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Will European capitalism win?
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As the global emotional cycle swings from greed to fear, Europe should be coming to the fore.
If regions resembled stock market investments over the past few years, the US could be likened to a racy (leveraged) technology play, Asia an explosive growth story and Europe a defensive utility stock happy to bumble along and throw off big social dividends.
We would appear to have reached that point in the stock rotation cycle when dull is good. That may help to explain the strength of the euro and the fact that Warren Buffett, the legendary US investor, has recently been sniffing around Europe for value investments.
But Jean-Philippe Cotis, former chief economist of the Organisation for Economic Co-operation and Development, warns that this may not be a standard economic cycle. What is frightening about the current situation is that commodity prices have (until very recently, at least) been surging while demand in the US and Europe has been slowing.
Does this imply that the global scramble for resources is permanently changing the balance between supply and demand? Are we entering a more adversarial world? Is Europe in danger of being the only vegetarian economic power in a world of carnivores?
That is certainly the conclusion of The War of Capitalisms Will Take Place, a recent book by France’s Cercle des économistes summarising the discussions of a conference in Aix-en-Provence last year. The authors argue that the apparent ascendancy of Anglo-American capitalism that enshrines the philosophy of a small state, minimal regulation and capital market finance has been an illusion – as proved by the US-originated credit crisis that has been distributed to the rest of the world.
Global financial markets may have encouraged many companies into mimicking Anglo-American behaviour in emphasising shareholder value. But what is striking, the authors contend, is how resilient other forms of capitalism are and how potent some of the new mutations are becoming. They point to the different forms of state capitalism evolving in China, Russia, the Middle East and South America and the vibrancy of family capitalism and private equity.
In principle, the existence of different forms of capitalism is healthy. After all, diversity is the essence of capitalism. But in practice the authors fear that globalisation will bring about a clash of capitalisms (just think of the fuss over sovereign wealth funds). Each capitalism is desperate to assert its own superiority in a process akin to economic natural selection.
This thesis can be challenged on many levels – as indeed it was at the conference. For starters, is it even theoretically correct to say there is more than one form of capitalism?
Nevertheless, in the real world it is clear that new rules of the game need to be established if there is to be efficient and equitable use of resources, fair competition and an adequate response to global challenges such as climate change. The worry is that there are few supranational bodies capable of enforcing reciprocity. Most of the multilateral organisations are viewed as occidental clubs that have limited legitimacy in the developing world.
Many in Europe fear that it will be particularly vulnerable in a more conflictual world. The European Union is configured for economic peace. It has abandoned the arms of war. It is naive in running liberal trade, competition and exchange rate policies. Europe is in danger of becoming the “idiot in the global village”, according to Hubert Védrine, France’s former foreign minister.
Yet Europe could itself play a big role in shaping the new economic order if it could only marshal its forces effectively. The 27-member EU is now the world’s biggest economy thanks to enlargement and the euro’s strength. It is also the world’s biggest single trading bloc setting many of the world’s de facto regulatory standards.
According to McKinsey Global Institute, Europe’s capital markets have probably now outgrown in size those in the US – if you throw in non-EU countries such as Switzerland, Russia and Norway.
Corporate Europe has also done a remarkable job in fighting its corner. Recent research suggests that in many areas European companies may be doing a better job of moving up the value chain than their rivals in the US or Japan.
Over the past decade, European companies have maintained their share of the aggregate market capitalisation in the FT500 ranking of global companies, according to an analysis by Bruegel, the think-tank. While the US companies’ share has dropped from 57 per cent to 38 per cent, Europe’s companies have held steady at 32 per cent.
This is not to deny that Europe faces enormous challenges. Can the EU assert its fragmented economic power in any meaningful way if things turn nasty – particularly after the Irish rejection of the Lisbon reform treaty? How can Europe stop squandering so many human and capital resources? Can Europe create an innovative “ecosystem” that will help it close the technology gap with the US?
But Europe’s biggest challenge may well be whether it can afford to maintain its welfare states in a hyper-competitive world. The only sure answer to that question is: we had better hope so.
As the historian Tony Judt has written, most of Europe’s welfare states were the creation not so much of woolly-headed socialist dreamers as of hard-headed conservative realists who understood that Europe would not survive another relapse into war.
The welfare state was built to neutralise the social tensions that fuelled aggressive nationalism. The European model is an arbitrage between capitalism’s winners and losers. As a result, Europe has been light on the accelerator but heavy on the brakes. That is a considerable handicap when careering along the straight but has its advantages when steering round bends.
For that reason, Europe’s example may be of particular use in a world currently experiencing such a scary ride. The EU, accurately described as a “permanent negotiation”, has been remarkably successful in establishing common economic rules between once-warring nations. With a single market and a common currency,
unity in diversity is not a wholly empty slogan.
In short, if the world does not become more like Europe then Europe will surely lose. But if the world does become more like Europe, the world can only gain.
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