Download State Intervention in times of the Global Economic Crisis

State intervention in times of the global economic crisis
Michael M. Franke
Ruhr-Universität Bochum,
[email protected]
Draft Paper. Please don't cite. Comments are very welcome.
Paper presented at the ECPR Graduate Conference 2012
Bremen, July 4-6, 2012
Abstract: The outbreak of the global financial and economic crisis in 2007 brought the
"active state" back into business. Whereas previous debates in Western countries were
dominated by questions about a "retreat of the state" and the triumph of neo-liberalism, we
have most recently faced a situation where governmental efforts have been undertaken to
intervene more directly in the economy. This is particularly the case in states which had
previously been reluctant to implement rescue packages for individual companies or to
undertake industrial political measures as a whole. Thus, it has become evident that "pure
institutional approaches" like Varieties of Capitalism, which focus exclusively on domestic
institutional structures, cannot adequately explain the at times tremendous state intervention
in economic sectors by Western governments. Nor can institutionalist approaches alone
explain the diverging strategies evidenced in reference to intervention by these governments.
The aim of this paper is to offer a new approach to explaining these anomalies. Theoretically,
the paper argues it is valuable to merge the institutionalist approach described above with the
"Societal Approach", which argues that material interests and societal ideas can explain
diverging approaches to state intervention. This claim will subsequently be tested empirically
in comparative case studies examining the divergence exhibited in reference to state
interventions by two Western countries – Germany and the United Kingdom – in two
economic sectors – the finance and automotive sectors – during the global economic crisis.
Content:
1. Introduction ..................................................................................................................................2
2. State intervention measures in the global economic and financial crisis......................................3
3. Theoretical Debate .......................................................................................................................4
3.1 Overview of the main theoretical approaches ............................................................................5
3.2 Societal Approach as theoretical framework: interests, ideas and institutions...........................7
4. Operationalization ......................................................................................................................10
5. Case Studies ...............................................................................................................................11
5.1 State intervention measures in the banking sector....................................................................11
5.2 State intervention measures in the automotive industry & electro mobility.............................15
6. Conclusion..................................................................................................................................20
7. Literature ....................................................................................................................................21
1. Introduction
The recent global economic and financial crisis implied a great socio-economic challenge for
the Western industrialized countries and other countries during the period of 2007-2010. This
crisis itself has been immediately caused by the bursting of the United States (U.S.) housing
bubble, which has been the result of an increasing overvaluation of real estate and of its
financing though the sub-prime market. This in turn created immense financial problems for
the two largest mortgage lenders in the U.S., Fannie Mae and Freddie Mac. In consequence,
both institutions had to declare insolvency, and survived only because of state assistance
given by the U.S. government. In the wake of the subprime crisis more banks had to cope
with financial difficulties, and from this point onwards the crisis did not remain restricted
mainly to the U.S. but evolved to a global financial and economic crisis. In particular, the
bankruptcy of the U.S. investment bank Lehman Brothers in September 2008 induced fears on
the international financial market of defaults in international lending, which ultimately led to
a complete standstill of the interbank market. This adverse development was, however, not
only restricted to the financial sector, but also had effects on companies in the real economy.
These were affected by both, the restrictive lending by financial institutions and the consumer
behavior of unsettled consumers. For example, in the automotive sector, all the Western car
producing countries were faced with declines in automotive production and sales during the
crisis. Essentially, the overall economic performance of the industrialized countries fell
significantly in 2009 – leading to comparisons with the world economic crisis of 1929 (see
Schäfer 2008: 808ff.; ILO 2010; Taylor 2010: 12ff.; Schirm 2011: 47).
The reactions of the Western states, however, diverged with respect to the economic policies
undertaken to solve the crisis, ranging from bail outs to economic stimulus packages. This
said, also altogether a sharp increase in state aid can be identified for 2008 compared to
2
previous years as can be seen on Table 1. Interestingly, this is even true for states, which have
been rather critical regarding state interventions. Furthermore, in prior crises, such as the
bursting of the dot-com bubble in 2001 no increases in aid flows were recorded.
Table 1: State Aid (total); Percentage of GDP1
EU 27
Germany
UK
2000
N/A
0,80
0,19
2001
N/A
0,92
0,21
2002
0,67
1,10
0,29
2003
0,62
0,78
0,26
2004
0,60
0,76
0,29
2005
0,56
0,75
0,24
2006
0,56
0,77
0,22
2007
0,53
0,62
0,32
Source: Eurostat
Thus, the research questions in this paper are (1) why did national governments change
their strategies of small state intervention measures and (2) why did the state
intervention measures diverge between the examined countries (Germany and the United
Kingdom, UK). This study is based on examples of the following sectors: the financial sector,
the automotive industry and electric mobility. It will be assumed that internal social factors
can explain state intervention measures in times of a crisis. In this case, the independent
variables are interests, ideas and institutions. These will be discussed in more detail later in
the text.
2. State intervention measures in the global economic and financial crisis
In this analysis, "state intervention measures" are defined as the complete state intervention
by the government in private economic activities of a country, which in this case, are crisisrelated. The term has to be distinguished from the adjacent terms "regulatory policy" and
"industrial policy", which are nonetheless equally important within the discussion about state
activity during the economic and financial crisis. While regulatory policy, however, refers to
the state’s task to define the economic conditions of a country, state intervention measures
have to be understood as interventions in private sector activities. The differentiation from the
term industrial policy is logically based on the finding that not every sector which received
assistance by the state during the latest crisis, has necessarily, in the strict sense, to be an
1
Definition of the term "State Aid" by Eurostat (2011): The numerator is the sum of all state aid granted to
specific sectors (agriculture, fisheries, manufacturing, coal, transport except railways and other services), State
aid given on an ad-hoc basis to individual companies e.g., for rescue and restructuring, and state aid for
horizontal objectives such as research and development, safeguarding the environment, energy saving, support
to small and medium-sized enterprises, employment creation, the promotion of training and aid for regional
development.
