Nicolas Sarkozy arrived at the Group of 20 summit having said: “The all-powerful market that is always right is finished.” The French president left it proclaiming “a page has been turned” on the Anglo-Saxon financial model. Whether or not a page really has been turned depends on the construction of a practical successor to free-market economics, a process that entrenched interests in America and Britain would be well-advised to encourage if they wish to remain centre stage.

The ideas that defined the golden age of market capitalism were formed in the vacuum left by the collapse of the Bretton Woods system of fixed exchange rates in 1971. Over the next two decades, the Chicago School of free-market economists helped to persuade the Reagan and Thatcher administrations to adopt laisser faire policies and deregulation. Simultaneously, at Northwestern University, Professor Alfred Rappaport’s work on creating shareholder value clarified the objectives of the corporate sector.

Management consultants took hold of these ideas and converted them to a coherent strategy for business. Then investment bankers, liberated by deregulation and with an eye to the main chance, picked up the whole package and sold it hard to chief executives. Once developments in derivatives theory in the 1970s opened the door to share options and performance-based compensation for executives, there followed three decades in which tooth-and-claw capitalism ruled supreme.

Conditions are now right for another radical rethink. The old model is busted. The big beasts of free-market economics, Britain and America, are more wounded than other species. Governments, central banks and regulators are groping unconvincingly for solutions. Against this background, new ideas should be welcomed. But for this to occur there would need to be a turnround in government attitudes on either side of the Atlantic, and a more effective and creative response from the academic sector in these countries than we have seen in recent years.

A change in government thinking requires finance to be put back in its box. The industry gradually infiltrated the commanding heights of public life in America and Britain from the late 20th century onwards. Senior bankers such as Robert Rubin, Jon Corzine and Hank Paulson upheld the American tradition of Wall Street titans taking public office. In Britain, the Conservatives’ connections with the Square Mile were well established, but the City was quick to build bridges with New Labour when it was elected to office in 1997 and the incoming government was equally eager to respond. Former investment bankers appeared in full-time positions at the Treasury, the government department that worked most closely with the City, and as chancellor of the exchequer Gordon Brown appointed City grandees to the business councils that advised him.

The influence of finance over political life was reinforced by money. Wall Street bankers regularly appeared at the top of the giving lists for the political parties. In the UK, financial sector philanthropists donated to Labour and supported the government’s pet schemes, such as the Academies programme. Others lined up behind the Conservatives, whose fundraising is led by two of the City’s most prominent people, Michael Spencer, chief executive of Icap, the world’s largest inter-dealer broker, and Stanley Fink, former chief executive of Man Group, the hedge fund manager. There is no suggestion of impropriety or that this enabled the industry to buy favour, it is just that in its pomp, finance became so important and so influential that it crowded out other voices.

Similar forces were at work in the academic world, a sector that might have stimulated debate but which was conspicuous by its absence when it came to forming an effective critique of red-blooded capitalism. The few academics who suggested that markets did not always know best were dismissed by economic liberals as living in the past or told that the new financial system had “transformed risk” and raised global living standards.

Finance wrapped its tentacles around relevant parts of the academic world. Hard-pressed business schools competed for students eager to forge careers in finance after they completed their masters’ degrees. The quantitative skills of certain academics were sought by hedge funds that were prepared to pay them life-changing sums in consultancy fees. Rich alumni endowed their alma mater with benefactions to further the study of finance. The giving was well intended, and everyone has the right to pursue their career of choice, but under these circumstances it is little wonder that so much academic output was supportive of the financial system.

But now is the time for change. Unless governments in America and Britain really open themselves up to new ideas, emerging economies in Asia and mainland Europe, places where alternative economic and corporate governance models do exist, will seize the initiative and redefine the global agenda. In parallel, academics need to recapture their heritage of creative, independent thinking and throw off the influence of finance. Wall Street and the City need to be grown up about this. They might not like the prospect of losing their grip on government and exposing themselves to new ideas. But unless they do, they might just find that the page has indeed been turned and they are no longer on it.

Class War in France?

alex.foti — Thu, 19 Mar 2009 11:09:38 +0000

SARKOZY WARNED OF ‘CLASS WAR’

France faces a “class war” that could undermine President Nicolas Sarkozy’s reform efforts and spark a period of damaging labour unrest, one of the country’s most prominent business leaders has warned. In an interview with the Financial Times as France braced for its second national strike in less than two months, Maurice Lévy, head of Publicis said “people are really angry” over the country’s growing economic hardship and costly bank rescues.

Mr Lévy criticised the government for fanning the discontent. The boss of the advertising group said ministers had failed to explain adequately why the state had bailed out banks while refusing to help consumers with new tax breaks or wage rises.

Unions have promised another record turnout for Thursday’s general strike, with more protests planned across the country than in January when up to 2.5m people came out on to the streets.

The public mood has worsened, with protests becoming militant amid factory closures and as the government struggles to revive the economy.

