Europe's Reluctant Capitalism

Financial markets may be global, but attitudes towards them are not. It is as if participants were competing in a world championship while playing by different rules and for different prizes.

In the U.S., a firm will typically be willing to pay a price well above its own trading multiple to acquire a strategic asset if the deal improves its financial profile. In Europe, the primal instinct is more often to distrust premium valuation multiples and conclude that the market has temporarily lost its footing.

US acquirors are also generally more willing to accept that a target’s value has significantly increased within a short period of time because the business prospects have improved or market preferences have rapidly evolved. European boards regularly struggle with rewarding sellers for a rapid uplift in value.

In America, exceptional profit margins are usually read first as evidence of quality and efficient capital allocation. In Europe, they are frequently read first as a potential problem to be investigated.

These are broad strokes and exceptions abound. Factually, though, demand from European investors is deemed irrelevant to US IPOs and European firms are often priced out of global M&A processes.

These observations point to Europe’s persistent ambivalence – and, at times, distrust, if not open disdain – toward financial markets, often proudly supported by a sense of intellectual superiority.

Paradoxically, Europe invented many pillars of capitalism including banks and exchanges. But it never morally reconciled itself with the idea of actively managing capital to maximize economic wealth.

There are several possible reasons. Europe’s aristocratic heritage looked down on trade. Its Christian heritage professed that ‘the love of money is the root of all kinds of evil.’ Its philosophical heritage gave it Rousseau’s view of property as the original act of social deception, Marx’s alienation and Weber’s ‘iron cage’ (see below). Its literary heritage, from Goethe’s ‘Faust’ (1790) to Zola’s ‘Money’ (1890), often portrayed the markets and money as a corrupting force.

The U.S. of A. had a very different starting point. In ‘Democracy in America’ (1835-40) read in my teenage years, Alexis de Tocqueville, a French historian who visited the new nation, saw a democratic society in which inherited rank was weak and money became a source of social distinction. Ultimately, America gave capitalism a heroic flavor, with financial success providing evidence of energy and merit.

Caution towards the financial markets is justified considering their mad tendency to overshoot and create crises. Besides, financial discipline must be a virtue. But when skepticism, moralism, and cynicism toward the markets (and their agents) are the default position, they impede economic growth and value creation.

The Draghi report on EU competitiveness offers many explanations for why Europe is losing, including weak productivity, poor innovation, fragmented capital markets, and regulatory burden. I believe these are just symptoms of a deeper issue: Europe is caught in a global game it does not want to win.

APPENDIX - RELEVANT QUOTES

MAX WEBER, ’Ascetism and the Spirit of Capitalism’ (1905)

• ‘Ascetism [i.e., religious puritanism] looked upon the pursuit of wealth as an end in itself as highly reprehensible; but the attainment of it as a fruit of labor in a calling was a sign of God’s blessing’

• However, ‘The Puritan wanted to work in a calling; [with capitalism] we are forced to do so.]

• ‘The care for [wealth] should only lie on the shoulders of the saint like a light cloak, which can be thrown aside at any moment. But fate decreed that the cloak should become an iron cage.’

• ‘In the field of [capitalism’s] highest development, in the United States, the pursuit of wealth, stripped of its religious and ethical meaning, tends to become associated with purely mundane passions, which often actually give it the character of sport.’

ALEXIS DE TOCQUEVILLE,  ‘Democracy in America’ (1835)

• ‘[The American’s] strictly Puritanical origin—their exclusively commercial habits […] fix the mind of the American upon purely practical objects.’

• ‘The passions which agitate the Americans most deeply are not their political [ideology/values] but their commercial passions.’

• ‘Amongst aristocratic [i.e. European] nations, money only reaches to a few points on the vast circle of man’s desires — in democracies [such as the US] it seems to lead to all.’

EMIL ZOLA, ‘L’Argent’ 1890

• ‘Once again had the inevitable, periodical epidemic come… the Black Fridays, as the speculators say, which strew the soil with ruins.’

• ‘What was the use of giving thirty years of one’s life to the earning of a paltry million, when, in a single hour, by a simple transaction at the Bourse, one can put the same amount in one’s pocket?’

HONORE DE BALZAC, ‘Le Père Goriot’ 1835

• ‘Money brings everything to you; even your daughters.’

JJ ROUSSEAU, ‘On the Origin of the Inequality of Mankind’ (1754)

• ‘Insatiable ambition, the thirst of raising their respective fortunes, not so much from real want as from the desire to surpass others, inspired all men with a vile propensity to injure one another, and with a secret jealousy, which is the more dangerous, as it puts on the mask of benevolence, to carry its point with greater security. In a word, there arose rivalry and competition on the one hand, and conflicting interests on the other, together with a secret desire on both of profiting at the expense of others. All these evils were the first effects of property, and the inseparable attendants of growing inequality.’