“Something is rotten in the state of Denmark,” is Marcellus’ memorable line in Shakespeare’s Hamlet. This sentiment echoes 425 years later after a month of withering critiques about the rotten state of Democratic Capitalism in Europe. Concerns are no longer expressed behind closed doors. Recent public statements have been blunt – two examples follow.
Börje Ekholm, CEO of Ericsson, recently pointed to an over-emphasis on regulation that is “driving Europe to last place [and] is driving Europe to irrelevance” which he reckoned was “on the way to becoming a museum – great food, great architecture, great scenery [and] great wine but no industry left.”
Never to be outdone in the rhetorical stakes, French President Emmanuel Macron argued at the Sorbonne three weeks ago that declining prosperity, rising illiberalism, and the return of war fed on one another and meant that European society faced a “mortal” threat.
What is going on, and what are we going to do about it?
When attention focuses on economies with a population of more than 20 million, none of the larger European economies placed in the top five in the 2023 IMD World Competitiveness Ranking.
Regularly aired concerns about Europe’s faltering productivity growth, stagnation, and poor track record in innovation in cutting-edge sectors are not new. But, as Figure 1 shows, media mentions of them in the languages used in Europe’s five largest economies keep on rising. Backing this up are expert analyses of Europe’s faltering business environment. Just this year, McKinsey & Co., The Economist, the Financial Times, and the International Monetary Fund have all offered detailed accounts of European malaise.
IMD’s World Competitiveness Ranking for 2023 confirmed the worsening relative position of Europe’s larger economies. Of them, Germany fared best, but at rank 22 still came in after China. Worse, Germany fell seven places in the ranking compared to the year before. In the 2023 ranking, the United Kingdom was in 29th place, France was 33rd, Spain 36th, and Italy 41st. At least Spain and Italy did not fall in the latest rankings.
When attention focuses on economies with a population of more than 20 million, none of the larger European economies placed in the top five in the 2023 IMD World Competitiveness Ranking. Even in the infrastructure component ranking, where large European economies have traditionally done relatively well, these five nations have fallen back. The business efficiency and government efficiency component rankings for the five largest European economies have either deteriorated in recent years or were terrible to start with.
“In addition to funding the healthcare and pension costs of our aging societies, providing incentives to accelerate the transition to a low-carbon economy, and investing in digital infrastructure, the prospect of a confrontation with Russia means that governments must spend more on their militaries.”
If this wasn’t bad enough, the demands on governments are also piling up. In addition to funding the healthcare and pension costs of our aging societies, providing incentives to accelerate the transition to a low-carbon economy, and investing in digital infrastructure, the prospect of a confrontation with Russia means that governments must spend more on their militaries. Estimates vary but extra spending typically lies in the 1-2% range of additional GDP that must be financed by states. Growing fiscal demands come at a time of record public debts.
Not only is there a risk that state support for R&D and innovation will be cut back, but there is also a risk that taxes will rise on corporate profits and higher-earning executives, affecting the war for talent. These fiscal pressures would be eased if there were moderate 1960s and 1970s levels of productivity and economic growth which allowed the tax take to grow without raising tax rates.
To these unfavorable circumstances must be added higher expectations on business from influential groups within society. As one of the few enduring successful institutions in European life, private enterprise is being called upon to solve more and more societal problems.
Heightened expectations have spawned new far-reaching regulations and the von der Leyen administration in Brussels has laid to rest any notion that European Union institutions are mired in deadlock and can’t make new rules. Yet, at the same time, enforcement of Single Market rules by European officials has weakened.
In addition, greater societal expectations, which have added to pressures to incorporate ESG considerations in corporate decision-making and reporting, have intensified and pushback against poorly designed ESG metrics has become more vocal. A commonly heard refrain is that C-suite execs simply don’t know what metrics to optimize anymore, essentially what to prioritize.
The lack of clear metrics for good corporate citizenship adds to confusion about how the responsibility to reignite European prosperity is distributed between governments and the private sector. A sense of jealousy towards successful businesses further complicates the discussion, leading to a one-sided approach that places an increasing burden on companies.
