Europe needs national champions, now
Marko Papic on the EU’s bright future
Europe faces an existential crisis. Long an innovation, technology and manufacturing hub, its greatest companies and wider industries have been hit hard by competition from American tech giants like Google and Chinese manufacturing powerhouses like BYD. Multiple prominent reports have circulated about how the European Union can rapidly respond before its economy struggles even more (Germany recently announced that its economy will not grow in 2025, for the third year in a row).
Today, Marko Papic makes the case for Europe — even against the tough competition. He’s a macro and geopolitical expert at BCA Research and a delightful guest with a panoramic perspective on the world’s current geopolitics, past and future economic history and the potential for technology to upend the global order.
Joining me and Riskgaming director of programming Laurence Pevsner, Marko talks about why he’s bullish on Europe, counters the idea that America is more deregulated, discusses why Europe needs a 28th “digital state” and why national champions are critical for success, describes how Europe can balance between the U.S. and China and finally, offers why he is optimistic that disruptions globally will actually accelerate innovation rather than slow it down.
This Q&A has been edited for length and clarity.
For more of the conversation, please subscribe to the Riskgaming podcast.
Danny Crichton:
Marko, we've discovered a massive schism between you and me, which is that I am a conventional Euro-doomer. I believe that the UK is dead, Germany is dead, France is going into a debt crisis, Italy is kind of holding itself together.
But I think I found a unicorn, which is you. You actually believe that not only is Europe not doomed, it's actually quite prosperous and has immense future potential. Why do you have so much enthusiasm for the Old Continent?
Marko Papic:
Five reasons. First of all, because everybody agrees that it's on the verge of collapse, including Europeans themselves. You go to Europe, it's just doom and gloom. And it is from doom and gloom that you get green shoots of policy action, value and so on.
The second issue is that the number one thesis, at least in the media, for why Europe is doomed, is the energy crisis. But there is an absolute tsunami of LNG supply coming that will drown Europe in cheap LNG. That's because too many countries have built too much supply.
Then the third issue is this pincer between Russian aggression and American abandonment, which I think is overstated. I don't think America is going to fully abandon Europe and I don't think Russia is an existential threat. On this, I'm a heretic. Europeans don't agree with me, which is awesome because they're finally doing stuff to deal with their perceived threats.
Then the fourth issue is that Europeans are actually really good at the kind of innovation and technology we're going to need in the next five years.
The final reason is glib and perhaps silly, but at every investor conference you get this annoying question, like, "Well, when I need to call Europe, I don't know who to call.” But the German election changed that. I do think we finally have someone to call, and it's Friedrich Merz.
Danny Crichton:
As we record this, we just found out that the debt brake that's been in place in Germany for the last 20 years is about to be loosened. What that means is Germany would potentially be able to invest in defense infrastructure. It could spend a uniquely enormous amount of money in the next couple of years.
But I'm curious, is this enough? Does this really change the game for Europe?
Marko Papic:
No, it doesn't, and that's why I listed five reasons. The macro context also has to be conducive.
For example, one thing Europe has are these very, very high-quality companies that have no profit margins. Why? Because there's like 30 of them. One of the good examples is telecommunications. Europe used to be the global leader in telecommunications, but today a Chinese telecom company has 400 million users on average, American has 120 million users on average, European has two.
One new idea for restructuring Europe is about aggregating activity. That means more value returned to shareholders, larger profit margins, and more competitiveness relative to the rest of the world. The two sectors I am most interested in are telecom and finance. I think they will be the big beneficiaries of this move. But that's another example of things that are going under the surface that aren't just about German fiscal spending.
Laurence Pevsner:
All of that makes sense. I guess my question is: What will proof look like that all this is actually happening? What would we see and say, "Oh, Marko was totally right"?
Marko Papic:
One of the best proofs may be currencies. If the dollar declines and euro goes up in some big macro way, this is evidence that the world expects the gap between European performance — both productivity and growth — and U.S. performance to narrow.
I don't think it will narrow completely. I don't think Europe is going to beat America, but I do think it's going to narrow.
Danny Crichton:
We’ve talked to a lot of entrepreneurs, and what they always come back to is deregulation. It's very hard to build a business in Europe. It is also fragmented. You’ve argued that Europe needs to aggregate more at the financial layer precisely because venture capital markets are all separate. Then another big challenge is we don't see companies scale all the way up.
When you think about the different visions for Europe’s future, are they inclusive of entrepreneurs wanting to go all the way to the end and being able to grow into national champions, or do you think there's a different model for Europe?
