The Euro is a neo liberal engine.
One of the happy assumptions made by the advocates of the Euro holds that, if all member states hang on in there long enough, all will converge on a European norm, due to market competition and EU or global regulation. This has not occurred, as underlying differences between jurisdictions have not been eliminated , and competition in market and political arenas between corporations rooted in different member state jurisdictions remains a defining characteristic of Europe.
National calculations drove the EU to a single currency and national calculations continue after its introduction. Europe is not converging on a single capitalism. There is convergence in the processes at work in the world and in Europe—the complex processes often summarised as “globalisation”—but there is continued divergence in the national structures which endure, restructure and shape them.
The Euro is a prime example of active “globalisation”. It is a creation, an act of will by the participant states using Europe’s more traditional (bilateral) and also newer instruments(multi-national or supra-national) of diplomatic statecraft. There were two prime sets of motives behind setting up monetary union, one being to stabilise the interdependent European economy operating in a multi-currency system, where the dollar and the DM called the shots; the other motivation was to prevent the emergence of a united Germany as the unequivocal potential leader of Europe. Before monetary union, Germany ruled the roost, so that German macroeconomic preferences, being closely tailored to Germany’s micro-economic arrangements, took precedence over those of most other states in the EU and beyond. After monetary union, French policy of embracing Germany in the European Union is only to be consummated through the adoption of policies heavily biased in a neo-liberal direction at the level of the Union in order to end the impasse created for the European economy by the co-existence of national mercantilist policies. France has made gestures to travel in that direction, but is light years from having done so. France has not been able to implement the domestic component of her chief foreign policy.
Member states in the Euro are deprived by the existence of the Euro, and of the ECB, of the interest and exchange rate tools required to manage their own national compromises between national cohesion and international specialization. As a result of the Euro, France or Germany are that much more like Texas or California in the US. But they also, like other member states, carry a long, national legacy. The interplay between national legacies and the new monetary and capital market regime is what “the battle of the systems”  is all about. But first some brief definitions.
Converge or diverge.
There are at least two stories which may be told about how national financial systems emerge: one points to convergence over time on a standard, and the other to continued divergence. Financial arrangements observedly start in response to differing situations, but over time convergence is said to occur through market competition and institutional mimicry. The way that the capital-allocation process is configured reflects the interests of protagonists, and affects national economic performance as well as international and financial relationships. This is done through the process of control over corporations and organisations. All financial systems are active intermediaries between political and social structures and relationships, and corporations or organisations operating in some form of market arrangement. Corporate strategy is understood here as the link between the external capital market, populated by shareholders and financial institutions, and the internal allocation of corporate resources. Convergence works through the market pressures on countries or corporations to adopt in a new standard the best practices observed in different situations. For corporations, it is the mix of European-type sensitivity to local conditions, together with Japanese national efficiency and US corporate capabilities to leverage the transfer of corporate know-how to international markets that make the post-1990 composite standard for global champions.
The divergent story holds that institutional arrangements start in response to differing situations, and carry on doing so. They are “path-dependent”, since their protagonists, even allowing for a changing composition over time, always have to make policy in an inherited situation. As institutionalist economists point out, how the markets are structured, what values are embedded in the prevailing rules and which organisations develop within the range of prevailing incentives, makes all the difference to outcomes.  Market structures have their own discrete histories, are permeated by the values which have been agreed or legislated on in particular political contexts, and yield different specialisations and efficiencies. The diversity of states is duplicated in the diversity of corporate strategies issuing from different local conditions as they permeate international or global markets. Given the nature of oligopolistic competition among few corporations in a particular branch and the variety of states in world markets, such differing conditions provide diverse incentives affecting the strategies of firms. Firms may go international, or even aspire to becoming citizens of the world. But their activities amount to the international operations of national firms.
