Inventing Postwar Europe

This is the weekly free edition of The Diff, the newsletter that tracks inflections in finance and tech. Last week’s subscriber-only posts:

• A deep dive into the theme park industry:  a great way to compound wealth is to have a business that a) can absorb  incremental capital, but b) has some unique fixed-cost investments that  simply can’t be duplicated.
• Communications, Commerce, and Money as the High-Order Bit: Facebook and Snapchat are both moving closer to commerce, but in different ways.
• Understanding the Great Japan Freakout:  during the 80s and early 90s, America lost its collective mind over  competition with Japan. This post looks at paranoia about Japan through  the lens of a 1970s-era book about Japanese business, and an early-90s  mass-market thriller (which the New York Times said could have the same social impact as Uncle Tom’s Cabin).
• Why United Airlines Wants to Risk a Run on the Bank: United Airlines is mortgaging its loyalty plan. This deal seems designed to fail badly—but that may be the point.

The Invention of Postwar Europe

I like to joke that the Euro is a German conspiracy to suppress the  value of the Deutsche Mark. Most conspiracy theories are false, because  most conspiracy theories are interesting, and the best way to  keep a secret is for it to be a boring one. A conspiracy about shadowy  forces bending geopolitics to their own sinister ends is exciting, but  unlikely to be true—it’s hard to coordinate and hard to hide. Whereas a  conspiracy about selling more BMWs and process control systems is  plausible.

As it turns out, this is roughly true. Tony Judt’s Postwar  is a history of Europe from 1945 to the early 2000s. It’s the kind of  thorough, cross-disciplinary book that reviewers like to call  “magisterial,” and they have a point.

Judt’s opening chapters are absolutely horrific, but they describe an  odd situation where Germany, despite starting and losing a world war,  almost immediately became the dominant power on the continent.

Much of the fighting happened in places Germany invaded, either when  they were on the offensive or the defensive. As a consequence, much of  Eastern Europe, France, and the Low Countries was basically leveled.  Germany itself was bombed, but still exited the war with some industrial  activity intact.

Europe’s immediate postwar reorganization actually fit in with  Germany’s nationalist claims following the First World War: borders were  adjusted or populations expelled to make state borders line up with  ethnicities. The modern term for the wholesale removal of a minority  group from their homeland is “ethnic cleansing,” and this was the  default policy of the victorious powers after the war. (It’s interesting  to contrast this with the draw-a-straight-line-on-the-map approach to defining  borders in post-colonial Africa.) Judt points out that, following this  swift and brutal process, Europe was remarkably peaceful. There were  coups, uprisings, and unrest, particularly in Eastern Europe, but  conflict between states was rare. Excluding The Cod Wars  (1 dead, 1 wounded), Europe was peaceful until the Yugoslav wars of  1991. And even that conflict favors Judt’s argument, since it was the  result of inter-ethnic conflict in Yugoslavia’s successor states.

The postwar peace has a sort of “Ones Who Walk Away From Omelas”  feeling to it. Those decades of peace and prosperity were the direct  result of immense suffering—which didn’t stop when the fighting did in  1945.

The US massively subsidized European defense after the war. NATO was  created “to keep the Russians out, the Americans in, and the Germans  down.” The US also subsidized Europe’s reindustrialization through the  Marshall Plan. So Western Europe’s welfare state was very much the  creation of a pan-European, US-subsidized welfare state of its own.  (Like many emerging markets, European countries could tolerate  poorly-conceived economic rules and norms, so long as they were growing.  As subsidies dried up and European labor got less cost-competitive,  they went through painful transitions.)

If postwar domestic policy was all about forgetting World War Two,  foreign policy was focused on preventing World War Three. Policymakers  had a clever solution to this: the European Coal and Steel Community, a  free trade zone explicitly designed to create intertwined supply chains  between France and Germany, so neither country would have any steel if  they went to war. While the agreement was signed in 1951, its original  design dates back a bit earlier—to a treaty between Nazi Germany and  Vichy France. The six-party ECSC deal was negotiated In 1951, mostly between Italy,  France, and Germany, and it was negotiated in their foreign ministers'  common language: German.

Germany wasn’t dominant forever—for a while, France wrote the rules  and Germany wrote the checks. But German financial contributions gave  them veto power, and flexibility besides. Over time, the European Coal  and Steel Community evolved into the European Communities and then the  European Union. And these negotiations, involving an increasing number  of countries, were generally bilateral. Every so often, the  Chancellor of Germany and the President of France would get together,  lower some tariff barriers, and announce to the rest of Europe that  there was a new economic status quo. Sometimes, there was quid pro quo:  when the Maastricht Treaty was signed, leading to the creation of the  Euro, Germany essentially had to bribe smaller countries to join in,  because the plan for the currency was to run it according to Germany’s  inflation-averse rules. (At one level, this is unseemly; other countries  gave up a bit of sovereignty for money. On the other hand, it’s how  markets work: Germany had a lower discount rate than Spain and Italy, so  they were willing to pay upfront for benefits they’d earn over time.  The Eurozone is big for the same reason rates on the Bund are low:  Germany has a high preference for saving over present consumption.)

This was not entirely objectionable to the rest of Europe: a  supranational entity with a budget and budgetary rules provides a  wonderful excuse for unpopular but necessary policies. Austerity is  never something a European politician had to advocate, just something they had to implement. Not that these rules were for everyone: in 2003, Portugal barely  qualified for the Euro, with public debt at 59% of GDP (maximum: 60%)  and a deficit of 2.8% of GDP (maximum: 3%). The next year, France and  Germany ran deficits of around 4% of GDP.

