Early retirement

Peru’s Congress topples Martín Vizcarra on its second attempt

The country chose a tricky time to change presidents

Peru’s constitution makes it relatively easy for Congress to get rid of a president. The legislature need only decide that he or she is “morally unfit”, and, by a two-thirds majority of its single chamber, evict the chief executive from the Pizarro Palace. 

On November 9th, by a vote of 105 to 19 with four abstentions, Congress did just that to Martín Vizcarra (pictured). That marks the second time in less than three years that it has toppled a president. (Mr Vizcarra took over from Pedro Pablo Kuczynski, who quit before he could be impeached.)

Manuel Merino, who was Congress’s speaker until he took over as president on November 10th, will probably hold on to the office until his term expires next July. But that does not mean Peru will enjoy stability. It is dealing with an outbreak of covid-19 that has killed 35,000 people. 

As a share of the population, that is the third-worst in the world. The economy contracted by 15.7% in the first eight months of 2020 compared with the same period a year earlier, and is expected to shrink by 12% for the full year. 

There is little reason to believe that the presidential and congressional elections scheduled for next April, in which by law none of the current office-holders may seek to hold on to their jobs, will produce leaders who can manage the economy or the pandemic better.

Mr Vizcarra fell over allegations that he took kickbacks from public-works projects during his one term as governor of the southern department of Moquegua from 2011 to 2014. Although he clearly has questions to answer, nothing has been proved. His critics say he has been meddling in the judiciary to avoid prosecution and to harm his foes. 

In his 50-minute self-defence before Congress, Mr Vizcarra agreed that an investigation was warranted but said it should wait until he finished his term. His ousting would cause chaos, he warned.

Rather than debate the merits of the case against him, lawmakers denounced his ethics and his handling of the pandemic. Mr Vizcarra challenged the “legality” and “legitimacy” of the impeachment, but went quietly. He declared his innocence and said he would go home “with my head held high”.

As he left the palace residents of Lima banged pots and pans to oppose his removal. Several thousand people gathered near Congress and outside the capital on November 10th to protest. Riot police used tear gas and water cannon to control the protesters. 

Some were arrested. More than three-quarters of Peruvians opposed his impeachment, according to one survey.

It is the latest crisis for a political system whose prestige and institutions have been ground down by allegations of graft. All of Peru’s presidents since 2001 have been ensnared in one way or another by the scandal surrounding Odebrecht, a Brazilian construction firm that bribed politicians across Latin America. 

Two former presidents are under house arrest; one is at liberty while he awaits trial; a fourth committed suicide to avoid arrest. Keiko Fujimori, until recently the most powerful opposition leader, is awaiting trial. The allegations against Mr Vizcarra were the result of a tentative plea bargain by suspects in the Odebrecht investigations.

Peruvians see corruption as the country’s biggest problem, even ahead of the pandemic, according to opinion polls. But they regard Mr Vizcarra as part of the solution. His approval ratings averaged 58% in the three main polls published in October. To many, his war with Congress looked like a valiant battle against graft.

Last year, when Congress resisted enacting political reforms proposed by Mr Vizcarra, he found a pretext to dissolve it and call new legislative elections. The vote in January this year did not produce a more pliant body. The nine parties represented in the chamber extend from the far left of the political spectrum to the religious-fundamentalist right. 

Mr Vizcarra had hoped for support from a reasonable centre, composed of about 70 lawmakers. But from the beginning the new Congress rowed with him over how to handle the pandemic and the economic crisis that came with it.

Congress made an abortive attempt to impeach him in September, when recordings leaked that appeared to show him meddling in an investigation of contracts between the government and a folk singer who had given him political support. 

This month’s attempt looked like a long shot at first. It succeeded after Mr Vizcarra angered congressmen by pointing out that many of them, too, are under investigation.

