Europe needs national champions, now

Danny Crichton:

Marko, thank you so much for joining us.

Marko Papic:

It's a real pleasure. Thank you guys for having me on.

Danny Crichton:

So, Marko, we've discovered a massive schism between you and at least me ... I won't speak for Laurence, but at least for me ... which is I am a conventional euro-doomer. I believe that the UK is dead, Germany is dead, France is going to a debt crisis, Italy is kind of holding itself together. There's these defense pressures. We can go on the list of macro factors. But I think I found the unicorn in the world, which is you, who actually believes that not only is Europe not doomed, it's not dead, but in fact it's actually quite prosperous, has immense amount of future performance. In your recent report you wrote, "Europe's underperformance is long in the tooth and exaggerated." And so, I'm just curious at this top of the hour here, why do you have so much enthusiasm for the old continent that feels like it's on the verge of collapse?

Marko Papic:

Yeah. I mean so probably five reasons. First of all, because everybody agrees that it's on the verge of collapse. And so, that would be the first, including Europeans themselves, which is if everybody thought Europe was on the verge of collapse, except for the Europeans, I would be very worried. But they 100% agree with you, Danny. 100%. You go to Europe, it's just doom and gloom. I've said before, Germans are like Charlie Brown where there's a rain cloud above them.

Listen, nothing in the macro universe really goes on forever. I mean it is from doom and gloom that you get kernels of green shoots of policy action, value, and so on. So that's the first issue.

The second issue is that the number one thesis, at least in the media, for why Europe is doomed, is energy crisis. Everybody who's traded commodities knows that the cure for high energy prices are high energy prices. And so, there is an absolute tsunami wave of LNG supply that will drown Europe in cheap LNG. That's because too many countries have built too much supply. You have Qatar, Russia, Mozambique, British Columbia, and the United States all competing now. There's not enough import terminals around the world. So Europe will get the benefit of that mistake, if you will, that suppliers are making.

Then the third issue is that this pincer movement between Russian aggression and American abandonment, which I think is overstated. You could argue another reason I'm actually bullish. I don't think America is going to fully abandon Europe and I don't think Russia is an existential threat. Again, there I'm also a heretic, but Europeans don't agree with me, which is awesome because they're finally doing stuff to deal with these perceived threats. I don't mean they're zero or one, I just don't think they're existential, but Europeans do.

Then the fourth issue is that Europeans are actually really good at the kind of innovation and technology that we're going to need in the next five years. I'm on record multiple times saying I agree with Peter Thiel. I think the foundation and the basis of what you guys are doing is similar. It's atoms over bits.

I think that we have too many apps. I don't think apps are winning the Ukrainian conflict. I think it's the kind of technologies that are more in the atom world, and Europe is good at that stuff. You might say, "Well, no it's not," and I'll be like, "Okay, cool." Well, every time I'm in a Boeing, I become religious. Every time I'm in an Airbus, I'm calm, cool, collected, and not that religious. Not at all. Not at all. So I would counter that. I think Europe is good at the kind of tech we're going to need over the next 5, 10 years.

Then the final reason is glib and perhaps silly, but there's always been at every investor conference you go through this annoying question, like, "Well, when I need to call Europe, I don't know who to call," right?

Danny Crichton:

Mm-hmm.

Marko Papic:

The German election changed that. I expected it to change that, just not as quickly. But this guy, Friedrich Merz, man, he is not effing around. He said some stuff over the last two weeks that I thought it would take him at least 12 to 18 months to say. And so, I do think we finally have someone to call, and it's Merz.

Is he going to try to string other members of Europe into a phone conversation using his iPhone, like, "Hold on. Just a second, president. I've got to get Macron on the line"? Yeah, probably, he will do that, but he will do that, and that's important.

Danny Crichton:

So I'm going to do a complete useless aside, which is, okay, Boeing, you pray, Airbus, you're totally at ease. Embraer, Brazil company, how do you feel in an Embraer jet?

Marko Papic:

That's a good one. Squeezed. How much squeezed?

Danny Crichton:

Yes, yes. Okay. So Merz, we saw the election, and I mean it was what we expected. There was not a huge amount of surprise. What has been surprising is the speed at which Merz is moving the plank. We're recording this in early March. We just found out I think in the last day or two that the debt brake that's been in place in Germany for the last 20 years, there's been this austerity friction on the entire economy, on productivity, on growth, infrastructure spend, et cetera, is about to be loosened in the CDP-SDP negotiations that are going on for the grand coalition.

What that means is Germany would be able to invest in potentially defense infrastructure outside of the break, would uniquely spend an enormous amount of money in the next couple of years. That has led ... At least I think the number was the largest gain in debt prices in Germany since '89, since basically the fall of the Berlin Wall, a one-day increase in prices.

How much of a dislocation is returning Germany? I literally wrote a piece just a couple of weeks ago about how Germany is dead. So maybe they're being resurrected. But I'm curious, is this enough? If they were to spend a couple of hundred billion euros in infrastructure, in defense, does that really change the game for the future of Europe?