“The great argument for democracy is not that it will produce good rule, but that it will prevent terrible rule, which is the worst thing societies can have, except for the absence of rule – in other words, anarchy.”
The upshot is a palpable sense of malaise that came to a head last year. Sentiments like malaise are hard to measure. But a plausible indication is European media references to a crisis in democratic capitalism. This captures the sense that firms and markets aren’t delivering sufficient growth and outcomes meaningful to societies, that democracy isn’t delivering the elected officials capable of driving change, that decision-making is the preserve of a largely unaccountable elite, that opportunities are diminishing and inequality rising, and that confidence is eroding in the institutions that underpin democracy and private enterprise.
Figure 2 tallies up the number of European media references to the crisis of democratic capitalism in 10 languages since the start of this century. There are two standout years: 2008 and 2023. Unsurprisingly, the first full year of the Global Financial Crisis saw the emergence of a narrative that democracy and capitalism were not delivering for societies. A total of 188 references to crises in democratic capitalism were made in European media that year yet concerns quickly abated. In the following five years (2009-13) there were fewer references to a crisis of democratic capitalism than in 2008.
Last year saw neither an economic slump nor a public health emergency, such as COVID-19. Yet, in European media there were no less than 252 references to the crises of democratic capitalism in 2023 – and dozens of such references already this year. The debate in Europe has materially changed with open acknowledgment of the crisis.
Europe’s leaders are, however, not giving up on democratic capitalism. They want to revive it. Chief Economic Commentator for the Financial Times Martin Wolf wrote in April 2024, “If one puts to one side a few resource-rich countries and Hong Kong and Singapore, the world’s richest countries are all liberal democracies. Is this really an accident?”
In his forceful defense of democratic capitalism, he wrote: “The great argument for democracy is not that it will produce good rule, but that it will prevent terrible rule, which is the worst thing societies can have, except for the absence of rule – in other words, anarchy. The more complete the set of rights, the more potent will be the constraints: there will then be open debate, freedom to protest, free media and independent institutions.”
This formulation gets a lot right, but the central role should be acknowledged that corporate executives play in making capitalism work, that is, in driving innovation, raising productivity, and creating opportunities for all. As more and more citizens have an economic stake in democratic capitalism, feel relatively secure that their basic needs are met, and see growth and progress – especially for their children – fewer will turn to the false siren of populism.
To address the current malaise and reignite growth through entrepreneurship, Europe needs to openly engage in a renegotiation of the role of business in society. A quiet, indirect renegotiation through speeches and newspapers is already underway but is insufficient. We must come together with the shared goal of saving democratic capitalism from its internal and external foes, recognizing that business is a great institution and a crucial part of the solution.
Fundamentally, a new License to Operate (L2O) for European business that commands widespread support must be agreed upon. A wide range of stakeholders must be brought together. This cannot be a top-down process. CEOs should expect to engage with representatives of trade unions, political leaders, and different generations, all of whom have a stake in the success of democratic capitalism in Europe.
Building a broad base of support for a new L2O requires paying particular attention to both the preconditions for business to flourish and to heightened societal expectations of business. This initiative cannot be a back door for carte blanche deregulation; that won’t fly. But re-evaluating what objectives states have and whether current regulations are fit for purpose is fair game, and, critically, where the boundaries between corporate and state responsibilities lie.
A key part of establishing a new L2O is determining practicable, empirical metrics by which businesses and their leaders are judged. Senior executives need to know what metrics to drive toward. Vague, unprioritized qualitative principles haven’t worked. As Peter Drucker reminds us, what gets measured gets managed. CEOs want to do right by society, they are right to demand clear, even challenging, goals, and they want their contributions recognized.
CEOs have a critical role to play in overcoming Europe’s current malaise and seeing off the challenges of populism, autocracy, and illiberal democracy. We need to revive democratic capitalism so that it reasserts itself as history’s single most powerful social contract to nourish innovation, entrepreneurship, and growth.
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