes. These membranes create not big but still significant local biases and allow for policy variation so that people can express themselves politically. Most importantly, this happens within a paradigm that explicitly calls for redundancy, diversification, and political-policy leeway for each segment of the population, allowing them to participate in governance.
*really it sorta phased over the period between ~1950 and ~2003 (maybe by 2010 is where we came all the way to where we are now, but the timeline and the multitude of actions requires too many words for here.
What you describe makes a lot of sense. Haven't heard that period in US political history described like that, but nation states and federations tend toward centralization rather than decentralization over time, at least politically. So what you're saying seems plausible!
Maybe it's a matter of degrees, but the EU is very decentralized given that it's not a federation and every country is still very independent. As you probably know, EU operates under the principle of subsidiarity, which is that decisions are made at the Member State-level if the intervention of the EU is not necessary. (The European Union should take action collectively only when Member States' individual power is insufficient.)
It's an interesting question though, to imagine what the EU would look like in such a decentralized paradigm that you describe?
Yes, well put, it is indeed a matter of degrees and I would say its also a matter of aspects. In my opinion, the overarching goals are fundamental to initial design considerations and also how the structures will operate and evolve over time. If the DNA of the operating paradigm is designed to, in a general and imperfect sense, generate a socio-economic organizational structure that bakes in a fair amount of redundancy and diffusion of activity, it would enable more opportunities, diversification, and democratic governance structures. This necessarily requires variability in material policy areas such as fiscal, regulatory, economic, etc. These areas can be deliberately constrained but need more flexibility than they have now.
In my personal opinion, the problem with the EU is that its DNA seems to aim for a continental division of labor while maintaining subsidiarity. This leaves it in limbo. It inhibits (not eliminates, I'm not saying this isn't there, I'm just arguing its far less than would it could be because it inhibits it) the natural competitive creativity that comes from heterogeneity and a larger number of independent firms composed of diverse people from across Europe's rich cultural landscape. At the same time, it prevents proper attempts at centralized planning because national powers still exist, and the EU center can't directly centrally plan. It can only force a condition that it can't fully control, resulting in a forced and uncontrolled centralization.
I think your description succinctly captures one of the fundamental flaws or issues with the EU project. Well put!
From the pov of innovation, what we want is a market that's as big as possible and is accessible to firms and inviduals with very few boundaries. (I.e. so firms can easily expand across the continent, people can move and work, etc.) So there has to be some regulatory and legal homogeneity on some level to allow for this. On the other, hand I totally buy the idea of a sort of redundancy and heterogeneity in governance across regions and countries, so that there is both a commercial and governmental evolution over time.
I suppose this is a neat idea but is very hard to implement, at least given where the EU is now.
I’ll note that what I’m referring to should be described as inhibitors, not barriers, they don’t create an inability to sell into the market, they just create a small but not insignificant advantage for players in the local area (which one from the outside would also have if they had the ops that were selling to that place located there), the current EU sort of lies and says it has neither of of those, but it seems that really thats just for most kinds of goods and some other stuff, and then it seems that local actors create TRUE barriers (regulatory?) to competition for some areas of the market (it seems a lot of areas of business services?), neither of those — BOTH no inhibiting AND barriers that greatly reduce the abiiity to compete there — fit the paradigm I’m referring to. But either way, at least in the USA I dont know enough about the EU to be sure about there — in my opinion decentralization is in our near future as our systems have some stark external dependencies that look to me like they may break in the coming years (possibly quite soon if theres a crisis), the scary part is very powerful special interests groups here and globally greatly benefit from this set up and they could collectively steer our ship towards war(s).
