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Europe's "Social Market"

by Chris Caldwell
Monday, October 1, 2001

Politicians make it their business to confound their opponents, but European politicians are increasingly pursuing economic policies that confound even their most earnest analysts. Germany’s Social Democratic Chancellor Gerhard Schröder is one of these. He brought his country the “Third Way” — the market capitalism softened by judicious governmental interventions that has come to be associated with British Prime Minister Tony Blair. Schröder claims to follow a politics of the Neue Mitte, the “New Middle.” Yet there is little new in Schröder’s recipes for economic growth. They include such time-honored business-friendly measures as Reagan/Thatcher-style tax cuts. Germany has lowered its top income tax rates from 51 percent to 42 percent, and its corporate tax rates from 40 percent to 25 percent. On top of that, Schröder has pushed through a program of corporate deregulation that has opened up German business to mergers and buyouts.

There isn’t much “Middle” in the Schröder program, either. For every page he takes from the supply-side playbook, he adds an item from the long left-wing wish list of his Green Party coalition partners — in their incarnation of 15 years ago. These hard-left moves include the Ecosteuer, or “Eco-tax,” a high levy on pollutants that could help clean up the environment, but could also (businessmen warn) help bring the country’s manufacturing sector to a screeching halt. And his rhetoric is firmly of the left. Asked in early summer whether he would start untangling Germany’s Byzantine job rules, making it easier for struggling companies and start-ups to hire and fire workers, Schröder angrily replied, “I don’t want American conditions placed on our labor market!”

But there’s an asymmetry in this political zigzag. Political analysts tend to treat Schröder’s right-wing moves as sensible — signs of an economic policy that, Europe-wide, is taking on a decidedly American hue. The same analysts tend to treat his left-wing rhetoric as either lunacy or idle pandering. Take Hans-Olaf Henkel, former head of the European division of ibm, whose best-selling autobiography has made him something of a guru of the German new economy. Henkel says, “I know Schröder. If you are sitting down with him, you can tell — of course he knows the Eco-tax is a stupid idea!” (Henkel is also fond of repeating an old European saw to the effect that “the Third Way is the fastest route to the Third World.”)

The picture is a confusing one. Many American policymakers look at “overregulated,” “tradition-bound,” “behind-the-times” Europe and refuse to believe it can function efficiently in a globalized information economy. Europeans are listening — to a degree. The European Union has proved a force for opening markets rather than adding a new layer of regulation, but it has also proved a force for a certain cultural leftism. On one hand, taxes have been cut not just in Germany but also in France (which cut its corporate tax rate from 40 percent to 33 percent) and the Netherlands (where the top personal income tax rate fell from 60 percent to 52 percent). On the other hand, the hot book of last summer in almost every European country was No Logo, a rant against the global marketplace by the Canadian leftist Naomi Klein, which sank like a stone on her native continent. On one hand, the number of stockholders in Germany has tripled in the past five years, to the point where Germany now has more shareholders than trade-union members; on the other hand, a much ballyhooed privatization of the country’s phone company has stalled out. On one hand, France Télécom has been split into ten different companies; on the other hand, Britain’s resolve not to privatize its postal service has hardened, and a majority of Englishmen now blame British Rail’s failures on its privatization five years ago.

So what is the Third Way? Is it propagandistic camouflage, designed to hide the hurt pride of once-great nations that now must comply with the largely U.S.-written rules of the global economy? After all, most of the theorizing about the Third Way gets done in France, Germany, and Britain, great powers until only recently — not in smaller countries like Spain, Switzerland, and the Netherlands, which are arguably just as centrist in their economic policies. Or is the Third Way really what it claims to be: a distinctively European way of looking at capitalism? After all, a great deal of dogma pronounced by American free-market apostles just five years ago — regarding marginal rates, government size, and wage-and-hour regulations — has already been belied by Europe’s recent socialist-led prosperity.

Main Street v. Rhine Street

The first economist to systematically draw the U.S.-Europe comparison in contemporary terms was Michel Albert, in his 1991 book Capitalism versus Capitalism. Albert is not just an academic. He’s also a former Commissioner of the Plan — the economic development czar of France — and ex-president of the insurance giant Assurances Générales. His thesis, which was quickly taken as gospel, is that there are two main strains of capitalism. The first is the Rhineland model that has existed in Germany for more than a century. (And in Japan as well — although that’s beyond our scope here.) In Rhineland capitalism, a company is an institution. It serves anyone who “holds a stake” in its operation, specifically: clients, suppliers, employees, stockholders, and the surrounding social community — in that order.

