To reform the economy, Miliband should learn from Germany

The German economy, with its works councils, its regional banks and its vocational training system was much better equipped to deal with globalisation than we were.

It is two and half years since Labour’s general election defeat and there are two-and-a-half-years to go until we face the country again. It seems that we are still torn between a defence of the New Labour record and the articulation of something different and better. But the second option still requires an explanation of what went wrong when Labour was in power.

The central insight of Blue Labour is that there was a fundamental problem with the political economy of New Labour. The assumption that globalisation required transferrable skills and not vocational speciality, and that tradition and local practice could be superseded by rationalised administration and production, both turned out to be mistaken. The denuding of the country and its people of their institutional and productive inheritance by the higher rates of returns found in the City of London, and then the vulnerability of those gains to speculative loss, is the story we confronted in 2008. It turns out that the German political economy, with its federal republic and subsidiarity, with its works councils and co-determination between capital and labour, with its regional and local banks and vocational control of labour market entry - a democracy locational and vocational - was much better equipped to deal with globalisation than we were with our financial services and transferrable skills.

The financial crash of 2008 will turn out to be the most important event in the politics of the next twenty years. It was the result of a failure of many things but one of them is corporate governance, and most particularly, accountability. There is a growing realisation that the workforce has interests in the flourishing of the firm and an internal expertise in what is going on and how it is done. The complement of workforce to shareholder accountability strengthens the honesty and durability of the firm. It establishes a form of relational accountability.

A comparative analysis of corporate restructuring strategy in Germany and Britain tells the story clearly. The resilience of German industry was based upon two fundamental differences with Britain, both relating to corporate governance. The first was that each stakeholder interest - capital, labour and region - has access to the same information about the state of the firm and the sector and could negotiate a common response and bring people with them.

The second reason relates to the common good. The recognition of complexity within the corporation, the recognition that it is a body constituted by complex and mutually dependent functions and the representation of that in the corporate governance model meant that a common good of the firm could be negotiated. German industry works within a legal framework that is based upon the ‘equalisation of the burdens’. In this the burdens of decisions must be agreed to be balanced between owners and workers. This meant that there could not be the imposition of a strategy that was based upon the interests of only one party. The result is predictable: fewer increases in managerial pay, a far greater retention of workers within a framework of greater flexibility, and a shared concern for the renewal of competitiveness.

Corporate governance reform asks a lot of capital. It relinquishes its ultimate sovereignty and recognises the workforce, and a skilled and powerful workforce at that, as a necessary part of the generation of value. It recognises the inability to hold itself accountable and recognises its common interest with labour in disciplining its tendency to be too generous to itself. It also asks a lot of labour, and of the unions. The German and British trade unions took different pathways in 1945.

While the British model was faster out of the blocks in 1945, it turned out that the German model won the race. They retained far higher trade union membership, lower wage differentials, fewer job losses and a vocational status for labour within the economy. One of the consequences of corporate governance reform is the requirement for trade unions to seek the common good and that is a conversation that has barely begun.

Worker representation on remuneration committees is a step in the right direction but needs to be extended into wider reform of the governance of any firm above fifty employees. A third of the seats on the supervisory board should be elected by the workforce. The energy, skills and commitment of the workforce is of fundamental importance to the good of any company and how that feeds into decision making and product innovation is a matter of institutional design.

Corporate governance reform is not a stand-alone policy and requires new regional banking institutions and a renewal of vocational training and status. It is, however, the most fundamental for it restores a dignity to labour, a value that has been for too long neglected in our economy. The lesson of the German economy is that labour is a source of value and its representation on the corporate body of the firm means that its value can be reproduced. It is a fundamental part of the institutional ecology of a sustainable economy.  

Maurice Glasman is a Labour peer and director of the faith and citizenship programme at London Metropolitan University

A longer version of this piece appears in the new Fabian Society pamphlet The Great Rebalancing

The sun sets on Berlin's Reichstag building which houses Germany's lower house of parliament. Photograph: Getty Images.

Maurice Glasman is a Labour peer and director of the faith and citizenship programme at London Metropolitan University

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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation