Capitalism Vs. Capitalism

When we make a deliberate effort to remember the events of the past – even the recent past – we again become aware of the extraordinary surprises history is always waiting to spring on us. Let us examine for a moment the situation at the end of World War 2: the U.S.A had triumphed, the atom bomb having sealed its dominion over the planet. Spared the ravages of war on its own territory, America was both a military and an economic superpower; as such, it could afford to devote its budget surpluses to the rebuilding of a war-torn Europe under the Marshall Plan, rather than cutting taxes at home. The Soviet Union was not yet in a position to defy American power with any degree of consistency, as the Berlin crisis demonstrated. Everywhere, the American Way of Life, which the G.I's seemed to wear as proudly as their uniforms and to distribute with every stick of chewing-gum, was a source of fascination. Even America's defeated foes found her culture irresistible.

But the two major Axis powers, Japan and Germany, had paid a horrific price: their cities in ruins, their industries shattered, their people in shock as they surveyed the scale of the disaster which their leaders had plunged them into. In the rubble of Dresden and Nagasaki, in the wreckage of Berlin and Hiroshima, the evidence of a cataclysm without precedent was there for all to see and to mourn.

The vanquished emerge victorious

Less than half a century later, on 19 October 1987, a financial crisis looms: Wall Street is heading towards a crash. The U.S Government has to move, and move quickly, to avoid a major catastrophe. The decision is taken to administer a massive injection of cash into the financial system: the Federal Reserve Bank opens the taps and the dollars flow. But before doing so, it was necessary to consult with, and obtain the agreement of, two institutions – the Bank of Japan and the German Bundesbank. Few observers paused, in the midst of global panic, to savour the irony of this extraordinary reversal of fortunes.

Two years later, the Federal Republic of Germany was able to achieve its longstanding goal of reunification by virtually 'buying up' the G.D.R, whose bankruptcy was by then manifest. Other nations may have had doubts, but West Germany had the money and the means to sweep aside all objections. By the end of 1989, with reunification a certainty, not only was Bonn seeking no aid, no outside support, but it was actually concluding an agreement with Moscow which amounted to the financing – by Germany – of the repatriation of the Red Army divisions stationed in East Germany. This meant that the Germans would eventually be paying for new barracks to be built on Soviet soil. There could be no better illustration of the fact that Germany was now so rich that it could buy its independence – and not on the instalment plan: in cash, and in full.

The two defeated nations of World War 2 had thus achieved the status of economic giants, challenging America's position of worldwide leadership in business and finance, all in less than two generations. Their success is not, of course, the product of exactly the same factors or motives: there are traits which are specific to the Japanese economy, others which apply only to Germany. But, though not identical, both economies have so much in common that the hypothesis of an alternative, and largely superior, model of capitalism can at least be posed.

The superiority of the Rhine model is manifold, as we shall see; but let us begin with an analysis of the economy, source and symbol of real power. In a world entirely won over by capitalism – not least because its ideological foe has simply collapsed – power will flow to those who, in the first instance, know best how to exploit the system for economic gain. From such a perspective, the Rhine economies look strong – and their strength is increasing daily.

To begin with, there is the hugely important question of a nation's monetary system, as indicated by the health of its currency. There is no denying that the U.S dollar continues to enjoy the prestigious status – somewhat diminished since the end of convertibility in 1971 – of a world standard currency, as conferred on it by the 1944 Bretton Woods accord (see Chapter 2). But neither is there any doubt that this long reign is increasingly under attack from the newcomers, the mark and the yen, as they nibble away at the dollar's supremacy.

The German and Japanese currencies together now account for about 20 per cent of central bank reserves worldwide – twice what they were 20 years ago. This is in spite of persistent efforts by the Bundesbank and the Bank of Japan to restrain a too-rapid expansion on the world money markets and maintain control over their currencies. It is anyone's guess what the mark or the yen would be worth today if the central bank authorities in Bonn and Tokyo had taken a more relaxed attitude.

The change is not just quantitative; it represents a psychological turning-point. The mark and the yen are now universally perceived as strong currencies, and assets quoted in them are seen as safe investments (especially in the case of the German mark). Both stand at the center of new, geographically defined monetary zones which exert a powerful attraction on the currencies of neighboring states.

Hrh the Deutschmark

Perhaps the most graphic illustration of this is to be found in the European Community, whose monetary system (the E.M.S) goes back to 1978. On the initiative of Helmut Schmidt and Valéry Giscard d'Estaing, the E.C created the notorious exchange rate mechanism (E.R.M) which, as everyone knows by now, meant linking the different European currencies (with a few exceptions, such as the U.K before 1990) in such a way that they could no longer'float' independently of one another, except within very narrow pre-established bands. The ecu was created at the same time to serve as the monetary unit of reference; its value is based on a'basket' of European currencies.

The E.M.S had two main aims: to limit the extent of currency fluctuations, which undermined the stability of intra-Community trade relations; and to impose a uniform discipline on member states, such that their economic policies would have to be in keeping with the defense of currency exchange rates.

Both aims have been achieved, and the E.M.S can be pronounced a success. True, it has occasionally been necessary to readjust E.R.M parities, but on the whole European currencies have remained stable in relation to one another; as for the economic discipline required of member states, France itself provided an excellent example of this when the socialist government made its celebrated 1983 U-turn in the direction of 'fiscal responsibility' – almost entirely dictated by need to defend the franc by staying within the E.R.M and abiding by its terms of membership.

By and large, though, it is Germany which has benefited most from the E.M.S, on two counts at least:

1. From the very beginning, the mark has been the semi-official standard against which all the other E.M.S currencies were valued. Thus each member state's monetary policy is, like it or not, strictly tied to that of Germany. The Bank of France (like the Bank of England, and the central banks of the rest of Europe) monitors the mark on an hourly basis: whenever the gap between the franc and the mark begins to widen significantly, it takes preventive action. This means ultimately that when German interest rates rise, their E.C partners nearly always have to fall in line and do the same. It also means that, if the European emu (Economic and Monetary Union) is ever to get off the ground, it will only be on the condition that Germany gives it the green light. It is hardly surprising that the proposed European central bank, Eurofed, is to be modelled on the Bundesbank: Germany would not otherwise have approved the emu scheme.

2. The strength of its currency allows Germany the luxury of keeping interest rates relatively low. As long as the mark remains in high demand because of its worldwide prestige, there is less pressure on the Bundesbank to make borrowing expensive in order to attract foreign capital. Added to the fact that low inflation keeps the mark's purchasing power fairly stable, this results in German interest rates actually being lower than those of its trading partners. By the end of 1990, for example, French rates were 1.5 points above German rates, while British rates were 6 or 7 points higher. The beneficiaries, of course, are German businesses and households who wish to borrow and expand.

Image summary: This figure is a line chart. It displays the fluctuations of interest rates on the international market for Euro Dollars and Euro Deutsche Marks over several years, comparing short-term three-month rates against long-term rates of seven years or more. The data indicates that interest rates for Euro Dollars generally remained higher than those for Euro Deutsche Marks throughout the period. While the rates experienced various fluctuations, there was an overall upward trend in interest rates across most categories toward the end of the observed timeframe.

A monetary 'home base'

Japan shares many of these same characteristics, if not quite so conspicuously (given that it is not a member of any exchange-rate system): the yen is somewhat undervalued, interest rates are low and Japanese influence on the world economic scene is growing. Switzerland, too, can count its blessings in the form of the widely admired Swiss franc, still the world's fourth most important reserve currency. Created nearly 200 years ago, more or less simultaneously with the French franc, it has not undergone anything like the 300-fold loss of value which its Parisian cousin has since experienced! It should also be noted that Swiss interest rates are among the lowest in the world.

Monetary power is, for Germany, Switzerland and Japan, the equivalent of a superior dissuasive weapon which can readily be turned to offensive purposes. The industrialists and entrepreneurs of Frankfurt, Zürich and Tokyo, knowing that their 'home base' is secure and well defended, can go forth on foreign economic expeditions with the means to overcome almost any resistance. Certainly money is no object: as Japan snaps up one American landmark or major corporation after another, a strong yen ensures that the dollar price-tag seems a great bargain. German firms, too, can afford to 'shop' abroad, and in fact to out-shop everyone else: when the Czech car manufacturer Skoda went up for sale, no one was surprised that Volkswagen was easily able to make a much higher bid than Renault. And Swiss companies such as Nestlé and Ciba-Geigy are equally dynamic in their overseas purchasing policies, investing billions of dollars in the U.S.A alone.

Whether by design or not, all of these overseas investments produce one very positive result, that of giving the Rhine countries a degree of control over their export markets. The Japanese strategy in the automotive sector is a well-known example. Threatened by a protectionist tide in the U.S Congress, Japanese exporters decided to start building car factories in the U.S.A (and Britain). This policy of 'delocalising' production has already paid off: it is estimated that in 1992, some 2 million Japanese cars will be built in American factories. That already represents 16 per cent of the total production of U.S car makers. The 'American challenge' which Europeans detected 25 years ago has been turned on its head.

Companies of the Rhine type do not, as a rule, follow a policy of spectacular and speculative takeovers. They prefer to move in gradually and methodically, taking care to shape their subsidiary firms in their own image and under their direct guidance. The anecdotal evidence occasionally seems slightly fantastical, as when French workers at the Akai plant in Normandy go through their Japanese exercise routine at the beginning of each day – willingly, it would appear.

The concrete evidence of Japan's successful overseas strategy is, however, convincing enough. In their U.S subsidiaries, they have managed to create an in-house 'micro-climate' which is responsible for productivity increases of up to 50 per cent over their nearest American rivals. What that morning exercise session also tells us is that Japanese overseas investment is part of a long-term commitment: Akai clearly has no intention of selling its French branch to the highest bidder as soon as possible, for the sake of a quick profit.

The 'slow and steady' approach to acquisitions is extremely efficient. From a solid financial base, Rhine firms gradually work towards a position of strength which shows two further advantages:

1. The new markets will not disappear overnight. The company, its goods and its brand names become established over a period of years; customers get to know them and the firm, equally, has a workforce, production site and distribution network which it knows well.

2. Delocalisation makes it much harder to draft protectionist legislation against foreign companies. It is not clear whether it is even possible, as witnessed by the debate between Europeans and Japanese over the 'turnkey factories' which the latter intend to set up throughout the E.C, in an attempt to get unrestricted access to the Single Market.

Expansion on a worldwide scale, and growing political and economic influence: such are the benefits accruing from the monetary stability and financial power of the Rhine countries. And there is more.

The virtuous circle of a strong currency

Economists speak of a 'virtuous circle' of mutually reinforcing positive consequences which a country can expect when its currency is strong. At first glance, this may appear contrary to elementary logic: it would seem more likely that a highly valued currency must count as a handicap, because it makes goods more expensive abroad, and therefore more difficult to export. Devaluation, after all, is a favorite tactic in the drive to increase exports – examples of countries which have employed this method, or are currently tempted to do so, are too numerous to mention. The question of whether a weak currency might produce its own virtuous circle is not merely academic; it lies at the heart of the economic debate which will continue to rage throughout the 1990s, and so it is well worth taking a closer look at the arguments on both sides.

Economic theory teaches that currency depreciation will have two predictable effects on a country's balance of trade: imports, paid for in national currency, become dearer, while exports, paid for in foreign currencies, become cheaper. Logically, this takes the shape of a two-stage progression:

1. In the very short term, the balance of trade worsens. This is because imported goods, now at a higher price, have to be paid for as they arrive – demand for them does not drop overnight – whereas foreign buyers will take some time before increasing their orders of newly cheaper export goods. There is a time lag on one side of the equation, but not on the other. This shows up as a downward curve in the balance of payments.

2. In the medium term, the curve moves upward. Consumers buy fewer imported goods because of the additional expense; exports pick up; the time lag is usually corrected quickly enough so that the losses incurred in the initial stage can be recouped. In the end, the country's overall economic position in relation to its trading partners will have improved.

This two-phased movement in the trade balance following devaluation is called the 'J-curve effect' (because plotting it on a graph produces a superb capital J). It has provided the justification for a great many economic strategies since the 1950s, notably in France (as recently as 1983) and Britain, not to mention American monetary policy since 1985. The dollar has been subject to systematic depreciation in a last-ditch effort to remedy the appalling balance-of-trade deficit; the J-curve effect was thought to be the miracle cure that could not go wrong. Unfortunately, all the signs indicate that the J-curve of devaluation is a nostrum of dubious efficacy, however elegant its theoretical construction. The facts simply do not bear out the claims made for it, and the theory needs to be overhauled as well.

The facts, to begin with: Germany (pre-unification) and Japan both maintain strong currencies and, of course, colossal trade surpluses. France and Italy, on the other hand, have not managed to generate surpluses with any consistency, in spite of repeated devaluations. And in the most glaring example, a dollar in free-fall since 1985 has not yet produced the desired effect on the U.S trade deficit. What could possibly explain how a mechanism that looks so straightforward on paper can go so spectacularly wrong in practice? It turns out that the J-curve theory rests on a number of hypotheses whose validity is open to question, on at least three counts.

First, there can be no iron-clad guarantee that imports will always become dearer, and exports cheaper, in the same proportions as the depreciation in the currency. Both importers and exporters can 'play' with the margins of profitability, whether to take advantage of the new situation (i.e. exporters can put their prices up, and thus increase their profit margins, without the foreign customer 'noticing') or to mitigate its effects (i.e. importers decide to sacrifice their margins and reduce prices, so as not to lose customers). This is more or less what happened in France between 1981 and 1983: French exporters saw successive devaluations as a chance to put up prices (to help pay the cost of new social measures introduced by Mitterland's first government), while foreign importers squeezed their own profit margins in order to keep prices down and preserve their market share.

A second criticism of the devaluation nostrum concerns the risk of what economists call 'imported inflation', where the increased cost of imported goods is passed down the line, eventually affecting all products and services. This is most obvious in the case of imported oil and other raw materials, as well as capital goods. At best, this means ending up back where one started; at worst, it results in rising inflation, which in turn may panic the government into another round of devaluation. The downward stroke of the J-curve clicks in, and new deficits mount up quickly. It is all highly reminiscent of the proverbial avalanche that began with a snowball.

Finally, devaluation may work as a stimulant to exports on the condition that exporting companies are willing and able to exploit the opportunity and win new markets. If for some reason they are not, the chance will be lost and the trade balance will not improve. This is not just a hypothesis: to take but one example, American industry suffers from a number of internal weaknesses that have prevented it from taking full advantage of the cheaper post-1985 dollar. There has been no significant 'clawing back' of the markets America had previously lost to Japanese and European manufacturers.

If the theoretical basis for devaluation can thus be debunked, it is still difficult for governments to kick the habit – for that is exactly what it amounts to, an addictive process whose initial 'high' is illusory and short-lived. The danger is compounded by the fact that the devaluation 'junkie' becomes increasingly blind to its own shortcomings. The French are depressingly familiar with this vicious cycle, having been locked into repeated injections of the 'miracle drug' from 1970 to 1983.

What, then, of the other path, that of maintaining a strong currency? It would seem, at first glance, to be a very hard road to travel. There is something almost heroic in taking up the challenge, for industry, of exporting products which are expensive abroad while competing with cheap foreign imports at home. The country may find its balance of payments adversely affected as a result. Yet, like all challenges, there is a positive side: energies are galvanised, complacency is banished and opportunities must be actively sought. It cannot be a coincidence that the most successful trading nations – Germany, Japan, Switzerland and the Netherlands – are those that have applied the 'strong currency strategy'.

Besides the fact that such a strategy avoids the worst side effects of devaluation, as enumerated above, it also has a number of salutary consequences. In the first place, businesses are forced to enhance productivity – virtually the only recourse available to them to compensate for the higher cost of their goods abroad. As a means of keeping management lean, keen and alert, it is rather more effective in the long run than the threat of an unwanted takeover.

Take, for example, the response of the Japanese automotive giant Nissan to the endaka (appreciation of the yen in relation to the U.S dollar) of 1986 to 87: productivity was increased by 10 per cent a year, which meant that the price (in yen) of their vehicles dropped by the same proportion. Meanwhile, American productivity continued to decline along with the dollar, to such an extent that Paul Gray, President of M.I.T, admitted in an interview that 'the problem facing American industry is not so much to increase productivity as to halt any further decline'.

Another favorable consequence of a strong currency is that it gives manufacturers a clear incentive to concentrate on top-of-the-range goods, where the selling point is not so much price as quality and innovation, not to mention after-sales service. This in turn requires a long-term commitment to research and development – which can only be a boon for the company as a whole. The German machine-tool industry is a shining example of this approach: its products are relatively expensive, yet always in demand because of their unsurpassed quality. The same formula has worked well for German car makers such as mur-say-dees-Benz and B.M.W, who have taken on the luxury end of the market with great success (so much so that Germany now sells more cars to Japan than vice versa – an astonishing achievement).

Image summary: This figure is a political cartoon. It depicts a disheveled man reclining under a bridge, surrounded by empty bottles and a newspaper featuring a Wall Street headline, while two well-dressed men observe him from a distance. The scene suggests a narrative of financial ruin and addiction, contrasting the extreme poverty of the central figure with the stability of the onlookers. The imagery implies a cyclical nature of economic failure and personal collapse, specifically linking the volatility of the stock market to a state of destitution.

It should not be forgotten that Germany and Japan – today synonymous with quality merchandise – both had a pre-war reputation for producing third-rate, shoddy goods. That they have managed to turn their energies from the pursuit of war to the conquest of markets, using the arm of monetary discipline, is further testimony to the reality of a dynamic German–Japanese economic model.

In summary, the maintenance of a strong currency, however steep the challenge, brings out the best in an economy as toil, perseverance and imagination are harnessed in the drive to excel. This virtuous circle is not for the faint-hearted, but it ultimately reaps rich, and durable, rewards. To say so is no longer heresy – an encouraging turn in the economic debate – but, lest we forget, a whole generation of the best and brightest in France accepted without question the pseudo-Keynesian orthodoxy of spurring growth through repeated devaluation. While subjecting the franc to its biennial meltdown, some French economists could even be heard sniggering at the obvious stupidity of the Germans in their obstinate refusal to dope their economy with the elixir of 'controlled' inflation.

I was personally involved in the 5-year struggle by Raymond Barre (an economist who served as French Prime Minister from 1976 to 1981) to gain acceptance of the strong-currency approach; at the time, this amounted to preaching in the desert. Since 1983, however, the cause has been largely won, thanks to the support of three successive Finance Ministers – Jacques Delors, Edouard Balladur and especially Pierre Bérégovoy (later to be Prime Minister himself). That the example set by the Rhine model should have inspired this turnaround in thinking at the top is surely the nearest thing yet to a genuine economic miracle!

The dynamo of industry

Every newspaper reader knows that the brilliant results chalked up by Rhine economies have lately received a great deal of attention, and that the contrast is all too vivid when set against the trials and tribulations of the Anglo-American economies, beset by inflation and debt. Not unreasonably, there have been many attempts to explain 'how on earth they manage it' in Bonn and Tokyo; this book is one such effort. But let us be clear on one point: the strength of the Rhine economies lies first and foremost in their immense industrial strength, promoted by aggressive salesmanship.

That Rhine manufacturing industry is the best in the world is simply not in doubt. Moreover, it occupies pride of place within the national context: in Germany, Japan and Sweden, industry accounts for about 30 per cent of both G.D.P and total wage-earners; in the rest of the O.E.C.D, the figure is below 25 per cent (and in the U.S.A it is under the 20 per cent mark). This superiority, as previously argued, is not just numerical but qualitative as well. Rhine-type countries have established leading positions in virtually every sector of manufacturing from the oldest, most traditional industries to the highest of the high-tech. Take any index of the top ten countries in steel making, shipbuilding, car manufacture, chemicals, textiles, electrical goods, or agro-industry: the roll of honor will inevitably include a majority of Swiss, German, Japanese and Dutch firms. Toyota, Nissan, Daimler Benz, Mitsubishi, Bayer, Hoechst, B.A.S.F, Nestlé, Hoffmann-La Roche, Siemens, Matsushita. . . – the list goes on and on.

True, in certain high-tech industries, the Rhine economies still lag somewhat behind America, the leader; but for how long? It is already clear that Japanese and German companies are taking enormous strides to catch up with their U.S competitors in such branches as aeronautics, information technology, electronics and optics. Japanese advances in computer technology, for instance, mean that this field is no longer the exclusive preserve of the big American firms (who hold seven of the ten top places in the world league tables).

The alarm bells are ringing in Washington as the Japanese consolidate their mastery of peripherals (monitors, printers and disks) and a near-monopoly on memories and components. It is now fair to say that the average computer bears an American brand-name, but almost everything inside it is Japanese.

So, how do they manage it? Rhine industries build on three principal strengths:

1. They pay close attention to production techniques, striving endlessly to improve quality, reduce costs and increase productivity – none of which would be possible without sustained investment in plant and machinery. Again, it is no coincidence that the O.E.C.D countries which invest the most in such capital goods are Germany, Japan, Switzerland and Sweden. (By 1989 Japan's investment in plant and machinery had already exceeded, in absolute terms, that of the U.S.A, whose economy is eight times bigger than Japan's.) The Rhine countries invariably use the most sophisticated methods of production management, such as the'zero stock' technique or the concept of'total quality management' (T.Q.M) – both of which were pioneered in Japan and have now been adopted by Citroën and Renault. What sets these new techniques apart is that they stimulate the creative, participative faculties of each worker and depend on a certain level of consensus through debate, thus ensuring that everyone involved in production is regularly consulted, and listened to.

2. Training is a priority, not a luxury (see Chapter 6). The new methods of production management represent a definitive break with the dehumanising techniques of 'efficiency engineering' associated with F. W. Taylor (and hilariously caricatured by Charlie Chaplin in Mod- ern Times). But if workers are to be more than automatons, training must be more than an afterthought. True, Rhine countries spend twice as much as anyone else on their unique combination of apprenticeship and further training, but it is well worth the investment: there is no chronic shortage of engineers in Germany or Japan. The importance of all forms of vocational education as a key factor in Rhine industrial achievement simply cannot be overemphasized.

3. Company spending on research and development (R&D) is one of the areas where the contrast between the two economic models is most striking. For countries like Germany, Japan or Sweden, investment in R&D amounts to about 3 per cent of G.D.P; it is primarily aimed at developing basic technology which can ultimately benefit all branches of industry. In the U.S.A, the figure is 2.7 per cent of G.D.P, but more than one-third of this investment (1 per cent) is devoted to weapons research. Rhine governments take a particularly active role in promoting civil R&D projects, often with generous subsidies. The Japanese super-ministry M.I.T.I, for example, draws up a list of ten priority areas for research which the private sector is encouraged to gear up for; this approach has already paid off handsomely, and famously, in the industry-wide robotics program launched 20 years ago, with the result that Japan is today the world leader in this sphere, producing more robots than the rest of its O.E.C.D partners put together.

Taken as a whole, the industries of Rhine countries are a formidable dynamo, outstripping all competitors. What is more, they are backed up by some extremely effective (and aggressive) sales and marketing techniques. The Rhine countries have thus become the undisputed export champions of the world.

Germany has long been a great exporting nation, and Japan is now in the same premier division. The statistics are quite astonishing: the proportion of company turnover in the major German industries (automobiles, chemicals, mechanical and electrical engineering) accounted for by exports is nearly 45 per cent. In the U.S.A, exports amount to no more than 13 per cent of G.D.P; in its report on American industry, M.I.T noted that U.S manufacturers suffer from a narrow, parochial outlook which causes them to miss export opportunities.

Image summary: This figure is a line chart. It displays the spending on military research and development in the USA compared to the total research and development spending in Japan and West Germany over several decades. The data indicates that while USA defense-related spending experienced a general decline and subsequent fluctuation, spending in Japan and West Germany showed a consistent upward trend. Consequently, Japan's total spending eventually surpassed that of the USA's defense-related spending, and both Japan and West Germany exhibited steady growth in their research and development investments over the period shown.

There is hardly a market anywhere in the world today which has not been penetrated by German, Japanese and Swiss exporters. Even in those places where American (or British or French) firms have traditionally held sway, the newcomers are pushing ahead, elbowing their way to the top.

The economy as culture

The assertion that there can be a 'culture of the economy' may seem suspiciously vague to some, while to others it is a tautology. But if there is one word that designates a body of individual behaviour patterns shared by a whole population, enshrined within institutions, subject to agreed rules and forming a common heritage, then it is indeed culture. And in the Rhine model there is every indication that a specific 'economy culture' operates at every level, with its own distinctive traits.

Of particular significance is the inclination towards personal and household savings: among O.E.C.D nations, it is again Japan, Germany and Switzerland which distinguish themselves in this category. (Italy, too, rates a mention – but its savings go mainly towards financing an enormous budget deficit.) Personal savings are an indispensable source of financing in all capitalist economies; at too low a level, a foreign deficit tends to accumulate, as borrowing abroad increases to compensate for insufficient funds at home. Such is the case in America today. U.S households are the 'big spenders' of the Western World, buying everything on credit and building up personal indebtedness to such an extent that interest payments may add up to a quarter of their income. And just as the failure to save goes some way toward explaining America's massive foreign trade deficit, so the opposite is true of German and Japanese surpluses: very high levels of domestic savings provide the wherewithal both to finance investment at home and to make loans abroad at favorable rates of return.

The propensity to save has always featured prominently in the pan- theon of factors which, according to liberal theorists, make economic progress possible. Interest rates, after all, are organically linked to levels of savings. But this propensity is itself linked to other social and cultur- al factors which may change over time.

Irving Fisher, the noted Yale economist, once asserted that the main cause of a drop in interest rates – that is a rise in savings – was 'the love of one's children and the desire to provide for their welfare'. When such feelings are dulled (as in the terminal phase of the Roman Empire, according to Fisher), impatience and interest rates both tend to increase. The result is a reckless spending spree and an attitude infamously capsulised in the supposed motto of Louis 15 and Madame Pompadour: 'après nous le déluge'.

Image summary: This figure is a dual-axis line chart. It displays the West Germany manufacturing surplus in billions of dollars and the actual DM/$ parity over a period spanning several decades. The manufacturing surplus is measured on the left vertical axis, while the currency parity is measured on the right vertical axis. The data indicates that the manufacturing surplus generally trended upward over the period, despite some fluctuations. The currency parity showed significant volatility, peaking and then declining sharply before recovering toward the end of the timeframe. A general positive correlation is observed between the strengthening of the currency and the growth of the manufacturing surplus for a significant portion of the timeline, although the surplus continued to rise even as the currency parity fluctuated in later years.

Image summary: This figure is a dual-axis line chart. It displays the relationship between the Japanese manufacturing surplus, measured in billions of dollars, and the actual yen to dollar parity over a period spanning several decades. The manufacturing surplus is represented by a solid line corresponding to the left vertical axis, while the currency parity is represented by a dashed line corresponding to the right vertical axis. The data indicates a strong upward trend in the manufacturing surplus over the entire timeframe. While the currency parity experienced significant fluctuations, including periods of sharp increase and decrease, the overall trajectory of the manufacturing surplus remained positive, suggesting that the surplus grew consistently regardless of the volatility in the exchange rate.

Image summary: This figure is a grouped bar chart. It displays the balance of current accounts for the USA, Japan, and West Germany over a period of several years. The chart shows the financial position of each country, with values extending both above and below the baseline to indicate surpluses and deficits. The USA consistently maintains a current account deficit that deepens significantly over the observed period. In contrast, Japan and West Germany maintain current account surpluses. Japan shows a substantial and growing surplus that peaks toward the end of the period, while West Germany maintains a more moderate but steady surplus. The data indicates a widening gap between the deficit of the USA and the surpluses of Japan and West Germany.

