There is an economic war raging. It is a battle for the hearts and minds of the competing countries’ citizens/voters. In one camp is the American-style version of capitalism in which the profit motive dominates and the social compact is a secondary consideration. In the other camp there is the social democracy model in which the social compact with the citizens takes precedence over the profit motive.
In the second installment in the Financial Times’“Globalization and the European Union” series, Nicholas Timmins, the public policy editor with the Financial Timesand author of The Five Giants: A Biography of the Welfare State(HarperCollins, 2001), describes some of the aspects of this battle of the capitalisms as they relate to the American style (what he calls the “Anglo- Saxon” model) and social democratic style (the “social model” welfare state).
In a recent commentary to my clients (March 2006), I addressed some of the key issues raised by Nicholas Timmins in his October 21, 2005, article, “EU Set for Clash on ‘Anglo-Saxon’ versus ‘Social’ Wel- fare Models.”
Timmins begins his article by outlining the central issue at work:
“Does much of mainland Europe need to break up its ‘social model’ wel- fare state in favor of an ‘Anglo-Saxon’ model along UK and US lines?”
Timmins describes how “the fundamental dispute will be at the heart of next week’s summit of the European Union at Hampton Court, heated by fears in France, Germany, and other EU countries that their generous jobless and pensions systems, whose benefits are often pegged to wages, could be slashed if replaced by far less beneficial pay-outs in the US and the UK.”
Timmins highlights the differences between the more social compact approach of the developed EU countries versus the U.S. and UK market- centric approach by quoting Richard Layard, an employment economist at the London School of Economics, who cautions that “painting a stark con- trast between the so-called ‘Anglo-Saxon’ model and the European ‘social model’ is to miss the point.
“The real distinction is between those countries that have had effective active labor policies, and those that have not.”
To illustrate this point, Timmins points out that “many of the Nordic countries have high levels of public expenditure and social protection but also high levels of employment thanks to policies that ensure those out of work are actively seeking to return to it.”
In contrast, the UK’s approach, which has been built around a “rights and responsibilities” agenda, helps crystallize the fundamental differences between the social compact approach between government and workers prevalent in many established and developed European countries and the more market-centric approaches of the United Kingdom (and the United States).
In fact, Timmins sees the approach taken by the United Kingdom as
“being drawn from the US.” In the United States, the market-centric, rights-and-responsibilities approach to worker relations is very strong. It permeates the political climate as well, and has placed American businesses in a strong global competitive position. In the United Kingdom, however, such a market-centric approach is not as deeply rooted.
For example, according to the Timmins article, John Hills, director of the Center for the Analysis of Social Exclusion (CASE) at the London School of Economics, says that “while much of the rhetoric and the jargon match that of the United States, many of the reforms have involved much more carrot and much less stick than in the US.”
In reality, many of the UK reforms were partly derived in response to the competitive advantage gained by such EU countries as Denmark and the Netherlands, which, through active labor market policies, began to push ahead of the United Kingdom. According to Timmins, what Layard argues is that similar programs “have helped Ireland and now Spain and others produce dramatic falls in unemployment.”
This shift toward a more market-centric approach to labor has put competitive pressures on all EU countries. In fact, Timmins points out that
“both France and Germany have taken steps down this road, although rather more dramatically in Germany than France.”
Timmins was prescient in his comments as Germany began to experi- ence labor unrest in the late winter of 2006 with strikes by various unions.
Related to this is the disparity in incomes between various worker classes. For an approximately 20-year span, from the mid-1970s to the mid-1990s, Timmins points out that in the United Kingdom “income in- equality rose dramatically, further and faster than in almost any country in the world.”
However, since the mid-1990s the income inequality trend was halted.
And, according to a recent analysis by CASE, thanks to a series of new tax credits (and higher employment), “the UK has made a significant step on the road to bringing child poverty down towards average EU levels.” These developments have helped to alleviate some of the child poverty in the UK
“at a time when other high poverty countries within Europe have seen child poverty rise.”
Timmins also notes that “while it is true that many of the UK’s welfare- to-work policies have seen the financial position of childless adults who re- main out of work worsen, . . . the improvement in the number of poorer pensioners has been cut by a quarter since 1997.” The result has been a de- cline in the United Kingdom’s overall poverty rate, so much so that the country compares favorably with the rest of Europe.
However, despite the United Kingdom’s fine progress and while income inequality has ceased to get worse, the government’s policies have yet to eliminate the still significant income disparity.
The picture is, as Timmins notes, complex.
In the early years of the twenty-first century, while “the poor have seen their position improve relative to the middle of the income distribution”
curve, “some of that improvement having come directly from [UK] welfare- to-work programs,” what has not been impacted is the fact that the rich continue to get even richer at a quickening pace—creating a further income disparity between the rich and very rich versus all other classes.
This trend is also true for the United States and is an area of potential populist politics.
What Timmins and others have highlighted are the challenges faced by the “social welfare models” of developed Europe in a globalized world. If part of the purpose of a government is to help those who cannot help themselves or are in temporary need of assistance, then a solution is needed for how countries like France and Germany, with their highly socialized re- lationships with their citizens, are going to attract and keep the capital nec- essary for businesses to compete.
With the free flow of capital, money knows no borders. It will gravi- tate toward those countries that offer the best rates of return.
How the developed EU countries will balance these issues remains to be seen.