Marko Papic:

No, it doesn't, and that's why I listed five reasons. There has to be more than that. The macro context also has to be conducive. First of all, this is not something that was a surprise. I think it's a surprise to currency markets. The euro was on fire, at least in early March when we recorded this.

But the Bundesbank, which is the paragon of fiscal conservatism, was calling for this to happen a couple of months ago. Then a lot of investment banks are skeptical. They're saying, well, there's still a blocking minority of anti-establishment. Don't listen to that nonsense.

When the political zeitgeist changes towards fiscal profligacy, you don't end up spending less. You spend more, because anyone who complains brings new stuff to the table. So your point about infrastructure is important because originally this was supposed to be just defense. Now it's ballooned to social infrastructure. They're going to spend money on everything.

Is this enough? Again, no. There has to be more. One of the things that Europe ... It's very interesting. If you read some of these plans that are circulating out there, there's a Mario Draghi plan, there's an Enrico Letta plan. I would read the Enrico Letta plan because he basically says, "Listen, enough of laissez-faire." Very interesting.

Effectively what Letta is saying, former prime minister of Italy ... By the way, he's more on the center-left side of the world. He's basically saying, "Look enough of laissez-faire, Reagan-Thatcher. We tried that. The commission tried this forever. We need to do what the Americans are doing."

Americans are not doing laissez-faire. They're doing hardcore industrial policy, like China style, CPC style industrial policy. Follow Xi Jinping. What Xi Jinping is doing, we're doing effectively. We have our own made in America now in 2025, and he's saying Europe needs to scale up.

Forget about deregulation. America's not kicking our butt because of deregulation. They're kicking our butt because they've created national champions. Europe is actually not bad. When we scale up and create an aerospace company like Airbus, it's a good one. So we need to do the same in sectors that are actually overly competitive.

So one of the things, Danny, that Europe has are these very, very high-quality companies that have no profit margins. Why? Because there's like 30 of them. One of the good examples is telecommunications. So Europe used to be the global leader in telecommunications, but today a Chinese telecom company has 400 million users on average, American has 120 million users on average, European has two.

So this new idea for restructuring Europe is about aggregating, and that means M&A activity. That means more value returned to shareholders, larger profit margins, and more competitiveness relative to the rest of the world.

Now the two sectors there that I am most interested in is not necessarily the stuff you guys are interested. It's more telecom and finance. I think they will be the big beneficiaries of this move. But that's another example of things that are going under the surface that aren't just about German more fiscal spending.

Laurence Pevsner:

So all of that makes sense. We have these under-the-surface currents. The five reasons you outlined, they're all very compelling. I guess my question is what would proof look like that this is actually happening? What would we have to see that we're like, "Oh, Marko was totally right"? Is it that out of Europe emerges the next big AI company? Is it that we get ... Denmark is benefiting so much right now from GLP-1s. Would it be like five more countries inventing a similar drug that really benefits their economy? What are the actual telltale signs that I would come back and say, "Marko, you nailed it?"

Marko Papic:

The Denmark one made me think should we use aggregate BMI like as a measure of competitiveness? I mean I think Europe is kicking our ass on that without GLP-1s, let's just be honest here. Just walk around the streets of Europe.

Look, so here's what I would say. I think I'm a macro investor, so I'm kind of like on the other side of where you guys are in a way. I don't invest in individual companies. I don't think about unicorns or innovation in that way. I want to see aggregate outcomes. I want to see productivity outcomes.

One of the best things is currencies, to be quite frank with you. Currencies are ultimately the proof that something is happening. If the dollar declines and euro goes up in some big macro way, this is evidence that the world expects European performance, both productivity and growth, the two are interlinked, is going to narrow relative to the US.

Now I don't think it will narrow completely. I don't think Europe is going to beat America, but I do think that it's going to narrow. You might say, "Well, okay. Well it's not going to beat America. What are we talking about?" American assets are priced for perfection. European assets are priced for imperfection.

So, Danny, your point in the absolutes could be very well correct. You are like a euro doom-and-gloomer. I mean the market has spoken, and it believes you and it's the truth. You're speaking the truth, but you're speaking an expensive truth. If I'm going to deploy a dollar, a new dollar, not sell a dollar I own, but deploy a new dollar of my LP money into America, bro, America better have humanoid robots playing piano [inaudible 00:10:04].

Danny Crichton:

We're working on that.

Marko Papic:

No, I know, I know. But it's like it's already priced for that, whereas Europe is priced to be a museum, as everybody jokes. And so, if they just inflect a little bit. And so, I would say currency will be a good measure. Over the next five years, is the euro up or down relative to where we are today?

There's other things going on there. There's monetary policy, there's fiscal policy. It's not just. But I don't think euro is at 130 five years from now because purely of monetary policy machinations. It's got to be because Europe showed and delivered something.

