Have European governments surrendered Palme’s principle to the free market?
In 1981, the French Socialist Party won a great victory, but subsequently isolated throughout Europe, changed direction and saw its share of the vote reduced to less than 20% in 1992. It has now been elected again on policies to create employment and to protect the French welfare state.
In Britain an electorate fed up with the failures of eighteen years of right wing Conservative rule and the stain of sleaze elected a Labour Government with a landslide majority. We now have socialist parties either in power or sharing it in twelve of the fifteen member states. Unlike 1981 there is now the opportunity to introduce a new direction in Europe.
Will it happen, or will European citizens receive further promises without policies to implement them?
Sadly, it appears that even where socialist governments exist, there is a view prevailing that the financial sector should be left alone. This pamphlet challenges that view, and argues for more democratic control of financial institutions. While the argument concentrates on mergers, takeovers and acquisitions, it also seeks to highlight the extension of Anglo American practices in Europe, and the changes in the global economy which affect the world's citizens.
Few would argue that private monopolies are a good thing, but what are the acceptable limits of monopolistic power? Who decides, and how?
Whether we compare people within each country, countries themselves, firms globally or within each market, we find that wealth is unevenly divided.
Many industrial sectors are dominated by a small number of firms. Though in the UK this is often called a monopoly, in other countries such a situation is (more correctly) called an oligopoly. This means control by a few firms, as opposed to a monopoly, which strictly is just one firm.
A simple measure of the extent of oligopoly within different sectors can be seen from the percentages of each sector controlled by the top five firms. Figures published by the UK Central Statistical Office show that in 1992, 99.1% of the tobacco industry was controlled by just five firms. The five firm concentration index for iron and steel was 94.8%; for motor vehicles, 87.3%; for agricultural machinery 75.1%; and so on. Such concentrations are undoubtedly increasing in most sectors of industry, and this effect is manifesting itself globally.
Hannah and Kay surveyed UK firms in 1977, looking at the events of the 1960’s. Based on this survey, they determined the percentage of change between 1957 and 1969 attributable to mergers:
Two sectors examined had become less concentrated in this period - nonelectrical engineering and building materials - while the tobacco sector had a ratio of 100% throughout the period.
The merger mania of the sixties was experienced again by the UK in the 1980’s, peaking in 1987 with 1528 mergers.
Within the EU, many mergers were motivated by the approach of the Single Market, the creation of which had been partly justified by the "economies of scale" which would result.
The table below shows the changes in the five firm concentration indices for selected sectors within the EC, between 1986 and 1991.
Interestingly, the greatest merger activity has taken place outside the manufacturing sectors. Between 1990 and 1992, out of 13,211 merger and acquisition operations, 3,990 were in the business services sector, and 1,252 were in banking and finance. There was also a wide variation between member states' activity within this period, which was not simply a matter of the relative country sizes.
While it will probably be some time before any full analysis of this period’s mergers and industrial concentration appears, it seems extremely likely that once again, the mergers will be seen to account for a large proportion of the increase in market concentration.
The very high level of merger activity in the UK could be related to its strong business services and finance sector - not simply as a result of a high level of activity within these sectors, but also because they have provided the driving force for much of the merger activity elsewhere.
In other words, the UK is acting as a role model, and these sectors in particular are extending their influence to other industrial and geographical areas of the EU.
In 1989, the European Commission brought forward a proposal for a European Directive on company law. It was withdrawn following pressure from the Takeover Panel in the UK and Tory government opposition. The proposal was reintroduced this year, albeit in a much watered down form.
On the Committee I argued for a Directive.
It was debated in the Commons and the Lords, with both chambers backing the Government and Takeover Panel’s opposition to a Directive, despite the reservations expressed by some Labour members.
Labour MP Alan Simpson was noted for his research into job losses in Britain as a result of takeovers and mergers. No serious questions were raised about the Takeover Panel’s operations in this country and the possible export of another of our free market enabling mechanisms to mainland Europe.
According to the Lords' Report, the Panel is an “... unincorporated, non statutory body whose membership comprises a chairman, two deputy chairmen and three lay members (all appointed by the Governor of the Bank of England), and representatives of a number of organisations representing the main investors, practitioners and the corporate sector." Considering how many employees are affected, some may find it strange that there has been no trade union representation on the Panel since it was established in 1968.
The report also detailed the number of written and oral representations which were made to it during its consideration of the proposals. It reported that the vast majority were hostile to any Directive, yet it didn’t say how many of those organisations giving evidence were also closely associated with the Takeover Panel.
