The research for this pamphlet included a survey of major pension funds - and all local authority funds. The results are presented on a separate page in table format, and include information not available elsewhere. Click here to view the results now.

Alex Falconer is the Member of the European Parliament for Mid Scotland and Fife. He has served on the Regional Policy Committee ('89-94), the Legal Affairs and Citizens Rights Committee ('89-'94), the Public Health and Safety Committee ('84-'89), the External Economic Relations Committee ('94 onwards), and the Committee on Economic and Monetary Affairs and Industrial Policy ('84-'89 and '94 onwards).

Thanks to everyone who assisted in the production of this pamphlet. In particular I wish to acknowledge the support of the Group of the Party of European Socialists; Pauline Green MEP for writing the introduction; various members of the European Parliamentary Labour Party, for their advice and constructive criticism; and my office staff - Stuart Ritchie, Dave Smith and Vicky Stephenson - for the extensive research which they undertook to make this possible. Supplementary text, design and data presentation by Dave Smith.  

number 12

GLOBAL VILLAGE ECONOMICS

WHOSE RULES?

Marshall McLuhan's "global village" has arrived. The good news is that if you can pay the toll, you can travel on the information superhighway to a thousand obscure corners of the world, without even leaving your seat. The bad news is that when the rainforest disappears at the rate of a hundred acres a minute, we all suffer.

For better or worse, the global village now has a global shopping centre, complete with trading regulations and enforcement officers. The far reaching tentacles of the World Trade Organisation and the General Agreement on Tariffs and Trade affect us all.

The world's financial system, however, is still chaotic. Profits take priority over people and planet. The right to shelter, food and employment comes a poor second to the right to make a quick buck.

UNEMPLOYMENT

In 1951, the UK's unemployment figures showed 237,000 people out of work - 1.1% of the workforce. In the first half of the sixties the figures hovered around the 1.4% mark, before growing to 2.5% by 1970.

The subsequent growth of United Kingdom unemployment can be seen from the graph, which also includes the other large EU member states.

GATT's supporters argue that it will increase international trade, and thus create prosperity and jobs. If this does happen - and it is certainly not a foregone conclusion - then the history of free trade shows that there is unlikely to be any uniformity in its effects. There will be winners and losers, and the losers will often be those people and countries who are already the most economically disadvantaged. Furthermore, jobs created in one area will often be at the expense of better quality jobs, pay and conditions elsewhere. This effect will be amplified by GATT's explicit exclusion of social or environmental constraints.

The European Union is first and foremost a free trade organisation. It was founded as such - enshrined in Article 2 of the Treaty - and it remains so despite the development of the EU as a political entity, and the various attempts to modify and ameliorate the social consequences of its economic raison d'être.

Article 2 also commits the EU to "a high level of employment and of social protection, the raising of living standards and quality of life, and economic and social cohesion and solidarity among Member States."

What are we to make of this, when unemployment in Britain has risen from 844,100 in 1972 (registered unemployed) to 2,336,200 (claimant unemployed July 95)? The EU as a whole has seen unemployment rise from 4.1% in 1975 to 10.6% - nearly 17 million people - in 1993 (the most recent complete official statistics). These latter figures, and the graphs, are based on criteria established for international comparison by the ILO and OECD. Both sources of data are, it is widely agreed, underestimates. UK alternative unemployment figures, based on claimant figures, produce roughly comparable numbers - but each measure includes about a million people not covered by the other. Applying this finding to the European Union, it is clear that well over twenty million people are jobless.

The second graph shows unemployment levels over the same period in the other G7 nations, compared with the overall EU figures.

After the 1994 elections, the European Parliamentary Labour Party pressed for the setting up of a Temporary Committee on Employment. With the support of the Socialist Group, this was agreed, and Ken Coates MEP was appointed Rapporteur for the Committee. His report (EP A4-0166/95) was endorsed at the July session of the European Parliament.

