Challenges to Europe:Varieties of

Capitalism and the Way out of the Crisis

Andrew TylecoteUniversity of Sheffield

Outline

• The contest within the Eurozone: stakeholder capitalism vs. family/state

capitalism:NorthCentre vs. EuroSouth.

• The diverging performance of these two groups threatens first the Euro, second the whole EU project

• The nature of stakeholder capitalism: effects on technological specialisation; effects on inflation

• The nature of family/state capitalism; ditto, ditto• The limited relevance of the Maastricht and Amsterdam

rules• The (single) Euro is doomed; and what of the EU?

NorthCentre: Stakeholder capitalism

• Germany, Austria, Netherlands, Nordic countries.• Power is shared between shareholders and employees

with the state in the background.• Shareholders and employees both have long-term

commitment to firm. Both accept co-ordination within the sector.

• Results: • Long term investments in R&D and training.• Success in medium-high tech sectors: auto, machinery,

chemicals…. some high tech too (aircraft, medical equipment).• Moderation in wage increases.

The EuroSouth: family/state capitalism• Italy, Spain, Portugal, Greece• Power is not shared. Family capitalism dominates the

private sector. Unions are confrontational not co-operative. The state fills gaps in sectors and regions where families are too weak.

• State regulation instead of co-ordination by social partners, aimed to protect rents rather than generate wealth.

• Results: • Little long term spending on R&D or training.• Success only in low- or at best medium-low technology

(partial exception N.Italy, and less so, N.Spain.)• Tendency to relatively rapid inflation

3 adverse shocks for the Euro South• New entrants of 2004, 2007 increased competition for

low-tech producers within EU; sharply cut S entitlement to regional aid.

• Entry of China (et al.) into the world economy, massively increased competition for low-technology manufacturers.

• Arrival, from 1980s, of new techno-economic paradigm (information and communication technology) accelerated technological change and increased returns to knowledge. Meanwhile S. educational systems lagged far behind N. (see the PISA studies).

3 favourable shocks for NorthCentre • New entrants of 2004, 2007 increased competitiveness

of NCentre exporters, by offering close low-cost locations within EU for their lower-tech operations.

• Entry of China (et al.) into world economy, massively increased market for higher-tech manufacturers (e.g. machinery, Mercs).

• Arrival, from 1980s, of new techno-economic paradigm (information and communication technology) accelerated technological change and increased returns to knowledge. Meanwhile (some) N. educational systems lead world (see PISA studies).

< 50

50 - 75

75 - 90

90 - 100

100 - 125

>= 125

No data

Index EU 25= 100

Index of GDP per Capita

Contrasting responses to Euro entry

• NorthCentre sees currency union in which low inflation means high competitiveness (cf. situation with independent currency)

• EuroSouth sees Christmas come early: lower interest rates on money borrowed for consumption, construction

Consequences of uncompetitiveness

Hopeless indebtedness

External debt, end 2009, €bn./% of GDP

Share of external debt, General govt/financial corps/other sectors

Greece 385/ 162% 53/29/18

Portugal 381/ 233% 26/55/19

Spain 1779/169%

17/47/37

And still the South borrows more from the North

Current Account balance, 2010, $bn.

Current Account balance 2010 (estimate: % of GDP)

Austria +8.7 +1.5

Denmark +15.6 +2.3

Finland +6.4

Germany +179.0 +5.2

Netherlands +46.9 +5.8

Sweden +29.2 +6.8

France -51.5 -2.0

UK -33.7 -1.6

Greece -37.5 -6.2

Italy -65.3 -2.8

Portugal -23.5 -8.3

Spain -74.9 -4.2

Table 3: Current account balances (Euro zone in bold)

The discreet bankruptcy of the Eurozone banks

• Detailed information on the exposure of core banks to the periphery is not available. However, the Bank for International Settlements (BIS) estimates that Eurozone banks, as of December 2009, had exposure of $727bn to Spain, $244bn to Portugal, $206bn to Greece, and $402bn to Ireland. The sum total of exposure to the four countries came to $1579bn, of which $254bn, or approximately 16%, was government debt. The bulk (both private and public) was held by French and German banks. With regard to public debt, the BIS estimated that French and German banks held, respectively, $48bn and $33bn of Spanish debt, $31bn and $23bn of Greek debt, and $21bn and $10bn of Portuguese debt.

• Lapavitsas et al. 2010 pp.25-6, drawing on BIS (2010: 18-9) International banking and financial market developments, BIS Quarterly Review, June.

From The Economist, 21 Nov 2009

•  •  •  •  •  •  •  •  •  •  •  •  

Will the gap close?• Two key determinants of economic growth:

• Quality of education systemStudy in science, reading and maths at age 15• Quality of the state apparatusOne good indicator is Transparency International’s

Corruption Perceptions Index

Look at the slides which follow and ask why multinationals should invest in the EuroSouth when they can invest in the EU East.

The EuroEast is no more corrupt:Transparency International Corruption

Perceptions Index 2007 (1998)• Dmk 9.4 (10.0), Finld 9.4 (9.6)…other

N.Europe, and ex-British (HK, Singapore, Canada etc.)….

• UK 8.4 (8.7), Ger 7.8 (7.9) Irl 7.5 (8.2) France 7.3 (6.7) USA 7.2 (7.5)

• Spain 6.7 (6.1) Slove 6.6 Est 6.5 (5.7) Hung 5.3 (5.0) Italy 5.2 (4.6) Cz 5.2 (4.8)

• Slova 4.9 (3.9) Greece 4.6 (5.4) Pol 4.2 (4.6) Bulg 4.1 (2.9) Cro 4.1 Tur 4.1 (3.4)

• Rom 3.7 (3.0) China 3.5 (3.5) Ser 3.4 (Y. 3.0) Alb 2.9 Ukr 2.7 (2.8) Rus 2.3 (2.4)

And it is decidedly better educated……

OECD PISA studies: Educational levels of 15 year olds

in science (2006 scores), reading and maths (2003 mean

ranks) • Finld 563/1/2.5, Est 519, Slove 519, • Ger 516/19.5/19, Cz 513/21/14.5, Hung

504/26/24.5 • Dmk 496/19.5/15, Pol 498/16.5/24,

France 495/17/16• Spain 488/26.5/26.5, Slova 488/30/21.5 • Italy 475/28.5/30, Greece 473/29/32.5• Bulg 434, Rom 418,

Can’t pay, won’t pay: the Euro endgame

• Spain, Portugal and Greece must default (maybe not Ireland).

• But even then it is not reasonably possible for these economies to become decently competitive within the Euro.

• Either these countries must leave the Euro, or furious Northern countries may exit individually.

• The more weak countries leave, the higher the Euro will rise, and the worse the position of the weakest ones which remain – e.g. Italy.

• The only open question is whether the retreat from integration can or should stop with a Euro break-up.

• The imbalance between dynamic North and weak South means that even continuing free trade and movement of capital may be too much – allowing the North to become ever more dominant in an asymmetric relationship.

• Economic disintegration – ideally within a Southern free trade area – will not in itself be a solution – thoroughgoing reform of Southern education and (corrupt) states will be required for that; but it may be necessary for one.