“No one understood that the vast majority [of bank support] was in guarantees and in reality the money was not yet spent. People were told the country was bankrupt and suddenly there was €340bn available for these greedy people. On top of that they are distributing bonuses. We have another class war,” said Mr Lévy.

Claude Bébéar, the honorary chairman of insurance group Axa and seen as the elder statesman of French capitalism, warned in a separate FT interview that the country risked becoming engaged in “a struggle, with each side seeking to take advantage of the other to strengthen its position”. He urged the government, unions and employers “to play a collective game”.

Many business leaders fear that, as militancy grows, the government will make concessions on its reform programme. Mr Sarkozy has already backed down in a long-running dispute with academics and students over university reform. Medef, the employers’ group, is worried that concessions made after the January strike could impose new constraints on companies.

Mr Lévy said further compromises could encourage more protests. “Each compromise, even if reasonable, is misinterpreted as a grand victory by the strikers and the opposition,” he said.

“We have always known that reform has to be done very, very quickly. If it is not done quickly it ends in conflict,” he said.

WORKERS PILE PRESSURE ON SARKOZY

By Ben Hall in Compiègne
Published: March 18 2009

After being pelted with eggs by workers blockading Continental’s tyre factory on the banks of the river Oise, managers have been spotted sneaking in the back entrance by boat.

“People are distraught,” says Christian Lahargue, a Conti worker facing redundancy. “We’ll go all the way to keep this factory open.”

This aggressive stand-off in northern France on the eve of a national strike suggests social tension is rising and adding to the impression that a once sure-footed Nicolas Sarkozy, the president, is losing his touch.

The eurozone’s second-largest economy faces widespread disruption on Thursday when unions stage a national strike and hundreds of demonstrations in protest at Mr Sarkozy’s economic policy and reform programme.

Union leaders have vowed to beat the turnout of the last strike in January, when between 1m and 2.5m people took to the streets.

The scale of the protests seven weeks ago took the government by surprise, forcing it to come forward with €2.6bn ($3.38bn, £2.4bn) in extra welfare payments and tax cuts for low income families. But the concessions did not satisfy the unions nor impress the public.

According to an Ifop opinion poll for Paris-Match magazine, 78 per cent of French people consider Thursday’s strike to be justified. The French “have given licence to the union movement to articulate their opposition towards Nicolas Sarkozy,” says Stéphane Rozès, chief executive of pollsters CSA. According to another poll, the French think Olivier Besancenot, the Troskyist leader of the extreme left, is as “credible” as the president.

Since the beginning of the year, Mr Sarkozy has been on the back foot as economic gloom has thickened. The government was slow to react to a six-week general strike and unrest in Guadeloupe, its Caribbean island territory.

The president has run into opposition from within his centre-right party on a range of matters, from France’s return to the Nato military command to tax breaks for the rich.

Mr Sarkozy was forced to backtrack on university reform, one of his flagship modernisation measures, amid fears that a student protest movement led by the far left could turn violent. The concession has worried some business leaders. “The most radical are getting results,” says Maurice Lévy, chief executive of Publicis, the advertising group.

Mr Sarkozy has reason to feel aggrieved. The French economy is expected to fare better than its neighbours after Mr Sarkozy rapidly implemented a bank rescue plan, loan guarantees for small business, government-backed trade credit insurance and other measures to keep credit flowing to the economy.

He mobilised France’s once-scorned interventionist state and caught the public mood with his criticism of financial capitalism.

But at the same time as celebrating the return of the state, Mr Sarkozy is sticking to his goals of cutting taxes, slimming down government bureaucracy and curbing spending.

This is why French people believe that Mr Sarkozy’s policies are “neither coherent, effective nor fair”, Mr Rozès says. The French feel that banks are bailed out with few strings attached, but there is little government help for ordinary families.

Opposition to Mr Sarkozy is likely to focus on tax breaks for the wealthy, the so-called shield limiting an individual’s tax liability to 50 per cent of income.

Unions and some in the president’s own party want to scrap it. Mr Sarkozy refuses, reinforcing his unfortunate image as a friend of the rich.

It is far from clear that social tension will coalesce into a coherent political movement capable of paralysing Mr Sarkozy’s government.

“He is not in a downward spiral,” says Zaki Laidi, of Sciences Po university, who points to the disarray among the opposition socialists and says public and union criticism of the president is very diffuse. “We are not on the verge of a general strike.”

But other observers fear the possibility of unrest. “The real question for everyone is to know how public opinion will evolve,” says Mr Lévy. “Will people really believe … that with the global economy in such difficulty that they will decide to be calm and reasonable and decide to work together to get through it? Or will this drive people to desperate acts?

“My feeling is that we are not there yet but we could find ourselves in a situation with seeds of a very profound discontent and in a negative spiral that could lead to repeated strikes. This would force the government to give in.”

Great Recession » sarkozy

Time To Put Finance Where It Belongs

It is time to put finance back in its box

Class War in France?