Without wishing to draw any hasty conclusions as regards 'the love of one's children', we can hardly ignore the fact that between 1980 and 1990, the level of savings decreased markedly in the U.S.A, dropping from 19 per cent to 13 per cent of G.D.P. In the same period, Germany saw its savings levels increase from 22 per cent to 26 per cent of G.D.P, while Japan's rose from 31 per cent to 35 per cent (according to O.E.C.D calculations).

The inescapable conclusion is that the two models of capitalism diverge on the fundamental question of whether to live for the present moment – and to hell with the consequences for future generations – or to plan for a better tomorrow, though it may require sacrifices today. This dilemma lies at the heart of the ethical choices facing every society as the twentieth century draws to a close.

To return to the 'economy culture': in Rhine societies, there is a general consensus concerning the importance of all things economic. Whole populations can be mobilised, in a variety of seemingly trivial ways, for the nation's economic good; the cumulative effect of such behaviour may be enormous. When Japanese tourists abroad are found to be discreetly collecting information which might be of use to their employers, it is missing the point to cry 'industrial espionage' or to deride their single-mindedness. What such behaviour reveals is a different set of priorities, among which is a sense of duty to one's company and the national economy. Germans show a similar 'civic' regard for the economy, and a host of institutions and bodies help foster public enthusiasm and disseminate information (in Germany, the banks provide their customers with a variety of detailed economic analyses and forecasts; in Japan this task is carried out by M.I.T.I and the business firms).

There is a general consensus that it is vitally important to keep abreast of new developments abroad, and firms put a great deal of time and money into finding out what their competitors are 'up to' – especially in their research laboratories. This restless curiosity and desire to learn, this openness to the outside world, can only mean one thing: a shared set of values – in other words, a culture.

The economy culture of Rhine countries undoubtedly explains the fact that they have largely succeeded in freeing their economies from the worst of the political disruptions and electoral vagaries that crop up elsewhere: not for them the classic seesaw between pre-election spending sprees and post-election belt-tightening. The near-total independence from political control of the central banks of Germany and Switzerland, for example, means that they can pursue their strong-currency policies, no matter what the political climate. The Bundesbank's founding charter even makes it compulsory for the central bankers to maintain a sound mark. Such an approach is world's away from the traditional powers of intervention exercised by the French Finance Ministry over the Bank of France, or by the Exchequer over the Bank of England. Similarly, the five German economic forecasting institutes are utterly immune from official tinkering, and their findings can thus be confidently accepted as accurate and objective by government, employers and trade unions alike.

Ultimately, the existence of an economy culture produces a government that serves the economy, and tailors its policies to that end. When the cultural consensus is so wide, the result is something like 'Japan Inc.' – a whole country patterned on the company model, a nation united at every level in the constant effort to capture new markets overseas.

That the company should enjoy its exalted status in Rhine countries is a logical outgrowth of the economy culture. Unlike the neo-Americ an view of the company as, at best, a collection of the contractual arrangements between temporarily convergent interests or, at worst, as a 'cash flow machine', the Rhine model sees the company as a social institution and an enduring community deserving of the loyalty and affection of its members, who can expect a measure of company care and protection in return.

Chapter 8 The social superiority of the Rhine model

The title of this chapter may seem surprising. Obviously one cannot define 'social superiority' as neatly as economic superiority: many of the criteria that would have to be examined are simply not quantifiable. The social achievements (not to mention the shortcomings) of a given economic model do not necessarily show up in charts and percentages; they may resist conventional statistical analysis.

Any pronouncement on the social advantages of one culture or another will contain more than a hint of subjectivity. No one knows better than economists the extent to which factors such as societal types, particular value sets shared by the population, social organization and even kinship systems can introduce a whole range of distortions which significantly complicate the analyst's task. I therefore intend to proceed with the greatest caution.

In the search to define a set of criteria which could form the basis for a relatively impartial comparison, there are three that seem to me to have the twin advantages of simplicity and clarity.

1. The degree of security provided: how are citizens protected from the major risks (illness, unemployment, family breakdown etcetera)?

2. The reduction of social inequalities: what remedies are brought to bear against the most obvious cases of neglect? How much help is available, and in what form, to the neediest members of society?

3. The extent to which it is an 'open' society: how easy (or how difficult) is it for different individuals to climb the socioeconomic ladder, to improve their lot?

One thing should already be clear: in the first two cases, the Rhine model performs demonstrably better than the neo-American model. (It is necessary to insist here on the term neo-American, rather than Anglo-American, because it would be wrong to lump the U.K with America insofar as the social economy is concerned. With its longstanding welfare system of a type undreamt of in the U.S.A, Britain stands at opposite ends of the scale from today's America in this sphere.)

Granted, then, that the attempt to compare different social systems can be somewhat hazardous, the contrast between the two models of capitalism remains striking – all the more so because, contrary to certain received opinions, the social superiority of the Rhine model does not entail hidden or extra costs which adversely affect economic competitiveness. Social benefits do have to be paid for out of the public purse, of course. But those who insist that such expense is inevitably detrimental to the economy are mistaken. On the contrary: it can be plainly demonstrated that social solidarity and competitiveness in the market place make excellent bedfellows.

The high cost of health

Let us begin with a couple of anecdotes culled from the press: in the first (witnessed by French journalist Jean-Paul Dubois) a man arrives in a terrible state at the Dade Medical Center in Miami, Florida. He says he has been ill for three days, and is obviously feverish. It is Sunday, and as doctors' surgeries are closed, he has come to the emergency unit of the nearest hospital, where the receptionist is taking down his particulars: name, address. . . 'and 200 dollars deposit, please'. She explains: 'If the doctor decides not to hospitalize you, you will be charged for the consultation and the difference will be refunded.' The would-be patient explains that he does not have 200 dollars on him just now. And she replies that she is terribly sorry, but he will have to seek medical attention elsewhere.

In another part of the country, in a small East Coast town, an employee of a local firm is faced with a dilemma over the toothache that has been tormenting him. Should he go to the dentist? If he does, he knows that he will lose the tooth – but not because his dentist is unable to provide a more sophisticated treatment than old-fashioned extraction. No, his dilemma lies in the fact that he has no private insurance, and the cost of a crown or some other palliative treatment is far beyond his modest means. So he faces the stark choice of more pain, or fewer teeth.

Neither story is in any way exceptional. They are further examples of the polarization of American society (as described in Chapter 3); and they serve to illustrate the lack of any generalised system of social security in the U.S.A. In proportional terms, public spending on health care in America is about half the level in other major Western countries. There is no compulsory health coverage: the only option is private insurance, income permitting. Approximately 35 million Americans do not, as a result, carry any form of health coverage.

Unemployment benefit is virtually non-existent, on the national level at least; but redundancy notices, once served, take effect almost immediately (within 2 days, on average, in small businesses). Family allowances are unheard of. The few social welfare programs of any note are legacies of the Kennedy and Johnson administrations of the 1960s: Medicare, which provides some health care benefits for the elderly, and Medicaid, which targets those who live below the 'poverty line'. Yet even this welfare net is designed in such a way that it inevitably misses a sizeable proportion of the neediest individuals.

The gaps in the neo-American model are, in this sphere, blatantly obvious. And there are two other grave shortcomings as well:

1. The 'litigation frenzy' which has taken hold of America has had drastic consequences for medicine in particular (see Chapter 3). Pick up any U.S newspaper, and you are sure to read of yet more record damages awarded against a surgeon, anaesthetist or dentist whose patient has joined the lawsuit parade, egged on no doubt by the new bounty-hunters we call lawyers. It is now common practice to consult one's lawyer before going to hospital or to the doctor's surgery; inevitably, the first person you are likely to encounter there is not your doctor or surgeon but his or her lawyer. The most innocuous treatment can become the pretext for a long, drawn-out legal battle, and the result is catastrophic for doctor and patient alike. Malpractice insurance and lawyers' fees add up to a phenomenally expensive, but indispensable, chapter in the budgets of clinics and practitioners, who pass the cost along to the public in the form of higher bills for medical treatment. In the end, the cost of such treatment becomes prohibitively expensive for the average person.

2. Even a cursory financial inspection of the American system of private health care reveals that it is far less economical than the European-style public welfare system. Total spending on health in the U.S.A is, at 11 per cent of G.D.P, the highest in the world; paradoxically, in the U.K – home of universal free health care – health spending is the lowest of the O.E.C.D countries, at less than 7 per cent of G.D.P.

Social security and social responsibility

Social insurance originated in Germany under Bismarck; Beveridge was to be his most celebrated disciple (in this one regard) in setting up the National Health Service in Britain. France, too, had by 1946 begun to implement its own social security system, which evolved gradually into its present, nearly universal form of coverage (99.9 per cent of the working population). Similarly, in Germany, Switzerland, Sweden and Japan, the provision of health care is automatically extended to all but a tiny fraction of the population.

Germans are broadly insured against all the major hazards (illness, work-related accidents, unemployment) and benefit from a generous basic pension. In Sweden, the 'flagship' of social democracy, the situation is much the same. Particularly noteworthy is the very efficient Swedish approach to unemployment: help is available in a variety of forms, including training and reinsertion programs. As for Japan, its national insurance system is one of the most munificent in the world: health care is universally available and totally free of charge.

When it comes to social security funding, the Rhine countries once again show the way. True, before 1985 the level of health spending in Germany was increasing much faster than G.D.P, and it was feared that the system would become dangerously unbalanced. The causes were not unique to Germany: an ageing population, technological advances requiring the purchase of costly new equipment (scanners, ultrasound devices, lithotripsy equipment etcetera), and a general increase in the demand for treatment, as well as for drugs – both a natural consequence of free health care. In spite of these factors, all the Rhine countries have managed to keep spending on health at or below 9 per cent of G.D.P. But Germany in particular has distinguished itself in the exemplary way it has, since 1985, tackled – and solved – the funding problem.

This is no mean feat. Bearing in mind the previously-cited ratios between health spending and G.D.P (Britain's 7 per cent, Germany's 9 per cent and the U.S.A's 11 per cent), the awkward truth seems to be that spending more does not guarantee a better system, since of these three the U.S.A has the worst record of accessible and affordable health care provision. This seems to run directly counter to the proposition that the free market, with its built-in incentives to maximise quality and minimise cost, should be able to do the job more efficiently than the state.

Heaven knows American medical facilities (privately owned and operated, in the main) use the most sophisticated management techniques – health management organization is a recognized professional category. On the other hand, there are waiting lists for some N.H.S operations or consultations, as every Briton knows; and it is true that the German system, in which doctors are 'tied' to mutual health funding agencies, removes some of the patient's choice. Nevertheless, the facts speak for themselves.

When health care provision is marketled, that is driven by the personal financial interests of the providers, the resultant system is inefficient. This leads me to believe that health is one sector that definitely cannot be left wholly to market forces.

To understand how the Rhine economies achieve their unique social welfare mix of fair entitlement, public funding and efficient management, it is necessary to examine the values and priorities which are shared by society at large. There is a sense of collective responsibility in Rhine countries that does not obtain in the U.S.A, for example. Deeply rooted in the national psyche and explicitly recognized by the political system, the trade unions etcetera, this feeling of community solidarity has as its corollary a well-honed self-discipline which is rather more remarkable than most people think. Naturally, there are 'welfare cheats' in Rhine societies, as everywhere; abuses do occur, and it is not entirely unknown for the unemployed to work while drawing benefit, say, or for some people to 'over-consume' medical services.

On the whole, however, the general populace seems to understand that there is a danger in demanding too much of the welfare system. On the basis of this understanding, measures can be taken to remedy specific problems: in Japan, where the ageing of the population is a serious concern, a program has been launched in order to push back the retirement age; in Switzerland, for the same reasons, citizens rejected (by a 64 per cent majority in a referendum) the proposal to bring the retirement age forward, from 65 to 62.

Given this sense of collective responsibility, it is not very difficult for the government to expect and obtain the disciplined cooperation of all parties. In Germany, the authorities now require everyone involved in national health insurance (unions, employers, doctors, funding bodies, the mass of citizens or 'contributors' themselves) to get together and agree on ways to keep health spending within reasonable limits. The Swedes accept without question that those on the dole may not refuse reasonable job offers. The most radical example of self-discipline must be the consensus in Switzerland regarding income support: it is seen as a debt, not a right, and must therefore be refunded once the beneficiary's financial situation improves.

Sadly, when one examines the preceding criteria in order to determine whether France might fall within the Rhine social welfare category, the answer is broadly negative. Not because the safety net is too small, but rather that it is starting to come apart at the seams. In France, no one can resist making as many withdrawals as possible on their social security 'account', but everyone is convinced that they will never really have to pay into it. As a Frenchman, I have the right to visit my doctor's surgery every day, if I wish, and to receive an unlimited number of treatments; my doctor, too, can write as many prescriptions as he pleases; and all of this is 'free'. It is a uniquely French attempt to realize a blend of socialism and capitalism, and it looks quite attractive on the surface. Unfortunately, the long-term consequences are proving to be most unwelcome.

When reform goes wrong: an American story

In the U.S.A, too, the government has tried to stem the continual rise in health spending, but without much success. One ambitious reform, enacted by Congress in 1984, was designed to improve hospital management while keeping a lid on the volume of medical expenses paid for by Medicare, the federal program of health insurance for the elderly.

It will serve as an object lesson in how a well-intentioned reform can go awry.

The plan was to overhaul the basic method of calculating the refundable costs of treatment. Prior to reform, hospitals would bill the government for medical care dispensed to patients by breaking down each case into separate 'treatment units' – surgery, anaesthesia, use of operating theater, tests etcetera The cost of each procedure was specified on a master price list agreed to by both government and private insurers, and hospitals were reimbursed accordingly. This method had the merit of being extremely precise, but it was also very complicated and open to manipulation: an unscrupulous consultant could order repeated tests on the same patient (X-rays, for example) that were not strictly necessary, but would boost the amount of reimbursements. Insurers could hardly be expected to examine every case or even make a judgement on which 'treatment units' were essential and which were not. Moreover, new techniques and procedures were inevitably several steps ahead of the pricing schedule, with the result that doctors and surgeons could be overpaid. A meniscectomy (surgical removal of a cartilage) would still be charged on the basis of a 2-hour operation when, in fact, advances in endoscopy had reduced operating time to 10 minutes.

The new legislation brought in to correct such abuses changed all this: henceforth, there would be a flat fee for treating each illness or condition rather than for each unit of treatment. Appendicitis, for example, would attract a reimbursement of $1000 – regardless of how many different procedures were involved. It would then be up to the hospital or clinic to manage its resources and personnel so efficiently that Medicare payments would more than cover costs; anything left over would be pure profit. This new system was based on the statistically confirmed fact that 95 per cent of illnesses fall into one of 465 specific treatment categories, which can be priced on the basis of average standard costs. All of which seems, in theory, admirably simple and easy to check, with a built-in incentive to improve efficiency through better management.

It was to prove otherwise in practice, however. The badly managed hospitals instantly found themselves in enormous financial trouble; many were soon specialising in those illnesses which were more 'generously' reimbursed or in which they could be especially competitive. A few others simply turned away patients they identified as 'risky' financial propositions. This was only to be expected, after all, in the absence of any sense of collective responsibility for health care – hospitals were strictly on their own, bidding for the most 'lucrative' patients in order to make a quick profit. In the land of the almighty dollar, not to do so would have been illogical and impractical. A reform which seemed wholly reasonable was thus gradually undermined and distorted, with the result that, despite an initial improvement, spending on hospital treatment in the U.S.A has continued to rise.

Those who instituted this reform might have increased the chances of its success had they first studied the way such matters are handled in Rhine countries. The same, incidentally, could be said of the French social security system as a whole – the inability to see beyond one's own borders is not only an American defect. But it seems that more than a few Americans are utterly blind to the possible shortcomings of the free market, and reject out-of-hand any 'foreign' solutions which imply an adulteration of market forces.

The logic of equality

The Rhine societies are, on a number of accounts, egalitarian: not only is the income spectrum narrower than in English-speaking countries, but the middle class is proportionally larger. Defined as those persons whose income is at or near the national average, the middle class (so characteristic of America, almost its 'trademark') now accounts for about half the U.S population; in Germany it forms about 75 per cent, and in Sweden and Switzerland nearer 80 per cent. Thirty years of surveys in Japan have shown that 89 per cent of the population consistently define themselves as middle class: the finding is subjective, but significant.

It follows from their egalitarian principles that Rhine countries are strongly committed to fighting poverty and social deprivation, and have organized their efforts more efficiently than either the U.S.A or Britain. In Sweden, for example, memories of the immense hardships and endemic poverty at the turn of the century have not faded. For the Swedes there is no greater national cause than that of trygghet (security). Social welfare and the fight against unemployment (the gravest form of deprivation) are seen as absolute priorities. The goal of full employment is actively pursued through a variety of initiatives – not least on the part of government, which set up the Arbetsmark-nadsstyrelsen (National Employment Authority) to this end, and provides it with a generous budget.

There is no national or federal institution in the U.S.A with responsibility for fighting the 'war on poverty': it is left to state and local governments to do what they can on the limited funds available to them. The large charities and volunteer organizations are, no doubt, as dedicated and generous as they are active and influential, but the task is still too great for them to shoulder alone. It was one of the pillars of Reaganism that individual charity and private associations should take over from the state in the sphere of social welfare. According to this reasoning, inequality is both normal and desirable; it stimulates competition and thus ultimately proves of benefit to everybody; poverty is not a political issue of concern to the state; rather it is a moral issue, and each individual must decide how and when to be charitable.

The question was widely debated in America during the first years of the Reagan administration. In Britain, Margaret Thatcher espoused the same ideology in the same terms. This was no fluke, no improvised coda to a new economic strategy: the Reagan–Thatcher dialogue crystallised the emergence of a new morality, created by and for the 'winners' – the rich who could (obviously) afford to be charitable.

To take one example of the change brought about by the new morality, it is sufficient to recall that until 1975 or so, one of the most widely discussed ideas in the U.S.A was the so-called 'negative income tax' (i.e. a form of guaranteed minimum income). Today, just when France is implementing an almost identical system, no American politician would dare utter a syllable in support of such an outlandish concept.

Of course, there is nothing really new under the sun: the philosophical justification of inequality as expounded by 'supply-side' economists such as George Gilder has a well-established liberal pedigree. In the mid-nineteenth century, for example, Dunover wrote of 'the pauper's hell' as a necessary component of the general well-being, because it forced people to 'behave' and to work hard. Gilder, writing in 1981, was of the same mind: 'Over-taxing the rich discourages investment; by the same token, over-compensating the poor weakens the incentive to work. Both inevitably lead to lower productivity' (Wealth and Poverty).

Reagan invoked this argument to justify drastic cuts in federal spending on social programs, with the result that whole new 'pockets' of generalised poverty have appeared from one end of the country to the other (see Chapter 3). The same reasoning also led to the dismantling of regulations which protected employees and were thought to place too many restrictions on employers. All, it was promised, for the greater good of the economy: 'The assault on employees' rights and benefits will, in the end, be good for employment in general, thanks to the sharpening of competition which it ought to induce.' (The words are those of an E.C official, Riccardo Petrella, who nevertheless goes on to criticise this view.)

In Germany – West Germany, in any case – the public attitude towards poverty is entirely different. In a manner of speaking, indigence is practically forbidden by federal welfare laws, which place the onus on society as a whole to assist those who are unable to provide for their own housing, food, health care and basic consumer goods. Social spending amounts to some D.M 28 billion per year, and there is a virtually guaranteed minimum monthly income of D.M 1200. According to Luc Rozenzweig, the Bonn correspondent for the French newspaper Le Monde, 'Welfare recipients currently number 3.3 million, or 5 per cent of the population; yet poverty is nearly invisible, despite the statistical proof of its existence.

The first thing that strikes you about this country is that the vast majority of people are comfortably well-off. Street beggars are a rare sight in the big cities, with the possible exception of a few “punks” in Berlin and Hamburg, for whom cadging is clearly a sport rather than a dire necessity'.

The picture is not entirely idyllic, of course. The same newspaper notes that the increase in the divorce rate and the number of births out of wedlock has meant that poverty in today's Germany is disproportionately feminine. About two-thirds of single mothers – whose numbers are steadily rising – live at, or below, the poverty line.

In Sweden, wages and incomes are regulated by what are officially dubbed 'solidarity policies'. Their dual aim is to promote social equality and to limit the permissible income spread within different economic sectors.

It has already been mentioned that the tax structure of the Rhine model is designed to reduce inequalities and ensure a certain redistribu- tion of wealth. One telling indication of this approach may be seen by comparing the top rate of income tax from one country to another: it is significantly higher in Germany, Japan (55+ per cent), France (57 per cent) and Sweden (up to 72 per cent) than in the U.K (40 per cent) or the U.S.A (33 per cent). Additionally, Rhine countries (including Switzerland) impose substantial taxes on capital gains.

Perhaps I should stop here, and make a full and frank admission that the implications of the preceding paragraph – that is a top rate of 55 per cent income tax might just be preferable to a top rate of 33 per cent – are intentional. I will let my preference for this aspect of Rhine policy serve as an unashamedly public mea culpa.

In seeking deliberately to reduce social inequalities, the Rhine societies can count on broad public support. The criteria which they apply in the area of incomes policy, namely seniority and qualification, are well understood by the workforce. The young bank clerk in Japan knows, and accepts, that he will have to wait 15 years before he can hope to become head of his department, though he may already be invaluable to it because he is, say, the only member of staff who speaks English. And once he is head of department, he knows that a further 15 years will be required before he can gain promotion to senior executive level, no matter how brilliant his performance!

In Swiss and German firms, the command and pay structures are strictly tied to qualification levels. Wage differentials are thus seen by everybody to be justifiably based on objective, measurable criteria.

The land of opportunity versus the closed society

There can be little doubt that the Rhine success story is collective, not individual; as a model of society, it appears inflexible by comparison with the scope for upward mobility offered by the neo-American model. Does this necessarily constitute a handicap?

The U.S.A has always been, and still is, the land of golden opportunity. The immigrants who first set foot on American soil at Ellis Island – next stop: the Promised Land! – brought with them not only pain and suffering, but dreams of a better life, dreams of freedom and prosperity, and the indomitable will to succeed. No other definition of the 'American Dream' is necessary.

There can hardly be a single American today who cannot trace his or her ancestry back to that hardy soul who decided to escape the hardships and unrelenting misery of Ireland or Poland or Italy, and try his luck across the Atlantic. And, sure enough, America opened her arms and welcomed each one. In the land of the self-made man, no dream was impossible, no ambition too great: the penniless immigrant could become a millionaire, the son or daughter of immigrants could one day be President. In other words, upward social mobility is not simply a banal fact of life in America, although it is that as well; it is an integral part of the original myth, the national raison d'etre.

It is fair to describe American society as fundamentally democratic, built as it is on successive waves of immigration. Aristocratic values, still current in Europe and Japan, count for little. Social stratification, of the sort that is laid down over centuries and persists largely unchanged from one generation to the next, has not yet occurred. It may be true that W.A.S.P's (White Anglo-Saxon Protestants) form a kind of ethnic aristocracy enjoying certain advantages, but it is equally true that the same advantages have been claimed, and won, by other immigrant groups in turn. The 'hyphenated Americans' (Irish-Americans, Italian-Americans etcetera) have, little by little, caught up with the W.A.S.P's or are now poised to do so.

No doubt the melting pot is not what it used to be, as has already been pointed out. Nevertheless, America continues to demonstrate a capacity for social absorption and integration far superior to that of Rhine countries, Japan included.

The fact that it is possible to 'get rich quick' in America can be seen as the grease that keeps the machinery of social mobility turning. In this sense, the primacy of money in the American value system is a positive advantage: as a social criterion, it may not be subtle but it is simple and ruthlessly efficient. The hamburger vendor can become a Rockefeller. The myth is also a present reality: the colossal fortunes amassed during the speculative frenzy of the 1980s came, in many cases, from exceedingly humble beginnings.

Germany and Japan are in another category altogether. Their immigration policies have failed to make any significant impact on the demographic time-bomb of an ageing population which both now face. Pre-unification Germany was home to more than four and a half million foreigners (7.6 per cent of the population), but they remain unassimilated and separate from mainstream German society, notably in the case of the 1.5 million Turkish migrant workers (not immigrants, as such: the German term, Gastarbeiter, meaning 'guest worker', is highly revelatory). Mixed marriages are usually a good indication of the degree of integration of minority groups, and in Germany such unions are very rare. There is a peculiarly German resistance to the idea of integration. The French historian and demographer Emmanuel Todd describes it thus: 'The entire legal and social apparatus has created what amounts to a separate regime for foreigners living on German soil [...].

If there is no change in the citizenship laws, or in people's habits and behaviour, the country is likely to revert to its old traditional social order. The intermingling of classes, the increasing social integration which the hardships of World War 2 had made possible, will thus have lasted only a few decades'.

In today's Germany, the far right is more than ever the lightning-rod that attracts a strong current of xenophobia, aggravated by the influx of Eastern Europeans (Poles in particular) fleeing their own shattered economies.

The situation of Asian immigrants to Japan (mainly from South Korea, the Philippines and China) is even worse. In Switzerland, immigration has always been strictly controlled, in spite of the large numbers involved (1.5 million foreigners in a total population of 6.5 million). Swiss policy is to make it extremely difficult for foreigners to settle permanently; deportation and refusal of entry are used unhesitatingly, and borders are strongly manned. Even in Sweden, a relatively small number of immigrants are the focal point of a variety of unresolved problems.

As for the U.K, the situation is not so clear-cut. The individualism characteristic of British society makes possible a significant number of mixed marriages and a large, established immigrant population – most of whom hold British passports but whose origins are in Africa, the West Indies and the Indian subcontinent. Unlike Germany, there is a distinct willingness to grant British nationality to settled immigrants. Yet, as Emmanuel Todd notes: 'Even more than in France, the tendency in Britain is one of growing segregation; communities of West Indian, Muslim or Indian origin seem to be retreating into their ghettoes [. . .]. British practice looks increasingly like German-style exclusion.'

Unable to absorb outsiders at the same pace as America or even Britain, countries of the Rhine model do not present the same opportunity for spectacularly rapid money-making either. Their stock exchanges offer far less scope for windfall profits, and property speculation has not run riot (except in Japan). Rhine societies are set in their ways, socially speaking. Individuals may improve their lot, of course, as in any capitalist country; but they tend to do so more gradually, and the achievement is more likely to be durable. Society is less open – but this may also mean it is better protected from sudden change, less subject to outside influences.

Does this amount to a strength or a weakness? Is an open society preferable to a partly closed one? These, too, are questions which must be asked, and whose answers cannot fail to influence the outcome of the conflict of capitalism against capitalism.

The war on direct taxation

The statistic cited earlier regarding health spending in the U.S.A and in Britain (11 per cent of G.D.P and 7 per cent, respectively) does not compare like with like: health spending in the U.S.A is mainly private, whereas in the U.K it is essentially a public expense – Mrs. Thatcher's privatization policies did not extend to the National Health Service.

As far as the overall American economy is concerned, the cost of the health system is immaterial. As long as individual consumers are paying for it, there is no reason why they should not spend more on health than on, say, holidays or furniture. In Britain or France, on the other hand, the public health system is financed through compulsory contributions by employers and employees, and these form part of the nation's overheads. They may thus have a direct bearing on the competitiveness of the country's products and services in the international marketplace.

