The European Way of Changing the Capitalist Model

The latter form of capitalism promotes a more even balance between stakeholders - employees represent up to 50% of German boards of directors, for instance - and is less constrained by concerns over short term financial gains. This Rhineland model of capitalism has already proven its efficacy, both from an economic perspective, as seen with Germany's economic growth over the last few decades, and from a social one, as shown by the increase in workers’ purchasing power.

A real advantage that European companies have developed over their American counterparts over the past decades is their awareness of and attention to multiple stakeholders. In 2019, the American-led Business Roundtable also offered to redefine companies’ missions to include other stakeholders alongside shareholders. However, let’s not forget that the same was done in 1980, with no tangible follow-up.

Bringing stakeholders on board for the long term

The emergence of a European model of capitalism allowing companies to go beyond the short-term financial incentives promoted by the Anglo-Saxon model requires aligning the interest of the company's various stakeholders - shareholders, management, employees and customers. This should be coupled with long-term value creation strategies.

Within the companies, shareholders are ultimately in control. A long-term vision thus requires long-term shareholders, which Europe is sorely lacking. It is struggling to direct its savings towards its companies: only about 6% of European savings are invested in shares, compared to nearly 30% in the United States.

The notion of companies having a raison d'être, an explicit mission statement, serves this purpose. Without this, a company will find it hard to justify decisions that, while being harmful in the short-term, will be met by higher multiples and stronger degrees of customer and employee loyalty in the long term.

Establishing the European model as a global example

Promoting the emergence of a European model within companies is not enough. Further measures must also be taken to allow its development in a context of both limited resources and major geopolitical struggles. 

To develop its own model, Europe must be able to attract capital. Today, Europe is not yet perceived as a single market by foreign investors, and each national market still requires dedicated expertise. To make the European market more accessible, and thus develop its ability to attract capital, Europe must work towards greater standardization across its member states, whether in banking regulation, green taxonomy, or other sectors.

Europe must also lead the way with its own accounting standards. IFRS standards and fair value measurement, according to which a company only has value as a transferable security, have done a great disservice to the European model. To avoid repeating the mistakes made in the early 2000s, it is crucial that Europe develops standards capable of accounting for - companies’ externalities, particularly environmental ones.

Finally, for Europe to successfully promote its model globally, it must develop an ambitious industrial policy and a strong political vision capable of clearly defining the new roles of the State, the regulatory authorities, and the companies.

Co-authored with Elise Lannaud, Assistant Policy Officer.

Copyright: ARMANDO BABANI / AFP