Executive summary

Donald Kalff - Hidden treasures

Executive summary

Europe is often presented as a declining global power, in which red tape, incumbency interests and governance flaws hamper economic performance, innovation and productivity. Part of this can be traced back to the inherent challenge and ambition of the European integration project; but also to external factors, including the rise of the United States as a global superpower during the 20th century, and the worldwide diffusion of ideas, especially in politics and economics, which were seldom originated in Europe, or tailored to its peculiar legal, economic and social traditions.

Until recently, Europe has sought to carve out its model and role in global governance by mimicking many US policy approaches: shareholder capitalism, deregulation and unconstrained movement of capital. As the global community increasingly sees the rise of protectionist stances, and a growing inability to face emerging challenges such as sustainable development and the breath-taking rise of disruptive digital technologies, Europe should look at its best qualities to revamp and reclaim its position in the global order, to the benefit of all. The prospect of Brexit, while certainly not favourable for the Union, paradoxically open up new opportunities to face emerging challenges with a greater degree of cohesion.

This book, a joint effort between Donald Kalff and Andrea Renda which benefited from the contribution of CEPS researchers and a number of very helpful discussants, aims at identifying and exploring a number of “hidden treasures”, competitive advantages often covered by dust that could, if adequately nurtured, bring back the Old Continent at the forefront of the global order. In our approach, a “hidden treasure” must meet specific characteristics: in particular, it should be a feature of the economy, legal system or legal tradition of the EU or a subset of its Member States, which was (or is being) given insufficient attention in public policy, and which bears the potential to increase Europe’s competitiveness and overall positioning in the global context.

Uncovering and promoting hidden treasures becomes, as of today, a timely and highly needed exercise, as the EU approaches its post-elections transition, and the global governance contexts seems to be rapidly changing, shaping a new playing field in which Europe has no obvious allies, and is increasingly challenged by superpowers with different, if not diverging, priorities.

Our findings show that Europe’s unique balance between freedom, justice and fairness provides a solid basis for identifying hidden treasures. For example, we consider that the egregious advantages offered by continental European contract law, starting with the good faith requirement in contractual relations, are hidden under layers of dust, which may have contributed to the overall belief that the EU legal system is inherently less efficient than the US one.

The main obstacles that can be identified are the inefficiency of the judiciary in many countries, the cost of access to justice for smaller firms and citizens, and the lack of a robust set of rules protecting the interests of smaller contractors in relational contracts. This is why we believe that the EU should consider taking action to promote the use of civil law, improve the effectiveness and efficiency of legal institutions, and remove remaining obstacles to trade in the Single Market.

Moreover, as widely known in the EU financial institutions, in particular banks, form the most important source of external financing for companies, whereas in the US the capital markets contribute more to the financing of corporations and the broader economy. As we explore in chapter 2 of the Book, most European banks adhere to the so-called “relationship model”, in sharp contrast to the “transaction model” that dominates in the US. This leads them to gain deep insight in the history and prospects of their clients as well as their markets and competitors, and to play an important role in helping clients upgrade their investment programs by backing and rejecting investment proposals. The contribution of relationship banking to the economy as a whole is real and should be more strongly emphasized at the EU level, and mentioned as an opportunity and a source of competitiveness for Europe, rather than as a cumbersome legacy of the past.

Furthermore, researchers have started to uncover the existence of a fundamental trade-off between mainstream corporate governance and the ability of a firm to innovate and successfully address societal challenges. This resulted in a mounting criticism of the so-called “shareholder model” typical of US capitalism, mostly coming from inside the US and the UK. What emerges is that both shareholder and shareholder capitalism feature problems. And indeed, in Europe the most advanced companies have moved beyond these standard models, a fact that deserves to be put in the limelight.

These experiences help to configure a peculiar “European enterprise model”, which makes the creation of economic value, rather than the generation of profit, the leading principle in corporate decision making. Such an organisational form features dispersed leadership, not unlike the unique mandates of national, provincial and local governments. It can only be managed based on principles, not rules. Its culture is characterised by fairness, internally and when dealing with suppliers, customers and partners.

