Donald Kalff - Hidden treasures


In a world increasingly dominated by nationalism, protectionism, short-termism and deteriorating trust, Europe still has a choice, and a challenge. The choice is whether to do “more of the same, and better” by adapting to a global governance regime largely modelled on the experience of other blocs, and in particular the United States; or to nurture, deepen and expand a unique European way, politically, economically and socially, creating a distinct form of capitalism that can easily compete with financial capitalism and state capitalism. If successful, Europe would create a truly tripolar world and set an example for many countries to emulate, especially those that share with the Old Continent legal traditions and values (e.g. Latin American, and many African countries).

Europe can and should capitalise on its common deeper cultural and historical roots, longer history, and variety of experiences to learn from. But Europe also has a challenge: changing its governance to make the most of its invaluable wealth and political foundations and finding its post-Brexit identity by exploiting more fully the aligned interests of continental European countries.

Our analysis of the “hidden treasures” in ten different areas of policy should not be taken as exhaustive, but rather as a collection of “low hanging fruits”. Other treasures wait to be discovered, and we already started to identify future candidates: for example, vocational training, Europe’s capacity to increase labour market participation (from 60% in 2008 to 70% in 2018), universal health care coverage; and a better regulation agenda that is less slave to neoclassical economics, Deleted sentence, too abstract.

We believe that our recommendations, even if far-reaching, are actionable in policy terms during the legislature that has just started. They are the vanguard of several steps that shall be taken to strengthen what is already strong. This is a cost-effective way to make progress, less subject to resistance on the part of vested interests: we call on EU institutions to start from Europe’s strengths, rather that conceive of EU policies as always reacting to a (market) failure. This, in our humble opinion, should become a new modus operandi when crafting EU policies and strategies vis à vis European citizens and the global community. We also point at the need to work closely with the private sector, for example in putting the relationship between large companies and SME’s on a different footing in the interest of all and the economy at large.

Our recommendations also show a remarkable degree of alignment, which we had not anticipated when we started our research. Such alignment, in our ex post reflection, falls into a few different, delated, “interrelated”muddies the pool buckets. We explore them one by one below.

In the US and EU27, fundamentally different views of the role of government prevail. Freedom to act and full ownership rights are important on both sides of the Atlantic; however, in the US government regulation and taxation are seen as attacks on these basic freedoms, whilst on the European continent regulation and taxation are forms of self-rule (Selbstgesetzgebung) enacted in order to protect economic freedom and, more generally, European citizens. In the US, this translates in perpetual antagonism between the state and its citizens.

Such difference also reverberates on distributional policies o the two sides of the Atlantic. Back in 2003, Alesina and Angeletos synthesised the approach to government in the US and the EU with very clear words: “pre-tax inequality is higher in the United States than in continental Western European countries … Nevertheless, redistributive policies are more extensive in Europe. The income tax structure is more progressive in Europe, and the overall size of government is about 50 per cent larger in Europe than in the United States … The largest difference is indeed in transfers and other social benefits, where Europeans spend about twice as much as Americans. Moreover, the public budget is only one of the means to support the poor; an important dimension of redistribution is legislation, and more specifically the regulation of labour and product markets, which are much more intrusive in Europe than in the United States”.

These differences are also a consequence of different approaches to the concepts of “freedom” and “equality” in the United States and in the EU. This appears to be more than a difference in implementation, and more than a constitutional divergence. As Eric Foner (1994) explains in his history of American freedom, and as brilliantly echoed by Guido Calabresi (2016) in his analysis of equality in the US Constitution, the 14th amendment in the United States calls for a notion of equality that is substantive: as Calabresi recalls, citizens must “be willing to say, ‘in my back yard,’ ‘raise my taxes,’ ‘on my back,’ to achieve the substantive equality that the 14th amendment demands. Reneging on our 14th amendment promise of equality and avoiding paying the cost of achieving that equality ourselves: both of these are cursed in our Constitution”.

To the contrary, today’s America seems to have embraced Nozick’s “minimalist state”, and ultimately a view of inequality-powered freedom that has little to do with the premises of the 14th Amendment. The Chicago School views of competition, and even more Friedman’s view of shareholder capitalism, which was analysed in Chapter 3, must be seen and approached in this context. And the revival of trickle-down economics with the recent tax reform as an extreme example, confirms America’s tendency towards a view of freedom “from”, rather than freedom “of”.

These differences have profound consequences for many policy domains, for example securing fair competition and protecting privacy. In the US, competition rules are mostly for private players to settle on, in private damages cases; whereas in the EU, they are largely entrusted to public authorities and enforced in the public interest (Renda et al. 2008). Provisions such as the “special responsibility of dominant players” and emphasis on the essential facility rule, among others, show how different EU antitrust is compared to the apparently similar rules applied on the other side of the Atlantic. Privacy rules are mostly referred to government interference with private life (e.g. the Fourth Amendment), whereas in the EU they focus also, and prevalently, on the mishandling of personal data by private players. Tax rules are enforced in the name of mutual distrust between the IRS and the private sector in the US; in EU, the search for fairness is frequently found in the general interest and the interest of the private sector.