In Europe, these two perspectives are less distinct than may appear in that both provide an explanation about where European capitalism is heading. In the convergent story, the emphasis is more on market emulation and institutional mimicry among member states and with the US, whereas the emphasis in the divergence story is more on EU aspirations to federal statehood overriding the individual states, to create a US of Europe; on EU efforts to legislate a European financial area, similar to prevailing conditions in the US; and on different national positions and structures. The US of Europe at the end of the EU federal line may or may not resemble the US of America, but whether it is different or similar it will assuredly differ from one or many of the existing national positions. These national positions and structures remain divergent, most evidently in the way that distinct national capitalisms relate to human capital: not just the detailed mechanisms of the labour market, but also to training, labour participation, or social security systems. Labour market institutions are prime differentiators among member states.
With the adoption of the single currency and capital market, which of the national systems will prevail in the EU, or which mix of them will emerge predominant is one, if not the most controversial issue of European and national politics. Opinion polls regularly indicate very low confidence in large corporate managements; express fears that globalization gives even more power to corporate managers; and record that the number one concern for EU publics is unemployment. Neo-liberal capitalism, particularly of the “Anglo-Saxon” variety, has next to no support. But that is the direction indicated by the processes of “globalization”, that are strengthened by monetary union, the EU’s most significant policy to date.
Hence, the next section starts by presenting the evolution of some central features of the Anglo-American shareholder and labour market system, because this is the dominant context within which the French state-centred financial and protective labour system, and the German bank-corporate-union consensual system is operating. The challenge to the supporters of a USE without the UK is that France and Germany will have to decide to champion politically what they have hitherto resisted: a completed market in financial services, and an EU Finance Ministry with redistributive capabilities. The consequence of a possible withdrawal of the UK from the EU may be stated simply: the EU is losing its most enthusiastic supra-nationalist.
The permanent context of repeated European efforts to fix currencies or to establish monetary union has been provided since the 1940s by the US as the world’s banker. Equally permanent has been London’s ambition to re-establish a pre-eminent position in international finance. Growing financial interdependence between New York and London provided the medium through which ever more volatile funds in dollars and other currencies were switched across the Atlantic, helping to undermine the post-war-system of stable exchange rates. With the rise in oil prices in 1973-74, surplus revenues from the Gulf states flowed into the London interbank markets, where banks borrowed from each other in dollars and lent on to developing countries, notably in Latin America. Funds available for recycling also found there way on to the London and New York markets from the trade surplus countries of continental Europe and Asia-Pacific. Bouyed by North Sea oil production, the UK resumed its role as an exporter of capital when controls were raised in 1979.
With privatization launched in the 1980s, public corporations in state hands fell from 12% gdp in 1979 to a fraction of 1% by 2010. In October 1986, the “Big Bang” in the London markets ended the separation of brokers and jobbers, and opened the markets to full participation by US or Japanese investment banks and European universal banks. The Table below shows an interesting pattern: in 1980, the differences in market capitalization of listed corporations was minimal. During prolonged boom through to 2001, market capitalization in the UK soared relative to France, and Germany; German investors, won over to the cause of shareholder capitalism in the late 1990s, beat a hasty retreat after the 2001 recession. Investors in the UK did much the same following the 2007 financial crash, leaving the UK and France with similar market capitalizations by 2015. As in the case of home ownership, share ownership by UK nationals fell rather than grow over the 40 odd years of market liberalization since 1979. The main owners of listed companies in the UK were North American(54%) and European (25%). 
Table Market Cap. of listed Companies as %gdp.
1980 1992 2000 2015
Germany 7.6 15.5 65.1 51
UK 6.4 81 150 92
France 7.7 23.2 105.7 86.3
Source World Development Indicators. ONS.
London ranks in 2017 No 1 in the global financial centres index. The dominant markets there are wholesale, servicing businesses from all over the world. Apart from traditional banking and insurance activities, London thrives as a prime centre for foreign exchange, futures, global insurance and bond trading. It is the financial capital for Europe, with 95% of EU equity turnover taking place in London. European institutions are prominent in equity trading, loan business and currency markets there.