Really? Interesting view. I cannot disagree more having worked in all three continents. In China you can sell just as easily in yunnan as you can in Beijing. Same tax, same hiring, same contracts, same courts. Literally zero friction except the flights….The US already much more painful across states and the EU not even worth it for many counties… Anyway. Just my personal experience and of course depends on sector…
Oh, no, I meant in other ways, if your more interested in the paradigm their applying and the way it used to work in the USA when we ran that same paradigm fully for the first 150 years of our existence and sill to a significant degree for the ~50 years after that see my reply to Philip's reply to my comment on this essay. Regarding local protectionism, China you can see the following article in the Economist for a taste of the info but its all I can offer right now as I'm about to head out and I'd have to go through folders for the better stuff: https://www.economist.com/china/2022/07/21/the-trade-war-within-china
Great and very compleet overview. Would argue America’s (and China’s) large single market is the most important by far. Not just legally (which indeed only half true for the US) but also cultural, language, and economically: same banks, insurance, shipping, sales channels, marketing channels. When you can sell in LA you can sell in Austin. But when you are succesful in Amsterdam you have no idea how to replicate in Paris or Berlin
Great peice @Philip Skogsberg. I don't buy the cultural explanation as to why Europe doesn't appear to innovate as much as the US.
I am not entirely sold on market fragmentation explanation either. The US may be one country on paper, but it is better understood as 50 European-sized countries. Just like the EU, legal, tax, and regulatoratory rules vary from state to state. Any company that does business in the US is constantly trying to navigate 50 sets of changing rules. Probably not as much as the EU, but China likely is far more “unified” in this way.
It's less about market fragmentation and more about overall regulation. The EU regulates everything to death. From banning GMO foods to forcing netisens to click pop-ups on every website they visit….it's death by a thousand small cuts.
Yeah, interesting perspective! I don't disagree that the EU is regulating itself to death.. But it's a matter of degrees I suppose.
Eventhough China and the US are not optimally unified from an economic perspective, they are still one country.
I don't know enough about China but in the US I suspect that regulatory differences between states isn't large enough to have become a real hurdle to start and grow US-wide businesses (in the same way it does in Europe). Specific standards or conventions like the fact that many startups are incorporated as a Delaware corp and that US investors can easily fund a startup with a SAFE, for example, may make a big difference. In other words, there are certain pivotal aspects and regulations that matter more or less than others (even though there are many legal differences between both US states and European countries).
FWIW, having started companies in all three continents. Your conclusion reflects my personal experience. China was by far the easiest even in semi-regulated markets, followed by the US (for cultural/language/economic reasons), followed by Europe as a distant 3rd
In regards to what your referring to China is, but in the context of tis article China is far, far less unified in that way conceptually. In regards to what your referring to, China is more unified, but China is the most politically and economically decentralized nation on Earth, it ha strong city governments that will engage in trade protectionism against even against the rest of China, it has partially fragmented capital markets, the list of those sorts of items goes on and on. The USA used to be like this fully for the first 150 years of its existent and to a significant degree after that until the late 1980s. It boosted innovation, growth, competition, and provided more democracy and opportunity
I think you are still being overly general about Europe here when what you really have is a North/South split in innovation. On one side, you have the UK, Netherlands, Switzerland, the Nordics and the Baltics, all of whom are highly innovative and perform very well on research and startups, particularly the UK and Switzerland (Europe does have a Silicon Valley, it’s known as the ‘Golden Triangle’ between Oxford, Cambridge and London). On the other side, you have everyone else (with the possible exception of parts of Spain and Germany). You can’t ignore the elephant in the room in that European dynamism is essentially propped up by the two countries that have the least to do with it, and of those that remain, they tend to be the most anglophone and most eurosceptic of the lot.
What really needs to happen here is a ‘mini-Brexit’, whereby said countries form a sub-unit within the EU, officially remaining part of it while in practice leaving the Single Market and Customs Union (albeit maintaining a degree of access through Freeports etc). They then combine with the UK, Switzerland and EEA (and possibly the other Canzuk countries), and start seeing if they can put together an actually functional joint regulatory regime, rather than the stagnation of the EU and the chaos of the US. The separation should also enable them to do a better job engaging internationally rather than continuing the de facto protectionism of the EU’s system, hopefully helping to better develop Africa and other places. How to go about doing this is a project I have just begun work on, and I’d be happy to explore this further with you if you’re interested?
I actually touched on the north/south, rich/poor split as well. But I agree it's a little ironic that some of the riches European countries are not in the EU.
I wonder if it wouldn't be possible to achieve tighter cooperation amongs those countries (the sub-unit) without sesceding from the union? Much like there are poorer, rural parts or regions in every country (often older industrial parts), there are richer and poorer countries within the EU, and states with the US. Seems like an inescapable part of any form of national or international statehood.
