By Daniel Michaels
BRUSSELS -- European Union leaders, aiming to turn the hardship
of the coronavirus pandemic into opportunity, are finalizing plans
to release almost $1 trillion into the bloc's struggling economy,
reshape industrial policy and strengthen trade defenses.
Underpinning the plans is a push to profit more from the bloc's
brain power, which over recent years has enriched foreign investors
at least as much as Europeans.
EU programs and draft laws that will kick off or be presented
over coming weeks seek to make the 27-country economy more digital,
entrepreneurial and environmentally friendly. The need for fast
action has been driven home by recent data showing the bloc fell
back into recession during the first quarter while the U.S. and
China recovered robustly.
The plans, including the EUR750 billion Next Generation EU
recovery funding, equivalent to about $905 billion, and the EUR1
trillion European Green Deal environmental program, leverage
Europe's bountiful flow of innovation, which Covid-19 has
highlighted. Pfizer Inc.'s vaccine was developed by a German
company, BioNTech SE; Johnson & Johnson's offering was
developed in a Dutch laboratory and Moderna Inc. is led by a French
Europe is an engineering hothouse that nurtures new technologies
and constantly improves old ones. Bluetooth, MP3 and the World Wide
Web all emerged from European labs, as did Procter & Gamble
Co.'s Tide Pods.
U.S. corporate giants from Alphabet Inc. to Qualcomm Inc. have
worked extensively with European universities, established research
centers across Europe and bought up European companies, boosting
U.S. profits and U.S. share prices. Chinese companies over recent
years have followed that model.
Yet the coronavirus pandemic and its economic shocks are
aggravating a problem European officials have grappled with for
years: how to turn the EU's size, wealth and brain power into
world-class companies, high-quality jobs and abundant tax revenue
by commercializing its breakthroughs.
"Unless Europe sees the entirety of the innovation cycle, it
risks becoming an incubator for the world," said Ann Mettler, vice
president for Europe at Breakthrough Energy, a company started by
Bill Gates to foster clean technologies, and former director of the
EU's internal think tank.
The result is fewer corporate giants. European companies last
year accounted for only 21 of Fortune magazine's global top 100,
down from 31 in 1995. Alcatel, Philips and Nokia are fractions of
their former selves and haven't been replaced by newcomers in the
vein of Tesla Inc. in the U.S. or Alibaba in China. The slide is
significant because big companies spend proportionally more than
small ones do on research enabling future blockbusters.
Now, as the U.S. and Chinese economies recover robustly, their
companies and investors have deeper pockets than Europeans to pay
for talent, intellectual property and acquisitions. The passing
shock of the pandemic-induced recession threatens to cause lasting
damage to Europe's broader economic prospects, just as the euro
crisis a decade ago did.
Two decades after EU leaders promised to make Europe "the most
competitive and dynamic knowledge-based economy in the world," the
bloc is less competitive and, many say, less dynamic. Rather than
becoming a seamless market of a half-billion consumers, the EU
faces political and commercial divisions among its members,
epitomized by the U.K.'s exit last year.
Europe "needs to rediscover its taste for risk," said French
President Emmanuel Macron recently, reflecting on the EU's failure
to finance and accelerate vaccine endeavors last year as the U.S.
and U.K. did. "We were wrong to lack ambition, to lack the madness,
I would say, to say: It's possible, let's do it."
The seeds are in place: Europeans launched roughly 50,000
startups last year, compared with fewer than 10,000 a decade ago,
according to GlassDollar, a consulting firm for startups in
But that new entrepreneurial energy is overwhelmingly going to
foreign buyers. U.S. and Asian investors accounted for 61% of
Europe's tech-startup buyout money over the past four years,
outpacing 38% from Europeans, according to Dealroom.co, a
tech-industry data provider.
In the venture capital world, European funds' share of deals
done in Europe fell to 62% last year from 72% in 2016, according to
a report from Index Ventures, a fund operating in the U.S. and
"The funding is there," Index Ventures partner Martin Mignot
said, but added, "a lot of that capital is American."
