What Can Europe's Answer to Wall Street Teach Us About American Capitalism?
This article is adapted from Steven Hill's recently published Europe's Promise: Why the European Way Is the Best Hope in an Insecure Age (EuropesPromise.org).
A year and a half after an economic earthquake shook the world, the so-called experts are still trying to figure out what happened and how to move forward. In the shadows of that confusion, new economic models are beginning to find traction. Alternatives to Wall Street capitalism, the epicenter of the temblor, are suddenly getting a new hearing in the United States, whether it's Paul Volcker calling for reinstatement of Glass-Steagall regulation of the banking sector, the United Steelworkers announcing an alliance with the Mondragon cooperatives in Spain to develop manufacturing cooperatives in the United States, or Cleveland-based efforts to establish worker-owned co-ops in distressed communities [see Alperovitz, Howard and Williamson, "The Cleveland Model," March 1].
But the brightest spots in the postcollapse landscape are in Europe, which long ago advanced a degree of economic democracy that has proved its mettle in this crisis and therefore deserves closer inspection. If Americans want to learn about cooperatives, Europe is a great place to start. They produce an estimated 12 percent of the GDP of the European Union and involve, directly or indirectly, at least 60 percent of the population. Besides the Mondragon co-ops in Spain, in which 256 companies employ 100,000 people in industry, retail, finance and education, there's also Coop Italia, which operates the largest supermarket chain in Italy, employing 56,000 with more than 6 million members; housing co-ops like Poland's TUW; and the Co-operative Group in Britain, which is the world's largest consumer-owned business, with 4.5 million members.
However, most cooperatives are generally small-scale and thus unlikely anytime soon to replace the most important economic institution in modern mass economies, which is the corporation. The corporation, even with all its considerable warts, is the greatest wealth generator that humans have ever created, but its success raises the questions: Who gets to control that wealth? Whose pockets should the wealth flow into?
To answer those questions, Europe, led by Germany, has evolved over several decades one of its greatest contributions to the global economy. Practices unfamiliar to Americans, such as co-determination, supervisory boards and works councils, have been crucial in helping to harness capitalism's tremendous wealth-creating capacity so that its prosperity is broadly shared.
Co-determination has several features, one of which allows workers to elect representatives to corporate boards of directors known as supervisory boards. Supervisory boards then oversee company managers, who handle day-to-day operations. In Germany, the world's second-largest exporter and fourth-largest national economy, fully half of the boards of directors of the largest corporations--Siemens, BMW, Daimler, Deutsche Telekom and others--are elected by workers. In Sweden, one-third of a company's directors are worker-elected. To understand the significance of this, imagine if Wal-Mart were legally required to allow its workers to elect a third to half of its board, who would then oversee the CEO. Imagine how much that would change Wal-Mart's behavior toward its workers and supply chain. It's hard for Americans even to conceive of such a notion; indeed, when I ask Americans at my lectures how many of them have heard of worker-elected supervisory boards, usually no hands go up. Yet most European nations employ some version of this as a regular feature of their economy.
The impact has been impressive. Klas Levinson, a researcher for the former National Institute for Working Life in Sweden, is one of the world's experts on co-determination. I met with Levinson at the institute's Stockholm headquarters, a sleek glass structure with the air of a university campus. "Co-determination is Europe's little secret advantage," he told me. "The idea that elected worker directors should sit side by side as equal decision-makers with stockholder representatives, supervising management, is a little-known yet unprecedented extension of democratic principle into the corporate sphere."
Levinson's research shows that employee representation on corporate supervisory boards, contrary to fears that it would cause tension or render decision-making too cumbersome, has actually fostered cooperation between management and workers. This, in turn, has benefited the businesses as well as the workers. Workers have input, even into important decisions, so companies are less plagued by labor strife and internal schisms. And workers are well compensated, with high salaries and the most generous social support systems in the world.