Peruvians now worry that Mr Merino will seek to postpone the election in order to continue enjoying the spoils of office. Others fear an orgy of populism in a previously well-managed economy, in the expectation that this might benefit presidential candidates who are either in Congress or have allies there. 

Mr Vizcarra’s finance minister, María Antonieta Alva, had fought tenaciously to block populist measures, such as early withdrawals from the pay-as-you-go public pension system (with a fiscal cost of up to 2% of GDP) and a freeze of repayments of bank debts. 

She has now resigned, along with the rest of Mr Vizcarra’s cabinet. The price of Peru’s foreign bonds slumped after the impeachment vote, and the sol sank against the dollar.

Mr Merino, a congressman from Tumbes, the smallest department, has given few clues as to how he will handle Peru’s overlapping crises. He has promised to appoint an ideologically diverse cabinet and to work closely with Congress. 

A former speaker, Ántero Flores-Aráoz, is to lead it. His most important pledge in a 13-minute inauguration speech was that elections will happen on schedule.

His successor may find it no easier to govern, even if he or she is free from suspicions of wrongdoing. Twenty-four people have declared their candidacy for the presidency. 

None is backed by a strong political party. Some hope to boost their chances by echoing popular indignation at Mr Vizcarra’s removal. 

George Forsyth, a former mayor and football goalkeeper who is the early front-runner, tweeted that it was a “veiled coup”. 

The eventual winner is unlikely to be able to elicit co-operation from a fragmented Congress. 

It may eventually find an excuse to usher Peru’s next president out of the door. 

Airlines Are Charting Different Courses to Recovery. Cash Could Still Decide the Winner.

Third-quarter earnings season has shown that major U.S. carriers have been following very different strategies

By Jon Sindreu

There is no single operating manual that airlines are using to fly through the pandemic. 

Where foresight fails to yield results, though, cash could lend a hand.

The big four U.S. carriers together lost about $11 billion in the third quarter, as a resurgence of coronavirus cases delayed the recovery in air travel. They have been forced to cut more flights from their schedules and push back the date at which they expect to stop burning cash.

Markets have so far chosen to be optimistic, whether due to top-down investment trends, hopes of further government aid or signs that willingness to travel may be improving ahead of Thanksgiving and Christmas. The Dow Jones U.S. Airlines Index is up 6% since Delta Air Lines kicked off the earnings season on Oct. 13.

Capitalizing on scarce domestic demand, however, can be approached very differently. 

The latest results confirm just how divergent airline strategies have become.

American stands out as the nimblest of the three legacy carriers. Like low-cost operators, it has sought to revive sales by chasing short-term demand trends, such as point-to-point routes to sunny spots like Florida and Mexico. 

While third-quarter passenger revenues at Delta and United Airlines fell 83% and 84% from a year earlier, respectively, American Airlines ’ dropped 77%. Budget leader Southwest reported a similar figure. American’s planes were almost 60% full, far more than other major airlines.

Competing with low-cost operators, though, is a double-edged sword, especially during a pandemic. Most of the third-quarter sales were to last-minute bookers at big discounts. 

To fill seats, American had to lower its average fare per passenger per mile by more than 25%, twice the drop reported by Delta and United. Even Southwest Airlines discounted less. Yet American’s operating costs are much higher, so it is losing more money relative to sales.

There are also points of strategic divergence between the two more conservative full-service players. United has included point-to-point routes in its winter schedule, and confirmed last week that it won’t permanently retire aircraft to remain flexible. This will make it easier to gain market share quickly as soon as a Covid-19 vaccine is found, but could lead to steeper costs in the meantime. By contrast, Delta has focused on reinforcing its hubs and recently emphasized efforts to reduce its fleet.

Meanwhile, Southwest is attacking airports traditionally dominated by legacy carriers, such as United’s hubs in Chicago and Houston and American’s in Miami. It intends to emerge from the pandemic with a bigger share of business travel, even though this source of revenues remains very limited for the foreseeable future.

