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The European Model

The European Union

European Coal and Steel Community (ECSC) (1951)

Supranational agreement between France, West Germany, Belgium, Luxemburg, Italy, and the Netherlands.

Created a common market and centralized authority for coal and steel.

Part of the Treaty of Paris.

European Economic Community (EEC) (1958)

Created a common market eliminating import duties and quotas among the founding members of the ECSC.

Part of the Treaty of Rome.

European Union (EU) (1992)

Created the basis for an eventual common currency and central bank.

Incorporated EEC and renamed it the “European Community (EC)”

Part of the Maastricht Treaty.

Originally 12 members; now consists of 28.

Treaty of Amsterdam (1997)

Abolished border patrols and passport requirements among member states.

The European Union

The Euro & European Central Bank (1999)

Euro is the official currency of the European Union (EU)

Euro Zone: countries that use the Euro as their sole legal tender.

The European Central Bank (ECB): monetary authority over the Euro.

Similar in structure to the FED.

Each EU member country has one vote on the board.

Stated goal of 2% inflation, no employment target.

Treaty of Nice (2000)

Detailed procedures for expansion and membership for potential entrants.

Accession: new additions to the EU.

European Stability Pact

No member country shall:

Run a deficit of more than 3 percent of GDP.

Accrue debt exceeding 60% of GDP.

Violations inflamed the Euro Crisis of 2011.

28 nations in the European Union

19 nations of the Euro Zone

Click to edit Master text styles

Second level

Third level

Fourth level

Fifth level

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Chapter 17: Macroeconomics in an Open Economy

The European Union Governance

European Commission (EU Executive Branch)

One commissioner from each member nation (28 total) determined by EU Parliament.

Commissioners have loyalty to EU, not their home country.

Proposes legislation, administers the budget, ensures that treaties and decisions are implemented properly, and takes legal action against violators of EU rules.

European Council (1/2 EU Legislative Branch)

A group of the heads of state of the 28 EU countries (EU’s highest political body)

Voting weighted by country with more populous nations having greater influence.

Council members have loyalty to their home country, not the EU.

Accepts or rejects recommendations from the European Commission.

European Parliament (1/2 EU Legislative Branch)

751 members elected by EU citizens every 5 years.

Seats allocated based on each member state’s population.

Accepts or rejects recommendations from the European Commission.

European Council Voting (effective 2003)
Member state	Votes/Percent of Total		Population/Percent of EU
Germany	29	8.40%	82	16.50%
France	29	8.40%	64	12.90%
United Kingdom	29	8.40%	62	12.40%
Italy	29	8.40%	60	12.00%
Spain	27	7.80%	46	9.00%
Poland	27	7.80%	38	7.60%
Romania	14	4.10%	21	4.30%
Netherlands	13	3.80%	17	3.30%
Greece	12	3.50%	11	2.20%
Portugal	12	3.50%	11	2.10%
Belgium	12	3.50%	11	2.10%
Czech Republic	12	3.50%	10	2.10%
Hungary	12	3.50%	10	2.00%
Sweden	10	2.90%	9.2	1.90%
Austria	10	2.90%	8.3	1.70%
Bulgaria	10	2.90%	7.6	1.50%
Denmark	7	2.00%	5.5	1.10%
Slovakia	7	2.00%	5.4	1.10%
Finland	7	2.00%	5.3	1.10%
Ireland	7	2.00%	4.5	0.90%
Lithuania	7	2.00%	3.3	0.70%
Latvia	4	1.20%	2.2	0.50%
Slovenia	4	1.20%	2	0.40%
Estonia	4	1.20%	1.3	0.30%
Cyprus	4	1.20%	0.87	0.20%
Luxembourg	4	1.20%	0.49	0.10%
Malta	3	0.90%	0.41	0.10%
Total	345	100%	498	100%

European Parliament Seats (total 751)
Member state	Votes/Percent
Germany	96 (12.8%)
France	74 (9.9%)
Italy	73 (9.7%)
United Kingdom	73 (9.7%)
Spain	54 (7.2%)
Poland	51 (6.8%)
Romania	32 (4.3%)
Netherlands	26 (3.5%)
Belgium	21 (2.8%)
Czech Republic	21 (2.8%)
Greece	21 (2.8%)
Hungary	21 (2.8%)
Portugal	21 (2.8%)
Sweden	20 (2.7%)
Austria	18 (2.4%)
Bulgaria	17 (2.3%)
Denmark	13 (1.7%)
Finland	13 (1.7%)
Slovakia	13 (1.7%)
Croatia	11 (1.5%)
Ireland	11 (1.5%)
Lithuania	11 (1.5%)
Latvia	8 (1.1%)
Slovenia	8 (1.1%)
Cyprus	6 (0.8%)
Estonia	6 (0.8%)
Luxembourg	6 (0.8%)
Malta	6 (0.8%)

EU Economic Data 2017

Population = 516 million

GDP = 21 trillion (2nd largest “economy”)

GDP per capita = 40,900

Unemployment Rate = 6.8% (August 2018)

Intellectual Foundations

Thomas Hobbes

Idea that economic freedom, property rights, and private contracts may

have to be abridged for the public interest.

