Brexit & The Future of Startups In Europe

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This is a guest post from Marguerite Arnold.

Since 1972, Britain has been part of the European continent. I remember the opening very well. I was a kid, living in London. The new openness meant we could afford oranges from Spain. Every week, an old French farmer would also peddle through London with strings of onions hanging from his bicycle. I thought the arrangement was unbelievably cool and more than romantic.

Fast forward forty years, and the situation is now reversing, and that is not only a shame, but I predict it will have dire and unforeseen consequences for the British.

The England I knew as a child was a fascinating place. It was a country struggling to keep together the concept of a social state, still wounded by the war, and losing the last pieces of its Empire. You could still travel to central parts of London and see unreconstructed bomb sites left over from the war. I will never forget seeing one, incongruent with the bustling scenes around it, and asking my father what it was from. He answered “The Blitz.”

Today, of course, London is a different city, and England is a different country – transformed, much like the U.S. into an economy which may be again calling itself “shared” – but in fact is premised on something very different.

After WWII, most European countries, as well as significant parts of the U.S., believed the future was only attainable by creating a strong social platform upon which the other parts of life would work. “Regular” jobs. A middle class life. A steady pay check. A system to take care of the sick. Retirement funds to take care of the old.

That system is gone now – or at least fading, and we are on the cusp of something else. Thus the explosion of start-ups, start-up culture and the new entrepreneurialism. This is part of the reason that start-ups have thrived in the U.K. – particularly high tech start-ups. The country has been, for a generation, trying to define itself. There is no way the island can survive independently. No country can. The British train system uses German trains. The auto industry is hurting. Oil is an uncertain energy source. Overpriced British real estate in London fueled by foreign investment does not an economy make. Britain, right now, is much like the U.S. Casting off the old very quickly in an attempt to create something that works better (although for whom and how many is still an open question).

However start-up culture is not the same everywhere.

Across the Channel, things are different. There is more social integration and infrastructure. Every country east of France still has a streetcar system that works. There are still national healthcare systems which strive to provide health care for the oldest and sickest. And the approach to start-ups is a lot more cautious – in part because things still work the way they were designed to. People here just do not understand how, for example, a presidential candidate who did not pay his taxes for 20 years can even be credible.

This reliance on a broader superstructure, which the Europeans are loath to destroy in search of something “new”, does not mean there is no innovation. As a professor of mine said to me recently, mobile payments (a particularly hot area of Fintech innovation elsewhere) are just not a priority in Germany because of the continual upgrades and improvements to the customer banking experience (also known as SEPA), that has already created a workable middle way.

However, Europeans in general and Germans in particular, are not deaf to innovation. They too are looking for ways to innovate as the older systems become increasingly outdated. It is just moving a bit more slowly here – and frankly a bit more humanely. Chaos might provide a lot of exciting booms, but that is not a place where most people want to live their lives. And as Britain shuts its doors to the rest of the continent, there are many now who are looking increasingly to both Berlin and increasingly Frankfurt, to be a new platform for innovation.

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In Frankfurt, there is a steadier (and much cheaper) platform for innovation in the form of cheap rent, transportation and an overall standard of living. And it is provided by the security and infrastructure that comes when countries do not throw the baby out with the bathwater in search for “something” if not “anything” new.

Marguerite Arnold is an entrepreneur, author and third semester EMBA candidate at the Frankfurt School of Finance and Management.

(Image Source: BBC and Tripadvisor)

Efficiency vs Fairness

On Thursday 23rd of June, the British people voted by a majority of 52% to 48% to leave the EU.

This is a monumental event, and it is worth trying to piece together what happened, and what some of the implications might be.

The voter turnout was strong with around 72% of voters casting a ballot. However, the results showed significant division within the UK, with different regions and demographics supporting different sides of the argument.

In England and Wales, a majority voted to leave the EU (53% and 52% respectively). However, within England itself, voters in London overwhelmingly opted to remain. Similarly, 62% and 56% of voters in Scotland and Northern Ireland voted to stay in the EU.

Perhaps even more interestingly, there were significant divides between key demographics. Regions that had a greater percentage of young people, residents with higher education, and higher median income levels were much more likely to vote to remain in the EU. Whereas, areas with older, poorer and less well educated residents overwhelmingly voted to exit the EU.

What does this tell us?

Well, some of the key arguments put forward by the “remain” campaign were about the economic benefits of staying in the EU. Leaving the EU, it was argued, would lead to increased unemployment, lower levels of investment, and lower levels of growth for the UK economy.

On a basic level, these arguments make sense. Economic theory suggests that free trade can increase the overall surplus available to producers and consumers. And investors are also much less likely to invest in a country when there is a lot of uncertainty. Reduced investment can reduce economic growth, and lead to a self-fulfilling prophecy of reduced investment, lower growth and yet still lower investment.

If these economic arguments are valid, and staying in the EU is better for the UK economy overall, then why would 52% of voters opt to leave the EU?

Well, putting the lies of the “leave” campaign to one side, I don’t believe it is particularly helpful to characterize all of the more than 17 million British people who voted to leave the EU as either stupid or racist.

If staying in the EU is good for the UK economy overall and would increase the size of the economic pie, then it may be that many of the people who voted to leave the EU don’t believe they will receive a fair slice of the pie (or any pie at all).

The referendum result highlights a growing tension in the UK and worldwide between the neo-liberal model which favours free trade and deregulation of markets, and a more social-democratic model (practiced in the Nordic countries) which aims to reduce poverty and support universally accessible public services like child care, education, old-age care, and health services.

Even large investment houses are starting to appreciate the risk posed by inequality.

Joachim Fels, a global economic adviser at Pimco, an international investment firm, wrote in a research note: “As I see it, the vote in the UK is part of a wider, more global backlash against the establishment, rising inequality and globalisation.” And Pimco has advised its clients that “… investors must start to anticipate new populist policy responses.”

Immigration was a big issue during the Brexit referendum, however I don’t believe, unlike some of my esteemed friends, that pretty much everyone who voted to leave the EU in order to limit immigration is a racist.

Lack of jobs, rising levels of economic inequality and uncertainty about the future can easily explain why many people might have wanted to limit new immigration to the UK.

That being said, economic stress can lead to high emotions and the desire to find a scapegoat for ones problems. Following the Brexit result being announced, the UK appears to have experienced an increase in racial abuse. For example, London’s metropolitan police say that they have seen a 57% increase in reporting to the “Stop Hate Crime” website.

Racism is a serious problem, but I believe it is a symptom rather than a cause of the division that we are currently witnessing in the UK.

People in the UK with the money and power to do so need to look for ways to reduce inequality and provide opportunities for the most marginalized members of their respective communities. And in doing so, they might benefit by taking a closer look at the social-democratic model adopted in the Nordic countries.

Increasing the size of the economic pie is an admirable goal, but if the system is set up in such a way that a growing number of people get no pie at all, then we shouldn’t be surprised if hungry people manage to find a way to spoil the party.