I'm by no means a policy expert or researcher, for that matter, but always interested to learn more! :)
It’s less wealth I’m referring to and more innovation and effectiveness at the knowledge/startup based economy - while the Nordics and Switzerland are at the top income wise , the UK is more middle of the pack in income despite being by far ahead of everyone else in Europe in innovation, and the Baltics are also disproportionately effective here relative to their relative lower middle income position within Europe. My personal belief is that it’s a combination of culture (they all tend to be more anglophone and more culturally liberal), economic configuration (this bloc of countries could reliably be expected to vote the same way in any negotiations, usually for more free trade and less tight integration), and in the case of the UK and Switzerland (the highest performers on innovation and research) not being part of the EU or full Single Market.
The difference here though leaves the EU at an impasse whereby on one side you have the Northern bloc who are dynamic and knowledge-based, and so would benefit from a less abysmal regulatory system, greater expansion of FTAs and a more proactive stance in international development (said countries are generally more active and spend more in this area), and on the other end, the rest of the EU which tends more to traditional industries of manufacturing and agriculture (and is fairly stagnant in them at that), and so wants to keep the sclerotic regulatory system and limited trade so as to maintain a de facto system of protectionism for their own industries. At this point there could be a strong argument for the Northern bloc to simply leave the EU and leave them to it, but given the way Brexit has been reported in Europe this is likely a hard sell. The idea then is to do something that essentially amounts to the same thing, but without the same ‘fear factor’ - said countries would remain part of the EU but firm their own market with the UK, EEA and possibly Canzuk (the other sensible high income countries) that is then able to adopt an independent regulatory and foreign policy, albeit one that maintains market access for the EU, and to a lesser extent to the EU (it’s notable that the majority of trade within Northern Europe is to other Northern European countries). This essentially allows everyone to have their cake and eat it - Northern Europe gets to have the regulatory regime that best suits their own economies without losing EU relations, and the EU gets to outsource its international development work and get shot of the annoying countries that keep frustrating integration efforts.
Do you really think that UK and Switzerland are the most innovative **because** they aren't part of the EU single market? Seems like it's unrelated if anything. In particular if it's mostly due to their universities and particular histories.
>>the rest of the EU which tends more to traditional industries of manufacturing and agriculture (and is fairly stagnant in them at that), and so wants to keep the sclerotic regulatory system and limited trade so as to maintain a de facto system of protectionism for their own industries.
This is perhaps the argument that makes me most apprehensive about the EU project, specifically, bringing in countries with very different levels of development and needs. Creating good policy that works for everyone becomes harder. Nevertheless, the same could be said about the differences between big cities and rural areas within those countries, or some states within the US. Is that really a show-stopper?
That said, I like the idea of "richer" countries forming additional free trade unions or other forms of harmonization of trade. Still, geographic proximity is important for creating a cohesive and fluid market, and as much as Swedes and Australians really feel the same about a lot of things, they're just too far apart to trade as efficiently as Germans and Swedes.
All in all, thanks for your comments this has made me see some perspectives I hadn't fully considered.
I don’t know if I’d necessarily attribute the UK and Switzerland’s success directly to the lack of the single market, but certainly I think it’s a massive indictment to the concept if none of its participants are able to meaningfully compete.
Regarding the regulatory union idea, the concept is less about Sweden and Australia being able to trade better with each other - you’re right that these countries are less significant partners than Germany, and indeed a key part of the idea would be the ability to retain a degree of market access through freeports, which would remain part of the single market in a similar fashion to the arrangement with Northern Ireland. The idea instead is that Australia and Sweden, being free of the need to adhere to rules built around propping up failing German manufacturers, are instead free to build a better system fit for genuinely dynamic economies, and to better adapt to trade with the likes of India. Collaboration is partly because trade benefits, while small, still exist (my argument isn’t necessarily against single markets/customs unions in general, more that the EU one is dumb and contains too many competing interests), and partly because clubbing together will help boost both the agenda setting power and bargaining power of the bloc (and give more markets willing to enable Africa and India to export tariff free, as their domestic industries would not be threatened by them).