Such is the line of reasoning which, beginning in the early 1980s, gave birth to the 'war on direct taxes'. The battle still rages.

At the forefront of the attack, President Reagan and Prime Minister Thatcher blamed the system of compulsory contributions for every ill under the sun: it penalised companies, discouraged individual initiative and dulled the fighting spirit of whole societies. The E.C, in turn, took up these accusations in one of its periodic bouts of Europessimism. The fact that contribution levels in Europe were so much higher than in America was thought to constitute an intolerable burden on E.C economies, making it impossible for them to compete on equal terms in the dog-eat-dog arena of international trade. The levels, however, have not come down significantly in the meantime.

Before a categorical yes-or-no answer can be given to the question of whether these criticisms are valid, it is well worth looking at the experience of Rhine countries. Their record of economic performance coupled with social achievements would suggest that the question is particularly complex, and cannot be reduced to the blanket assertion that less taxation inevitably produces a more prosperous economy. A thorough analysis will have to take into account not only the level of compulsory contributions, but the way they are structured as well. First, then, the theoretical and historical background. What we call 'contributions' are actually a form of direct taxation which the state collects for the purpose of financing social programs.

Since the end of World War 2 and the setting up of the European welfare state in all its different variants, this form of taxation has increased considerably, reflecting the growth of state interventionism and the generalisation of social welfare entitlement. The size and speed of this increase led some economists to predict that the growth rate of government spending (and hence of state revenues) would soon outstrip that of the economy. If left unchecked, they warned, an infinitely expanding public sector would eventually swallow up the entire national wealth: in other words, collectivisation by the back door.

The liberal reaction to this dangerous slide down the 'road to serf-dom' (in freed-rick von Hayek's words) was to unleash a ferocious attack on direct taxation, whose negative economic effects outweighed the intended social benefits. The best-known example of the liberal critique is the Laffer curve (popularised by the American supply-side economist Arthur Laffer), which is intended to demonstrate that government revenues actually decrease once rates of taxation go above a certain level. The reason for this is that people will simply lose interest in working harder if they know that the fruits of their extra labors will be confiscated by the state in the form of excessively high rates of taxation. Briefly, too much taxation kills off taxes.

This critique spawned a whole school of economics whose political influence in the 1980s was enormous, inspiring a multitude of tax reforms. Britain and the U.S.A drastically reduced income and corporate taxes; France committed itself to stabilising, and eventually reducing, the level of social security contributions; liberal governments in Germany, Sweden and the Netherlands soon followed suit.

If the argument against direct taxation made so many converts, it was because it contained more than a grain of truth – especially where European social democratic traditions were strongest. No one would deny today that British and Swedish rates of taxation had, by the late 1970s, reached such dizzying heights that they were choking the economy and proving oppressive to society in general. Some of the most dynamic and talented individuals chose to leave Britain and Sweden (the film-maker Ingmar Bergman, for one), and the phrase 'tax exile' was born. Not only were tax levels excessively high, but the measures adopted to enforce collection amounted to a veritable inquisition, creating a climate of suspicion and presumption of guilt that resembled that of a police state.

Meanwhile, the business of collecting taxes grew increasingly complex and bureaucratic – in other words, costly and inefficient – and it had to be paid for out of tax revenues (naturally). As the machinery ate up more and more of the money it was collecting, taxpayers were justified in feeling cheated by an inherently wasteful system.

The high tax burden on employers, too, was clearly a disadvantage for companies striving to enhance their performances in increasingly competitive world markets. Just as some individual taxpayers chose to seek tax relief abroad, a number of firms (notably in the textiles and electronics sectors) felt impelled to move parts of their operations to foreign climes where fiscal and social policies were more favorable.

The critics, no doubt, had scored several valid points. Their mistake was to go overboard: in excoriating the compulsory contributions system, in making it the bogeyman and source of all economic evils, they focused too exclusively on the overall levels of direct taxation. It is a short-sighted view.

There is no automatic connection between contribution levels and a country's economic performance. If proof were needed, it may be deduced from the following figures.

In the U.S.A, taxes deducted at source amount to 30 per cent of G.D.P. In France they add up to 44 per cent, and in Germany, 40 per cent. The Swedish figure is 52 per cent. Most interesting of all is the case of Japan: its 29 per cent rate, seemingly at the same level as America's, is (often wrongly) cited by liberal economists to support their argument. The figure is in fact highly misleading, for at least three reasons. First, because of demographic factors: if Japan had the same proportion of elderly people as the U.S.A, the ratio would be 32 per cent.

Secondly, most pensions are not included in the figure, as they are usually funded by private organizations rather than by the state, and thus do not appear in the public accounts. Finally, even in Japan the level of compulsory contributions has been rising steadily for the last 20 years.

France: mortgaging the future

It is apparent from the above figures that Germany's enviable economic performance has not been hampered by its relatively high level of direct taxation, while swinging cuts in taxes and social programs have neither halted America's economic decline nor made her industries more competitive in the face of the Japanese onslaught. It is no longer possible for Americans to blame the unions, the government or 'welfare cheats' for the country's lamentable situation. Once in the vanguard of social progress, Americans now have to work under worse conditions than most of their West European counterparts. If the U.S.A sometimes seems to be travelling away from, rather than towards, greater economic development, perhaps it is time to question the ultra-liberal theories which have been used to chart the nation's course.

The importance of money in American society is not something its citizens have ever been ashamed of; on the contrary, they are rather proud of it – which is why their declining competitiveness causes such acute embarrassment. Equally, in a land where people must be subservient to money, there is no shame in relegating social welfare to the back burner. Yet it is precisely this 'unsentimental' attitude towards social needs that is beginning to cost America dear.

This apparent contradiction is perfectly illustrated in the debate over compulsory contributions, and the failure to understand that it is not so much the total sums involved as the way they are structured that matters. In other words, more important than how much one pays is whom one pays, and by what method. Once again, all the Rhine countries have developed structures which are strikingly similar, and which could not be more different than those of the Anglo-American economies.

Image summary: This is a line chart. The figure illustrates the trends of compulsory deductions as a percentage of GDP across several countries, including France, Italy, Germany, the UK, Canada, the USA, and Japan, over a period of several decades. The data shows that most countries experienced an overall increase in compulsory deductions over time. France and Italy exhibit the most significant growth, reaching the highest levels among the group. Germany and the UK show moderate increases with some fluctuations. In contrast, the USA and Japan maintained relatively stable and lower levels compared to the European nations, while one unnamed country started at a much lower baseline and showed a steep initial rise before stabilizing.

Image summary: This figure is a line chart. It displays the trend of compulsory deductions as a percentage of GDP over several decades for various countries, including Belgium, Sweden, Denmark, The Netherlands, Greece, and Spain. The data indicates a general upward trend in compulsory deductions across all listed nations over the time period. Belgium and Sweden reached the highest levels of deductions, while Spain and Greece started at significantly lower levels but experienced substantial growth. Overall, the chart shows that most European countries increased their compulsory deductions relative to GDP, though they started from and peaked at different levels.

In Rhine countries, for example, social security contributions invariably account for at least 35 per cent of all direct taxes, while they represent only 28 per cent of the American total. Even more significant is the fact that the employee's share (as opposed to the employer's) of social security contributions is much higher, at about 40 per cent, in Rhine countries than in the U.S.A, where it is only 25 per cent. The tax 'bite' which reduces take-home pay is thus considerably greater in Rhine economies. By implication, the general public accepts that aid for the needy must not only be generous in order to be effective, but it must also come out of everyone's pay cheque, in a gesture of national solidarity.

The existence of a highly developed welfare system need not be a crushing economic handicap, then. It may even be an advantage, if the German example is anything to go by. State revenues go to finance a variety of programs designed to increase efficiency and competitiveness, such as training schemes, research projects and improvements to major infrastructure. There are a number of areas of 'invisible' public-sector spending (roads, postal and telephone services, railways, harbours etcetera) from which industry benefits, directly or indirectly, and which are seldom given the consideration they deserve – until they fall into such disrepair (as currently in the U.S.A) that it becomes impossible to ignore the consequences.

For all these reasons, the battle over taxes and social security contributions is certain to break out again, in the U.S.A and the U.K in particular, where the inevitable result will be new tax increases.

France, too, will have to join the fray, but it will be moving in the opposite direction. Its levels of direct taxation are the highest of all the large industrialized nations (44.6 per cent as against 40 per cent in Germany and the U.K); moreover, the government's relatively successful management of its budget cannot hide the inexorable increase in spending on health and especially on state pensions. The government of France is justifiably proud of having paid back its foreign debt in toto, and having kept its domestic debt within reasonable bounds.

But French companies have failed to make adequate provision for pension financing and have thus accumulated their own debts (off balance-sheet) of some F.F 10 trillion (1 trillion 800 billion dollars) – the equivalent of 2 years' G.D.P or 30,000 dollars per inhabitant. This phenomenal sum, needed to pay out the pensions of the future, will have to be raised through compulsory contributions: a financial nightmare, in short, which threatens to compromise the efforts of French companies to remain lean and competitive.

France, in this respect, is in a category of its own, for both models of capitalism (even the neo-American, despite its general neglect of the longer term) have made provision for financing workers' pensions. Formerly a nation of savers noted for their cautious approach to spending, the French are only now waking up to the realization that they have somehow squandered their inheritance and mortgaged their own future.

If there is a lesson to be learnt from the preceding discussion of the social economy, it is that it would be unwise to dismiss the medium-and long-term importance of what might be termed the social cohesion factor. The extent to which harmony reigns and imbalances are corrected within a given society cannot be ignored: it is crucial, albeit difficult to measure precisely. Like the proverbial water in the well, social cohesion is only missed once it has evaporated; only then does it become apparent that there is an economic cost to the stresses and strains which tear at the social fabric.

The ultra-liberal economists have been spectacularly blind to the unforeseen side effects of social injustice, and to the benefits of consensus and solidarity. There is no room in their supply-side calculations for unquantifiable 'details' such as the fact that, in a more homo-jee-nee-us society, the average level of education will be higher, and this in turn will facilitate society's ability to cope with change and adapt to new circumstances.

There is ample evidence to support the claim that social harmony goes hand-in-hand with economic success, no matter how obstinately the new conservative thinkers persist in ignoring it. The Austrian economist Joseph Schumpeter summed it up in a famous metaphor: it is only because they have brakes that cars can go faster. And so it is with capitalism. Because the authorities and the citizenry set certain limits and intervene to correct certain faults in the machinery of market forces, capitalism can be made to perform more efficiently.

As this enquiry into the nature of capitalism has by now made clear, there is no reason to believe the new orthodoxy when it proclaims that economic progress must be accompanied by increasing social injustice.

The dichotomy which pits development against welfare, and assumes that one cannot prevail unless the other is crushed, does not stand the test of observable fact. However antithetical they may at first appear, fairness and efficiency can be reconciled; they can even act in concert for the good of the economy – and the Rhine model serves as 'living' proof that this is no dewy-eyed fantasy.

That is the good news. But there is another, far more worrying, paradox which needs to be unravelled. At the very moment when the defects of the neo-American model stand revealed for all to see, the Rhine model remains largely unknown and unappreciated. Worse, it is actually losing ground on the political and ideological battlefield.

Chapter 9 The Rhine model in retreat

The economic and social superiority of the Rhine model is manifest, and ought logically to confer a measure of political respectability, if not outright triumph. Given their successes in so many areas, the Rhine countries should be fairly resistant to outside influences, and more especially to the siren song of the U.S.A and the superficial glitter of its casino economy. Incredibly, the reverse is true.

The Rhine economies today are increasingly falling under the spell of American politics, culture and media. In terms of ideological status and political prestige, the Rhine model is in retreat – and not only in countries which are undecided (so to speak) or share certain features with it. It is actually losing on its home ground.

America's seductive powers are such that even those societies which embody all the virtues of the Rhine model, and enjoy all its advantages, seem to be succumbing to her charms. In other words, they are in grave danger of becoming the latest victims of the neo-American illusion. A number of recent economic, financial and social trends are symptomatic of this drift, and in this chapter I will provide a few examples of them, and of their potential for undermining the foundations of the model itself.

The inequality trap

With its fundamentally egalitarian ee-thoss, the Rhine society, as we have just seen, is noticeably more cohesive than its neo-American rival. The social consensus founded on the ideal of equality is plainly one of the cornerstones of the model's success. But in practice, the relative equality of Rhine societies is under attack. An atypical species of 'nouveau riche' – ostentatious and self-indulgent – is making its appearance. This is particularly true of Japan, where the break with traditional values could not be more dramatic.

Japan's post-war economic growth brought considerable rewards for the vast majority of its population. Most of the old, established fortunes lay in ruins by 1945; afterwards, in the rush to Americanize and learn the ways of the democratic West, education was thrown open to one and all. Gradually, a Japanese middle class came into being.

The rebuilding of the Japanese economy thus incorporated a strong element of egalitarianism. This is not to say that everyone benefited equally: some did spectacularly better than others. But the new fortunes tended to be discreet, and were 'acceptable' to the culture; the hardships of the war justified the accumulation of new wealth, and the fortunate few were thought (rightly or not) to have earned their success through exceptional personal merit. Frugality and modesty continued to define the national consensus until the mid-1980s.

How times have changed! A new moneyed class of conspicuous consumers devoted to the pursuit of luxury is now on the rise. Their emergence can be traced to the extraordinary urban property boom of the 1980s, and the rapid development of speculation on the Stock Exchange. These two sectors of activity have, in recent years, generated an estimated 400 trillion yen (approximately $2.6 trillion) in windfall profits, according to the experts. Thus, a few land-owners, property developers and stockbrokers have become very rich – very quickly.

In Tokyo, Osaka and other big cities, even the owners of tiny plots of land which happened to be strategically located joined the ranks of the super-wealthy. Japanese society is increasingly split between landowners and the rest – and it is increasingly unlikely that the 70 per cent of the population who do not own land will ever do so. They may continue to save towards that goal, but the dream is fading. As it fades, one of the basic pillars of the post-war period is being undermined: home ownership was one of the key ideas the Japanese copied from the American way of life (the expression 'mai homu' – my home – has even entered the language). That this hope should be dashed is an ominous portent of social tensions to come.

The new wealth of the few is also seen by the many as somehow less legitimate than was formerly the case, if only because it has been acquired so quickly, that is it has not stood the test of time. A land-owner in today's Japan can make his fortune, amounting to billions of yen, almost overnight – and without selling his land! The boom in property prices means he can borrow money on favorable terms and invest it in speculative ventures, something the non-land-owner simply cannot do. The largest individual taxpayers in Japan are now thought to be property owners whose assets have increased tenfold, or even a hundredfold, over the last few years. The contrast is striking in a society whose capitalist ee-thoss has traditionally been founded on hard work and meritorious effort. The new magnates of finance and speculation are, broadly speaking, resented by the average Japanese.

In addition to the sudden, spectacular wealth of a small minority, Japanese society is having to come to terms with new patterns of consumerism. Nothing would seem to be more alien to its age-old values than lavish self-indulgence or the flamboyant exhibitionism of the conspicuous consumer. Yet the descendants of samurai warriors, inheritors of an ascetic tradition, have been astonishingly quick to adapt to the new narcissism of moisturising creams and designer fashions – just ask any European couturier, jeweller or wine merchant for whom Japan is now a lucrative export market. The sale of diamonds increased by 58 per cent between 1987 and 1988; the luxury car trade is doubling annually (the Japanese term for the nouveau riche is 'Benz-soku': literally, 'mur-say-dees-Benz people').

Japanese society is thus making a headlong dash to consume that threatens to erode its traditional values; this often takes the form of an exaggerated attempt to make up for lost time. There is, for example, a hugely popular late-night television program which goes far beyond anything dreamt of by American 'tele-shopping' promoters. The Japanese variant offers its viewers such tempting merchandise as a French chateau (a snip at $1.5 million), a vintage Rolls Royce once owned by the Duchess of Kent, or a modest Fiat that used to belong to the Pope. The new Japanese elite can be compared to the thrusting English middle class of the late nineteenth century or the flamboyant Americans of 30 or 40 years ago who gambled away millions of dollars in the casinos of the Riviera. Age-old values have begun to give way to a fascination with glamor and money, fuelled by the international purchasing power of the 'almighty yen'.

More than ever, such blatant inequalities are stirring resentment among ordinary citizens who feel left out of the new consumer culture. When Japan's prestigious Asahi Shimbun newspaper asked in a survey, 'Do you live comfortably?", 62 per cent replied in the negative; 60 per cent went on to say that they believed Japanese society would continue to become more unfair, and dangerously so. Little wonder, then, that the 'silent majority' of Japanese are increasingly ill-disposed to accept without question the traditional pattern of life shaped by work, thrift and civic duty.

The Japanese economy cannot escape the consequences of this galloping Americanization of its culture, and notably of its young people. The snob value automatically attached to foreign luxury goods is in danger of overtaking the economic nationalism which hitherto has been the best guarantee of Japan's perennial trade surplus. Worse, it could undermine the habit of saving which, as previously noted, is one of the great strengths of the Japanese economy. The decline is already significant: as a proportion of gross disposable income, savings have dropped to a level of 16 per cent in 1989 from 24 per cent in 1970. Plainly, fewer Japanese households feel the incentive to save, particularly towards housing.

As they gradually acquire a taste for hedonism and mass consumerism, Japanese workers are likely to develop a corresponding detachment from the work ethic and their traditional devotion to the company. In Tokyo one can already overhear ironic remarks concerning the workaholic behaviour of Koreans.

These changes within Japanese society are likely to give heart to those industrialized countries most vulnerable to the seemingly unstoppable tide of Japanese exports. Many in the West would be only too happy to see in them the symptoms of their main competitor's irreversible decline.

A fractured consensus

The social consensus characteristic of the Rhine model is also in jeopardy. One by one, the priorities that underpin this consensus – the primacy of collective over individual interests, the power of trade unions and the voluntary sector, co-responsibility in company management – are proving vulnerable to new and destructive forces.

Sweden is one of the Rhine-model countries which most vividly illustrates the breakdown of collective responsibility and the rise of individualism. The cradle-to-grave welfare system is increasingly under attack. Numerous commentators have already written off the 'Swedish model' of social democracy, and even the government's own economists are on record as believing that the nation can no longer afford the high price of universal social protection. Taxation levels remain relatively high; the emigration of 'tax exiles' goes on unabated and Swedish firms continue to see investment abroad as more attractive than expansion at home. Capital is in fact pouring out of Sweden at an unprecedented rate: from less than $1 billion in 1982, Swedish investment overseas totalled about $7.5 billion by 1989. The tax system also discourages individual and household saving, to such an extent that the savings ratio is now into negative figures.

Such losses are only to be expected in any national economy where direct taxes, and more particularly social security contributions from wages, are significantly higher than in neighboring countries. The French would be well advised to reflect on the Swedish experience in this area! As the sense of community solidarity begins to weaken, so abuses of the social security system tend to become more widespread.

The Swedes themselves are not joking when they say that their country holds two world records: one for good health and the other for sick leave. The latter amounts to an average of 26 days per person per year, fully paid and subject to only perfunctory checks. Absenteeism is another Swedish speciality, often reaching the unheard-of level of 20 per cent.

Swedes, then, are increasingly keen to take personal advantage of the system without giving any thought to the consequences their behaviour must inevitably have on the system's very survival. Or, in the wry observation of one Swedish economist, 'Compulsory social insurance works very well indeed – until people figure out how to make use of it'.

So many aberrations and inconsistencies inevitably sparked a backlash. In October 1989, the Social Democratic government headed by Ingvar Carlsson announced that state spending would be slashed by 15 billion crowns (nearly $2.25 billion). At the same time, measures were introduced to liberalise the economy. These included tax cuts, deregualise lation of the banking sector, freer movement of capital into and out of the country, and less subsidising of agriculture, among others.

The Swedish model is beset by nearly every problem in the book at the moment (although many of its difficulties go back to the early 1960s at least). The Financial Times of 29 October 1990 summed it up:

Indeed, the Swedish economy began to reveal alarming signs of sclerosis. Its growth rate – which, apart from Japan's, had been the best in the Western industrialized world since the 1890s – began to falter. Poductivity became sluggish. The balance of payments fell into deficit. [. . .] Above all, wage and price inflation in a tight labor market undermined its international competitiveness.

Sweden's current plight has the signal merit of illustrating those aspects of the Reagan–Thatcher revolution which were right on target, and remain valid today. Like Labour Britain, Social Democratic Sweden has finally realized that it simply went too far in the direction of solidarity; what began with generous intentions ended up bogged down in a mire of irresponsibility and indolence that would inevitably attract all the economic demons from inflation to trade deficits – and, ultimately, a lower standard of living.

In the battle of capitalism against capitalism, the first casualty in the ranks of Rhine model will be Sweden.

Individualism and demography

Demographic problems are not, perhaps, something one would expect to find in a chapter on the retreat of the Rhine model. But if one accepts that demographic decline is always accompanied by increasing individualism, then the choice is entirely justified.

All the Rhine countries are facing a serious demographic shortfall, having failed to maintain the population replacement rate of 2.1 children per female. As a result, the working population is shrinking, and the ranks of the non-working will grow correspondingly to a proportion of about 60 per cent. It is a trend characteristic of all developed societies, but nowhere more so than in the Rhine countries.

If there is a convincing interpretation of this tendency, it surely lies in such factors as the rise of individualism, the desire to live more comfortably, and a less optimistic view of the future (the newspaper Le Monde put it more bluntly in a recent article entitled 'Germany is Afraid of the Future'). In Japan, the housing crisis is just one of the social, economic and financial constraints which have conspired to lower the birth rate. There is no lack of statistical proof of the debilitating effects of an ageing population on the economy, many of which are perfectly obvious. As the working population declines in relation to the non-working population, the inevitable results are manpower shortages, social security deficits and increased expenditure on pensions.

There are other, less easily measurable, consequences too: research programs suffer for want of young scientific brainpower, the economy becomes generally less dynamic, and society as a whole becomes more inward-looking. It would seem only logical that the Rhine countries – any ageing society, in fact – threatened with a demographic crisis on this scale would actively pursue a policy of encouraging larger families. So far, this has not been the case. The authorities have been extremely reluctant to implement measures which could be widely misinterpreted and whose efficacy in promoting the birth rate is far from guaranteed.

In Germany, at least, a new variable has been introduced which is certain to alter the fundamental aspects of this problem: I am referring, of course, to the flood of immigrants from Eastern Europe already pounding at the gates.

New habits, new demands

A further example of changing perceptions and new patterns of behaviour in the Rhine countries is the general attitude towards work. Already, the shortest working week in the O.E.C.D is Germany's (still on course for a further reduction to 35 hours); in Japan, too, a shift in attitudes is under way which looks all the more remarkable because it is so sudden.

The Japanese work ethic, founded on the employee's unquestioned devotion to his company, is showing signs of fatigue. At present, the average Japanese worker takes only one week of holidays per year. But the younger generation wants more: two or even three weeks. The government actually encourages this trend, and has been trying (so far, unsuccessfully) to reduce the official work week from 44 to 42 hours. Another sign of the times is the fact that leisure industries are booming. And there is a general movement of opinion which is increasingly crit- ical of the Japanese obsession with hard work and all its ill effects: the problems of stress, family break-up and early death linked to overwork are abundantly reported in the media. The Ministry of Health itself carried out a study of cases of sudden death which indicated that 10 per cent of all adult males who die each year literally 'worked themselves to death'. The damage can be measured in terms of sociological consequences which are no less worrying. Long working hours and chronic exhaustion may lead to suicide, divorce and alcoholism.

The 'Japanese miracle' has its limits, and the lifestyle which it demands is being openly challenged by the younger generation. As in Germany, the youth of Japan cannot reasonably be expected to share their parents' impulse to rebuild a nation ravaged and humiliated by war. Having experienced only prosperity, in full knowledge of the country's massive surpluses and all-conquering currency, they naturally wish to enjoy today the fruits of yesterday's labors. Yet this desire must inevitably have repercussions on the economic and ideological model which produced so much abundance. Japanese society is henceforth faced with the challenge of learning to accommodate individual hopes and freedoms which are essentially alien to its traditional culture.

The trade union movement and the bargaining procedures it has imposed are yet another (predictable) casualty of the diminishing sense of community solidarity now apparent in the Rhine countries. It is true that deunionisation is a worldwide trend: in America, the U.K, France, Sweden, Japan and even, to some extent, Germany, trade union power is in decline as membership plummets. But for Rhine societies this phenomenon takes on a different meaning, given the traditional importance of the labor movement in helping to create, and perpetuate, the social consensus.

Deunionisation is particularly noticeable in Sweden, for example. The principal trade union, L.O, has seen its influence greatly reduced as a result of reforms in the labor market whose effect has been to decentralise the collective bargaining process. Negotiations between management and workers now take place company by company, rather than on a national level. The new procedures have resulted – perhaps unexpectedly – in spiralling wage settlements, leading in turn to inflation and a further blow to Swedish competitiveness. The old discipline (of which L.O was the chief guarantor) is cracking, as pay bargaining becomes more arduous and subject to threats and counter-threats in the absence of overall coordination and control. (Swedish employers are especially vulnerable to threats in these days of manpower shortages.)

The Swedish example thus proves a valuable point: declining union power and greater flexibility in the bargaining process are not necessarily synonymous with a more efficient, more competitive, industrial profile.

In addition to all this, the unique Rhine model of company organization is also under pressure. The traditional corporate command structure, in which promotion depends to a large degree on seniority (whose advantages have been pointed out in an earlier chapter), is thought to be inflexible and inhibiting. A growing number of young Japanese graduates balk at the prospect of a minimum 15 years' service before they can become managers or department heads, and another 15 years to reach senior management level.

The exaggerated formality which characterises relations between staff and executives in Japanese companies is also coming in for criticism, with the result that Toyota, for example – a model Japanese firm in every respect – has eliminated one of its middle-management positions, whose Japanese title smacked of old-fashioned paternalism. In Germany, Siemens has struck a number of ranks from the corporate roll in a bid to speed up information exchange and decision-making procedures within the company. As for the system of boards of directors and supervisory committees at the highest level of management, it too is not immune from attack.

Critics say the traditional arrangement at the top of the command structure is heavy-handed and prone to inertia.

The pay scale is another sore point. Plainly influenced by the neo-American model, the brightest German or Japanese graduates – some of whom may have been to American universities and colleges – are showing their impatience with a system that links salaries to seniority and qualifications. They are demanding a faster climb up the pay and promotions ladder, especially in rapidly expanding sectors and the most successful companies. Their frustrations may ultimately play into the hands of foreign firms 'head-hunting' for their offices in Frankfurt or Tokyo.

If the young managers in German or Japanese firms have rejected the slow but steady career path of their own corporate culture – the Rhine culture – in favor of the American success story, it is because the latter is such a potent myth. Seen from afar, the U.S.A still shines like an irresistible beacon; its influence may be deplored (or not) but it certainly cannot be denied. And it is felt at another level which may prove to be decisive in shaping the future of the Rhine model.

The siren song of finance

I have already had occasion in previous chapters to stress the advantage enjoyed by Rhine-model companies whose ownership is in the hands of a stable and loyal pool of shareholders, and who can count on bank financing. I wrote those passages with the small shareholder in mind.

Small shareholders possess the inestimable quality of feeling a certain attachment to the firms they have invested in. But they can hardly be blamed for showing an interest in a takeover bid, should one come along. It is, after all, a bid, which they can refuse or accept – and why refuse, if it proves to be the chance of a lifetime to make a substantial profit on their holdings?