Danny Crichton:

Let me ask you, I mean obviously we talked to a lot of entrepreneurs, particularly in what you described as atoms versus apps. Obviously what they always come back to is deregulation, which is they are the laissez-faire. It's very hard to build a business in Europe. It is also fragmented. One of the arguments you have made is you need to aggregate more at the financial layer precisely because venture capital markets are all separate. If you're in France, you really only raise from VCs there. You don't raise from Berlin, you don't raise from Stockholm. It's not a single market in the way that Boston, New York, SF, and LA feel like one home.

Then one of the big challenges is we don't see companies scale all the way up. And so, you described national champions. Google's a national champion, but there was not a lot of involvement other than the original NSF grant for the research that funded Sergey Brin and Larry Page to go build their technology.

Same with Facebook. There's not a lot of government involvement. Now it's still holding on at 2.4, 2.5 trillion as we're recording the show.

Nvidia, you can keep going down this list, now benefiting from the CHIPS Act. But I think '94 company, has been around more than 30 years. Obviously they're getting this tailwind in the last couple of years because of AI, but there was not so much involvement all the way through.

And so, I'm curious, because you went with the center-left report, I read the Draghi report and I felt that the Draghi report was much more accurate to the experience of the people I talked to. So I'm curious, when you compare those two and the visions of the future, is that inclusive of entrepreneurs wanting to go all the way to the end and being able to grow those sorts of national champions, or do you think there's a different model that Europe needs in order to succeed?

Marko Papic:

Well, I just think that the deregulation one is well known, so that's why I didn't mention it. But I obviously agree that that's important. Now you are correct that all the companies you referenced didn't have much of involvement of the US government, but they have a whole lot of involvement today, which is why they've wrapped themselves so tightly in the US flag, particularly in the China industry, because what's holding the hand of antitrust, it's that they are national champions now.

So who's going to go after Nvidia and say, "You're a monopoly"? What US government official is going to do that when, supposedly, without it, we're going to all be speaking Mandarin in 10 years.

So there is definitely involvement of US now and they're definitely now national champions. Although, yes, I don't obviously criticize how they got here. It was purely through private entrepreneurship. Same with Google. I mean President Trump has said, "I don't want to go after Google because of competition with China."

So I think it's both, both the Draghi report, which is much more focused on deregulation, so more a center-right view, and then the Letta report, which is ... I don't think it's a leftist view, but it's more of a view of like, "Hey, once we have a kernel of innovation, we need to nurture it," and not immediately say like, "Hey, no more state aid," which the commission was always coming hard on, "and also no more M&A activity."

There was this case, again not something you guys are necessarily focused on. It's a very important example. It's the UniCredit, which is a bank in Italy, very well-run bank. Italian banks are actually really well-run. It was trying to buy Commerzbank in Germany. It became a campaign issue ahead of the German election, like, "No, we cannot give up our German company." That's a good example.

Google would not be Google if it was not allowed to acquire over the course of 10 years various companies. In Europe, there is a hesitancy to allow M&A, and so create these conglomerates, which I use the term national champions, so does Letta, but it doesn't mean they're necessarily supported by government. It's just that the government allows them to get bigger.

And so, one of the things that Letta talks about, in fact, is the need for Europe to create a digital state, a 28th member of the EU that doesn't exist. It's purely digital. So you can do all of your regulatory activity there. It's funny because you're thinking to yourself like, "Well, America doesn't have that," and then you're like, "No, it does. It's called Delaware." Has anyone actually been to that?

Laurence Pevsner:

So that gets to the point about aggregation. I was recently at a seminar with The Moynihan Center, where one of my fellow fellows, Klaus Welle, who was the former secretary general of the European Parliament. He was talking about how there is this ... The EU is only as strong as its weakest link. You have this idea like the UK used to be the weakest link and now they're not part of it anymore. Then now you have France, which is paralyzed by a combination of a destructive right and then Socialist and Green tour held hostage by the left, and you have the destabilizing situation. This can be true, it doesn't have to be France, it can be any single country, can disrupt the entire EU. How do you think about that as a potential threat to all the progress that you're talking about?

Marko Papic:

First of all, I think from an innovation perspective, I don't agree. There are many states in the United States of America that are a mess, as long as you are allowed to switch from one state to another, to move freely to create businesses, to aggregate, to do M&A activity. So it's a perspective, like let me just ... "Look, I'm a French innovator. I created a cool thing. I'm going to move to Latvia," like YOLO, like let's go. Then eventually France is like, "Oh no, all of our entrepreneurs are somewhere else."

So that competition is good, but it requires the top layer to encourage that. That's why I would say to investors interested in this space, watch the UniCredit-Commerzbank thing. Have they figured it out? They need to send a message that it's perfectly fine for you to hop borders and create conglomerates.

Now the second issue you're referring to is more of a weak link like the whole thing falls apart because people become Eurosceptic. I use as a proxy support for the euro. The euro is a really nerdy way to integrate. The Europeans decided to integrate through currency, which is like what? I mean nobody's out there like, "Yeah, man. US dollar, baby. Let's go." That doesn't unite people. It's very esoteric, it's very nerdy, and only a bunch of economists are going to get excited about it. Like who will monetary policy union? But they did it. They did it. That was what they chose in the '80s and '90s, and that's fine.