I do find this idea intriguing, seems like it would would benefit developing countries outside the EU too. I wonder what would happen to the southern european countries though. If the northern/richer countries start trading more with each other or with countries in Africa, India etc, would they fall into further poverty or would they instead be forced to modernize more into knowledge economies? (Thinking here of how governments and the EU have been "propping" up domestic manufacturing industries with tariffs or subsidies that would have failed a long time ago otherwise.)
In terms of direct market access, Southern European countries should be fine - there’s no reason for the bloc not to accept European standards on goods as these will inevitably be more stingy and complex than what they come up with - in that manner, single market access for them will be maintained. Outcompeting could potentially be a bigger problem, but ultimately the big markets for them are likely to still be Germany, France, Italy etc which will be business as usual. The only major ones to crowd out would be the UK (which will be signed these trade deals anyway), Netherlands (which together with Denmark would likely want to be a ‘middle ground’ between these blocs), the Nordics (which barely register anyway) and Canada/Australia (miles away and not on preferential terms). Besides, half of Southern Europe isn’t even in the EU anyway.
Depending on what you mean by innovation in this case, it's probably just correlational and not causal. I think European innovation-prowess was lost a long time ago. In any case, the most innovative countries' ability to innovate shouldn't decrease because there are more member countries, I think.
Excellent analysis.
As an American who used to live in Europe, it has been frustrating to see the stagnation in Europe over the last two decades. Europe seems to have the mindset of retirees who are willing to accept that their best years are behind them and just want to enjoy a comfortable retirement. As you said, this can only go on so long.
As for the causes, do not underestimate the importance of energy policy. Europe has extremely expensive energy prices and this takes a huge toll on everything else. This is largely due to government policy. Importing Russian natural gas papered over the problem for a while, but I think the results of trying to force a Green energy transition while phasing out nuclear are becoming obvious to all.
Given the recent EU election results, it is clear that voters know something is going wrong, but it is not clear to me that any political leaders are offering a new model based on economic growth.
I should also look into energy prices/energy usage etc in Europe vs GDP growth. Maybe there's a strong correlation there...?
https://philipskogsberg.substack.com/p/skepsis-46-growth-and-energy?r=2mmx1
I agree, energy policy is probably one of the most important but relatively neglected areas for the EU to focus on. People only care when the energy prices increase, but other than that there is only room to talk about in terms of climate change or the net-zero goals etc, which as you have pointed out in your writing, is probably a bad goal to strive towards (on the time frame that has been set). The right-wing (far-right populist) parties in Europe don't oppose nuclear energy but tend to care far more about the culture wars and immigration questions which animates a large part of the electorate. The center-right coalition that makes up the largest share of the EU parliament is generally pro nuclear and probably more pragmatic in supporting natural gas, for example, so I have some hope that they can push a better EU wide energy agenda.
Well written and interesting!
I found your essay to be informative, however one disagreement I have with its contents is your suggestion for the EU to become more innovative it should move even more towards a unified market. But I actually think that the current example of China and the historical context of the USA, two nations you compared the EU to disfavorably, suggest otherwise.
Among advanced economies, China has the most politically and economically decentralized system on earth. Local governments in China engage in partial trade protectionism, even against the rest of China. This decentralization includes fragmented capital markets and local spending that constitutes two-thirds of government spending, the inverse of the USA and EU. Local operations of state owned companies are controlled by city governments, effectively making them partially many different companies.
Similarly, the USA had a highly decentralized system for its first 150 years, with significant capital flow inhibitors between states until they began to phase them out in the late 1970s and early 1980s, fully eliminating them in the 1990s. This decentralization boosted competition, scientific advancement, technological innovation, real growth, and improved social and cultural conditions.
Historically, Europe also benefited from a less integrated market, where diverse regulatory environments spurred localized innovation and competition. Therefore, while some harmonization to reduce barriers might be beneficial, the EU should consider the advantages of reducing overall market integration. This could generate more diversified and competitive industrial ecosystems
Thanks again for the good writing, I hope you have a great weekend!
---Mike
Thank you for a thoughtful and interesting comment!
