The Sun Belt will save Europe Startups breathe life into the Med

Florence. No city on earth is a more miraculous testament to what entrepreneurs can do, and how hard work and grit can build beauty that endures. Yet as he looks out, over the red roofs and graceful churches of the Tuscan gem, Mattia Guidi sees less a glorious past, and more a stagnating present. “Tourism has a dual effect,” the political scientist at the University of Siena tells me. “Some benefit but there’s not a lot of opportunity.”

It’s a fair point. For if tourism powers the bloc’s otherwise torpid economy, more galleries and restaurants is not what Europe needs. Squeezed by a conservative business culture, and an elephantine welfare state, genuine entrepreneurs increasingly seek exile in the Anglosphere, while the workers that remain wallow in low-paying service jobs. Especially as the shock of Trumpism forces the continent to defend its fading interests, it’s a recipe for economic catastrophe, with the EU expected to encompass just one tenth of global GDP by 2100.

Yet if the Old World needs to reclaim the magic of the Medici, the continent’s redemption will come far from Florence. Rather, Europe’s periphery is leading the way, with places like Portugal and Greece offering sunny business prospects dashed with pleasant weather. Combined with similar dynamism in the former communist states of eastern Europe, it’s increasingly possible to talk of a European Sun Belt. For just like the former Confederacy, once disdained and now booming, the continent’s future will be made on its edges — if, that is, the EU’s reactionary status quo can finally be vanquished.

Europe’s economy is broken. Over the past 15 years, the Eurozone has grown about 6% in dollar terms. The US has jumped 82%. The biggest gap is in tech: of the top 50 tech firms, only three are located in Europe, with the list unsurprisingly dominated by Silicon Valley. Not that Europe’s entrepreneurial deficit is not only in ones and zeros. MIT researcher Andrew McAfee has shown how, over the last 50 years, the US has created “from scratch” companies with market cap of over $10 billion five times faster than the EU. No wonder some observers now quip that Europe is “a museum as a continent and a museum as a stock market”.

Faced with this malaise, and geopolitical upheavals from Kyiv to the White House, it’s little wonder that Europe’s leaders, in Paris and Berlin, are rushing to reindustrialise. That’s clear enough militarily, with the Bundestag promising €500 billion for new tanks and missiles. Yet if the German defence minister claims his countrymen have an “erotic relationship” with weapons — and we agree that bolstered self-sufficiency is necessary given Trump’s rising isolationism — it’s unlikely that Europe can thrive in the 21st century through force-of-arms alone.

Certainly, you shouldn’t count on Brussels, prime mover of the continent’s decline, to reverse the slide to irrelevance. Mario Draghi’s much-ballyhooed response to the current crisis followed the old patterns of green obsessions, social “inclusion” and ever greater conformity with Brussels edicts. Europe’s grandees believe that money fleeing Trumpian chaos will head to a permanent economic shift towards the Old World. But that ignores the fact that Europe is far more dependent on exports than the US, and lacks new industries that can compete with either America or the rising powers of the developing world.

Instead, the best hopes for European revival lie not in the old heartlands of the Ruhr or Picardy, but in enterprising economies of the south and east. “France and Germany are not good for startups, while places like Spain and Portugal are catching up and far more open to new firms,” suggests Giacomo Gentili, founder of the Pack digital mentoring firm, itself based in Barcelona. Other tech experts agree. For Andrea Zorzetto, co-founder of People Rank, a Milanese social media outfit, the European periphery offers ample opportunities for ambitious startups.

To a large extent, these transformations can be understood in fiscal terms. As traumatic as the great financial crisis doubtless was for countries like Greece and Spain, EU strictures did oblige them to finally reform their internal markets. “They were forced to change and reform while others did not,” says Veronica de Romanis, an economist who advises the Italian ministry of finance. “After 15 years they are the ones that [are] growing.”

An example to the contrary is de Romanis’s native Italy, which retains high costs and eye-watering tax rates. School teachers in Naples or Milan can expect to pay upwards of 60% of their income to the state, while sales taxes squeeze them even more. Despite its handsome piazzas and educated population, no wonder Italy today boasts far less venture capital funding per head than either Portugal and Spain. Eastern Europe, too, continues to bask in its post-Soviet sun. Big new IT investments are taking place in Polish towns like Wroclaw, where Intel is building a $6.4 billion semiconductor facility. Google, for its part, plans to invest up to $2 billion in a Romanian data centre.