Why do I mention this? I mention this because support for the euro should reflect some sort of baseline support for European integration. I've got a report to you guys, man, it is an outdated view when people say that there is cleavages or there is problem countries. Support for the euro across the euro area is at 80%, and that's for this esoteric thing.

So, yes, you do have the far right in France, although I would not call Marine Le Pen far right anymore. She has evolved. So she's more now the Gaullist. She's like a Gaullist right, which is Eurosceptic in a traditional sense, like, hey, I don't want the commission presidents to tell me what to do, but I believe in integration. We need to do it. That's what's happening in France.

Obviously in Germany, the AFD is a holdout for sure. They still genuinely want to leave European integration. But most of the other right-wing parties have put this under the carpet.

I'll give you another data. If you combine Die Linke, which is the far left, and AFD, which is the far right in Germany, you've got about 30, 35% of vote. But only 15% of Germans are anti-euro. So that means that half of all anti-establishment voters are pro-European integration even at this nerdy currency level, but they still voted for anti-establishment.

So I think there's other things that are bothering people in Europe, namely I would put immigration as number one, the lax asylum system. And so, what that tells me as an investor, as an investor, I don't have to worry about France leaving, or Austria leaving, or Germany leaving European integration project because it just tells me establishment parties, centrist parties will adopt parts of the anti-establishment agenda that allows integration to go through. So, yes, immigration will suffer on some level.

Then, of course, your follow-up question will be but doesn't Europe need immigration given their demographic situation? My answer would be like, yes, but they've solved that problem with common labor policy, which is ironically why the UK left. UK left because too many Romanians, Poles were running around doing hard jobs and so on, and they were like, "We don't want this." Germans are okay with that.

There is a pool of Eastern European and Central European migrants that is just going to feed Western Europe, and that's something that actually United States of America doesn't have. If it does, it's not cool with it and is putting up walls. Europeans actually have huge labor pools in Eastern Europe. You're talking about about 60 million people just sitting there ready to move without any authorization, without any need to apply for a visa. That's the common labor policy.

In many ways, UK being part of the EU was a problem for continental Europe because, guess what? Eastern Europeans don't speak German, they don't speak French, they speak English. So they all went to the UK, and now they have to go to France, Germany. That's a positive, I would say.

Danny Crichton:

It's interesting when I think about this. There's a book out recently called Stuck by Yoni Applebaum, which is really focused on the US and how people in New York don't go elsewhere, people in South Dakota aren't going to the coasts, that everyone is living and staying where they are. Movement across the country is at a multi-decade low.

It's interesting to think that we are still probably ... And I do not know the statistic, but I am imagining we are still dramatically higher within the continental United States compared to Europe, where the idea of ... Your example of moving a French entrepreneur to Latvia is maybe utopic. I don't think it would ever happen in real life for a whole host of reasons.

Maybe that's the gap right now is how do you incentivize that? How do you encourage it? We've just recently invested tens of millions of dollars into a company in Lithuania, and it's our first bet in the Baltic state, I believe, across hundreds of companies. Amazing talent, PhDs, great lab. You can imagine them maybe migrating to a more metropolitan center at some point. I'm not putting words in their mouth, but hypothetically you reached the limit of what Lithuania, Latvia, Estonia can pull off.

But I'm curious how much you actually think that that integration will unstuck itself. Does that require from the commission level, from the parliament on down saying, "Look, how do we encourage this? We want intermixing. It'll actually integrate in a much deeper, more cultural level, versus some of the populism that's going on that says France for France, terrare, we want to be connected to the land, et cetera"?

Marko Papic:

Well, I don't want to mythologize it or romanticize it, but in my sphere, which is more finance, so I work more with financial institutions, hedge funds, banks, asset management companies, sovereign wealth funds, and so on, the truth is that if you go to an office anywhere in Europe, you are facing a room, a boardroom, full of a mix of people. So if you are in Frankfurt, there's going to be Italians in that room. There's going to be people from Portugal or of that descent, and I don't think that's an elitist thing to say. So I would actually go look at your Lithuanian company and see what percent of it is non-Lithuanian as an example.

I would also say that there's a massive, massive history over the last 50 years that proves that Europeans are actually really good at this stuff. In America, we have this very negative view of European integration efforts, and that is to a large case true when it comes to non-European immigrants.

But there was a huge influx of Italians, Portuguese, Spanish, and people from former Yugoslavia into places like Germany, Switzerland, and Austria. These people are today German, Austrian, Swiss, like people of Portuguese descent or Serbian or Croatian descent. They have the IC at the end of their name like I do, but they do not speak a word of Serbian. They are Swiss, they are German. Their parents taught them some, they speak it poorly.

So when we say that Europe has bad immigration integration, yes, I get it. Non-European migrants, fine. France has had a problem with its former colonies in the Middle East and so on. European immigration is so much more than that. It's also in immigration within Europe. So your country, like, let's say, Portugal in the '50s and '60s, not doing well, boom, you moved to Germany, your kids are German. And so, I would say that there's both elite immigration and also this kind of long thread of immigration.