Of the 26 organisations involved, eight were members of the Panel. They all have their roots firmly in the City of London.
Ten members of the Takeover Panel are members of institutions which collectively control most of the investment activities in the UK, through building societies, banks, insurance and pensions companies (see left). Other panel members belong to firms prominent within the financial sector.
J. Henry Schroder & Co., for example, topped the takeover advisers league for the first six months of 1997. They assisted in 17 takeover deals worth £6billion. From the £22.3billion total value for all deals in those six months, advisers netted about £600 million (Guardian 8 July 1997). Some might infer from this a potential conflict of interest, but I am sure that panel members know whose interests they are representing.
There is nobody on the Takeover Panel who has been appointed by any employees or consumers organisation. Even among the feeder bodies, only one (IMRO) has a consumer representative, and there is nobody from any labour movement organisation or NGO.
Our attempts to gather detailed information about the practices in other member states met with a poor response, with the exception of the Netherlands.
Their set up is based on an equal three way split between trade unions, manufacturing industry, and government nominees.
In contrast, the UK Takeover Panel, run almost exclusively by a concentrated and powerful financial sector, illustrates the other extreme which exists in the UK.
Currently the debate at European level is centred on meeting the Maastricht convergence criteria for economic and monetary union. Yet convergence is taking place in other areas at a rapid speed.
According to the Financial Times (20 June), recent Commission reports “highlight the convergence of employment strategies across the EU”. The FT states “a number of examples can be found of employment systems which are a good deal more sensitive to market forces than the UK.” Under this heading it lists
In Italy last September an agreement was signed by the government, employers and trade unions which emphasised the need for employment flexibility which was described as “the main principle of labour market innovation.” Only in Austria was there any form of resistance to the UK model.
The Anglo Saxon extension can also be seen elsewhere:-
"In the past three years Daimler-Benz has listed shares in New York, adopted American accounting standards, sold loss making subsidiaries and offered its executives bonuses linked to the share price. Managerial performance used to be measured by a complicated formula unknown outside the company. The firm has now replaced that with the shareholder-friendly aim of increasing return on equity.
"The European system tends to blur distinctions of ownership through a complex system of cross-holdings and encourages long term relations between suppliers and managers of capital. It also gives power to “stakeholders”, especially workers, than in America.
"But what is Daimler now? With its New York listing, restructuring plans and managerial incentive scheme, it clearly has some of the features of an American firm. Is that because it is a special case, forced to change by the scale of its losses - DM5.7bn in 1995? Or is Daimler still a symbol of European business&emdash;but this time as an early adapter of new management techniques, closer to the American model, with its shareholder values, opportunistic ways of raising capital and hostile takeovers?" (Economist, 1996)
The recent hostile bid for Thyssen steel made by Krupp is an excellent example of this practice and how they are succeeding.
In the Financial Times (19th March 1997), this was described as
“...an extremely Anglo-Saxon takeover bid....” that “....breaks Germany’s cosy corporate culture wide open.” It concluded that the bid was good news for investors and that industrial logic was starting to prevail over vested interests. Presumably they don’t mean those workers with a vested interest in the future of the company, whose demonstrations over possible job losses, led to the withdrawal of the bid.
If we express any interest, we are invariably told that such matters are good for the economy (with the implication that they are thus good for everyone). Are they? Are these mergers healthy? Or, to put it another way, whom do they benefit?
How strongly is the concentration of industrial wealth related to the concentration of personal wealth and income?
It seems likely that the concentration of power in the hands of the few is linked to growing inequality in society. If this is so, then the assertion that the concentration of power is beneficial is open to challenge on democratic grounds (whose economy is
it anyway?); social grounds (inequality connected to health, employment, crime and other issues); and economic grounds (market concentration is anti-competitive, and there is evidence that inequality hinders economic growth).
There seems little doubt that income inequality is frequently, if not always, associated with a range of social problems. Two surveys of all fifty US states (one by Harvard University and the other by Berkeley University) found that higher inequality was correlated with
These effects were seen not only among the poorer classes, but among the middle classes in areas of high inequality as well. The situation in Europe is not so extreme, but researchers have found a similar pattern of results here too.
According to the 1995 OECD Income Distribution survey of member countries, Belgium, the Netherlands and Germany show a “modest” rise in inequality
(between one and two percentage points increase in the Gini coefficient, a recognised means of comparing the degree of inequality). Australia, Japan, Sweden,
the UK and the USA show a much bigger rise. The UK exhibits by far the largest increase in inequality during the 1980's and the Gini coefficient shows that inequality in the UK has increased from 27% to 36%. (for more information on inequality, click here).