I've read a bit about China's decentralized governance system (which is contrary to what many suppose), but I have to profess my ignorance on the details. Overall I'd echo what I replied to JK Lund; China may not be perfectly unified from an economic perspective. But there has been no European version of WeChat or Alibaba, and the (fragmented) market has to be one of the major reasons. I think the pivotal difference is just that there must exist a really big market that companies can grow into without too many hurdles. The US and China seem to have provided that, the EU hasn't.
That said, you make a good point about the benefits of decentralization and diverse regulatory environments. The fact that there are places like Luxembourg in Europe, or that US startups incorporate as a Delaware corp, show that legal differences create opportunities for regulatory arbitrage that companies can take advantage of in various ways. I wonder what the optimal balance is?
Great reply! Yes indeed, "what the optimal balance is?" is the multi trillion dollar question. The devils are in the details! But from my extensive research into the economic, science/education/research, and political history of the USA (I actually now refer to the USA prior to the late 1970s* as the Old Republic :)) and my partial research into China's, it should be thought of less as specific details and more as the characteristics and features of a different socio-economic organizational paradigm. The simplified version is that the USA's Old Republic, over its first decades, with the gigantic exception of banking, eliminated most protectionist measures that truly stopped competition. It actively took measures such as legal harmonizations and standardizations of parts and components. It was conceived of as an economically and politically decentralized democratic republic that wanted to fully integrate while maintaining the variability in public policy requisite for grassroots participation in governance. Our two parties used to be mass member parties, and the variability in policy, along with the fact that most economic, fiscal, regulatory, etc., policy happened at the state and even city levels (cities used to do antitrust! China's cities do antitrust in 2024!), meant that the publicly accessible parties were effectively many different parties. We no longer have a Democrat and Republican party; we have a technocracy and conservative party, neither of which care much for democracy or republicanism. It achieved this through a broad societal consensus that redundancy, economic diversification, and the ability of local areas to meaningfully affect policy were not only necessary for a democracy but also generated more competition over the long run because there were more firms, far more opportunities (including in areas like science and engineering), far more diversified industrial ecosystems, and their associated scientific and research ecosystems. These all feed into, inspire, and enable each other, and make it so that there is true heterogeneity in decision-making while also preventing capital concentrations and the sorts of financialization that steer significant amounts of the nation's aggregate resources into FIRE industry type growth and away from real economy investment. In short, the reason they were able to have the benefits of integration while maintaining geographic inhibitors that generated redundancies, more firms and labs, more opportunities, etc., isn't due to any set of details but rather because it was a whole different paradigm. The paradigm could be rebooted, and also done in the EU, but it would require significant amounts of re-decentralization. Whatever the details are, they generate interaction that also has geographic membranes. These membranes create not big but still significant local biases and allow for policy variation so that people can express themselves politically. Most importantly, this happens within a paradigm that explicitly calls for redundancy, diversification, and political-policy leeway for each segment of the population, allowing them to participate in governance.
*really it sorta phased over the period between ~1950 and ~2003 (maybe by 2010 is where we came all the way to where we are now, but the timeline and the multitude of actions requires too many words for here.
The Old Republic - I like it ;)
What you describe makes a lot of sense. Haven't heard that period in US political history described like that, but nation states and federations tend toward centralization rather than decentralization over time, at least politically. So what you're saying seems plausible!
Maybe it's a matter of degrees, but the EU is very decentralized given that it's not a federation and every country is still very independent. As you probably know, EU operates under the principle of subsidiarity, which is that decisions are made at the Member State-level if the intervention of the EU is not necessary. (The European Union should take action collectively only when Member States' individual power is insufficient.)
It's an interesting question though, to imagine what the EU would look like in such a decentralized paradigm that you describe?
Yes, well put, it is indeed a matter of degrees and I would say its also a matter of aspects. In my opinion, the overarching goals are fundamental to initial design considerations and also how the structures will operate and evolve over time. If the DNA of the operating paradigm is designed to, in a general and imperfect sense, generate a socio-economic organizational structure that bakes in a fair amount of redundancy and diffusion of activity, it would enable more opportunities, diversification, and democratic governance structures. This necessarily requires variability in material policy areas such as fiscal, regulatory, economic, etc. These areas can be deliberately constrained but need more flexibility than they have now.