Table: Top European financial Centres Source
London 1 782
Zurich 11 718
Luxemburg 18 708
Geneva 20 704
Frankfurt 23 698
Munich 27 682
Paris 29 679
Dublin 33 663
Amsterdam 40 647
Jersey 43 633
Oslo 44 632
Stockholm 46 630
Guernsey 47 629
Liechtenstein 48 628
Copenhagen 52 623
Source: Global Financial Centre Index 21.
London’s success in re-establishing its place in global finance has major geopolitical implications. London and New York form the heart of a vast Anglo-sphere market for financial services. London is massively dominant in the European zone, with Zurich and Geneva, as the other prime financial centres—a potential here for a UK-Swiss common interest, outside of the EU regulatory space. Nine out of the ten top financial places in the world are in the Anglo sphere. Two, Hong Kong and Singapore, may be seen as forming the overlap with mainland China. The Gulf states, Dubai and Abu Dhabi, rank as financial centres above Paris. Continental financial centres number six out of the top 30, two of these being Zurich and Geneva, so outside of the EU. So are Jersey, Guernsey, Liechtenstein. Both Dublin and Copenhagen have close ties to London. The prime continental financial centres are Frankfurt, Munich and Amsterdam. Paris is the sole Latin centre on the top list of financial centres in Europe. There is no meaningful Latin alliance for Paris to lead here, and Frankfurt is a rival.
Shareholder value provides the benchmark for UK corporations. As in the US, large, publicly-quoted and diversified corporations are run as managerial hierarchies, taking their sources of external financing from the capital market, which in turn oblige chief executive officers to pay paramount attention to the priorities of financial institutions. British corporations are obliged to earn high rates of return in order to retain the loyalty of investors on whom they depend for future capital. Maintaining the corporations’ share price, though advisedly not the target, nonetheless is crucial for fear that a reduced dividend may have serious consequences in terms of a lower share price and a predatory takeover. This is particularly the case in the UK, where defensive tactics by target managers is prohibited, whereas in the US, it is suggested, “the dynamics of judicial law-making in the US have benefited managers by making it relatively difficult for shareholders to influence the rules.”  Hostility is the exception not the rule, but in the UK, 0.85% of takeovers announced during the period 1990-2005 were hostile, compared with 0.57% in the US. Of these hostile bids, 43% were successful in the UK, as opposed to just 24% in the US.
A shareholder capital driven capitalism requires a flexible labour market. This was a central plank of the Thatcher reforms, which involved strengthening management powers to hire and fire, but also making it much easier for job seekers to find work. In this, UK governments since the 1980s have been very successful. The labour force has continued to expand in size; the time for job search has been kept down; and unemployment levels have been kept down, though in part disguised by an expanding welfare budget of chronically unemployed. The German government put through its own flexible labour market policies, the results of which can be seen in the Table below. What is visible on the graph also is that total employment levels in the Eurozone have stagnated or fallen, for France too but especially for Italy.
What these disparities suggest is that labour market policies are determined nationally, and that EU social policies, embedded in the Maastricht Treaty, with strong French and German government and trade union support, may be characterized as “virtue signaling”—as broad standards for social protection, the standards being interpretable nationally. The Thatcher governments did try to champion a market-friendly social policy for the EU as a whole, –a supra-national assumption if ever there was one- but it fell at the first hurdle. Continental labour market policies remained national, and very diverse.
Table: Total % of working age population 2005-2015 in work.