That is the whole point of Rhine legislation regarding takeover bids: to address the legitimate interests of the small shareholder, so that they too may benefit from the offer of a better share price than that quoted on the exchange – something which elsewhere is a privilege reserved for major shareholders, those who hold blocks of shares.

If the end result is to discourage takeover bids in the Rhine countries, does that necessarily mean that shareholders miss out on profit-making opportunities? In an attempt to find out, I arranged for a statistical analysis to be carried out, based on the variations over a ten-year period in the spot share values as listed on the four major Rhine-model stock markets (Frankfurt, Zurich, Amsterdam and Tokyo) as well as on the London, Paris and New York exchanges. (The data were drawn from the usual stock indices, such as the Dow-Jones, the F.T 100, the Nikkei etcetera) The question asked was: How much would $100 invested in each of these markets on 31 December 1980 be worth 10 years later? Here are the answers:

Table summary: Tokyo has the highest value among the listed cities, followed by a group of European cities, with London, New York, and Zurich showing the lowest and most similar values.

The figures are eloquent: despite the effervescence of Wall Street and the City during the 1980s, the Rhine exchanges win hands down (with the exception of Zurich, whose poor results since 1986 reflect Switzerland's difficulties as it faces the E.C Single Market).

I do not wish to claim that these findings are absolutely conclusive, insofar as they are based on my own personal calculations rather than on a rigorous scientific method which would, for example, have to take account of the different approach to sampling from one index to another. Furthermore, although allowance was made for currency exchange rate fluctuations, I did not consider dividend payments (much higher in Britain and the U.S.A) or the effects of taxation in arriving at the final figures. All told, the 'edge' in favor of the Rhine exchanges may not be so clear-cut, but the result is, at the very least, a draw. Small shareholders in Japan, Germany and Holland can rest assured that they have not 'lost out'.

In the case of Japan, there can be no doubt that shareholders did very well indeed during the 1980s. The Tokyo Stock Exchange took off in spectacular fashion at the beginning of the decade, and the Nikkei index climbed to unprecedented heights. The price-earnings ratio (Per), which reflects the market price of shares relative to company earnings, has in some cases reached multiples of 60, whereas American or British stocks rarely exceed a Per of 10 or 15. The large Japanese banks have profited immensely from this escalation of market values, and in the small world of international finance names such as Nomura, Dai-Ichi, Sumitomo and Daiwa now trip off the tongues of the initiated. The latest arrivals on the Japanese financial scene are futures and options markets, copied on those of Chicago, London and Paris.

In Germany, the banks have at last begun to get involved in the new international financial markets – reluctantly, because high-flying speculation is not part of their traditional culture. But the American example has proven too strong even for the sober German financiers to resist; it is as if an order of monks had woken up one day to find that their austere chapel had been turned into the Crazy Horse Saloon. In Frankfurt, as in Tokyo, finance is plotting its revenge.

Two recent examples of this trend will serve to illustrate the breach that has been driven through the traditional defenses of the Rhine model of finance. Early in 1991, the leading Dutch insurance company, Nat-Ned, made an offer of exchange of its own stock for that of the Netherlands' third-largest bank, N.M.B Postbank. This would have produced a merger of unprecedented proportions for the Netherlands. The small shareholders closed ranks and attempted to stop the bid, protesting that the terms offered fell short of what might be acceptable. They were joined in their efforts by Aegon, an insurance group which held 17 per cent of Nat-Ned shares. Yet together they were unable to stop the merger, once the initial bid had been improved. An unremarkable story, had it taken place on Wall Street; but on the banks of the Rhine, it is the sign of a new and alien financial mentality.

The second case in point is the takeover by Pirelli, the Italian tyre maker (ranked fifth in a highly concentrated world market), of its German rival Continental Gummi-Werke. Having gradually acquired 51 per cent of Continental shares, Pirelli was nevertheless powerless over the affairs of the German company, whose articles of association restricted any one shareholder from exercising more than 5 per cent of voting rights. Such limitations are common practice in Germany, and allow the board of directors to refuse unwanted merger bids – which is exactly what Continental's board did. This time, however, the denouement was entirely unexpected: Continental shareholders held an extraordinary general meeting and voted (by a 66 per cent majority) to overturn the 5 per cent clause.

The board of directors lost, the owners won, and the financial history of German capitalism was changed forever. The rise of the shareholders as adversaries rather than allies of management is bound to be a shot in the arm for the hitherto sluggish German stock exchanges.

As finance takes off, the shareholder's higher profile is mirrored by the faltering power of the banks. The traditional role of the 'house bank' One enjoying a special relationship with a company – is, according to observers of the German scene, on the wane. Firms are putting some distance between themselves and their usual bankers as they begin to respond to the advances of foreign banks and the lure of the financial markets. Banks, for their part, are no longer automatically entrusted with the A.G.M voting rights of shareholders whose accounts they manage; such proxies must now be granted in writing. In general, the banks' cosy relationship with their corporate clients (and the economic power it entails) is attracting more and more criticism: political parties such as the S.P.D and the Liberals have begun the attack by suggesting that a ceiling of 15 per cent should be put on bank ownership of capital stock in any one company.

The steady rise of the financial markets in Rhine countries also means that the monetary authorities, and governments in general, will lose some of their powers. Such is the logic of finance on an international scale: the more capital moves across borders, the less discretion is available to central banks and national treasuries in their attempts to influence the principal economic parameters (taxation, interest rates, money supply etcetera).

When Helmut Kohl had to scrap a fiscal reform involving deductions at source because it had sparked a massive flight of capital from West Germany, he unwittingly gave a superb demonstration of the new political impotence. And although the Bundesbank may still, on occasion, go its own way in setting interest rates (as it did in January 1991, scuttling a Group of Seven agreement reached only 10 days earlier), it is obvious that the German and Japanese central banks no longer enjoy the complete independence which has traditionally been theirs. Interest rates in particular are increasingly subject to Eurodollar levels, which in turn depend on decisions taken in Washington by the Federal Reserve Bank. As German and Japanese monetary authorities lose their room to manoeuvre, the dependence of national economic policies on outside forces contrasts even more strikingly with the immensely powerful position which the economies of these countries occupy on the world stage.

There is another disquieting tendency which reflects the growing influence of American-style 'casino finance' on the Rhine model, and that is the dubious behaviour – if not outright fraud – of some financial operators. Germany and Japan can now 'boast' that they, too, have embezzlement and insider trading scandals. The Volkswagen affair, in which a top executive was found to be playing the stock market with company funds, is an especially revealing case. More notoriously, German firms provided Saddam Hussein with all the help he needed to produce chemical weapons; it is unlikely that any American company would have accepted the job. And what of the potential for criminal abuse of the sacrosanct secrecy of the Swiss banks? Again, it was the Americans who forced them to 'come clean' and freeze the $20 billion of Iraqi assets deposited in bank vaults in Geneva, Basel and Zurich – provoking, by the by, one of Saddam's more spectacular tantrums.

Business ethics are also under scrutiny in Tokyo these days, notably on the stock exchange, where the hand of the yakusa (a Japanese version of the mafia) has been detected in several recent cases of fraudulent operations. There is certainly no shortage of financial misdoings in the political arena; the Recruit scandal, it will be remembered, helped sink two Prime Ministers.

Plainly, the virus of 'easy money' has begun to insinuate itself into the heart of the Rhine model and its financial institutions. What is especially worrying is that Rhine countries have not yet built up as many 'antibodies' (rules and regulations, investigative methods etcetera) with which to fight the infection, as the Anglo-American economies have done. They are, therefore, alarmingly vulnerable to a host of ills. But even these, in the final analysis, are only the secondary manifestations of a much larger, much more important force, which goes by the name of financial globalization.

Finance – it is worth repeating – is one of the two or three most powerful vectors involved in the spread of the neo-American model. I have tried to show how it helped fashion the present shape of American capitalism, and is now emerging with a vengeance in Japan and Germany. Just as a lever multiplies the force applied to it, finance is the perfect tool for adding strength to the capitalist ideology: what it does spectacularly well is to reinforce the status of the market as the most powerful economic mechanism and the ultimate arbiter of the fortunes of business and industry.

For the last decade and a half, the lever of finance has been exerting an unprecedented force on all the capitalist economies, of whatever scale. Three powerful factors – innovation, internationalization and deregulation – combine to fuel the drive towards financial globalization, making it much more than a passing phase. It is a new, but probably permanent, part of the world economic landscape.

Before taking a closer look at the forces behind it, let us first examine its origins in the series of dislocations and upheavals which have allowed finance to achieve its present dominant position.

Shocks to the system

It is not easy to pinpoint the beginning of globalization in the sphere of finance. International movement of capital is, of course, a centuries-old phenomenon: Renaissance Europe was largely financed by the Lombard banks (immortalised in the 'Lombard rate', the name given to the German prime lending rate, and Lombard Street in the City of London). Throughout the nineteenth century, the English and French were the great exporters of capital, via their colonial empires principally, but not exclusively: Russia and Turkey both borrowed heavily from the accumulated wealth of Britain and France.

British financial power remained considerable after World War 1, but by then American finance was beginning to flex its muscles. The 1929 crash was to provide an eloquent illustration of just how crucial the movement of capital had become, as the channels of international finance became the means by which successive stock market failures gathered weight and speed. Finally, by the end of World War 2, the international financial system seemed to have settled down into a respectable, and durable, maturity. Governments of all hues collaborated in shaping and maintaining a reasonably sound mechanism whose foremost achievement was monetary stability.

The Bretton Woods agreement inaugurated the first credible international financial and monetary system. The gold standard was partially revived by giving it an alter ego in the form of the U.S dollar ('as good as gold'); other currencies would be measured against the dollar within a parity grid. The system's watchdogs were put in place: the International Monetary Fund, on the one hand, would be responsible for mitigating the currency fluctuations caused by balance-of-payments difficulties, while the World Bank, on the other, helped finance economic development and reconstruction programs. The entire system hinged on the commanding position of the dollar as both universal standard and unit of international exchange. At a time when the U.S.A was politically and economically dominant, accounting for half of world industrial production as well as 50 per cent of world gold reserves, and in the forefront of technological progress, this did not seem illogical or unsuitable. Certainly no other country was in a position to challenge American leadership in monetary and financial matters.

Although we refer to this post-war system as 'international', it nevertheless remained circumscribed by the economic requirements of individual nation states, and above all by that of the U.S.A. Three shocks were soon to be administered to the system, inevitably destroying its fundamental logic. The first shock was the decline of American power, and with it, that of the dollar, while at the same time Japan and Europe were catching up. The Deutschmark, the Swiss franc and the yen were soon to join the dollar as recognized international currencies. The second shock arrived on 15 August 1971, the day President Nixon announced that the dollar would no longer be convertible to gold. The Bretton Woods system collapsed at a stroke, and the dollar lost 80 per cent of its value.

The 1976 Jamaica accords made it official: fixed exchange rates were abandoned once and for all, and currencies would be allowed to float freely. The I.M.F and the World Bank had never worked as intended, having failed to secure a broad enough base upon which to build monetary discipline and keep member states in line. Bretton Woods had in fact broken down under the weight of its own contradictions: founded on the dollar as the vehicle of finance and development, it had to juggle two equally important but conflicting requirements in order to function properly. In the first place, a ready supply of cash had to be available to keep the financial machine ticking over – in other words, the U.S balance of payments had to be kept in the red so that there would be enough dollars abroad.

Conversely, the dollar's gold convertibility had to be maintained, and for obvious reasons this meant that the U.S foreign deficit could not be permitted to grow beyond reasonable limits. It was an insoluble dilemma. Either the world economy would be starved of dollars, or the American deficit would expand indefinitely along with the dollar supply, leading to insolvency. Bretton Woods had to fall apart eventually; when it did, the sense of order and discipline which had prevailed since 1945 was condemned as well. Currencies would henceforth be left to float – or, more accurately, to be tossed about on the unpredictable seas of world money markets.

The abandonment of the Bretton Woods led to a profound change in the very nature of money itself. From now on, it would be perceived as a merchandise like any other: 'Money is a commodity', in the phrase made famous by Milton Friedman. A commodity, and nothing more: the formula may seem harmless enough, yet it marks a traumatic break with the past, when money was something more – a standard, an intangible symbol, an immutable point of reference. In its new incarnation money is merely a negotiable asset which can be traded on the market in the same way as wheat or beef (or companies, for that matter). The money markets have inevitably come to resemble those which deal in agricultural produce and raw materials, and the same techniques are brought to bear – trading in futures and options, swaps etcetera It is fitting, and somehow inevitable, that such innovations as foreign currency options and futures contracts on interest rates should have been developed and refined in Chicago, home of both the Milton Friedman school of monetarism and of the great commodities markets, where pork bellies, orange juice and soy beans are traded in the same way. None of these innovations could have arisen in the era of money-as-totem; all became possible once its status had changed to that of a mere commodity.

The third great shock to the system took the form of a series of upheavals and imbalances on a worldwide scale: one oil crisis after another, a faltering dollar, massive trade gaps and oceans of the debt of the developing countries have, since 1973, kept the planet in a permanent state of red alert. Each tremor is registered on the economic seismograph as a sudden panicky movement of the major financial indicators – interest rates, exchange rates, share prices etcetera In the first 4 months of 1980, for example, American interest rates fluctuated within a range of more than 10 percentage points.

Faced with so many uncertainties, financial dealers could hardly be blamed for trying to protect their own interests; the new forward-exchange and options markets seemed the best defense, and their rapid expansion was only logical in view of the risks involved. After all, if a French investor wishes to launch an operation in the U.S.A, he must take every precaution against the eventuality that after 5 or 10 years the dollar may have lost half its value (something which in fact has happened – twice – in the space of 10 years). The profitability of his investment would thus be severely compromised. However, importers of American goods, running their businesses on very low profit margins, are equally vulnerable to any upward movement of the dollar. The point is that such brusque movements in the value of the U.S currency are now almost everyday occurrences, and so financiers are constantly shifting enormous amounts of capital from one end of the planet to the other in order to keep out of harm's way. This invisible 'merchandise' exists in order to provide cover for the risks inherent in the system which hardly anyone talks about, but whose costs everyone has to bear.

This brings us to the question of innovation, the first of the three major factors responsible for increasing financial globalization.

Innovation: giving wings to finance

The globalization of finance would never have been so thorough, or taken shape so quickly, without modern technology and new legal provisions. Information technology and telecommunications would prove to be the main weapons in the financial arsenal. Thanks to satellites, cables and computers, financial data travel freely around the globe and can be instantly processed and integrated into existing data – all at very low cost (it has been estimated that the real cost of financial transactions has been reduced by 98 per cent as a result). The 'golden boys' of finance never have to leave their desks in order to trade on virtually any market in the world; a computer terminal is all that is needed. American Treasury bonds can be traded in Paris, Peugeot shares bought and sold in Tokyo or London, the European ecu quoted in Chicago. Technology is the vehicle which allows finance to gather momentum.

There have been other innovations of a purely financial nature. Until the 1970s, finance was almost immune to the creative impulse: banks provided credit and stock exchanges dealt in shares and bonds, and that was that. But the last 15 years have seen the development of a bewildering variety of new financial products, from futures and forward-exchange contracts to options-convertible securities and note issuance facilities (N.I.F's), not to mention R.U.F's, M.O.F.F's and other exotic acronyms.

It all adds up to a whole new financial universe of immense propor- tions. The Chicago futures markets, which specialize in these products, handle a volume of business that is two or three times greater than that of Wall Street. But the phenomenon is not limited to Chicago; the new finance has burgeoned everywhere in the capitalist world (whose markets are of course open to any and all foreign business). Moreover, governments have actually encouraged the trend towards internationalization of the new markets. When the French futures exchange, matif, was set up in 1986, the authorities knew it would attract German investors anxious to secure the kind of innovatory financial cover unavailable to them under the Rhine system. Where the Anglo-American financiers had been quick to develop and refine new techniques, the stolid world of German banking had been reluctant to abandon its slow and cautious approach to finance, and had thus fallen behind in the race to innovate. Financial globalization is, among other things, a process that frees capital from the earthly bonds of classical banking and propels it towards the exalted heights of speculation and the thrill of the stock market. As well as the new technology, the new concepts that have made globalization possible are, in the main, products of Anglo-Saxon cultures.

Internationalisation of the financial sphere is a logical consequence of its own growth, but it is also (if not principally) the result of a general trend encompassing virtually every economic activity on earth, not just finance.

Trade is the locomotive that drives internationalization, and that has been true even before the birth of capitalism. What is new is the rate of expansion of world trade since 1945: it has grown at double the rate of world production. This means that the proportion of goods leaving the country is increasing in relation to the amount remaining where they were produced. The corollary to this phenomenon is, naturally, that national economies are increasingly open to the outside world. The evidence can be seen in the import ratio (imports as a percentage of G.D.P), which doubled in the U.S.A between 1970 and 1990 to reach 14 per cent, and in France jumped from 15 per cent in 1960 to 23 per cent in 1990.

The growth of world trade has a dynamic all its own whose effect is to internationalise industry and production in a two-pronged movement. On one side, the multinationals feel it is good strategy to estab- lish themselves on the home ground of the new clients and new markets they are constantly seeking to win; on the other, there are the companies who (sometimes reluctantly) delocalise part of their operations in order to save on labor costs. That is why, for example, the electronics industry has most of its basic components manufactured in south-east Asia.

Commercial and industrial internationalization leads to gigantic flows of capital across borders: trade and new investment have to be financed, risks have to be insured, profits have to be sent home. An increasingly international economy naturally creates a need in the financial sector for vast amounts of 'cross-border capital' to be available at all times. And on top of all this, the huge surpluses of German, Japanese and opek capital need a home from home, ending up as investments in capital-poor areas around the globe.

It is difficult to imagine what this international trade in the invisible commodity of capital really amounts to as it circles the planet at the speed of light. The statistics tell us that the daily volume of transactions on the foreign exchange markets of the world totals some $900 billion – equal to France's annual G.D.P and some $200 billion more than the total foreign currency reserves of the world's central banks. Capital leaps over borders, oceans and deserts in the time it takes to type in a computer command. It is constantly on the move, seeking investments in every market on the planet, and it has even conquered time itself.

When the Tokyo exchanges close, computer trading moves on to London just as the British markets open, then proceeds to New York and thence back to Japan a few hours later, to begin all over again. If they are to cope with non-stop trading, financial operators (especially banks) have no choice but to develop their international networks, concentrating on the three main poles of attraction (the U.S.A, Japan and Europe). Thus Nomura, one of the large Japanese commercial banks, took the decision to transfer its market operations command center to London. Plainly, the money trade has already created its own 'Single World Market'. The individual exchanges are little more than frail craft on the financial ocean, buffeted by the variable winds of capital as it moves ceaselessly across the globe.

Deregulation

Deregulation is the last, but not the least, of the factors contributing to financial globalization. The effects of regulation on movements of capital are well known: in the 1960s, for example, American banks migrated en masse to London in order to escape restrictive legislation at home (and thus sowed the seeds of the Eurodollar market). Conversely, deregulation is the signal that opens the doors to international markets and brings capital flooding in. When the U.S.A rescinded the infamous Q rule, which restricted the return on sight deposits, the banks chalked up a tenfold increase in business in the race to sign up new customers. The creation of unit trusts in France, in 1978, is a similar success story: today they manage funds amounting to some F.F 1.5 trillion (more than $270 billion).

America and Britain led the way in deregulating their financial markets; other countries were quick to imitate them, knowing that failure to do so would only benefit their competitors. The plethora of rules and restrictions governing securities and commodities trading were everywhere relaxed or simply abolished. The French Treasury, obsessed with the power and influence of the City of London, instituted a comprehensive deregulation of the Paris exchanges in order not to lose business to the great rival across the Channel.

The financial sector thus has an inherent tendency to expand, on at least two accounts. First, its activities inevitably extend beyond national boundaries. The framework of the nation state is too narrow, too parochial to accommodate the impetus of world finance. Individual states and their often arbitrary borders can hardly resist this built-in logic of internationalization. In the words of Nobel Prize-winning economist Maurice Allais, 'The world has become one vast casino whose gambling tables are scattered from one end of the globe to the other'.

The second reason has to do with the ideology of the 'pure' market, inseparable from the logic of finance itself. It is in the nature of the beast, so to speak, to seek out markets offering the least resistance, the fewest rules, and the greatest opportunities for initiative and innovation – but also presenting the highest risks (whether of dishonest dealings or of outright crashes).

On both accounts, then, financial globalization is the principal means by which the ultra-liberal model is disseminated throughout the world. Its power is such that even the best-organized economies – the Rhine economies – are unable to fight back effectively. Added to its media appeal and historic successes, the neo-American model has thus managed to infiltrate its Rhine counterpart by means of a Trojan horse filled with financiers and brokers.

Chapter 10 The American hare versus the Rhine tortoise

At this point, it is essential to examine more closely a central paradox in the analysis. Of the two models of capitalism, it is the Rhine variant which is plainly more efficient than the neo-American, whether considered from the economic point of view or from the social angle. Yet there can be no doubt that the neo-American model maintains both a psychological and political edge over its rival, and has done so since the beginning of the 1980s. It enjoys this position of 'moral superiority' on Rhine territory itself – in Germany, Sweden and even Japan – and throughout much of the southern hemisphere, notably in Latin America (where, to be fair, American-inspired ideas have shaped the economic policies and management techniques successfully applied by the up-and-coming economies of Chile and Mexico).

In the struggle for influence which pits one capitalist model against the other, one is eerily reminded of Gresham's Law, the 400-year-old dictum which says that bad money will drive out good. It is a strange contrast indeed: the neo-American model consolidates its psychological advantage while at the same time offering abundant proof of its economic shortcomings. Conversely, the demonstrable qualities of the Rhine model fail to grip the imagination, in spite of the increasing public concern for the economy. On the face of it, this makes a nonsense of the market principle itself; it is as if car buyers were flocking to purchase a model whose flashy exterior concealed a third-rate, clapped-out engine.

Imagine for a moment that a survey could be carried out in the less-developed countries, in which the following question was asked: 'Given the choice, where would you rather live: in North America or western Europe?' Now, you and I may know that immigrants (legal ones, anyway) are in general better off – or less badly off – in Europe. Wages are at least as high as in the U.S.A, there is adequate provision for social security, and in Rhine countries the right to decent housing is guaranteed, in stark contrast to the U.S.A. No matter: the overwhelming majority, particularly the young, would opt for America. The fact that Europe is something of an unknown quantity in Latin America and Asia may go some way towards explaining this – nowhere is the U.S.A more popular than in communist China! – but even in Africa and eastern Europe, most people would still spontaneously pick North America as their preferred destination. Canada would win hands down over Scandinavia, for example. Why should this (still) be the case?

There is a larger question which must be asked, and that is the extent to which the economic behaviour of groups and individuals is rationally motivated. Those who assume that the economy obeys no other logic than self-interest, or even community or national interest, are mistaken. The illusion of a system in which all economic activity results from a careful weighing-up of the pros and cons of a given decision, such that the sum of competing individual interests is evened out by the invisible hand of the market, is exactly that: an illusion. Homo economicus, the ideal producer/consumer whose choices are systematically arrived at through a dispassionate, almost mathematical, process of calculation, simply does not exist outside the theoretician's imagination.

Image summary: This figure is a conceptual illustration depicting a downward trend. It shows a thick, jagged line descending from left to right, resembling a crashing stock market graph, with people in circular pods sliding down the slope. Some individuals are falling off the line entirely, surrounded by flying papers and documents, while one person clings to a sign labeled share. The illustration suggests a catastrophic financial collapse, implying that investors are losing their assets and stability as the market value plummets rapidly.

In the real world of real economies, the irrational is strongly represented. Passions, passing fads and improbable fantasies play a far greater part in the economy than any textbook on the subject dares suggest. Politicians, on the other hand, have to be more realistic: governments, if democratically chosen, are certainly in no position to ignore the preferences – however 'unreasonable' – of the electorate.

In economics, as in everything else, it is not enough for an idea to be intrinsically worthy or valid. It must also be politically marketable.

It is clear that Rhine capitalism, quietly competent and judiciously even-handed, has failed to make much of an impression on world opinion. It is in fact so utterly devoid of glamor and panache that, in media terms, it is a 'turn-off' and its economic success a non-story. In this it resembles the E.C, whose painstaking construction languished for many years in almost total obscurity until the Single Market and Maastricht came along to galvanise public opinion and attract the attention of the media.

And so the Rhine tortoise wins the race, but nobody notices – the press corps is far too busy interviewing the American hare. The neo-American model has style, if not substance; it possesses star quality. Moreover, it comes complete with a legendary past.

The greatest show on Earth

American capitalism has all the ingredients of a good Western. It promises to be rough and ready, filled with danger and excitement and suspense. There is something for everyone: the thrill of the chase, the narrow escape, the good guys shooting it out with the bad guys. As in the circus, the threat of real harm makes the audience applaud all the more at the end. 'Casino capitalism' also has its menagerie of fearsome. beasts: sharks, hawks, tigers and dragons. The Rhine bestiary, consisting mainly of domesticated animals of wholly predictable behaviour, is a mere petting-zoo by comparison.

Life in the Rhine countries holds out little promise of excitement, though it may be very active. It conjures up a grey image of monotonous routine which holds strictly no interest for the producers of Hollywood blockbusters and their audiences. An evening at the Crazy Horse Saloon will inevitably make for more compulsive viewing than a day in the life of a Benedictine monastery. And no one is likely to convince teenagers to switch from jeans to lederhosen.

Capitalism in the American mode could be mistaken for a creation of Hollywood. Reagan himself could stand as a paradigm of this symbiotic relationship between the new conservatism and show business, but there are equally obvious clues in the vocabulary of business and finance which emerged during his 'reign'. It was surely no accident that the inventor of junk bonds, Michael Milken (now behind bars), was nicknamed 'The King' in financial circles. The King, of course, was Elvis Presley, the first worldwide pop idol.

In a fascinating article in the American Journal of Sociology, P. M. Hirsch points out that popular culture is the source of much of the imagery used in the language of takeovers, from piracy and Westerns (ambushes, heroes and villains etcetera) to romances and fairy tales (Sleeping Beauty, for example), as well as sports and games. The often warlike terminology could fill a whole dictionary. It is readily apparent that 'bear hugs', 'golden handcuffs', corporate warlords, dealmakers and shark watchers all belong to the world of adventure stories and cartoons, not to mention video games.

Indeed, the point at which fiction blends into fact and the game becomes reality is increasingly hard to spot; as the American sociologist John Madrick noted some years ago, takeovers are Wall Street's equivalent of parlour games, and the players are no more in touch with economic and industrial realities than children engrossed in a game of Monopoly.

America's capitalist extravaganza thus combines the spine-tingling thrill of the jungle – the fight to survive against all odds – with the playful, heart-warming scenario of romantic comedy and its inevitable happy end. Easy money, after all, is a dream come true. How much more attractive than the plodding prosperity of the Rhine countries! Talk of 'striking it rich' seems fundamentally irrelevant in the Rhine context, just as it is the very essence of American capitalism, Las Vegas style. The media's favorite new scenario – The Fastest Deal in the West – was not dreamt up in Zurich or Frankfurt, but in New York and Chicago. Nevertheless, even the good grey burghers of Zurich and Frankfurt are beginning to wonder what it feels like to win the jackpot with one spin of the roulette wheel. To be comfortably well-off in Germany or Switzerland does not necessarily mean that one is immune to the lure of the casino economy: small investors, too, have dreams – not, perhaps, of power and fame, but of just once making a 'killing' by betting on the right horse. The new generation of Swiss, Japanese and German managers is particularly vulnerable to the virus of 'fame and finance'.