The
denominator
is
GDP,
gross
domestic
product.
URL:
http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tsier100.
3
industrial sector. Although, industrial policy was a commonly used term in the context of the
various rescue measures for the banking sector, in order to avoid confusion here the less
critical term "state intervention measure" will be used here.
Concerning this above-mentioned definition of state intervention measures, this term provides
some advantages compared to the term industrial policy, because state intervention measures
can cope with interventions in every economic sector. On the other side, even though
industrial policy is a commonly used term in conjunction with state interventions since 2007,
it is more restricted to one particular sector due to its connotation (see among others Haucap /
Coenen 2010 & The Economist 2010 a & b). Thus, it can be noted that intervention measures
– but not industrial policy measures in the conventional sense – can also be undertaken in the
banking sector, as was obvious in view of the bank bailouts during the recent global financial
and economic crisis. Based on Ikeda (2005: 21) intervention measures can thus be defined as
a "doctrine or system based on the limited use of political means [...] to address problems
identified with laissez-faire capitalism."2 This definition is complemented here by the
previously made distinction, that intervention measures always imply interventions in the
economic process, while they do not contribute to shape the economic order, unlike regulatory
policy. In a first attempt to identify a typology of possible intervention measures, here the
following points should be distinguished:
1. state intervention measures by rule setting,
2. state intervention measures by interventions in private economic activity, e.g. through
subsidies, protectionism, or state investments,
3. state intervention measures as coordination mechanisms.3
In the course of the following elaborations, the second (subsidies) and the third point
(coordination) will be relevant.
3. Theoretical Debate
As the introductory question already pointed out, this paper is located in the field of
comparative political economy (CPE). Through country and sector studies, the relationship
between the spheres of politics, economy and society will be comparatively analyzed, so as to
gain an understanding of the relevant causal relationships. However, CPE is by no means a
2
3
In the further course, however, Ikeda questions the effectiveness of state interventionism and concludes that it
is counterproductive for a country in general. He refers to the classical theorists of the Austrian school – in
particular Ludwig von Mises (1929), who criticized in the 1920s from a liberal view state interventions as
found in the Marxist theory.
In parts inspired by Brösse (1999: 127ff.)
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homogeneous theoretical building. On the contrary, it is marked by a variety of approaches
whose focuses can be both empirical-analytical and normative. Since this paper deals with the
questions of how internal societal factors can explain government actions, and since its focus
is empirical-analytical, approaches such as neo-gramscianism (normative) as well as neorealism and neo-mercantilism (state as a black box) will not be considered. Instead, the
theoretical basis will be provided by liberalism and institutionalism. These approaches are
presented in section 3.1. The explanation of the theoretical analytical framework, the relevant
definitions, and the justification of the independent variables as well as the derivation of the
research hypotheses will follow in section 3.2.
3.1 Overview of the main theoretical approaches
Liberalism emphasizes the importance of the national decision-making process for the
formation of economic policy preferences of national governments (see Frieden 1995,
Moravcsik 1997, Katzenstein 2005). According to Frieden, for instance, mainly the economic
preferences of national economic sectors are crucial for the policy that is made by national
governments. "The economic circumstances of each sector to lead sectoral policy preferences
with predictable implications for domestic bargaining over foreign economic policy" (Frieden
1995: 283). In this respect, its assumption overlaps with that of Moravcsik. Besides interests,
Moravcsik emphasizes additionally the importance of ideas and institutions. "Societal ideas,
interests, and institutions influence state behavior by shaping state preferences, that is, the
fundamental social purposes underlying the strategic calculations of governments"
(Moravcsik 1997: 513). Furthermore, Katzenstein highlights that the effects of the global
economy to the individual states are not visible without an understanding of the domestic
factors. "More generally, the effects of economic internationalization can not be understood
apart from the deeply rooted domestic institutions, ideas, and interests that shape the
preferences of actors, thus bending considerations of international economic efficiency to
distinctive national purposes" (Katzenstein 2005: 18-19 ). Because of the emphasis on the
internal social factors the liberal approach, thus, offers a good starting point for an analysis of
the question why national governments find diverging answers to the global financial and
economic crisis. However, it should be noted that liberalism focuses primarily on the
importance of interests and ideas and that the variable institutions remains widely
unconsidered in this approach. This study however assumes that institutional factors play
equally an important role in the decision-making process for state intervention measures.
5
In this regard, institutionalism provides some complementarities. The approach can be divided
into several kinds/types of institutionalism. All of them emphasize that institutional factors are
crucial in the intra-societal preference formation. However, they make different statements
regarding the origin, logic and action within institutions. Essentially, there are three types of
institutionalism to be distinguished: historical institutionalism, rational choice institutionalism
and sociological institutionalism (see Hall/Taylor 1996). The historical variant assumes that
institutions develop evolutionary. Emphasis is made on the importance of path dependency as
well as the unintended consequences of any decision taken for further development. These
developments ultimately decide about the influence of one particular institution, and they
affect actors’ decision-making (see Hall/Taylor 1996: 937ff.; Sanders 2006. 39ff.). The
rational choice institutionalism by contrast, does not assume historical paths that affect actors’
behavior, but that this action is shaped by strategic behavior. In this respect, the objective to
be achieved is to maximize the actors’ preferences. By the same rational logic the approach
explains further the emergence of institutions. These are therefore agreements of rational
actors who hope to benefit from their existence (see Hall/Taylor 1996: 944f.; Shepsle 2006:
23ff.). The sociological institutionalism, however, keeps some distance to these views. It
rather understands institutions as expressions of cultural and ideological realities within a
society. "Instead, they argue that many of these forms and procedures should be seen as
cultural-specific practices [...] and assimilated into organizations" (Hall/Taylor 1996: 946).