Such network strategies are key to identifying which airlines will ultimately wrest profits from others. But investors shouldn’t forget that making the right decisions now could end up being less important than preserving the ability to make them later, when the crisis finally ends. 

To achieve that, the only real flexibility involves having the money to course-correct. In this department, Southwest and Delta still tower above the rest.

Cash was king during the depths of the crisis this spring. When demand eventually recovers for airlines, it could be an even bigger game-changer.

Third-quarter passenger revenue at Delta fell 83% from a year earlier. / PHOTO: MICHAEL REYNOLDS/SHUTTERSTOCK

Unpacking the Federal Reserve’s Aggressive Response to COVID-19

Nicolas Crouzet

A Kellogg professor spent the past year at the Fed. He explains the bank’s “guns-blazing” response—and the limits to these interventions.

With the nation reeling from public-health and economic crises, many economists have urged the President and Congress to act far more quickly and aggressively to deliver aid to unemployed workers, shore up city and state budgets, and otherwise stimulate the economy. In other words, economists want the federal government to go big.

But one federal system has already gone big: the Federal Reserve.

Nicolas Crouzet, an associate professor of finance at Kellogg, just returned from a year at the Federal Reserve Bank of Chicago. He recently spoke with Kellogg Insight to explain the Fed’s “guns-blazing” response to this crisis. He also talks about the Fed’s new approach to inflation, how it might alleviate the next crisis, and what tools may ultimately be needed to get the nation’s economy back on track.

Kellogg Insight: So you’ve spent the last year at the Chicago Fed. What have you been up to?

Nicolas Crouzet: I was in their research department as a visiting economist. I had always been interested in seeing how research and policy are done in a central bank. It turned out I picked a really nice year to do this, because it was probably much more interesting to be there this year than in any year since 2008–2009!

KI: I bet. Your visit overlapped with what, by all accounts, has been a fascinating response to the COVID-19 crisis. The Fed has generally been credited for acting quickly and aggressively, with a lot of new programs as well as some programs that were also implemented during the Great Recession. Can you provide a general outline of the Fed’s response?

Crouzet: There are basically two arms: One is what you could call conventional monetary policy, and that just consists of making the interest rate that the Fed controls as low as possible. Before 2009, this is basically all the Fed did: it would set short-term interest rates in a particular funding market for banks. And through that interest rate, other interest rates in the economy would adjust. 

To slow down an expansion, they would increase that short-term rate; otherwise, they would lower it. That tool has become less powerful over the last decade or so, but the Fed still had a little bit of room at the beginning of this crisis to lower their interest rate. And so the first thing they did was just put the interest rate down to zero.

And then there’s all the rest, which is what the Fed did very aggressively, which people call unconventional monetary policy.

The way I think of unconventional monetary policy is that it tries to achieve two goals. 

One is short-term stability in financial markets—ensuring that financial markets function relatively smoothly and, in particular, acting as a lender of last resort. That’s really kind of a fire-fighting job, where the central bank is trying to calm panic when it occurs. The other mission is stimulating overall economic activity. So I think of the Fed’s programs as generally having components that address one of these two missions.

What I think was special this time is that the Fed didn’t waste any time in deploying both kinds of programs at a really big scale. They came out guns blazing: it was kind of amazing.

KI: Can you give some examples of what they’re doing to stabilize the financial markets versus stimulate the economy?

Crouzet: So on the stabilization side, one example is that they revamped a program that they had created in 2009 called the TALF, the Term Asset-Backed Securities Loan Facility. That’s a way to stabilize issuance in markets where people trade securities backed by specific assets: credit-card loans and auto loans, among others. 

When those markets showed signs of instability, the Fed immediately announced that they would bring that program back from the dead. There are other examples: for instance their large-scale intervention in Treasury markets, which also showed some signs of fragility early on in the crisis.

