Sunday

18th Feb 2018

Opinion

In defence of Anglo-Saxon capitalism

Those who never liked 'Anglo-Saxon' capitalism are feeling smug. Marxists, fans of 'Rhineland' capitalism and those who simply cannot stand American power are crowing.

"The US will lose its status as the superpower of the world financial system," says Peer Steinbruck, Germany's finance minister.

Thank you for reading EUobserver!

Subscribe now for a 30 day free trial.

  1. €150 per year
  2. or €15 per month
  3. Cancel anytime

EUobserver is an independent, not-for-profit news organization that publishes daily news reports, analysis, and investigations from Brussels and the EU member states. We are an indispensable news source for anyone who wants to know what is going on in the EU.

We are mainly funded by advertising and subscription revenues. As advertising revenues are falling fast, we depend on subscription revenues to support our journalism.

For group, corporate or student subscriptions, please contact us. See also our full Terms of Use.

If you already have an account click here to login.

"Self-regulation is finished. Laissez-faire is finished. The idea of an all powerful market which is always right is finished," says France's president, Nicolas Sarkozy.

The British academic (and sometime fan of Margaret Thatcher) John Gray proclaims that "in a change as far-reaching in its implications as the fall of the Soviet Union, an entire model of the government and the economy has collapsed."

All this hyperbolic froth and windy rhetoric conceals a real danger for the European economy.

The perceived failure of one model of capitalism, combined with growing protectionist pressure from all continents, could push EU governments to ban or discourage a whole range of 'Anglo-Saxon' practices and institutions.

Cross-border takeovers and equity issues, the private equity and hedge fund industries, and even privatisations - all of which can help to make economies more efficient - may come under threat.

Furthermore, some governments may think that because the EU's 'Lisbon agenda' of economic reform is British-inspired, they can relax their efforts to carry out its painful but essential prescriptions.

Schadenfreude

Of course, the credit crisis has exposed huge weaknesses in the American and British financial systems. The so-called phantom banking industry of institutions and instruments that focused on fiendishly complex off-balance sheet financing was poorly regulated.

Those in charge of many leading banks appear to have had no idea about the risks they were taking on. Their pay packages were ridiculous and unjustified, especially when those who had failed received tens of millions of dollars of 'compensation' for being fired.

The property and credit booms in the US, the UK, Spain and Ireland were excessive. And the British decision to allow the building societies (mutuals) to turn themselves into banks - and their subsequent move into risky financial instruments and models of funding - may have been an error.

But politicians such as Steinbruck should not indulge in too much schadenfreude. For the next few years, some of the core euroland economies may be lucky enough to escape some of the pain that will afflict the Anglo-Saxons. But the continental banks are certainly not immune from the crisis, as the rescue of the Belgo-Dutch Fortis Bank shows.

The capital ratios of some of the top continental banks are inferior to those of their American peers. And if a European bank involved in several members-states did head for the rocks, could the EU's ramshackle regulatory system - with national authorities holding many of the key powers - move as quickly as treasury secretary Henry Paulson and Federal Reserve governor Ben Bernanke have done?

The nature of capitalism

Many of today's Cassandras mistakenly assume that financial crises are a uniquely Anglo-Saxon phenomenon. Very different sorts of financial system - such as those of Japan and Sweden in the early 1990s - have ended up being bailed out by governments. Financial crises are inherent in the nature of capitalism, rather than one particular brand of it.

However the current crisis turns out, many continental European governments will have to tackle serious structural flaws in their economies.

They are held back by a lack of competition and restrictive practices in a host of sectors, especially services. Their universities cannot compete with the world's best. In many of these countries, old-fashioned trade unions block reform and modernisation (look at the pitiful saga of Alitalia).

Excessive state aid distorts the allocation of capital and may deter new entrants. Over the past 20 years, France, Germany and Italy have performed poorly on economic growth and job creation. Europe as a whole has a poor record on innovation and the adoption of new technologies.

Among the EU-27, the UK has not been the star of the class. In recent years the Nordic economies and the Netherlands have had the best record of combining on the one hand high employment and active labour market policies, and on the other generous welfare and high-quality public services.

But the UK has many strengths (as well as notable weaknesses such as infrastructure). Its liberal labour markets have helped to push the employment rate above 70 per cent of the workforce - the only other EU countries above 70 per cent are Denmark, Sweden and the Netherlands. And of the EU's large economies, Britain is the most open to foreign investment, which is one reason why it has a good record of adopting new technologies.

Moreover, the City of London remains a big British strength - despite everything that has happened. Much of what the City does is valuable not only to the UK, but also to Europe and indeed the world economy.

If properly regulated, mergers and acquisitions, corporate advice, City law firms, hedge funds, private equity, the euromarkets, the fund managers, the Lloyds insurance market, the currency markets, the international equity markets, and much else, add value.

The City is in for a lean few years, but it will come back - after some consolidation and regulatory reform - because the world needs a centre of expertise for international finance.

European economies need the Lisbon agenda

Nobody should write off the American economy. Compared to its European peers, its history of recovering rapidly from recession is impressive. Its track record on innovation and start-ups is the envy of the world.

Where are the European Googles, Microsofts, Ciscos and Intels?

The US has most of the world's best universities. It consistently out-performs the EU on productivity. Despite the rise of the BRIC economies, at market exchange rates the US will remain the world's leading economy for many decades.

China's leaders know this very well and have not resorted to the kind of hubris that we have heard from certain continental politicians.