Never having experienced the privations – or the glory – of war, they may actually come to find a substitute for the thrill of combat in the power games of neo-American model; this is not by any means the most far-fetched explanation for the sudden explosion of Japanese interest in the Kabuto-Cho (Stock Exchange). It is the remedy for the ennui of economic stability and predictable prosperity. The frenzied activity of the Kabuto-Cho gets the blood pumping; its excitement is contagious. Yet 'Stock Market Mania' ultimately feeds on itself – it is little more than the froth on the tide of economic reality, fulfilling a role which elsewhere is assigned to theater or sports and games.

Media success and the success of the media

Despite its failures, despite debts and deficits, ailing industries and social inequalities that cry out for attention, American capitalism – the capitalism, as far as most people know – is a planetary superstar. Whether vilified by its few remaining enemies or deified by its defenders, it has a mythical quality which the media do not hesitate to exploit. Like their audiences, the media too find it all very exciting: flamboyant gamblers and financial acrobats, white knights and black knights, high drama and high risk – not to mention high incomes – are the stuff media dreams are made of. Economists ignore this phenomenon at their peril, for it is by no means a harmless by-product of casino capitalism; on the contrary, it is one of the most powerful means of (quite literally) broadcasting and amplifying the new values.

The media now play a major role in economic life, one aspect of which has already been touched on: the up-and-coming financier or the head of a recently formed company in search of funds via the stock exchange simply cannot do without publicity. It is worth recalling that the communications sector really took off in the 1980s; and in the age of communications, it is no longer enough to be a success – you must be seen (or at least seem) to be a success.

Entrepreneurs no longer have the option of merely running their businesses well. They have become personalities in a drama, and they must live up to the script or disappoint an audience of millions. More than just a personal satisfaction, being a winner – and a highly visible one – is part of the image-making which is essential for doing business in a media-saturated environment. The raider who comes back from the hunt with his corporate trophy, the company gladiator who survives the ordeal of the Wall Street arena confer an aura of prestige on their firm which is as important as its turnover or its market share. Against such photogenic competition, there is little chance that the media spotlight will linger long on the restrained, somewhat austere figure of a German senior executive, or on the discreet charms of a Zurich banker.

The media have their own laws, one of which is that the show must go on – until audience shares decide otherwise. The celebrities it creates are expected to do their part in keeping the show alive. The economy-as-spectacle works both ways, and the complicity of those in front of the cameras with those behind them is one of the secrets of its success.

But the mutual reinforcement which this suggests can have disastrous side effects, as the high-profile Chief Executive Officers, market raiders and young Turks of finance all vie for media coverage. Like Hollywood stars, they may become prisoners of their image. How many high-risk strategies, how many outrageous schemes have been hatched with the unstated aim of earning media approval?

The casino economy plays on the image of itself which it actively promotes, but over which it no longer has control.

When the neo-American model crossed the Atlantic, 'showbiz economy' naturally came with it. Like it or not, European entrepreneurs soon understood the importance of a high media profile, and learnt to their cost the enormous consequences a poor showing on television or a slip of the tongue in front of the microphone could have.

Image summary: This is a political cartoon. The illustration depicts a chaotic stock market scene where a monstrous figure is causing destruction, with banknotes flying through the air and people lying defeated on the ground. In the foreground, two composed businessmen observe the devastation, with one remarking that the problem with the stock market is the small element of the irrational. The cartoon uses irony to contrast the extreme, violent chaos of a market crash with the understated and detached language used by financial professionals to describe systemic instability.

They are, by now, quite resigned to being part of the galaxy of celebrities, along with sports heroes and pop stars; they know that the show will go on, and that they have been cast in it. Companies, too, have had to play along or suffer the Wildean ignominy of 'not being talked about'. With varying fortunes, they have hired 'communications consultants' to polish and promote the company image. The in-house position of 'Communications Manager' was virtually unknown in France before 1980; now it is the job most coveted by the thrusting young men and women of the 'media generation'.

Fame begets fortune

What does it mean to be a capitalist? What is the aspiring capitalist's goal in life? For the new generation, the obvious answer is, very simply, to get rich.

The answer was not so obvious in former times. A great many of France's most distinguished industrialists apparently 'forgot' to make their personal fortunes; rather, they put all their efforts into ensuring the success of their firms. In Germany, such behaviour – unthinkable in the U.S.A – is the rule, not the exception.

Given that a company's fortunes, in the American model, are organically linked to its chief executive's own wealth, it is imperative for the entrepreneur to get rich, and fast. Fortunately, there is a proven formula for doing so, according to which 'it is cheaper to buy than to build'. The implications of this philosophy have already been explored in earlier chapters; its usefulness here is in drawing a distinction between the two permissible strategies an entrepreneur can adopt.

The first is to invent a product, a service or a concept, and then sell it on the open market. The inventor may eschew the media spotlight in this case, but it is not in his interest to do so if he hopes to reach the widest possible audience of potential buyers. He is well advised to use the media to 'sell himself' and, thereby, sell his invention.

The second method is to raise money on the financial markets, something established institutions can do without attracting publicity. But, as we have already seen, the lone individual who chooses this 'smart' strategy must make a name for himself in order to attract investment money to his scheme. If he is to succeed in selling the hope of windfall profits to a myriad of investors, he does not have the option of remaining anonymous: self-publicity is the oxygen which breathes life into his endeavor.

The new logic of high finance thus reverses the proposition that fortune begets fame. In the topsy-turvy world of 'showbiz economy', fame and prestige must come first; only then do the millions start to pour in. The same applies to moral values and behaviour: formerly, these preceded, and justified, subsequent fame and fortune. Now that prestige and celebrity have taken over as the prime consideration, they serve to vindicate whatever behaviour may follow.

This headlong rush to secure publicity and media celebrity can be seen as the logical extension of an economy which, as it modernizes and innovates, has necessarily become an 'information economy'. American capitalism is miles ahead of its rival in this field; all the elements are in place to ensure that its winning image will dominate the media from one end of the planet to the other. From Djakarta to Rio de Janeiro and from Cairo to Cracow, vast audiences are fed a steady diet of American mini-series and Hollywood epics; every modern cultural artefact from advertisements to comic books the world over is made in (or modelled on) America. And now that Marxism is in its terminal phase, the universities too are wide open. It would no doubt come as a shock to the Brazilian lecturer, the Egyptian intellectual or the Nigerian don to find out that there is more than one kind of market economy, to be shown the proof that Rhine capitalism does not follow the same rules he has seen acted out in last night's sub-titled episode of Dallas – and that its results are, on the whole, more impressive.

Money and the media

In the sphere of public relations, the Rhine model, unable to communicate effectively, has left the field entirely to its neo-American competitor – who in turn finds itself boxed in by the requirements of the same media from which it simultaneously derives enormous strength. Taking this analysis one step further, it is clear that the media themselves are increasingly subject to the casino mentality and the obsessive pursuit of short-term profit.

Journalists themselves are often among the first to deplore the oppressive influence of money on their trade. The need to demonstrate immediate profitability has created a palpable malaise among media professionals, who view with alarm the tendency to jettison what should be the basic aim of journalism in a capitalist economy: to sell information to readers and viewers. Now, it seems, the professional code has been rewritten. Information has become a merchandise like any other, and the new goal is to sell readers and viewers to the advertisers, something we French are all too familiar with, given that France has probably gone further down this path than even the U.S.A.

The English-speaking countries boast a long tradition of journalistic independence, in the sense that journalists have organized themselves effectively within interprofessional bodies and can therefore often keep a rein on their employers. In this they are supported by their readership, who are relatively well educated, particularly those who follow the economic and financial press. Journalism of the Anglo-Saxon school has thus been able (so far) to stave off the kind of incestuous relationship between the media and finance that has developed in France, notably since the largest television channel was privatized.

Among the many books and articles which, in just the past year or two, have examined the question of economic manipulation of the French media – not to mention manipulation of the economy via the media – I will cite two which make the point most succinctly. In a long article detailing the threat to journalism posed by big money, the writer on economics Jean-Francois Rouge describes the 'active and passive corruption' which he says is now rife in the French press: 'Since 1944 the principal threats to press freedom in France have come mainly from the political sphere. That is where the strongest defenses and the greatest vigilance have always been necessary. Traditionally, the corrupting influence of money has been kept to a tolerable minimum, at a level which was at least compatible with the basic independence of the press, and of the most important national titles in particular. But it is a delicate balance of forces, and recent behaviour suggests it is in danger of being upset.'

In February 1991, Alain Cotta, one of the top French economists and a long-standing champion of the market economy, published a chilling analysis of recent developments in the capitalist world. Much of this study is concerned with three increasingly important, and worrying, trends: the role of 'media capitalism', the growing influence of finance, and corruption. He writes:

The rise of corruption cannot be dissociated from that of the media and finance. Given that the overnight acquisition of a fortune, far greater than any which can be had through a whole lifetime of hard work, may result from the possession of privileged information (notably in cases of mergers and takeovers), the temptation to buy and sell such information becomes irresistible. The broker's commission thus attracts corruption as surely as the thunderhead calls forth the storm.

It was not so long ago that the well-paid public servants of the developed economies could be relied on to treat any attempt at bribery with contempt; 'baksheesh' was a foreign word and an affliction of the developing world. But now that the West has begun deregulating the economy – and deregulation is another magnet for corruption, as Cotta goes on to demonstrate – and with the role of the state reduced to a bare minimum, corruption is being rehabilitated, even glorified. It may, after all, be just one more form of entrepreneurship, and a highly successful one at that!

If anyone still has doubts that corruption is both lucrative and widespread, a few statistics concerning the drugs economy – an example of 'pure' corruption, so to speak – should suffice to dispel them. The value of the cocaine seized by the Mexican police in the 3 years to January 1991 amounted to some $150 billion, twice Mexico's foreign debt. That, of course, is only what was seized.

Meanwhile, the Federal Reserve Bank, which like any central bank controls the printing of money, was looking into the extraordinarily strong demand for bank notes. It found to its surprise (and embarrassment) that 90 per cent of all the notes it was printing were not being circulated in the U.S.A; rather, they were going overseas, where they were needed for use by a variety of parallel economies – but mainly by the drugs trade, whose aversion to bank accounts is self-explanatory. The drugs business is many things, but it is not small or even medium-sized: it is a macroeconomic giant.

When the media glorify those who make their fortunes with ease, overnight and virtually without lifting a finger, is it any wonder that others will choose the path of corruption or the drugs trade in order to achieve the same dream? Similarly, once the media have fallen prey to the law of instant profit (the last strongholds of public television services, modelled on the B.B.C, are likely to be the Rhine countries), their reporting of business and economic matters will inevitably become a hostage to the power-hungry schemes and rampant paranoia of the financial superstars, the prima donna billionaires who believe themselves to be above the law. In the final stages of delirium, the monsters created by the self-perpetuating hype of fame and fortune come to deny time itself. As Cotta puts it: 'Television entertainment, to achieve perfection, must refute the passage of time and focus entirely on the pres ent moment. It is one way of banishing the limitations of the real world, the greatest of which is death. The television series may appear to mimic linear time, but it actually negates the principle that all things must pass by giving the impression that nothing ever stops.' The present is unending, so never mind the future. Why wait? Profit now!

Profit now

The intellectual scene in the 1980s was astonishingly receptive to this particular aspect of the neo-American model. It was a decade which began under the sign of ideological breakdown, a time when the star of individualistic hedonism was on the rise. Gilles Lipovetsky has dubbed it'the age of emptiness', one whose world view'has been emptied of everything but the quest to satisfy the ego, to serve the interests of the self, to experience the ecstasy of personal liberation, to indulge sexuality and the cult of the body'. The time was also ripe for'massive private investment and, as a result, deactivation of the public sphere'.

The neo-American model injected a powerful but simple idea into this atmosphere of exaggeratedly blasé individualism, an idea whose incantatory spell would prove as reassuring as the old Marxist catechism: Profit now. This may be variously restated as 'self-interest is the only legitimate interest' or as the systematic preference for the short term and a corresponding mistrust of any plan requiring collective action. The logical absolutism of this neo-American creed, its covert cynicism, even its corrupting effect on the media are all eerily reminiscent of the communist dragon which it has just slain.

Eminently 'broadcastable', the message of 'Profit now' is in 'synch' with the times. It is simple to grasp, and possesses the absolute clarity of purpose which is balm of Gilead to the distress and confusion of an epoch robbed of traditional values. In its glorification of personal success, its exaltation of the winner, it serves the cult of individualism; in assigning top priority to the short term and justifying the addiction to credit and debt, it meshes perfectly with the climate of hedonism. In times of moral and ideological drift, people will tend to cling to the present in order to ward off an uncertain future; exhortations to save up for rainy days, to plan ahead, simply fall on deaf ears. The result is the law of the jungle, that is that which remains after all other 'laws' governing collective behaviour have been rendered suspect. In a peculiar way, it is also a return to base reality once the flights of ideological fancy have come crashing down.

That the religion of 'Profit now' was wildly successful in the 1980s can be seen in the number of temples devoted to its worship. The decade saw an astonishing proliferation of business schools, where initiates were called upon to read from sacred texts with intriguing titles such as The Price of Excellence; excellence in pursuit of what goal, you may well ask. Profit, of course, is the goal; but do not then presume to enquire whether profit is to be pursued other than for its own sake, for you will be cast out of the temple.

None may doubt the first article of the new faith, which is that profit is an end in itself. To question this is to be guilty of heresy. In the new religion, any enquiry into 'philosophical' matters has been resolutely set aside in order to concentrate on techniques, ways and means, methodology, 'how to' but never 'why'. The new synthesis of American capitalism thus comes down to a perfectly circular, self-contained logic: profit is for the present and the present is for profit. This is more than superficially related to the kind of sophistry which elevates a given economic system into the guiding principle of a whole society, whereby 'whatever succeeds is efficient; whatever is efficient is right; whatever succeeds is therefore right'.

There are, nevertheless, encouraging signs of a certain reaction against the cynicism of the trendy values of the 1980s. The heady days of executives revelling in their own ruthless efficiency are beginning to recede, as 'business ethics' comes back into fashion. Today's 'with-it' manager recognizes that a purely utilitarian approach may have its limits. The fact that this latest trend, too, originated in America is both good and bad news for France; good news, because any concept stamped 'Made in America' is sure to be snapped up by the French, and bad news, because Americans, unlike the French and other Latin peoples in general, actually take ethics very seriously.

The charms of Venus and the virtues of Juno

America's change of mood may become more pronounced over the next few years; prevailing conditions nevertheless continue to give the neo-American model a formidable advantage, in almost every field, over its opposite number. Whether viewed from the perspective of the trade unions and other faltering institutions, of the company-as-community, or of the Stock Exchange and other booming financial markets, the Rhine model seems constantly to be swimming against the tide. Its concern for the longer term would seem to be wholly incompatible with the unstoppable drive to consume, while the predictable career path it stakes out for managers and workers looks increasingly old-fashioned to those who yearn for heroism and adventure, and who reject as 'nannying' the tradition of social protection and social security.

Rhine capitalism suffers from an image problem: it looks out of date, it breeds neither dreams nor excitement, it is not fun. In the language of the media consultants, it is not a 'sexy' concept. If the neo-American system has all the seductive charms of Venus, then the Rhine version is clothed in the ordinary virtues of Juno. And just as Juno has never had her Botticelli, so the extraordinary socioeconomic success of Germany has no widely respected advocate in the universities or on the hustings.

The fault cannot be assigned exclusively to a low media profile or a momentarily unfashionable set of values. Deep down, the Rhine variant of capitalism has its source in two great currents of thought, one of which is largely unknown and the other in disrepute.

The role played by the mainly Roman Catholic C.D.U and the mainly Protestant S.P.D in shaping the German social market economy points to the influence of Christian social doctrine on the Rhine model, but, amazingly, almost nobody seems to know this. Such ignorance is all the more astonishing as Catholic social doctrine since Pope John 23 has finally recognized, not just the legitimacy, but the positive creative potential of private enterprise. The moral authority of the Church has been strengthened by this recognition.

It is worth noting that in Japan, too, the community-building role of the company is a profound reflection of Confucian philosophical values. Perhaps the West will see a rise in the influence of a newly energetic 'social Christianity' – heretofore confined mainly to the Rhine countries – now that the post-communist era has wiped the ideological slate clean.

The influence of Christianity has been overlooked while the social democratic component draws all the critical fire. Social democracy, that vast and multi-faceted European movement of which the Scandinavian countries (especially Sweden) are the best examples, bears more than a passing resemblance to the Sozialmarktwirtschaft, the social market economy; and it may be argued that the Rhine model which I have described in this book is a modernized and updated version of social democracy, seen from a new perspective. What is certain is that social democracy has tumbled in the public esteem, having sacrificed much of its vitality in the last 20 years or so to become a complacent and bureaucratic incarnation of the labor movement. Asked how many people were working in his plant, a Swedish factory supervisor can truthfully reply, 'About half of them'. The Swedish system is in deep waters: its rates of taxation, inflation and investment are simply not up to the challenge of European competition.

Swedes woke up to this grim reality towards the end of the 1980s, and are now attempting to put their economic house in order, in much the same way as other European socialists before them – Italy's Bettino Craxi, Spain's Felipe Gonzalez, Mario Soares in Portugal and Francois Mitterrand in France – went about their respective U-turns. Whether Scandinavian social democracy can pull out of its present tail-spin may depend on how well it manages to come to terms with the worldwide collapse of state socialism. The prognosis is, to say the least, uncertain.

Socialism dismantled

What Francois Furet has called 'the enigma of communism's disintegration' is not something I wish to dwell on in these pages. We have, in any case, only begun to measure the effects of this extraordinary, unpredictable ideological earthquake. One of its consequences, as I stated at the beginning of this study, has been to leave capitalism alone to face itself; this book might never have been written had it not been for the demise of communism and of East–West confrontation.

It is not simply that a liberal system has triumphed over a state-run system. It is as if a tidal wave has swept over the continents, causing the planet itself to list dangerously to one side; in the aftermath, it appears that a whole body of ideas, an entire corpus of study, analysis, sensibilities and reflexes has been washed away by the flood waters. And it is not just Stalinism or bureaucratic Soviet communism that have gone overboard, but almost anything connected with the socialist ideal or bearing the imprint of social reform, however faintly.

This wholesale abandonment is both unfair and unwise. History will ultimately be the judge of how much can, or should, be salvaged from the cataclysm, but for the moment, the dismantling of socialism and of the wider social dimension is total, uncritical and uncompromising.

The shock waves released by the collapse of communism are still echoing, with amplification, within the hollow shell of every East European state – so much so that even words in common use have been thoroughly discredited and inspire revulsion: words like 'party' or 'collective' or even 'workers' can no longer be pronounced without a grimace. Thus the new political parties in the East call themselves forums, alliances or unions, anything but parties; newspapers now studiously avoid any mention of yesterday's topics (workers, plans, strategic objectives etcetera), all of which have been consigned to oblivion along with the hated system.

We have not yet reached this point in the West, at least with respect to vocabulary; but in the realm of ideas, the consequences of communism's downfall may prove to be equally devastating. Notions of social justice and social democracy, aspirations towards group action or collective discipline, institutions such as trade unions, national economic plans and direct taxation – all are now branded with the mark of disapproval, insidiously prefaced by a minus sign. Not quite discredited, perhaps, in the strongest sense of the word, but suspect, not to be trusted. A great void has opened up in Western political culture, too, on its left and center–left flanks.

European politics has suffered the equivalent of a stroke, in which one side of the brain is left disabled. It is the reverse of what happened in France after 1944: the right's collusion with the Vichy regime meant that an entire political, cultural and even literary sensibility was to remain under a cloud of opprobrium for many years. The left was handed its de facto monopoly on culture and higher education more or less by default. Today it is the left, perhaps even the center, whose universe has suddenly collapsed into the black hole of historical censure. And not only in France: the center of political gravity throughout Europe has shifted towards conservatism, whether openly proclaimed as such or not.

The neo-American model – which has no inhibitions when it comes to proclaiming its credentials as an ultra-conservative exponent of 'pure' capitalism – is the obvious beneficiary of the left's sudden paralysis. Just as obviously, the Rhine model, with its overt social agenda, cannot escape being tarred with the same brush as its Scandinavian cousin, social democracy.

In the coming ideological beauty contest, it is easy to see who will score more points. The neo-American model proudly presents itself as a hard-headed professional, undisguised and untroubled by sentiment or second thoughts. Its main rival comes across as complicated, opaque – if not obscure – and cloaked in too many overlapping folds of social considerations, financial constraints, cherished traditions and good intentions.

It is a bit 'soft' in the middle, and fails to dazzle. Yet the day is not far off when the divide between the haves and the have-nots, so readily apparent in America today, will split East European societies down the middle. The dislocation will be violent in the extreme; perhaps only then will there be a serious revival of interest in this form of 'capitalism with a human face' (there is already a glimmer of curiosity in Poland) which I have here designated as the Rhine model.

The psychological, political and media success of American capitalism is not as paradoxical as it first appears, given so many contributory factors and advantages. What is deeply troubling, on the other hand, is the fate which may befall those who, seduced by the image, import it wholesale with no regard to its possible secondary effects. When it crosses the Atlantic to infiltrate the Rhine countries, seducing the U.K and France along the way, the American model does not bring its own anti-dotes with it. The U.S.A possesses its personal pharmacopoeia of remedies and corrective measures designed to curb the excesses of the 'law of the jungle': a meticulous legalism, morality inspired by religious faith, a civic sense underpinned by voluntaryism, and so forth. The cultural foundations of Europe and the emerging countries of the South are entirely different. They do not have the same checks and counter-weights; they cannot apply the same brakes that the U.S.A keeps in reserve.

The 'export brand' of American capitalism, which Europe is so eager to imbibe in its current enthusiasm for ultra-liberal economics, may prove to be a far coarser brew than the original, a drastic remedy of the sort that must be administered with extreme caution and an adequate supply of back-up procedures to counter violent reactions. It now looks as if the frail figure of Eastern Europe is going to be the first, and most vulnerable, candidate for this experimental – and dangerous – treatment.

Long live the multinationals!

Everything, then, points to the inevitable victory of the less efficient neo-American model over its less glamorous Rhine cousin – everything, that is, except for one very important element: the phenomenon of multinational corporations. Again, the paradox seems at first unbelievable. What could possibly be more American than American Express or Coca-Cola, what more blatantly patterned on the American model than Colgate, McDonald's, Ford, I.B.M or Citicorp? Yet a closer examination reveals that the giant American multinationals are hardly typical of the neo-American model, in two basic respects.

First, multinationals are essentially the products of internal growth, based on an industrial plan which in turn is driven by technological or commercial innovation. They are thus firmly wedded to the longer term, and have never given in to the temptation to abandon it. It was the multinationals who invented corporate planning; it was their success which put corporate planning on the business school curriculum.

The other atypical characteristic of such corporations has to do with employment and labor relations. The need to implant itself overseas and recruit staff of widely varying cultural backgrounds means that the multinational must offer a coherent corporate culture and marketing concept; it must, in other words, train its employees and encourage their loyalty through an attractive career structure. This cannot be done overnight, and it cannot be left to the rough-and-tumble of the open labor market.

However paradoxical, the fact is undeniable: the big American multinational corporations are more closely related to the Rhine model than to the neo-American one. And in the case of the European multinationals (e.g. Bayer, A.B.B, Nestlé, lor-ee-al, Schlumberger, Shell), the Rhine component is even more pronounced.

The case of Shell is especially interesting. On the face of it, the hybrid nature of its financial base – 40 per cent British and 60 per cent Dutch – should constitute a handicap: theoretically, the balance is too delicate to be durable. Yet its balance-sheet shows that Shell is the greatest generator of corporate profits in the world. This is in large measure thanks to superb economic forecasting. Shell's economists were probably alone in predicting, long before it came to pass, the oil crisis of the 1970s; moreover, they were able to convince management to develop a corporate strategy that would take their forecasts into account. At another level, Shell has always distinguished itself from its European brethren in insisting on ethical standards which are both extremely rigorous and well accepted by its employees.

The multinational corporations mentioned above have in common at least two characteristics which point to the possibility of some future synthesis of the conflicting models of capitalism.

In the first place, all of these long-established and powerful firms seem to have defied the law of 'corporate biology' which usually applies, to wit: the older and larger an organization is, the higher the risk that it will fall prey to the double threat of bureaucratic inertia (because upper-echelon management tends to proliferate beyond reason) and poor employee motivation (because everyone knows the company is 'fat and rich').

Why should the big multinationals be any different from other organizations? It is principally because they are listed on the Stock Exchange; however powerful, they are nevertheless dependent on the financial market – the hardest of taskmasters, the most ruthless of industrial fitness trainers. Whereas the Rhine model is inclined to underestimate the invigorating action of the financial markets, the European multinationals and their successes are a kind of homage to their beneficial effects. Moreover, with success and power comes the need to invest more, and thus to seek increases of capital on the stock market; this presupposes that the firm's shareholders are happy ones.

Yet the second reason for the resilience of the multinationals is that their dependence on the financial market does not mean they are entirely subject to its whims: with share capital widely distributed, no one shareholder can ever dominate the others. Such corporations are simply too big to fall victim to an outside raid or a hostile takeover. As long as they remain profitable and dividends go on rising, this protection is theoretically unassailable.

And so, bending to the prevailing winds of the market but unperturbed by sudden strong gusts or momentary lulls, the multinationals can (and must) devote all their efforts to the long-term development of their respective industrial and global strategies. In so doing, they create a web of elite staff who work together across oceans and continents; the more multicultural they become, the better their claim to be true multinationals.

For all these reasons, the multinationals, whether of American or European origin, can be said to have achieved an elegant, best-of-both-worlds synthesis which manages to avoid the protectionist temptations of the Rhine model and the dangers of the neo-American addiction to finance.

Chapter 11 The second German lesson

The first 'lesson' Germany teaches us, that top economic performance can be wedded to social solidarity through the social market economy (Chapters 6 and 7), has failed to reach a substantial audience. During the 1980s, in fact, West Germany was routinely taken to task over its day-to-day economic policies or its responses to specific events; the wider context was ignored. The critics, it seemed, could not see the forest for the trees.

The events of 1990 silenced most of these protests. The world looked on dumbfounded as Helmut Kohl grasped the nettle of reunification and accepted what is perhaps the greatest economic and social challenge ever to face a modern capitalist state. In taking up the challenge, the German incarnation of the Rhine model has embarked on an uncharted course that may well serve as an example to all of Europe, if not the world.

The scapegoat of Euro-stagnation

The bombast and bright lights of the Reagan-Thatcher decade kept the German model firmly out of the spotlight. Its image was that of an outdated piece of heavy machinery whose complexities might hold some interest for antiquarians, but whose upkeep was proving an unnecessary burden on West Germany's European partners.

Germany in the 1980s was held responsible for the snail's pace of European economic growth, which since the first oil crisis of 1974 had languished well below the levels everyone had grown accustomed to during the 30-year post-war boom. European growth rates had more or less been cut by half, whereas the effects on America and Japan were much less dramatic: of course they experienced a slowdown, but in no way comparable to the European débâcle. Furthermore, the employment picture remained encouraging (except in the immediate aftermath of both major oil crises) in both Japan and the U.S.A – the latter even chalking up record successes in job creation.

