Luis Garicano on Why Europe Fell Behind

Luis Garicano is Professor of Public Policy at the London School of Economics and a co-founder of The Rhine Group.

In this week’s conversation, Yascha Mounk and Luis Garicano discuss why Europe has failed to produce world-leading technology companies, whether labor market rigidities and a fragmented single market explain Europe’s innovation deficit, and whether culture versus institutions are to blame for European risk aversion.

This transcript has been condensed and lightly edited for clarity.

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Yascha Mounk: You co-founded very recently something called The Rhine Group. If I can put it in somewhat blunt terms, the idea of The Rhine Group is to unscrew Europe. Why is it that you think that Europe is screwed in the first place?

Luis Garicano: If you try to picture Europe, let’s say in the 1970s, in terms of technology and innovation, you see everything from trains, Siemens and Alstom, to planes, Concorde, to nuclear plants. We were at the forefront of technology. Basically, what has happened since 1990 is that nothing has happened. There’s been an information technology revolution and now an AI revolution, and Europe has missed the first.

And it looks like it’s going to miss the second. There are many ways to see this. What is the proportion of innovative firms? What is the market capitalization of European startups? One of the ones I like most is to think of who were the three or four biggest companies by market cap, or by research intensity, in Europe in the 90s, in 2000, in the 2010s, in the 2020s. You get three or four top German car manufacturers all the time. You look in the United States and you get entirely different firms per decade. You get Facebook, you get Microsoft, you get IBM, which goes up and then down, and you get the car companies, which disappear from the top rankings. So you get a very dynamic industry in the United States and a very static picture in Europe.

Mounk: The striking thing, by the way, is that this shows that Europe has over-invested in the car sector, that it hasn’t had enough innovation outside the car sector, which would be worrying but somewhat forgivable if European cars were at the technology frontier. But I just spent a few weeks in Beijing. I went to the Robot Olympics. I wrote about it on my Substack. The robots were very impressive, and some students from one of the leading European universities, ETH Zurich, who I spoke to, who happened to be in the audience, said we have nothing like that at our university. But when I was walking home, I went to the display of BAIC, one of the minor Chinese car companies, state-owned, not renowned to be particularly innovative. And they showed me the newest models, which were far more impressive than European cars at a fraction of the price. So even in the one area that they’ve invested in, they’ve fallen behind.

Garicano: Yes, because I think the problem doesn’t have to do with the sector. It has to do with the form of progress. We are good at incremental innovation. We have this three-year cycle: you do something better, you never fire anybody, you hire just a few people, you continue in that path, and that path kind of carries you over the line. But you don’t suddenly shut this sector and open this other one. You don’t get rid of this industry to get that industry going.

Because it’s very hard to fire and hire, because it’s very hard to create and destroy businesses, because bankruptcy proceedings are very difficult, because scaling up is very hard—all of those things mean that if it’s all about continuing to do what you were doing before, we’re pretty good. If it’s about changing directions, we are terrible.

Mounk: Part of the problem is that these challenges compound, right? The tech revolution has created so much wealth that the United States—and now, in a very different way, China—has a lot of investment capital lying around. So when there’s somebody, an 18-year-old with a bright idea who wants to create an AI company or a biotech company or whatever company, there is just this huge pool of money in Silicon Valley that can be devoted to taking out a lot of lottery tickets. And as is the nature of VC, a lot of those lottery tickets don’t work out, but some do. And that then is the next set of big companies that creates new capital. At this point, has Europe fallen so far behind in the capital game that it’s just very, very hard to catch up?

Garicano: I’m skeptical of the capital explanation. It looks more like good Europeans going to Silicon Valley to be married with good European capital—the human talent and the capital going away. I think there’s something very related to what you’re saying that is going on, and we can see it in Sweden. In Sweden, you have Spotify and the children of Spotify, and Estonia and Sweden are in the same boat. The founders have the capital, but they also have the knowledge—how do you scale up, how do you start, which doors do you need to open. The person who is the angel investor in the next generation of startups is somebody who has the money, as you’re saying, but also has the knowledge of how to navigate this. So in Europe, once you don’t have that, it’s very hard to get started. In Silicon Valley, it is this knowledge which is allowing the next generation to succeed. And yes, we are pretty behind, except for a couple of countries, in terms of unicorns, startups, and this ecosystem.

