London, 24/11/2009
Thanks to the European Business School for this invitation, and not least for the chance to renew my duels with John Cridland, sometime partner, sometime adversary, but always well respected in whatever guise he appears, however dastardly.
Since John and I last debated, we have had the biggest case of market failure in human history. The potential debts of rescuing the UK banks are somewhere in the region of 1.5 trillion pounds, 1 ½ times our GDP. And while Wall Street was the main source, London was an enthusiastic player in the casinos of financial capitalism.
Meanwhile even a 25% devaluation of the pound relative to the euro is not prompting the surge in exports that normally follows major devaluations. Perhaps we will soon see big improvement – I hope so – but the sluggish response suggests that British industry may possibly be too anorexic and too feeble to take advantage of this huge potential gain of competitiveness.
I don’t blame it all on John, or even on the CBI! But pre-crisis I did not notice – may be I missed it – the CBI raging against the unbalanced nature of the UK economy, with on the one hand, an overblown, over-mighty, overpaid financial services sector and, on the other, an over-leveraged, low investment, shrinking manufacturing sector.
Well I’ve got those points off my chest.
But tonight is not primarily about points scoring or about Britain, or even Britain in Europe, but about Europe and the world.
Let me start by referring to some facts about Europe’s many achievements, too often overlooked in this country:
- It now has 27 members with others queuing up to join;
- a project which has reintroduced and reinforced democracy in the former fascist countries of Greece, Portugal and Spain, and more recently in 10 former Communist states;
- a union of 490 million citizens and a GDP which is 30% of the world with the best welfare states, public services and generally applicable employment standards anywhere in the world;
- a single market, common negotiations on trade deals and a competition policy which has, inter alia, made possible cheap air travel, and has had the guts to take on the market domination of Microsoft;
- free movement of labour and the emergence of a single European labour market;
- and of course, 15 countries sharing a single currency, the euro, whose major problem, unlike sterling, is that it is too strong; and again there is a queue forming of countries wanting to join.
In the social sphere, the achievements were well described in a pamphlet by David Lea and Stephen Hughes MEP.
Key features include four weeks paid holiday, a voice at work through information and consultation rights and European Works Councils, protection for migrant workers, fixed-term and part-time workers, a wide raft of health and safety standards, equal pay and sex discrimination laws and, most recently, a directive on equality for agency workers.
These are the laws which are labelled by the Conservatives as the excesses and abuses of social legislation when in truth, they are Europe’s most popular feature, and not a matter of controversy anywhere else.
The measures are being exported to the applicant states, as it is an obligation on them to introduce these measures as they are joining the EU. In this way, free trade unionism and social dialogue together with democracy are being strengthened throughout Europe.
These are all substantial achievements although the social ones were initially opposed by successive UK governments egged on by the CBI and a new opt-out as proposed by Mr Cameron would be another depressing low point in Britain’s relations with the EU. Everyone is out of step except us.
In fact, the current recession is proving the virtues of social Europe. Before the crisis, the business world’s pressure was all for less red tape, lower social standards, more liberalisation and, in truth, less trade union influence.
Now social Europe, with its welfare states, is riding out the crisis in rather better shape than the USA, where unemployment is above 10% and where the loss of a job often means a loss, not just of income, but of family health care and pension entitlement as well. And in truth, the best EU examples are using publicly supported short-time working schemes to keep down the level of unemployment rather more successfully than the UK. In the Netherlands, the fall in GDP is about the same as in the UK but unemployment is only around 5%.
I acknowledge the scope for reform.
That’s why the ETUC made an agreement on ‘flexicurity’ with Business Europe. This is a concept developed in Denmark to give individuals employment, rather than job security, with good benefits and income protection, skills and opportunity for work rather than be tied to a job which might become redundant.
But it also means employers being responsible and adopting long-termist perspectives as much as possible.
And this brings me to what I hope will be the next question to be faced by social Europe – how can we apply the social market throughout the EU and modify Anglo-Saxon capitalism to act in more responsible and more long-termist ways?
I don’t accept the argument that globalisation means that we must all face downward pressure on living standards. I am less worried, frankly, about China and the rest of Asia that I am about the demands from investors for short-term gain.
Herr Ackermann of Deutsche Bank famously declared 20% as the new norm for an acceptable return on capital.
Investment banks, hedge funds and private equity, and capital markets more generally, were working on that basis until the recession, and many investors continue to do so even though inflation is negligible.
The pressure on companies, certainly in the English speaking world, but increasingly more generally, is to provide high profits regularly and quickly. As one London investor told me – “I do have long-term investments; they are short-term investments that have gone wrong”.
The result is that CEOs more and more resemble football managers. Two bad sets of quarterly reports and you are out. The tenure of chief executives is getting shorter and often ends in failure, or judicious escape. A new, whizz kid Messiah is then recruited and comes in with a message of change and a mandate to restructure as he or she aims to pump up shareholder value. Financial engineering is becoming the dominant skill of too many chief executives.
This system brought our banks to the edge of disaster – and it has made many companies anorexic and fragile. For short-term reporting, investments are cut, research and development is cut, training is cut, jobs are cut – and cost-cutting of this kind, which is like a farmer eating his seed corn, is, too often, applauded, and rewarded, in the investment community.
The system of quarterly reporting and linking executive pay to short-term shareholder value has become a monster, unsustainable for many companies once they move into maturity.
Frankly the system is too tough. It breeds greater income inequality, and workers bear the costs.
There are, fortunately, impressive examples of best practice and no-one gets more pleasure than I about change being handled smoothly and successfully by employers and unions. I have a long commitment to the partnership agenda. But it is not easy to implement when so many company chiefs and styles change like the fashions in Paris or Milan.
All concerned need to review corporate governance so that it reinforces long-term profits and partnerships rather than just rewards get-rich-quick spivs. The present systems are often not fit for purpose.
Tale climate change, that other big crisis that we face. Developing the means of combating carbon emissions is expensive and I am far from clear that the investment and financial services worlds regard this sector as a good bet, unless there are incentives and guaranteed markets based on public money and policy. Yet the restructuring implications are enormous for sectors with high carbon emissions, and if they are to survive, they will need public help – yet for the next few years with all the pressure on budgets, it is hard to see where and how that help can be funded.
In the early 1990s, Will Hutton sold 40.000 copies of a book “The State We’re In” where he extolled the German style stakeholder economy over the shareholder value economy. Has he not now been proved right? And should we not now move in the UK to embrace the social market economy that is proving its worth in many parts of the EU in the current tough times. That’s my challenge to John and to all of you tonight.