In direct reference to these three types of institutionalism Hall/Soskice (2001) developed the
Varieties of Capitalisms (VoC) approach, which assumes that there are two distinguishable
ideal types among the Western economies due to their institutional design. One of them is
called liberal market economies (LME), which are typically represented by the Anglo-Saxon
countries. The other ideal type is the coordinated market economies (CME) with Germany
being the main representative. The VoC was designed as a firm-centered approach, and thus,
it emphasizes the behavior of companies. Of critical importance are thereby institutional
complementarities. The approach always infers to institutions whenever these complement
each other and are thus of mutual benefit (see Hall/Gingerich 2004; Amable 2000).4
Complementarities in LMEs include in particular market coordination mechanisms. Nonmarket coordination mechanisms, in contrast, are the institutional complementarities within
CMEs – e.g. in the form of collective partnerships or informal corporate roundtables as in the
4
The example of German and Anglo-Saxon varieties of capitalisms shows that the historical determination of
the current institutional constellation can be traced back to the mid-19th century. Hobsbawm (1980: 266f.), for
example, points to the forms of corporate finance at this time. Already in this period, they can be understood as
an early form of the later VoC.
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times of the so-called Deutschland AG. These aspects show the linkage of The VoC with
historical institutionalism, because equally according to the VoC, institutions have developed
over time and decisions which were made in the past are possibly going to affect future
actions. Elements of rational choice institutionalism in turn can be found in the assumption of
rationality of the involved actors.5 These act goal-oriented and always search for the locations
where they can achieve their aims best (see Soskice 1996: 2; Hall/Soskice 2001. 8ff; Noble
2010: 2).
Since the VoC is a company-centered approach, the behavior of states or the influence of
governments by companies is of minor interest. In this study however, these aspects have to
be put in the foreground. It should however be highlighted that the state's role in the CMEs is
fundamentally different than in the LMEs. Whereas on the one hand in coordinated market
economies the state is perceived as an actor that regulates the economy and, where
appropriate, provides some support, on the other hand, in the liberal economies the belief of
the "lean state" prevails, with the state only holding a rule setting function. Its influence on
the market is limited to (low) taxation and only the most necessary social services (see Green/
Mostafa/Preston 2010: 24). State intervention is therefore not to be expected in LMEs,
whereas in CMEs the possibility of saving or stabilization of companies or industries as a
(last) means exists.
3.2 Societal Approach as theoretical framework: interests, ideas and institutions
Based on the considerations made in the last paragraph of this paper, these elaborations are
built on the assumptions of liberalism and the institutionalist view of the VoC. In the
following, therefore, a liberal-institutionalist approach will be developed, which emphasizes
the high explanatory value of the explanatory variables, social interests, ideas and institutions.
These variables are supposed to explain the dependent variable, which is here defined as state
intervention measures. The approach refers to the societal approach of Schirm (2011; 2009),
which in turn is based on the liberal approach of Moravcsik, and to some extent the VoC. In
contrast to Moravcsik, this approach is to a much greater extent oriented on an empirical
verifiability. At its core, Schirm defines interests and ideas as independent variables to be
tested, whereby the definition of the variable ideas also includes an institutional aspect.
Interests are defined as "material economic considerations of domestic groups which can alter
rapidly according to changing circumstances understood as new benefits and costs induced by
5
In the following, rationality is always understood as "bounded rationality", as in research there is large
consensus that no such thing as complete rationality can appear in social relationships – neither for emotional
reasons, nor because of lack of information (see Jones 1999).
7
globalization and (new) global governance" (Schirm, 2009: 504). This assumption assumes
that economic actors adjust their preferences in the context of changing circumstances like the
economic crisis, and that they adjust to the new requirements. While this definition reveals the
similarities with the liberal approach (see above), the definition of the variable ideas also
points on thoughts from the institutionalist or VoC literature: "Ideas relevant for formulating
preferences on global economic governance are defined here as path-dependent and valuebased collective expectations on how politics should govern the market. Ideas can express
themselves in societal attitudes and, in institutionalised form in the political culture and
system of a country"(Schirm, 2009: 504). This is assumed to be a relatively broad
understanding of ideas, which includes institutions into the definition as a kind of "solidified
ideas". However, for the theoretical framework as it is used here, ideas and institutions have
to be separated again.
Interests
According to Schirm interests shall be understood as material considerations, in the sense of
vested interests of particular groups. It will therefore be assumed that interests have a high
explanatory value, when single and cohesive firms or economic sectors are affected. Their
representatives express their concerns and demands to the respective national government.
The formulation of these interests may change quickly, depending on the situation and
circumstances. For example, an economic crisis might lead the affected companies and
industries to call for public support, while in "normal" times (when a crisis is absent) an
economic interference of the state would be criticized. Whether and how the government
follows the sectoral interests is assumed to be determined according to the economic
performance of the sector, its importance for the labor market and its relevance for other
economic sectors. If these factors are given for the affected sector, it is expected that the
government takes the sectoral interests into consideration. This is, because not only the
interest groups must be seen as rational actors, but also those politicians and political parties
involved in government, because of their individual aim to remain in office and to win the
next election (see Downs 1968: 34; Schirm 2011: 51). The government’s decision not to
follow particular interests could thus be mainly due to a lack of homogeneity of the people
who represent the interests or to a minor economic importance of the sector. Finally, the
following hypothesis can be formulated:
8
Working hypothesis 1: Interests
If an economic sector is important for the labor market, contributes a significant share
to national value added and/or has cross-sectoral relevance, then state intervention
measures can be explained by national material interests.