Marko Papic:
Well, the deregulation point is well known, so that's why I didn't mention it. But I obviously agree it is important.
For future visions, there is the Mario Draghi report on Europe’s future, which is much more focused on deregulation, so more a center-right view. And there is the Enrico Letta report, which is ... I don't think it's a leftist view, but it's more of a view of like, "Hey, once we have a kernel of innovation, we need to nurture it," and not immediately say, "Hey, no more state aid," or "no more M&A activity."
One important example is UniCredit, which is a bank in Italy — a very well-run bank. It was trying to buy Commerzbank in Germany, which became a campaign issue ahead of the German election. But Google would not be Google if it was not allowed to acquire various companies. In Europe, there is a hesitancy to allow M&A, and so create these conglomerates. I use the term national champions, and so does Letta, but it doesn't mean that these conglomerates are necessarily supported by governments. It's just that the government allows them to get bigger.
Laurence Pevsner:
I was recently at a seminar with The Moynihan Center, with one of my fellow fellows, Klaus Welle, who was the former secretary-general of the European Parliament. He was talking about how the EU is only as strong as its weakest link. The UK used to be the weakest link and now they're not part of it anymore. Now you have France, which seems gridlocked, but it doesn't have to be France. Any single country can disrupt the entire EU.
Marko Papic:
From an innovation perspective, I don't agree. Many states in the United States are a mess, but it doesn’t bring down the whole system as long as you are allowed to switch from one state to another, to move freely to create businesses, to aggregate, to do M&A activity. So it's a perspective. Entrepreneurs need to be like, "Look, I'm a French innovator. I created a cool thing. I'm going to move to Latvia." Then eventually France will see that all of its entrepreneurs have gone somewhere else.
Competition is good, but it requires the top layer to encourage it. They need to send a message that it's perfectly fine for you to hop borders and create conglomerates.
A second issue could be that the whole thing falls apart because people become Eurosceptic. As a proxy, I use support for the euro. The euro is a really nerdy way to integrate. A currency is very esoteric, and only a bunch of economists are going to get excited about it.
Why do I mention this? Because support for the euro should reflect some sort of baseline support for European integration. And I've got to tell you: Support for the euro across the euro area is at 80%.
So, yes, you have some euroscepticism, but most still believe in integration. Obviously in Germany, the AFD is a holdout. They still genuinely want to leave. But most of the other right-wing parties have put this idea under the carpet.
I think there are things that are bothering people in Europe. I would put immigration as number one. But what that tells me as an investor, is that I don't have to worry about France leaving, or Austria leaving, or Germany leaving. It just tells me establishment parties and centrist parties will adopt parts of the anti-establishment agenda. So, yes, immigration will suffer on some level.
Your follow-up question will be: But doesn't Europe need immigration given its demographic situation? My answer would be yes, but they've solved that problem with the common labor policy. There is a pool of Eastern European and Central European migrants that is going to feed Western Europe, and that's something the United States doesn't have.
Danny Crichton:
There's a book out called Stuck by Yoni Applebaum, which is focused on the United States and how people in New York don't go elsewhere, people in South Dakota aren't going to the coasts, everyone is living and staying where they are. Movement across the country is at a multi-decade low.
I do not know the exact statistic, but I imagine we are still dramatically higher within the continental United States compared to Europe. The question would be, how do you incentivize moving? How do you encourage it?
Marko Papic:
Well, I don't want to mythologize it or romanticize it, but in my sphere, the truth is that if you go to an office anywhere in Europe, you are facing a boardroom full of a mix of people. So if you are in Frankfurt, there are going to be Italians in that room. There's going to be people from Portugal or of that descent.
In America, we have this very negative view of European integration efforts, and that is to a large extent true when it comes to non-European immigrants. But there was a huge influx of Italians, Portuguese, Spanish, and people from former Yugoslavia into places like Germany, Switzerland, and Austria. And these people are today German, Austrian, Swiss.
Laurence Pevsner:
I was reading another piece of yours in which you wrote about the impossible geopolitical trinity: the idea that we have to deal with de-risking from China, decarbonization, and the threat of Russia. Each of these individually would be very difficult, but collectively the trilemma is potentially overwhelming.
I was thinking about this in the context of Europe versus the United States. In the United States, we have our two oceans, and that makes us feel safer. But Europe is surrounded on all sides. How do you think about that impossible geopolitical trinity?
Marko Papic:
Pressure makes diamonds. That's what I would say. I think our two oceans have made us fat and lazy in many ways. The current administration is basically saying, "Oh, we can withdraw from all these challenges."
