Green Shoots In Europe? Not Until It Will Create Innovative Economies Southern Europe lacks a business friendly political culture, itself the precursor for a pro-innovation eco-system

By Paolo von Schirach

July 27, 2013

WASHINGTON – The international business and financial media are desperately trying to tell us that the worst is over for Europe. Every tiny morsel of semi-good news is magnified in order to support the idea that we have real green shoots; and so all will be well, very soon –really. (Look: Spain’s unemployment is down from 27% to just 26%. Hey, the UK economy grew by 0.6%. Great news!)

Good news from Europe?

Good news? Really? Look, Northern Europe may be doing alright, at least by international standards. But the South is another story. The combination of high social costs, inefficient and costly public services, lack of innovation, and  corruption are at the root o a chronic crisis that may at best morph into semi-perpetual stagnation, assuming continuing support coming from Brussels and the European Central Bank. .

Of course there is no law dictating that “it has to be this way” in Italy or Spain. Post industrial knowledge economies are all about the production and optimization of intellectual capital and its coveted fruits: world-class innovative technologies. Assuming a decent level of education and the creation of a reasonably large cadre of smart people who can think and innovate, almost anything is possible. Look at Taiwan. Look at Bangalore in India. Look at state of the art Scandinavian corporations.

A pro-business eco-system

But while in theory all this is very straightforward, in practice the creation of a well-balanced “eco-system” that will spawn innovation is devilishly complicated. It is complicated because it rests on the creation of a good balance among intangible yet crucial factors. Yes, we need good education systems that will train young minds. But, while absolutely essential, this is not nearly enough.

We also need a society that will create real and easy to understand material incentives so that would-be innovators will apply their knowledge and enthusiasm to economically viable pursuits. And this implies the correct alignment of a host of extremely relevant factors. We need clear rules of the game (good laws), and credible enforcement mechanisms. Contracts need to be honored, Intellectual property needs to be adequately protected. Failures should not be the kiss of death for any would-be entrepreneur. Economic activities should be supported by modern infrastructure and decent public services. Capital markets should be well-regulated in order to ensure transparency.  Likewise, commercial credit as well as venture capital should be available; and finally taxes should be fair, not punitive. 

In other words we need a pro-growth environment that will make people believe that it is definitely worthwhile to make an effort trying something new, because there will be real rewards in case of success, while failure will not for ever disqualify an entrepreneur who tried and did not succeed. 

It is not easy

All this sounds pretty self-evident; and yet it is extremely difficult to implement, because doing it right depends on a deep understanding of how to modulate and organize so many different moving parts in a harmonious way. For example, if we go back to the old Soviet Union, there is no doubt that the Communist system did produce a large number of first class scientists and engineers. That system created state of the art military hardware, (tanks, fighter jets and submarines), nuclear armed  intercontinental ballistic missiles and satellites. That gigantic effort required the sustained production and harnessing of human talent and physical resources. The Soviets did that.

But they managed that process at an extremely high cost and in a very wasteful, top down, fashion. Indeed, lacking the same levels of inordinately high state spending devoted to one single goal, since the collapse of the Soviet Union the new post-communist Russia has been unable to create really modern, world competitive, high-tech champions. And yet it has its share of very smart people. The problem in Russia (as elsewhere) is that on top of smart people you also need a credible, self-sustaining, business friendly eco-system.

Southern Europe still believes in statist fallacies

Spain, Italy and Greece are not Russia; but they also lack a pro-innovation eco-system. They are plagued by a populist and fundamentally anti-business political culture that assumes, among other silly beliefs, that the state drives economic development. Wrong idea. The state is usually a mediocre to bad steward of public resources (that these indebted countries do not have to begin with). 

If Europe’s real come back hinges on some new and clever public policy that will drive a turn around, we can search all we want for green shoots. While we may find some, they will never be enough.

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