One of Levinson's studies of Swedish businesses found that two-thirds of executives viewed co-determination as "very" or "rather" positive, because it contributed to a positive climate, made board decisions "deeply rooted among the employees" and facilitated implementation of "tough decisions." Eight of ten chairmen were satisfied with the arrangement and felt it was not important to reduce worker representation. An EU directive establishing a continentwide framework for board-level employee representation went into effect in October 2004, firmly rooting supervisory boards in Europe's economic culture.
The other pillar of co-determination is known as works councils, which are just what the name implies--elected councils at businesses, through which employees gain significant input into working conditions. Works councils, which are separate from labor unions but often populated by trade unionists, have real clout. They enjoy veto power over certain management decisions pertaining to treatment of employees, such as redeployment and dismissal. They also have "co-decision rights" to meet with management to discuss the firm's finances, work and holiday schedules, work organization and other procedures. In addition, they benefit from "consultation rights" in planning the introduction of new technologies and in mergers and layoffs, as well as in obtaining information useful in contract negotiations, such as profit and wage data. In some nations, including Germany, Sweden and France, works councils have acquired even more rights and greater influence.
In France the food manufacturer Danone agreed with its works councils to specific rules on job cuts, including consideration of union proposals to avoid layoffs and worker transfers. The Polish union Solidarity has said that the inclusion of Central and Eastern European worker representatives in works councils is "the most effective and sometimes nearly the only way" for them to obtain information on multinational companies' operations. German law stipulates that factorywide workers' assemblies must be held at least four times a year, at which a management representative must report on the plant and the business. The head of the works council also reports, and workers use these assemblies to promote their views and, if necessary, criticize company decisions in front of management.
In 1994 the EU issued a pioneering directive on works councils, stipulating that every multinational with at least 1,000 workers, and at least 150 workers in two or more EU nations, must negotiate agreements with works councils. Other nations have supplemented that directive by requiring councils in every workplace. Studies by Princeton's Jonas Pontusson and others have concluded that works councils contribute to efficiency by improving communication, which in turn improves the quality of decisions and legitimizes decisions in the eyes of workers. The studies also found that works councils are associated with lower absenteeism, more worker training, better handling of grievances and smoother implementation of health and safety standards. It turns out that when workers are given a degree of consultation, it makes them more satisfied and more productive.
In Germany works councils and supervisory boards can take substantial credit for the fact that, while the US unemployment rate has more than doubled during this economic crisis, Germany's has barely increased. That's because Chancellor Angela Merkel was heavily influenced by works councils and labor unions, and by the culture of consultation in general, to adopt a policy called Kurzarbeit, or "short-time work," in which, instead of laying off millions, employees agreed to spread the pain by working shorter weeks. Most of the lost wages have been made up from a special fund squirreled away during more prosperous times. As a result, more Germans have money in their pockets, and communities and households haven't been decimated by layoffs like they have been in the United States. (Despite the advantages, when Larry Summers, one of Barack Obama's closest economic advisers, was asked why the president didn't pursue short-time work to stem the economic bleeding, he dismissed the idea, saying the White House wanted to create new jobs, not preserve old ones.)
Co-determination has proved crucial to Europe's economic success and its broadly distributed wealth. "The practical effect of co-determination," says Levinson, "is that corporate managers and executives must confer extensively with employees and unions about a range of issues, even about the future direction of the company." Co-determination reflects European "social capitalism," with its communitarian values, long-term strategic vision and emphasis on manufacturing, much the way huge executive bonuses, quarterly earnings and a bloated financial sector reflect America's Wall Street capitalism. Social capitalism has both produced and benefited from the culture of consultation, which has also contributed to the creation of cooperatives and resulted in a vibrant small-business sector that produces two-thirds of European jobs, compared with only half of US jobs.