Ideas
Unlike interests, ideas are not exclusive to one single group but rooted in the society as a
whole. They are not changeable as fast as interests and are path-dependent. Societal ideas
include, among other things, social norms and values with, but also the opinions about what
are "reasonable" or "inappropriate" institutions – but not the institutions themselves. Because
of the path-dependent character, ideas change slowly over time. They might only change fast
when an external shock occurs. The previous thoughts can be summarized in the following
second hypothesis:
Working hypothesis 2: Ideas
If an economic sector is not important for the labor market, does not contribute a
significant share to national value added and/or has not cross-sectoral relevance, then
state intervention measures can be explained with societal ideas.
Institutions
Here, it is assumed that the origin of institutions can differ from case to case. Thus, it could be
possible that some institutions are "solidified ideas" according to Schirm (2009).
Otherwise institutions can also be rational agreements according to rational choice
institutionalism. The essential matter for the following analysis is the definition of institutions
as formal or informal ruling systems, whose existence is given regardless of their origin.
Furthermore, they restrict actors in their decision-making process to a certain extent – whether
rational or emotional – but it does not completely determine its actions, as is assumed in the
VoC. On this basis, the third hypothesis is the following:
Working hypothesis 3: Institutions
If functional market-based or non-market forms of coordination exist, then national
governments will use them and do not issue new rules or modification of the economy.
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4. Operationalization
The time frame of this paper includes the time since the outbreak of financial crisis in late
2007 until the end of 2010. The analyzed countries are Germany and UK, the analyzed
sectors, the financial industry, the automotive sector and the sector of electric mobility. The
method applied is discourse analysis. For this, the considered empirical material includes
political statements – i.e. speeches, interviews – by heads of government or relevant ministers.
It is crucial here, to answer the question of whether the justification for political decisions is
rather close to the influence of material interests or social ideas and to what extent institutions
restrict their decision-making. It is important to note that statements made by politicians do
not necessarily have to correspond to the actual intentions behind the actions. According to
Schirm, however, this dilemma can be avoided. "However, public statements provide
evidence for what the government considers to be acceptable to the voters and, therefore,
legitimate" (Schirm 2011: 51). To illustrate the interest variable, the respective sector interests
will be analyzed, based on statements made by representatives of business associations or by
other key industry representatives. The assumption here is that, even if a politicians' intention
to choose a certain policy measure is different from the "official" reason, it is made under
consideration of the interest groups' claims.
The operationalization of the variable social ideas includes the position of the population,
which can be worked out by opinion polls. This paper will take into account such surveys that
explore the relationship between state and market – here: the European Value Study (EVS).
Here, the two countries compared show some differences according to the EVS. The
divergence of the idea of "individual vs. governmental accountability in provision" is still
relatively low. In the UK, 78.2 percent of the population are in favor or are more in favor of
the individual's responsibility, while this is 71.3 percent in Germany. Within the idea
"liberalization of companies vs. state control over business" divergence is far bigger. While in
the UK 71.3 percent are in favor or are more in favor of further liberalization, the percentage
in Germany is much lower with only 52.7 percent. Thus, state intervention in the private
sector – so the revered argument – is far more accepted in Germany than in the UK.6
According to hypothesis 2, these preferences over ideas should also appear in the empirical
case studies.
The operationalization of the variable institutions refers to assumptions of the VoC approach,
which says that the UK and Germany each have different institutional constellations, as has
already been described above. Following working hypothesis 3, the empirical part will
6
The data is provided by the EVS under www.europeanvaluesstudy.eu/evs/data-and-downloads.
10
analyze, which of these institutions influenced the decision-making process on state
intervention measures.
5. Case Studies
5.1 State intervention measures in the banking sector
United Kingdom
The financial crisis began in the UK at an early stage compared to Germany and is associated
with the name Northern Rock, a bank, which had been hit by the American subprime-crisis at
the end of 2007. A consequence of this was that the investors panicked, and massive capital
withdrawals were made, the biggest in the country for over 100 years. This further
exacerbated the situation. After several failed attempts to rescue the bank by other means,
such as an acquisition by an investor, the government decided to nationalize the Bank on
February 17, 2008, marking a unique decision in recent UK history. Furthermore, after the
massive problems at Northern Rock, the financial market produced further imbalances. The
UK government responded with the launch of a bank rescue package worth 500 billion
pounds on 8 October 2008 to avoid systemic risks. A total of eight banks received financial
support from the British state in 2008: Abbey, Barclays, HBOS, HSBC Bank plc., Lloyds
TSB, Nationwide Building Society, Royal Bank of Scotland und Standard Chartered. The
intention of this financial aid was, in short, to provide sufficient short-term liquidity and new
capital to domestic banks in order to enable them to restructure their finances and continue to
support the real economy. Besides, it should have been made sure that the banking system had
the funds necessary to maintain lending in the medium term. But how can these policy
decisions be explained?
First, the role of the UK financial industry for the country's whole economy has to be
considered. More than 500,000 people are employed in a credit institution and the whole
financial sector amounted to a share of over nine percent of the gross value added (GVA) in
2008, while the share in 2001 was only about 5.3 percent. Thus, the UK's economics &
finance ministry points out that one might thus surely recognise the UK's financial sector as a
highly-important contributor to the country's welfare, but it would not be right to consider it
as "overgrown" (see HM Treasury 2009: 19). Anyway, the most interesting question should
rather be what relevance an industry for the economic system has, not as a separate but rather
as an integrative part of the economy.