The report called for greater economic democracy through the involvement of employees in companies’ decision-making processes, shorter working time, and redefined roles for the public sector in any programmes to combat unemployment. While lukewarm about the Maastricht convergence criteria (see footnote), the report did say that

“... the fulfilment of the convergence criteria laid down in the Treaty on European Union requires that the Member States pursue sound budgetary and monetary policies; expects that this will create a more stable economic climate and so help boost investment and employment; believes, however, that progress to economic and monetary union needs to be balanced with an active employment strategy and that this will require additional, Union level, financial instruments capable of meeting investment and job-creation objectives; . . . ”

Ken Coates’ explanatory statement shows the contradiction between the implementation of the convergence criteria and the attempts to satisfy the demand for full employment:

“Independent studies now indicate that the deflationary costs of meeting the 3% budget and 60% debt limits of the Maastricht conditions for a single currency are much higher than widely appreciated . . .

“The effects on employment would be catastrophic . . .”

The Temporary Employment Committee examined various independent studies, including one by the Observatoire des Conjonctures Economiques (OFCE), whose analysis of the effects of meeting the deficit and debt targets in full led them to comment:

“Such a strategy seems to us suicidal . . . it seems to us vital to forget the budgetary criteria of the Treaty.”

It is tempting to assume, as did one study, that the criteria simply could not be met by 1999. But even an attempt to meet them will have disastrous consequences. Economic union is being driven by a lust for a grandiose European plan, and completely disregards what is happening in the real world.

Unemployment is the direct result of governments relying on capitalism driven by free market forces. They have done so to the virtual exclusion of any other consideration.

Trade and finance

In September 1993, the External Relations Committee of the European Parliament held a conference on "The European Community and Global Economic Interdependence."

The conference was well attended by delegates from developing nations, trade unions, and financial, trade and consumer organisations. Several papers identified the problems involved in the regulation of trade and financial markets. Solutions are, of course, more difficult. Take this quote from Rudi Dornbusch of the Massachusetts Institute of Technology ...

“Free trade needs no apologies; by contrast, protection is an irresponsible flirtation with a threat to prosperity and international security.

This is a statement which will provoke strong disagreement from many socialists. By contrast few will argue with the following ...

“Soon we have to cope with the integration of post-communist economies, India, and China into the world trade system. Billions of people who today live in basically closed economies will over the next decade try to participate in the world trading system. We can’t keep them out, at least not without major security risks.”

Whereas ten years ago, the countries of eastern Europe would have been no-go areas for most capitalist enterprises, they are now a major growth area for investment. To attract this investment, they have introduced many of the structural adjustments and stabilisation measures so beloved of the IMF and World Bank. Several have joined the queue for European Union membership.

The flip side of these developments will be clear to the growing number of east European citizens who find themselves jobless, homeless, and bereft of social facilities. Their governments pin their hopes on building a robust market economy, but the rapid transition has left them weak and open to the ravages of the international financial markets.

To deal with the most damaging aspects of capital movements, Mr. Dornbusch advocated a financial transaction tax. He emphasised, however, that such a tax "cannot work unless applied by all the major economies." But if all the major players were willing to work together so closely, would the problem still be there?

A consumer viewpoint?

The European Bureau of the Consumers' Unions also presented a paper. It was clear, however, that the Bureau’s main interest was the consumer as a passive customer, not as an active participant.

“Today, consumer interests are not fully recognised by the different parties concerned. Moreover, economic analysis - both micro and macro-economic - is too often incomplete and biased, since its models and estimations do not specifically include consumers interests. As a result, economic analysis underestimates - and even ignores - consumer welfare. In such a context , the consumer is rarely aware of the direct and indirect implications of international economic interdependence. The consumer usually has to pay for such implications.

Any hopes that the last sentence might be a reference to the consumer as a citizen who has to pay for the indirect costs of our consumer society - through crime, unemployment, social deprivation and so on - are subsequently dashed as the paper, referring to the financial markets, goes on to stress that

“In the first instance, we can state that the globalisation of financial markets should also bring clear benefits to consumers. They should be free to move and invest their financial capitals, particularly where market conditions are the most advantageous and attractive.”

We are talking wealthy consumers here. What about the rest of us? For most consumers, speculation means a flutter on the lottery.

Tackling GATT

Dennis McShane, now a Labour MP, but at that time representing the International Metalworkers Federation, listed several possible courses of action, including re-inserting full employment as policy goal; linking social issues to economic growth via social clause in GATT; and strengthening economic citizenship transnationally, notably through European Works Councils.