The second model is “Anglo-Saxon” capitalism, as practiced in the United States and (to a lesser extent) Britain. Whereas Rhineland capitalism serves “stakeholders,” variously defined, Anglo-Saxon capitalism serves shareholders — period. The distinction can be differently put, as one between the “managerial” capitalism of Europe and the “proprietary” capitalism of the United States. It should be stressed that the Anglo-Saxon version was the newcomer here, the innovation. Although its defenders presented it as a purer form of capitalism, a removal of “artificial” constraints and regulations, Albert thought it was nothing of the sort. It came into being only with the start of the 1980s when, inspired by Reagan and Thatcher, corporations that had been as “managerial” as their European counterparts (mutatis mutandis) repudiated a variety of debts to their employees and communities.

Albert saw a “double superiority” in the German model. First, it resulted in higher average salaries. Second, those salaries were scattered in a more socially equitable way. What’s more, in terms of productivity per capita, Europe was the clear-cut winner. Albert explained the superior productivity in corporate-finance terms. Stakeholder societies favored long-term investments that supported technological improvements, while shareholder companies, focused on the short term, simply juiced up profits with layoffs and accounting gimmickry in a way that was deleterious over the long term.

With America deep in recession, this thesis got a sympathetic hearing throughout the West. Those who had been skeptical about the durability of the Reagan boom looked as if they were being proved right. An entire American subgenre of How-Japan-Will-Crush-Us books found its way onto bestseller lists. Economists at the Massachusetts Institute of Technology predicted in their 1989 study Made in America that the underqualification of its managers and workers, combined with economy-wide short-term thinking and planning, would lead America into economic decline — a prediction that seemed to have been borne out by the time Albert wrote in 1991. And the Albert reading was even less controversial among European political leaders. Indeed, in certain circles it persists even to this day. “I categorically refuse to transpose the American model onto Germany,” Helmut Kohl said in 1995, “because the situation in the United States is different in many ways. You can see it in the words they choose. We speak — and properly — of a social market economy, and not merely a market economy. And we have a totally different conception of social responsibility.” Note that this is a considerably more hard-line defense of Rhineland capitalism than the one for which Schröder was snickered at last summer, and that Kohl was able to make it without calling his, or his party’s, conservative credentials into question.

But there must have been other factors at work, outside of Albert’s model. The superiority of the Rhineland capitalism came into doubt almost as soon as his book went to press. By the mid-1990s, Europe’s distinctive economic feature was double-digit unemployment and America’s was its first steady 4 percent annual growth rate since the 1960s.

The roots of Europe’s crisis seemed to rest, somehow, in the divergent way the U.S. and European economies reacted in the quarter-century after the oil crisis that began in 1973. According to the Organization for Economic Cooperation and Development, the United States saw its productivity growth collapse from 1973 to 1996 — falling to an annual average of 0.8 percent over the period, compared to 2.8 percent and 2.6 percent for France and Germany respectively. And Europe remains more productive — per hour worked, at least — than the United States. According to British analyst Mary O’Mahoney, the 20 to 30 percent advantage America enjoys in per capita gross domestic product is due to the fact that its workers work 30 to 40 percent more hours.

So Europe has done fine on questions of productivity. The problem was that it has not been able to create jobs. While the United States did have a spike in unemployment in the late 1970s and early 1980s, it ended the post-oil shock quarter-century in roughly the same employment position it began with — 5.5 percent unemployment in 1974, 5.4 percent in 1996. Europe, meanwhile, saw unemployment quadruple over the same period, from 2.8 percent to 12.3 percent in France, and from 2.1 percent to 8.8 percent in Germany. Europe-wide, unemployment stood at 10.8 percent in 1996, and a recent spate of job creation has brought the figure down only to 8.4 percent. The United States created 32 million jobs from 1980 to 1997, versus 3 million in Europe. If the major parties in the European democracies entered a period of waning legitimacy and rickety popular support, it was due mostly to the collapse of their economic model. More than anything, unemployment holds the key to the discrediting of Rhineland economics and the new vogue in some European quarters for “Anglo-Saxon” ways.

Work weak

The way labor markets pose problems to liberalizing European welfare states is best seen in France. Among the most enduring and untouchable leftovers from the old état providence are generous pensions and the cluster of benefits that surround government jobs. Last year, France’s socialist prime minister Lionel Jospin sought reforms in both, and backed off after a public outcry — much as the conservative Alain Juppé had when he sought reforms in 1995.

