MPIfG Working Paper 97/6, June 1997
The Future of Continental Socio-economic Models
by Michel Albert
(Membre du Conseil de la Politique
Monétaire, Banque de France, Paris )
MPIfG Lecture Series Economic Globalization and National Democracy, lecture
given on June 12, 1997
Michel Albert studied law. After his doctorate he went on to the Ecole
Nationale d'Administration and then joined the civil service as Inspecteur
General des Finances. From 1976 to 1981 he served as the head of the
Commissariat du Plan. In 1982 he became president of an insurance company,
Assurances Generales de France. He also served for several years as president of
the International Association of Christian Businessmen. In 1994, Michel Albert
became a member of the Council for Monetary Policy of the Bank of France. In the
same year, he was elected a member of the Academy of Moral and Political
Sciences. His book "Capitalisme contre capitalisme" (1991) has been
translated into 19 languages.
(This paper was translated from the French by
0 Are There Several Continental Models?
1 Is Current Opinion Biased by Contrasts between Business Cycles?
2 Do the Structural Problems of the Rhenish Model Make the American
3 The Future Path of the Rhenish Model Will Go Via the Euro and European
0 Are There Several Continental Models?
A philosopher once said that making predictions is a
dangerous business, especially making predictions about the future! But that's
exactly what I've been asked to do, and in a particularly dangerous area, as it
is one that is not governed by any form of determinism. The only economic model
based on a deterministic view of economic history is the communist model, and we
all saw how it collapsed in a way that was least expected.
To take an example on a completely different scale, but
nevertheless a significant one, who would have thought 15 or so years ago that a
country such as Ireland, which seemed to be afflicted by a secular curse, would
take off in such an astonishing manner that its output per capita would overtake
that of Great Britain?
Thus I shall temper my rashness in approaching this
subject and would ask you in advance to excuse any shortcomings.
The second comment I would like to make as a preliminary
to this talk is to ask whether, as far as continental Europe is concerned, we
really are justified in talking about economic models in the plural? One might
be tempted to answer in the negative considering what current events keep
emphasising, namely that all the members of the European Union on the continent
share at least two major features: a slow rate of growth and mass unemployment
without precedent in the present day and age and unique worldwide. However,
these two common difficulties are not enough to define a common socio-economic
Thus my first step was to consult a book that, to my
knowledge, is the best on the subject, Les capitalismes en Europe.
However, I have to admit that, in my opinion, the book does not provide a
decisive answer to this question.
The first chapter is devoted to "the particular
circumstances in Japan" and goes on to study four countries, of which, in
my opinion, only one fully deserves to be considered as the centre of an
The first case to be examined is entitled "The
Swedish model in transition to neoliberalism or to the German model?" This
single question sums up the entire topic, and I have nothing to add to it except
perhaps to pay tribute to the remarkable efforts undertaken by the Swedes to
retain the essential features of their much-celebrated traditional social model,
while at the same time adapting to the new constraints imposed by economic
competitiveness. After Sweden, the book takes a look at Italy, and here, too,
the chapter title is particularly revealing: "The different forms of
capitalism in Italy". The following question is posed, but is not answered
either: "Should Italy be considered as a national entity or merely as a
juxtaposition of regional models, each characterised by a specific form of
interaction between the economy and institutions?"
The next chapter deals with France, and it can be assumed
a priori that France is a country that is both significant enough and
distinctive enough to be worth considering as a model in both senses of the word.
First of all, a model is an example to contemplate, if not to imitate. In this
respect, economic and social development in France was considered exemplary in
the 1950s and 1960s, but it seems to me that it lost this virtue with the oil
crisis and the socialist experiment of 1981. More importantly, France cannot be
considered as a model in the second sense, i.e. as a simplified prototype
representing a more complex system. Indeed, I regret to have to say that, in my
opinion, France's socio-economic system is too complex to be able to be
accurately reduced to such a simplified model (although I might not be in an
ideal position to form such an opinion). This is true to such an extent that, in
1991, when I presented my editor with the draft of my book entitled Capitalism
Against Capitalism, he criticised the fact that I had not written a chapter
on France. I went away and wrote one to satisfy him, basing the chapter on a
long quotation by someone who was undoubtedly better placed to comment on France
than myself, namely an Italian professor by the name of Romano Prodi, who, as
you know, has since gone on to assume positions of great responsibility. This
quotation was taken from an article with a particularly revealing title: "Between
the two models."