On the stimulus side, an example is that they created the Main Street Lending Program, which was meant as a way to provide credit to small and medium firms that would otherwise have found it difficult to obtain credit from private markets. The idea there was to help jump-start the recovery for these firms and maybe also to avoid excessive liquidations.

My sense of this program is that it has been a big failure, however.

KI: Well, that was my next question. In your personal opinion, how has the Fed been doing? I’m sure you view some of these programs as more successful than others.

Crouzet: I think they did great. There are things that didn’t work out—the Main Street Lending Program is probably the most glaring example. Basically, I think the Fed was trying to step in and take the place of banks. And that’s just hard to do. 

It’s a very micro job lending to small firms and the Fed is a very macro institution. So coming in and taking the place of these specialized bankers who have complicated, long-lasting relationships with small firms is tricky, and it’s not totally surprising they didn’t achieve their target there.

But if you leave out that program, I think they are doing super well. The response to their stabilization of financial markets in particular has been great.

Now, on the stimulus side, you can ask whether the Fed actually has the tools required to really stimulate the economy anymore. And does its mandate, does its institutional setup, allow it to do what needs to be done right now? And that’s a much bigger question. Within the parameters that the Fed has, I think they did everything they could and they did it really well.

KI: Let’s dig into that deeper question. What makes you question whether they have the requisite tools to respond effectively to the current economic crisis?

Crouzet: For the past 10 years or so, we’ve been in this world of zero interest rates, or close to zero interest rates. And since, at a basic level, most of what the Fed does is basically try to influence interest rates on financial markets, it’s become progressively more difficult for them to effectively stimulate economic activity. 

What really needs to happen in the context of this crisis is fiscal policy: transfers to households and probably transfers to businesses. These are things that the Fed is not really allowed to do. In general, the Fed is just not allowed to take credit risk. 

So whenever it puts money out in financial markets, it has to do it in a way where there are no credit losses.

But when you have those constraints, you can’t really stimulate very effectively, say, household credit or corporate credit. You can work at the margins, but it’s not going to have the huge effects that fiscal transfers would have. I think that might be the conundrum that they have right now: they’re doing everything they can, but they may simply not have the right tools for the situation.

KI: So is this restriction on credit risk what’s preventing, say, their Main Street stimulus program from being more effective?

Crouzet: Yes, I think for that program, it was probably one of the bottlenecks. The program is set up so that you can’t lend to the riskiest firms: those with the most leverage or the most reduction in economic activity. And that’s by design, so it doesn’t take any losses on lending to these firms. 

But this makes it so that you can’t really lend to the firms that would most need it. If the Fed hadn’t had those institutional constraints, it might have been able to say, “Okay, we’re going to lend to a lot of firms. On some of these loans, we’re going to make big losses, but that’s fine. That’s part of a stimulus policy.”

KI: You mentioned the challenges of being in such a low-interest-rate environment, where you lack the room to stimulate the economy further. Are negative interest rates on the table?

Crouzet: There have been talks in academic circles of negative interest rates, which have been implemented in a bunch of European countries. I think the general track record on them is mixed. It hasn’t had super stimulatory effects, and on the downside, it seems to have depressed the profitability of commercial banks. So I think there’s some debate about whether it’s a good policy tool at all.

What the Fed has done is change its inflation-targeting framework, which is related to the problem of low interest rates.

KI: So this is the announcement that the Fed made in August—that it will allow higher levels of inflation.

Crouzet: Yes, though it was in the works before COVID. The Fed has had a formal inflation target of 2 percent since 2012. So every year, the Fed would look at next year’s inflation and basically target 2 percent. What happened over the last 10 years is that the Fed would target 2 percent, and then inflation would come in at 1.7 percent. 

Year after year. Inflation has been undershooting the target for 10 years! But there was really nothing in the Fed’s mandate that said, “Oh, if you undershoot, well, you have to correct something.” So, the way I think about this new framework is that if they undershoot, they ‘re going to allow themselves to overshoot a bit in compensation going forward. This is called average inflation targeting.

