The limits of Modell Deutschland and British social democracy

Attempting to emulate Germany’s economic model is not the cure-all that many British social democrats hope for

Scott Lavery
Scott Lavery

A long-standing current of thought within the Labour party has sought to rejuvenate British democracy and economic performance by looking to the ‘social market economies’ on the continent.

Under Ed Miliband, the Labour Party’s ideological flirtation with this European alternative has become increasingly explicit. In particular, the German economic model has come to provide the blueprint of how a revitalised British economy might look.

This isn’t just because the German economy is the most competitive in Europe, with a trade surplus of €158 billion in 2010 and a budget deficit of below 3%.

It’s also because Modell Deutschland provides a useful lens through which to critique the dysfunctional institutions that lie at the heart of Britain’s state and economy.

Take, for example, the domination of the UK economy by the financial services sector. ‘Light touch’ regulation in the UK encouraged irresponsible lending practices and the formation of massive asset-price bubbles prior to the crash of 2007-8. In Germany, however, tight regulation of domestic financial institutions has been a defining element of the country’s growth strategy for generations. Comparing the UK with Germany reveals that a rampant financial sector can be a barrier to, rather than precondition of, economic strength.

This relates to a second deep-seated weakness in the British economy: the decimation of the manufacturing base which took place in the 1980s and which has been locked-in to steady decline ever since. This contrasts with Germany, which has supported and nurtured its industrial sector, making it the third largest exporter in the world.

In order to support this indigenous growth dynamic, German financial institutions are geared towards facilitating regional investment, ensuring that long-term competitiveness – rather than short-term profitability – is a key determinant of their investment decisions. And these regional banks are profitable: the state-owned KfW Bankengruppe, for example, contributed €2.6 billion Euros in revenue to the German state in 2010. So much for the ‘inefficiencies’ of government intervention!

Modell Deutschland also holds a wider moral appeal to British social democrats. As David Marquand argued in his book ‘The Unprincipled Society’, at the heart of the Whitehall model there has been a long-standing commitment to “reductionist individualism” and a corresponding failure to develop a coherent account of the ‘public good’. This has encoded a ‘laissez-faire’ approach to industrial management within the British state, leaving business and labour to pursue their own narrowly-defined interests irrespective of the longer-term health of the national economy.

In contrast, a core principle of the German economic model has been that capital and labour should mediate their conflicts through corporatist institutions in a spirit of reciprocity and mutual advantage. The long-standing principle of co-determination, for example, has traditionally ensured that workers have some say in the management of the companies that they work for.

This notion of cooperation over conflict – of ‘pulling-together’ in the name of a greater national good – is a crucial component of Miliband’s One Nation vision. Calls for a British investment bank, a massive expansion in vocational training, and a return to ‘productive’ industrial investment over ‘predatory’ speculative practices are all inspired by the perceived comparative advantages of the social market model.

As I have argued elsewhere the challenges facing the implementation of Miliband’s One Nation project – not least the enduring power of the City of London and its political allies – are formidable.

However, even assuming that these barriers could be surmounted, it is important to recognise that the transition to Rhineland capitalism may not provide the golden road to prosperity and social justice that British social democrats might hope for.  Modell Deutschland itself embodies a series of internal contradictions and constraints that seriously limit its progressive potential.

Germany’s success in exporting manufactured goods rested fundamentally on a suppression of real wages for German workers. From 2000-2008, the German wage stagnated to such a degree that “income inequality and poverty grew faster in Germany than in any other OECD country.” Contrary to Miliband’s call to represent and protect Britain’s ‘Squeezed Middle’: a Germanic style export-led growth strategy could well rely on ramping-up the ‘squeeze’ further.

Germany’s model must also be placed within the wider context of the international political economy. Its impressive trade surplus wasn’t generated out of thin air. The upshot of the German trade surplus was debt, credit extension and deficit elsewhere: in particular within the so-called PIIGS countries of southern Europe. In this sense, the imbalances at the heart of the European economy cannot be understood simply as a case of Southern profligacy, but rather should be seen as crucial preconditions of Germany’s growth and relative economic success in the lead-up to the Eurozone crisis.

Modell Deutschland should not, and cannot, be understood outside of the international context within which it is embedded. The euro effectively ensures that German exports are more competitive than they would have been under the higher valued deutschmark, whilst undermining the competitive potential of other Eurozone members. The ‘PIIGS’ path to salvation, outlined by the EU troika, lies in German-mandated deflation and public sector retrenchment. These reforms can only exacerbate the social and economic crises spreading throughout Europe.

As Maurice Glasman wrote in a recent New Statesman piece, the German example demonstrates that there is an alternative to the crude market liberalism, which dominates the British political debate.

However, Modell Deutschland has succeeded not only because of the ‘virtuous’ nature of its domestic institutions, but also because of its capacity to exploit uneven development in an increasingly unstable global economy.

Turning a blind eye to this last fact may be a convenient rhetorical strategy in pursuing a progressive alternative to Coalition austerity in the UK. However, in so doing we run the risk of ignoring the wider limitations of Modell Deutschland – and indeed the limits of British social democracy as it is currently formulated.