Although French union membership has fallen to 10 percent of the workforce, below even American levels, France’s public-sector unions have found it easy to carve out exceptions to the prevailing trend in the direction of denationalization and flexible management. The French national railway sncf split into two divisions in 1997 in order to allow various carriers to compete on its rails. But the railway’s unions have taken advantage of their hold over French travel and commerce to retain various anachronistic benefits — early and large pensions, supplemental medical services — that date from earlier in the century when railway work was still an affair of coal-damaged lungs and crushed limbs. Air France’s unions have also used their ability to choke economic activity to claim higher wages than similarly placed employees in other fields. Across the continent, in fact, labor policy is the area where the U.S. has the simplest lessons to teach. Spain’s unemployment rate fell from 24 percent to 14 percent only after the government dropped Franco-era guarantees of tenure.

Many European economists make the point that the gap between American and European employment is explicable if one looks at differences in just a few sectors (hotels and restaurants, financial services, education) — as if Europe’s plague of structural joblessness were a mere oversight. That certain sectors lag, though, hardly proves wrong the Reagan-Thatcher dogma that regulation, guaranteed tenure, and mandatory benefits cost jobs. The deficit in hiring in those sectors may be due exclusively to the fact that most new-economy service jobs are too fleeting, too irregular, to defray the cost of adding welfare benefits to them.

One caution: It is on labor policies — and the job rates that result from them — that European statistics are the most difficult to interpret. Despite high continent-wide unemployment, four countries in the eu are at or below U.S. unemployment levels, according to the oecd. The Netherlands is lowest, at 2.5 percent, followed closely by Austria, Portugal, and Sweden. All are countries with (by American standards) massive social states. Belgium, in contrast, with a 12 percent jobless rate, is one of Europe’s employment basket cases despite its similarity to the Netherlands in size, culture, location, and government share of gdp. The Dutch secret, most economists agree, is the country’s decade-old labor-market reform, which made it possible to hire part-time and entry-level workers without committing an employer to bearing the full brunt of social insurance.

The labor market may also give clues to why Germany’s economy has, despite reforms, proved so hard for investors to read and trust. Even after Schröder’s package of tax cuts and corporate deregulation, German growth figures got worse. In July, the imf lowered its growth projections for the country from 1.9 percent to 1.25 percent. A day later, the Berlin-based economic think-tank diw lowered its own projections from 2.1 percent to an anemic 1 percent — and even those numbers were expected to fall. Germany has been in the bottom half of European growth rankings for years now, and in 2000 shared (with Italy) the very slowest growth rates in all of Europe. In 2000, foreigners invested more in the Netherlands (pop. 14 million) than in Germany (pop. 80 million).

The few bright spots on the German landscape have been not free-market havens — real estate prices and salaries continue to stagnate in Berlin — but showcases of government subsidy. Bonn, for instance, lost its major industry — the national government — two years ago, but has turned into the country’s great success story of the past half-decade, thanks to government efforts to turn it into a high-tech and communications hub. Jena, in the former East, is thriving, too — again, thanks to government construction projects and “seeded” entrepreneurship. Fault for the general stagnation may rest with the one conspicuously unreformed corner of the German economy: labor policy — particularly Germany’s Rube Goldbergesque rules whereby wages negotiated for one union immediately cause across-the-board wage increases in all sectors.

The most productive changes in European labor practices appear to be a combination of left-wing legislation and what French author Alain Minc calls “stealth capitalism.” Take the 35-hour work week — the réduction du temps de travail (rtt) which Lionel Jospin launched as the centerpiece of his 1997 campaign. Floated as a way of “sharing” jobs with the unemployed at a time when France was suffering 13 percent unemployment, it arguably won Jospin that election.

The doctrinaire free-market viewpoint on the rtt is that it’s a catastrophe waiting to happen — if not now, then soon. Since the late 1990s, the law has applied to all French firms with more than 20 employees — which covers over half of the country’s workers. The rubber will meet the road next year, claims Financial Times Paris reporter Jo Johnson, when the law comes to cover all firms. That means, for instance, the small shop with a half-dozen specialized malétiers who put the handles on every single item in a certain Louis Vuitton handbag line. Germany and other European countries already have a 35-hour limit. “But this one is enforced,” Johnson notes. “It’s serious.”

Up to a point. France’s hours limits have wound up being enforced in ways that are much more flexible — much more “new economy” — than its neighbors’. Part of the thanks is due to the Movement of French Businesses (medef). Founded during the rtt debate in 1998 to replace the half-century-old National Council of French Employers (cnpf), it has proved a muscular defender of business interests and has shaped the implementation of the 35-hour work week in ways those who drafted the law would never have envisioned. As it stands, rtt actually increases the number of authorized overtime hours and decreases the overtime premium. What’s more, companies have “annualized” the arrangement, so those that need 40 hours’ work from their employees can get it — by giving back the five weekly hours as vacation time. Many mid-level employees in all types of French businesses discovered to their surprise last summer that they were entitled to eleven weeks of paid vacation.