KI: I think many people are a little bit confused about what this means practically, however. Is there concern about inflation going up too quickly?

Crouzet: The Fed’s battle against inflation in the late 70s and early 80s was hard to win and very costly. Basically, the Fed had to engineer a recession to convince the markets that it could control inflation. And so I think some might worry that if the Fed starts messing around with inflation targeting, it’s going to lose the fruits from those hard-won battles. 

But the reality of it is that inflation hasn’t been north of 2 percent for the better part of 10 years. The Fed is often missing its target. So it seems reasonable to try and do something about it.

And remember: one reason for wanting to have higher inflation is this problem of the lower bound on interest rates. Inflation influences the real interest rate that people face. If your nominal interest rate is zero and you have inflation of 1 percent, then your real interest rate—the interest rate once inflation is taken into account—is actually -1 percent. 

On the other hand, if your nominal interest rate is zero and you have inflation of 3 percent, then your real interest rate is -3 percent, which is way more stimulative. I personally think that part of the thinking here was, “Let’s try to increase inflation a bit so that the next time we have to push interest rates to zero, the real interest rates are going to be way below zero and we’ll have more stimulus power.”

KI: Speaking of interest rates: the Fed recently announced that they’re going to keep interest rates low through 2023. Is their goal to inspire confidence that, yes, this is the time to do that big new project or expansion you’ve been planning on?

Crouzet: I think so. Their goal is probably to communicate, “We’re going to be giving you an economic environment that’s going to be extremely stimulative going forward.” 

This is about influencing firms’ and households’ current decisions on spending, but also decisions that are forward-looking. Whenever the Fed can do something to influence people’s expectations about that future, typically, they try to.

KI: A big topic right now is rising income inequality. I wonder how Fed policies potentially intersect with that. So the stock market is flourishing in part because of the actions of the Fed, but many other parts of the economy are really struggling. How is the Fed thinking about whether its actions exacerbate existing inequalities in the country?

Crouzet: There has been a lot of discussion about effects of the Fed’s policies on inequality. You mentioned the Fed boosting the stock market. The Fed doesn’t target the stock market, as they will frequently remind anyone who asks. They’re not trying to raise asset prices. It happens as a side effect of what they do, which is to lower interest rates. When you lower interest rates, you stimulate all asset prices, including the price of equities.

So the Fed may have had large effects on the stock market, but I think that’s really an unintended consequence of their effort to either stabilize markets that are perhaps coming under more stress, like the Treasury bond market or the corporate bond market, or to stimulate the economy overall.

That said, this has effects on wealth inequality simply because the ownership of the stock market is not equally distributed across households. Only 55 percent of Americans own stocks—just 22 percent of Americans in households that make under $40,000. 

The wealth transfers that result from an increase in stock prices are most concentrated among the highest-income households and the highest-wealth households. It’s almost mechanical. And these unintended consequences will probably be larger, the longer the Fed keeps rates low and policy accommodative.

But as I said before, I think that while direct transfers to households or firms might be required, the Fed can’t really do that; it has to use the tools at its disposal. So these large unintended consequences in asset markets might just be a reflection of the fact that the Fed doesn’t have the perfect tools for our current economic predicament. 

The power of negative thinking

We should all spend more time considering the prospect of failure and what we might do about it

Tim Harford

© Claire Merchlinsky

For a road sign to be a road sign, it needs to be placed in proximity to traffic. 

Inevitably, it is only a matter of time before someone drives into the pole. If the pole is sturdy, the results may be fatal.

The 99% Invisible City, a delightful new book about the under-appreciated wonders of good design, explains a solution. The poles that support street furniture are often mounted on a “slip base”, which joins an upper pole to a mostly buried lower pole using easily breakable bolts.

A car does not wrap itself around a slip-based pole; instead, the base gives way quickly. Some slip bases are even set at an angle, launching the upper pole into the air over the vehicle. The sign is easily repaired, since the base itself is undamaged. Isn’t that clever?

