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8 October 2021

Why Brexit Britain should embrace a European-style economic model

If Boris Johnson wants a high-wage, high-skill economy, he could start by learning from Germany.

By Stewart Wood

This week the Conservative Party conference took place on Planet Boris Johnson – a world in which collapsing energy firms, soaring gas prices, petrol and food shortages, and brutal cuts to Universal Credit are miraculously absent. In the frozen north of Planet Johnson lies Frostland, a small outpost run by the government’s “Chief Negotiator of Task Force Europe”, David Frost.

Frost’s ostensible job is to ensure a smooth transition to good post-Brexit relations between the UK and the EU 27. He pursues this task by indulging in repeated potshots against the EU. Mostly this consists of attacks on the Northern Irish protocol, of which he was the co-author (something Frost seems to have forgotten), alleging that negative consequences widely foreseen before it came into force (not least by Northern Irish unionists) are the result of bad faith actions by the EU. Surprisingly, things are not going that well.

But at conference Frost’s foray into altered reality entered a new dimension. Addressing the Tory party faithful, he succinctly captured the difference between the economic models of the UK and the EU: “We know that there is only one way to prosperity – free enterprise. We have not successfully rolled back the EU’s frontiers from our country with Brexit only to import a European economic model.”

Where to start with this one? Well, after you’d stopped wincing at imagery suggesting Brexit was akin to repelling an enemy invasion, you could note that nine countries inside the EU have higher GDP per capita than the UK. You could point out that in terms of output produced per hour, the UK’s productivity is over 10 per cent lower than Italy’s, over 22 per cent lower than France’s, and over 26 per cent lower than Germany’s. You could laugh at the absurd implication that there is no such thing as free enterprise in the EU. And once you’ve seen through the laughable caricature of the EU as a state-run federalist conspiracy in which freedom and prosperity are banished, you could smile at the bizarre notion that Europe has a single economic model. Greece? Just like Sweden. Portugal? A carbon copy of Denmark. Croatia? Spitting image of Belgium. Obviously.

But let’s put aside petty factual corrections and take the chief negotiator of Task Force Europe at his word. What have the EU’s major economies ever taught us about prosperity? Strangely enough, quite a lot. 

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Take Germany: with its reunification after 1990 the most successful political-economic project of my lifetime, it is the most successful exporting democracy in the world. How did Germany become so prosperous? Not through giving up on private enterprise, but by a commitment to organised private enterprise rather than Anglo-Saxon laissez-faire capitalism. The German economy relies on a comprehensive system of laws, regulations, partnerships and public institutions – all of which interconnect to produce an economic model famed for generating high-wage, high-skill, high-productivity work.

It may surprise Frost to know that underpinning this system is a thriving private sector economy. Germany never toyed with nationalisation on anywhere near the scale that the UK did. The spine of Germany’s economic success since 1945 has been the small and medium-sized enterprises of its Mittelstand. German industry is highly organised, and runs sector-wide education and training in collaboration with the formal education system (divided between academic and technical specialisms). The supply of highly skilled labour means that companies can invest in research and development considerably more than in the UK. This in turn connects to banks that provide longer-term capital and enables employer-union relationships to be collaborative and strategic. Yes, it has problems, and yes it is an evolving model. But if you want a gold standard for a high-productivity economy, you’d probably start with Germany. 

What do countries like Germany have to teach Frost and Johnson in their new-found embrace of a high-wage, high-skill, levelled-up vision for Britain’s future? That high wages come from economic systems that produce high productivity, not the other way around. That high-productivity, levelled-up economies are the result of the interplay between organised systems of industrial relations, research collaboration, education, bank-company relations and coordination between firms. That constant collaboration between unions, employers and government (national and regional) is an indispensable part of maintaining the incentives and behaviour that keep the “high everything” model working. 

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Of course the UK must find its own route to higher productivity, not mimic other countries whose comparative advantage and economic activity is so different. But what a successful economy like Germany shows most clearly is that overcoming the British disease of low productivity will be a long-term national mission that requires economic partners and political parties to work together in rethinking how our economy works. 

Instead, the route to higher productivity mapped out by Johnson so far has one bullet point: enforced wage increases in sectors with labour shortages caused by Brexit. Meanwhile, Britain stands on the edge of a period of painful public austerity, open conflict between business and government, and serial waves of energy price shocks. As plans go, it’s beyond clueless. Is this what we “rolled back the EU’s frontiers” to build? Ah well, at least Frostland is warming itself with the delusional thought: “Free at last, free at last, thank God almighty we are free at last.”

[See also: Boris Johnson is asking for trouble by promising a high-wage economy]