In turn, the huge windfall in hours of leisure has allowed companies to renegotiate, from the ground up, employment arrangements that were in some cases decades old. medef firms have cut starting salaries, eliminated privileges, and won long-term wage constraints in collective-bargaining agreements. And a happy accident resulted. The idea of “sharing” jobs by having employed people “give back” five hours to the unemployed was always silly economics. Yet French unemployment has fallen from 13 percent to just under 9 percent in the four years Jospin has been in power. Alain Minc, a polymathic money guru and consultant whose latest book, www.capitalisme.fr (Paris, Grasset) is a bestseller, makes a few cautious claims. “The 35-hour week created jobs,” he says, “even if not as many as the government is claiming. What’s important, though, is that it created those jobs for reasons other than the ones the government is citing. It created jobs because it held down wages.” In effect, the 35-hour week has produced Dutch-style labor flexibility.

Stealth capitalism

The pattern that emerges from Europe’s attempts to extract itself from its deepest problems is exactly that of stealth capitalism. France is cutting wages de facto without cutting them de jure; hence its new-economy growth. Germany is loudly proclaiming zero tolerance on erosion of labor rights, and practicing what it preaches; hence its stagnation. The problem is the way the labor market fits in with the equity and other markets. Everywhere the pattern persists. “We have labor savings,” says Alain Minc. “But you have to do that without claiming it. You see, we have a kind of double language here.”

One indication that resistance to American-style markets is honored more in the breach than in the observance is that every country claims that its own economic folkways are American in spirit. While most Europeans agree that the British economic system is most like the American, the French say they’re more like the Anglo-Saxons than the Germans are, and the Germans say they’re more like the Anglo-Saxons than the French. Christoph Kannengießer, a spokesman for the Union of German Employers, points to Germany’s relative lack of centralization, to its successful early privatization of the post office, to the denationalization of German railways, which has proceeded much more smoothly than in Britain, and to a friendlier regulatory climate.

Minc, meanwhile, points to France’s more open labor market and to its ability to do things rather than talk about them. Three years ago, Minc notes, France Télécom and Deutsche Telekom were each 75 percent government owned. Germany declared it would soon privatize; France answered questions about privatization with a firm “never.” Today Germany has sold off only an additional 8 percent of Deutsche Telekom’s value and still owns 67 percent; France has sold off a third of its stake, so that the government owns a bare majority of it.

In his four years at the helm, Jospin has privatized $40 billion worth of French industries — more than the previous five prime ministers put together. Soon he will have privatized more than all previous governments, including the conservative reformers who ran France from 1986 to 1988. And he has managed to do this with communists in his government. For all his talk about the need to maîtriser (“bring under control”) la mondialisation, his control of the market has been most unradical. His three finance ministers have all been conservatives. The first, Dominique Strauss-Kahn, held discretionary spending increases below Britain’s for his three years in office; the latest, former prime minister Laurent Fabius, recently attacked a taxation plan on the grounds that it would “interfere with the working of the market economy.” This seems not to bother Fabius’s boss. In general, according to the Brookings Institution’s Philip Gordon, “Jospin signals left and moves right.”

Getting access to American levels of capital funding without abandoning the role of the French state provides huge advantages, according to Minc. “Because of our government, we have wonderful infrastructure,” he says. That’s certainly true, and constitutes an invisible subsidy to business. Last spring, a new high-speed rail line opened that connects Paris to Marseille, 600 miles away, in under three hours. For cell phones, France is the most thoroughly covered country of its size in the world, with reception on 91.6 percent of its territory. Jospin’s Comité à l’Aménagement, a sort of national development board, announced this summer a project to cover the remaining 8.4 percent of French territory. The plan would make France the first large country with wall-to-wall cell-phone reception.

France’s mixed economy provides even more specific advantages that are hard for a cultural outsider to understand. (That’s why prophecies of French collapse, which British and American economists have made for the past century, seem never to come true.) “The public-versus-private model as you understand it in the United States is meaningless,” Minc says. “The American cliché is of corporations confronted with competition, and administrators not confronted with competition. That may be the case in America, but it’s not the case here.” In this he is certainly correct. Much of the ingenuity of the French government arises from competition between rival agencies, and from the financial incentives offered to public servants through pantouflage — the informal arrangement whereby government employees make lateral moves into the private sector, where they can turn government contacts into government contracts, and cash in handsomely.