In this regard, the UK banks are crucial for the supply of finance to the industrial sectors of
the real economy, in which the country – in accordance with the VoC – has comparative
11
advantages such as biotech, IT, pharmaceuticals or aerospace (see Soskice 1996). The
engagement of UK banks in these sectors is also due to the fact that the expectations of the
financiers generally amount to rates of return of between 30 and 40 percent, which by nature
is best realised in fast-growing industries (see Mayer 2002: 317). The globally-organized UK
banking industry therefore provides access to the international capital market. In particular,
the placing of short-term credits is well developed in the UK financial markets. This is, not
least, the result of the principal of short-term profit-maximization that LMEs follow according
to the VoC assumptions. Another resource of finance is private equity, which is traditionally
strong in the UK, particularly when compared to Germany (see Vitols 1995: 19; Lerner 2009:
40; HM Treasury 2009: 21).7,8 Altogether, there are strong economic reasons for the
government to keep the country's financial industry strong. As The Economist (2009) states:
"Understandably, the government is scared to risk further erosion of London’s position as a
global financial centre."
Then Prime Minister Gordon Brown explained the measures undertaken with the exceptional
situation, and states that exceptional times need exceptional actions: "We needed a
fundamental restructuring of the banks, in some cases the nationalisation of banks, to be able
to deal with the scale and the fundamental problem that the banking system had. […] We
decided that a normal injection of resources into the economy, letting the automatic stabilisers
work, would be quite insufficient to deal with the scale of the loss of output that was taking
place around the world" (Brown, speech hold on October 12, 2009). The interests behind
these state intervention measures, however, can be illustrated by a statement of the then
Minister for Trade, Investment and Business, Evan Mervyn Davies: "Look at the London
Metals exchange - it’s seen roughly a 22 percent increase in volume last year. It’s right at the
heart of metals trading across the world. […] Look at the surplus from the financial services
industry in the UK economy last year, which was £43bn. Look at the London stock Exchange
7
8
In this regard it must be mentioned the so-called Heuschreckendebatte, initiated by the then Vice-Chancellor
Franz Müntefering in 2004. This debate about a supposed damage for the domestic economy, triggered by
private equity firms, illustrates the German caveats against this form of finance very well. "Franz
Müntefering deserves credit for having made a reasonable criticism of capitalism respectable again.
Compared to the previously prevailing key concepts "free market" and "strengthening of the private market
forces", which transfigure reality, now the real driving forces of capitalist private sector finally are to be
moved to the centre" (Hickel 2005: 647).
The British Venture Capital Association (BVCA) provides a definition for private equity and explains its
relevance for (non-financial) companies. "Private equity is finance provided in return for an equity stake in
potentially high growth companies. However, instead of going to the stock market and selling shares to raise
capital, private equity firms raise funds from sources such as pension funds, endowments, and high net worth
individuals. Private equity firms use these funds, along with borrowed money, to invest in underperforming
companies that have the potential for high growth" (To find under the URL
http://www.bvca.co.uk/assets/features/show/FAQs).
12
and the respect it enjoys across the world. And the way people still see the centre for capitalraising as London, whether it be equity or debt" (Davies, speech hold on May 28, 2009).
These statements deliver some plausible arguments to suggest that the state intervention
measures towards the financial markets can be best explained by material interests. The
probably most important intention was to maintain the worldwide position of the UK financial
industry.
Germany
In October 2008 the crisis also spread to the German financial system, with the Hypo Real
Estate (HRE) as the first victim. As a reaction, the German government took the UK
stabilizing policy as a model, and decided to launch enormous governmental rescue packages,
comprising comprehensive state guarantees and capital measures available for the financial
industry, with the aim of avoiding a collapse of the whole economy. The German Bundestag
adopted a rescue package to stabilize financial markets on October 17, 2008 in an accelerated
procedure.
The
so
called
Financial
Market
Stabilization
Act
(Finanzmarktstabilisierungsgesetz, FMStG) pursued fundamentally similar goals to its British
counterpart, as ensuring the liquidity of financial institutions and preventing a credit crunch
for non-financial institutions. Furthermore, under this act, the Financial Market Stabilization
Fund (Sonderfonds Finanzmarktstabilisierung, SoFFin) was created. It comprises a total
volume of 480 billion euros, of which 400 billion euros are warranties to revive the interbank
market, and up to 80 billion euros available to the fund, and enables the state to participate at
financial institutions. In accordance with the FMStG, it aims "to overcome the current
liquidity shortages and to improve the capital base of financial firms based in Germany"
(SoFFin 2008: 1). In the context of the beginning of the crisis, a statement made by Josef
Ackermann, CEO of the Deutsche Bank, is interesting. "I do not longer believe in the selfhealing forces of the markets. Banks alone can not save the situation. There are only a few
strong banks in the world. There is no point to take the risks of others and run into danger
himself" (Ackermann, cited in Focus Online, March 13, 2008).
Unlike in the UK, the German discourse regarding the financial sector is not about its size.
The German debate focussed more on the regulation issue, whereby a broad consensus can be
seen that more regulation is needed, on the national as well as on the international level (see
Spiegel Online, 23.01.2010). The struggle of the German banking sector and the following
rescue packages led to the question of to what extent these programmes were justified. This
was particularly important in the context that state-owned and regional banks participated in
13
the trade with risky funded and unfunded credit derivatives, which were irresponsible,
inefficient and illegitimate actions, and ignored their public mission to provide the SME's
with liquidity (see Schirm 2009: 313). Huffschmid made an admittedly quite drastic comment
regarding the rescue packages for the banks, which according to him was initiated by them.