Has the free market, as presented by "Anglo-American" behaviour, had an effect on this rise in inequality? If so then to quote the FT, there exists a “cosy corporate culture of vested interests” . . . . . which deserves to be blown wide open.
There is therefore a good case for democratising institutions operating in the financial sector. Such democratisation should not, however, stop at national boundaries. We should also consider global financial and industrial institutions, and the changes that have taken place throughout the world since the Second World War.
“We are up against the most powerful economic institutions on the face of the earth - multinational corporate giants who worship no god but greed, salute no flag but their corporate logos and will sacrifice employees, communities and even countries just to boost their quarterly profit statements” - Andrew L Stern, President of the Service Employees International Union (Morning Star 9 May 1997)
Andy Stern’s words present a problem for socialists today. How do we attempt to place a measure of control over these huge unaccountable organisations?
As in Britain, workers in Germany, France, and the Benelux countries all enjoyed Keynesian reflationary programmes following World War II. Unlike Britain though, their public sectors were further boosted by US aid in the form of the Marshall Plan. This was designed to support US interests in Europe, in what came to be called the Cold War. It was notably accompanied by rather quaint and extremely un-British policies encouraging discussions with workers and the wider communities over investment policies.
This "European" approach developed into systems of ‘collective’ corporate governance which did much to secure inward investment in domestic industry, education, health, welfare and other social areas. Over the years, such systems also made workers in mainland Europe somewhat complacent about the growing problems associated with the EU, the Single Market and Maastricht.
The extreme pressure they are now under is due to several factors. They are faced with massive changes imposed by
Yet such laws serve primarily a narrow range of interest, and there is no proof that the trickle down philosophy has been successful. Quite the reverse. Wherever we look, the application of so-called free market economics is characterised by a widening gap between rich and poor, whether that be individuals, companies or countries.
In 1944, the Breton Woods summit meeting brought about the creation of the World Bank, the IMF and indirectly, the European Economic Community. Socialists were divided but both supporters and opponents had good idealistic reasons for their position.
Capitalists were also divided but were convinced by Keynes and White's argument that these institutions, supported by the public resources of the Western nations, would be a bastion against communism. A similar argument was used by others to support the creation of the EU.
In her excellent book “The World Bank” Catherine Caulfield highlights the sheer scale of the waste of resources used to prop up vicious undemocratic regimes, and subdue communist sympathising liberation movements. Despite the avowed good intentions of many of its Presidents, the World Bank continued to pour scarce resources down the well of corruption, and the IMF was allowed to screw down public sector expenditure in both western and developing countries.
With the collapse of the Soviet Empire, even the dubious justifications above no longer apply, so it is likely that the financial institutions present role will be taken over by the more covert hand of market forces and trade agreements.
What then, does the future hold for the IMF and the World Bank? Many people would like to wish them good riddance, but they are unlikely. to disappear. Could they be pushed towards a role more in line with that envisaged by their early idealistic supporters?
The monopolisation of power referred to on pages two and three has been paralleled by developments at international level.
This industrial power is now being accompanied by a concentration of financial resources in fewer hands. This poses a new threat to socialists, for what we are witnessing is not the industrial capitalism which many Europeans are familiar with, but global capitalism in its rawest form.
Yet the decisions and proposals by the Commission and member states governments, to make the citizen more responsible for meeting their own welfare and social provision, will lead to more of the European citizens' resources being placed at the disposal of institutions such as those involved in the Takeover Panel and related bodies.
Most consumers are also producers. Being excluded in either capacity from decisions which affect them requires a socialist response. Since their disempowerment is often accompanied by impoverishment, the alternative must be rooted in the most fundamental of socialist principles - the assertion of ownership and the redistribution of wealth.
I tabled amendments to ensure that
The final report which included these amendments was adopted on 26 June 1997, by 277 votes in favour to 44 against, with 38 abstentions.
As this matter is under the co-decision procedure, Parliament must now wait for the response from the Council of Ministers and the European Commission.
Meanwhile, as far as the UK is concerned, we should push for the reform of financial institutions, such as the Takeover Panel; the Monopolies and Mergers Commission; and the Securities and Investments Board, based on the best practices in Europe.
From the European perspective, one problem we have as part of the Socialist Group is the lack of detailed information about such matters.
The Socialist Group should therefore set aside more time for discussion of these matters within the Group, proactively not reactively. The Socialist Group need to address the serious lack of alternatives, and to learn the lessons of history.