Mounk: That’s very interesting. So you’re saying it’s not just the lacking capital, it’s also the lacking human capital in a sense—which doesn’t mean that Europeans aren’t very smart, that they’re not very talented in those industries. When you look at Silicon Valley, there’s a lot of Europeans who have risen to important roles there. But that ecosystem doesn’t exist within Europe. And part of the ecosystem is financial capital, but part of the ecosystem is having people around who said, well, I did a startup and I made this mistake, and I know this person who could be good for you, and all of those kinds of informal things.

What about other kinds of obstacles that exist in Europe today? You said in America, you might say let’s try this as a big company, you hire a bunch of people, and if you decide that this investment didn’t work out or this area of business didn’t work, then you fire a lot of those people. That seems cruel, but because there are so many companies doing that, those people are likely to have other opportunities, and on the whole, the wellbeing of talented workers in the United States is a lot higher than that of talented Europeans. Arguably, at this point, the average American has a much higher standard of living than the average European. One of the reasons for this, of course, is that in Europe you simply can’t fire people in the same kinds of ways. So there are labor market obstacles. There’s a question of whether there’s a truly unified single market, where in many areas it’s actually still very, very difficult to scale a company at the European level because of all kinds of informal and formal obstacles.

There’s a question of culture and mindset, too. I notice this: when I speak to European students, they dream of joining the European Commission. When I speak to American students, they dream of joining Anthropic and OpenAI. I’m slightly exaggerating, but not fully. There is really a difference in what the modal student thinks they can aspire to, and does in fact aspire to. Are those the explanations you’d reach for, or is it really other kinds?

Garicano: I’m not a big fan of cultural explanations—of the last set of explanations you mentioned. It seems to me that there are good, solid institutional reasons to explain what we observe. In terms of the firing and hiring regulations, the first one you discussed, I think is really important. Creative destruction, which is what we’re talking about, is a crucial aspect of progress. Two Europeans, Cost and Controlem, have been making the following point: if you have very big firing costs, it’s very hard to change course. If Facebook decides that the metaverse is the future, invests in the metaverse, changes the name to the metaverse, then decides it’s a completely stupid idea and instead they should be doing AI—they just, one day, fire all the metaverse people, the next day hire all the AI people, and they’re gone. If you do the calculation for how difficult that is for Ericsson or for Nokia, which are examples these two scholars are studying, it’s very difficult. You need to talk to the committee on this and that, you need to pay this, and the unions have to agree. You need to get it all approved. And all of that takes months—but also, more importantly, all of that means that before you take a crazy bet, before you try for something that might work or not, you’re going to think twice, because if you make a mistake, you cannot rectify it.

So to me, this kind of problem is more important. We’ve written a lot about this in Silicon Continent, our Substack, which I have with my son, and we have a lot of evidence that this could be important. There are indeed problems with scaling up in the single market. It’s very hard for a company in Germany or Czechia to grow into France and Italy, because many regulations are different. And even when we have single market rules that are the same, the regulators apply them in different ways. If you talk to VCs, what they tell you is the way they recommend their companies scale up is: you start in Austria or you start in France, then you scale up in the United States, and then we’ll do more of Europe. Don’t start trying to go through all these little markets, because it’s going to take you too long.

Mounk: Let me be a stand-in for my sociologist friends here. Why is it that you argue that culture doesn’t matter? Now, it may be that culture is downstream from a lot of those institutional things, and that if we fix those institutional things, then over time the culture could adjust. But surely it’s not implausible to say that there’s been outsized returns to being a startup founder in the United States—that this has created an ecosystem and a cultural ethos where going out at the age of 18 or 21 or 25 to do a startup is something that is prized, for which there’s all kinds of cultural resources, people understand what it is to be doing a startup, your parents are not going to fall unconscious and say “what on earth are you doing,” and so on. And because in Europe there’s been all of these obstacles to the creation of a startup culture, which may have been institutional, now there’s a lacking culture.