Much in the same vein, the EU has a real chance to build a new approach to innovation and competition, more inclusive and oriented towards sustainable development and well-being. This will take political courage and coordinated action with Member States, some of which score very high in global innovation rankings. One opportunity to uncover this innovation potential is provided by the upcoming transition to “mission-oriented innovation policy” in the future Horizon Europe, the EU’s 100bn research and innovation programme: within that context, Europe should help companies forge long-lasting coalitions, powered by trust and cooperation.

Within this context, European patents may be used as a true “quality seal”: obtaining a European patent should become a way to get out of the “noise” generated by bad quality patents around the world. This can improve patent justice and certainty and restore the patent system in Europe as a catalyst of innovation efforts and investment. In the neighbouring area of competition law, there is a growing divergence between US and EU rules. During her mandate, commissioner Vestager seems to have spotted a hidden treasure: an extremely rich set of national experiences that extends the reach of competition-related rules way beyond the remit of Article 102 TFEU. Rather than being an obstacle, this seems to be now an opportunity, to be reaped especially in key sectors such as retail commerce, agrifood, and the platform economy.

We also see potential treasures in the way the EU deals with taxation and corruption. In Europe, minimum standards have been achieved on the quality of tax codes and tax rulings, and the handling of tax filings is more efficient in comparison with the US. Europe’s tax treasure, however, remains hidden due to the great heterogeneity of tax regimes and, most importantly, the overall lack of cooperation between Member States, which leaves numerous loopholes. The move towards a common consolidated corporate tax base, coupled with the deployment of RegTech for regulatory monitoring and compliance purposes, could help Europe exploit the quality of its tax system, to the benefit of all.

More generally, Europe is a better place than most, when it comes to effective policymaking as well as doing business: however, while the legal instruments and institutions to prevent and fight corruption are available in all Member States, in some of them enforcement is insufficient; this generates direct costs of up to a trillion Euros per year.

Europe has a chance to lead the global community also thanks to its primacy in trade policy, and its emerging leadership in the regulation of emerging digital technologies. EU trade policy is already a shiny gem: but additional policy coherence would make the EU a potential leader in ‘responsible globalisation’. And on digital technologies such as Artificial Intelligence, Blockchain, the Internet of Things and 5G, Europe can claim to possess three advantages: a solid, comprehensive legal framework; the size of the Single Market; and a potential leadership in the global quest for fundamental rights and sustainable development goals, at a time in which the US is backtracking, and China appears not yet ready to lead. Establishing a comprehensive policy framework to enable the contribution of digital technologies to the SDG agenda would optimally place the EU as global leader both in the SDG arena, as well as in the technological one.

These are our main findings. But we believe that the list could be much longer, and the treasure trove much richer. Most importantly, we believe that Europe’s unique balance between freedom (“of”, not “from”), justice and fairness can make it the perfect place for the next generation of capitalism. Fairness, reasonableness, good faith, pre- and post-contractual obligations are time-tested principles and part of the heritage of Continental Europe. These principles are enshrined in many laws and regulations. They give guidance to behaviour of individuals and small and medium size companies. They also provide the basis for most of the hidden treasures: in contract formation, in dealings between tax officials and taxpayers, in financing small enterprises, in the European Enterprise Model, in joint efforts to innovate, in granting patents, in competition law and enforcement and in the EU trade agreements. The fight against corruption can be seen as crucial to protect these principles, just as the export of European standards is important to spread them around the world.

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. The Book shows that the Shareholder model of capitalism fails conspicuously on all three fronts. Only EU27 can be home to alternative enterprise models that make a positive difference. Pursuit of the creation of economic value, rather than short-term profit, unshackles investments. And the counter-argument that well-designed financial markets would incorporate long-term economic value in their fundamental is not convincing: financial markets are far from perfect, and incorporate imperfect signals, biases and herd behaviour to an extent that their ability to provide correct information signals is questionable at best.

Our book also 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 upcoming ethical guidelines on Artificial Intelligence and the observed effectiveness of legislation such as the GDPR and Platform-to-Business 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. Recent reports have confirmed that, 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 sufficient 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.