This book has argued that there is no need for the EU to feel bound by elaborations and evolutions that pertain explicitly to the Anglo-Saxon world. Europe’s has managed to keep its economic growth per capita on par with the US despite the latter’s many competitive advantages, ranging from one homogenous market for goods and services and one legal and fiscal system to deep capital markets and the most advanced universities in the world. In keeping the pace, Europe has also managed to remain more sustainable, less unequal, and on average a leading continent in terms of quality of life, as recently recalled by EU leaders in their Sibiu Declaration.

Against this background, Brexit increasingly seems like “blessing in disguise”, as Europe can now pursue well established rules with new vigour, create new rules and build new institutions. This would provide remedies for some of the vexed problems that have emerged on the two sides of the Atlantic over the past decades. The analysis of the role and the merits of fairness and good faith in contract law, competition law, tax law and anti-corruption policies in Chapters 1, 6, 7 and 8 go exactly in that direction. Our discussions of the role of relationship banking and the emergence of the European Enterprise Model in Chapters 2 and 3 follow a similar pattern.

Our views of innovation, outlined in chapter 4, as a public-private endeavour, is very different from the accounts of Silicon Valley and Palo Alto as it is focused on market dominance and financial gain. Innovation, in Europe, may be required to be “fair” to society. Disruptive innovation is not necessarily good (as the verb disruptive suggests), unless it caters to the needs of society, and advances prosperity for all, not only the happy few.

All this demonstrates that Europe can build a different and appealing narrative. Not necessarily a brand new one: to some extent, our fairness- and sustainability-centred vision of Europe’s Hidden Treasures can be traced back to the early days of economic theory, and to the renown work of Adam Smith. While classical and neoclassical economics, including the Chicago school, largely referred to Smith’s rather elusive “invisible hand” to build a theory of minimalistic state presence in the economy.

In contrast, in Smith’s Theory of Moral Sentiments the Scottish philosopher argued clearly and convincingly that justice, not efficiency, should be the basis for the distribution of rights in an economy. Justice, in Smith’s words, is “the main pillar that upholds the immense fabric of human society”. Europe’s unique balance between freedom (“of”, not “from”), and justice explains its peculiar legal and economic tradition. Fairness, reasonableness, good faith, pre- and post-contractual obligations are time-tested principles and part of the heritage of Continental Europe.

This book also shows that these principles are crucial to meet the economic challenges of our time: insufficient investment, lack of socially relevant innovation, and slowing productivity growth. Chapters 2 and 3 show that the Shareholder Model of capitalism fails conspicuously on all three fronts. As things stand, only the EU27 can be home to alternative enterprise models that make a positive difference. Focus on the creation of economic value, rather than short-term profit, unshackles innovation and investments. And the counterargument that well-functioning financial markets would price in long-term economic value is no longer convincing. Financial markets are guided by profit per share, are driven by algorithms that can only take the past into account and are therefore blind to trend breaks and are subject to biases in decision making and herd behaviour. The causal link between corporate value and share price has gone, the rudder of financial capitalism is broken.

All this takes on new urgency as the financial economy appears to run out of the steam, the next recession is approaching rapidly, and central banks and governments have exhausted their ammunition to stimulate the economy ( with the notable exception of Germany and some of its neighbours) as it was used in fighting the 2008 crisis.

This book leads to two additional, essential findings related to technology and sustainability. On the one hand, Europe can harness the potential of digital technology “for good”, by setting ethical and policy standards through the sheer size of its Single Market, as well as through procurement, certification and trade policy. Europe’s “secret sauce” on digital technology can fill an existing gap in global governance, and help the Old Continent find space for its approach to economic policy at the global level. This is crucially related to Europe’s ability to treat technology as a means, not an end: in this respect, the recent ethical guidelines on Artificial Intelligence and the effective implementation of legislation such as the GDPR, rules on web taxation and Platform-to-Business practices will be essential to gauge Europe’s ability to play a decisive role in this expanding space.

This also leads to a more general consideration on the broader, long-term picture. Looking at current trends such as the resurgence of nationalism in politics, deteriorating rule of law (also in some European countries), new protectionist stances and tariff wars in trade, short-termism in social policy and reiterated denial on climate change, the agreement reached in September 2015 by 193 countries on the Sustainable Development Goals seems to belong to a very distant era in the history of mankind. The pursuit of the SDG agenda, orphan of strong political will, now looks more to technological breakthroughs and global private initiatives, than to the alignment of political agendas in leading blocs.