European officials are trying to respond. The EU recently
launched the European Innovation Council, a new body endowed with
EUR10 billion for technologies, startups and growth capital. EU
officials are also pushing a raft of initiatives, dubbed Europe's
Digital Decade, that aim to foster digital industries and help
old-line companies go digital. And the European Green Deal aims to
promote EU green industries, an emerging field in which European
companies are world leaders.
Recent experience, though, offers reason for caution. European
companies were leading producers of cutting-edge solar panels and
e-bikes more than a decade ago, until China ramped up production
and slashed prices, prompting some European rivals to file dumping
suits and driving many out of business.
Europeans are now pioneering new environmental technologies, but
their prospects remain uncertain.
"We find that too often in Europe, innovation cannot scale up,
and that's really a problem," said Ms. Mettler.
A study prepared for Breakthrough Energy recently found that
while EU environmental startups garner almost 23% of world-wide
seed-stage venture capital funding, the proportion plunges as
companies expand. The EU companies attract less than 7% of global
VC growth equity, compared with more than 54% for North American
rivals and 32% in Asia.
The imbalance is "condemning promising ventures to move to North
America or Asia to reach scale," said the report, by Cleantech
Clean technology is just the latest industry to face this
barrier. Many European startups that struggled to grow at home have
found foreign buyers or listed overseas. Skype, invented in Estonia
in 2003, was bought by eBay in 2005 and then Microsoft. Apple
acquired Shazam, a U.K. startup, in 2018. Spotify, from Sweden,
gained global heft thanks to U.S. investors with its listing on the
New York Stock Exchange the same year.
"It's not a lack of entrepreneurship," said Jacob Kirkegaard, a
senior fellow at the Peterson Institute for International Economics
based in Brussels. "It's going from being a new company to being a
great big one that's a problem."
Fledgling startups in Europe raised more seed-stage funding than
did their counterparts in Asia or North America over the past two
years, grabbing 38% of investments that were doled out in chunks of
less than EUR4 million, according to Index Ventures' report. But as
funding-round size grows, Europe's share plunges. In fundraisings
above EUR250 million, European startups garnered only 9%, Index's
Not so long ago, European multinationals were global tech
leaders. A Dutch engineer at Philips invented the cassette tape in
1963 and helped develop compact discs, unveiled in 1982. AT&T
in 1984 raced to catch up in the personal computer market by
slapping its logo on stylish desktops made by Italy's Olivetti.
Nokia, Siemens and Alcatel into this century dominated GSM, the
world's first digital-cellular standard, created in France.
Tectonic shifts came with the internet-inspired shift to a world
dominated by software. Europe, like Japan, had excelled in
mechanical and electrical engineering, industrial design and
precision manufacturing. The internet made many physical products
obsolete and increased demand for software engineers -- a
specialization not valued in Europe or Japan until recently.
Europe also lost a global financing race where it once competed.
A wave of deals starting in the 1990s to create pan-European stock
exchanges that could rival top U.S. and Asian exchanges failed to
reach critical mass. Forays into investment banking and risky
ventures this century by one-time European banking powerhouses
including Deutsche Bank, Crédit Lyonnais and Dutch ABN-Amro ended
in massive losses.
As a result, European financial firepower faded just as U.S.
hedge funds and venture-capital funds -- funding vehicles new to
Europe -- became global players and sovereign-wealth funds from
other countries began prowling for deals world-wide.
Entrepreneurs say one way Europe could better retain talent and
help small companies grow is by making it easier to use stock
options, which give startups' employees a shot at future riches.
France and the tiny Baltic states treat options favorably but
Germany and other big European economies impose heavy taxes and
regulatory burdens, investors and founders say.
"The only way local companies can compete for talent is with
stock options," said Mr. Mignot at Index Ventures. "It's all about
Write to Daniel Michaels at email@example.com
(END) Dow Jones Newswires
May 04, 2021 08:57 ET (12:57 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.