Interestingly, the conquering US powers in World War II can take some credit for co-determination. After the war a group of prominent German economists, led by future chancellor Ludwig Erhard, Walter Eucken and others, proposed what they called the "social market economy" in the belief that the market should serve broader social goals. And it was conservative Christian Democrats, not the leftish Social Democrats, who introduced this idea. The Allied powers encouraged this line of thinking, since it decentralized economic power, shifting it away from the German industrialists who had supported the Nazi war effort. In effect, US planners "punished" postwar Germany with economic democracy as a way of handicapping concentrated wealth and power, helping to birth the most democratic corporate governance structure the world had ever seen.
In the decades after Germany's launch of social capitalism, co-determination spread throughout Europe; it has been adopted in most of the new EU member states from Central and Eastern Europe. Sixty years after its genesis, co-determination is a core element of the European economy, and it distinguishes Europe's social capitalism from America's Wall Street capitalism.
Critics allege that co-determination hurts competitiveness, but the success of the European economy and of its many global businesses belies this criticism. Contrary to the US media stereotype that "old man" Europe is chronically plagued by a weak, sclerotic economy, Europe has the largest economy in the world, producing nearly a third of the world's GDP. Indeed, its economy is almost as large as those of the United States and China combined. Europe has more Fortune 500 companies than the United States and China together, and Europe had a higher per capita growth rate from 1998 to 2008 than the United States. Long denigrated by US pundits as the land of high unemployment, the EU currently even has a slightly lower unemployment rate than the United States. Indeed, the World Economic Forum in 2008-09 ranked Denmark, Sweden, Finland, Germany and the Netherlands--all of which employ some degree of co-determination--among the top ten most competitive economies in the world. They are also ranked at or near the top of most lists for quality of life, healthcare and social benefits. That's not a coincidence, since co-determination allows for both economic vibrancy and more egalitarian social policy. And while the United States also ranks high in competitiveness, it is near the bottom among most-developed countries in healthcare, social benefits and quality of life.
Sweden, Germany and other European countries are proof that you can have it all--but only if you have the right institutions to facilitate both a powerful economic engine and the supportive institutions and benefits to harness that engine and keep employees and families healthy and productive. These distinctly European advances may be the most important innovations in the world economy since the invention of the modern corporation, since they encourage free enterprise combined with economic democracy and worker consultation that does not unduly burden entrepreneurship and commerce. The advances allow businesses to be both competitive and socially responsible.
In effect, Europe has reinvented the corporation. Yet the latest critiques of capitalism by leading authors like Naomi Klein, Noam Chomsky and the producers of the popular film The Corporation tend to view all corporations and all capitalisms as the same. American progressives, while searching for effective responses to globalization, appear to be mostly unaware of these intriguing European inventions. Movements to revoke the charters of offensive corporations, while having gut-level appeal, have failed to recognize that European corporations are fundamentally different animals from their "disaster capitalism" US counterparts. When I asked a leading globalization critic from the Economic Policy Institute his opinion of co-determination and works councils, he replied dismissively, "Bah, those just lead to company unions," a demonstrably false claim.
Of course, the American right rejects co-determination as socialism incarnate, ignoring its potential to renew capitalism and support real family values. While the United States does not have a strong history of economic democracy, we do have a recurring pattern of responding to economic crisis by extending stakeholder rights as well as New Deal-type supports. This has resulted in employee stock-option plans, a small but vigorous co-op movement and stakeholder laws passed by an unusual labor-business coalition in Pennsylvania as a shield against corporate raiders, and other reforms. The Steelworkers alliance with the Mondragon cooperatives is another encouraging sign. These are some of the American threads of consultation and economic democracy that can be used to fashion a progressive response to the stunning failure of Wall Street capitalism. There is nothing magical or culturally determined about Europe's use of co-determination. All it takes to start the ball rolling here is a legislator, a governor or a president willing to introduce such a law. What would be the argument against it--that the CEOs who nearly destroyed the American economy and then came back for a government bailout know best? That's a debate any progressive leader should relish.