Can Europe establish a Green Model of Capitalism?

13 May 2021

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

The financial and Covid-19 crises have illustrated the need for a green model of capitalism. The implementation of this new model will be vital for ensuring a sustainable future.

In little more than ten years, capitalism has been hit by two major global crises that have had catastrophic ramifications for the global economy and society, while inequality, according to Professor Thomas Piketty (2018), is projected to further increase in the future.

The first global crisis was a financial one, reflecting the limitations of a liberal model of capitalism and a loosely regulated financial system that enabled for endogenous deficiencies and greed to capture a system that could only survive if the taxpayers covered for the losses of private corporations. Then, not long before the dust of the financial crisis had started to settle, a second disastrous crisis took hold because of the COVID-19 pandemic, highlighting the need for strong, adequately funded, public health sectors. 

Though at first sight the ongoing health calamity seems to be the result of exogenous factors that could not have been foreseen and prevented, the stark reality is different. Environmental groups, such as Greenpeace, note that the pandemic is of ‘our own-making’ and highlight that it should serve as a wake-up call for humanity, emphasising that environmental degradation will only lead to more environmental crises

Along the same lines, Harvard scholar Aaron Bernstein noted that climate change has already made conditions more favourable to the spread of some infectious diseases and combating climate change can only be a one-way road. Considering these developments, one cannot but stress the shortcomings of the predominant market model of capitalism and its lukewarm stance on environmental degradation.

Nevertheless, proposing the complete abolition of capitalism is yet a far-fetched alternative. Even ‘radical’ politicians choose to focus their criticism on what they see as its key excesses and vouch to ‘humanise’ and redesign the system in a way that growth and prosperity no longer solely benefit the rich. However, is it valid to refer to more than one models of capitalism and pursue alternative models?

Aerial shot of the sea hitting the shore

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

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:

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.

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