Presumably that problem is not going to disappear overnight. So even once we have managed to fix some of those institutional obstacles, there’s still going to be some parents who say, well, I’ve never heard of anybody doing a startup, this is really not what you should be doing. And there’s still going to be a lack of cultural knowledge about how to engage in this and why you would do that. And there may still be a generation of people who share the aspirations of their elders and who think that perhaps being a functionary in Brussels is more honorable, or somehow a better way to serve Europe, than to go and try to become what continental Europeans like to call, in their favorite English phrase, a “tech bro.” Like, that’s betraying Europe, right? You’re serving Europe by becoming a good bureaucrat.

Garicano: I would say two points on culture. First, yes, norms and beliefs matter, and there are norms and beliefs that societies have, and you marry or you don’t marry young or old, and all these things change. I am not a big fan of looking at those as a policymaker, or as a policy analyst, because there is not much we’re going to be doing about that.

You also talk about cultural knowledge, and I certainly think that’s the part I was talking about with business angels—the knowledge part, the cognitive part, is very important. And that one we can change. So, there’s no business angels, so we don’t get a transmission of knowledge on how to get started. Okay—how did Sweden change this? That was the third point I was going to make, which is that we have seen these things change. Sweden did a reform in 2003 or 2005, one of those dates, where they decided to allow the capital gains from one generation of startups to be reinvested in the next generation without taxation. So if you create a new startup, you can save yourself the capital gains. If you do that, then suddenly everybody wants to reinvest, and then suddenly you have a culture. You’re like, the Swedes do have a culture. Well, why do the Swedes have it and the Norwegians or Danes don’t? Because the Swedes changed the law. So I think that sometimes we use culture as an easy crutch to say Europeans can’t do it because they’re not risk-takers—and yeah, we might not be risk-takers, but it is indeed, as you put it, to some extent downstream of all the other things we have, which are taxes and which we can change.

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And for sure, there is one thing that does explain risk aversion, which is crucial, and I’m not going to deny it, which is demographics. Europe does have aging populations. And if you ask my mom, or the mom of my wife, or somebody else in Europe, they don’t care so much about innovation and all these things, because they think life is good as it is and they want to just get their pensions and continue the way they are. And the older the population is, the more important those voters—who are saying “please keep everything as it is, we’re doing fine”—become. That part is crucial.

Mounk: Yeah, I think there’s a second way in which it matters, which is for the ability to make political change. If you have political change that changes the institutions and the incentives, downstream from that, you probably get cultural change as well. But part of the problem is that you have a political culture that makes those policy reforms difficult in the first place. And I’m struck that this is true of older Europeans who have generous pension schemes and who want to defend them. That’s very understandable in politics—maybe a challenge for Europe, but it’s certainly straightforward that people who have high pensions don’t want to give them up.

What I’m really struck by is that a lot of young Europeans I speak to actually have the same outlook. A lot of elite students in countries like France, for example, seem just naturally convinced—we haven’t sort of analyzed this in a deep way, by and large, but it’s just obvious to them—that defending France’s generous pension scheme, and opposing the kinds of reforms to that scheme that Emmanuel Macron was trying to put in place, is in fact in their generational interest. That their parents’ generation is trying to take away something from them. And they don’t see the connection between that and why they’re earning so little, and why they pay so much tax and other social charges, and why that makes it so hard for companies to innovate and therefore to create positions that would give them opportunities in life.

They reject all of that and just say, our parents had something that’s going to be taken away from us, it’s in our generational interest to go defend this extremely generationally redistributive scheme—one that is continuing to feed the comparatively good lifestyles of older French people, who, retired, now on average make more money than people who are in the workforce, in a way that’s going to be completely unsustainable 30 or 40 years from now, when those people themselves might start to go into retirement.

Garicano: Yes, I agree that there is a tendency not to look forward on this. I also think the media, which is kind of oriented to the needs of the majority of the public, and often that public is older, has been reluctant to talk about the generational divide. I think that has changed. In Spain, there was one account on Twitter which picked up on all these things economists were saying, did it very well in putting out the graphs, etc., and got an enormous following. He had to be shut down by his bosses—there was demand for this. And in France, there is the one called “Pierre qui paye”—”Pierre, the one who pays.” There is an increasing kind of demand for these stories. I think when you look at recent gains by populist parties among young voters, among male voters, among working-class voters—that we saw with the recent elections in Germany, the regional elections in Saxony-Anhalt—you do see a lot of people who are paying those contributions, who are probably not thinking of their standard of living without necessarily understanding exactly why it’s so low, but being upset that they’re paying so much. So I do think there is some backlash, in part, in the populist reaction we have seen.