Mercantilism

Favors strong state to control trade relationships.

State sells licenses, charters, and grants monopoly rights to special interest groups.

Historic European Welfare State

Government sponsored programs that provide economic security and welfare.

May be used to head-off Marxist revolutionaries trying to overthrow capitalism.

Marxist Revisionists: chose to achieve the goals of socialism by reform, not revolution.

Eduard Bernstein’s “Revisionism”: abandoned the Marxist idea a proletariat revolution seeking instead to win peaceful rights for workers through the formation of a Social Democratic Party operating within a democratic political system.

Otto Von Bismarck (German Chancellor: 1871-1890) created the first major welfare legislation in Europe and paved the way for the future European Welfare State.

“My idea was to win over the working class, or maybe I should say to bribe them for them to see the state as a social institution that exists because of them and for their benefit” Bismarck

Eduard Bernstein

Germany

(1850-1932)

European Corporations

Managerial Capitalism

Places the interests of stakeholders above shareholders.

Contrasts with Shareholder Capitalism in the Anglo model.

Stock shares are often held by stakeholders with goals other profits.

Presumed benefits

Improved loyalty of employees and other business relationships.

Longer-term outlook for investment and training.

Downturns absorbed by profits, not employment.

Greater equality of income within the firm.

Cross-ownership

Corporations owning shares of other corporations.

May concentrate corporate control in the hands a few large companies.

Reduces minority shareholder influence and incentive for small-denomination investors to participate.

Interlocking Directorates

Directors serving on the boards of multiple companies.

Common in Germany.

Illegal in the U.S. (intra-industry) since corporate officers have a Fiduciary Obligation to their company.

Reduces minority shareholder influence and incentive for small-denomination investors to participate.

European Corporations

Insider Trading

A corporate official that trades on information about the company’s performance that public shareholders do not possess.

Securities Trading Act of 1994

First major German insider trading law prohibiting trading on private information that would significantly affect the price of stock.

Minimal effects: no blackout period and no reporting of trading on remuneration for transactions less than €25,000.

Blackout period: the time frame prior to public disclosure where insiders are precluded from trading.

European countries have less protection from insider trading than in the United States.

Increases risk to investors lacking inside information, especially small-denomination investors.

Control Owner: percent of firms that have a single controlling owner.

Widely Held: percent of firms that have broad ownership.

Severity or Insider Trading Laws: ranked low to high (1-5).

Countries with stricter ITLs generally have higher stock values, suggesting investors discount the others due to greater risk.

European Corporations

Corporate Transparency

The supply of regular, accurate, and readily accessible information concerning corporate operations and prospects.

Lower in European model

May be perceived as unnecessary since stakeholder, versus shareholder, interests are prioritized.

European companies wishing to list on an American exchange must reveal greater information (e.g. related party transactions, insiders, etc.).

Hostile Takeovers--“Corporate Raiding”

Less likely in European model

Cross-ownership limits availability of shares available to public.

Stakeholders hold stock for reasons other than profits and may be less open to selling.

Replacing management during difficult times may not be a goal of stakeholders.

Mergers and Acquisitions

Occurs when one company formally integrates with another.

The U.S M&A movement in 80s and 90s hit Europe in the post 1999 era.

Explaining:

Copying of the U.S. to grow competitively.

Globalization of financial markets opened up companies for corporate raiding.

European Corporations

Germany’s Mittelstand Model

Small to medium-sized businesses known for highly specialized, high quality, and cost efficient production.

Pay higher wages due to higher priced products.

Examples

Jungbunzlauer supplies citric acid for Coca Cola worldwide.

TetraMin is the #1 producer of fish food worldwide.

Uhlmann is a global leader in packaging systems for pharmaceuticals.

Flexi is the #1 manufacturer of dog leashes worldwide.

Few “Garage Companies” that evolved rapidly into giant companies.

In U.S. 12 of the 50 largest companies (zero in Europe) did not exist prior to 1950.

Explained:

Desire to stay family-owned.

Stricter regulation limiting growth.

Undeveloped venture capital market.

New innovation in Germany and Europe typically come from established companies rather than new start-ups.

European Capital Markets

Capital Markets

Stock markets less pronounced due to:

Influence of stakeholders over shareholders.

Lack of minority shareholder rights.

Relatively less property right protections in civil, compared to common, law.

Greater use of bank lending and bonds.