Full employment is desirable, but unless the present transnational stranglehold over the global economy is challenged it will remain unachievable. GATT has been signed sealed and delivered - without any social or environmental clauses. European Works Councils will have to do a lot more than transfer national considerations to the European stage if they are to have any meaningful impact.

McShane's paper did suggest some progressive policies for the European Union - but most would be difficult, if not impossible, to implement without drastic changes to the world's economic system. There was no explanation of how international economic activity would become "the servant not the master of international civil society." At least Mr. Dornbusch proposed a tax regime to ensure that capital investment was based on long term returns!

Foreign Direct Investment

So where did all this lead? One of the main conclusions was that "The issue of foreign investment has been largely divested of its ideological overtones." - (Dec. 1994, in the EC's subsequent External Economic Relations discussion paper). In other words, with the Berlin wall demolished, western capitalists need worry no more about investment in the former Soviet bloc.

This was in turn followed by ‘A level playing field for Direct Investment World Wide’ (aka COM (95) 42 Final). Optimists could be forgiven for thinking that the Commission was about to tackle the problems arising from the uncontrolled flow of capital. Not so. The Commission is seeking the complete removal, throughout the world, of any regulation of the free flow of capital.

It is clear that the Commission wishes to approach the World Trade Organisation on this issue. The WTO is modelled on the Commission. Its staff will largely comprise civil servants. Experience of other international bodies suggests that their major influence will be the transnational companies that they are meant to supervise.

Creating a new agenda

Many social and economic problems arise because so many people are severed from and thus alienated by the economic system. The effects can be seen in the rising crime statistics and the growing threat of fascist and racist forces. But instead of tackling the causes, leading politicians call for tougher measures to deal with the more visible effects of our economic malaise. Forcibly ejecting the homeless from their shop doorways is no substitute for providing adequate housing for all our citizens. Banning squeegee merchants from the roads is no substitute for providing jobs. Getting tough with beggars is no substitute for a comprehensive welfare and benefits system.

Throughout Europe, the media regularly bombard us with warnings that we can no longer afford the existing levels of social protection. We are told that state pension levels are unsustainable, and we must turn to private schemes. Yet in Britain - which has the most advanced private pension provision - the problems of state provision are beginning to affect the private sector. For example, there are fewer contributors than recipients.

Investment managers know that their strategies need to change to accommodate this and other developments. As Paul Myners, Executive Chair of Gartmore says in their 1994 annual report:

"Within the UK pension fund market, two influences are producing a change in the nature of pension funds generally. Firstly, demographics and life expectancy mean that an increasing number of scheme members are now receiving pension payments. Many schemes are commissioning asset/liability studies in order to decide whether to change their investment strategies by increasing exposure to fixed interest securities and other income oriented assets. Secondly, we believe that stipulations on solvency in the Pensions Bill currently before Parliament will persuade a number of schemes to consider changing the balance of their investment towards asset categories that are less volatile. This again suggests a move from equities to fixed interest securities ..."

Local authority funds, though on average having a slightly higher proportion of overseas equities and bonds, are mostly in line with general trends. The main exception is the London Pensions Fund, with only 20% in UK equities and only 8% in overseas equities, but with 52% in index linked securities. This is a prime example of a strategy which has been adopted to deal with exceptional liabilities. Will others soon be following suit?

While private schemes have a surplus at present, they are beginning to move to less speculative investments, and searching for higher returns through increased overseas investment. If there is any shortfall in their future returns, this will of course be met by lower payouts and higher contributions.

Fully funded state pensions are needed now more than ever before. Advances in scientific and technical knowledge, coupled with cheaper methods of analysis, mean that insurance companies will soon be able to tell who is a bad genetic risk. Those who suffer from chronic illnesses are already at severe disadvantage when dealing with compassionless actuarial statistics. Similarly the widening health divide could lead to discrimination against people in lower socioeconomic classes. These factors make it clear that the poorest and least fit will continue to shoulder a growing and disproportionate share of the burden. Unless such problems are addressed, we face a future of cossetted haves and a growing number of disgruntled have nots.

A major problem in the formulation of a socialist strategy to deal with these problems is the lack of familiarity with the wide range of financial institutions and structures in the EU. If we are to create a new socialist agenda we need to examine them critically.