Allow me to read you an extract to save my coming back to
the subject, however much my own country interests me:
"As far as France is
concerned, the country has never wholly opted for one or the other of these
models. The stock exchange and the financial markets have traditionally only had
a modest role to play. The size of the stock exchange in Paris in comparison
with the London stock exchange is simple and unequivocal proof of this. Moreover,
the phenomenon of banking groups being set up or structures of ownership being
established similar to those seen in Germany has not occurred, whereas public
enterprises - both industrial enterprises and companies in the banking or
insurance sector - have always played a decisive role. Particular attention
should be paid to the developments that took place in the 1980s, even if their
significance is ambiguous. In 1986, prompted by the then Prime Minister Jacques
Chirac, the Minister of Finance Balladur did in fact draft a plan for the
extensive privatisation of public enterprises. (...) The initial motivation for
this new policy in France may suggest that the objective was to move closer to
the Anglo-Saxon model in that the size of the stock exchange was to be increased
However, the way in which this
privatisation was carried out constituted an 'objective' premise in moving
closer to the structures of ownership found in the Germanic model. In all the
privatised companies, the power of command lies with the 'hard core', although
it only accounts for 25% of the shares. By means of skilful intertwinement of
shareholders, who have become increasingly rationalised, several large financial
and industrial groups are in the process of being set up in France. From the
point of view of ownership and the stability of their contacts, these groups
tend more towards the Germanic model than the Anglo-Saxon one, even though the
system is infinitely less dense and impervious than in Germany.
Moreover, there are still a large
number of publicly owned enterprises in France that do not correspond to either
the Anglo-Saxon system or to the Germanic one, although during the past few
years the strategy pursued by public enterprises in France, especially as far as
the acquisition of foreign companies is concerned, draws its inspiration more
from a Germanic than from an Anglo-Saxon form of logic."
Allow me to add a brief personal comment concerning the
last point. At the time (in the early 1990s), I was the president of a French
insurance company, AGF, which had bought 25% of the German insurance company AMB
on the stock exchange. This was completely legal; however, the Commercial Court
in Aachen refused us voting rights as shareholders. I found this judicial
decision very enlightening about what I have since referred to as the "Rhenish
The significance of this term is based on two points:
Firstly, the group of countries around the Rhine
Valley have several economic and social characteristics that are very
similar and that constitute the central model of continental Europe, a model
that is both the most original and the most advanced. For this reason, I
suggest that we consider in the singular the question that was put to me in
the plural and that we concentrate on the problems facing the Rhenish model
in the future.
This Rhenish model of capitalism is profoundly different from the
Anglo-Saxon model and above all from the neo-American model that emerged out
of the revolution under the Reagan administration.
Portraying these models as opposites is no doubt something
of a caricature; nevertheless, it appears to me to be to some extent an
illuminating one, as my book has been translated into 19 languages. Above all,
since it was written in 1991, there has been a radical change of perspective:
today, the prevailing opinion is that the neo-American model is the only way
open to those countries who wish to succeed in the 21st century, while on the
other hand we are constantly having to listen to a chorus of laments on the
failure and the doomy prospects of the Rhenish model.
The only music we hear is a kind of Rhenish requiem. Is it
Before discussing this point, allow me to remind you
briefly of the distinctive features of the Rhenish model. I do not of course
intend to enlarge on the subject and would merely like to emphasise four types
of distinctive features:
a) The first two features are of a macroeconomic
The Rhenish model is characterised by the "social
market economy." This social objective results in the extensive
development of social protection, leading to an increase in compulsory
levies, which are much higher all over Western Europe than in the United
States or in Japan.
