Analysis: Europe, Waiting For Germany, Could Be Disappointed

By Om Malik September 17, 2013: 04:53 AM ET ( ) — It is less than 24 hours to our second Structure Europe conference , this time in London. And as I sit and review my notes for my on-stage interviews, I am reminded of a conversation with Abhi Talwalkar, chief executive officer of LSI, a company that makes chips which are used in everything from switches to servers to the gear that powers cell-phone networks. Talwalkar, who has a unique view into the data center business, points out that in the future there will be about twenty large cloud(s) in the world and most of them are going to come from hyper-scale companies that will leverage their gigantic web businesses to offer cloud services to others. Subscribe to Amazon is clearly a trendsetter and since then has been joined by Google and Microsoft. These companies built big infrastructure for their own web-needs, learned vital lessons and gained an edge in eventually becoming public cloud service providers. Talwalkar believes that Chinese giants such as Tencent, Alibaba, Weibo and Baidu are going to use their web scale to become major players in Chinese cloud market. Japans Rakuten could be another giant cloud provider, much like Amazon. What about Europe? While it has produced some great technology companies, few have gained the scale of say a Tencent or an Amazon. Spotify is an important Internet company, but its scale is small compared to the big webscale companies we talk about. Same goes for Angry Birds, Super Cell and e-commerce phenom, Net-a-Porter.

Though its clout as Europe’s biggest economy has grown in four years of crisis, giving it effective veto power over any European solution Berlin remains reluctant to exert leadership, especially if that means taking on any more risk. “Germany wants to be imitated but it doesn’t want to lead,” said Jose Maria de Areilza, professor of law at Madrid’s ESADE business school. “There is a big gap between its more assertive economic power and lack of leadership in security and defense.” Christian Lequesne, research director at France’s Sciences-Po institute in Paris, said Germany was becoming “a big Switzerland”, accumulating wealth while avoiding international responsibility in crises like Syria or the euro zone. “They have no desire to risk blood or treasure. They are in a ‘zero risk’ mindset,” he said. Prickly about efforts to impose more European discipline on national budgets and economic reforms, the French want a re-elected Merkel to move fast on practical steps such as EU funds to fight youth unemployment, to head off a feared Euro skeptic tidal wave in next year’s European Parliament elections. UNDER INVESTED Most Germans share Merkel’s view that other Europeans just need to emulate the German model of public and private thrift at home and competitiveness abroad to solve their economic woes. There is little, if any, inclination to acknowledge that Germany’s export-driven economic model, excess savings and suppressed domestic demand might be part of the problem. Nevertheless, some policymakers and analysts in Brussels and Berlin expect a shift in economic policy, especially if the Social Democrats or the Greens take a role in coalition. “What may well happen is a rethinking of national economic policy, not for Europe’s sake but for Germany itself,” said Daniela Schwarzer, head of European research at the German Institute for International and Security Affairs (SWP). “We have under invested in infrastructure, education and research,” she said. That would raise wages and domestic demand and could attract more workers from poorer European states. For most euro zone partners, the top priority is to create a single European resolution system to wind down failed banks after giving the ECB the role of supervisor for some 6,000 banks. They want it underpinned by a common backstop fund until enough money is raised from banks’ own contributions. Economists say this is urgently needed in case a planned ECB review of the quality of banks’ assets produces nasty surprises, and to help restore credit to business in southern Europe.