The wave of privatizations, paradoxically, heightens these incentives for government workers. As the Oxford historian of modern France Robert Gildea writes, “After ten or fifteen years in one of the grands corps, members of this power group became directors or chairmen of the large banks or industries linked to the state by being nationalized, semi-public, or having the state as a major customer. These sideways moves into industry . . . allowed the administrative élite the opportunity to make more money and permitted industry important contacts with government.”1 On a more brass-tacks level, Minc notes that a mid-level corporate employee with France Télécom can have the combination of government-work job security and the ability to buy stock in the company he works for.

“People accept capitalism as a neutral system,” says Minc. “They don’t say it, but they do. Our stock market is Americanized, even if ours is not fully a market economy.”

Business culture: American import

Markets or not, no European economies are immune to American business culture. How could they be? They’re all — after a fashion — a part of it. One reason is that Europeans tend to lack private pension funds, and the public ones — except in the Netherlands and Switzerland — are pay-as-you-go and don’t produce investment capital. American pension funds can thus travel the world, throwing around their mammoth investing weight. Fully a third of France’s stocks are foreign-owned, and according to Michel Albert, American retirees own 10 times more stock in France’s cac 40 companies than do French workers (who have only 2 percent of it). Half of French stocks are owned by foreign institutional investors, who — whether American or not — bring Wall Street criteria to their valuation of investments.

Here is the big difference between Europeans’ relation to the market and Americans’: 48 percent of Americans hold stocks, versus (if one uses the most liberal measure) 20 percent of Europeans. In Europe, equity markets have not been important. The German finance tradition, for instance, has rested since Bismarck on a network of “universal banks.” In Europe as a whole, banks still finance two-thirds of business needs, versus only 20 percent in the United States — although even here the figure was as high as 80 percent 30 years ago. According to Adair Turner — a British businessman and London School of Economics professor whose brilliant study of the various European capitalisms, Just Capital (London, Macmillan), was published this spring — equity-market capitalization (as a percentage of gdp) has risen all across Europe in the 1990s: from 23 percent to 71 percent in Germany, from 32 percent to 116 percent in France. The value of mergers and acquisitions in Europe has increased sixfold since 1995. As American capital travels, American business folkways travel with it.

That the culture of American business has penetrated Europe is most visible in the obsessions — and the very language — of businessmen, even those most skeptical of American institutions. Inside the offices of Alcatel, which has become one of the continent’s most dynamic telecommunications firms since France’s burst of privatizations under Jospin, English is the language of business communications, even when a handful of Francophones are meeting to discuss internal matters. Ditto at the multinational pharmaceuticals giant Novartis, whether the employees in question are talking at the firm’s Barcelona or Basel or Munich offices. The coffee shop in the German Foreign Ministry is called “the coffee shop im Auswärtigen Amt.” And business writing seems not to be done in continental languages at all. “Le return on equity,” writes Michel Albert in the original French, “permet de mesurer les succès de la shareholder value . . . qui constitue l’objectif-clé de la corporate governance.” He is not alone in saying that the key objective nowadays is “shareholder value” — an expression one hears among European economists as frequently as the word “oui.”

Everyone seems to agree about this convergence of business cultures. Michel Gurfinkiel, editor of the Paris-based financial newsweekly Valeurs Actuelles, says, “Is Europe a common culture? No. But it has a common style of leadership. And what its leaders have in common are the American parts of their own cultures.” Klaus-Peter Schmid, financial journalist for the Hamburg-based national weekly Die Zeit, adds that there is “no fundamental difference between the business classes of the United States and of Europe.” An interesting twist on this Americanization, however, is observed by the political scientist Pierre Manent: “It is the left that is the most American part of France,” Manent says. “They speak the best English, have heard the most American music, and have visited New York the most frequently.” What do they want?

Whose style of corporate governance?

The key questions for those who believe in a unique European model of capitalism — or at least believe in taming the American variant — are, first, whether an element of managerial control can be seized back from shareholders; and, second, whether it should be seized back. To both questions, European economic thinkers tend to respond with a resounding “yes.” What’s fascinating is how much of this attack on the American estimate of the utility of markets derives from American thinkers. In early September, the 83-year-old Yale Nobelist James Tobin felt the need to give an interview to Le Monde in which he insisted that he had “nothing in common” with the French leftists who had tried to turn him into the patron saint of their crusade against globalization.

But Tobin is only the latest such guru. Berle and Means’s 1932 study of corporate governance — in which the distinction between “ownership” and “management” was first laid out in a systematic way — remains influential in Europe, and John Kenneth Galbraith maintains a sway over European economic thinkers that he has lost on his native continent.