Mounk: I think what’s interesting about that reaction—one thing that people sometimes say about populism, which I think is fair, is that it can be a kind of disease, it can be very damaging to democratic institutions, but it’s also a symptom of an underlying disease. When populists rise as much as they have, particularly in Europe over the last 25 or 30 years, we should probably take it very seriously as a signal that something is off, that people are upset about something. We shouldn’t be too quick to dismiss that.

I find that to be fair. What’s really striking about many of these populists, though, is that they are actually even less willing to rethink the European social and economic model than other political parties. The Rassemblement National of Marine Le Pen in France has been effective in part by totally refusing to countenance anything like a pension reform. And the AfD in Germany—which sometimes scores points pointing out some of the real problems of the country—itself has a set of policies that, in general, are not going to help the future of Europe or the future of Germany, particularly on the economy. They were, for example, mobilizing against the building of a large Tesla plant in East Germany, where a lot of their voters are. So they’re firmly part of the anti-future coalitions.

Garicano: No, I think you’re completely right. I read the populist vote as a protest vote, not a constructive vote, and most of these people don’t know what they’re doing. A lot of people are giving too much credit to the AfD as representing something about change. The truth of the matter is the AfD is just a symptom that people are upset, but they don’t have any human capital, they don’t have anybody who knows what they’re doing, and there is no chance that they are going to be able to provide for the population in terms of actually doing things better.

Mounk: Laurenz Guenther, who’s been on the podcast in the past, talking about this paper—that the average member of the Christian Democratic Party in Germany, for example, before the rise of the AfD, was to the left of the median voter in Germany on issues like immigration.

Garicano: Yeah, exactly. The thing that he observes, which I think is very smart, is: on the economics, as you’re pointing out, more or less it does look like the parties are following the voters. So, on pensions—the French parties are defending the pension system, the French voters are defending the pension system. On the cultural issues, though, and that’s the key point, you see that there is a humongous gap between where the voters are on immigration and things like that, and where the mainstream, right-wing politicians are. That gap opens up a space.

In his view, it’s like an industrial organization model—an entry model, like in a market. There’s no supermarket in this part of town, so somebody should come in and put a supermarket there. The idea that voters want the migration problem solved in a different way than the traditional political parties in Europe are offering, and that new parties are coming in to offer those solutions, seems to me obvious. It’s been the case in the United States, and it’s probably the case in Europe. Spain’s been having a huge problem with the southern border, where an enormous amount of uncontrolled migration came in. There is no real separation, no real wall between Europe and Africa in those cities, and the voters want proper borders, and they want people who enter illegally to be thrown out. That’s how people see it. And if voters don’t get this from traditional parties, they are going to get it some other way.

Mounk: One thing that I find striking about this is that it has somewhat changed in the United States, but in Europe I think it’s still true that, first of all, political parties aren’t acting on the very evident anger about immigration in huge parts of the population—nearly as much as perhaps they would be if they really meant seriously that the rise of these populist parties is a threat to democracy, as I believe in certain places it is. But secondly, that perhaps outside of leading politicians who have somewhat changed their tune over the course of the last 10 years—basically, Europe’s left-wing and center-left parties are now to the right on immigration of where Europe’s conservatives were 10 years ago—in many elite spaces, I’m struck by the unwillingness to acknowledge that an inability to control the border is one of the causes of populism.

I teach classes on populism and democracy, and one of the questions I ask is: what do you think drives the rise of populism? That’s always a great, lively debate, and I think the causes are not obvious. Some people think it’s to do with technology and the internet and social media. Other people think it’s really about economic grievances and economic stagnation, or perhaps inequality, which I think are two slightly different explanations. Some people might say it’s because people don’t like that women now have equality and gays and lesbians are treated better than they were in the past. They’re kind of willing to acknowledge that. Immigration never comes up. What is it that Donald Trump speaks about the most? What is it that Marine Le Pen speaks about the most? What is it that 91% of people who voted for the AfD in the state elections in Sachsen-Anhalt recently said was the primary reason they voted for the AfD? It’s immigration. Well, perhaps that’s something to do with it.