2006 2008 2011 2015
Germany 67.1 70.1 72.7 74
UK 71.6 71.5 69.3 72.3
Euroarea 64.5 65.8 64.1 64.5
France 63.7 64.9 63.9 63.8
Italy 58.3 58.6 56.8 56.7
It could be no surprise that the incoming Labour government agreed in 1997 to sign up to EU social policy, in order to differentiate from the preceding Tory governments. The virtue signaling also enabled Prime Minister Blair, at the Lisbon March 2000 summit, to berate his EU colleagues for holding to “the old social model”, rooted in the social legislation and welfare of the 1960s and 1970s. The targets for these remarks were European businesses, to whom Blair, and Brown in their different ways, sought to appeal as the champions of a utilitarian supra-nationalism for the EU —the full Heath programme, minus the Thatcher belief in a Europe des patries. But Blair’s positioning remained just that: he positioned the UK with Bush II against President Chirac and Chancellor Schroeder over the 2003 Iraq war; Brown scotched any hopes Blair may have had for the UK to ditch sterling for the Euro; and “Brussels” stood accused of seeking to turn the supra-national tables back on the UK, and push the UK in “direction of rigid labour markets”.  The motto? It takes more than one to do the supra-national tango.
Labour productivity: gdp per person working. 2010=1.
2006 2008 2011 2015 2018 forecast)
France 0.981 1.00 1.013 1.030 1.048
Germany 0.982 1.023 1.023 1.033 1.046
Italy 1.028 1.017 1.004 0.975 0.978
UK 0.995 1.012 1.010 1.037 1.060
Contrary to the suggestions from the economics literature on an optimal currency area, that labour markets in particular should be convergent, and highly flexible, the reality is that EU labour markets remain highly differentiated along national lines, as evidenced in the two Tables above of work force participation, and labour productivity. The differences, noticeable especially with regard to labour market participation, are the expression of distinct labour market structures, and behind that of political cultures.
The UK was no more successful in seeking to export its supra-national agenda on financial services. It found allies in London-based financial institutions, the Commission, the European Court of Justice jurisprudence, and-initially-the Dutch, Luxemburg and German governments. Together with the Commission and the Court of Justice, the UK government helped to elaborate a policy doctrine, which aimed “to secure acceptance of the equivalence of national legislations rather than their replacement by European law”. The major breakthrough came with the EU decision to move to freedom of capital movement, as one of the main conditions for the creation of the internal market, in that its achievement would assure “an optimal allocation of European savings.” The EU directive was adopted in June 1988, to be followed by directives on banking, insurance, and investment services.
Battle with Britain was engaged in May 1989 when Andrew Hugh-Smith, chairman of the London-based International Securities Exchange, proposed the creation of a single European equity market. There was an immediate closing of the ranks, especially between France and the Federal Republic. The tone of the response was captured by Alfred Herrhausen, speaker of the Deutsche Bank, in an address to the prominenz of German business in October 1989. Who would replace banks as custodians of German equity(via the voting and proxy powers they enjoyed)? “I do not have to illustrate to you what would happen if, on the basis of a clear decline in attendance, annual general meetings were to become dominated by active minorities. We have repeated experience of such minorities. God help us, is our economy should become their plaything”.(my translation)
In terms of legislative activity, continental member states in the late 1980s and early 1990s had little problem in fostering EU directives in financial services which held shareholder capitalism at bay, in favour of managerial prerogatives, which were formally justified in terms of their contribution to national welfare. EU directives on banking and insurance, for instance, allowed bank-insurance tie-ups, opening the way in EU legislation to recognise national financial conglomerates. These conglomerates could access global capital markets, but –it was hoped—their managements would maintain control over French or German corporations. Disputes spilled over into policies covering mergers and acquisitions, competition law and social policy.
As the EU legislative train slowed after 1993, it became apparent that key features of national financial systems remained in place. Over a decade later, Commissioner Bolkestein, in charge of the Financial Services Action Plan,(FSAP) launched at the Lisbon EU summit in March 2000, to open up financial service markets, called on member states to implement and enforce the rules—including the 39 detailed directives of the FSAP—which they had struggled to agree upon. But the slew of proposed market liberalization measures met strenuous opposition in Sweden, Belgium, Germany, and in France. Fears were expressed that liberalization would lower social protection, promote wage competition, and lower standards. The Directive was adopted in 2006, but was still languishing in 2016, when the UK voted to leave. Over 70% of the EU economy is in services, but the Commission reckons that only 5-10% of EU gdp is generated through cross border services.