The Rhenish model of capitalism is institutional,
collective and based on consensus. It is built up on the development of the
role of agreements between the "social partners,"
i.e. employers and trade unions, especially as far as working conditions and
remuneration are concerned. Codetermination - the involvement of works
councils in the management of the major German companies - is probably the
most characteristic institution.
b) The other two features are of a microeconomic
The task of enterprises in the Rhenish model contrasts
with Anglo-Saxon ideas about the "shareholders' value". This task
corresponds to the "stakeholders' value," i.e. it consists in
reconciling the interests of clients, employees, shareholders and the social
environment in general.
The realisation of this task is favoured by the stable
financing of enterprises; the role of the banks is much more important than
that of the stock exchange, resulting in a stability of capital which
encourages stable relations between the social partners, but which may
constitute an obstacle to the changes that are necessary in the face of the
technological revolution and economic globalisation.
These introductory remarks put me in rather an awkward
position, because they mean that I have to concentrate on a subject that I know
a great deal less about than you do, as it forms the topic of your daily
Thus I would ask you to be indulgent with me, and I can
assure you that I will pay close attention to what you tell me after my brief
talk, a talk which I may add will leave you with many more questions at the end
1 Is Current Opinion Biased by Contrasts between Business
The case of Japan is striking in this respect. At the
beginning of the 1990s, American companies found the superiority of the Japanese
methods of management so terrifying that General Motors imported the methods of
"toyota-ism." Some years later, in 1995, Japan's competitiveness had
come to an end, as had its growth, which was nearly zero, despite a huge budget
deficit and a monetary policy that was so accommodating that the curve of
interest rates flattened out between 0.5% and 2.5%. The dollar was worth 85 yen.
In the spring of 1997, it was worth 125 yen, and suddenly opinion changed once
more. Japanese competitiveness was denounced in Congress as a danger to the
American economy, particularly as far as the car industry was concerned.
Such is the way of the world: even more cyclical in its
opinions than in its macroeconomic developments.
A similar phenomenon occurred in the competition between
the Rhenish model and the neo-American model. In 1990, West Germany showed a
performance that was unrivalled at an international level, as demonstrated by
Professor Wolfgang Streeck, and it was easy for me,
in Capitalism Against Capitalism, to show
at that time that the Rhenish model embodied the most remarkable reconciliation
ever obtained in the course of history between economic efficiency and social
solidarity. This analysis was scarcely disputed. At the time, the USA was in the
middle of a recession, and all that people talked about was the American decline.
Fortune magazine published a long article entitled "'Made in the
USA' on the Road to Extinction," and, in an extensive report called Made
in America, the MIT undertook a gloomy examination of the reasons for the
large-scale industrial decline in the United States.
Since then, economic conditions have radically reversed
between the United States and continental Europe. Since 1992, the United States
has been experiencing a period of growth, something that is all the more
remarkable because this growth has been continuous and non-inflationary,
leading to a twofold increase in the quoted values on Wall Street.
In contrast, continental Europe, which was hit by
recession in 1993, has never recovered. This recession has been particularly
severe in Germany, where growth, which had been greatly accelerated by
reunification over a period of 2 years, subsequently slumped in the Länder
of the former East Germany from 1995 onwards.
The pessimism that is currently rife in Germany is on the
same scale as the euphoria that broke out after reunification and centres on the
phenomenon of unemployment: in 1990, the levels of unemployment in the United
States and in Germany were identical (7% in both cases). At the beginning of
1997, while the United States is enjoying full employment (5.3%), the
unemployment rate in March in reunified Germany was 11.3% (9.8% in the West and
17.3% in the East). Moreover, according to the IMF, the percentage of
unemployment of a structural nature is approximately 9%. These realities have
been overamplified by an emotional reaction in which the media have at times
gone so far as to evoke the precedent of the Weimar Republic! The cyclical
nature of opinions in the current day and age thus reaches new heights ...
This romantic interpretation of developments in the
economic climate detracts attention from what is actually a central phenomenon,
namely the inadequacies of European structures faced with the new macroeconomic
problem since the beginning of the 1990s. The first weakness consists in the
fact that the costs of reunification were not considered as a Community problem,
but as a national one. As a consequence, Germany has undergone budgetary and
inflationary pressure, which naturally led to monetary policy being tightened,
with a rise in real interest rates that has had repercussions to a greater or
lesser extent in all of the countries belonging to the European Monetary System.