In my personal opinion, the problem with the EU is that its DNA seems to aim for a continental division of labor while maintaining subsidiarity. This leaves it in limbo. It inhibits (not eliminates, I'm not saying this isn't there, I'm just arguing its far less than would it could be because it inhibits it) the natural competitive creativity that comes from heterogeneity and a larger number of independent firms composed of diverse people from across Europe's rich cultural landscape. At the same time, it prevents proper attempts at centralized planning because national powers still exist, and the EU center can't directly centrally plan. It can only force a condition that it can't fully control, resulting in a forced and uncontrolled centralization.
I think your description succinctly captures one of the fundamental flaws or issues with the EU project. Well put!
From the pov of innovation, what we want is a market that's as big as possible and is accessible to firms and inviduals with very few boundaries. (I.e. so firms can easily expand across the continent, people can move and work, etc.) So there has to be some regulatory and legal homogeneity on some level to allow for this. On the other, hand I totally buy the idea of a sort of redundancy and heterogeneity in governance across regions and countries, so that there is both a commercial and governmental evolution over time.
I suppose this is a neat idea but is very hard to implement, at least given where the EU is now.
I’ll note that what I’m referring to should be described as inhibitors, not barriers, they don’t create an inability to sell into the market, they just create a small but not insignificant advantage for players in the local area (which one from the outside would also have if they had the ops that were selling to that place located there), the current EU sort of lies and says it has neither of of those, but it seems that really thats just for most kinds of goods and some other stuff, and then it seems that local actors create TRUE barriers (regulatory?) to competition for some areas of the market (it seems a lot of areas of business services?), neither of those — BOTH no inhibiting AND barriers that greatly reduce the abiiity to compete there — fit the paradigm I’m referring to. But either way, at least in the USA I dont know enough about the EU to be sure about there — in my opinion decentralization is in our near future as our systems have some stark external dependencies that look to me like they may break in the coming years (possibly quite soon if theres a crisis), the scary part is very powerful special interests groups here and globally greatly benefit from this set up and they could collectively steer our ship towards war(s).
Have a great weekend!
—Mike
Really? Interesting view. I cannot disagree more having worked in all three continents. In China you can sell just as easily in yunnan as you can in Beijing. Same tax, same hiring, same contracts, same courts. Literally zero friction except the flights….The US already much more painful across states and the EU not even worth it for many counties… Anyway. Just my personal experience and of course depends on sector…
Oh, no, I meant in other ways, if your more interested in the paradigm their applying and the way it used to work in the USA when we ran that same paradigm fully for the first 150 years of our existence and sill to a significant degree for the ~50 years after that see my reply to Philip's reply to my comment on this essay. Regarding local protectionism, China you can see the following article in the Economist for a taste of the info but its all I can offer right now as I'm about to head out and I'd have to go through folders for the better stuff: https://www.economist.com/china/2022/07/21/the-trade-war-within-china
Great and very compleet overview. Would argue America’s (and China’s) large single market is the most important by far. Not just legally (which indeed only half true for the US) but also cultural, language, and economically: same banks, insurance, shipping, sales channels, marketing channels. When you can sell in LA you can sell in Austin. But when you are succesful in Amsterdam you have no idea how to replicate in Paris or Berlin
Exactly. That's my main point. At least from the pov of startups it's the most important aspect
Great peice @Philip Skogsberg. I don't buy the cultural explanation as to why Europe doesn't appear to innovate as much as the US.
I am not entirely sold on market fragmentation explanation either. The US may be one country on paper, but it is better understood as 50 European-sized countries. Just like the EU, legal, tax, and regulatoratory rules vary from state to state. Any company that does business in the US is constantly trying to navigate 50 sets of changing rules. Probably not as much as the EU, but China likely is far more “unified” in this way.
It's less about market fragmentation and more about overall regulation. The EU regulates everything to death. From banning GMO foods to forcing netisens to click pop-ups on every website they visit….it's death by a thousand small cuts.
Yeah, interesting perspective! I don't disagree that the EU is regulating itself to death.. But it's a matter of degrees I suppose.
Eventhough China and the US are not optimally unified from an economic perspective, they are still one country.