The upshot is that France has its open European markets for farm products; Germany has open European markets for manufacturing products. So do the multi-nationals. But the service sector is riddled with discrimination, red tape, and all forms of local protection. UK services looked elsewhere on the world market to develop.
Shareholder driven capitalism provides incentives for corporations to invest in diverse territories so that share prices may be sustained, despite downturns in one or other market. Other reasons range from cultural or linguistic proximity, to the size of home and that of target country markets or the specific reasons for taking on the challenge of bedding down operations in a foreign jurisdiction. By 2015, UK based corporations had accumulated an estimated outward stock of $1.5 trillion, which when combined with the role of London in global finance arguably justifies the description of the UK as a cosmopolitan rather than just a purely national economy.
Table Outward FDI stock in billion dollars
1980 2000 2015
Europe 236 3,157 10,649
France 22.6 366 1,314
Germany 43.1 484 1,812
Italy 7.3 170 486
UK 80.4 923 1,538
The counterpart to outward investment is the UK as a target for inward direct investment, with an estimated stock in 2015 of $1,4 trillion. About half of this inward stock is accounted for by investors from other members of the EU.  The Table below gives comparative figures for Germany, France, Italy, and the UK.
Table Inward FDI stock in billion dollars
1980 2000 2015
Europe 200 2,466 8,782
France 22.6 184 772
Germany 36.6 471 1,121
Italy 8.8 127 335
UK 63 463 1,457
All European countries participated in this trend, as have most other countries running market economies of one type or another. The trends are visibly all in the same direction. As national economies opened up, national corporations went abroad, and worked their way to becoming global corporate citizens. It is worth noting though that the big four European countries have lost their initial shares of inward and outward stocks as a proportion of all European stocks: investors have looked at Europe as a semi-integrated market; value chains have bedded down. To that extent, national differences have been eroded. But it is also notable that the UK and Germany remain outstandingly in the lead as targets for and sources of foreign investment.
There are however significant differences: public policy in the UK has tended to look at UK territory as a platform for business-any business operating lawfully and regardless of ownership- and done so very successfully. In the World Bank’s Ease of Doing Business ranking, the UK in 2017 ranks 7; Germany 17, France 29 and Italy 50. The numerical disparity is just one further reflection of the reality that with the Euro, there has been no evident sign of convergence in such a crucial matter as making sure that businesses can prosper on territories purporting to live under a single jurisdiction, or at least under a potential single jurisdiction.
In Germany, as we shall argue shortly, the consistent focus of policy has been to preserve Standort Deutschland-Germany as a production base for manufacturing. In addition, German macroeconomic policy, except for an interlude in the late 1960s and early 1970s, has talked to itself in terms of Ordo-Liberalismus, a social market economy where the state sets the conditions in which businesses operate, and seeks to ensure that wealth is spread around, both geographically and across society. Great emphasis is placed on skills training, the sharing of tax revenues around the Länder or –as is well known- on price stability. In the UK, public policy is spoken of in Keynesian language, whereby the task of government is indeed to set favourable conditions for businesses, and to redistribute income. Additionally, though, it is to encourage consumption and imports for the benefit of consumers and job seekers.
The differences show up in many indicators, notably on savings, on government accounts and on the current account. Average savings as a % of gdp in Germany for the period 2001-2015 are 8.4%, and for the UK 1.2%. Under New Labour (1997-2010) the average current account deficit rose from a sustainable 1,2% gdp average in the early 1990s, to 5% gdp, and back to under 3% gdp with the Conservative-Lib Dem coalition of 2010-2015. While successive German governments worked hard at getting domestic expenditures under control,(they had exploded following reunification) encouraged savings, and kept wages moderate, New Labour plunged into deficit on government account as of 2002 (see Graph below) With low savings, the UK came to depend on foreign investors. New Labour saw finance proud; an overvalued foreign exchange rate; manufacturing in the UK fall from 20 to 10gdp; and inequalities between London and other parts of the UK rise.