And so, no, I don't think it's a problem. I think people will move. By the way, we saw this,. I dabbled in venture. I dabbled in it.

Danny Crichton:

[inaudible 00:21:57].

Marko Papic:

Yes, I dabbled slightly in my previous role. I was five years at an asset management company that had a fintech fund. What I would say to you is, for example, Latin America, interestingly, Mexico City has become a hub for fintech entrepreneurs. People from Colombia, from Peru, from Ecuador, they start their firm in those countries and they move to Mexico City. Mexico City has exploded as this kind of capital city of the Spanish-speaking Latin American fintech ecosystem. Interesting.

If Latin America can do it, Europe can do it as well, because in Europe, it's actually even easier. You don't even have to apply for any sort of a visa. You just move from Latvia to France or from France to somewhere else.

Laurence Pevsner:

These all sound very encouraging signs. I was reading another piece of yours, though, where you talk about the impossible geopolitical trinity. You talk about the idea that we have to deal with both de-risking from China, decarbonization with the climate, and then there's also the threat of Russia as well, and that each of these individually would be very serious and difficult threats to take on, and collectively the trilemma is potentially overwhelming.

I was thinking about this in the context of Europe versus the United States. One of the things that we like to talk about in the United States is we have our two oceans, and that makes us feel safer, versus Europe is surrounded on all sides. Danny and I were recently at a ... We led a risk game at the UK embassy in DC where there are a bunch of scientists and engineers and think-tankers and so forth from the UK who are talking to us about how their country is ... We think we are integrated with China, and that's a de-risk for us. They're like, no, for them it's like ... When it comes to biotech, for example, it's like we're either ... Are we going to take American money or Chinese money? It's really up for debate.

The same thing when I think about energy. Of course after the invasion of Ukraine, Europe has been trying to become independent from Russia, but that's still a huge challenge for them. So how do you think about that impossible geopolitical trinity that I believe is your own term in terms of the crisis that Europe might face?

Marko Papic:

Pressure makes diamonds. That's what I would say. I think our two oceans have made us fat and lazy in many ways, geopolitically at least. I mean think about the current administration is basically saying, "Oh, we can withdraw from all these challenges." In some ways I think Donald Trump is going to usher in a period of stable equilibria. I don't think he's going to usher in a period of war, but he's like, "Yeah, we're good. You guys figure it out. We've got two oceans."

I think that pressure makes diamonds. I mean this is what human history tells us. I'll give you one example. Why did we get industrial revolution? Well, there's many reasons, including UK's advanced legal common law systems. So I don't want to take anything from that. Well, England's at the time.

But one of the reasons we got the industrial revolution is because Britain is an island and it's in a northern climate. Trees grow slower and it basically completely cut all of its forests in pursuit of grazing land. And so, it ran out of wood effectively and had a deficit of burning fuel. It would import it from the Baltic region of Europe actually. Then the Danes being Danes were messing with that supply. They were like, "Cut it off. Let us interrupt the flow through the Jutland straits."

And so, the poor English had to turn to coal. Coal was not an innovation. Everybody knew about coal. It's not like people didn't know about coal. They were just like, "This is stupid. You get dirty, it's heavy, and it doesn't grow outside of my house." So they were all laughing at United Kingdom. "You guys have to burn coal."

Then of course the problem with coal is you've got to move it around. And so, they started building canals. Eventually that was extremely expensive, very onerous. They eventually figured out, "Hey, why don't we burn coal to move coal?" and that was the industrial revolution.

So if you were standing anywhere in Europe, 1550, you were doing what we're doing. You were basically putting an economist cover with Europe freezing itself, which happened a couple of years ago, like, "Ha ha. Russia's cut off your natural gas." And what did the Europeans do? They've surged import terminals. People said, "Oh, the Germans wouldn't be able to deal with this. It takes two years to build an import terminal." They built it in three months because they're German. What did you think Germans were going to do? Which part of German history tells you they just lie down and like, "Okay, we lost."

Then the other one was Spain. One of the biggest plays, every hedge fund billionaire I talk to is investing in data centers in Spain. Why? Because they've surged alternative energy massively, and they now have periods where electricity costs nothing in Spain.

Now we'll see if that works out. There's all sorts of problems with that, by the way. It makes it difficult to invest in energy infrastructure where it costs nothing. But the point is that I think that these geopolitical challenges are where we will get innovation.

I think one of the things that's happening right now, most innovation in the field that you guys are very excited about and are in is probably happening on the front lines in Ukraine, where you've got really smart people trying to figure things out as they're fighting a much, much better force.

And so, I don't know. I think that that's a positive. So though these challenges are not a reason to sell Europe today, they were perhaps a reason to sell Europe 5 or 10 years ago.

Danny Crichton:

When you think about it, we're talking about challenges, and Laurence was bringing up the trinity of climate change, Russia, and China. We haven't talked about China a lot, but when you think about the story of Germany, it essentially was this incredible story, which Germany was essentially the only trade surplus country with China. It was the exporter to China in order to build out the manufacturing, the factories, the facilities, and everything from chemicals to parts and everything in between up until about a couple of years ago. Then the narrative shifted and the narrative has dramatically changed.