Bank loan departments, rather than venture capitalists or investment bankers, determine company value.

Bank is often a stakeholder and sits on the board.

Universal Banks

Bank that performs traditional banking but also risk-sharing, stock sales, and merchant-banking functions.

E.g. Germany’s Deutsch, Dresdner, and Commerzbank

State Public Banks

Owned primarily by state governments.

Founded as non-profits to promote a regional economy.

Represent approx. 44% of loans and 40% of private savings in Germany.

Disadvantages

Bank bureaucracy

Advantages

Banks diversify risks and monitor business activity to prevent mismanagement.

Banks traded on an exchange can be held accountable through market discipline.

European Labor Markets

Labor Markets

Europe has among the most highly regulated labor markets in the world.

Codetermination: Places worker representatives on the board of directors and requires worker participation in the decision making at the shop floor level.

Industrial Democracy: requires management to consider workers interests to achieve a consensus.

Enterprise Constitutional Law in Germany 1972

Firms with >5 workers must elect an Employee Works Council on behalf of workers.

Influences wages, length of work day, firings, and layoffs at the floor level.

Codetermination Law in Germany 1976

Firms with >2,000 employees.

Shareholders and workers have equal representation on a supervisory board of directors that ultimately elects the executive board of directors (two-tiered system).

European Works Council Directive in EU 1994

Firms >1000 workers and >150 workers in at least 2 EU states.

“Consult and inform” requirements obligating employers to consult with employees about decisions that could directly or indirectly affect their jobs and keep them informed about the financial health of the business.

European Labor Markets

Treaty of Amsterdam in EU 1997

Max 40 hour work week (48 w/overtime), 4 weeks paid vacation, minimum daily rest of 11 consecutive hours per 24 hour period, etc..

EU Members can offer more generous benefits, if desired.

German Example:

Unemployment insurance: 32 months and individual is not required to take a job if migration or a cut in pay would occur.

Notice of termination: 4 weeks to 7 months depending on years of service.

Companies must inform the Employee Work Council who supplies their opinion to the State Employment Office who approves or disapproves the termination.

If process not completed in 90 days it starts over.

Workers have rights of appeal in a time-consuming and complicated process.

Rationale for Labor Market Inflexibility

Shorter work hours may help generate more jobs.

Culture that values greater leisure relative to work.

Job protections may raise worker productivity, loyalty, and reduce turnover.

European Labor Markets

Issues

Compliance costs have caused a shift from full to part-time jobs where laws are less stringent.

Two-Tiered Labor Market

Full time employees enjoying full protection and part time workers/independent contractors who are not protected.

Greater costs to termination reduces opportunities for employment and may perpetuate poor performance.

Labor inflexibility can be catastrophic for a company during recessions.

“Short Labor”: companies reduce hours to avoid lay-offs.

Comparisons

Long-term unemployment rate:

EU: 8% to 11%,

United States: 5% to 7%

2005-2010: 40% of EU labor force was part-time (17% in US).

2005-2011: average unemployment duration was 10 months (4 months in US).

Strong resistance to change (measured by days lost to strikes)

From 1994-1999: Spain lost 250 days per year per 1000 workers; Italy 100 days; France 90 days; in the U.S. it was 10 days.

European Taxes & Regulations

Nontax Compulsory Payments

Greater employer payment for pension contributions, unemployment insurance, and health benefits (see graph).

Tax Wedge

The difference between the wage received by the worker and the wage paid by the employer (see graph).

Higher wedge causes migration of employers and employees to more competitive nations.

Privatization

Conversion of enterprises owned by the state to private corporations (see graph).

Led by Margaret Thatcher in the 1980s.

Goal was to reduce bureaucracy and inefficiencies.

Unionization

Declining across Europe but still much higher than in the U.S. (see graph).

Public Employment

Generally higher in Europe than U.S. partly due to greater number of public enterprises and union growth in public sector (see graph).

European Taxes & Regulations

Modern European Welfare State

Larger in European model than others (see graph).

Higher payroll taxes

Elderly population rely more heavily on public transfers for consumption.

Potential long-term issues

Increased spending as demographics shift toward older and more dependent populace.

Higher taxes often decrease economic performance and may actually lower government revenue.

Debt accumulation may be come unsustainable.

Swedish Model

1960s and 1970s expanded transfer programs to exceptional levels.

Universal Coverage: anyone could qualify for benefits regardless of work situation.

Lowered Gini coefficient: 0.28 in 1960s, 0.20 in 1980s.

1971 tax reform lowered marginal take-home pay to 30% for individuals and 10-15% for executives.

Taxes=52% of GDP (U.S. 17%, UK 40%, France 51%, Germany 44%).

Private pension funds have become almost non-existent.

Tax Foundation Scandinavian Countries.