Graph: General Government balances as %gdp.
Britain was particularly badly hit by the crisis of 2008. One of the first measures of the New Labour government had been to make the Bank of England independent, and also to relieve it of the task of regulating the housing market. The lightly regulated housing market duly boomed; banks competed to extend mortgages to people who could not afford it. The result, in the words of Carmen Reinhardt, and Kenneth Rogoff, is that the severity of the crisis in the UK, outstrips that of the 1930s, and is comparable to that of Greece and Italy. As the government nationalized one bank after another to prevent a run on the banks, total UK debt (household, corporate, government and financial institutions), reached 500% gdp(See Graph).This was Keynesianism with a vengeance. The efforts to reduce UK government deficits in the subsequent six years had serious political repercussions in the June 23 2016 referendum on Brexit, where people in northern England, where local economies are massively dependent on government spend, felt the pinch in their pockets.
 See Jonathan Story, Ingo Walter, Political Economy of Financial Integration in Europe: The Battle of the systems, The MIT Press, Cambridge, Massachusetts. 1997.
 See Michael Porter, “Capital Disadvantage: America’s failing Capital Investment System”, Harvard Business Review, September-October 1992.
 Christopher A.Bartlett, Sumantra Ghoshal, (1989) Managing Across Borders: The Transnational Solution, Boston, Harvard Business School Press,.
 Douglas C. North, et al (1991) Institutions, Institutional Change and Economic Performance, Political Economy of Institutions and Decisions, Cambridge University Press.p. 109
 C.K.Prahalad, Yves Doz, (1987).The Multinational Mission: Balancing Local Demands and Global Vision, New York, London, The Free Press,
 Yao Su Hu, “The International Operation of National Firms and Competitor Advantage”, Henley Working Papers, HWP 9405; Louis Pauly, L.W., Simon Reich,.”National Structures and Multinational Corporate Behaviour: Enduring Differences in the Age of Globalization”, International Organisation, vol.51.no.1.Winter, 1997.
 John Armour, David A. Skeel, Jr , Who writes the rules for hostile takeovers, and why? –The peculiar divergence of US and UK takeover regulation, Centre for Business Research, University Of Cambridge Working Paper No. 331 by Centre for Business Research University of Cambridge Judge Business .
 Chris Brewster,Paul Teague, European Community Social Policy: Its Impact on the UK,London, Institute of Personnel Management, 1989,pp.94-99. Résolution du Conseil du 22 décembre 1986 concernant un programme d’action pour la croissance de l’emploi(86/C 340/02).
 The Economist, “ Free to Bloom”, December 2, 2000.
 See Simon Bulmer, New Labour, New European Policy? Blair, Brown and Utilitarian Supranationalism, Parliamentary Affairs, , Vol. 61, 4. 2008. Pp.597-620.
 “EU ‘punishing’ UK over labour market”, Financial Times, November 30, 2004.
 Statement of Robin Hutton, director of banking, insurance and financial institutions in the Commission, quoted in Financial Times, December 5,1977.
 Financial Times, September 11, 1989.
 “”Es riecht nach Komplott und Konspiration”, Die Welt, October 27, 1989.
 According to Secretary General of the Banking Federation, Umberto Burani, the home country principle, –supposedly the centrepiece of the financial services programme– “has been introduced in no legislation.” “Interview avec Umberto Burani, Sécrétaire Generale de la Fédération Bancaire”, Europolitique No.1958, May 12, 1993.
 Mr Frits Bolkestein, Member of the European Commission, in charge of the Internal Market, Taxation and Customs Future Directions for European Financial Integration Opening remarks at the conferenceon European Financial Integration : Progress and Prospects Palais d’Egmont, Brussels, 22nd June 2004 Europa Press Releases. http://europa.eu.int/rapid/press
 CEP BREXIT ANALYSIS No. 3 The impact of Brexit on foreign investment in the UK, April 2016.