Europe began to wonder if its economy would ever recover. Euro-stagnation led to Euro-pessimism, a period of gloom and intense self-doubt embracing all possible scapegoats: an ageing population, the high cost of social cover, an apathetic workforce and a complacent business élite etcetera Germany was specifically accused of fostering these unhealthy trends because, said the critics, it was refusing to play its 'rightful' part as the locomotive of the European Community. The Germans were simply being selfish: a 2 per cent annual growth rate was quite sufficient to ensure their own prosperity, and never mind the rest.

It is true that demographic factors in Germany made rapid economic growth a less pressing priority. Sharing with Sweden the distinction of having the highest proportion of over-65s in the West – a proportion predicted to reach 25 per cent of the total population by the year 2030 – Germany knew that there would be fewer jobs to create, less infrastructure to build (crèches, schools, universities, housing etcetera), fewer needs to be met. Why, then, should the country strive to maintain a high growth rate?

France, at the time, was still coping with the effects of the baby-boom. Growth was urgently required, in the form of new jobs and new public investment, in order to wean the baby-boomers on to the joys of consumerism, now that they had got the radical student politics of May 1968 out of their system.

A disciplined currency

German adherence to financial and monetary orthodoxy was another source of intense irritation to a number of European detractors, who saw it as further proof that the economic slowdown had been engineered in Bonn. No one is unaware of Germany's abhorrence of inflation as the economic evil which brought the nation to its knees in the 1930s, ultimately paving the way for Nazism. The reforms of 1948 thus wrote into the Bundesbank charter the requirement, on the part of the financial authorities, to maintain the stability of the mark; more recently, the experiment of the late 1970s was still fresh in every mind: the Germans had finally acquiesced to their partners' insistence that they play the role of European economic locomotive, and as a result had again found themselves in the red.

West Germany, then, was intent on creating the 'virtuous circle' of a strong currency, as described in Chapter 7: a strategy which requires short-term economic growth to be put on hold, while overall financial stability is given priority. That means limiting government expenditure to reduce state debt, and raising interest rates when necessary. It is a Spartan discipline which nevertheless pays handsome rewards, once inflation is under control and the currency stabilised, in the form of medium-term economic growth.

Germany's impatient partners blamed this strategy on her demographic weakness. The residual Keynesianism of the other European governments (which one could even detect in Britain, under the cloak of Mrs. Thatcher's pseudo-monetarism) meant that a certain monetary laxness was still accepted as the inevitable accompaniment to strong economic growth. Because they were themselves under considerable demographic pressure to create jobs for their relatively younger populations, they assumed Germany was acting from similar motives.

Then came the European Monetary System, and German-style management of the currency became an irresistible force within the Community. Once capital was allowed to circulate freely within the E.C, separate and divergent national monetary policies became untenable. No country within the Exchange Rate Mechanism could afford to stray very far for very long from the general trend in interest rates, as any unilateral lowering of rates would simply prompt investors to take their money where it would earn more – abroad, in other words – and the country's currency would lose its appeal (and value) as a result. Thus, whichever country had the strongest currency and the healthiest economy would inevitably set the standard, in terms of monetary policy, for everyone else. Within the E.M.S, that country is, of course, Germany. Its financial rigour has spread, via interest rates and the Bundesbank, to all the members of the system – whether they like it or not.

This 'contagion' was not, at first, welcomed by those who assumed that Germany's financial orthodoxy was a pretext for building up huge trade surpluses or even attempting to 'take over' Europe on the strength of its monetary superiority. But many of those same critics soon saw the benefit of E.M.S discipline as their economies improved. The change has been most noticeable in the traditionally high-inflation Latin countries (France, Italy, Spain and Portugal) where socialist governments were among the first converts. Who could have predicted that the robust strength of the French franc would be credited (by no less an authority than the English-speaking press) to the steadfastness of a socialist minister, Pierre Bérégovoy?

At a more general level, Germany's critics (in particular those fascinated by the neo-American model) condemned the rigidity and inertia of its industrial and financial structures, so pale in comparison with the feverish activity of Chicago and Wall Street. Germany's financial markets were too narrowly based, too inhibited, they said; its big corporations were penned in by overly timid policies of capital management; the social market economy was an anachronism and mainly to blame for slow growth. Some went so far as to predict that German industries and the economy itself had already entered a phase of permanent decline. I have my own personal (and embarrassing) memory of this school of thought. It so happens that I am the director of the C.E.P.I.I (Centre d'études prospectives et d'informations internationales), a Paris-based institute whose record on economic forecasting, thanks to the quality of its staff and of my predecessors, is widely respected (notably in the U.S.A). But in October 1981, an article appeared in the journal of the C.E.P.I.I whose central premise now seems perfectly ludicrous: it was entitled 'The Deindustrialisation at the Heart of the German Model'.

All in all, the portrait painted of the Germans in the 1980s showed them as a selfish nation of wealthy pensioners living off the accumulated wealth of their surpluses and investments. A caricature, undeniably; but it is equally undeniable that by 1985 German per capita consumption was the highest in Europe, at $8000 per year; that Germans were, at the same time, saving at an increased rate – unlike virtually everyone else in the world; that the terms of trade continued to be massively favorable, with each year bringing another record surplus (D.M 130 billion in 1988). Germany was replete with its own success. To be German was, in a word, to be comfortable.

Then reunification struck, like a bolt of lightning.

The shock of reunification

Just as surprising as the fall of the Berlin Wall was the speed and energy with which the Federal Republic responded to the political and economic challenge it posed. Even before it became inevitable, reunification had all the makings of a Pandora's box of difficulties and dangers, a real 'can of worms'. There were dozens of reasons to proceed with caution.

In purely domestic terms, once the patriotic euphoria had subsided, West Germans began to fear the high cost of taking in their Eastern compatriots. What would happen to their generous social security system, their hard-earned standard of living? The arrival of 700 000 refugees from the East had already put them on their guard.

Politically, the consequences looked equally unpredictable and, for Chancellor Kohl and his party in particular, highly destabilising. The Christian Democrats looked embarrassingly vulnerable, in electoral terms, under any new unified structure; according to all the opinion polls it was their rivals, the S.P.D, who would most benefit from reunification. There was even a point, during the summer of 1990, when reunification was more popular in France than in the former Federal Republic.

International opinion was in fact a major consideration. Germany could hardly ignore the deep anxieties which her European partners would naturally feel when confronted with this new giant of 80 million inhabitants, now the dominant member of the Community.

The Yalta Conference, in dividing Europe – and above all Germany – had established the basis for a delicate equilibrium which had lasted for 45 years. The existence of the two Germanys guaranteed the military status quo, with the two superpowers able to maintain the 'balance of terror' in a continual build-up of nuclear weapons (officially described by each side as the attempt to achieve parity with the other). Medium-range missiles (Pershings on the one hand, S.S-20's on the other) brought the doctrine of nuclear dissuasion onto European soil itself; not to put too fine a point on it, this meant that Europeans could now destroy themselves on their home ground. As for conventional warfare, nato and Warsaw Pact armies were being trained for a future conflict in central Europe. Each side had its troops, tanks, jets and artillery lined up in sufficient quantity to suggest that the clash would be of titanic proportions; this, too, was part of the logic of dissuasion.

Germans on both sides of the East–West divide naturally felt concerned, if not directly targeted: any future battle would ineluctably be fought on German territory, and both German armies were on the front lines. It is little wonder that the pacifist movement became such a force to reckon with in West Germany; in some respects the national yearning for peace could be seen as the equivalent, in military terms, of the economic 'selfishness' decried by its European partners.

Now reunification was about to change all that. The old balance of forces, the power blocs, strategies, the configuration of armies and arsenals would have to be reconsidered. Reunification was a problem – perhaps a threat. What kind of foreign policy would a united Germany pursue? Firmly committed to the West via capitalism, was it not also irresistibly drawn to the East, as Willy Brandt's Ostpolitik had demonstrated in the early seventies?

Germany's E.C partners were no less concerned over the economic consequences of reunification. As the memory of an earlier 'Gross Deutschland' sent shivers through the Brussels bureaucracy, the new challenge inspired a variety of responses: the British dreamt of a new Entente Cordiale while simultaneously hoping to strengthen the 'special relationship' with the U.S.A; the French began to feel a certain nostalgia for past policies incorporating a Franco-Russian alliance.

The cost of reunification – variously estimated at between D.M 600 billion and twice that – seemed enormous, even for Germany; but that was only one obstacle. There would be macroeconomic consequences: reunification would have to be financed on the markets, already stretched by a decline in savings and a general increase in capital requirements. Interest rates would inevitably be subject to upward pressure as a result. Foreign capital would then, just as inevitably, be drawn to the German financial market rather than to other, less prestigious or less predictable investments.

But another alarming possibility was that the German economy would overheat, stimulated by rising consumer demand in the former G.D.R, and lead to inflation. There is certainly no lack of inflationary pressures in the world economy – American deficits, the volume of cash in circulation, and high levels of industrial capacity in actual use, to name but three of the most important. My own view is that the developed economies are no longer at risk from high, long-lasting inflation (above 10 per cent), and that this has been the case since the mid-1980s. The reason is essentially that the effects of such inflation, transmitted round the globe in real time thanks to computerised markets, would be so horrendous for any nation's businesses and their ability to compete that countermeasures would be taken without delay. Not everyone shares this view, and many believed reunification was the spark that would ignite the powder keg, sending prices sky-high.

On the social front, an endless stream of questions would have to be answered. The disparities between the two halves of the new Germany were daunting: gross income per capita in the Federal Republic was three times higher than in the G.D.R (an explosive factor in itself), and prices were notoriously dissimilar. In the old G.D.R, some basic goods and services (bread, potatoes, rents, transport) were five times cheaper than in the West, while consumer durables (televisions, refrigerators, personal computers) were vastly more expensive. The former East Germans would presumably find it so difficult to take care of basic necessities that, in the end, they would be no nearer to entering the Valhalla of the consumer society. How much patience and restraint could they be expected to show?

There were still other inauspicious omens, less easily quantifiable – but no less real – with respect to the cultural and behavioural differences that 40 years of separation had produced. Surveys carried out in 1990 showed that a united Germany was far from being of one mind on a host of issues. Only 7 per cent of adults in the West, for example, described themselves as atheists, as against 66 per cent in the former G.D.R. A whole raft of terms and concepts familiar to every 'Wessi' (West German) were simply unknown to the average 'Ossi' (East German), as advertising agencies were soon to discover.

The cumulative effect of so many disparities and potential dangers is impressive, and would have been more than enough to discourage, if not paralyse, most countries. The Germans nevertheless pressed forward with great energy, in spite of the many voices which counselled prudence. With the benefit of hindsight, however, the go-slow approach, had it prevailed, could so easily have gone wrong – if only because reunification depended on Moscow's approval. It was essential to make the process irreversible before some new twist in the Soviet power structure could throw up new obstacles. The coup d'état against Mikhail Gorbachev in the summer of 1991 might, after all, have ended differently. . . Germany was certainly right to proceed with all deliberate haste.

Helmut the bold

It was Chancellor Helmut Kohl's decision to act speedily. His boldness – verging on audacity – took everyone by surprise, and made it possible for Bonn to overcome every obstacle in short order.

The very first barrier was lifted almost immediately: Kohl made it clear that a united Germany would continue to be a full member of nato. The Soviet government, caught unawares, was in no position to offer even token resistance, especially as the 'sweetener' offered by Bonn was tempting: Germany would pay for the Red Army to be removed from the ex-G.D.R. A detailed and orderly withdrawal was agreed, and Germany could consider that 12 billion marks was not too high a price to pay for a 'liberation' so peacefully obtained. The Deutschmark thus prevailed over the military might of the Kremlin.

European doubts were also quelled in short order, not least because Germany's partners were given no time in which to mobilise resistance, if there was to be any. Bonn was organizing history; the others could only react. All the skills of German diplomacy were put to the task of solemnly reaffirming the country's total commitment to the Community, and the spectre of a return to the bad old days of 'Greater Germany', which had initially provoked a flood of (sometimes rabid) speculation and commentary – notably in France – was soon laid to rest.

When it came time to test the domestic electoral waters, Kohl and the Christian Democrats, in coalition with the Liberals, won an unambiguous vote of approval on both sides of what was once the Iron Curtain. Reunification was not to be the political manna Kohl's opponents had confidently expected.

The Chancellor's boldness, rewarded with a comfortable government majority, has been matched by an unprecedented effort on the part of the authorities to meet the financial challenge. The stakes are certainly high: the burden to be borne over a 5-year period by the public finances (i.e. the budgets of the federal government, the Länder and the social security agencies) could not amount to less than D.M 600 bil- lion. Of this, D.M 115 billion is to come from a 'German Unity Fund' – the equivalent of annual overseas investment by West German firms, or of nearly half the total of household savings. The sacrifice being demanded of the German taxpayer is considerable; but the only alternative – massive borrowing – is unpalatable in the extreme, given the dangers involved (a rise in the annual national debt to D.M 100 billion, upward pressure on interest rates, flight of capital etcetera).

During the election campaign, Helmut Kohl hinted that it might be possible to raise the necessary funds without increasing taxes. In so doing, he was obeying the first commandment of the new American capitalism, more at home in California than on the shores of the Rhine, which states: thou shalt not raise taxes. The power of contagion is such that even in Germany, even in the midst of a great patriotic leap of solidarity and unselfishness, Kohl had to defer to the visceral anti-tax reflex of the man in the street. By early 1991, however, he was asking Parliament to approve the inevitable tax hikes.

It was estimated that the year 1991 would see a West-to-East transfer of funds from the public purse amounting to some D.M 150 billion (over $75 billion). This is about what the French spend on health, and three times what they pay in income tax, every year.

It is not only the sums which boggle the mind. What is most extraordinary is that, in the midst of a global widening of the 'equality gap' such as the world has not seen since the nineteenth century, and at a time when 'cut-throat capitalism' is at its zenith, there is still one nation where the priority of priorities remains the reduction of inequalities among its citizens – whatever the cost.

Reunification will not be financed entirely by state funds, of course. The private sector is heavily involved, thanks mainly to cooperation agreements between West German firms of all sizes and their counterparts in the East. Such cooperation is essential, for the industries of the G.D.R were unprepared for the harsh realities of the free market, and many have gone under. The government agency responsible for privatizing them, the Treuhandanstalt, made a total of D.M 55 billion available in guaranteed loans during 1990 – in the full knowledge that at least half this debt may never be recovered. Plainly, the 'upgrading' of the new private sector in the East is going to require a huge injection of investment by West German firms.

Image summary: This figure is a political cartoon. It depicts a group of people seated around a large dinner table with a waiter approaching to serve food. One individual at the table is speaking, claiming to be hungry enough for two people. The scene illustrates a contrast between the abundance of the meal and the appetite of the guests, suggesting a theme of greed or disproportionate consumption.

Mezzogiorno or Fifth Dragon?

This unprecedented financial effort by the Federal Republic to bail its long-lost Eastern sibling out of bankruptcy shows an admirably bold and hugely generous spirit; it is not a perfectly disinterested gesture, however. Germans know that this is exactly the kind of investment that pays off in the medium-to-long term. Eventually, the absorption of the five Eastern Länder into the F.R.G will bring economic rewards.

The world, too, knows this and still sees Germany as a pillar of growth in an otherwise stagnant global economy. This is not to suggest that nothing can go wrong; reunification may yet prove a tougher nut to crack than anyone could predict. But it would be reasonable to expect that one of two possible scenarios (as envisaged by C.E.P.I.I analysts) will unfold over the next 5 years:

1. In the optimistic 'Fifth Dragon' scenario (an allusion to the four 'dragons' of the booming Asian economy), the former G.D.R generates growth, and spectacularly so. This hypothesis is based on three premises: first, that salaries will rise to no more than 75 per cent of West German levels by 1995 (in 1990, they stood at only 30 per cent, but by 1991 had already reached 50 per cent). Next, there would have to be D.M 110 billion of new investment every year until 1995. And finally, foreign goods would enter the market at a rate of 40 per cent, and 'Ossi' emigration to the West would have to decrease from a high of 360 000 in 1990 to 50 000 by 1995.

If all these conditions were met, the economic results of reunification would be truly impressive: the country as a whole would record an average growth of 3.7 per cent per annum over 6 years (1990 to 95), the inflation rate would remain stable, and the balance of payments would still show a surplus, amounting to 2.7 per cent of G.D.P. Crucially, the gulf between the two Germans would begin to close, with unemployment in the former G.D.R brought down to 11.8 per cent and the deficit in its current account at only 1.2 per cent of G.D.P.

In this scenario, Germany is not the only beneficiary: all the countries of the O.E.C.D ought to derive some advantage, whether in terms of growth or inflation, budget deficits or balance of payments, from the newly invigorated German dynamo. The signs are there: in the first quarter of 1991, for example, sales of French cars to Germany grew by 40 per cent, while at home they had dropped by 20 per cent.

The 'Fifth Dragon' scenario is founded on patience and foresight; its premise is that sagacity will prevail.

2. The 'Mezzogiorno' scenario takes its name from the southern half of Italy, where years of government action have signally failed to bring the region up to the level of the North. In this forecast, salaries in the former G.D.R rise much faster, reaching 90 per cent of 'Wessi' levels by 1995. This is the essential point, for it means that impatience, not sagacity, will prevail. As an immediate consequence, investment will be much lower, at only D.M 90 billion per year on average; and immigration to the West will remain high (at an average 200 000 persons per year).

The economic returns would be significantly lower than in the 'Five Dragons' scenario. G.D.P growth would be only 3.5 per cent per annum, and unemployment would reach 9.8 per cent (East and West combined). The pace of inflation would quicken, and the famous trade surplus would represent a relatively meagre 1.2 per cent of G.D.P. The most disturbing aspect, though, would be the persisting gap between the two halves of the nation: unemployment in the Eastern Länder alone would reach 20.8 per cent by 1995, and the current accounts deficit would amount to a whopping 16.1 per cent of G.D.P.

In the words of the C.E.P.I.I research team, the picture is one of progressive deindustrialization of the former G.D.R as it becomes an economic desert in comparison to its lush Western neighbor.

There are two lessons to be learnt from these contrasting scenarios. In the first place, the former West Germany has everything to gain from the strongest possible solidarity on behalf of the East, even if it means huge sacrifices in the short term. The 'Fifth Dragon' scenario implies a larger commitment of public resources and general belt-tightening on both sides, but it ultimately brings more substantial benefits.

Secondly, and more importantly, the 'Mezzogiorno' forecast shows what could happen if salaries in the East rise too sharply. Wage restraint is the sine qua non of a gradual reduction in unemployment and a return to robust economic growth.

This second lesson, as the French found out between 1981 and 1984, is a painful one. The deluded belief that the best way to reduce unemployment was to work less and earn more gradually gave way to the realization that steadily rising wages and salaries only look good on paper if, in real terms, purchasing power is being eroded and jobs are being lost. This constitutes a major advance in public perceptions of economic reality, bringing with it a salutary recognition of the role of the company, a vastly improved economic performance and – for the first time in French history – a national consensus on the merits of capitalism. It is just such an awakening (but on a far greater scale) that is now required of the former citizens of East Germany and of other central European nations. Helmut Kohl never stopped reminding his compatriots of this during the 1990 election campaign. How many heard his message that 'the road to prosperity will be long and hard' over the jubilant cries of 'One Germany, One Fatherland'? Already, there are troubling signs that impatience and frustration are mounting: widespread unemployment has sparked demonstrations and protests in the East, and the metalworkers' union, I.G Metall, has won for their 'Ossi' members 100 per cent wage parity with their counterparts in the West by 1994. Such deviation from sensible restraint may yet produce a Mezzogiorno on the eastern flank of the Rhine model.

Why Herr Poehl had to go

On 26 March 1991, the then President of the Bundesbank, Herr Otto Poehl, speaking in Brussels, declared that the Inter-German Monetary Union (I.G.M.U) was 'a perfect example of what ought not to be done in the European Community'. He upbraided the government in Bonn for having 'introduced the Deutschmark into the former East Germany overnight, with hardly any preparation and no means of subsequent rectification, but worst of all at an unsatisfactory rate of conversion. The consequences are disastrous'.

What is in fact disastrous is that this adjective should have been used at all, especially by the head of a central bank (and not just any central bank, but the legendary 'BuBa'). One cannot blame Herr Poehl for having made every effort to persuade Bonn not to resort to borrowing in order to help finance reunification; such was his duty. But having failed, he was surely not entitled to take his revenge so publicly and so sweepingly as to condemn European Monetary Union (emu) in the same breath. His words immediately caused the mark to fall, but that is secondary; more seriously, they betrayed a shocking eagerness to play down Helmut Kohl's achievement, to forget that the speed and determination of his response was absolutely right – for who can say that anything less might not have ended with the Iron Curtain making a return appearance in the middle of Berlin?

There is an element of wounded pride in Poehl's remarks which can be traced back to the argument over the rate of convertibility to be applied to the Deutschmark vis-à-vis the Ostmark (the G.D.R currency). Poehl lost this argument, too. He had proposed a rate of 1:3, or at the most 1:2, which was technically sound, because it was based on the productivity ratio between the two Germanys – comparable to that between West Germany and Portugal. Kohl, however, opted for parity. One Ostmark would be exchanged for one Deutschmark.

The consequences of this decision might have seemed disastrous in the short term: unemployment and factory closures rose precipitously, while the enthusiasm of a few months before gave way to gloom. But what would the outcome have been if Poehl's advice had been followed instead? The rise in East German incomes would have been much less dramatic, and unemployment would not have climbed so quickly. But the huge disadvantage to Poehl's scheme was the mass immigration that would ineluctably have taken place. As Kohl remarked, 'If the mark had not come to Leipzig, Leipzig would have come to the mark'. In 1990, up to 150 000 'Ossis' were making the journey to the West; but by Spring 1991, the wave had slowed to a trickle – only a few hundred each day.

It was, from the start, a particularly thorny dilemma: either the Easterners stayed put, and waited out the inevitable – but temporary – period of unemployment, or they left, reducing East Germany to an industrial and economic ghost town for years to come. When Poehl condemned the former path as 'disastrous', he was feigning ignorance of the latter. Kohl's decision does entail hardship and sacrifice, but it is plainly the lesser of two evils.

Poehl's outburst was motivated by more than just spite, however. For decades, German monetary authorities have tirelessly preached the doctrine of convergence, according to which no monetary union should be attempted between two states before their political and economic positions have grown sufficiently alike. Obviously, no two situations could have been less convergent than those of East and West Germany; it was thus inevitable – and essential – in the eyes of the Bundesbank that I.G.M.U should be pronounced a disaster. Any other outcome would result in a galling loss of face, not only within Germany, but within Europe and its institutions. The wider issue of European Monetary Union, and the prior convergence that the Bundesbank has always insisted (and staked its reputation) upon, was uppermost in Herr Poehl's mind when he warned that I.G.M.U was a model of 'what ought not to be done'. Yet, here too, Poehl was feigning ignorance of the facts, for all the evidence of the past decade has shown that monetary union, even in the attenuated form of the E.M.S, actually promotes economic convergence. To deny this is to imply that Portugal, Greece, probably Spain as well – perhaps even Italy – will have to be excluded from any future European Monetary Union.

If that is so, then what hope is there for Hungary, Poland, Czechoslovakia and the other countries of Eastern Europe? Their successful transition to the market economy is increasingly tied to European progress towards economic and political union; and if European union does not come to them, they will come to us.

Otto Poehl resigned soon after his intemperate remarks. The jury is still out on the question of whether German reunification will be a success, or if (as Helmut Kohl's present political difficulties and the impatience of I.G Metall seem to suggest) the 'Mezzogiorno' scenario is nearer the mark. But my personal view is that, notwithstanding Herr Poehl's prediction of disaster, the German experience has already proved to be a salutary illustration of what ought to be done in Europe, if only Europe could grasp the nettle of real union as boldly as Helmut Kohl did. That is the second German lesson for our times.

What Europe could achieve

There is a saying which sums up a government's pledge to its own parliamentary majority: 'Give us good finances and we will give you good politics.' Helmut Kohl may go down in history as the embodiment of this principle. For more than 40 years, Germany has been the citadel of financial orthodoxy, yet Kohl had the courage to insist on instantaneous monetary union between the two Germanys. Against the advice of the experts, despite the internationalization of the economy (which reduced his room for manoeuvre) and the risk of alienating the voters, despite the combined forces of vested interests of every description – in spite of all this, a politician widely dismissed as timid and unimaginative pulled off a stroke of genius. For once, the federal power in Bonn was able to impose its political will on the Länder and their representatives who run the Bundesbank.

It is a truth too easily forgotten that economic strictures must occasionally be relaxed in order to accommodate political necessity. The corollary to this principle is also too often ignored: that is, the primacy of the political sphere is conditional on the prior success of the economic and financial sphere. In other words, political necessity must not be used as an alibi; politics can free itself of financial constraints only when the economic base is already strong. If Germany had not already built up its hoard of trade surpluses, or if its currency were not so strong and its industries not so dynamic, Bonn could never have brought off its extraordinary buyout of the G.D.R – one merger that has every chance of proving beneficial to all concerned.

A further lesson to be digested from recent German history is that bold, imaginative action in the economic sphere is not necessarily synonymous with inequality, social injustice or marginalisation; and that such action combines well with solidarity, which need not be synonymous with bureaucracy, inertia and heavy-handed interventionism.

Two essential characteristics of the Rhine model have made possible this reunification without tears, and it is not for the first time that they appear in these pages – but in this context they take on special significance. First, of course, is the long-term vision of the nation's interest. Germans on both sides of the former divide understand that today's sacrifices are an investment that will pay off handsomely in the future. However ill-tempered they may occasionally feel in the short run, however unpleasant some of the immediate consequences may be – and there will be deficits, social problems and, yes, higher taxes – they know that if they stick together now, their patience will be rewarded.

The second Rhine factor is the priority assigned to the common good over individual interests. This is the bedrock on which the long-term vision is founded. If given free reign in the case of reunification, individual interests in West Germany would have imposed a cautious, go-slow approach, with as little commitment of public and private funds as possible. Chancellor Kohl would never have taken the plunge had he listened to the advice of the taxpayers or unemployed of his country. And what if he had listened to the financial markets?

Reunification was beyond all doubt a gamble they would never have accepted, given the choice: much too uncertain, with absurdly high stakes. It is undeniable that the financial risks were – are – considerable. The sums required are gigantic, and no one can say for certain that the shock waves of so much borrowing and spending can be absorbed without doing too much damage to the system.

What is certain is that such shocks can be more easily absorbed by a system whose financial institutions are fundamentally sound. The financial markets, had they been the dominant force (as in the neo-American model), would have proved too volatile, too nervous and unpredictable to absorb the shock of reunification. A stable and powerful banking system, with close ties to business and industry, is in a far better position to adapt relatively smoothly to the new financial requirements. The collective interest is already part of the vocabulary of such solid structures, founded on the patient accumulation of assets over many years; conversely, it stands little chance of being heeded by thousands of independent financial dealers, each driven by the need to produce instant results and influenced, moreover, by a host of ephemeral criteria – of which the most important is the high opinion which some dealers have of the opinions of a few others.

The 'German lesson' is sure to inspire more than a few provocative thoughts on the subject of Eastern Europe. Just as the Germans have taken on the formidable task of rescuing a third of their own nation from the dustbin of history, Europe is now called upon to devise a strategy for reclaiming its own center from the abyss of 50 years of communism.