These rules remain flexible. Nobody will be fined in 2020 for  breaching the deficit limits, for example. But the flexibility tends to  break in favor of larger countries. Sometimes France, often Germany, and  only after extensive negotiation anyone else.

Peter Zeihan calls America the “Accidental Superpower,”  since the US’s postwar hegemony was not the result of a  well-thought-out plan but an improbable accident. Germany’s position is  similar, albeit on a smaller scale: after periodically trying to take  over Europe, Germany ended up running the continent through a historical  coincidence. The most effective kind of diplomacy in Europe was  economic diplomacy, and the country with the biggest budget ended up  being the high bidder for power.

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Elsewhere

Identity (pt 1)

Payfone has raised $100m  for a service that matches phones to human beings To prevent account hijacking. They give users a  “trust score” by matching information about the phone with information  about the user. They’re a bit vague on exactly how they do this, but the  CEO says “A phone is with you and in your use for daily activities, so  from that we can opine information,” which makes it sound like they’re  using location data. Since home and work location can deanonymize most  people, Payfone could function by joining data from a data broker with  data from a phone company.

Most large-scale online services end up doing the same thing on an ad  hoc basis: matching a phone number, and a phone user, to a single  digital identity. While the main purpose of this is to sell ads and  prevent spam, it’s too useful to pass up as the basis for a fintech  play—hence the growth of messaging apps that turn into payments companies.  Payfone is in a very fortunate position: they’re helping companies with  cash flow (like banks) catch up to companies that have the basis for a  better product, but haven’t implemented it yet.

Identity (pt 2)

Real-world and digital activities leak identity, and not just at scale: the  FBI deanonymized someone accused of setting police cars on fire, by  tracking down her Etsy review of the shirt she was wearing. But for  privacy advocates, this story is actually pretty optimistic. First, it  was relatively labor-intensive: the FBI executed a manual join on  several unstructured datasets (Googling the text on the shirt, reading  Etsy reviews, Googling usernames, identifying the accused on LinkedIn).  Any one of those steps could have broken down, either because there was  too much information or none at all. And second: buying a relatively  unique Etsy shirt and setting a police car on fire are both the acts of  someone who is really, really into self-expression. Such people will  leave far more breadcrumbs than average.

(Stay tuned for a future Diff piece with much more on questions of privacy and deanonymization.)

Google Outsources the Ultra-Long-Tail

A few weeks ago I linked to a story  about a change in Google’s search product. Now, if you search for a  piece of information buried in a page, clicking through will take you  right to that information, instead of to the page itself. This changes  the shape of the Internet, from a network of pages to a network of  facts. But one question is: how can Google adapt its link-driven search  approach to extracting information that’s not at the link level? The  answer: a new Chrome extension that allows links to specific chunks of text, rather than full pages.

When Google started, it used the existing link graph to rank sites.  Now, it doesn’t have the link graph it needs, so it’s asking users to  make it.

(I look forward to seeing the first black-hat manipulation of this new feature. If you spot one, share it!)

YouTube and the Influencers

Every business that sells ads against user-generated content has a  shoplifting problem: user-generated content can include ads, and the  platform doesn’t get a cut. But Spotify has shown that the way to  compete against piracy is through a better user experience, and now  YouTube is using the same trick: direct response ad units for products mentioned in videos.  Right now, this is being offered for ads, not organic content, so it’s  just a standard example of an ad platform packing in more inventory and  moving down the funnel. But eventually, a product like this could apply  to any video, cleaning up the influencer arbitrage by giving YouTube a  cut of the proceeds.

Putin on Geopolitics

Vladimir Putin has a lengthy essay on what we can learn from World War Two. (It was, presumably, not written by Putin—but even his plagiarized dissertation offered a reasonable preview of Russia’s approach to natural resources under Putin.) His main themes are: don’t trust Western powers to deal fairly, do  remember that Russia made far more sacrifices in World War Two than any  other power, and also consider that Russia’s natural western border is plausibly  a bit farther to the west than one might think (“This fact is known to  very few these days,” Putin notes).

Tech and Externalities

An ongoing Diff theme: the biggest tech companies are  basically an index fund for GDP: Facebook, Google, and Amazon naturally  capture some percentage of every dollar of economic growth, and they  trade at a high price/sales multiple, so they derive an outsized benefit  from it. For high-value tasks like mitigating the impact of a pandemic,  their incentive is to subsidize money-losing but welfare-improving  projects, like better testing at job sites.

With its new service, Verily is joining numerous tech  giants and start-ups rushing to help business across the United States  as they grapple with how to safely reopen the workplace. Microsoft and  the large insurer UnitedHealth Group, for instance, recently  collaborated on a free symptom-checking app that helps pinpoint workers  at obvious risk for the virus and direct them to testing resources. On  Tuesday, Fitbit [which is in the process of being bought by Google]   introduced a program that includes a daily symptom-checking app for  employees and a work force health-monitoring dashboard for employers.

The German Enron

Wirecard, a German payments company long suspected of being a fraud, announced yesterday that they’re missing €1.9bn of cash. (They’ve hinted that they were the victim, not the perpetrator.) The Value and Opportunity blog has a retrospective: the author of the blog flagged accounting issues at Wirecard in May 2008.  The story will make you respect short-sellers more: the fact that  they’ve been proven wrong by market performance doesn’t mean they  weren’t right all along. The practical lesson for betting against frauds  is more complicated: if a company can get away with fraud, it has a  source of cheap off-balance-sheet funding, and it’s a PIK  debt. This probably explains why so many fraud-spotting short-sellers  are activist shorts: if your research shows that the company is  committing fraud and getting away with it, the value of the stock is higher. Being right helps, but persuading other investors that you’re right is what makes you money.