Monday, September 29, 2008

In defence of Anglo-Saxon capitalism

by Charles Grant

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. “Self-regulation is finished, laisser 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.

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 Dutch-Belgian Fortis 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 Hank Paulson, Federal Reserve Governor Ben Bernanke and the Congress have done?

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 like 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.

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?

Charles Grant is director of the Centre for European Reform.


David said...

But, Charles, it's not a question of feeling "smug". When a preacher is discovered to be a hypocrite, the congregation is entitled to feel resentful. During the Bush years a version of market fundamentalism has been preached from Washington and it has now been exposed. And that model, don't forget, has been based on growing inequality, boardroom excess and a wilful neglect of the consequences of financial decision making for jobs and corporate prospects.
Of course there is no single European version of capitalism. Across the EU the state and markets interact in a variety of ways. But there surely is a precious "European" concern for the social consequences of corporate decision taking, for equality within nations (as within a community of nations) and a useful habit of governments reminding companies that the pursuit of profitability cannot be untrammelled. Would you rather be poor in France or in Louisiana...the American model is deeply flawed. And you make a mistake if you don't see that the American model is itself a conflation of state and markets with government operating, in the american case, to protect the interests of certain groups. The idea which you seem to want to perpetuate is that somehow the American model is, as the ideologues in Washington have claimed, based on "free markets". In fact it's based on a distinct pattern of spending and taxation which - look at the fiscal crisis in the states - was always internally contradictory. Of course Europeans have to look to issue of innovation and flexibility but this posting by you is an odd attempt at defending the indefensible

NickCrosby said...

Up to a point, Lord Copper.
You are right to point out the resilience of the US and the UK' reforms over the past 20 odd years.

However, I do not think the term 'Anglo-Saxon' model means much anymore. The messianic belief of the neo-liberal movement has now been overextended- geo-strategically in Iraq etc... and economically in the USA.
What does Anglo-saxon model mean? There is an American economic-political system, a British one etc...Charles Hampden-Turner wrote an excellent work some years ago about the 7 cultures of Capitalism. That is more insightful. The emphasis is as much on ways of thinking and organising as it is of straight policies. Some US firms have highly Swedish 'business models'etc... Public authorities across the piece have flexible responses to issues of housing, environment etc..
The key is less the policy, more the philosophy/moral economy behind that policy. And in this sense the UK on most political-economic-social measures is much closer to our Continental partners than the US. The continuation of the neo-liberal project in the UK (by New Labour)- well beyond its stretching point- has as much to do with the peculiarities of the historic failures of the Labour Party than it does any attachment to the underlying philosophy of Buchanan, Leo Strauss,Goldwater etc... and the ideological/political drivers of the programme in the USA.
The idea of a nightwatchman state, of limited regulation, of 'privatising social protection to fundmentalist religious institutions' and a 'belief' in market solutions to all problems- if that is the Anglo-saxon model- and it is the policy/philosophy of large sections of the US-than that is revealed to be seriously flawed.And scary.
All of which is not an argument for some return to 1970s statism. But it also means that the current US election is the most important for 30 years; and we in the UK should be careful for what we wish for. If Cameron is Mc-Cain lite and a continuation of Thatcher by other means...
I agree this no time for schadenfreude. But for all those eurosceptics gleefully writing off the Continent as finished a few years ago, some feeling back the other way is only understandable.

Anonymous said...

Charles, I agree with David (comment 1). It's not about smugness. It's about vindication. For years continental Europeans have been abused in Anglo-Saxon publications that their economic system (usually referred to as "socialism", and pronounced as an exceptionally dirty word) is inferior to that of the US (and UK). Slow, sluggish, unrewarding, meddling, nanny-ish, ... many more terms such as these were used for years.

It was rare to find an Anglo-Saxon author who focused on the positives of a European-style social market economy.

This form of peer-pressure (even bullying, in my opinion) has resulted in continental countries adopting some of the flawed practices, which now lead to renationalizations of banks in the Netherlands, Denmark, Belgium, ...

Do you honestly think it is not time now for the ultra-capitalists to eat their words and fall on their swords? They should be allowed to fail, so that 10 years from now they will not be tempted to go the same way. They need to accept that their version of capitalism has died and should not be revived.

PS. How swift have Paulson and Bernanke proven to be? The Benelux countries (three different governments) were able to act in mere days. Stop seeing the US as so superior. The emperor has no clothes.

G700 said...

Dear mr Grant,

there is no need to be apologetic or state the obvious. Both the US and the UK with their "anglo-saxon capitalism" as you call it and the market oriented reforms they adopted all these years, managed to become the global economic powerhouses for the last 3 decades having also managed to achieve good results on the social front.

However you got to be able to see that fundamental aspects of this model are in great need of revision, especially unregulated financial markets especially "phantom banking" as you call it.

What we are facing today is not only the burst of a bubble economy, but also the collapse of an economically irrational greedy capitalism of the "Gordon Gecko" kind. The world,especially the US and the UK, is given a chance to focus once again on the real economy, expand into new industries and adopt a new productive ethos.

Generation 700 Euros - Greece

G700 said...

@ sd

Europe hasn't been much faster in its response to the crisis either. It's only been more effective when it decided to act. Not to mention that it got saved by British ideas. For Europe it is time to think seriously about linking the currency union to a fiscal federation and forming an economic government for times like this. Deep recession is coming with a probability of 80% and Europe's already overspent.