Daniel Cohen of the Ecole Normale Supérieure, who is an adviser to the government of Lionel Jospin and was a top adviser to former prime minister Michel Rocard, is as sophisticated an economist as France has today. He has written several books on the new economy for general audiences — including Nos temps modernes (Our Modern Times, Paris, Gallimard). Cohen has been particularly impressed by the Berkeley economist Oliver Williamson’s 1975 study Markets and Hierarchies (Free Press) — a book that is revered in France. “You have markets, for sure,” Cohen explains. “You also have ‘hierarchies,’ organizations which internalize the things the market cannot internalize — in particular, longstanding relations between firms and workers. When you’re in a firm, you’re not in the market. What you do is, you price a longstanding relationship.”

And these relationships can take many different forms, depending on the culture. The sociologist Philippe d’Iribarne spent years investigating corporate cultures in Europe and the United States and assembled his findings in a 1989 study called La logique de l’honneur (The Honor Principle, Paris, Seuil). These cultures, he found, vary widely. In the Netherlands, workers won’t start a job until they’re absolutely convinced why they’re supposed to do it. That’s different from the French model, where the worker has to pretend he’s a craftsman. The U.S. model is more contractual. What’s key is that French and Dutch workers consider certain tasks by definition beneath their dignity. American laborers, who see no insult to honor provided one makes arrangements as an independent contractor, are flexible about the tasks they perform, provided they can be embedded in an advantageous contract. (The same goes for off-the-job employment-related activities, such as moving to a new city to take up a new position.) The upshot is that a great deal of the American advantage in labor-market flexibility is due not to American employment policy but to American culture, and American workers’ attitudes.

It is over the matter of employment contracts — implicit and explicit — that Europeans and Americans most clearly went their separate ways about 20 years ago. Most European economists endorse a theory of implicit contracts first laid out by former Treasury Secretary Lawrence Summers as a young academic. Summers challenged the Harvard Business School consensus that buyouts added market value to companies through increased productivity per worker. Most of the companies’ gains, he said, actually came from a unilateral abrogation of implicit contracts — the seniority system, for instance, in which workers traded salary when young for security when old. It was a mere repudiation of debts. Such repudiations generated more distrust in Europe simply because Europe had more such implicit contracts. So when the 1980s and 1990s brought a revolution in the management of corporations — particularly in the provision of stock options to managers, in order that they might act more in the interests of shareholders — it was perceived as a change of regime, and resisted.

“To say ‘the market is the market’ — this is false,” Cohen says of the incentives that have led to decades of layoffs — and decades of growth — in the United States. But what does he think, as an economist, of the revolution in corporate finance and management? “The fact that financial markets give a proper incentive to the manager cannot be wrong,” he says. “On the other hand, we now see that there was a bubble in the 1990s. The stock market was overvalued. And therefore the idea that the stock market always gives the right incentive cannot be right — even about this tendency that it’s a good thing to fire workers because that shows the market you’re committed to reform.”

Institutional investors

Johen’s vision is clearly not an ideological one. That is, the strong value judgments are all at the cultural level d’Iribarne describes, and one cannot claim that his capitalism is less “capitalist” than the American variant. A great expositor of the pitfalls of thinking about such matters too ideologically is the contrarian Jean-Paul Fitoussi of the Paris-based Observatoire Français des Conjonctures Economiques (the French Economic Research Institute). While most would consider Fitoussi a man of the left, he damns the Third Way with a vehemence that, among economic thinkers I interviewed for this article, only the right-leaning Hans-Olaf Henkel could match, albeit for different reasons. “I detest the concept of the Third Way,” Fitoussi says. “It’s conceptually empty. To talk about mediating between the market and the state is to ignore that there’s no such thing as a market without a state.” It is in this context that Fitoussi makes his most provocative point. He thinks that the United States runs a more interventionist, more activist economic policy than the Europeans. Not only that. “Free-market dogma,” he says, “is more powerful in Europe than in the United States.” And he gives several reasons why.

First, America’s monetary policy is more activist and flexible. Whereas Alan Greenspan is free to stimulate or stifle the American economy as he sees fit, his counterpart at the European Central Bank (ecb), Wim Duisenberg, is constrained to use monetary policy to keep inflation below a 2 percent target. The ecb is a bureaucracy that serves business, says Fitoussi. It’s an Anglo-Saxon-style institution — except that it’s run in a continental fashion, without the indispensable Anglo-Saxon gift for improvisation. Fitoussi’s point could, if anything, be made even more strongly, with reference to the U.S. Congress’s longstanding Humphrey-Hawkins Act, which established that full employment should take precedence over fighting inflation in U.S. monetary policy. But his more modest point is that Europe’s hands are tied in a way that has quite conservative implications. “It’s as if your Balanced Budget Amendment had passed,” he says. Perhaps out of sympathy for just this viewpoint, European newspapers have lately been full of stories on the disaster that befell Argentina’s economy over the summer, due (or so it was editorialized) to its overzealous fight against inflation — specifically its decision to peg its currency to the U.S. dollar through a currency board.