On the one hand, this has resulted in diverging developments which, due to a
lack of co-ordination at the European level, led to the major foreign exchange
crises in September 1992 and July 1993; these crises in turn led to the
devaluation of the pound, the lira and the peseta, in particular. The disorder
that ensued suggests that it would have been in the common interest for the
European Community to contribute to the budgetary assumption of the huge costs
Instead, a policy of "each man for himself" was
pursued, despite the undertakings signed at Maastricht, with unacceptable
increases in the budget deficits in the majority of the member states of the
European Union. Action has only been taken from 1995 onwards. However, all the
countries launched a frantic effort to reduce these deficits, and the obvious
effect of this simultaneous action was to make growth slacken even more
throughout the Community and to make it even more difficult for each country to
fulfil the famous 3% criterion.
Thus Europe's image has suffered dangerously at the same
time as that of the Rhenish model; instead of bringing economic prosperity and
social justice, both are now having to face the charge of having fallen into low
growth and unemployment following a turnabout in economic conditions that has
been considerably magnified by the media at a psychological level.
It thus becomes clear why prevailing opinion has a simple
answer to the question asked, and that answer is that the future of the Rhenish
model lies in Americanisation. Even though, in June 1996, 300,000 demonstrators
protested in Bonn against this prospect, and even though Chancellor Kohl
keeps repeating that he will not accept an American-style society.
2 Do the Structural Problems of the Rhenish Model Make the
American Solution Necessary?
Can the main structural difficulties of the Rhenish model
be summed up in the excessive cost of labour? In this respect, in its latest
report (June 1996), the Bank for International Settlements in Basle published
the table shown below, which I find particularly interesting.
This table is particularly interesting because it shows
that the overall hourly costs of labour in German industry are 82% higher than
in the United States. Admittedly, this very high figure is partly due to the
fact that the value of the dollar was particularly low in 1995.
From a short-term point of view, these extra costs
obviously constitute an enormous handicap for German companies. From a more
structural point of view, however, the fact that - in contrast to the situation
in the United States - the balance of trade in Germany has always been in
surplus despite such extra costs can be attributed to a greater level of
efficiency in German industry. It is justified to add that this superior
efficiency is the result of the very application of the Rhenish model, with its
consensus between the social partners, the role of vocational training and the
loyalty, dedication and pride in their work that employees show... Are these
values outdated, irrevocably banished by the new conditions created by modern
technology and international competition? There is no reason to claim this is
true, even if in certain areas computerisation enables standards to be reached
that could previously only be obtained by very high levels of professional
However, the rapid increase in direct investment by German
companies abroad at a time when direct foreign investments in Germany have
shrunk dramatically is a warning sign: if labour costs in Germany were to stay
rigid, the competitiveness of German industry on the international stage would
suffer further, as would the level of employment. The future of the Rhenish
model depends more than anything on its ability to adapt in this respect.
Given the resistance to lowering nominal wages, it is
clear that it is the social costs that are going to have to be influenced. John
Major was not entirely wrong in saying "jobs for us, social security for
you (continental Europeans)." It is difficult to imagine a better
illustration of this than the one shown in the table above: in 1995, the
non-wage labour costs alone paid by German industry amounted to the same as the
total labour costs in England (45 in each case).
In other words, it is hard to imagine how the Rhenish
countries (which are all in a similar situation in this respect) will be able to
withstand international competition without a dramatic reduction in the costs of
social security. Throughout continental Europe, people are deeply attached to
the principle of the universality of social welfare for all. If people are not
willing to give up this principle in order to concentrate on the most
disadvantaged groups, it is difficult to see how they will be able to avoid
sooner or later being forced to follow the example of the new conservative
revolution in America, i.e. to exclude the most needy from the right to enjoy a
basic standard of living and to support them only through more or less random
2.3 Making working conditions more flexible
Up to now, the countries of the Rhenish model have on the
whole benefited both from an increase in the purchasing power of wages and a
reduction in working hours. This combination of two forms of "social
progress" should probably now be considered as being called into question
by the new conditions of international competition and in particular by the need
to give new priority to the profitability of enterprises. Moreover, it seems
that the German trade unions are now well aware of this, with the IG-Metall
suggesting a 32-hour week in 1999 but accepting a wage cut.