So Volkswagen has suffered dramatically in China and the domestic markets. You see competition rising from the east across a lot of areas where Germany was the monopoly producer, or at least one of a very small number of companies able to produce precision machine parts, industrial equipment, et cetera.

I'm curious how you think the China dynamic plays into this long term, because as we sit, again, we're recording in early March, there are inklings from the European Union of saying, "Look, we have to be a buffer zone between the US and China. We have to pivot between the two. China could be not an ally in the way that obviously America is in terms of values, in terms of human rights, et cetera, but as an economic leverage point against the US and the trepidations that we're seeing from the Trump administration, have the opportunity to use that."

Do you think China is a threat to Europe economically in terms of finance and deindustrialization, or do you think that this is a triggering point for Europe to regrow, rebuild, and reindustrialize?

Marko Papic:

I mean I think it is definitely a threat. It's a challenge. China has been getting much better, not just with cars, which everybody talks about, but also machine tools and CapEx goods, which Europe used to dominate. So when China industrialized in the early 2000s, which is the peak Chinese industrialization where all the corporates decided to move their factories to China, that was built on the back of Siemens turbines and CapEx goods other than Caterpillar. It was European CapEx goods that built that.

So China's caught up with that, and for sure, I would just say that the world is a big place and there's plenty of places out there in the world that are going to need to build out your infrastructure. And so, there is plenty of room for both China and Europe to compete in CapEx good.

So that would be my first point. But, yes, it is a challenge and it is reinvigorating Europe because they're realizing they have to scale up and they have to get serious. One of the interesting sources of innovation in Europe and real quality is this high-end metallurgic capacity that really only Europeans have in certain fields. For example, semiconductor CapEx machines. What ASML does is dark magic. Nobody can really replicate it.

So that's a good example, but you have a lot of those in the Mittelstand in Germany. You have a company that's been building hooks to hook a car in a factory for 150 years, like the grandfather invented the hook. They only build these hooks and they're really, really good.

China's been trying to go after that. They actually have a specific program to try to innovate and defeat the German Mittelstand, and they're largely failing on that. So that's what I would say.

But that's the economic competition. Economic competition ultimately is healthy. I think that we've all become enamored, and I think it's not fair to blame the Trump administration. The Biden administration completely hooked itself to the same narrative, which is like competition is bad and we need to protect our industries. That's actually usually a path towards losing the competition. So that's the first thing I would say.

The second thing I would say is that, yeah, I think Europe ... Like China is not a geopolitical threat to Europe, and the United States is trying to convince Europe that it is. But it would certainly require China to act more. I've often joked, if we were making a Hollywood movie, China would've been fired as the villain. You're just not doing it, man. [inaudible 00:30:29]. Evan is going to take your spot. He's doing a much better job. I believe Evan. You, I don't know.

So China needs to do more. For Europe to truly be threatened by China, China would need to invade Taiwan ASAP. That's what's needed.

And so, yes, that is another way in which Europe has this ability to trade with China, to continue to have a flow of IP go both ways. For example, you guys are probably aware, China wants to build a lot of battery factories in Europe, and the Europeans are saying like, "Cool, story, bro. No problem. You can do it, but you've got to give us the IP." So Europe is doing to China what China did to the west in the '90s and in the 2000s.

I have a feeling that Donald Trump is going to do the same, but again I'm a heretic on that view. I think if the US wanted to have a true national security policy towards China, the number one thing would be to bring BYD into Ohio. It's a fixed asset investment. It's called fixed because it's fixed to the ground. It's $2, $3 billion worth of medieval hostage. In medieval times, you would take someone's kid and raise them in your castle so you can kill them if the war starts.

So let's go. You want to invade Taiwan? No problem. I'll just, yoink, take $3 billion BYD plan. Then you tell BYD, "Listen, you can come build BYD cars, but they're going to be GM branded." So you're going to teach GM how to build a sedan, because they clearly can't do it.

That will be really smart. Europeans seem to be doing that when it comes to battery technology at least. I think you've already actually seen it in Europe. It's happened in auto manufacturing. It's called Volvo, which is Geely, and it won the US Car of the Year Award a couple of years back with the XC, which basically the Chinese showed up in Gutenberg and said, "Here's $2 billion. Build us the best car ever." The Volvo engineers were like, "What? You don't want to ... " "No, no, no. You do whatever you do. Here's 2 bil. Just get us the best SUV." So this Europe-China integration can actually work better because they're far less paranoid about China than the US is.

Danny Crichton:

I agree with you on a couple of things. So, first, anytime you back away from competition, you end up just weakening yourself. It's about fitness in the marketplace. When you put up the protection walls, it gives you maybe a short to medium-term safety and insulation, and you can make some profit and margins go up because you're cutting investment.