Second, Fitoussi says, the United States benefits from a de facto industrial policy, made up of government spending on education, scientific research, and military contracts, all of which are funded below the radar screen. (He refers to this complex as “occult interventionism.”) In citing education, science, and military spending as glorified r&d operations, Fitoussi would seem to be on shakier ground, although the opinion is a common one throughout Europe — and particularly so now that a Defense Department networking project launched in the 1960s has blossomed into the internet and dominated the world’s financial life for the past decade.

At a July editorial meeting of Die Zeit, former German chancellor Helmut Schmidt paused to discuss George W. Bush’s plans for a missile defense. Schmidt thinks it’s a poorly thought out and probably futile project — as a defense project. Nonetheless, he says, “if I were an American, I would favor building it,” largely because of the industrial spin-offs it would generate. Schmidt noted that, as is now well known, the Pershing missiles that he had fought to help nato install in Western Europe in the early 1980s contained guidance systems that have revolutionized aeronautics. When an editor asked if Germany had received any of that technology for its own industries, Schmidt replied, “We weren’t thinking about that then” — the implication being that this is the kind of thing Americans think about all the time.

For Fitoussi, economic performance comes down to institutions rather than ideologies. Essentially, Europe (the individual countries that comprise it) has not bought Reaganism or Thatcherism, but Europe (the supergovernmental experiment in continental federalism) has. As the citizens of every European nation except Britain understand, the European Union has turned out to be a force for the free market. In one particularly astute section of Just Capital, Adair Turner traces Britain’s decline relative to other European countries to its decision in the 1950s to opt out of the European Common Market, and its later exclusion, on Charles de Gaulle’s veto, when it sought to join in the 1960s. Since the Single European Act of 1987, almost all the eu’s regulations have been in the direction of loosening controls on the mobility of capital and labor.

Almost by accident, the creation of the European Union’s common currency, the euro, which will be used in all transactions in 12 countries at the turn of the year, turns out to have been a saving grace. And Fitoussi’s defense of the euro sounds decidedly capitalist. “If anything,” he says, “the euro is more driven by the U.S. model than a reaction to it.” In retrospect, it turns out to have been the optimal response to the end of Bretton Woods-era currency stability, he thinks, which was very costly for Europe. There were several problems the euro solved. For one, exchange-rate risk meant that even the smallest businesses operating internationally had to waste time and money doubling as currency speculators — taking up hedge positions in all the currencies in which they dealt. For Fitoussi, Europe’s sudden explosion of growth in the late 1990s was mainly a function of declining exchange costs.

But considerably more important than the euro’s role in creating an open product market was its role in creating an open capital market. Borrowing in different currencies, of course, creates a distortion, a double risk — an exchange-rate risk on top of the issuer’s risk. So until 1997, most European capital markets were domestic. British, French, and German bankers had the means to fund start-ups and mergers and undertake massive expansions. Other countries did not, and the euro turns out — in a way that few of its designers could have envisioned — to have been the handmaiden of American-style market liquidity.

As Michel Albert notes, since the coming of the euro three years ago, the traditionally border-bound Latin companies, like the Italian business-machine giant Olivetti and Spain’s Repsol oil company, have made huge acquisitions themselves. In 1999 (the first year the common currency was in use for financial transactions), Olivetti tried to block a Deutsche Telekom/Telecom Italia merger with an offer of $65 billion in cash, shares, and the kind of bonds that would have been out of its reach the year before. Then Repsol made a $15.4 billion cash offer for the Argentine oil company ypf, an offer financed through elaborate arrangements with Citibank, Goldman Sachs, Merrill Lynch, Warburg Dillon Read, and Salomon Smith Barney, not to mention a handful of European banks. As one financial newsletter put it, the previously sleepy and domestically tethered Repsol thus set the records for “the largest-ever European all-cash offer; the largest Spanish industrial transaction; the largest unsolicited oil company offer; and the largest Latin American corporate acquisition.” Across Europe, corporate debt issuance tripled the year the euro was launched — outstripping the previous year’s total issuance by the end of the first quarter.

