World economy

One market, many growth models

Brexit had many causes and it would be wrong to single out economic factors. However, if one looks at the political economy of Brexit then there are clear lessons for the rest of Europe. The nub of the matter is that national growth models mediate heavily the experience people have of European economic integration. In the British case, this interaction produced results that helped push the UK out of the EU. In other countries, the results are different but the lesson is the same: there may be one European Single Market, but there are many different national growth models. Each model has its strengths and weaknesses but the Single Market makes it very difficult to reform these models, leading to a build-up of pressures.

In Britain’s case, the economy grows by expanding the labour market. This has the effect of boosting aggregate demand and injecting life into the country’s service sector-dominated economy (Baccaro & Pontusson 2016). This model delivers low levels of unemployment  – even outside the booming Southeast of England – but is associated with low productivity and low wage growth, both of which are prominent features of open labour markets (Giles 2017).4 The only way the labour market can grow, in the absence of significant domestic population growth, is through high levels of net immigration. For this reason, the free movement of labour is at the heart of the UK’s experience of the Single Market. This aspect of the British growth model has received much less attention than the other, more fashionable part, namely the very high reliance on credit as a way of compensating for stagnant real wages, what Colin Crouch calls ‘privatised Keynesianism’ (Crouch 2009). Commentary around Brexit and immigration has focused on the themes of xenophobia and racism but the core of the matter lies in the nature of the British growth model.

This mediation of Single Market rules through national growth models produces very different results in other parts of Europe. In some countries, such as Romania, Bulgaria and in the crisis-hit economies of Spain, Greece, Italy and Ireland, net emigration is the great worry and criticisms of the EU focus on fears of a ‘brain drain’. Elsewhere, in countries with heavily regulated labour markets such as in France and Sweden, protest has centred on ‘posted workers’ and the clash between national labour codes and the rules regulating EU migrant labour.

The German growth model is fundamentally different from the British one. The focus is on building export surpluses, with little consideration given to aggregate demand. Indeed, Germany’s huge balance of payment surpluses exists only because of a long-standing policy – supported by the German trade union movement – of wage and price suppression. Whilst Germany has been an economic success story from an aggregate perspective, when one looks inside the country the results are more mixed (Bickerton 2017c). The euro-equivalent of Poundland shops dominate the high streets in many ostensibly wealthy German cities. Labour market and welfare state reforms in Germany have created a large group of people who have seen their incomes stagnate since the mid-2000s. If we add to that the effect of negative interest rates on a country with a high savings rate we can begin to understand why there is so much opposition in Germany to the idea of a European fiscal transfer union. ‘We’ve not had it easy’, goes the argument, ‘so why should we help out the Greeks and the Italians?’ The political consequences of this interaction between the German growth model and European economic integration are not as dramatic as Brexit but they are shaping the EU in profound ways. They go a long way to explaining why Germany took the line that it did during the eurozone crisis and why further integration of the eurozone is politically off the agenda.

The Single Market radicalises the differences between national growth models whilst at the same time making it harder to change the models themselves. The pressures this produces go well beyond the Brexit result in the UK’s 2016 EU referendum.