Pension funds ... owned but not controlled

Britain is the most liberal of the major developed capitalist states. It has huge amounts of capital, invested through pension, insurance and other funds, which are deployed around the world regardless of the effects.

Pension and insurance funds have grown enormously since the war, both through appreciation and expansion of membership. In the sixties, pension funds' rate of appreciation averaged 9% against an average inflation rate of 5%. By 1972, British pension funds had seven million members and £11 billion invested. Insurance sector assets were about £25 billion.

After this growth slowed to the point where, due to high inflation of the seventies, it was only just keeping ahead, before once more accelerating through the eighties, to hit a record 30.3% in 1989 (31.6% excluding property).

In straight cash terms, that's only exceeded by the US, whose pension funds' international assets have doubled in the last two years, now standing at $303 billion. But as a percentage of their total assets - $3,760 billion - the US is still well behind the UK, with only 8% abroad.

US $ billion	Total Assets 1992	Total Assets 1993	Foreign Assets 1992	Foreign Assets 1993	Foreign as % of total 1992	Foreign as % of total 1993
UK	642.2	717.3	192.6	223.8	30.0%	31.2%
Netherlands	237.3	261.3	40.5	53.8	17.0%	20.6%
Germany	100.4	106.0	8.1	8.6	8.1%	8.1%
France	41.1	41.1	0.8	0.8	1.9%	1.9%
Denmark	23.6	25.9	0.9	1.1	3.6%	4.3%
Ireland	16.0	18.1	5.6	7.4	35.0%	40.6%
Italy	11.5	11.7	0.5	0.5	4.1%	4.1%
Spain	7.6	10.1	0.1	1.0	0.9%	10.0%
Belgium	6.4	6.9	2.0	2.6	31.2%	37.0%
Portugal	2.7	4.6	0.1	0.5	3.0%	10.0%
total assets/ % averages	1088.8	1202.9	251.1	300.0	23.1%	24.9%

Source: European Federation for Retirement Provision / EU committee

By the end of 1993, there were over £480 billion in pension fund assets; over £430 billion in insurance companies' long term funds and over £50 billion in other insurance companies funds. The latest figures for UK bank assets and liabilities show £1,366 billion in their coffers; building societies have nearly £300 billion. There is little or no accountability in these funds to the vast bulk of the people who have created these assets through their work.

These funds move freely, governed mostly by a balancing consideration of profit margin and security. Even with funds which have a strong geographical base, the needs of the local economy, and the long term sustainability of local economic development, take a poor second place. In the UK, this natural tendency is reinforced by the regulations governing pension fund operation.

The eighties saw a radical shift in investment policy. Equities increased their share of portfolios, at the expense of fixed interest and property. The nineties have seen a slight reversal of this trend (see graph). Overseas investment has also increased tremendously, from 6% in 1979 to nearly 40% now.

The UK model for pension provision is slowly spreading to other EU countries, but their pensions are mostly still provided by different systems. Consequently pension funds assets are much smaller in other member states.

Some EU countries have limits on the proportion of pension funds that can be invested abroad. The UK limits schemes to not more than 50% in securities listed in non EC states. Germany and France have 5% limits. Restrictions may apply to the whole fund or to a specific part (e.g. Netherlands, where domestic assets must cover liabilities) and may distinguish between different types of investment. Sometimes Governments insist on specific investments. Portuguese funds must invest at least 30% in government bonds, and at least 10% in domestic equities. Current EC rules would, however, prevent any new restrictions or limits being introduced unilaterally by a member state.

... and other funds

British Gas highlights an aspect of fund accountability which would simply not occur under the best of European Corporate law. There can be no doubt that the vast majority of pensioners, fund contributors, and private pension and life assurance scheme members, are opposed to the large salaries and increases, and massive share options which have been given to the executives and directors of privatised companies.

Yet at the British Gas AGM, despite the principled and vocal opposition of many individual shareholders and some pension funds (particularly those organised through PIRC), the British Gas oligarchy won their votes by a sizeable majority.

Why?

The analysis of British Gas shareholdings by size makes interesting reading. At 31st December 1994, there were 1,654,745 shareholders who had up to a thousand shares each (down 70,000 from 1993). That's out of a total of 1,844,492 shareholders, but they account for only 14.5% of the shares held. At the other end of the spectrum, 456 shareholders have over a million shares each, and 65.2% of the total. So much for the power of the small shareholder in our share-owning democracy.

