We Need to Outgrow Our Problems

Investments in renewables were not progressing rapidly enough, while investments in traditional energy sources were not sufficient.

Since then we have witnessed a significant slowdown in inflation, and, at the same time, issues with the number of offshore projects in Europe.

In the 1970s, we experienced two spikes in inflation, with interest rates rising both at the beginning and at the end of the decade.

Where are we now?

In relation to that narrative, we find ourselves where the first spike in inflation subsided.

When it comes to inflation, we are not at zero or two. We’re still at four. So it’ s still not zero inflation. The question now is: will the mechanisms that can continue to bring it down be in place or not? One key aspect is having access to materials and energy at full scale, which has increased slightly compared to last year but not on a massive scale. This still puts pressure on the system.

What are the other pressures?

Wages had to rise to compensate for inflation, forcing prices up. So, when it comes to inflation, I think we are still in a “higher for longer” scenario. But how much higher will it reach and will there be another spike? At the moment, the supply side has not expanded on the labor, productivity, or material and energy fronts enough to eliminate volatility.

Volatility is not gone?

The threat of a strike in Australia caused European gas prices to rise by 40 per cent. This means that the system is still very tight. The question is, are we doing the fundamental work to keep it in check?

Are we doing the fundamental work on renewables?

While renewables are accelerating, the total energy mix is not accelerating enough. Last year, we presented a chart showing a decline in energy investment. In the last 18 months, it ticked up, but it is still not above the level of 2014. It should be well above the level of 2014.

Can we solve the puzzle without nuclear energy?

We need a full-spectrum energy solution that includes all modalities. Furthermore, energy transition is not only about getting clean energy; it must also be affordable. Otherwise, much of the world will not participate in the project, and lots of poor people in Europe and a large part of European industry will be affected.

It seems that the European economy has been lagging behind the US for a long time. Is it a structural problem? A lack of the capital market?

In our report on European competitiveness, we highlighted that the valuations of European public companies were growing at one point less than the average growth of US companies. This trend has persisted for decades. One percent is not much but if it continues for 30 years, it means we are 30 per cent behind. That doesn’t bode well.

Why is that?

There are many factors. Europe is more fragmented, making it harder to launch new initiatives. Product variation has to be higher, and European regulation differs to that in the US. Additionally, there is IRA (Inflation Reduction Act).

It's hard to compete with such an incentive as the IRA.

That’s an issue. It only makes the competitive differential harder. But on a positive side, society at large, both European or American, only learns through real world events. High energy prices, low energy security and problems with food supply have taught that we need to address these issues. In times of plenty, we could make a lot of stuff that made no sense. Now we are forced by reality to learn.

Are we in the learning process?

The process has intensified a lot in the last year, and the IRA was one of the key factors that influenced us.

By ‘us’ you mean political leaders or people?

Both, as voting patterns show how people react to all kinds of issues.

The intensity of the debate has increased because of the slow scale of the energy transition over the last decade.

It wasn’t fast enough?

We added each year 1 or 2 points of renewable energy over a decade while we should have done 10 or 20 times that. Without accelerated progress, issues such as lack of affordable energy will impact industry and energy prices. Now the learning process is on an upward trajectory and hopefully it will settle in the right place.

One of the structural problems of Europe is that capital markets in Europe lag behind those in the US and the UK in supporting innovation.

The common belief is they lack enough venture capital. I don’t think we lack European entrepreneurs; rather it is a question of how big the market is.

Ventures geared towards Germany are smaller than those geared towards the US.

While Europe has examples of ventures that went global and actually got the right funding, there are is a sense that if you are an entrepreneur in Germany, you are going to do something in Germany, then maybe go further into four other countries. While in the US the rollout is easier. There are some technical issues too.

What do you mean by that?

For example, you need to launch in ten banks if you want to go into Europe with a digital bank, while in the US you need to launch one. So the fragmentation is complex. If good European entrepreneurs compete with good American entrepreneurs on a European scale versus a US scale, the difference is substantial. American entrepreneurs can more easily go global due to the widespread use of the English language, creating a significant differential.

Inflation is going to hurt poorer people. Do you think we are dealing with this problem?

Governments have recognised this, leading to subsidies on energy. However, challenges persist in housing, education and health. Subsidising everything is not an option; eventually growth, prosperity and good jobs are needed.

You pointed out all the structural problems that European economies and the companies are facing. And I don’t see the easy way out, too.

Europe is not easy, but that’s what makes it beautiful. When Eastern Europe joined the EU, the single market played a crucial role in helping it catch up. It’s not all bad, but there is more to be done.

There are some people saying that our European social model, our social contract is over. It is impossible to keep competing with the Asian economies or the North American economy.

It’s a balancing act. The question for Europe is not how we are today, which is pretty good, but how long we can sustain a slow decline. Compared to the US, the difference in growth is 1 per cent, which may not seem a lot. It's not 5 per cent. But over 20 years we fall behind by 20 per cent. So we need to find a better optimum, which has the benefits of Europe that we all love and like, but not this hesitancy on growth. It seems that Europe is hesitant of growth.

I get the feeling that you are more optimistic than you were last year.

It’s because what is happening on the ground is putting a mirror up and showing what doesn’t work. And so the pace of learning over the last year is much higher than it was.

But when you’re observing reality…

The reality is tougher.

So, what information are you looking for to understand whether we are accommodating to the new challenges?

It’s not only about micro actions; the large discussion is crucial. The involvement of Mario Draghi in the discussion on European competitiveness is a lift. It signals a shift to higher level.

We also see instances where people say we went too far, so we correct with a subsidy and then fix the real problem. That’s what I mean by the learning process. We have a genuine discussion addressing issues like the IRA. I would also add the Chips act. The European response on those two has been much stronger than almost any industrial policy over the last decade.

So what is next?

I would say that the real question is how we define growth and prosperity. It is not only about getting shelter and food but about quality of life. If we want Sustainable Inclusive Growth we need to make sure that people are not only fed but they have a quality life. In 1960s and 1970s we recognised in Netherlands that we might have enough income but we live in an environment where you cannot swim in Rhine, the biggest river of our country. So we changed a model of growth. However, to afford such a growth model, we need to outgrow poverty and outgrow our problems.

I believe that increases in productivity and the advent of AI and automation will allow that. We can still have growth in Europe even though the population doesn’t increase. ©Ⓟ