It’s not that people are totally unwilling to accept that as a possible explanation once you raise it, but it never comes up spontaneously. And even then, people are very quick to say, well, that’s really only because of social media, or because the media reported it wrongly, or because Russian propaganda is exploiting the issue, etcetera. There’s a strange unwillingness to confront this as one of the reasons for the political troubles Europe is finding itself in.

Garicano: I think that’s exactly right. I’m a cosmopolitan liberal, pro-open-borders and all that. I’ve lived all my life abroad. And yet I can see that if we don’t give an answer to these grievances, as you said at the start, our liberal democracies are at extreme risk. Isn’t this obvious?

So I agree with your initial point that liberal democracy can be at risk if we don’t address this issue. And I am also surprised. The first function of the state is—just think of it from the perspective of someone who’s seen on TV in Spain, all the time, these thousands of people who crossed the border from Ceuta in one day, in some mass move. People are looking at them, seeing them on the beach, complaining that they don’t have a place to sleep, and people are thinking, okay, well, just go back to your home in Morocco.

And the fact that voters are not understanding what’s going on—not understanding that if a liberal state can’t give an answer to “somebody violated your territorial integrity,” then you respond by either making the frontier stronger, expelling the people who shouldn’t have a right to stay, etcetera. No—you don’t do any of those things. This has been a huge reason Donald Trump came to power, causing enormous trouble for the United States in many ways. And it can be a big reason Le Pen or the AfD or the extreme right in Spain gets to power, and that would be equally problematic for Europe. This is a problem we should solve before it explodes in our hands.

Mounk: David Frum wrote an article long ago that has become a kind of little slogan in my mind, but I think it’s a helpful one: if liberals don’t enforce borders, fascists will. I’m not sure I would use the F word, but I think if established political parties persistently refuse to listen to these very strongly articulated views by voters on immigration, people are going to go to others who will listen to those views.

There’s certainly a substantial portion of the population that has quite extreme views on immigration. But most people have, I think, quite reasonable views. They see that immigrants are making real contributions to their countries. Many of them have genuine friendships and social relationships with people who have origins outside the country, because much of Europe is now very diverse. But they want their country to have control over its borders, which is, I think, not an unreasonable preference.

I wrote a piece about the election in Saxony-Anhalt in The Washington Post, in which I made an argument that is somewhat specific to Germany, but I wonder if there’s a broader European version of it. I’m really struck by the fact that Germany, out of all European countries, has had an economic, social, and political model that has worked surprisingly well over the last 75 or 80 years. That is, of course, a stark contrast to the earlier history of Germany. In the first half of the 20th century, Germany, with utterly disastrous consequences for the world but also for Germany itself, failed to settle upon a working political, economic, and social model, which led to World War I and certainly to World War II and the absolute disasters that entailed.

So I think, quite understandably, when after World War II a better model was partially imposed on the country, partially achieved by its post-war elites, partially a matter of choice and partially a matter of luck, the operating system became: don’t change it in any way. Konrad Adenauer won re-election famously on the slogan keine Experimente—no experiments.

What I think is striking is that today Germany’s post-war model is really unsalvageable. As Constanze Stelzenmüller has said, it used to outsource its security needs to the United States, its energy needs to Russia, and the creation of economic growth to exports to the huge Chinese market, over the course of the last few decades. And each element of that model is now very much in doubt and probably unrecoverable. It’s not clear to me that, whoever succeeds Donald Trump, Europe can ever rely on the United States for its security to the extent it has over the last 50 or so years. Europe is far behind on energy, which is very troubling, especially for a country that relies on manufacturing as much as Germany does, because that’s a major input cost. And China has gone from having huge demand for high-quality manufactured goods like luxury cars, to being able to produce such strong ones of its own that we’re now in the second China shock, which is affecting Europe more than it is the United States. Suddenly Volkswagen, Mercedes, and so on have gone from thinking of China as a wonderful export market to fearing the innovation of Chinese car companies that can outcompete Volkswagen and Mercedes.

So I think this would require a genuine rethinking of Germany’s model, but the operating system of the post-World War II era makes it very hard for German elites to actually engage—first of all, to admit that the model no longer works and that it needs not just a little reform here or there, as the Red-Green government did in the early 2000s to reduce labor costs, but a genuine change of model. And it makes it very difficult for people in Germany to genuinely think about what that change might look like. I’m surprised by the paucity of debate about how Germany can reinvent itself, given how urgent the need for that is.