Analysis of shareholdings by type is equally interesting. The pension fund holdings seem remarkably small compared to our survey results, which suggest that about a quarter of British Gas shares are held by pension funds. Besides which, why are there only 139 of them?

Ask the nominees. They hold 55.3% of the shares on behalf of other investors, all of whom could presumably be analysed in terms of the other categories. There are several reasons why financial institutions invest through third parties. Making life difficult for people who want to scrutinise their activities (including how their votes are used at AGMs) is probably one of them.

Thus the exact holdings of the various funds are difficult to establish, because they are often held through nominees, avoiding disclosure on shareholding registers. It seems likely, however, from our survey and other sources, that funds are the ultimate owners of a large proportion of the shares in the UK’s privatised industries. In British Gas, we estimate that they own a majority of shares, and possibly as high as two thirds.

The bank that likes to say nothing ...

A letter, written by Alex Falconer as a Royal Bank of Scotland account holder, sought information about whether, and how, the bank had voted at the British Gas AGM (tellers: Royal Bank of Scotland), and whether the bank was investing money, directly or on others' behalf, in any of the other former public utilities. Chairperson Lord Younger's office replied that its shareholdings in British Gas were held on behalf of clients, and confidentiality prevented them disclosing how they voted. As for other utilities, they sought an undertaking that their customer would meet any cost incurred in answering the question! Strange that in the era of computerised banking, it is so difficult for a bank to provide such data.

Ensuring a good return

The role of the funds does not stop at buying a few shares. They naturally take an active interest in their investment. What, for instance would the average policyholder or pensioner say if they discovered that the company which looked after their money was trying to get their water bills increased?

In 1994, the Prudential and Barclays de Zoete Wedd Investment Management urged water companies to appeal to the Monopolies and Mergers Commission rather than accept price limits which might be set by OFWAT, the water industry watchdog. When the Chief Executive of the Prudential replied to a letter from Alex Falconer on the subject, saying that they "would not wish to see this equity fettered by unreasonable regulation." He also noted that "you have a number of constituents who, as well as being water consumers are Prudential pensioners and/or savings and retirement fund holders." What would they have said if they'd been consulted?

What regulation?

The financial institutions argue that there is too much regulation. This is nonsense. Clearly, there is not enough. Take the case of Barings Bank and Nick Leeson. Anyone who watched David Frost's interview with Leeson would have judged the situation farcical.

The free flow of capital, such as currently exists in Britain, makes it impossible to achieve any substantial social goal without the consent and cooperation of those who control capital. In most cases, that consent is unlikely to be given.

Any attempt to restrict the flow of capital will meet stiff opposition from the financial sector, the media, other members of the European Union, and sections of the general public. The scope for social reform is therefore limited.

Even the mighty powerhouse of Europe, the German economy, having withstood the rigours of reunification, is now feeling the effects. Volkswagen workers have recently accepted a deal in which they will work overtime for no pay other than the promise of time off when order books are slack.

"High German wage costs and the associated social benefits have already cut heavily into the amount of foreign investment in Germany. In 1971 foreigners invested DM3,100 million in Germany, about the same as the amount invested by Germans outside Germany (DM3,300 million). By last year the figures were dramatically different. Foreign investment in Germany had crept up to DM5,100 million, while Germans were sending abroad seven times more than they used to (DM23,800 million)." - Guardian 21/9/95

There was a further sharp rise in the first six months of 1995. German companies invested a record DM28bn abroad - 212% higher than in the same period of 1994. Hans-Olaf Henkel, head of the BDI (the Federation of German Industry), estimates that 300,000 German jobs have migrated in the last five years. ("German job exporting debate is renewed." - Financial Times, 2/11/95)

Germany - direct investment abroad

• 1994 - Europe DM17,756m inc. EU DM13,027m
• 1995 (Jan - June) - Europe DM20,657m inc. EU DM19,035m

(source : FT 2/11/95)

What can be done?

• One way to introduce new controls on funds would be to make them more accountable to their ultimate owners, rather than to the intermediaries in the financial institutions. The financial sector would still object vehemently, but if advanced properly, such a recommendation would win public support.