He called it "extortionate kidnapping of the whole society, which should lead to anxiety, a
feeling that there was no alternative and – ultimately – to obedience" (Huffschmid 2008: 8),
and which was according to him largely successful against the government.
Leaving aside these statements about the classification of the influence of the banks, the
rescue packages fit into the ideational constitution of German society. Despite the fact that the
individual bankers were made responsible for the crisis, the wide-spread idea of the
government as the fire service in critical situations was applied to the crisis. Just as Simons
(1996) stated, the German government has intervened in the economy quite often. The fact
that it has chosen just that way, with the nationalization of banks as ultima ratio, made
possible by the Finanzmarktstabilisierungsergänzungsgesetz (law to supplement the law
about financial market stabilization) which resulted in the "squeeze out" of the HRE, can be
best illustrated by providing an overview of the position of the German banking system within
the economy.
The German financial sector contributed around 92 billion euros to the gross value added in
2007 and about 4 percent to the GDP. The whole sector employs about 1.2 million people in
total, making it to one of the largest employers for highly skilled and highly-trained labour
(see Die Bundesregierung 2008). These figures already show that the German financial sector
– as a percentage of GDP – is much smaller than it is in the UK. Nonetheless, there is a strong
relationship between the German financial sector and the rest of the economy and in particular
for the manufacturing sector will not be doubted. This is particularly true for small and
medium enterprises (SMEs) and their Hausbanken – though only about 39 percent depend on
one single bank (see Busch 2005: 133; Bluhm & Martens 2009: 589/600). Though, the role of
banks changed over the last years, its importance for the real economy is still given. To be
more specific: While in the UK, the Bank of England spoke publicly about a credit crunch
that was hampering the UK economy, the German Bundesbank according to its special
surveys on banks' lending to domestic enterprises9 stated on January 2010 that there is "little
evidence of an imminent large-scale credit crunch in the credit business with domestic
enterprises" and six months later that there was "no evidence of an impending credit crunch"
9
To find under the URL http://www.bundesbank.de/volkswirtschaft/vo_veroeffentlichungen.en.php (reserach
done on September 29, 2010).
14
(Deutsche Bundesbank 2010a; Deutsche Bundesbank 2010b).10 Having said that, the state
intervention measures can be understood as interest driven.
That Germany did not undertake such extensive measures like the UK, can be best explained
by the fact that the German government tried to make their interventions as market friendly as
possible. "Above all, to address this crisis and prevent a recurrence, a proper regulatory
framework be created, which however, may not kill all market forces and severely restrict
them" (Merkel, speech hold on June 2, 2009). Another important factor was the question of
the systemically relevance of the financial industry. Regarding this the then Minister of
Finance, Peer Steinbrück, said.: "The term 'systemically relevant' is true only for the banking
sector, because this is the arterial system that supplies the economy with capital. In addition,
the banks can trigger a domino effect, which does not occur in the real economy in such a
manner" (Interview in Süddeutsche Zeitung, May 30, 2009).
Summing up, it can be said that the influence of the material interests to keep the banking
sector running can best explain the measures undertaken by the German government. It may
be resumed that the instruments and institutional arrangements provided by the CME did not
make it necessary to adjust interests or ideas in spite of the economic crisis.
5.2 State intervention measures in the automotive industry & electro mobility
United Kingdom
The British car manufacturing industry has undergone rapid changes within the past thirty
years. The sector was predominantly characterized by little continuity and asset stripping,
accompanied by the closure of assembly plants, which was larger in number than in the rest of
Europe. The Conservative governments in the 1980s and early 1990s as well as the following
Labour governments put their main focus on the issues of productivity growth and
competitiveness. The most important measure of this policy was privatization, and the
governments allowed the market forces to downsize manufacturing, which resulted in a
general de-industrialization of the country, because the economic future was assumed to be
the service sector (see Bailey & Kobayashi 2006; Reitan 2003: 56; Crafts 2007: 274). The
British carmakers were most affected by this policy, because neither their competitiveness nor
their productivity levels were able to deal with these new requirements.
The government simultaneously focused its policies on attracting foreign direct investments.
The effect on the British automotive industry was that the carmakers were taken over by
10
In sum, short-term and long-term loans from banks to non-financial institutes and private persons rose about
5.5 percent from in 2007 (2,470 billion Euros) to 2009 (2,606 billion Euros) (Deutsche Bundesbank 2010c).
15
companies from abroad. Today, there are no longer any independent British carmakers.11
Instead, the UK has become more and more attractive for green-field investments. It started
with the Japanese company Nissan in 1996, followed by the Japanese producers Honda and
Toyota and their German competitor BMW. The crucial reason for these investments was,
according to Holweg (2009), the "labour flexibility that makes capacity adjustments in a
dynamic market easier, which has given the UK a distinctive advantage over its European
peers". A main positive effect of the inflow of fresh capital, which came from the inward
investments, was that the productivity growth of the UK manufacturing improved (see
Foreman-Peck & Hannah 1999: 49-50). This was true also for the car producing industry.
Today, the automotive industry in the UK is much smaller but also more productive than
thirty years ago and it is also characterized "by significant foreign direct investment and high
exports, equivalent to 13 percent of the UK’s exports of goods" (BIS 2010). It contributes
currently about 10 billion pounds to the UK economy, what is about one percent of the annual
value added (see UK Parliament 2010: 4). Nonetheless, the importance of the automotive
industry for the UK's economy decreased significantly within the last 30 years. Most recently,
this development even strengthened. While the downward movement in sales was already
notably high in 2008, the production slumped majorly one year later. These negative
developments are particularly important for the region of the West Midlands, where the
automotive industry is very developed with its assembly plants around Birmingham.