I don't know enough about China but in the US I suspect that regulatory differences between states isn't large enough to have become a real hurdle to start and grow US-wide businesses (in the same way it does in Europe). Specific standards or conventions like the fact that many startups are incorporated as a Delaware corp and that US investors can easily fund a startup with a SAFE, for example, may make a big difference. In other words, there are certain pivotal aspects and regulations that matter more or less than others (even though there are many legal differences between both US states and European countries).
There no restrictions on travel between states, and regulatory competition between states creates better regulatory enviroments.
Yes, it's a matter of degree. My point is that the US is probably less unified than it appears from the outside.
FWIW, having started companies in all three continents. Your conclusion reflects my personal experience. China was by far the easiest even in semi-regulated markets, followed by the US (for cultural/language/economic reasons), followed by Europe as a distant 3rd
In regards to what your referring to China is, but in the context of tis article China is far, far less unified in that way conceptually. In regards to what your referring to, China is more unified, but China is the most politically and economically decentralized nation on Earth, it ha strong city governments that will engage in trade protectionism against even against the rest of China, it has partially fragmented capital markets, the list of those sorts of items goes on and on. The USA used to be like this fully for the first 150 years of its existent and to a significant degree after that until the late 1980s. It boosted innovation, growth, competition, and provided more democracy and opportunity
I think you are still being overly general about Europe here when what you really have is a North/South split in innovation. On one side, you have the UK, Netherlands, Switzerland, the Nordics and the Baltics, all of whom are highly innovative and perform very well on research and startups, particularly the UK and Switzerland (Europe does have a Silicon Valley, it’s known as the ‘Golden Triangle’ between Oxford, Cambridge and London). On the other side, you have everyone else (with the possible exception of parts of Spain and Germany). You can’t ignore the elephant in the room in that European dynamism is essentially propped up by the two countries that have the least to do with it, and of those that remain, they tend to be the most anglophone and most eurosceptic of the lot.
What really needs to happen here is a ‘mini-Brexit’, whereby said countries form a sub-unit within the EU, officially remaining part of it while in practice leaving the Single Market and Customs Union (albeit maintaining a degree of access through Freeports etc). They then combine with the UK, Switzerland and EEA (and possibly the other Canzuk countries), and start seeing if they can put together an actually functional joint regulatory regime, rather than the stagnation of the EU and the chaos of the US. The separation should also enable them to do a better job engaging internationally rather than continuing the de facto protectionism of the EU’s system, hopefully helping to better develop Africa and other places. How to go about doing this is a project I have just begun work on, and I’d be happy to explore this further with you if you’re interested?
I actually touched on the north/south, rich/poor split as well. But I agree it's a little ironic that some of the riches European countries are not in the EU.
I wonder if it wouldn't be possible to achieve tighter cooperation amongs those countries (the sub-unit) without sesceding from the union? Much like there are poorer, rural parts or regions in every country (often older industrial parts), there are richer and poorer countries within the EU, and states with the US. Seems like an inescapable part of any form of national or international statehood.
I'm by no means a policy expert or researcher, for that matter, but always interested to learn more! :)
It’s less wealth I’m referring to and more innovation and effectiveness at the knowledge/startup based economy - while the Nordics and Switzerland are at the top income wise , the UK is more middle of the pack in income despite being by far ahead of everyone else in Europe in innovation, and the Baltics are also disproportionately effective here relative to their relative lower middle income position within Europe. My personal belief is that it’s a combination of culture (they all tend to be more anglophone and more culturally liberal), economic configuration (this bloc of countries could reliably be expected to vote the same way in any negotiations, usually for more free trade and less tight integration), and in the case of the UK and Switzerland (the highest performers on innovation and research) not being part of the EU or full Single Market.
