The Euro: How a Common Currency Threatens the Future of Europe

The Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz
My rating: 4 of 5 stars

I went to see Professor Stiglitz talk at the LSE a few months ago and that's when I purchased this book, which I also got Joseph to sign for me. I've enjoyed quite a few of his books before including 'The Roaring 90's' about the boom in the Economy in that decade.

This is compelling reading. He shows that even the Success story of the European Union, Germany, has only had fairly anaemic growth since the European monetary union was formed. You can see this demonstrated here, with this chart of German GDP growth over the last ten years: 

source: tradingeconomics.com


At the other end of the spectrum, you have crumbling economies like Spain, Portugal and particularly Greece that according to Stiglitz are being decimated by the austerity measures imposed on them by the EEC and heavily enforced by member states like Germany.


It also went some way to explaining some of the Economic struggles the EEC has gone through since the Euro was introduced 17 years ago; That the EURO has shackled a lot of Economies that may need the financial independence of their own currencies to perform to their highest potential.

He also questions the fact that an unelected body is imposing budgets on countries that their own people have rejected, for example in the case of Greece, which actually voted against these measures but had them imposed upon them by the EEC nevertheless.

This may be the reason why tax revenues have fallen significantly in some of these countries. 'No taxation without representation' was the rallying cry of another well-known revolution.

In addition, the Economics Nobel Laureate, Joseph Stiglitz raises the question of Currency manipulation and who really benefits from the Euro. Much is made in the News about China artificially reducing the value of the Yuan in order to make their exports cheaper so that they operate with a trade deficit.

However, Professor Stiglitz shows that actually, German has a larger trade surplus than China. It's entire Economy relies extremely heavily on exports. This is the deeper issue at play here. Even the UK has operated in the EU with a trade deficit of about one hundred billion dollars (the EU sells $100 billion more products in the UK than the other way around). With countries like Spain, Italy and Greece, this will be far higher.

In February Germany's trade surplus--or the balance of exports and imports of goods--increased to 252.9 billion euros ($270 billion), which marks the highest surplus since records began after WWII. 

Because all the weaker Economies in Europe bring the value of the Euro down, Germany ends up with a currency that is 15% undervalued; thus creating their imbalance.

Conversely, countries like Greece, Spain, and even France, operate with a currency that is too high for their exports to be competitively priced; Hence their poor economies, high unemployment, lower exports and trade deficits (as opposed to Germany's surplus).

It seems counter-intuitive, but Professor Stiglitz believes that the only hope of saving the Euro in the long term is for Germany to leave the European Economic Union. 


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The Economics of Persistent Slumps

This week I went with a friend to the Philips lecture  at The London School of Economics and Political Science (LSE) with Professor Robert Hall of Stanford University, originator & author of ‘The Flat Tax’   & one of the founders of Macroeconomics (author of one of the first books on the subject and now the standard University textbook on Macroeconomics )

The gist of the lecture was how productivity has declined in the USA. Areas of concern included the rapid fall in the Labour participation rate, which has now started to affect women (who previously were increasing in the labor force quite rapidly) too.

The biggest surprise here is that almost all of the decline in the Labour force is in the top levels of income and education.

Professor Hall speculated about a number of reasons for this. One rather novel one, was that fifty or sixty years ago, there was very little in the way of entertainment. If you chose not to work, even with a high income, life could be quite dull. These days there are a variety of interesting pursuits, that can occupy people all their life, without them having to work.

It would be interesting to pull a chart of video game use in the last thirty years and match it with the fall in work participation rates for high-income youth.

Another interesting chart to look at would be the increase in benefits and the fall in the work participation rates. My suspicion is that a lot of people claiming benefits are not truly unable to work.

I myself had a medical condition, that was classed as a disability for seven years. I could have claimed disability benefits for it. Fortunately, I worked through it and now I'm healthy again.

The toll on one's self-esteem of claiming money for doing nothing is rarely considered when debating the government benefits system.

Almost all the Labour participation shrinkage in the US Economy is from the richest and most highly educated sectors

 Professor Hall calculated that US GDP would be approximately 15 percentage points higher if this and a few more minor issues were addressed. He was only covering the US in his lecture. However, I'd imagine these issues with productivity will only be worse for some of the other developed countries if you look at this chart below. 

Current GDP per hour worked, G7 countries 2013 and 2014

We rounded off the night with dinner at The Delaunay.

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Has Venture Capital finally arrived in Europe?

Now that I'm back in London after 10 years working in the USA, it's fortuitous that my office at Zscaler is a stone's throw away from my Alma Mater, The London School of Economics.

They have regular lectures, and recently I decided to go back to attend one on Venture Capital in Europe. The LSE Finance Department invites me to these from time to time.

There was quite an exciting bunch gathered in the Conference room, including my neighbor, a Consultant at KPMG specializing in due diligence accounting for Venture Capital.

The host of the evening was Ulf Axelson, the Group Professor in Finance and Private Equity at the London School of Economics. LSE has just started a Master's degree program in Private Equity.

Byron Deeter, the managing partner in Bessemer's Menlo Park, California Office, was the most interesting speaker. He focuses on investments in cloud computing, mobile, and internet sectors which is exactly my area of expertise.

Bessemer's 10 Laws of Cloud Computing and SaaS

He was the founding CEO of Trigo Technologies, acquired by IBM. Byron is the co-author of "Bessemer's 10 Laws of Cloud Computing and SaaS", the BVP cloud index, BVP's cloudscape and BVP's next cloud unicorns. He was the principal investor in Criteo, France's most successful IPO of recent years.