Of course that just means that you have a worst product in two, three, four, five years, and that competition eventually breaks through the dam and now you have nothing, or you just have this sclerotic business at home and you can't export anymore because no one else wants your, frankly, shitty product. And so, you just don't have access to the global markets. And so, I agree with you 100% on the protectionism and how that tends to undermine these companies as opposed to pushing them to be better and to be aggressive and to be on the cutting edge.

Second, I think what you're getting at is this idea of how de-risking actually increases risk, that by layering additional interdependencies, it forces people to actually consider your BYD plan in Ohio, all these jobs that might otherwise be here, all those profits that may go back. Not only are you risking the war in your context, but you're also risking all these other factors, if nothing else muddles the decision-making quite a bit more and keeps everyone more at the table for a longer period of time and gives peace a chance.

What's interesting, just this morning, Geely was shown to have entered the top 10 for global auto sales, meaning that now two Chinese companies, BYD and Geely, are in the top 10. I believe BYD has now beaten GM and Ford for total sales as well.

And so, I feel like we just had a risk gaming scenario in December on the Chinese electric vehicle markets. We did it in DC and New York and SF, and our listeners have heard us yell again, have had about that for a very long time. But I do think this comes up again and again of, look, at some point we have to go the other direction, which is China's so far ahead in EVs, it should be market access-controlled on our side, which is if you want to sell these EVs in the US market, which is very profitable, a lot of people would like to have them, you have to transfer the technology in the exact same pattern that we saw 20 years ago with joint ventures with SAIC and GM, et cetera, et cetera.

Marko Papic:

Yeah. The problem, Danny, is that in Congress, in the Beltway, Chinese auto software is seen as a national security threat. Why? Because a suburban mom driving her minivan in case of a war becomes a suicide bomber. Her minivan is taking over from Beijing.

Danny Crichton:

Right, right.

Marko Papic:

Look, it's not going to happen. Let's chill out. It's like-

Danny Crichton:

Oh, let me give you another example. I mean a couple of years ago up in Boston, for the MBTA, the local public subway system, they had a contract with a Chinese train manufacturer to build Chinese trains. The MBTA's trains are ... I used to ride them. They're very, very old. They're from the '70s, '60s. They're 50, 60 years old.

And so, they had the ability to do this. It was cheap, effective, some of the best trains in the world, and it was nixed by national security concerns at the federal level that the Chinese would shut down the system.

Marko Papic:

Yeah, they rolled-

Danny Crichton:

So it's not even like I have a car, I'm going to drive it into a pylon. It was just trains below the surface. My question always was, but with cyber warfare, I mean it's not just your own parts that you can hack into. I mean it's no guarantee that the electronics on an American made train are any way safer than a Chinese-manufactured product.

Marko Papic:

So that's when I ... So sorry. That was the moment I knew we lost our mind. Sorry to interrupt, Laurence. It's just that I know exactly what you're talking about. There was a amendment put into the national defense authorization, and it was to ban foreign rolling stock. The company you're talking about was building rolling stock in Massachusetts and in California, in LA actually. They had two plants, American workers building Chinese-owned rolling stock.

It's a great example of how national security threats in China as the boogeyman has become. Basically, if you're a lobbyist in DC and you have a client. The client comes in and says like, "Hey, man. Can we do something about all this competition? Can we say they're Chinese?"

That's where we are, we're right now in America. It's like if you can find ... Like Mark Zuckerberg going to Congress and telling everyone that TikTok is evil and you're like, "Bro, okay." I have a teenage daughter. Let me tell you, man, I'm not so cool with Instagram either. TikTok versus Instagram. I don't know, man. Really?

So my point is it's become a way to effectively reduce competition in the United States, and it's a really big problem. President Trump says, why don't Europeans buy more cars from America? Well, I can assure you it's not the 10% tariff they've put on, although by all means, President Trump should get that to zero. Why not? Let's go. The reason nobody buys American cars is because we can't build them. Other than Tesla, you can't parallel parking F-150 in Milan. You try parallel parking one of the trucks we produce.

So a great example is exactly what you're saying, Danny. BYD wants to come to America, fine, hey, but here are the onerous terms by which that will happen. Employees, good jobs in Ohio, union jobs. Boom, you check that box and then, boom, you check the box where they teach GM how to build ... What's the word? A sedan.

Laurence Pevsner:

Yeah, I mean I do think there is an aspect of self-dignity about this that we don't talk about enough, where we looked at how the Belt and Road Initiative took over lots and lots of Chinese investment in Africa and Latin America, and there's a little bit of a feeling, I think, among Americans of, "Oh, if they're coming here, then does that mean that we are Africa or Latin America?" which I think is insulting in multiple directions and a misunderstanding of what's happening. But I do think that that is part of what's going on.

Also think, to Danny's point, there is security concerns. Even though you can be hacked into, you don't want to necessarily just hand over the keys to China. So I understand the argument, but then there's the counterargument of, well, don't we think we're tough enough? Are we so weak that we can't compete? Same thing with our car companies. "Oh, we don't think we can actually compete with them."