Two, three, many capitalisms

The upshot of this institutional perspective is this: “You have a whole range of policies in Europe,” Fitoussi notes, “from minimal state intervention to maximal. And not a single European economy has gone into meltdown in the past decade. The facts plead against ideology.” They certainly do. Within Europe, where one ranks in unemployment and growth has very little to do with how “American” one’s fiscal policy is. Europe remains more statist than America, of course. Government revenues in the United States make up 32.3 percent of gdp, as against 48.2 percent for the European Union as a whole. Britain is a kind of way station between the two systems, at 39.9 percent, while France runs at about 55 percent. That last number, more than any other, confounds free-market economists, who keep pointing to the French economy and saying it’s due to collapse. Yet France has averaged 3.2 percent growth over the past four years, outstripping Britain at 2.9 percent.

Adair Turner’s book has a fascinating summation of economists’ conventional wisdom over the past decade — and it shows that the battle over which capitalism is best has not merely been a matter of a soft European version duking it out with a hard-line American one. There have, in fact, been close to a half dozen reigning dogmas over the past 10 years.

The first is Michel Albert’s from 1991 — in Japan and Germany, cooperative “Rhineland” capitalism was creating not just more stable communities, but also higher salaries and bigger profits, at a time when American productivity was flat-lining.

Then, second, as Japan and Germany stalled out in the mid-1990s, the wave of the future seemed to be the familial, trust-based economies of the new Asian tigers. (Recall Joel Kotkin’s Tribes.)

Third, once the new Asian economies went south in 1997, “familial” and “trust-based” came to be seen as synonyms for “crony capitalism” — and the ideal economic model as consisting of a nonideological technical expertise of the sort Robert Rubin had deployed a year or two earlier to rescue shaky equity markets from the Mexican peso crisis.

Fourth was the period of seemingly unstoppable U.S. hegemony, as dot-com issues blossomed beyond the wildest imaginings of Western investors.

Now that we are in the fifth stage of economic thinking, in which none of the old remedies seem to work, Turner opines, with considerable understatement, that a “common factor independent of policy may be responsible” for these shifts.

That common factor is technology, or at least the way new technologies are brought to market. And in this light we can see that Albert was not only not ridiculous in his claims for Rhineland capitalism. He was absolutely correct — but he was in the right place at the wrong time. Looking back over the almost four decades of spectacular growth German factories created, it is clear why they worked. As Albert explains in a 25-page pamphlet written in 2000 to update his Capitalism versus Capitalism, from 1953 to 1990, Germany’s corporate organization proved splendidly well-suited to manufacturing companies, particularly engineering companies with “long product cycles.” A lens in 1986, after all, was only an improved version of what it had been in 1957. And Germany’s bank-based financing system proved splendidly well-suited to providing a steady stream of funding to such companies. As Albert put it: “Those financings are very well adapted to businesses that are developing continuously and regularly.”

But then an industrial revolution took place. From 1960 to 1990, the share of manufacturing in Germany’s gross domestic product stayed roughly the same, varying from 34 percent to 32 percent. In the seven years after that — that is, in the very first years after Albert promulgated his thesis — German manufacturing went through the floor, collapsing to 24 percent of gdp. That sector was (in other, more flexible economies, at least) getting replaced by information technology. As an industry in its infancy, information technology was exactly the opposite of a business “developing continuously and regularly.” Bank-based financing couldn’t keep up. Albert’s claim that American fund managers’ focus on short-term investments harmed American productivity was, again, absolutely correct — in 1988. But short-term investments are mobile investments, and by the 1990s, mobile capital was the best kind of capital to have.

Economic policy is not an eternal verity; it’s more like a portfolio of stocks. Countries may end up paying dearly for hanging onto parts of their policy portfolio (like Germany’s bank-based financing) that made them rich 10 years ago; or, alternatively, they may reap windfalls from policies (like America’s in favor of capital mobility) that seemed worthless in the past.

What is crucial is that such a portfolio be made up of policies that can be “sold off” as circumstances create new challenges. In recent years, the biggest challenges have come from the revolution in information technology. But any exogenous change that one can imagine — war, cold fusion, an average lifespan of 125 years — will make necessary some kind of economic-policy rejiggering. As Europe looks at the elements of the American economic model that it would like to imitate, then, a formula is the very last thing it is looking to discover. There is evidence that European Rhineland capitalism is converging with the American shareholder variety. But what the Europeans are seeking to learn is not so much capitalist doctrine as capitalist flexibility.

1It can be argued that the American system of “revolving door” alternation between elected office or political staff jobs on one hand, and private-sector lobbying or investment-banking or “entrepreneurial” sinecures on the other, has created de facto pantouflage in our own country. It’s probably likely, too, that such incentives have done their part to make American government more efficient. See Robert Gildea, France Since 1945 (Oxford University Press, 1996), p. 118.

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