Now, that argument perhaps doesn’t easily translate to Spain or to France or to the UK, because those countries don’t exactly have the same historical baggage, or have different kinds of historical baggage. But do you think it’s true that, at the Europe-wide level, it’s still disconcerting how little awareness there is of the depth of the European crisis—and that, despite important efforts like yours with The Rhine Group, how little really serious, genuine debate there is among European elites about how Europe can catch up?

Garicano: Yes, I think Germany does have something peculiar over the last few years, which is the fact that it has been governed by a grand coalition and alternation between left and right, which naturally makes change very difficult, because we have the extreme left on one side and the extreme right on the other, and everybody else has to be in government in some sense or another. This is true for Europe as well. At the European Union level, we basically also have a grand coalition of Social Democrats, the Popular Party, the Greens, and the Liberals. And that makes change hard.

But this is just a fact of the arithmetic—as the populists get stronger, the center has to stay together, and that means there is less and less room for debate. But it’s also true, as you said, that there is a lack of awareness among citizens of the need for change. In some ways, we have it too good in Europe. The truth of the matter is life is great. Life is comfortable, people have long vacations, etc. And the stimulus for change usually comes from a crisis.

Of course, the truth of the matter is: who has it very well in Europe? Not the young people, who cannot start a life—in many places they cannot get a house, they have very low salaries. Wages in Spain, for example, haven’t really gone up since the 1990s; in Italy either, in real terms. In France, the real wage is below what pensioners get. So there is a generation which has it pretty well, and I think that is the crucial element in this debate.

European politics, to me, are demographics—that’s it. If you understand the age of the median voter, you understand how close to retirement the median voter is, you understand the trade-offs between investments and pensions. The marginal dollars always go to pensions and health, not to education and investment. And you understand everything else about change and reforms in the economy, which is that that voter doesn’t want to change. The problem with demographics is that they’re slow-moving and very hard to change. We see it in France, where the political debate at this point—in the year of the presidential election, at the start of the term that will end at the presidential election at the end of spring—is dominated by solutions proposed by the extreme left or the extreme right, which are not solutions to any of the things we’re discussing. Like, let’s not pay the debt—which is just a crazy solution. So I think that demographics are the story, and that’s what makes me worried about how to change it.

Mounk: Let’s talk about what some of the solutions might be. I think part of the aspiration of The Rhine Group is to search for solutions and help build the capacity to implement them. Demographics are very unlikely to change—if anything, the demographics of Europe are likely to be more challenging 25 or 50 years from today than they are now, and it doesn’t take a crystal ball to say that. There’s demographic momentum, and if the generation of people who are fertile today is significantly smaller than the generation of people who were fertile 25 or 50 years ago, then unless suddenly every 30-year-old decides to have five children, we can basically guarantee that there’s going to be fewer children over the next years, and fewer people in their 20s and 30s 20 or 30 years from now.

So where are the levers? If you were dictator of Europe for a day, what do you think we should do? What do you think we could do to address all of these deep-rooted problems we’ve been talking about for the last 30, 35 minutes?

Garicano: I would start with practical things. I wrote a piece with Bengt Holmström and Nicolas Petit called The Constitution of Innovation, in which we started from practical things to get innovation and scaling up going. The first thing I would do is... are you having trouble with the noise?

Mounk: Normally we try to deal with all of the noise problems on the back end in this podcast, and it’s always challenging to get the audio right. People are traveling in different kinds of places. But Luis, if you don’t mind, let us talk about this noise for a moment. Are you at the moment in your office at LSE?

Garicano: I am in my office at the LSE. It’s a very European problem. There is a window there that you can see on top. That window is part of this very modern intelligent building, in which there is no air conditioning, and the building decides when it opens those windows and when it closes them. This system didn’t work, because the window starts opening when you’re in the middle of a Zoom call. The result is that it either stays open or closed, and you have no control over it.

