Virus will challenge the Rhineland model

BEFORE the novel coronavirus hit us, there were signs that capitalism was beginning to change from the free-wheeling neoliberal shareholder value model to something more sustainable. Increasing inequality and a resulting rise in populism have raised concern. Greater focus on environmental issues has prompted a re-examination of a predominantly Anglo-Saxon free-market model.

Shuttered industrial plants and grounded flights will, at least temporarily, reduce global emissions. But sustainability in business practices may take a back seat for a while as companies struggle to survive. In Europe, we may see a renaissance of interest in Germany's long-term stakeholder-focused capitalism - the Rhineland model. Yet, even that strong framework faces the sternest of tests.

The reappraisal of the "shareholders first" paradigm has come despite, and perhaps partly because of an avowedly pro-business Donald Trump in the White House. His policies - big on corporate tax cuts, poor on countering climate change - helped propel Wall Street to record highs until earlier this month.

Sensing a swing in the popular mood, a large number of companies and business leaders have signed up to longer-term capitalism. Paul Polman, former chief executive of Unilever, has set up Imagine, a sustainability foundation designed to fight climate change, reduce global poverty and help achieve the United Nations 2030 sustainable development goals. He has assembled luminaries on his board such as Virgin group founder Richard Branson, environmental campaigner Suzy Amis Cameron, communications guru Arianna Huffington, and philanthropist Sue Rockefeller.

However, when business leaders are suddenly faced with unprecedented challenges, it is difficult to keep the high moral ground. Virgin Atlantic, part-owned by Mr Branson, has announced eight weeks of unpaid leave for its employees, with 75-85 per cent of its fleet not flying.

Other badly affected airlines have been forced into similar action. Thousands of small and large companies will shed employees one way or the other. The UK and US governments have promised massive amounts of help including the Washington announcement of direct injections of cash to citizens. Governments and central banks are having to scramble for mechanisms to implement these measures on a grand scale. The effect on the US and UK debt servicing could be catastrophic.

THE GERMAN MODEL

This is where the much-criticised German model of prudence and careful anti-cyclical financial management may come into its own. The country's economic minister, Peter Altmaier, has announced that "every healthy German firm of any size" will be supported and "will not lose one employee".

How can he promise that? First, Germany had a fiscal surplus in the last six years and the government is prepared to loosen self-imposed rules of a balanced budget. Second, Berlin will use the KfW state development bank as the instrument for channelling loans through Germany's 3,000 banks to companies in cash difficulties. Third, as a result of low unemployment, Germany's hypothecated unemployment insurance fund is full and will be used for the short-time working (kurzarbeit) benefit, under which companies pay their employees' wages even when they are sent home.

This has been one of the German social market economy's biggest postwar successes, greatly lowering redundancies in 2008-2009 compared with the UK; it also better prepared the country for an eventual upswing.

One large question mark hangs over Europe's south, already burdened by immigration and debt, with less resilient economic systems than Germany. These nations will now struggle even more. Germany has no alternative but to show more solidarity. If the richer states abandon the poorer, the problems will just be pushed further north. But if Germany extends its largesse too extensively to the south, even the sturdy Rhineland model could start to buckle. OMFIF

• The writer is chairman of the German-British Forum and vice-president of the German-British Chamber of Industry & Commerce