  Failure to control the flow of capital will leave the European Union prone to catastrophic market collapses, against which Black Wednesday will pale in comparison. In such circumstances, the EU could be torn apart. Is it not ridiculous that the fate of three hundred million people (and, for that matter, the rest of the world too) should lie in the greedy hands of financial gamblers?

• Socialists must argue for the adoption of a more federal system, incorporating not only regional and local government, but also banking and financial institutions. The federal system in Germany, while not socialist, works on these lines to provide a degree of accountability by banks. The system could be used as a model, and in certain respects, extended.
• Regional industrial development bodies should be primarily accountable to regional government. Their membership should incorporate local regional and national governments, and employers, employees, and other representative organisations.
• Such changes should be accompanied by changes in company law, to reflect wider interests, not only of the companies' shareholders and financiers, but also their customers, their suppliers, their workforce, and the communities in which they operate. In other words, everyone who has a stake in a company should have a say in what that company does.
• The 1996 Intergovernmental Conference (IGC) has the power to make big changes. Its remit is to decide on the next step after Maastricht. There are plenty of big changes which need to be made. Why do we have twenty million people on the Eurodole while, with so many people suffering from lack of social provision, there's so much work to do? The IGC should be considering how to put them back to work.
• It could also take a look at how the former Soviet bloc countries can climb out of their economic pit, with its booby trapped cold war nuclear technology which it can no longer afford, its Mafia style black market economy, and its collapsing social services - all the result of the too rapid transition to market worship encouraged by the West.
• The IGC could be looking at how to restructure the world economy through a new GATT, designed to help the starving to feed themselves without destroying the rain forest.
• It could consider the part which the non-governmental bodies are playing in tackling the problems of the world, and recognise this by involving them in the decision-making process.
• It could be looking at how we can make sure that workers' pay and social and environmental conditions in poor countries can be improved, rather than standards being reduced to the lowest common denominator.
• It could also take a long hard look at the finite resource depletion, ozone holes, global warming, and other environmental problems we face, but have not yet adequately addressed.
• And what about the continuing waste of money on "defence" initiatives such as testing nuclear devices?

The tragedy is that this powerful body will probably spend their time tied up by the antisocial tendencies of the UK Tory government, agonising over how many tracks there will be to EMU. Meanwhile the important issues will continue to be debated in the European Parliament, whose limited power is unlikely to be extended by the IGC.

Change, however, has to come. If those at the top are too blinkered to make necessary changes then, as usual, they will come about because of pressure from the masses.

There have always been people who oppose the European Community for political reasons. Some criticise it for being undemocratic. Some argue that it is leading to a bureaucratic state managed by an unaccountable commission. Many socialists, myself included, regard it as a capitalist club.

There has also always been a lot of criticism from ‘little Englanders’ or nationalists. Unfortunately the EEC fanatics used the ‘little Englanders’ phrase to dismiss any criticism of their policies. It is extremely foolish to continue this dismissive response today.

The recent Conservative leadership campaign was the first in which withdrawal from the union was a major issue. However, John Redwood is not a ‘little Englander.’ He is a free marketeer. He believes in the ability of capital to exploit labour. Now that the Berlin Wall has collapsed, he and many others are set to challenge what little remains of the social aspect of the European Community. In doing so, the British economy will wreak havoc on the Community.

The foundation for this has been laid by the British Conservative government by their attack on their citizens democratic rights at local and national level, over the past 16 years. This political ideology is now being extended into many parts of Europe. The Commission's proposals for the free movement of capital, without any policy of democratisation, are a clear signal to those on the left of politics that "Thatcherism" rules.

There are those who argue that we should increase the power of the European Parliament to remedy this democratic deficit. While this may appear an attractive proposition, it will not happen so long as the member states of the European union are unwilling to give up the powers over taxation and expenditure which this would require. Neither is there any evidence that member states are willing to allow the Treaty to be changed to accommodate more powers to the European Parliament in the areas of trade, capital flows, or public sector expenditure.

Therefore we must deal with realpolitick, not rely on wishful thinking. If socialists are to reverse this trend we must campaign for structural and constitutional reform of the British economy. It must be brought under a more democratic and accountable system of control.