The contribution of the business community is greatly hampered by the focus on shareholder return on investment, which discourages investment. Stimulating investment is key. Replacing plant and equipment both increases productivity, key to the future of the company and reduces the environmental footprint, a key sustainability objective.

Only setting unequivocal standards will trigger such behaviour, and only Europe, today, can set these deleted standards. For now, with the exception of Scandinavian countries, all high-income countries are far from a trajectory that would lead them to achieve the 17 goals, and struggle in particular with four objectives related to sustainable consumption and production patterns, climate action, aquatic life and life on land. The EU has not shown enough ability to step up its efforts to date. Recently, in a stocktaking exercise of progress achieved over the past five years, Eurostat found slow progress in certain areas of sustainable development, and a worrying deterioration of inequality in Member States.

It is now time to shift gear: the financial crisis is over, the Silicon Valley model is plateauing, and the world witnesses the rise of less democratic, less open forces in both developed and developing countries, and in the private sector. The Old Continent can stand up against these worrying developments. We believe Europe’s Hidden Treasures offer an essential, compelling starting point to rethink Europe by retrieving its lost identity and strengthening its self-confidence.

Our recommendations are different from what is usual in EU circles. This flows for a large part from our methodology. We do not set targets for a limited number of key parameters, design policies to achieve those targets, evaluate progress and make policy adjustments. Rather, we take the world as it is, according to our analysis doing much better than prima facie evidence suggests; and call for structural improvements. Hence the considerable differences in character and scope between our proposals. Still, we see three recurring themes.

The first one is a strong emphasis on implementation and enforcement. The EU has a plethora of promising policies, well-thought-out regulations and high-quality legislation. However, in many instances implementation is below standard. This, the so-called “delivery phase”, is the less glamourous, ill-funded and politically less convenient part of good government. And yet it is the area where Europe needs to improve the most. If the rule of law is important, we need to invest in our court system. If we believe in the common market it is about time that the European capital markets becomes operational. If we truly worry about corruption, we should make far more resources available.

The second common denominator of our recommendations is the improvement of the position of small and medium sized enterprises (SMEs) Their crucial contribution to innovation, economic development and employment is widely recognized, and many support programs have been put in place. We point out that in the rough and tumble of day-to-day operations, SMEs are far more vulnerable than generally assumed, and the EU acquis is still insufficiently tailored to their specific needs. Our proposals thus seek to help SMEs to (re)gain access to the courts, to prevent abuse of power by their large business partners, to streamline the appeal process of the EPO and to improve protection against corruption.

A third common denominator is an underlying emphasis on productivity, production per working hour that with the number of hours worked are the only two sources of economic growth. The slowing of productivity growth is a vexed problem which diagnosis, let alone solution, has escaped economists and politicians alike. In our view, because it is approached as a macroeconomic and not as a micro economic problem. As we show in chapter 3, both the shareholder and the stakeholder model are deeply flawed and the responsibility for lower productivity growth should be laid at the doorstep of the boards and management of private companies and public institutions. Productivity growth is key to sustainable growth, as it requires focus on prudent use of resources and on investment as each new generation of plant and equipment is far more efficient and more environmentally friendly then the previous one.

Moreover, our call for enabling fair, smart and flexible cooperation between large and small businesses is aimed at boosting productivity in the medium- to long-run, just as better access to capital, adopting a suitable enterprise model, and charting the way towards product, process and organizational innovation inspired by the pursuit of the common good. The same can of course be said for our proposals on the patent system, as well as those on competition and trade. We also believe that investment would be greatly facilitated by improvements in the tax system, as well as a Europe free of corruption, which otherwise lowers productivity as a result of the mis-allocation of capital and human resources. And needless to say, we believe that digital technologies have the potential to massive improve productivity, but policymakers have to be wary of the sirens of automation at any cost (Ashford et al. 2019).

The final common denominator is that our proposals help to restore trust. Trust in the courts, trust in the banks, trust in large companies, trust between large and small companies, and overall trust in governments and EU institutions. The latter, after a worrying inflection, is now hitting new highs. Trust in the European Commission, particularly in areas such as competition and trade, is at all-time highs, as is the reputation of the ECB. The EIB is a giant, but silent force, for good. The European Court of Justice is one of the world’s anchors in our turbulent times.

And yet, the time is ripe for more agile, flexible institutions, able to deliver on policies that increasingly suffer from rapid obsolescence, and from pressure from other global superpowers aiming to outcompete each other. Our call to properly embed fairness in our institutions, in the economy and in work relationships is a necessary, albeit not sufficient, condition for trust to grow. No society and no economy can prosper on divisive policies, rising inequality and acrobatic economics. As the noise of post-truth geo-politics rises, and underlying patterns of development blur, Europe is increasingly forced to walk on its own legs, rather than playing second-fiddle, or dance on someone else’s tune. In the quest for this new course, there are plenty of hidden treasures to start from.