Before examining this new perspective, however, it is worth looking at the mistakes now being made in the former East Germany, mistakes whose consequences could be even worse than those predicted by the Mezzogiorno scenario. Essentially, they come down to policies on wages and welfare benefits: the former are rising much faster than productivity, while the latter are so generous that many unemployed 'Ossis' now earn more than they once did as workers. Yet public dissatisfaction is increasing with the realization that living standards and future prospects in the East remain well below those of the West.

How much longer can the East continue to sink into torpor and acrimony, despite all the financial sacrifices made by the West? That will depend on the pace of investment in production, which will come mainly from West Germany. The point is that, whatever its pace, it will be German. The East European context is entirely different: in countries like Poland and Hungary, national investment in production will be almost negligible – the resources simply do not exist. Only substantial foreign investment can provide the necessary boost towards a fully fledged market economy. Again, it is the pace that matters. At present, no doubt, it is arriving too slowly; but there is a risk, should it speed up too quickly, that foreigners would be perceived as having 'taken over' the national economy. The result could be an exacerbation of already volatile populist and nationalist tendencies – and further deterioration of the economy.

Logically, the European Community should be seeking to strike a balance between the overabundance of aid available to East Germany and the paucity of resources currently on offer to the rest of Central Europe. Yet this is to beg the question, for the E.C is not yet in any position to decide on, much less carry out, a coherent policy on the matter.

On the face of it, the E.C can take heart from the fact that West Germany, with a population of 58 million, could undertake to 'rescue' 17 million East Germans, for the proportions are identical with respect to the Community, whose twelve member states have a population of 340 million, and the 100 million inhabitants of the four major Central European countries – East Germany, Poland, Czechoslovakia and Hungary. But the latter three are already beginning to discover that the events of 1989, far from ushering in a golden age of prosperity, were only the first steps in a long journey through the wilderness – a wilderness dangerously populated by false prophets and demagogues. Unlike the 'Ossis', the Poles, Hungarians, Czechs and Slovaks will not be on the receiving end of generous, long-term financial assistance, despite all the efforts of the newly created European Bank of Reconstruction and Development, because – unlike Germany – the E.C is not a political federation, not even a fully operational single market: more a free-trade zone, with few common policy areas apart from agriculture and the E.M.S.

If the twelve countries of the E.C were to pool, not just 1 per cent or 2 per cent of their resources, but 10 per cent or even 15 per cent (as all federations in the free world do), they would take a giant leap forward in the direction of the Rhine model, towards solidarity and mutually reinforcing wealth creation. And that is not all: they would be able to find the means to make the new economic deserts of Eastern Europe bloom again. Not in precisely the same terms as German reunification, of course; they ought to aim for something along the lines of the Marshall Plan, the twentieth century's most impressive testimonial to the idea that one country's efforts to assist others can, in the end, prove indirectly rewarding to the donor.

It is an idea whose discovery we owe to the United States of America. That there is, at present, no United States of Europe is a great pity. The failure to create European union will cost us dear – eventually – because of what is about to happen in Hungary, Poland, Czechoslovakia and elsewhere. The longer we in the E.C resist the notion of the United States of Europe, the more we are helping turn Eastern and Central Europe into what Vaclav Havel has called 'a zone of despair, instability and chaos, posing no less a threat to Western Europe than the Warsaw Pact's armored divisions once did'.

Chapter 12 France at the crossroads of Europe

When the Gulf War broke out, Europeans absorbed every detail on their television screens, avidly following a drama that seemed to concern them as much, if not more, than anyone else. And they made an astonishing discovery: as events unfolded, Europe was nowhere. America, with a population of 250 million, had immediately sent 550 000 soldiers to the Gulf, while the 340 million people of the European Community had only mustered 45 000 men, under various flags, to put under American command.

It was a shock to realize that there was no European army: Europe had been discussed for so long that, in France as well as elsewhere, people had subconsciously formed the vague idea that Europe was a fact. Now, instead of European unity, they saw Britain marching in step with America, France following militarily while trying to take the initiative diplomatically, Germany barred by its constitution from sending a single soldier, and the Latin countries divided, with a number of anti-American demonstrations in Spain, for example.

This disunity, this powerlessness and ignorance merely underline how urgent it is for the European Community to choose its own model of capitalism. If it fails to do so, market forces will make the choice. This has already begun – badly.

We have noted how, beyond its superficial unity, present-day capitalism is divided into two profoundly distinct currents. Most European countries are closer to the Rhine model than to the neo-American model. But we have seen how the Rhine model is steadily retreating.

This can be seen particularly clearly in the development of the European construction industry. Having been almost at a standstill for about 10 years, from the first oil crisis to the Fontainebleau summit of European Community leaders in 1984, the industry has started up again magnificently in the approach to the single market. But what will this market consist of? It is striking that though the French have keenly supported the project, its content has been largely inspired by Thatcherite concepts. Although the Germans have approved the steps towards economic and monetary union, their main concern has been to avoid damaging the stability of the German mark.

Now we have our backs to the wall. In the ongoing effort to define economic and monetary union on the one hand, and political union on the other, European leaders will have to decide between the radically opposing ideas revealed in two remarkable speeches delivered in Bruges. Should Europe be nothing more than a large market, as Margaret Thatcher argued in 1988, or should it be a social market economy, which would imply genuine federal power, as Jacques Delors urged the following year? That is the fundamental dilemma that is crucial to the destiny of the 340 million inhabitants of the European Community countries, and, indirectly, to that of the people of Central Europe and North Africa.

But among the 12 European Community countries, there is none for which the choice is as important as it is for France.

France's break with the tradition of Colbert

It is hard to know where to place France in the great struggle between the two forms of capitalism. That is what Professor Prodi, one of the world's shrewdest observers of French affairs, said in a particularly penetrating analysis published in the journal Il Molino. The article by the former president of the I.R.I, the state holding company set up to rebuild Italy's heavy industry, was called'Between Two Models'. It was an apposite title since Professor Prodi was discussing two distinct models of capitalism defined according to criteria very close to those used in this book. He wrote:

France is one country that has never entirely opted for one model or the other. Its Stock Exchange and financial markets have traditionally played a modest role. The size of the Paris Bourse compared to that of London is plain and unquestionable proof of that. On the other hand, France has not seen the creation of banking groups or of forms of ownership like those found in Germany. In France, state-owned corporations have always played a deciding role, and this applies both to industrial companies and to those involved in banking or insurance. Although the significance of developments in the eighties may not be clear, they are still worth looking at closely. In 1986, pressed by Jacques Chirac, the prime minister, Edouard Balladur, the finance minister, prepared a plan for the large-scale privatization of state-owned companies. Under this plan, 27 groups employing 500,000 people were to move into the private sector. As a result of the change of government that followed, the plan was only partly put into practice.

Nevertheless, eight large groups were transferred from the public to the private sector, and for the most part they were of enormous importance. They included Saint-Gobain, Paribas, C.G.E, Havas, Société Générale and Suez.

The immediate motives of this new French policy might suggest a movement towards the Anglo-Saxon model, in which priority is given to expanding the stock exchange by creating several million new shareholders. However, the importance given to this goal has been steadily reduced, because many of the new small shareholders have quickly sold their shares to make an immediate profit. The way in which these privatizations have been achieved, on the other hand, has paved the way for a movement towards the forms of ownership that are found in Germany. In all the privatized corporations there is a hard core which holds on to the power, even though it has only 25 per cent of the shares. Deals, made possible by an advanced information network, have progressively rationalised share ownership, such that some large financial and industrial groups are now forming in France. In terms of their ownership and their connections, these groups tend towards the Germanic rather than the Anglo-Saxon model, even though they are far less compact and watertight than those in Germany.

Moreover, France still has a large number of publicly-owned corporations which do not fit into either the Anglo-Saxon or the Germanic system, even though in recent years the strategy of the French public corporations – particularly regarding the acquisition of companies in other countries – is inspired more by Germanic than by Anglo-Saxon logic.

In fact, these acquisitions have provoked strong reactions in Britain and elsewhere within the European Community because they have been interpreted not as the fruit of a commercial strategy, but as the instrument of a national strategy.

Why then does France, which for half a century has been so keen to promote its own model – the elusive 'third way' between capitalism and communism – now present such a blurred profile? There are two main reasons. The first is that the French have finally broken with a tradition which goes back to the mercantilist policies of Jean-Baptiste Colbert, Louis 14's chief minister, in order to enter fully into the European and international economy; the second is that in making this transition they have borrowed as heavily from the Anglo-American model as from the German–Japanese one.

In the French tradition of social Colbertism, it is the state that directs the economy in order to fulfil political ambitions and achieve social progress. This tradition is now rapidly losing ground. The proof of this is the fast decline of the standing of the civil servant in French society – yesterday honored and envied, today often held in low esteem – and the simultaneous ascent of the celebrity capitalist.

On the first point, it is worth noting that in Japan two people of similar age and qualifications can expect to earn about the same, even if one works in the private sector and the other in the public sector. Also, teachers are better paid than other public employees because their job, in this Confucian country where learning is a virtue, is seen as a noble one. For the Japanese, teaching is a life-long vocation, not a job. The social standing given to teachers is a guarantee that children will be well taught.

Nevertheless France is still characterised by an omnipresent central state. On the political level, despite decentralisation, government from the center, which dates back to the Jacobins, is still the norm. There is nothing like the federal-type organizations which dominate in Germany, America and Switzerland and which act at local level.

In France, the state remains at the forefront. In Germany, for example, much of the industrial aid on offer is distributed by the Länder, or regional governments. The board of the Bundesbank is in any case made up mainly of Länder representatives who take little notice of the great movements of international finance and even less of the opinions of Bonn.

As for the economy, it is a mistake to think that in 1991 France is still the classic planned economy, merely because it has important nationalised industries. In fact, there is a sharp distinction between public monopolies such as the electricity and gas industries, the railways and the national savings association, on the one hand, and national corporations, both industrial and financial, on the other, which trade internationally and which, for 15 years at least, have been run according to the principles of open competition.

In technology, however, the public sector has retained its dominance over most of the research organizations (such as those dealing with nuclear energy and fuels, medical and scientific research etcetera). The situation is quite different in both the Anglo-American and Rhine models, where it is mainly private companies and universities that carry out research, though they often do so with public money.

More than any other capitalist country, France has long had a powerful state at the heart of society, a state that has always taken the economy under its wing: protecting and planning on the one hand, but on the other investing and creating in the spirit of Saint Simon, the social philosopher who promoted the development of industry and science.

The opposition between the two models of capitalism is reflected in two equally distinct models of trade unionism. The Anglo-American trade unions have always rejected the notion of social partnership, refusing to participate in company decision-making or to accept co-responsibility. They maintain this refusal by confining themselves to issues of pay and conditions, as in the U.S.A, or by acting as a political force, as in Britain, where trade unions support the Labour Party and combat capitalism from the outside, in an approach that owes as much to anarchism as to interventionism.

In contrast, trade unions in the Rhine countries (which have strongly influenced those of Japan) have opted for integration with the employers. They collaborate in order to compete: in these countries, each trade unionist is like a member of a football team, whose main motivation is the wish to help the team win.

French trade unionism has been influenced too much by Marxism and the ideology of class struggle to belong to either camp. Caught between the pincers of a Colbertist state and a broadly Marxist workforce, French capitalism has long wavered between authoritarianism and mob rule. The results of the latter can be seen in the figures on wage inflation and the devaluations of the franc. The authoritarian strain manifests itself particularly in the absolute monarchy within companies: the all-powerful managing director is not a German idea, but a very French one. While the Rhine countries constantly demonstrate that collective management is more efficient, France still puts its faith in Napoleon's belief that one mediocre general can command an army better than two outstanding ones.

All of which helps to explain why market forces and free enterprise have for so long been distrusted in France, and why profit was until very recently seen as a cardinal sin. It is hard to believe now that in The American Challenge, which appeared in 1967 – 5 years into Georges Pompidou's conservative government – Jean-Jacques Servan-Schreiber was moved to protest that 'all that is private – private enterprise, private property, private initiative – having been associated once and for all with Evil, everything that is public is seen as Good'.

The socialist government must take the credit for having cured France – deliberately or otherwise – of its inhibitions and for having reasserted the basic values of a market economy.

It remains the case, however, that for more than 30 years France has remained radically estranged from the two models of capitalism, each of which ascribes crucial importance to these values. In the case of America, that is self-evident. As for Germany, it must be remembered that the Sozialmarktwirtschaft is above all a market economy, in which the State merely makes up for the market's most glaring deficiencies without either intervening directly or distorting free competition.

Another distinguishing feature of the French economy is the financial system, and the way in which companies are controlled. In this area French capitalism differs from both the neo-American and the Rhine models. The Stock Exchange in France has nothing like the importance that it has in the U.S.A. General de Gaulle used to say: 'French politics is not decided on the trading floor.' Indeed company financing was largely done by the banks and by the treasury and its associated bodies. The percentage of company cash movements that went through the banks was 90 per cent throughout the 1960s, the 1970s and right up to 1985. Despite that, capitalism in France is significantly different from German 'bank capitalism', which depends upon the links between banks and industry. No financial institution in France can boast anything like the influence of the Bundesbank. There are still a number of very powerful capitalist families in France; not, perhaps, on the same scale as in Italy, where two-thirds of the share capital listed on the Milan Stock Exchange involves family companies, but the importance of family capitalism is still manifest in such first-rate French companies as Michelin, Peugeot, Pinault, D.M.C, Dassault, C.G.I.P etcetera

French capitalism, which remains hard to classify, has for a long time given the impression that it is trying to find its way, or even battling against the current within Europe. At the beginning of the 1980s, after the left came to power, it went through an interventionist phase. Then in 1983 it did a U-turn and took the Anglo-American route with the zeal of the converted – a zeal which did not weaken, but rather the opposite, during the 'cohabitation' period of 1986 to 88, when the country had a conservative prime minister and a socialist president.

France's double conversion

But what sort of conversion was it exactly? It is hard to say. Monetary policy was borrowed from Germany and everything else from Britain.

By 1991 it could be confidently predicted that the French rate of inflation would be about the same as Germany's. Ten years previously, there had been a persistent 10-point difference. The improvement is the result of a steady and exemplary effort begun by Jacques Delors, continued by Edouard Balladur, and for which Pierre Bérégovoy will certainly claim most of the credit. Behind this policy of the strong franc (to which everyone now pays homage) there have been innumerable decisions, starting with the abolition of price controls for services as well as products, and ending with the introduction of free movement of capital on July 1st 1990. I remember, about 2 years before this, telling an important Paris banker that the decision had just been taken to abolish exchange controls on that date. He was incredulous, saying it would be impossible for the French franc to resist the outward flow of capital that would immediately be triggered.

It is to the influence of Britain – and, it must be said, to the rivalry with the City of London – that the extraordinary financial deregulation process must be attributed. It began in 1984 with the removal of barriers separating the interbank, securities and mortgage markets, the ending of the stockbrokers' monopoly on trading, the strengthening of the Stock Exchange regulatory commission (which has acquired a full set of very sharp teeth), and finally, the development of the financial futures market, which has overtaken its London counterpart by attracting considerable foreign business, notably from Germany.

The volume of business on the stock exchange has increased by a factor of 25 in just 7 years (from F.F 124 billion in 1980 to nearly F.F 3.1 trillion in 1987), and the rate of turnover of the most active shares has multiplied 50 times in the same period. In the company that I run, for example, the level of stock rotation went from 12 per cent to 123 per cent between 1980 and 1987. Ten years ago, securities management consisted of receiving the coupons and waiting for the payment date. Financial engineering has become so sophisticated that in the A.G.F Group, for example, a capital share changes hands every few minutes.

The new rich and the new poor

The new rich are those involved in the financial sector as it strives to emulate its British rival. The new poor are at the other end of society, as the extremes of wealth drift inexorably apart, American-style.

At the end of the 30-year post-war boom, inequalities had visibly narrowed in France. Two figures illustrate this trend. The first measures the gap in income between the poorest 10 per cent of the French population and the richest: in 1970, the latter group earned 3.12 times more than the former. This was an all-time low.

The second figure measures the concentration of national wealth. The richest 10 per cent held 65 per cent in 1960 and only 54 per cent in 1985. Again, the reduction in inequality was significant.

Since 1984, however, we have witnessed a reversal of this trend. The income gap was back up to 3.2 per cent by 1988. As for the wealthy, thanks to the surge in property and share prices, they have seen their capital grow much faster than ordinary earned income.

In this respect France is a long way behind the U.S.A, where the Department of Commerce calculated that between 1980 and 1989, company directors' pay increased by 260 per cent, while that of employees rose by only 50 per cent.

These figures reveal profound social changes. For example, there is an American-inspired tendency to decide each employee's pay individually, and to enforce what is called 'greater flexibility'. Companies are ensuring that they apply principles of neo-liberalism to the workforce just as they are applied to other production factors. An employee's annual pay will thus reflect his individual efficiency, or what economists call marginal productivity.

That is not simply a change in methods. It is the expression of a logical process of growing inequality which results from supposedly 'natural' laws. The rich need no longer feel ashamed of their wealth.

Image summary: This is a political cartoon. The image depicts a man relaxing in a large hammock stretched between two tall apartment buildings, while another person stands on the ground looking up at him. The man in the hammock responds to a question about whether it is his day off by stating that he is a landlord. The illustration suggests a critique of the landlord's role, implying that they can enjoy leisure and passive income derived from the housing provided to others.

Where they once shunned any hint of ostentation, they now display it with an immodesty that the French used to consider shockingly vulgar when they witnessed it in Americans. And this wealth increasingly rubs shoulders with a new poverty of the kind that is flourishing in the U.S.A. France, too, now has its zones of urban blight, dumping-grounds populated by a growing army of the unemployed, those whose benefit has run out, young people seeking their first job, and immigrants – illegal or otherwise. As in America, there are sporadic charitable efforts which step in where the state has failed: soup kitchens – something the French thought had vanished forever – reappeared during the 1980s, at the same time as the expressions 'polarized society' and 'the new poor' became common. Inevitably, a Minister of State was appointed to direct the massive task of improving conditions in deprived urban areas.

The open sore of run-down, crime-ridden neighborhoods in America is an obvious result of the state's enforced impoverishment and its abdication of social responsibility. In France too, now that social Colbertism has been put to flight, the question arises: surely the most eminent among these 'new poor' is the state itself?

The evidence for this is not just the peeling paint and broken-down lifts, but rather the French aversion for public service. Not long ago, to take on public office was a noble thing, and recruitment by means of competitive examinations made it an option widely available to ordinary people. Today public servants are held in low esteem.

Ridiculed and demoralised, they are, above all, badly paid. Nobility has been conferred on dealers, on winners, on whoever can make a killing ('killing' having become something positive and desirable). These sought-after 'killings' are an obvious sign of how strongly American values have taken root in France.

Even the French postal service is no longer very efficient. It is much worse in the U.S.A, where private mail is one of the fastest growing industries. The owner of the leading company in this field recently went to Switzerland intending to buy a second home. He came back disgusted, saying: 'Switzerland is not the place for me: the public postal service there is the best in the world.'

The choice between the neo-American model and the Rhine model is no abstraction: it will even determine how our mail is delivered!

France needs the Rhine model

Let us go back to basics. The role of the company is now so important, and at times controversial – particularly in France – that it is time to put before the public, and the appropriate authorities, a proposed 'declaration of the rights and duties of companies' like that which Jacques de Fouchier, President emeritus of Paribas, and Alexandre de Juniac have already outlined for the European Parliament.

The Rhine model responds quite well to this search for balance between companies' rights and their duties. It embodies, on the one hand, capitalism which can provide social security, and on the other, a system in which the company is seen not just as a heap of capital but as a group of people. This is exactly what France badly needs.

Undoubtedly, the reason we have heard so much over the years about problems with social security, hospitals and pensions is that France, unlike the other developed countries, has barely started dealing with them; and yet we have just discussed how another problem, equally daunting for democratic governments, has been dealt with – the management of a strong currency. Another reason why these problems have attracted so much attention is that the steady advance of the neo-American model, whose public acceptance depends largely on tax cuts, inevitably means a weakening of the protection provided by the social security system. France has been unwilling to consent to this. In another chapter, we will see what would happen if it were suddenly decided that the French would pay no more tax than the Americans.

Apart from the need to maintain social cover, France needs the Rhine model to strengthen the capacity and financial stability of its companies. Following the Anglo-American example, the restructuring of industry has recently gathered speed, with mergers and takeovers becoming bigger and more frequent. In 1986 they amounted to F.F 61 billion, in 1987 to F.F 165 billion, and nearly doubling in the following year to F.F 306 billion.

Only a tiny proportion of these operations resulted from takeover bids, to which the French (like the Germans and Japanese) are allergic. It is perhaps in France that the term 'takeover bid' has the most negative connotation, being automatically associated with the law of the jungle. Restrictions on takeover bids are explicitly aimed at protecting the interests of minority shareholders against so-called dawn raiders. This is no doubt partly the result of the media attention lavished on two bids in particular, that of Suez for Compagnie Industrielle in 1989 and the Paribas bid for Compagnie de Navigation Mixte in 1990.

Takeovers, whether of French firms by foreign companies or vice versa, have virtually never been followed by asset stripping. On the whole, their objectives have been genuinely constructive, aiming for the kind of industrial restructuring that is necessary in the run-up to the Single European Market.

In this regard the industrial company that has succeeded most brilliantly is probably the Schneider group. In 1982 it was a non-specialized company largely dependent on state orders and subsidies, and it posted a deficit of F.F 350 million on a stock market value of F.F 250 million.

In less than 10 years, Schneider dispensed with its loss-making divisions and began to concentrate its activities on electricity, becoming the world's number one distributor and the leader in electrical automation, ahead of such companies as Westinghouse, General Electric, Siemens and Mitsubishi. By 1990 its stock market value had increased sixtyfold.

This extraordinary turnabout was only possible thanks to more than 50 acquisitions, which were all agreed amicably, except in the case of Télémécanique. In 1988, Schneider launched a particularly controversial bid for Télémécanique, an outstanding company that was cited as an example of participation by workers in both management and funding. I confess that at the time I was sorry things had to be done so speedily. If it had been happening in Germany or Switzerland, the business would have been handled more gently, with bankers as intermediaries. But in the end this restructuring was imposed in Télémécanique's own interest: the company is now in a much stronger position in the world market than it was at that time.

In the spring of 1991 Schneider launched another remarkable takeover bid on the American company Square D, which was shielded by particularly protectionist statutes in force in the state of Delaware. These gave the intended victim a whole cupboard full of poison pills with which to defend its independence. Also, to comply with anti-trust laws, Schneider had to send to the U.S.A more than a ton of documents, all of them translated into English. Yet throughout the bid most shareholders were in favor of the buyer. Schneider raised its initial offer, and since everything in America has a price, the president of Square D shamelessly announced that he had struck a good deal.

Europe's version of the Japanese zaibatsu

If France wants to move towards a system that combines the performance and social solidarity of the Rhine model, it must take account of the new paradox that goes against our received wisdom: the power of banks and insurance companies has become indispensable to any attempt to wed economic efficiency to social justice. Roger Fauroux said simply, 'I am in favor of the German model, because their finance is at the service of industry'.

France has a deficiency that is rarely acknowledged: it lacks dependable, stable shareholders. For shareholders to give their loyalty, it has to be in their interests to do so. At the moment it is not, because the tax advantages of mutual funds, which are judged on their short-term performance, have the effect of moving the small investor's money about – which in turn tends to favor takeover bids. To give small investors and fund managers a renewed desire to support sound, long-term strategies, the old long-term savings accounts would have to be revived. These would be confined to shares in European Community companies; a shareholder would be able to buy and sell shares on account without paying capital gains tax, provided the total investment on the account was not reduced.

In the same way the shareholder would be exempt (within a limit that would have to be fixed) from paying wealth surtax. This would give the investor the same advantage currently enjoyed by the head of a company who owns more than 25 per cent of the shares and need not declare this as capital for purposes of surtax.

As far as companies are concerned, it would be sensible to follow Germany's example by increasing taxation on undistributed profits, and by taxing dividends paid on paper more than dividends paid in cash. Such policies have been shown to stabilise shareholding and to curb the market forces that encourage immediate profit-taking.

All this would allow the great financial institutions to raise more funds in order to invest them, at their own risk, in the form of capital or long-term loans, as they do in Japan and Germany.

That is why Jean-Yves Haberer, president of the Credit Lyonnais bank, has become an advocate of the German-style multi-purpose 'universal' bank. It is striking that in the great debate going on in the U.S.A on the banking reform plan drawn up by the Treasury in 1991, the main question is whether this reform should be along German and Japanese lines. The argument that stands out in this affair is the one put forward by the opponents of any such innovation: given that in the U.S.A bank deposits are guaranteed by the federal government, a universal bank system would increase the risks run by the federal insurance scheme, which is already on the verge of collapse.

France's national business institute published a study in January 1991 entitled 'Strategies for capital and share ownership' which came to the implicit, though quite clear, conclusion that France needs to move towards the Rhine model in order to strengthen its worryingly vulnerable capitalist structure. Since 1990, the fashion for takeover bids has given way to one for marriages of convenience and internal reorganization. Nevertheless, the weakness of company share capital and the volatility of institutional investment, dominated by unit trusts and investment pools, has the effect of making share ownership as unstable as it is in America. The 40 or so well-qualified people who contributed to this study stated: 'The publication of monthly performance tables has the same effect on unit trust managers as the publication of quarterly results has on managers of American companies: they impose a short-sighted attitude, which in France leads to a fast rotation of portfolios. Unit trusts are gradually replacing individual small shareholders, who until recently would keep their blue chip stocks for a lifetime before passing them on to their children.'

The institute demanded the usual tax incentives to stabilise share ownership and went on, remarkably, to propose that France should completely copy the Rhine model. It advocated company laws requiring supervisory boards and tribunals, in order to ensure a balance between the power of shareholders and that of management; it also called for statutory limitations on voting rights for single shareholders and on the use of dual votes, although it noted that these two proposals go against the fifth Brussels directive (of Anglo-American inspiration).

In that case, some might say, France must be wary of Europe and of the European Commission's ideas, but that is the opposite of the truth.

Although a number of the technical standpoints taken by the Commission on industrial and financial matters are inspired more by the Anglo-American model than by the Rhine model, that is simply because Brussels was never given the chance to plan a social market economy under the authority of a European federal organization. Rather, it was asked to devise a Single Market for goods and services which, unless it is accompanied by a strengthening of the network of European financial institutions, will inevitably become a market controlled by companies.

In such a market, the company is seen as an item of merchandise. That is why France is veering towards the Anglo-American model, even though its political tradition, its social aspirations and the demands of its financial make-up should be nudging it towards the Rhine model. Why is it going in the opposite direction to the one it wants to go, and should go? Simply because these matters are now way beyond the scope of a single state, and one state cannot hope to deal with them. As soon as the economy of the developed world began to cross borders at high speed, the individual state was out of the game, whatever its politics.

It is almost few-tul to look to the state for improved social policies. There is virtually nothing the state can do. If the aim is to harness capitalism without impairing its efficiency, it is no longer to the nation state that we must look, but to Europe. And Europe must produce both powerful financial structures – its own answer to the Japanese family-run corporations called zaibatsu – and political institutions for which the European Coal and Steel Community (E.C.S.C) is the model that is too often forgotten.