Bessemer's Ten laws of Cloud Computing

Felda Hardymon, a senior partner at Bessemer Venture Partners and the Class of 75 Professor of Management Practice at Harvard Business School, was also very interesting. 

His investments have included Parametric Technology, a product cycle-management software provider; sporting-goods chain Sports Authority; office-supply company Staples; and Axis Networks (acquired by ACE), a 4G, wireless-remote radio head supplier.

Also on the panel was Saul Klein, who most recently co-founded Kano and Seedcamp and the co-founder and original CEO of Lovefilm International (acquired by Amazon). He was also part of the original executive team at Skype (acquired by eBay). 

Skype is one of my favorite companies. It enabled me to cheaply and easily stay in touch with friends and family in Europe when I first moved to the USA in 2005.

11% of US businesses are venture-backed companies, which makes up a whopping 21% of the US Economy. So it's apparently crucial to US business. 

This article was referenced at the beginning of the talk. 9% of US Venture-backed companies have IPOs versus only 4% in Europe. While 28% of US companies are bought out versus 20% in Europe.

Some of the theories on why Europe is behind the US in Venture financing include:

1) Venture Capital is a younger business in Europe. It only really got going in 1999, while in the US, it started in the late 1980s. I would have to partially disagree since Sir Ronald Cohen founded VC firm Apax partners in the UK in the early '70s.

2) There is less of a network of VCs and support organizations (Law firms, Consultants, etc.) in Europe than in the US. Part of this problem is caused by employees not moving around enough in Europe. 

In the US, it's far more common to change jobs quickly than in Europe. This change accelerates the size of the networks, which is crucial to building successful tech startups.

3) Financing - in the US, the entrepreneur is the star. Funding plays the second fiddle. In Europe, it's the other way around.

4) Fear of failure - some discussion of the idea that Europeans are more risk-averse than Americans?

5) Regulatory problems - Byron Deeter talked about the difficulties he had trying to set up Criteo in France. Though a French company, Criteo chose to have its IPO in the US on the Nasdaq 

Although the 50 square miles of Silicon Valley creates more companies than the rest of the world put together, this talk did leave me feeling optimistic; now is the time for new companies to take off in Europe.

Share of global venture capital markets by country

As you can see from the chart above, the UK is the dominant recipient of Venture Capital funding for startups in Europe, and Globally, the USA is dominant (50% of the entire global VC funding).

Skype, founded in Denmark (and now owned by Microsoft), is a great template for aspiring European Entrepreneurs.

In the UK, startups are booming. The entire sector has been growing rapidly, well over 10% each year.

• Last year UK startups generated a record $15 Billion in Venture Capital Funding.
• 672,890 startups were founded in the UK in 2018/2019 tax year
• 57.6% of companies that started up in 2013 were gone 5 years later
• 89% of companies founded in 2017 survived the first year
• 65% of UK employees want to start their own business

Below: The European Venture Capital Event at the LSE

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Dinner with the founder of Justgiving

Bela Hatvany was in town, He comes to Boston a lot since He has family and Business interests here as well as some history (although He now lives in the South of France). He's an ancient family friend who has known my parents for almost fifty years. 

I actually went on holiday with his family when I was a child and even lived at his house in Kensington Park Gardens (featured in the film 'Notting Hill') for some time. My parents had just taken him out for dinner in London, so this time, dinner was his treat.

We ate at a Spanish Tapas restaurant where I used to live in Newbury street when I was taking my MBA. Bela's a fascinating guy. His dad lost his fortune in Hungary during the war. So his father came to England & made another fortune as a bridge player, Buyer of art & backer of racehorses. 

His father actually got so good at betting on racehorses, that the betting agencies and bookies began to pay him not to gamble.

Bela told me a great story about when He was at Harvard Business School. He was asked by IBM to complete a data/software project at the end of the first year of his MBA.

IBM told him it would take fourteen software programmers a year to complete. Bela explained that He figured out a way to do it much quicker - He actually completed the project alone, & in only twelve weeks. After that, he was in quite a lot of demand.

Here's one of his other companies, Silverplatter, which He sold to Wolters Kluwer for $113 Million in 2000. These days He invests in a whole host of new companies, such as Justgiving, which he started and which has grown immensely as a business.

I remember clearly Bela telling me about his idea to set up this online giving site back in 2000. I was more than a bit sceptical at the time since the internet was still at quite an embryonic stage plus there had just been a major 'dot.com crash', which took shares in my wife's company, Akamai, from $400 a share to $1 a share.

However, his idea was spot on, and they got the first-mover advantage in the market, so everyone knows the Justgiving brand now. Looking back, I realize that this did teach me a valuable lesson; to be more open-minded about start-up ideas. By the way, Bela also invented the touchscreen back in 1982.

Since then, many of the start-ups or early-stage companies I have worked at have been successful and proliferated.

One of them, Visual IQ, was acquired by a Multinational, Nielsen, for two billion dollars. Another, Zscaler, the cybersecurity company, just had an IPO which now gives the company a Market Cap of $50 Billion. - not bad for two companies that are both just ten years old.

Bela Hatvany recently sold Just Giving for £95 Million. This was a company Bela set up as a project after he had 'retired', to do some good in the world.

Newbury Street, in Boston, USA, where I lived as an MBA student, 2006-2007