Mounk: I think this is actually a beautiful case study of the problems of Europe. First of all, it’s kind of amazing that we call this building intelligent, when there are still a lot of people who are reluctant to acknowledge that artificial intelligence is intelligent. But it’s just such an amazing thing. Obviously sometimes you’re going to want the window closed, because you’re in a confidential conversation, because you’re recording a podcast and you need to not have street noise, for any number of reasons. So the idea that there’s anything intelligent about a building that doesn’t allow its occupants to close it is astonishing. I’ve been to the building. It’s a nice-looking building, but it’s very recent. So five years ago they decided, let’s not have any air conditioning in this building, because obviously air conditioning is evil and environmentally unfriendly, and let’s make sure that people suffer through the summer. Miraculously, nobody says that Europeans shouldn’t heat their homes in the winter, even though that uses as much CO2, or more, than it does to cool buildings in the summer. I think it’s a great example of central planning. The idea that it’s somehow going to be more environmentally friendly for this building to decide on its own when to open windows and when to close them, that we’re not giving you the choice to open or close windows... I don’t want to relitigate an earlier part of this conversation, Luis, but how is this not a cultural problem?

Garicano: I come in the winter with a space heater, because the heating, which is also intelligent, doesn’t do anything of what I need in terms of temperature. So yes, it is a disaster.

Mounk: I wish I had a photo of every senior British official and ex-official I’ve met with a space heater in the room. It’s something I haven’t encountered anywhere else in the world.

Garicano: It’s insane that now the temperature’s pretty cool and they still haven’t pressed the button, or the building hasn’t decided it’s cool enough, to close my window. So you asked what we would do, and this is a good one. I like this one. The first thing is scaling up. I would like to have an interstate commerce clause for Europe, which means if you can sell something in Madrid, you can sell it in Brussels. End of story, no questions asked.

There was a big decision by the Court of Justice, called Cassis de Dijon, which said you cannot put obstacles to trade. If you can sell in one place, you can sell in another. But eventually there were exceptions for cultural reasons, for hygiene, for environmental reasons, for security in the workplace, which means, at the end of the day, any country can put any barrier on any other. That’s the truth of the matter. So I would like to say: from now on, if you incorporate a company in any country, you can sell in every other country, end of story. True for services as well. If you’re an engineer and you’re allowed to build bridges in Germany, you’re allowed to build bridges in Spain. Not only between countries, but even within countries. If you’re an industrial engineer in Spain, you should be able to sign off on projects even if you’re not in the exact same specialty. All these professions and services and goods are very difficult to trade.

But let’s go to the windows of the buildings. In Europe, something happened in the seventies. All world citizens in the Western world realized that we had done some damage with excessive development, and Nixon established the EPA, and it grew and grew to the point where nothing can get built. This is now the case almost everywhere in Europe. You cannot build housing. I’m in London now. You cannot build housing. There’s a huge need for housing in London. There is this green belt, which is nothing but old industrial areas where you can’t build, because there’s one mouse that appeared, and then the whole biodiversity legislation kicks in. It’s insane.

In Germany, my son Peter wrote a post on the blog about the toads in Berlin. Do you know about these toads, Yascha? There is some toad which came in a truck twenty years ago, and it’s in a site where there’s a zone planned for a lot of apartments. People have been suing, because this toad is now protected. You cannot do anything, you cannot move it. The developer wanted to create a kind of refuge for the toads, all sorts of things, and nothing was acceptable. So there are thousands of people who don’t have a place to live because this toad is there, and the toad isn’t even native to Germany, or native to this site, or anything.

I think when people thought about biodiversity, they weren’t really thinking about the toads on a building site, or the grass between two lanes of the highway, all of these places like old industrial areas where some species starts growing, some mouse or some bee. No bees, I can’t say, because bees are sacred. But many other things. We could do better. We could have more true biodiversity, more true nature, by building nature. Instead it seems like we protect the nature that happens to be in the exact place where we want to build. That nature gets enormous investment in the form of the opportunity cost of not building, and we don’t protect nature in places where we could be actually generating more nature. This would be something that if I were dictator for a day, I would radically change.

Mounk: So we need an abundance agenda for Europe. This is one of the huge changes, certainly in Germany, which was always renowned for its efficiency around the world. When you now look at the famous German stories, it’s not just that trains are now less punctual than Italian trains, because they’ve fallen so far behind on investment, but the fact that remodeling the train station in Stuttgart is taking decades and costing billions, that building an airport in Berlin, which still has problems, cost an enormous amount of money and took twenty years longer than people anticipated.