If we look at what is actually taking place in companies,
it seems that a great deal of progress has indeed been made over the past few
years in most sectors. If the extent of this progress appears to be limited,
this is due to the necessary latency period.
Anyway, at least two points in this debate remain to be
On the one hand, some suggest that the collective,
liberal and consensual form of management seen in the "social market
economy" was suited to relatively stable situations, but that it is no
longer suitable in the new age of technological acceleration and
uncertainties of competition, in which job security becomes a nuisance.
After a period of several years during which
Anglo-Saxon managerial thinking advocated methods of management and
organisation that were increasingly restrictive (something that is indicated
by expressions such as "reengineering" and "downsizing"),
a new current of thought can now be observed according to which good
management of a company in the long term should rely on the classical
methods of the Rhenish model and in particular on relationships of trust
based as much as possible on job security. Thus Professor Dieter Läpple
went as far as to wonder whether "the following question might arise
after a time: can the Americans avoid taking on the European model?"
Until the Rhenish model crosses the English channel, too,
its future will no doubt be largely determined by the development of financial
structures and particularly by shareholding.
Although I cannot address this huge question here, I would
nevertheless like to comment, as Prof. Streeck has done, that it is an inherent
problem of the social market economy. Indeed, the financial sector functions
"as an economic infrastructure in order to establish a model of production
that is compatible with social objectives such as the reduction of inequalities
(...). However, just like the labour market, the German capital market is
becoming diluted in its international environment." This phenomenon took on
a symbolic character in 1993, when the Daimler-Benz group decided to radically
alter its global strategy and to be quoted on the stock exchange in New York.
Since then, German finance has rapidly moved closer to the Anglo-Saxon model and
is propagating a new "equity culture" in companies that is all the
more appealing, especially for the new generations of management executives,
because it is accompanied by the distribution of stock options. In the Rhenish
model, the bank prevails over the stock exchange, and in the Anglo-Saxon model,
the opposite is true; at present, in Frankfurt, Zurich and Amsterdam alike, the
stock exchange is relentlessly gaining ground on the bank.
The significance of this development is ambiguous:
Since the financial markets are technically more
efficient than intervention by the bank, this development favours the
competitiveness of those companies that are able to benefit from it.
On the other hand, the strategy that companies follow
is increasingly being determined by their shareholders. To what extent is
the internationalisation of capital in Rhenish enterprises compatible with
the practice of "stakeholders' value"? This is still an open
Nevertheless, there is an area in which the development of
the most modern financial techniques links up with social progress by creating
new jobs, and that is the development of risk capital, following the example of
the American NASDACQ. In this context, it is interesting to note that the French
Society of the New Market has taken the initiative and created a European group
with an economic interest called EURONM, in which as of now the "New Market"
departments of the stock exchanges in Frankfurt, Amsterdam and Brussels are
3 The Future Path of the Rhenish Model Will Go Via the Euro
and European Political Union
All the problems of the Rhenish model, both those of a
cyclical and those of a structural nature, are directly or indirectly associated
with the difficulty of reconciling the competitiveness and creativity of an
enterprise with the costs of social security, costs that are becoming
increasingly high due both to demographic factors and to medical progress.
Throughout continental Europe, the vitality of the economy and its ability to
create jobs increasingly depend on the reduction of labour costs and on firms'
Whatever the significance of the European Social Charter
and the possible impact of its future developments, the fact remains that social
questions will essentially continue to be governed by decisions that are taken
at the national level. This is dictated by the principle of subsidiarity, but
above all by the following two facts: Firstly, the practices of working out and
negotiating labour relations are the result of cultural phenomena of an
essentially national character; secondly, all the systems of social security
were set up based on the principle of national solidarity. However, this
national solidarity is now being put to the test. Up to now, it has allowed
social insurance to be generalised to cover the entire population; if it is to
remain financially feasible, changes of focus are now going to have to be made
in order to give priority to the most needy. A certain degree of segmentation
will necessarily have to be introduced instead of the principle of universality
that has been applicable up to now. Such a reform will be all the more difficult
to implement because, in the majority of the countries in continental Europe,
and particularly in those of the Rhenish model, social security lies less in the
competence of the state than in the responsibility of the social partners, who
are particularly attached to the principle of equality.