Similar arguments are made around TikTok. Don't you think our freedom is strong enough and our level of free speech is strong enough that we can handle any kind of propaganda? That tends to be, I think, one of the strongest counterarguments here. Pivoting a little bit, you've given a lot of hot takes over the course of this interview so far. The one-

Marko Papic:

Got to give [inaudible 00:38:22] what they want.

Laurence Pevsner:

Yeah, that is what we're in the business of. We're baking up and delivering hot takes. I think the hottest one I heard from you we were discussing beforehand is that you recently were writing with the headline that war is good, and that is ... I worked at the State Department and the UN before this and, yeah, that really sends a shiver down my spine. I am very much the hippie, peace-loving person at the firm. And so, what is your defense of this title? How could we possibly think that war is good?

Marko Papic:

Well, when I wake up in the morning, I put on my analyst hat in the financial community. So I have a very glib job, if you will, very petty job. I just yesterday interviewed ... There was this conference here in Santa Monica. I interviewed General John Allen, who led troops into combat, and KT zu Guttenberg, former defense minister of Germany. I introduced myself as like, "Well, my job is petty." These guys try to make the world a better pace place. I just try to make my clients' money.

And so, when I say war is good, I really mean it from an investment perspective and from an innovation and technology perspective. So you have this period in global history, from 1812 to 1914, and it's actually considered the long peace. That's how many historians call this period, which is not true. There were many wars, the Crimean War, the US Civil War. You had the Franco-Prussian War, the Austro-Prussian War. You had a ton of conflict.

But it's considered a period of peace because the great powers didn't really go to war, other than the Crimean War, which was still a very small engagement from a perspective of the world. The world powers tended to settle their affairs after a quick skirmish, like, "Okay. Well, let's sit down." There was a concert of Europe.

And, I believe, we need to study this period because I think too many people in America are obsessed with China, as I've already given you my view. I think it's nonsense. I think China will be fired as a villain. So we're not in a bipolar world. We're just not.

But US is also not head, shoulder, torso, and hips above everyone else, which is required for unit polarity. It's merely head and shoulders above everyone else. And so, we're in this multipolar world that resembles that 1812 to 1914.

So what does that period of time teach us? It teaches us that conflict, the probability of conflict is much higher. But conflict remains relatively contained. And it also teaches us, for example, Robert Gordon, the famous American economist who wrote the book The Rise and Fall of American Growth, which is a really good book. He keeps referring to this kind of period of 1871 to 1950.

Well, what happened in 1871? Well, Germany unified and it created this huge security challenge to all the great powers. Also, Japan woke up, either 1860. There was a major restoration. And Russia lost the Crimean War and woke up as well. And the US woke up after the civil war.

So there was all of this waking up of peripheral powers that nobody took seriously. Nobody took Japan seriously for much of the 19th century, certainly not the United States of America, certainly not Russia. Then Germany fuses all of these countries together, and that led to an extraordinary explosion of technological innovation. Why? In the pursuit of statewide competition.

So what I'm saying is there's this kind of a competitive multipolar environment that suppresses great power of warfare because there aren't too neatly delineated blocks, but creates the need for national defense spending for innovation, for technology, and not frivolous innovation. I would argue that a lot of what tech has produced is frivolous, like getting me a cheeseburger at 3:00 AM after my date left. That's frivolous. Both of those apps are frivolous. They haven't improved anything. But this kind of a serious competition between peers is going to be conducive to innovation.

And so, that's what I meant. War is good is because that period was the greatest burst of innovation in human history, and I would argue it's greater than the last 30 years. Internet, whatever. Cool story, whatever. You could have done it with the phones. No, seriously, but go back to the 1980s. 1980s versus today, it's not like 1980s, people were in carriages and no indoor plumbing, like [inaudible 00:42:36] today, yeah, cell phones were bigger, but people still traded stocks. People still use technology. Information still moved at the speed of light. It just wasn't as cool user interface. But the difference between someone living in 1871 and 1920 was like unbelievable difference, and I think that that's what the next 50 years are going to look like.

Danny Crichton:

Well, I'll close this out by saying a couple of limited partner letters ago, LP letters, Josh here at Lux was writing about a book called Superabundance. In Superabundance, the argument was looking at relative prices for illumination. So turning on a light bulb used to have whale oil. Now you have LED lights. It lasts 10,000 hours. They only cost three bucks. Even with inflation, salaries have gone up.

And so, if you look at the percentage of income it takes to light a room, actually we continue to have an amazing cost curve across an enormous range of technologies. And so, even though it may feel like there's no progress in the last 30, 40 years, and I'm a fan of Gordon's work and I think there's a lot of lessons to it, the counter to some of that is actually just keeps getting cheaper on a whole range of topics.

The exceptions are oftentimes the human services, hospital, instruction, education are huge cost drivers today, but across a huge number of other material goods, we see cost improvements, efficiencies, technology increases, et cetera. But we're already on time. Marko, thank you so much for joining us.

Marko Papic:

Oh, it's it's a real pleasure. This was a lot of fun. Thank you, guys.

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