There are two elements to the cleverness. One is specific: the detailed design of the slip-base system. But the other, far more general, is a way of thinking which anticipates that things sometimes go wrong and then plans accordingly.

That way of thinking was evidently missing in England’s stuttering test-and-trace system, which, in early October, failed spectacularly. Public Health England revealed that 15,841 positive test results had neither been published nor passed on to contact tracers.

The proximate cause of the problem was reported to be the use of an outdated file format in an Excel spreadsheet. Excel is flexible and any idiot can use it but it is not the right tool for this sort of job. It could fail in several disastrous ways; in this case, the spreadsheet simply ran out of rows to store the data.

But the deeper cause seems to be that nobody with relevant expertise had been invited to consider the failure modes of the system. What if we get hacked? What if someone pastes the wrong formula into the spreadsheet? What if we run out of numbers?

We should all spend more time thinking about the prospect of failure and what we might do about it. It is a useful mental habit but it is neither easy nor enjoyable.

We humans thrive on optimism. Without the capacity to banish worst-case scenarios from our minds, we could hardly live life at all. Who could marry, try for a baby, set up a business or do anything else that matters while obsessing about what might go wrong? It is more pleasant and more natural to hope for the best.

If you anticipate possible problems, you have the opportunity to prevent them or to prepare the ideal response

We must be careful, then, when we allow ourselves to stare steadily at the prospect of failure. Stare too long, or with eyes too wide, and we will be so paralysed with anxiety that success, too, becomes impossible.

Care is also needed in the steps we take to prevent disaster. Some precautions cause more trouble than they prevent. Any safety engineer can reel off a list of accidents caused by malfunctioning safety systems: too many backups add complexity and new ways to fail.

My favourite example — described in the excellent book Meltdown by Chris Clearfield and András Tilcsik — was the fiasco at the Academy Awards of 2017, when La La Land was announced as the winner of the Best Picture Oscar that was intended for Moonlight. The mix-up was made possible by the existence of duplicates of each award envelope — a precaution that triggered the catastrophe.

But just because it is hard to think productively about the risk of failure does not mean we should give up. One gain is that of contingency planning: if you anticipate possible problems, you have the opportunity to prevent them or to prepare the ideal response.

A second advantage is the possibility of rapid learning. When the aeronautical engineer Paul MacCready was working on human-powered aircraft in the 1970s, his plane — the Gossamer Condor — was designed to be easily modified and easily repaired after the inevitable crashes. (At one stage, the tail flap was adjusted by taping a Manila folder to it.)

Where others had spent years failing to win the prestigious Kremer prize for human-powered flight, MacCready’s team succeeded in months. One secret to their success was that the feedback loop of fly —> crash —> adapt was quick and cheap.

Not every project is an aeroplane but there are plenty of analogies. When we launch a new project we might think about prototyping, gathering data, designing small experiments and avidly searching for feedback from the people who might see what we do not.

If we expect that things will go wrong, we design our projects to make learning and adapting part of the process. When we ignore the possibility of failure, when it comes it is likely to be expensive and hard to learn from.

The third advantage of thinking seriously about failure is that we may turn away from projects that are doomed from the outset. From the invasion of Iraq to the process of Brexit, seriously exploring the daunting prospect of disaster might have provoked the wise decision not to start in the first place.

But I have strayed a long way from the humble slip base. It would be nice if all failure could be anticipated so perfectly and elegantly. Alas, the world is a messier place. All around us are failures — of business models, of pandemic planning, even of our democratic institutions. It is fanciful to imagine designing slip bases for everything.

Still: most things fail, sooner or later. Some fail gracefully, some disgracefully. It is worth giving that some thought.