Some European leaders may view the Lisbon agenda of economic reform as 'Anglo-Saxon', but they should not abandon it. Parts of the agenda are rather Anglo-Saxon, such as the emphasis on creating employment, liberalising utilities and enhancing competition. But much of the agenda has a broader scope: boosting innovation, improving R&D, reforming pensions and helping start-ups.

All the European economies need the Lisbon agenda, whether they are Anglo-Saxon, Rhineland, Nordic, East European or Mediterranean. At some point the financial turmoil will settle down. Then EU leaders will need to return to two key questions: why is the trend growth rate of the EU economy about one percentage point less than that of the US, and what can Europe do to catch up?

The author is director of the Centre for European Reform

News in Brief

  1. Merkel: Nord Stream 2 pipeline poses 'no danger'
  2. Spanish king in Barcelona next week
  3. Turkey jails journalists for life
  4. Make budget cuts in farm and regional funds, the Dutch say
  5. UN: Hungary's anti-migration bill is 'assault on human rights'
  6. Journalist Deniz Yucel freed in Turkey
  7. New organic farming bill not ready until late spring
  8. Commissioner: Western Balkans in EU is 'obvious'

Stakeholders' Highlights

  1. International Partnership for Human RightsUzbekistan: Investigate Torture of Journalist
  2. EPSUMovie Premiere: 'Up to The Last Drop' - 22 February, Brussels
  3. CESICESI@Noon on ‘Digitalisation & Future of Work: Social Protection For All?’ - March 7
  4. UNICEFExecutive Director's Committment to Tackling Sexual Exploitation and Abuse of Children
  5. Nordic Council of MinistersState of the Nordic Region 2018: Facts, Figures and Rankings of the 74 Regions
  6. Mission of China to the EUDigital Economy Shaping China's Future, Over 30% of GDP
  7. Macedonian Human Rights Movement Int.Suing the Governments of Macedonia and Greece for Changing Macedonia's Name
  8. Dialogue PlatformBeyond the Errors in the War on Terror: How to Fight Global Militarism - 22 February
  9. Swedish EnterprisesHarnessing Globalization- at What Cost? Keynote Speaker Commissioner Malmström
  10. European Friends of ArmeniaSave The Date 28/02: “Nagorno-Karabakh & the EU: 1988-2018”
  11. European Heart NetworkSmart CAP is Triple Win for Economy, Environment and Health
  12. European Free AlllianceEFA Joined the Protest in Aiacciu to Solicit a Dialogue After the Elections

Latest News

  1. EU asks charities to explain anti-abuse measures
  2. ECB, Budget, EU elections This WEEK
  3. EU states stay mute on implementation of mercury bill
  4. Baltic states demand bigger EU budget
  5. Germany raises concerns over Hungary's 'Stop Soros' bills
  6. EU ties Brexit transition talks to divorce agreement
  7. EU divided over Western Balkan enlargement
  8. Facebook and Twitter weak on protecting users, says EU

Stakeholders' Highlights

  1. EPSUDrinking Water Directive Step Forward but Human Right to Water Not Recognized
  2. European Gaming & Betting AssociationGambling Operators File Data Protection Complaint Against Payment Block in Norway
  3. European Jewish CongressEJC Expresses Deep Concern Over Proposed Holocaust Law in Poland
  4. CECEConstruction Industry Gets Together to Discuss the Digital Revolution @ the EU Industry Days
  5. Mission of China to the EUChina-EU Relations in the New Era
  6. European Free AlllianceEnd Discrimination of European Minorities - Sign the Minority Safepack Initiative
  7. Centre Maurits Coppieters“Diversity Shouldn’t Be Only a Slogan” Lorant Vincze (Fuen) Warns European Commission
  8. Dialogue PlatformWhat Can Christians Learn from a Global Islamic Movement?
  9. European Jewish CongressEJC President Warns Europe as Holocaust Memory Fades
  10. European Free AlllianceNo Justice From the Spanish Supreme Court Ruling
  11. Nordic Council of MinistersNordic Solutions for Sustainable Cities: New Grants Awarded for Branding Projects
  12. Mission of China to the EUTrade Between China, Belt and Road Countries up 15%

Stakeholders' Highlights

  1. Nordic Council of MinistersOresund Inspires Other EU Border Regions to Work Together to Generate Growth
  2. Mission of China to the EUTrade Between China, Belt and Road Countries up 15%
  3. AJC Transatlantic InstituteAJC Calls on EU to Sanction Iran’s Revolutionary Guards, Expel Ambassadors
  4. ILGA EuropeFreedom of Movement and Same-Sex Couples in Romania – Case Update!
  5. EU2017EEEstonia Completes First EU Presidency, Introduced New Topics to the Agenda
  6. Bio-Based IndustriesLeading the Transition Towards a Post-Petroleum Society
  7. ACCAWelcomes the Start of the New Bulgarian Presidency
  8. Mission of China to the EUPremier Li and President Tusk Stress Importance of Ties at ASEM Summit
  9. EU2017EEVAT on Electronic Commerce: New Rules Adopted
  10. European Jewish CongressChair of EU Parliament Working Group on Antisemitism Condemns Wave of Attacks
  11. Counter BalanceA New Study Challenges the Infrastructure Mega Corridors Agenda
  12. Dialogue PlatformThe Gülen Community: Who to Believe - Politicians or Actions?" by Thomas Michel