The difference here though leaves the EU at an impasse whereby on one side you have the Northern bloc who are dynamic and knowledge-based, and so would benefit from a less abysmal regulatory system, greater expansion of FTAs and a more proactive stance in international development (said countries are generally more active and spend more in this area), and on the other end, the rest of the EU which tends more to traditional industries of manufacturing and agriculture (and is fairly stagnant in them at that), and so wants to keep the sclerotic regulatory system and limited trade so as to maintain a de facto system of protectionism for their own industries. At this point there could be a strong argument for the Northern bloc to simply leave the EU and leave them to it, but given the way Brexit has been reported in Europe this is likely a hard sell. The idea then is to do something that essentially amounts to the same thing, but without the same ‘fear factor’ - said countries would remain part of the EU but firm their own market with the UK, EEA and possibly Canzuk (the other sensible high income countries) that is then able to adopt an independent regulatory and foreign policy, albeit one that maintains market access for the EU, and to a lesser extent to the EU (it’s notable that the majority of trade within Northern Europe is to other Northern European countries). This essentially allows everyone to have their cake and eat it - Northern Europe gets to have the regulatory regime that best suits their own economies without losing EU relations, and the EU gets to outsource its international development work and get shot of the annoying countries that keep frustrating integration efforts.
Do you really think that UK and Switzerland are the most innovative **because** they aren't part of the EU single market? Seems like it's unrelated if anything. In particular if it's mostly due to their universities and particular histories.
>>the rest of the EU which tends more to traditional industries of manufacturing and agriculture (and is fairly stagnant in them at that), and so wants to keep the sclerotic regulatory system and limited trade so as to maintain a de facto system of protectionism for their own industries.
This is perhaps the argument that makes me most apprehensive about the EU project, specifically, bringing in countries with very different levels of development and needs. Creating good policy that works for everyone becomes harder. Nevertheless, the same could be said about the differences between big cities and rural areas within those countries, or some states within the US. Is that really a show-stopper?
That said, I like the idea of "richer" countries forming additional free trade unions or other forms of harmonization of trade. Still, geographic proximity is important for creating a cohesive and fluid market, and as much as Swedes and Australians really feel the same about a lot of things, they're just too far apart to trade as efficiently as Germans and Swedes.
All in all, thanks for your comments this has made me see some perspectives I hadn't fully considered.
I don’t know if I’d necessarily attribute the UK and Switzerland’s success directly to the lack of the single market, but certainly I think it’s a massive indictment to the concept if none of its participants are able to meaningfully compete.
Regarding the regulatory union idea, the concept is less about Sweden and Australia being able to trade better with each other - you’re right that these countries are less significant partners than Germany, and indeed a key part of the idea would be the ability to retain a degree of market access through freeports, which would remain part of the single market in a similar fashion to the arrangement with Northern Ireland. The idea instead is that Australia and Sweden, being free of the need to adhere to rules built around propping up failing German manufacturers, are instead free to build a better system fit for genuinely dynamic economies, and to better adapt to trade with the likes of India. Collaboration is partly because trade benefits, while small, still exist (my argument isn’t necessarily against single markets/customs unions in general, more that the EU one is dumb and contains too many competing interests), and partly because clubbing together will help boost both the agenda setting power and bargaining power of the bloc (and give more markets willing to enable Africa and India to export tariff free, as their domestic industries would not be threatened by them).
I do find this idea intriguing, seems like it would would benefit developing countries outside the EU too. I wonder what would happen to the southern european countries though. If the northern/richer countries start trading more with each other or with countries in Africa, India etc, would they fall into further poverty or would they instead be forced to modernize more into knowledge economies? (Thinking here of how governments and the EU have been "propping" up domestic manufacturing industries with tariffs or subsidies that would have failed a long time ago otherwise.)
In terms of direct market access, Southern European countries should be fine - there’s no reason for the bloc not to accept European standards on goods as these will inevitably be more stingy and complex than what they come up with - in that manner, single market access for them will be maintained. Outcompeting could potentially be a bigger problem, but ultimately the big markets for them are likely to still be Germany, France, Italy etc which will be business as usual. The only major ones to crowd out would be the UK (which will be signed these trade deals anyway), Netherlands (which together with Denmark would likely want to be a ‘middle ground’ between these blocs), the Nordics (which barely register anyway) and Canada/Australia (miles away and not on preferential terms). Besides, half of Southern Europe isn’t even in the EU anyway.
It's interesting that as more countries entered the EU, innovation decreased.
Depending on what you mean by innovation in this case, it's probably just correlational and not causal. I think European innovation-prowess was lost a long time ago. In any case, the most innovative countries' ability to innovate shouldn't decrease because there are more member countries, I think.