Garicano: Yeah, years and years. Because people are not protecting the environment, they are anti-growth. They hate growth. They don’t want things to change, and they are going to put any obstacle in the way. The moment that something is urgent, like the liquefied natural gas terminals in Germany once the Russian gas stopped coming, you remove this legislation and you can build it in nine months. The legislation is done on purpose to stop these things from happening, and it’s completely crazy. People are dreaming of a world where you have your own apple tree, this Greta Thunberg-type of green attitude, where you eat your own apples and don’t trade with anybody and live in autarky forever. That is just insane.

Mounk: I really did not mean to make this a methodological seminar about the relative importance of institutions or economic incentives versus culture, but it strikes me that there is a cultural element to this. I have so many friends and acquaintances in Europe who use a lot of CO2 in their lives, who don’t live, by global standards, particularly environmentally friendly lives, because they’re quite international, they travel a lot, they use the plane a lot, they live in big, nice apartments, some of them have second homes, all of the things that actually drive CO2 emissions, which is understandable. But they don’t have a car in Berlin, because you can get around very nicely on public transport and a bicycle if you’re in the center of Berlin, and every now and again you call a cab if you’re being lazy, so you don’t really need a car. They somehow feel that because we’re making those sacrifices at the margin, which probably account for a difference of one percent in the CO2 for which we’re responsible over the course of a year, they lead this deeply environmentally friendly lifestyle.

If this was just some form of personal expiation for the guilt of being a modern-day human, and sometimes in the rain they bicycle and feel virtuous about it, and they think that’s changing the world even if it’s not, let them have their fun. But they then want to impose that lifestyle in a normative way on others. Those are the people who will say, well, we don’t want more housing in Berlin because that would be really bad for the environment, even though people living in cities consume less CO2 than people in more suburban places or in the countryside, so actually this is driving up CO2 consumption. But it is that set of cultural and political attitudes that helps to explain the existence of this legislation, is it not?

Garicano: Yes, there are definitely these luxury beliefs, very widespread, particularly among German elites. I wouldn’t say it’s a particularly European thing. We got the NEPA, and this environmental legislation, the habitats legislation, from the United States of America, and this emphasis on process. This legislation is not so much about allowing things, but about documenting that you’ve done all the steps, that you’ve done the environmental impact assessment. It takes years, and somebody can cancel the whole procedure because you jumped one step, you didn’t measure the impact on this particular species or whatever. All of that is American. All of this process obsession is American. So these luxury beliefs are not necessarily just European. But I wouldn’t disagree with you. Luxury beliefs exist, and people will get a belief like, you know, AI uses water, and it’s like, okay, that’s a completely crazy belief, and almond milk, which you drink every day, is much worse. But almond milk feels green to people, whatever.

So yes, they do have the luxury beliefs. My view, and the view when I’m thinking of this group and these efforts to change European policymaking, is that yes, we need to make a big effort at communicating, but it’s going to be hard to change the culture. What we need to do is look for low-hanging fruit, a set of institutional changes that can then lead to all these other downstream changes. For example, we were talking about whether we can get the taxation on business angels’ gains from exiting a startup and re-entering another startup modified, so it’s easy, or even eliminated, to convert one startup into the next. I think it wouldn’t be too difficult. I think it’s something we could try. Sweden managed it, and this would generate change.

Beliefs matter, and these norms are there, and people have these crazy views, like you were talking about CO2 and nuclear. Killing nuclear is the least environmentally friendly thing Germany has ever done. It’s driven up gas consumption and coal consumption through the roof. Germany consumes much more CO2 than anybody, and more than it would have otherwise, and yet it’s not even a debate. Nobody’s talking about nuclear except for the extreme right, because it’s a luxury belief. We can try to find those models, we can try to modify those beliefs, and you and I do that through our Substacks. I write a Substack, people read it, but I have like twelve thousand readers, so is that going to significantly change how everyday Europeans see the world? Probably not. So let’s go for those practical, low-hanging-fruit changes.

In the rest of this conversation, Yascha and Luis discuss why Europe is behind on artificial intelligence, how the continent can change its approach, and what Europe can learn from Ukraine.

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