Can Europe establish a Green Model of Capitalism?

Adonis Pegasiou - Academic Director at the European Institute of Management and Finance (EIMF)

Hall and Soskice (2001) in their seminal study ‘Varieties of Capitalism’, while recognising the globalisation/liberalisation pressures on economic systems, propose two distinct varieties of capitalism: Liberal Market Economies (LMEs) and Coordinated Market Economies (CMEs). 

The former model is identified with neoliberal policies and the free functioning of the markets. Key examples include anglophone countries such as the US and the UK. The latter model is more linked to social democracy and is less reliant on market forces. A key CME example is Germany. 

Importantly, the two academics acknowledge the possibility of diversity within the CME model and, in fact, other alternative models of capitalism have been suggested in later years, focusing on a more intrusive role for the state in the economy (Mixed or State-Influenced Market Economies).

Given that different varieties of capitalism do exist (both at the theoretical and practical level) the overarching challenge for national governments is, based on country-specific characteristics, to identify and promote a model that achieves sustainable growth, stimulates innovation, and combats inequality. Moreover, it will be an even greater achievement if the EU succeeds in enabling such a progressive model of capitalism.

The withdrawal of the UK from the European Union allows the remaining EU countries to better promote sustainable growth, drawing from the CME traditions. This model should rest on the efficient coordination of the relevant economic actors; allow state agencies to carry out a supervisory and regulatory role in a transparent manner; and develop within the framework of the EU’s novel Green Deal that strives to make Europe the first climate-neutral continent while serving as a roadmap for future EU policies. Importantly, the Green Deal is considered a priority for the incumbent Commission President Ursula von der Leyen who has described it as “Europe’s man on the moon moment”.

Already a number of European countries share some key CME-related institutional characteristics whereby

• employers and employees engage in more long-term relationships that involve investment in vocational training and the acquiring of relevant skills  by employees

• firms depend on more ‘patient’ sources of capital

• companies in the same industry enjoy some degree of cooperation 

• employees have a strong presence through unions that share a sense of ownership and productively contribute to the firm’s growth

The challenge for the EU is through the Green Deal to further strengthen key institutional complementarities and develop a more sustainable modus operandi. Accordingly, key spheres of the economy will feed on each other and allow for overall growth and prosperity. 

For example:

• Vocational training – Emphasis needs to be placed on equipping labour with the relevant skills to transition into sustainable economic sectors where necessary (the Just Transition Mechanism could also assist in this)

• Inter-firm, inter-regional, inter-industry collaboration – There needs to be collaboration between different firms, cutting across industries and countries. For example, research funding needs to bridge the gap between industry and academia and, crucially, encourage cooperation between firms and universities from different industries and geographical locations with the common aim of promoting green growth. Horizon Europe (EU’s key funding programme for research and innovation), but also COSME (an important tool for small and medium-sized enterprises (SMEs), assist in this cause.

• Corporate Governance – Importantly, the primacy of shareholders cannot sideline a broader stakeholder approach. Corporations need to shift towards ‘green’ or ‘sustainable’ finance whereby investments aim for a more sustainable economy through the integration of Environmental, Social or Governance (ESG) criteria into financial services.

• Industrial relations – The determination of wages and working conditions requires the participation of the workforce (offering fair remuneration at all levels). Employees must overall be treated with dignity and respect.

• Regulatory/Supervisory Agencies – The rigid regulatory framework established post-financial crisis needs to be continuously adjusted so as to allow the relevant agencies to have a key role in overseeing the transition to green finance and sustainable growth.

Additionally, in any attempt to redefine capitalism, strong, accountable and transparent governance is vital. Harvard Professor Nadia Henderson (2020) rightly notes in her book ‘Reimagining Capitalism’ that rebuilding and strengthening democracy is vital for a sustainable system that serves the many and not the few. Strong independent institutions that check the executive and hinder the capturing of political elites by business interests are vital to this cause. For the EU specifically, tacking the democratic deficit also needs to be dealt with effectively.

Overall, the EU has already taken tangible steps towards redesigning its growth model. The regulations stemming from the Green Deal seek to cover many of the aspects mentioned above, but nothing can be taken for granted as the challenge is colossal. The coming years will be critical in determining how deep the EU and the member states are willing to go in investing money and resources for this strategic goal, while at the same time keeping the European civil society engaged through democratic reforms.

Already, the strengthening of the Greens/European Free Alliance in the European Parliament, where a majority of progressive parties identify with the vision of a green economy, and the emergence of the Greens as a serious contender in the run-up to September’s federal elections in Germany, show that people are rallying around this cause. This momentum needs to be further strengthened in order to secure that the EU succeeds as a pioneer in promoting Green Capitalism and sustainability.