The E.C.S.C, a European Prototype for the Rhine Model

The life and works of the economist Jean Monnet explain a great deal about the recent evolution of the Anglo-American model and the dominant influence it has had on the European Community.

The small-time brandy merchant who became a great banker was a man who shared the values of Roosevelt, Truman and Kennedy. He was firmly in favor of a market economy and did more than anyone to get France away from protectionism and into international free trade. On a personal level, he was capitalist enough to refuse any payment from the state when he was appointed head of the planning ministry, so that he could be sure of remaining completely independent. Nevertheless he had a specifically Rhine conception of the market economy. He could not conceive of one that was not a social market economy.

What he accomplished at the planning ministry is proof of this – particularly his setting up in 1952 of the E.C.S.C, precursor of the European Community, with its 'High Authority' (a name that gives pause for thought).

Initially the idea was to create a common market with completely free trading in the two products that armed Europe during the war: coal and steel.

At the same time, though, it was necessary to modernize Europe's iron ore and coal mines, which were less and less able to compete with overseas suppliers. Because modernisation would inevitably reduce the workforce, a grave social problem was clearly on the horizon. To resolve it, Jean Monnet got the six founding countries of the E.C.S.C to agree on the need for an institution that today sounds almost mythical: the 'High Authority'. This authority was granted wide statutory and fiscal powers with a double aim: to encourage investments in increased productivity and to finance a pro-active social policy.

What could be more contrary to the philosophy of Ronald Reagan and Margaret Thatcher than a European tax and a European 'High Authority' to decide the fate of mines and steelworks?

It is a particularly interesting topic now that the American and British steel industries are in deep trouble, while the French giant Sacilor has been beating world records for productivity and profits.

These powers – and the very idea of a 'High Authority' – alarmed governments, who feared that some of their sovereignty would be lost to European institutions. That is why the Treaty of Rome, signed in 1957, gave far fewer powers to Community institutions. The Commission in Brussels, so often accused of wielding too much power, is actually a very toned-down version of the 'High Authority'. In particular, it has practically no responsibility or power over industrial policy – indeed, even the phrase itself has been banned. The Commission's vice-president, Martin Bangemann (former West German Minister for the Economy), provoked an uproar when he used it in a document on the crisis affecting the European electronics industry – a crisis we are sure to hear a great deal more of, incidentally. By the year 2000 electronics will be the most important global industry and will constitute 10 per cent of the gross domestic product of Japan, for example. Yet the present crisis in European electronics was foreseen at least 25 years ago.

The European Council of Ministers had been warned as early as 1965 by one of its vice-presidents that this sector was particularly vulnerable, and that its decline was an absolute certainty in the absence of concerted action by the Community. His warning was in vain: the Common Market did not concern itself with industrial crises. So it was left to Japan to take up Mr. Colonna's ideas: M.I.T.I launched its celebrated robotics program, which put Japan ahead of the world in the field of electronics. The U.S.A is doing the same in other ways: the Pentagon's military research budget is equal to the total spent on research and development in Japan.

In Europe, meanwhile, progress towards the Single Market continues, but there is no institution able to raise European competitiveness in the great technologies of the future. There is a choice of routes now: one leads to a genuine Europe and the other leads to a collection of nations that happen to be neighbors. The latter route is the one that most member states have chosen, despite the Commission's warnings. It has led to the grave situation in which the last three European electrical component manufacturers, Philips, S.G.S Thomson and Siemens, find themselves. The proof lies in the fact that I.C.L in Britain has fallen prey to the Japanese, Olivetti in Italy to the Americans, and in France Bull had no option but to accept an infusion of capital from N.E.C of Japan.

Because of the European Community's failure to follow the E.C.S.C's example, each of these companies has carried on down the wrong turning at the European crossroads, playing the role of national leader right up to the moment when there was no alternative to becoming American or Japanese.

A community, or twelve competing tax havens?

The general agreement among member states to prevent the Community from playing a proper European role in technology and industry is only the most visible aspect of the Community's movement towards the Thatcherite model.

To put that into perspective, it is worth looking at the conclusions of a report produced for the Commission in 1987 by a group of experts led by Tomaso Padoa Schiopa, head of the Bank of Italy. The content of the report is perfectly clear and boils down to these words: efficiency, stability and fairness.

Economic efficiency, as this book has constantly pointed out, results from market mechanisms. It is thanks to the Common Market and the planned Single Market that the countries of Western Europe should between now and the year 2000 overtake the living standards of America – provided exchange rates remain normal.

Monetary stability, thanks to the single European Monetary System (E.M.S), will contribute to this growth, particularly if it results in a genuine economic and monetary union in which none of the 12 member states will initially be compelled to join. The Bundesbank must stop trotting out the argument that convergence of economic and monetary policies is an essential pre-condition for union: it is just as well that German unification did not have to wait for the systems of East and West Germany to converge.

Fairness, or social justice, remains. This has only a limited connection with monetary stability: certainly, inflation further impoverishes the poor and adds to the wealth of the rich, but beating inflation is not enough to prevent inequality from growing. On the contrary, it is a basic principle that market forces draw their efficiency from these very inequalities.

In order to combat them, government must supplement private and charitable initiatives by redistributing resources. This is becoming more and more difficult for two reasons. We have seen how states are being sidelined, not by the Common Market, but by the globalization of the economy, which in the short term means that a country's ability to compete economically depends on the reduction of its public expenditure and ultimately on the impoverishment of the state.

Yet there is really nothing at the European level to take the place of states which have been bypassed by globalised capitalism and turned into provinces. And it is this institutional void that is dragging the E.C from the crossroads towards a Thatcherite destination.

The most significant example of this, and the one that concerns us all, is the way taxation has evolved in Europe.

What is the European tradition? Since the beginning of this century it has essentially been that the poor should pay less and the rich more. That is the principle of progressive taxation which gradually spread from the Scandinavian countries towards the Latin countries.

Mrs. Thatcher's idea of taxation is quite the opposite of this. The most spectacular illustration of the Thatcherite approach was her reform of local government taxation. In Britain, as in other European countries, this tax was not a progressive tax, in that it did not depend on income. However, everyone paid according to the rentable value of their home, so that the rich, who generally had good houses, paid more than the poor who were not so well housed. Mrs. Thatcher announced that this was unfair because the poor did not take up a smaller share of public expenditure than the rich – quite the opposite, in fact – ergo, they should pay at least as much. The poll tax was introduced, with everyone from the duke to the chauffeur paying the same. The subsequent popular revolt forced Mrs. Thatcher's successors to act quickly in abolishing the hated tax, so that such an excessive affront to the majority of the population might be forgotten as soon as possible.

That is a well-known story. But what is less well known is that it is being repeated on a much wider scale all over the European Community and in a more critical area than local government taxation: that of capital gains and capital earnings.

If you are French, living in France and the owner of French bonds, the issuer gives the tax authority the details of the coupons you have received, on which you have to pay a tax of 17 per cent (above a certain threshold). If, however, you own foreign stock, the coupons will not be declared by the issuer. Certainly, despite the ending of exchange controls, you should declare them yourself – but if you do not, the risk you are taking is infinitesimal. That is why in February 1989 the Commission proposed to introduce a 15 per cent deduction at source on all stock bought by European Community residents. A report by the research group C.E.P.I.I, published in 1991 and entitled 'Towards a European Tax System', said: 'The Federal Republic of Germany, which had agreed (in a spirit of European solidarity) to make deductions at source from January 1989, stopped doing so the following June, following massive outflows of capital, often into Luxembourg. This failure sounded the death knell for the Commission's project and zero deductions are gradually becoming the norm.

Who benefits from these zero deductions? Those who own stocks and bonds – the most privileged section of the population. Other things being equal, if the rich pay less, it follows that the poor must pay more – as was the case with Mrs. Thatcher's poll tax.

Most European governments find that unfair, but majorities count for little in the European Community because, in financial matters, the rule of unanimity applies, supposedly as a safeguard of national sovereignty. In other words, nothing can be decided without Luxembourg's agreement, and it is because of Luxembourg that the other 11 states have set off down the road to being a tax haven. Margaret Thatcher is no longer in power, but she can be proud of the influence she still exerts over taxation in the European Community. Her legacy amounts to a kind of generalised poll tax on the thing that matters most in capitalism: capital itself.

I his is but one of many indications that the Single Market, unless it leads rapidly to true political union, will turn Europe into a sort of American subsystem, with a lot less state and a lot more market, an outcome that would delight Margaret Thatcher and distress Jacques Delors. At the crossroads of Europe in 1992, it is difficult to imagine two ideas further apart than theirs. A crucial part of France's future depends on the choice that must be made between them.

Ronald Reagan and Margaret Thatcher built their popularity largely on the promise to cut taxes. At the national level they succeeded only partially; the European Community may actually go one step further than either Reagan or Thatcher in instituting a 'competition of rules' (rather than the rule of competition) whereby, on the face of it, the state that can operate most cheaply and make the fewest demands will have the advantage.

Chapter 13 Conclusion

Having dissected a problem from top to bottom, the author of any economic study is tempted to conclude with a barrage of advice. It is so easy to put forward a few recipes for reform, just vague enough to be unarguable, and appeal to everyone's better instincts to 'do the right thing' in future. In my previous works I have so often denounced this facile approach (the one that begins, 'All we have to do is. . .') that I am not about to start indulging in it now. I am too confident of the persuasive power of the facts and the force of reason alone to feel any need for a final flourish of rhetorical eloquence. The facts in this book, it seems to me, speak for themselves. Capitalism has vanquished its only comparable rival: that is obvious; its undisputed authority makes it dangerous: that, too, is plain to see. The existence of two differing, and opposing, models of capitalism has been demonstrated beyond reasonable doubt, and the ascendancy of the less efficient, more aggressive of the two variants is, I believe, a clear and present danger. My principal objective in writing this book has been to point out just how dangerous it has become.

In seeking to present my case, however, I do not wish to overstate it by ignoring certain facts that may not quite fit the overall picture. It would be wrong to pretend that the past decade or so has not brought its share of good news as well as bad. After all, the collapse of communism is a triumph for democracy; the all-conquering market and the rise of economic interdependence and world trade has certainly meant greater prosperity for millions of people. Perhaps never before has the global economy provided so generously for so many. The retreat of centralised planning, bureaucratic meddling and the empty ideological slogans of state socialism has truly given wings to individual initiative and creativity – even in Reagan's America and Thatcher's Britain. No, the 'new conservative revolution' has not been all bad, far from it. The balance-sheet of our era will undoubtedly show that greater individual freedom and mobility, a more dynamic entrepreneurial spirit and a keener sense of competitiveness are all precious assets, not liabilities. The American dream that continues to fascinate whole populations in all parts of the world, the magnetic pull of a Western lifestyle for millions of men and women in the East and the South – these cannot entirely be put down to mass hallucination or a well-orchestrated 'media event'. There is no reason to think that the Hungarians and Albanians who look longingly to Chicago and New York are wholly deluded; if Lech Walesa goes from his royal audience at Buckingham Palace to a meeting with Margaret Thatcher, it is not because he is a simpleton. For us, the advances and advantages of the last 10 years can be difficult to gauge, because they have come to us more gradually, almost naturally.

The preceding remarks are not meant to be incidental; they are fundamental to an understanding of capitalism today. But they are not enough. For, despite its recent successes, its undisputed victories, its solid record of achievement, capitalism is well and truly in peril of being blown off course.

Its current drift into dangerous waters is what this book attempts to describe; moreover, I hope to have shown that this is not merely a temporary loss of bearings but is part of a larger pattern in the world economy – a pattern which reveals a fundamental break with the history to date of the industrialized world. It is a momentous change, and I doubt that we have yet grasped its full import.

The three ages of capitalism

In order to explain myself more fully, I will take the risk of simplifying the picture at this point. My view is that capitalism, in its relations with the state, has gone through a three-staged metamorphosis over the last two centuries. We have just recently entered – almost without realising it – the third phase.

1791: Capitalism against the state

The first stage is dated from 1791 in homage to a French law passed in that year. The Le Chapelier law was perhaps the most important piece of economic legislation to come out of the French Revolution: it abolished the old corporatist guilds and syndicates, and freed trade and industry from the grip of the monarchist state. For the next hundred years, progress was continuous and spectacular.

The state was made subordinate to the rule of law; a genuine civil service took shape, and official corruption became the exception rather than rule; above all, the prerogatives of the state were rolled back as market forces began to prevail. The state returned to its primary role as the agent of law enforcement, responsible for keeping the 'dangerous classes' (i.e. the new industrial proletariat) in order, and in their place. It was the age of a new 'exploitation of man by man', of the insidious decline of the peasantry and traditional rural life, of working-class oppression and the appalling hardships of the industrial revolution.

By 1848, all of these ills were glaring enough to be exposed and denounced by Karl Marx in a brief pamphlet entitled The Communist Manifesto. And by 1891 the religious establishment had entered the fray: Protestant and (especially) Roman Catholic thinkers had set themselves the task of proposing a Christian alternative – cooperation between capital and labor – to the Marxist remedy of class struggle. In that year, Leo 13 published the encyclical Rerum Novarum. Its call for the state to ensure the just treatment of workers was to prove enormously influential in the moulding of twentieth century capitalism, and it still has a prophetic ring about it today.

1891: Capitalism disciplined by the state

In this second phase, a multiplicity of reforms were undertaken, all of which had the same goal: to correct the excesses of unregulated capitalism, to temper the more violent side of its nature. The state became the advocate of the poor and the only sure defense against the seemingly arbitrary and unfair workings of the free market. Governments everywhere – often goaded into action by labor movements – applied themselves to the task of humanising and moderating the 'raw' form of capitalism. Laws and decrees were issued, working conditions were regulated, wage bargaining was encouraged, taxation was increased and made more redistributive. America was slow to join the rush to legislate on 'working-class issues', which did not burn quite so fiercely there until the Great Depression of the 1930s; thereafter, from Roosevelt to Carter (via Kennedy and Johnson, notably), the U.S.A kept pace with the European drive to discipline capitalism (although it did not go so far as to create a post-war welfare state).

During most of this hundred-year phase which saw the rise of the state, capitalism was not so much evolving at its own pace as reacting to – lest we forget – competition; its communist rival had assigned itself the high moral and ethical ground, and claimed to have cornered the market on hope and a brighter future. It takes a concerted effort now to recall just how strong the pressure exerted by communism once was. Thirty years ago, Francois Perroux, one of France's most subtle economists, wrote that'capitalism has been so disfigured by attack and so insidiously brought into disrepute that, for many if not most people, it is the enemy of all mankind. Those who wish to go on criticising it may do so without fear, for they are merely preaching to the converted; those who dare to defend it are instantly banished from the court of received opinion and must do their preaching in the wilderness'.

1991: Capitalism instead of the state

For the last 10 years or so, the tendency has reversed. Having tried so hard to mould the economy and regulate its behaviour, the state was in danger of suffocating it. Too much discipline was paralysing the market, and ordinary people simply got fed up with the Kafkaesque bureaucracy that seemed to dog their every step. Mrs. Thatcher was helped to power by the 'Winter of Discontent' (1978 to 79), when a series of public sector strikes (notably by the ambulance drivers) brought the Labour government into thorough disrepute. Priorities had changed.

The state was no longer seen as a protector or organizer but as a parasite, a strait-jacket, a dead weight on the economy. This third phase of capitalism, initiated by Mrs. Thatcher's triumph in 1979, came into full bloom with Ronald Reagan's 1980 election victory – but it has taken us more than a decade to realize that neither event was a quirk of domestic politics or a routine change of government. This time, a whole new ideology of capitalism had come to power.

Its essential principles are well known and can be summed up in a few words: the market is good, the state is bad; social welfare provision, once a sign of progress, is blamed for encouraging laziness; taxation, once an indispensable means for reconciling economic development and social justice, is accused (not without reason) of discouraging talent and initiative. The powers and privileges of the state must therefore be reduced, by cutting taxes and social insurance contributions and by deregulating business and industry – only then will society recover its creative energy. Where the nineteenth century saw capitalism challenge the state, but with no thought of replacing it in such areas as health, education or the media (because hospitals, schools and newspapers were already in the private sector), the late twentieth century now proposes to substitute market forces for the state. And so it shall be: in the majority of developed countries, more and more services, from broadcasting to rubbish collection and from the water supply to the post office, are being transferred from the public to the private sector.

Image summary: This figure is a line chart. It displays the compulsory deductions as a percentage of GDP for France, Germany, and the United Kingdom over a period spanning from the early seventies to the late eighties. France experienced the most significant increase in deductions, ending with the highest percentage among the three nations. Germany showed a steady upward trend throughout the period. In contrast, the United Kingdom exhibited a fluctuating pattern with an overall minimal change, ending with the lowest percentage of the group.

Before 1991, it was still possible to suppose that the 'conservative revolution' might be a temporary break, a passing phase, one more fashion among many. Many Europeans took this view, and mocked Reaganism and Thatcherism to their heart's content. The latter is, indeed, undergoing something of a (perhaps cosmetic) transformation in the hands of John Major, notably in the case of the poll tax. But on the other side of the Atlantic, Reaganism is solidly ensconced in its position of authority.

The Gulf War, the 'genius' of General Schwarzkopf and the triumphant homecoming of the troops (followed by a rise in the dollar) seem to have banished the last shadow of America's doubts about itself. More than ever, the U.S.A believes its own form of capitalism to be the best system in the world; and it is not alone in this belief. This is a crucial point. It is because not only Americans but virtually everybody else as well is convinced of the success of the conservative revolution, and is busily trying to emulate it, that a fundamental historical turning-point has been reached.

One glance at the ex-communist countries makes the point with added irony. No one there has ever heard of the social market economy or the Rhine model. The Poles, for example, lost no time in setting up the Warsaw Stock Exchange (in the former premises of the Communist Party), and Lech Walesa trumpets the ultra-liberal doctrine of the Chicago school from one end of Europe to the other – but they have yet to create a banking system worthy of the name.

Then look at the developing world: prior to the advent of Reaganism, it was taken for granted that any significant progress towards development would have to involve vigorous governmental action, following the example of Japan and South Korea. But the great success stories of the past decade, such as Chile, Mexico and Thailand, are all devotees of deregulation and privatisation. And there is certainly no denying that whereas the Rhine model works supremely well in Europe, transposing it (in its social democratic variant) to the developing world can be a hazardous exercise. Too often it has been the alibi for the proliferation of ruinous public expenditure and government manipulation of the economy, both of which are a powerful stimulant to corruption. Some pruning of public spending and government deficits, some cutting back on taxation, some privatising and deregulating may actually work wonders, however difficult it may seem at the time.

Now, turning to Europe, we are about to enter the Single Market – essentially a Reaganite construct – whose double-barrelled leitmotiv could be 'maximum competition, minimum state intervention'. The social consequences of the Single Market are certain to be profound and long-lasting, for in the absence of any political union to accompany (and discipline) it, each of the twelve member countries, of whatever political stripe, will feel increasing pressure to boost its economic competitiveness. They will do so, inevitably, by withdrawing resources from the state and, following the Reagan recipe, taxing the rich rather less and the poor rather more. This is already under way. In a few years, moreover, the new managers and directors of European companies will be those same students who today, in every university and business school, are being taught that all of this is the lesson of the past and the way of the future.

For 100 years or so, the forces of democracy and the nation state had gradually caged and tamed capitalism, and now the tables have turned. Divided and disunited, the nation states and their puny borders can offer no real resistance to the globalised capitalist economy. In 1991, this much is obvious. Capitalism intends to tame the state; eventually, it hopes to do without it altogether.

Capitalism's third stage has been characterised by prosperity and a new energy, as we have seen. But it has also brought distress, and even despair, to some sections of society. The new conservatives would have us believe that all the measures introduced over the past 100 years to provide social cover were in fact anti-economic aberrations; they would ask us to accept that the industrialized nations must now become jungles of dog-eat-dog competition and naked greed if they are to be fit for the twenty-first century. No sector will be spared, and no one will be 'nannied', in this harsh new world.

Incredibly, there is almost no argument over this assertion! It has somehow already taken root and displaced 'passé' notions of solidarity and social justice. The Rhine model, whose virtues and superior performance I have tried to portray in these pages, holds no allure in 1991. It has no more status than some unmarried cousin from the provinces in dowdy attire, laden down with old-fashioned moral scruples and 'afflicted' with the laughable virtues of prudence, patience and compassion.

Should the visitor be mugged in the mean streets of New Dodge City, no Boy Scouts will come to the rescue: they, too, are down at the Crazy Horse Saloon whooping it up.

If there is one thing, finally, that infuriates me as I conclude this study, it is this outrageous paradox. I have often mulled over the question of what I, or anyone, can do to alert my fellow humans to the dan- gers at hand. No doubt it is pointless to appeal to higher principles by sermonising. There is an aphorism of Lao-Tzu, however, which strikes me as apposite in this case: Every problem on earth must ultimately come down to something as simple as 'frying a little fish'. I shall thus place my trust in the virtues of education, and assume that, in a democracy, my fellow citizens can and will exercise their intelligence – once they are in possession of the facts. How, then, to get the facts across?

Perhaps it would help to imagine what our lives would be like, in concrete terms, if the present drift of capitalism in Europe were allowed to continue and develop into full-blown Reaganism. The hypothesis is far from fanciful; Europe is Americanizing in more ways than financially and economically. The current runs deep, as revealed by a survey carried out by the consumer research center credoc in 1990. The results of this enquiry into the main changes in recent French behaviour, lifestyle and attitudes were published at the height of the Gulf crisis and thus barely earned a mention in the mass media. A pity, because credoc identified four fundamental changes:

1. Attitudes to money are now guilt-free: this, in France, is a decisive break with Catholic tradition, and brings us nearer to the Anglo-American world.

2. Individualism has triumphed: what credoc calls 'everyman for himself' is matched by a spectacular decline in group participation (trade unions, clubs, associations of every variety).

3. Social attitudes have hardened – notably in the workplace – and new factors of stress (linked to competition, fear of unemployment etcetera) are on the rise.

4. Behaviour is becoming uniform: in particular, the gulf between Parisians and provincials is narrowing, thanks to the now-dominant influence of television.

There is much more to be said about these four conclusions, but what must be obvious is that together they point to a profound Americanization of French society. If our habits and thoughts have already been so thoroughly and so insidiously transformed, can the economy be very far behind?

An offer we can refuse

In order to convey what it would mean to the ordinary citizen if France were to adopt the neo-American model, let us imagine that the tax system were to be recast in the Reagan mould. Taxes, after all, are the foundation on which the state's power and wealth must rest. Without fiscal resources, the state can hardly pretend to regulate the market or protect the needy.

Say, then, that the rate of direct taxation in France, currently standing at 44.6 per cent of personal earnings, were to be reduced to the 30 per cent rate applicable in the U.S.A. However one calculates it, this would be money withheld from the government and its many branches, and put back into our pockets. I estimate that on a yearly basis it would amount to F.F 920 billion in all, or F.F 16 400 per person. In other words, a family of four would find that they were better off by some F.F 65 600 per year – the equivalent of the annual guaranteed minimum wage. It would seem to be an offer we could not refuse.

But would we really be better off? This tax windfall would have to be compensated for, sooner or later, by shifting the burden of a whole range of expenses from the community at large to the individual. A few examples follow.

Social welfare programs would naturally be the first to suffer. No longer would 80 per cent of the cost of drugs and treatments be automatically refunded; universal free access to hospitals and the most advanced medical techniques would become a thing of the past. Health would become a regular household expense, like rent and food. Accident victims would have to accept that emergency care could be withheld until their personal finances have been investigated, as in America. As for old-age pensions, the basic benefit might remain intact, but almost all supplementary pension schemes would be adversely affected since these, too, come out of compulsory contributions.

Education would have to change beyond recognition, since universal free schooling from kindergarten to university would be out of the question. Children would receive the schooling their parents could pay for, full stop. Higher education would become prohibitively expensive, as in the U.S.A, and would become the privilege of the wealthy, plus a handful of scholarship winners.

Public transport would likewise come to resemble the American system, or lack thereof. The car would definitively supplant an increasingly outdated, uncomfortable and badly maintained public transport network, with a consequent worsening of traffic congestion, parking costs, pollution etcetera

The quality of community facilities and the national infrastructure could not possibly be maintained at present levels. Governments strapped for cash do not assign a high priority to parks and wildlife areas, secondary roads and bridges, railway stations and airports. Never mind the aesthetic dimension, which would obviously suffer; the overall quality of such amenities would deteriorate, in spite of the fact that a first-rate infrastructure has been shown, in study after study, to be an important factor in determining the competitiveness of business and industry.

Social inequalities would deepen and become more dangerous for society as a whole. The wealthy would be wealthier, but the poor would not only be poorer, they would also be much more numerous. It is difficult to assess exactly what the consequences would be in terms of social disorder – violence, crime, drugs etcetera – but they, too, would increase in number.

To give the neo-American model its due, the one area where some improvement might be noticed is in employment. France has, since the 1970s, been lamentably unsuccessful in putting the unemployed back to work, whereas Reagan was able to reduce American unemployment almost by half by reducing state benefits – thus forcing many people to accept unskilled and poorly paid jobs (notably in the booming security and property-protection business). The question of whether it is preferable for individuals to be in badly paid work or on the dole is at least debatable.

The list of examples could go on almost indefinitely, but the point is surely obvious: the change from one type of capitalism to another cannot be made without a host of other changes also ensuing, not all of them welcome or expected. The distinguishing feature of the neo-American model is that it deliberately sacrifices the future for the present; yet, in each of the areas examined above, quality and well-being are strictly tied to investment in the future. It is a wise society that understands the 'productive delay' of such investment.

We Europeans are, more than anyone else on the planet, faced with the question of which sacrifices we shall make, and for which gains. The European Community is the main battleground on which the conflict of capitalism against capitalism will be fought. Without presuming to see into the future, I maintain that we cannot have it both ways:

1. Either Europeans will fail to understand what is really at stake, and so will not press their leaders to make the imaginative leap towards true political union: in which case, the Single Market will begin to fray and disintegrate before it has begun; the possibility of unity will recede ever further under a cloud of permanent Euro-pessimism; the slide towards the neo-American model will accelerate as the zones of decay and deprivation already staked out on the periphery of our cities continue to swell; and we will be increasingly imported by those in the old 'Third World' (the South) and the new (Eastern Europe and the former Soviet Union) who seek to enter our own, inner 'Third World' of American-style urban blight on the outskirts of Manchester or Lyons or Naples.

2. Or we will actually begin to build the United States of Europe: in which case, we will have all the means at our disposal to choose the best possible socioeconomic system, that which has already proven its mettle within one part of the continent and which will become the 'European model' of capitalism.

The United States of Europe can do better than the United States of America, if we put our minds to it. It is entirely up to us, each of us; after all, tomorrow will be decided today.

"A genuinely interesting, disquieting, and constructive book about the economic system in which we live, written by a businessman! He is, of course, a French businessman, and the diagnosis and remedies he lays out will take many American readers by surprise. I consider it to be as thoughtful and helpful a book on the economic problems and possibilities before us as any that I have read for a long time." —Robert Hilebroner, Professor of Economics, the New School for Social Research; author most lately of Twenty-First Century Capitalism

Capitalism versus. Capitalism provides America with a blueprint for its future. In this, the last decade of the Twentieth Century, the Soviet Union has collapsed. And twelve years of Reaganite rule has left America with a deficit many times bigger than ever before, record unemployment, a collapsed banking system and a severe recession.

What are our choices? Where do we stand and what will the new world economy be based on?

Michel Albert

Audio by Paper2Audio.

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