These reforms, which are of an essentially national nature,
will be all the more readily accepted as the prospects for growth and employment
improve at the European level. However, in this respect, much depends on what
happens at the deadline set for the Euro and on subsequent developments from the
point of view of European Political Union.
Let us take a brief look at the two main contrasting
a) The "Postponement-Failure" Scenario
If the deadline set by the Maastricht Treaty of 1 January
1999 had to be postponed, for whatever reason, this would mean more or less
failure of the project of the single currency and all that it entails.
In order to assess the immediate consequences of this
failure, we should remember first of all that, since the beginning of 1996, the
markets have placed their bets to a very large extent on the Euro being
introduced on schedule. Huge commitments have been made, for instance, on the
basis of the opinion that, as of 1999, the German mark and the French franc will
be one and the same currency. It is this in particular that explains why long
rates have become almost identical in Germany and France.
If this bet were to be lost, the following divergence
In the majority of the Rhenish countries, beginning
with Germany, the currency would rise in value, which would choke growth,
further increase unemployment and lend credence to particularly gloomy
In contrast, in the majority of the Latin countries,
the currency would depreciate and interest rates would rise dramatically,
making it extremely difficult to control public debt.
For both groups, this would mean the end of any
European model conceivable with reference to the "social market economy."
Inevitably, this would lead us into a perverse logic
involving an increase in national unrest. The European Union would give way to
disunity, and it would not be long before Germany's neighbours began to suspect
that Germany could yield to what one might call "the Berlin temptation."
b) The "Euro-Europe" Scenario
This scenario perhaps deserves to be examined using a
concrete example. At the beginning of 1997, Ford announced that it was going to
stop production of its Escort models in Great Britain (Merseyside) in favour of
production sites in Germany and Spain. Thus, "although wages in Germany are
twice as high as in Great Britain, Ford is going to transfer part of its
production to Germany. This step was justified by the fact that the level of
productivity in Ford's factories in Great Britain is considerably lower, as well
as by the geographical location of the German factory in Saarlouis, in the heart
of Europe. In this context, the possibility cannot be excluded that, in choosing
its site, Ford was already anticipating that Great Britain probably would not
join European Monetary Union." The directors
of companies such as Toyota, Mitsubishi and even Unilever have let it be
understood that, on the basis of the same hypothesis, they too could envisage
directing their investment more towards continental Europe.
The single currency will be a phenomenon of huge
importance for Europe's dynamism. From the point at which price comparisons
between all the countries that have joined the single currency become completely
transparent, companies will be motivated to invest, innovate and be creative and
will have a solid base on which to face the great challenge of globalisation.
Thus one of the major French companies is preparing to
group together its factories, which are currently spread throughout the most
important countries in Western Europe, so as to specialise each of them at the
level of the single currency area. In approximately 5 years, this will result in
a decrease in costs of 15-20%. From then onwards, this company will no longer
have to fear any other on a world scale.
This entire scenario is of course based on the Euro being
introduced in accordance with the Treaty. In this context, I have to smile when
I hear people claim that Germany might well not pass the test to join the single
currency in Spring 1998. We only have to remember that the objective of the
Maastricht criteria is to create a European currency that is as stable as the
German mark in order to see how strange such claims are - they amount to saying
that Germany is not fit to have the German mark as its currency!
2 Colin Crouch and Wolfgang Streeck (eds.) Les capitalismes
en Europe. Edition française La Découverte 1996.
3 Il Molino, issue no. 1, 1991.
4 This concept is often unknown in
5 See footnote no. 2.
6 Capitalism against Capitalism,
7 Speech at the Institute of Political
Studies, Paris, February 1997.
8 Prof. Dieter Läpple, speech given at
the Institute of Political Studies, Paris, February 1997.
9 Meanwhile, direct foreign investments
are turning away from Germany and direct investments abroad by German companies
are increasing. Any upset in the timetable for the single currency would
inevitably strengthen these two developments.
Copyright © 1997 Michel Albert
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