But pressure can be beneficial. I'll give you one example. Why did we get the industrial revolution? One reason is that Britain is an island and has a northern climate. Trees grow slower there, and the country had basically cut down all of its forests in pursuit of grazing land. And so, it ran out of wood and had a deficit of burning fuel. It would import it from the Baltic region of Europe actually. Then the Danes started messing with that supply.
And so, the poor English had to turn to coal. Coal was not an innovation. Everybody knew about coal, but they didn’t like it. You get dirty, it's heavy, and it doesn't grow outside of your house.
Then, of course, the problem with coal is you've got to move it around. And so, they started building canals. Eventually that was extremely expensive, very onerous and so they figured out, "Hey, why don't we burn coal to move coal?" and that was the industrial revolution.
Danny Crichton:
Laurence brought up the trinity of climate change, Russia, and China. We haven't talked about China a lot. But for Germany, it is an incredible story. It was essentially the only trade surplus country with China. It was the exporter to China in order to build out the manufacturing, the factories, the facilities, and everything from chemicals to parts and everything in between up until about a couple of years ago.
Now you see competition rising from the east across a lot of areas where Germany was the monopoly producer, or at least one of a very small number of companies able to produce precision machine parts, industrial equipment, and so on.
Do you think China is a threat to Europe economically in terms of finance and deindustrialization, or do you think that this is a triggering point for Europe to regrow, rebuild and reindustrialize?
Marko Papic:
It is definitely a threat. China has been getting much better, not just with cars — which everybody talks about — but also machine tools and CapEx goods, which Europe used to dominate. I would just say, though, that the world is big and there are still plenty of places out there that are going to need to build out their infrastructure. And so, there is plenty of room for both China and Europe to compete.
Yes, it is a challenge. But the challenge is reinvigorating Europe because they're realizing they have to scale up and they have to get serious. Economic competition ultimately is healthy.
Danny Crichton:
I agree with you on a couple of things.
First, any time you back away from competition, you end up weakening yourself. If you put up protectionist walls, it gives you maybe short- to medium-term safety and insulation. But that just means you have a worse product in two, three, four, five years. Or you have this sclerotic business and you can't export because no one wants your, frankly, shitty product.
Second, you're getting at this idea of how de-risking actually increases risk. By layering on additional interdependencies, risks multiply.
Marko Papic:
Yes, and national security risks have also become a means to protectionism. Basically, imagine you're a lobbyist in DC. Your client comes in and says like, "Hey, man. Can we do something about all this competition? Can we say they're Chinese?" That's where we are right now in America. Mark Zuckerberg goes to Congress and tells everyone that TikTok is evil.
So my point is it's become a way to effectively reduce competition in the United States, and that’s a really big problem.
Laurence Pevsner:
To pivot, you recently wrote under the headline that war is good. I worked at the State Department and the UN before this and, yeah, that really sends a shiver down my spine. What’s your defense of this title?
Marko Papic:
When I wake up in the morning, I put on my analyst hat in the financial community. So I have a very glib, very petty job.
And so, when I say war is good, I really mean it from an investment perspective and from an innovation and technology perspective. You have this period in global history, from 1812 to 1914 that many historians call “the Long Peace.” That’s not really true. There were many wars: the Crimean War, the U.S. Civil War. You had the Franco-Prussian War, the Austro-Prussian War. You had a ton of conflict.
But it's considered a period of peace because the great powers didn't really go to war, other than the Crimean War, which was a very small engagement. The world powers tended to settle their affairs after a quick skirmish.
We need to study this period because too many people in America are obsessed with China. I think it's nonsense. We're not in a bipolar world. We're just not. But the United States is also not head, shoulder, torso, and hips above everyone else, which is what is required for unipolarity. It's merely head and shoulders above everyone else. And so, we're in this multipolar world that resembles 1812 to 1914.
What does that period of time teach us? It teaches us that the probability of conflict is much higher. But conflict remains relatively contained. And it teaches us about growth. In 1871, Germany unified and it created this huge security challenge to all the great powers. Japan woke up. Russia lost the Crimean War and woke up as well. And the United States woke up after the Civil War.
All this led to an extraordinary explosion of technological innovation. Why? In the pursuit of statewide competition. So what I'm saying is there's a competitive multipolar environment that suppresses great power warfare, but creates the need for national defense spending, for innovation, for technology.
War is good is because the Long Peace was the greatest burst of innovation in human history. And I think that that's what the next 50 years are going to look like.
Danny Crichton:
Marko, thank you so much for joining us.