The Labour government reacted with the adoption of a number of sector-specific measures for
the car industry, with the aim of stabilizing the regional economy as well as the economic
sector. First to mention is the Automotive Assistance Programme, which is a 2.3 billion
pounds package of loans and loan guarantees. It consists of Government guarantees worth
around one billion pounds as well as 1.3 billion pounds coming from the European Investment
Bank. Its aim is the provision of access to finance for healthy companies with turnovers above
25 million pounds in the UK’s automotive and automotive supply sectors to encourage
investment in new green-technology development projects. Furthermore, a car scrapping
scheme was launched, offering consumers a discount of 2,000 Pounds under certain
conditions when they bought a new vehicle (see BIS 2009). Prime Minister Gordon Brown
justified the intervention in the economy with such an extensive package of measures for the
11
The former British flagship car producer, Rover, is owned by the Shanghai Automotive Industrial Corporation
(SAIC), a Chinese group. Trademark rights and most production plants of the other British brands like Mini,
Jaguar or Rolls Royce's car division are hold by foreign companies, too (Holweg 2009). Especially the Rover
case has been the object of many scientific investigations, just to mention the study of Holweg & Oliver
(2005) who found out that the decline of the company wasn't due to a particular wrong decision at a certain
time or the fault of one specific actor. Instead, as their analysis demonstrated "Rover's problems were long
term in nature." (Holweg & Oliver 2005: 22; compare also Bailey & Kobayashi 2006).
16
UK economy in a guest comment piece, written for the "Birmingham Post Online". He
explained: "We will not repeat the mistakes of the past, when whole industries, vital to the
strength of our country, were left to fend for themselves, and whole communities were
abandoned. I will not allow that to happen. Instead, we want not just to help the car industry
through the recession, but also create the basis on which it can transform itself into an
industry fit for the future, ready to prosper and grow when the recovery comes" (Brown
2009). This statement illustrates the government's willingness to leave the path of nonintervention, which it had taken up to now.12 Due to the crisis a "traditional" industry such as
automotive industry gained more importance, what is well illustrated by the previous
statements. The government's decision to intervene in this sector, however, can probably, best
be explained by ideas: namely the perception of the UK as an industrialized country with a
strong industrial base. In this context Peter Mandelson can be understood, who spoke about
the need for "new industrial activism".13
This new approach has been continued by the new Conservative government, which came to
power in May 2010. In his first official speech as the new Prime Minister, David Cameron
focussed heavily on the UK economy, stating that it is heavily reliant on just a few industries
and a few regions. "We are determined that should change. That doesn’t mean picking
winners but it does mean supporting growing industries – aerospace, pharmaceuticals, highvalue manufacturing, hi-tech engineering, low carbon technology" (Cameron 2010). Thus,
also the Tories decided to leave the path of non-interventionism. Regarding the automotive
industry, this change across party lines can be illustrated best by the support for the market of
electric vehicles (EVs). It includes a consumer incentive up to 5,000 pounds for the purchase
of an energy-efficient vehicle and a total funding of 43 million pounds for the scheme. This
subsidy has to be seen as part of a general strategy to make the UK a world leader in the lowcarbon economy, and to reduce tailpipe emissions by 40 percent by the year 2020 (see UK
Parliament 2010: 2). It is a result of an inter-ministerial study came to the conclusion that only
"by redirecting toward a low carbon foundation and creating a stable investment framework to
encourage long-term investment in the UK can there be a viable future for the [automotive]
12
13
Just to mention "The government's Manufacturing Strategy" of 2002, where the Labour government pointed
predominantly to horizontal measures like training and upgrading measures, improvements of the
infrastructure or creation of incentives for foreign direct investments (DTI 2002).
He explained that the state should search pragmatically for industries where it had a comparative advantage,
with the aim of assessing how horizontal policy can secure a maximal benefit across all sectors and reinforce
the strengths of the UK economy (see Mandelson, "The RSA Lecture", December 17, 2008).
17
sector" (DfT & BERR & DIUS 2009: 6).14 Despite several critical statements regarding the
general need of state intervention, the new British government neither questioned this
subsidy.15
Interestingly enough, the automotive industry (as a relatively small sector) seems to be
playing an important role for the UK economic policy during the crisis. Politicians from all
parts of the political spectrum emphasised the necessity of giving the producing industry a
greater prominence in the future. It is interesting that those efforts are made in an industry that
faced harsh declines in the past. But its new opportunities (i.e. low-carbon-technology,
attraction of FDI) and the (possible) newly defined and more active role of the government as
a result of the crisis offer plausible explanations for this.
Germany
Compared to the UK, the German industry as a whole and the automobile industry in
particular still have paramount importance for the country's economy.16 Vitols describes this
success of the German automobile industry in global competition as a result of the great
expansion in the production of traditionally low-volume premium carmakers such as
Mercedes-Benz and BMW by increasing sales at the high end of the market (cf. Vitols 2006:
399). But not only the big carmakers contribute to the success of the German automobile
manufacturing base, since without their up- and downstream industries, the special status of
the German automobile industry would be unthinkable. Here, it is worth noting that the
automotive suppliers' contribution to the domestic value added stands at about 80 percent in
the powertrain segment and at 90 percent in the electronics segment (cf. Bächstädt & Fröhlich
2010: 6). Here one can already see a big difference between the German automobile industry
and its British counterpart. Germany, on the one hand, has a large automobile sector that is of
significant importance for the country's exports and social welfare, while in the UK the
automotive industry is of less total importance for the countries economic performance
14
15
16
Compare also Peter Mandelson's statement: "We are committed to making the UK a world leader in lowcarbon transport. We're investing in the skills, research and infrastructure that will attract private investors
and help the UK lead the market" (The Independent, December 15, 2009).
