A Clash of Models By Wim Romeijn
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n May 2009, when the world was still dealing with the aftershocks of the financial meltdown caused by the collapse of Lehman Brothers, Charles Dumas of Lombard Street Research crooned triumphantly from London: “German economic policy is bankrupt”. Mr Dumas derived his wisdom from the 3.8% contraction suffered by Germany’s GDP over the first quarter of that horrible year. By comparison, the UK’s economy had shed only about 2%, showing the resilience, if not superiority, of the dynamic Anglo-Saxon business model vis-à-vis the sluggish Rhineland one. Even after his faux pas, monumental by any standard, Mr Dumas was duly promoted to the lofty twin positions of chief economist and chairman, touted on his firm’s website as one of the world’s leading macroeconomic forecasters. Mr Dumas’ career trajectory instantly lays bare the most fundamental difference between the two economic models: words speak louder than actions.
Final Thought
More of a dark art than a scientific pursuit, economic forecasting suffers from the same deficiencies that plague weather and climate forecasters: a lack of hard data coupled to a poor understanding of causes and effects. The stars of the business derive their fame mostly from adhering to a mantra. Predict a downturn or stock market crash long enough and one is sure to happen – eventually. With Brexit about to take shape, the muchmaligned Rhineland model has sparked renewed interest across the EU27. Even in The Netherlands, an early adopter of the freewheeling Anglo-Saxon model, the state is quietly changing its tune, providing behind-the-scenes support for large corporates in their attempts to fight off foreign – read: US – predators. The change of heart came after US semiconductor and telecom giant Qualcomm acquired Dutch chipmaker NXP – one of the country’s high-tech crown jewels – for €43bn in October 2016. With, mostly, moral support from the government in 194
“As a result of a policy initiated well over half a century ago, and with a little help from a pliable euro, Germany now churns out a massive current account surplus equal to 8.1% of its GDP.” The Hague, consumer goods company Unilever, one of the world’s oldest multinationals and owner of no less than 400 brands, managed to keep its much smaller US competitor Kraft Heinz at bay, blocking a €110bn takeover attempt in February. AkzoNobel, the world’s third-largest paint maker, is now doggedly resisting a takeover by its US competitor PPG. Grown into a full-blown corporate saga, the acquisition showcases the differing attitudes towards business. PPG argues that the management of AkzoNobel, by steadfastly refusing to entertain the generous offer, fails in its fiduciary responsibility towards shareholders – to maximise the return on their investment. AkzoNobel rejects the charge and points to the company’s broader corporate responsibilities owed to its multiple stakeholders – workers, clients, and communities. AkzoNobel’s arguments hark back to a bygone, though not necessarily all-bad, era when large monolithic corporates set the tone and drove economic progress. Undoubtedly anathema to Mr Dumas and corporate raiders the world over, German experience proves that the Rhineland economic model, now perhaps unwittingly embraced by AkzoNobel’s management, is far from dead. Rather than “bankrupting” the country, the model has produced some of the world’s most competitive economies which produce the excess cash that currently underwrites the large deficits produced in the Anglo-Saxon world. CFI.co | Capital Finance International
Instead of selling off or closing down its manufacturing base, Germany managed to keep its assembly lines humming by moving upmarket. Largely ignoring the next quarter’s results – a fetish particular to most of the English-speaking world – German industry takes a long view in pursuit of organic growth rather than claiming market share via acquisitions. As such, management may fail in its short-term fiduciary responsibilities. Shareholders, however, play but a minor part in corporate affairs as the necessary cash, if not readily on hand, is mostly raised via banks – not equity markets. As a result of a policy initiated well over half a century ago, and with a little help from a pliable euro, Germany now churns out a massive current account surplus equal to 8.1% of its GDP. The Netherlands, though not quite as stern and until recently more reluctant to protect its industrial base, outshines the Germans and consistently registers a current account surplus amounting to around 9% of GDP. Mr Dumas and other advocates for the AngloSaxon model usually counter argue that large c/a surpluses are indicative of sluggish low-growth economies. Facts, however, fail to bear this out: The Netherlands still remains world record holder of the longest stretch of continuous economic growth in modern history (1982-2008) and during that time never once saw its current account dip into negative territory. The secret, it turns out, is a unique blend of the Rhineland and Anglo-Saxon economic models which absorbs the best of both worlds whilst discarding the inconvenient bits: the ruthless practices imposed by the diktats of the market in the Anglo-Saxon model, and the often sclerotic behaviour of large and uninspired corporates dwelling in the Rhineland and environs. Thankfully, there is a word for this approach – pragmatism, the polar opposite of the dogmatic thinking along ideological lines as taught (propagated) at most US business schools. A bit more pragmatism would go a long way indeed towards the rebalancing of priorities. After all, man shall not live on bread alone. i