As these examples imply, much of this investment is happening in tech. Three of the EU countries with the highest proportion of IT workers are all found on the continent’s edge: Ireland, Malta and Lithuania. People with advanced degrees in places like Poland are far less likely to be unemployed than their counterparts in the UK and France. According to Nima Sanandaji, a Swedish economist, traditional tax-and-spend havens just can’t compete, especially when their obsession with EU climate policies tend to mean energy costs are much higher.

Taken together, it’s little wonder that peripheral Europe is now growing faster than its more established rival, with a so-called “regional inversion” set to upend cliches of Nordic verve. It helps, of course, that much of southern Europe is blessed with the so-called “Mediterranean premium”. From the weather to the food, much of southern Europe is a delight, another neat echo of California in its 20th century pomp. Though not quite as stunning as my adopted home state, states like Georgia and Florida are similarly attractive. The summers might be sticky, but lower energy prices also allow for the generous use of air conditioning.

It’s unsurprising, too, that the European Sun Belt has become popular with digital nomads, while Barcelona and Lisbon now host digital hubs for Danone and Carlsberg respectively. “The quality of life here attracts people,” says Gentili, whose staff includes Spaniards, Italians, Japanese and Argentinians. The wages help too: a software designer in Portugal is a third cheaper than in France, while similarly skilled workers in eastern Europe are as much as half the price. All told, offshoring to low-cost tech hubs in Europe can lower project expenses by up to 70%.

Yet if these strengths have seen even Greece’s tech sector grow by 15% in a single year, this model is not without challenges. In cities like Lisbon, an influx of digital nomads has driven up prices for local residents. The southward flow also threatens the very authenticity that attracts people to these spots to begin with. Troops of US graduates may make good techies, but they risk undermining the Old World charm of southern Europe in much the same way as mass development in California has sapped away its laid-back character.

There are broader questions, too, about the viability of Europe’s periphery, something that goes well beyond tech and other bluechip firms. At the grassroots level, the number of European self-starters has actually dropped in recent years, even as their counterparts in America are thriving. “In Europe people are afraid to fail and take risks like in the US,” Zorzetto argues. “Europe has become a continent of old money. We have to get back to our entrepreneurial, artisanal DNA.”

Considering the continued legacy of welfarism from Porto to Piacenza, it’s an reasonable point, even if the communist legacy doubtless bestows the continent’s east with more collective grit. “We are hungrier, and western Europe has a high level of comfort,” says Gabor Szanto, a Hungarian novelist and screenwriter. “We had nothing, so we worked harder and risked more.” To explain what he means, Szanto describes the remarkable rise of the region’s film industry, with Hungarian studios alone now employing some 20,000 workers.

For both established Europe and the upstarts, events in America are, at least, shaking things up. “I think we should see Trumpism as a historical opportunity for Europe,” says Ermelinda Campani, director of the Breyer Center for Overseas Studies, a Stanford-affiliated institution in Florence. But Campani sees a future where Europe capitalises not on its huge welfare state, but on its technological nous as well as its artisanal skills in design, fashion and food.

To be sure, such a transformation wouldn’t be unprecedented. Throughout its history, Europe has seen economic power shift from Italy in the Renaissance, to the Dutch Republic in the 17th century, to industrial Britain, Germany and France in the 19th and 20th centuries. Now, again, is time for something new, with Kraków and Alicante happy to oblige.

Of course, Europe’s powerful progressives will resist any such shift. The Guardian predictably calls for Europeans to preserve the continent’s welfare and climate regime. Certainly, this approach is central to the European Commission, which remains wedded to net zero and continent-wide green initiatives. Essentially, then, they are reaffirming the formula that has brought Europe to the brink of economic irrelevance. Yet doubling down on this approach, combined with low fertility rates, will inevitably ensure that spots like Florence remain what they are now — lovely museums, but museums nonetheless.

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