Inventing Postwar Europe

Plus! Identity, Ultra-Long-Tail, YouTube and the Influencers, Putin, Externalities ,The German Enron

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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.