Draghi Takes Aim at Europe's Industrial Zombies
Lionel Laurent
Sep 10, 2024
There’s still a chance to turn the continent’s innovation lag around – honest.
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Take the recent wave of layoffs on both sides of the Atlantic. Layoff plans at Microsoft Corp, Meta Platforms Inc., Alphabet Inc. and X, formerly Twitter,were accompanied by severance payments worth three to seven-and-a-halfmonths of median pay, according to a paper by former Alcatel Lucent SAS executive Olivier Coste and economist Yann Coatanlem, and some pretty agile shifts such as Meta’s metaverse U-turn. Europe’s Nokia Oyj and SAP SE, meanwhile, announced layoff plans that won’t be completed until 2026 andone that provisioned over 18 months of compensation globally.
This has an impact on the profitability of investing in tech and the kind of investment that ensues. The authors estimate the time and cost to restructure means a failed tech investment amounts to 10% of revenue in the US but 60% in Europe — the difference between loss and profit if four out of five projects fail. They connect this gap with the evidence that European venture capital firms are less profitable than their US counterparts and that European corporations are vastly underrepresented in the global research spending rankings. It’s telling that the only euro-area firm in the top 10 for R&D is century-old automaker Volkswagen AG, which is considering factory closures in Germany for the first time.
By flagging this issue, Draghi is encouraging Europeans to incentivize risk-taking, not to tear apart their social model. Coste and Coatanlem suggest that a solution already exists within Europe’s borders: Denmark’s “flexicurity” model, which allows employers to more easily hire and fire workers while also ensuring they have a safety net between jobs. If this were applied to the highest 5% or 10% earners, it could go some way to injecting dynamism without widespread job losses. And if it helped close the tech gap with the US, so much the better.
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