This article first appeared on Social Europe.

While France and Britain cooperate on multiple fronts, the Cameron government is not above using its neighbor as a political foil. Grant Shapps, conservative party chairman opined in January 2014 that French President Hollande had “led his countrymen back into the dust” which is “exactly what [Labour leader] Miliband wants to do with the British economy.”

British employees should be so lucky.

Cameron’s tactic opens a debate the British will lose. As described in the Financial Times by Janan Ganesh, the British economy has come to feature “Growth powered by financial services and consumerism, an indifference to all but the most avant-garde manufacturing, a workforce trading on its flexibility rather than its productivity…”

Aside from the banking sector (more on that in a moment), Britain seeks international advantage using American-style wage compression. That has occasioned labor remuneration to grow faster in France and across northern Europe since 2000. In 2012, average hourly wages in France ($27) and Germany ($30.5) were 25 and 41 percent higher than in Britain ($ 21.6). These are updated Eurostat data for firms of ten or more employees, covering all sectors except agriculture and public administration, adjusted with OECD purchase power parity statistics. Indeed, UK wages are no higher than long-stagnant US wages which also lag northern Europe as explored in my book, What Went WrongThey lag because labor compensation has largely stagnated in Britain since 2000 while marching ahead in purchasing power terms in France and Germany. Worse, British wages have fallen in real terms since the first quarter of 2010 according to Britain’s Office of National Statistics.

Wages are higher in northern Europe because those nations follow the Australian wage determination mechanism. The mechanics vary between nations, but they all ensure that the gains from growth are broadcast widely among most employees rather than left mostly to the market to allocate as in Britain. That’s why British workers have fared little better than those 95 percent of Americans whose real wages have stagnated since 1980.

Surely France and Germany are paying for higher and rising living standards with weak competitiveness? After all, in addition to the double-digit wage gaps, British employers pay lower government fees on labor: they pay €8.2 per hour less than in France and €3.4 less than German firms. These statistics are the crux of the argument that while living standards and wages now are considerably higher in France and Germany, the continental high wage economic model is unsustainable: high wages impede productivity growth and investment crucial to international competitiveness.

Let’s see how that has played out, beginning with investment rates.

An extensive assessment of gross investment rates was conducted for Eurostat by Dennis Leythienne and Tatjana Smokova, parsing in detail the performance of non-financial firms in OECD nations from 1995 through 2007. The ratio of gross fixed capital formation, mostly machinery, software and buildings, to gross value added by British firms in 2007 was 17.8 %, below rates across northern Europe except for the Netherlands and lower than in France (20.9 %) and Germany. That snapshot accurately captures investment patterns since 2000 where the ratio at French firms exceeded British ones every year. And investment rates in Germany have exceeded Britain’s every year since at least 1995 (they were identical one year, 2002).

Mal-investment is one problem: many tens of billions of British pounds have been poured into residential housing and commercial real estate speculation in recent decades, proving no more productive that the capital wasted in Irish real estate or the US bubbles. A second problem is Britain’s finance-intensive economy. Economists since Bagehot and Schumpeter have realized that a sound and robust financial system is vital for economic growth. But overly large financial sectors are destabilizing as pointed out by economists such as Charles Kindleberger and James Tobin. This was documented in 2012 in an IMF research paper by Jean Louis Arcand of the Graduate Institute in Geneva, Enrico Berkes of the IMF and Ego Panizza of the UN. Their analysis concluded that the grand deregulators of recent decades – including Britain, Ireland and the US – suffered a growth penalty as a consequence.

The diversion of capital into finance by Britain has harmed productivity. It would be strange indeed to think otherwise of a business sector featuring volatile, risky behavior, computerized arbitrage, front running clients, and a time horizon measured in nanoseconds or days that produces outsize profits, presumably draining talent and other resources from sectors characterized by innovation and real engineering. In 2009, former Fed chairman Paul Volcker famously noted dismissively that ATMs are the most useful financial innovation of the past 30 years. “I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy.” Wolfgang Münchau agreed in December 2009: “There is not a shred of evidence, theoretical or empirical, that the financial instruments invented in the past 10 years produce sustainable growth.” The deregulation theocrat Alan Greenspan couldn’t do it, acknowledging in March 2011 the need “to address the as yet unproved tie between the degree of financial complexity and higher standards of living.”

The relatively weak UK investment performance has translated into weak productivity growth, with observers like Chris Giles, economic editor of the Financial Times fretting about the UK’s “stagnation of productivity.” Labor productivity per hour worked in 2012 (OECD GDP figures adjusted for purchase power parity) was about twenty percent lower in Britain (48.5) than in France (59.5) or Germany (58.3). Eurostat data suggest the disparity is a bit narrower, but confirms that the gap has existed at least since the 1990s. And be mindful that the northern European figures are not distorted by finance that swells British productivity statistics. More competitive French and German firms can compete with British firms despite paying higher wages because their employee costs do not rise as fast as productivity growth. They out-invest British firms and are more productive, in part due to the efficiency bonus provided by the northern European corporate codetermination governance model.

In short, it is difficult to conceive of a brighter future for the British workforce where employers are out-invested by competitors abroad whose productivity is already 20 percent or so better. Max Hastings summarized in 2011:

“It has been an article of faith that the revolution wrought by Margaret Thatcher transformed a sclerotic, declining nation into a dynamic and robustly prosperous one. We decided that we manage our affairs better than our European partners do theirs. The events of the past 18 months suggest otherwise. Britain is emerging from the crisis weaker than other developed economies, and notably more vulnerable than Germany and France.”

The proud British economy certainly has significant world class capabilities. Yet, put simply: current trends are economically lethal for the British middle and working classes. Their future is no brighter than for those classes in the US. Real living standards are higher in France and Germany, and their wage determination and corporate codetermination systems ensure that the gap will continue steadily widening.

What remediation might be in the offing? That question exposes the supreme irony in the Tories’ critique of France. Not only is France outperforming Britain in providing broadly rising living standards, it is positioned far better to meet the challenges facing the high wage capitalist economies. Britain requires transformational reforms to implement something resembling the Australian wage system and massive investments in productivity to overtake France while the latter need only tweak its more productivity economy. Sure, France faces challenges: GDP has only just now recovered pre-crisis levels and unemployment is high. To tackle unemployment President Hollande is considering labor market reforms mimicking those potent but controversial ones of Gerhard Schroeder a decade or so ago.

In contrast, like the US, the challenges facing Britain in achieving the minimum necessary reforms of its wage system and introducing German-style codetermination in corporate governance are vastly more daunting. The requisite seismic shift to the capitalism model linking wages to productivity is too much to expect from indifferent politicians.


Kindleberger, C. P. (1978), Manias, Panics, and Crashes: A History of Financial Crises, Basic Books, New York.

Tobin, J. (1984), “On the efficiency of the financial system,” Lloyds Bank Review, 153, 1–15.