Tim Harford’s new book is “How to Make the World Add Up”

A new career in a new town

How Berlin has become a centre for European venture capital

Once edgy, the tech scene is in danger of going mainstream

For brits of a certain age and inclination, Berlin is a city that is forever linked with David Bowie. When he lived there in the late 1970s, Bowie’s life was in flux. He was estranged from his wife, splitting from his management and trying to slough off rock-star excess. 

Berlin was similarly unsettled: a refuge for artists, misfits and draft-dodgers on the front line of the Cold War. Bowie lived anonymously above a car-parts store. He did some of his best work there.

The block of flats where Bowie lived with Iggy Pop, another celebrated rock star, still stands. Berlin remains an edgy, in-between sort of place—it is Germany’s capital, but is not quite German. And it remains a place where people go to try something new. It now vies with London and Paris as Europe’s leading hub for technology startups.

That seemed unlikely a decade ago. Berlin had no real industrial base. Its early venture-backed successes were often knock-offs of American e-commerce firms. Risk capital was scarce. Berlin had no vast ranks of home-grown techies. In a strange way, these and other deficiencies have been strengths. 

For Berlin has no competing hierarchy for all-important status. Paris has fashion and food. London has famous musicians. In Berlin, the venture capitalists (vcs) and entrepreneurs are the rock stars.

Berlin’s vc scene emerged in the years following the global financial crisis of 2007-09. 

The city had three things to recommend it. First, it was cheap. Berlin was a poor capital city by the standards of Western Europe. The only competing industry was government. So housing and office space were plentiful. 

If you were part of the early wave of startups that settled in the city, you might be offered office space rent-free for several months. Second, it was hip. There were lots of cheap, cool places to eat and to meet others. Part of the allure was Berlin’s history as a bolthole for creative types, such as Bowie and Iggy.

A third factor is that Germany is welcoming to migrants. Berlin has always been a cultural melting pot. High youth unemployment in southern Europe in the wake of the euro area’s debt crisis was a spur to migration. A lot of engineers came from Eastern Europe. 

The Swedish founders of SoundCloud, a music-streaming site to which independent artists upload their output, based their company in Berlin, despite a vibrant scene in Stockholm. Often the working language is English; but it might be Russian or Portuguese. Plenty of people have poured in from other German cities, too. 

That reflects a cultural shift. A talented engineer who used to go to work for bmw or Mercedes now thinks about starting a company, says Ciaran O’Leary of BlueYard, a Berlin-based venture-capital firm.

The idea that one capital will dominate Europe is seen as old hat. Berlin’s vc firms typically invest in startups in other European cities, which are all a short hop away. A lot of the money they deploy comes from outside Europe—from America or Asia. In Berlin this is mostly seen as a strength, an external validation. 

Another outdated notion is that Berlin is a location for “shallow tech”, rather than original ideas. That is in part the legacy of Rocket Internet, a Berlin-based “clone factory”, an incubator that aped the business models of America’s online firms. But Berlin had to start somewhere, and there has since been a shift from consumer clones to tech startups that serve businesses.

The pandemic may be a kind of coming of age for Berlin’s tech scene. Two of its listed graduates—HelloFresh, which sells meal kits, and Delivery Hero, a food-delivery firm—have been bolstered by it. Tech looks more than ever a better bet than Germany’s old industries, such as carmaking. 

Even the government has taken notice. Its stimulus package included tailored support for startups. “It was the first time the government listened to us and heard what we need to do to build a strong ecosystem,” says Christian Miele of the German Startup Association. 

There are hopes of a change to the tax treatment of share options, a bugbear of vcs. 

From a frayed and frazzled San Francisco, though, the stodgier bits of the German model (its bureaucracy, health care and social-safety-net) might now seem rather enviable.

With time, the hip becomes conventional. Bowie’s Berlin-period recordings were not universally embraced on their release. But by the 1980s every other pop group in Britain claimed them as a big influence. 

Similarly, Berlin’s vc hipsters no longer look like misfits. Its tech scene is in danger of going mainstream.