"Exceptionally, the Government has agreed the announcement of this incentive ahead of the completion of the
spending review to support the early market for ultra-low carbon cars. The Government remains committed
to reducing the UK’s budget deficit, but understands the need for certainty for investors […]" (DfT, press
release, 28 July, 2010).
The German automotive sector's annual turnover was about 263 billion Euros in 2009 (- 21 per cent to 2008)
and the share in the total exports of manufactured goods amounts to about 20.2 percent. The export quota of
domestically-produced cars reached 74.4 percent in 2008 and 69.0 percent in 2009 – when the crisis hit the
carmakers.
Data
from
BMWi
2010:
Eckdaten
der
deutschen
Automobilindustrie
http://www.bmwi.de/BMWi/Navigation/Wirtschaft/branchenfokus,did=195940.html.
18
compared to the service sector. In the UK, automotive production remains a niche sector of
mainly regional importance (West Midlands).
In Germany the automotive sector is considered as one of Germany's key industries, which
makes it easy to imagine why the slump in production and sales, the German car market had
to cope with during the crisis, were viewed with concern by politics, business and the general
public. Within this context, the car scrapping scheme (Abwrackprämie or Umweltprämie)
must be taken into account. This instrument had the aim of avoiding a slump in car sales and
car production as well as promoting more energy-efficient cars. Germany was one of the first
countries to introduce such a scheme, and its car-subsidy programme was also the largest in
scale. The incentive was worth 2,500 euros and was paid when an old vehicle was traded in
for a new one.17 The scheme came into force on January 14, 2009 and ran until the end of the
year. Its budget was about 1.5 billion euros.18 The government's intention was to assure
consumers that the state had their best interests at heart and was not leaving them alone in
times of crisis (cf. Fojcik & Koch & Proff 2009: 8). According to the number of new-car
registrations the car-scrapping scheme must be considered a success, while in other countries
such as the UK, Italy or Spain, which at the time did not (yet) have car-scrapping schemes,
car sales continued to fall (see Financial Times Deutschland, March 17, 2009).19
Dealing with the question, why the car scrapping scheme has been established, this can be
considered as a good example of ideas and interests that reinforce one another. The strength
and global notoriety of the German car industry spread the idea that this sector would have to
be maintained in the country at all costs. This can also explain why German politics made
such a big effort when it came to rescuing Opel, the German subsidiary of General Motors,
which suffered under structural problems which have been reinforced because of the crisis –
while ignoring the employees of the also suffering and meanwhile insolvent holding company
Arcandor, which was engaged in retail and tourism.
Another field where state intervention measures took place, is the case of low-carbon vehiclepromotion. For this reason an EV summit (Elektroauto-Gipfel) with participants from all
relevant companies and institutions was hold on May 3, 2010. In its run-up, this summit has
been considered as a turning point for the German government interventionist policy which
was very cautious in providing offensive sectoral strategies. But in fact, the government
considered itself more as a mediator or agent, without intervening into market decisions. This
17
18
19
In addition, the old car had to be more than 9 years old and the new one had to fulfil the European standard
Euro-4.
Data from taken from Fojcik & Koch & Proff (2009).
For example in the UK, the total scrappage scheme provided a sum of all in all only 300 million pounds (AFP
2009).
19
is even more true, given the fact, that Germany unlike the UK does not provide consumer
incentives for the purchase of electric cars. For reaching strategic goals an electro-mobility
platform ($ationale Plattform Elektromobilität) has been established to design a strategy to
reach the declared political goal to bring 1 million EVs on German streets by 2020 (see
BMWi 2010a; BMWi 2010b; Berliner Morgenpost 2010). Meanwhile, the platform has
published three interim reports (the latest in May 2012). They show that the perception of
fundamental changes in the German industrial policy is by far exaggerated. Instead, the
governments focus is mostly on horizontal activities, because according to the platform
"intelligent industrial policy" should look after framework conditions first of all (see NPE
2011: 15).
6. Conclusion
The world financial and economic crisis is the most drastic event of the last years regarding
the economic, political and societal systems. The sharp economic downgrade provoked a
large number of responses from the affected states. However, as the comparison of Germany
and the UK has shown, both countries intervention measures to face the crisis diverged.
While the UK government was first to establish a rescue package for the banks, Germany
started the car scrapping scheme before the UK. Both can be explained with the variable
interests, while each of these sectors is of particular relevance for the respective country. Most
interestingly is the reaction of the UK regarding the automotive industry. The country
established an assistance program in order to help the industry. For a LME this can be
interpreted as a very uncommon measure. This can be explained by the variable ideas – the
UK government wants to provide the country with a strong industrial base. The reliance on
the financial sector has been challenged by the crisis, and established a orientation towards a
broader industry base. In Germany again, it might surprise that there was no large financial
state support to the EV sector. Here, two variables go hand in hand. First, the German
automotive industry is internationally competitive and doesn't need financial government
support to promote new technologies. Second, the institutional tradition of coordination made
still worked during the crisis. Though the automotive industry was declining in these years,
these was no need to establish a whole new basis. The typical corporative mechanisms of a
CME, with the state as intermediator and initiator of the Nationale Plattform Elektromobilität,
were sufficient. The German government actions regarding the financial sector were quiet
different, instead. Though, this sector is not as big compared to the UK, it is of particular
relevance for the economy. However, that does not mean, that this is also true for every single
20
bank. And the fact that many, also relatively unknown banks, were rescued makes the
interpretation plausible that economic interest groups were the relevant driving forces for state
actions.
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