Margareta Pagano: Thatcher got it wrong. Blair and Brown did too. Can Cameron get it right?

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The Independent Online

Maggie Thatcher got it wrong because she misdiagnosed the problem. Tony Blair got it wrong because he bought into Thatcher's diagnosis, and Gordon Brown has got it wrong because he followed suit. The problem was Britain's plunge into industrial chaos in the 1970s, which then prime minister Thatcher thought was due to bolshy trade unions and rigid work practices.

But a devastating critique of British capitalism published last week by two young academics argues that she tried to solve the wrong problem. They claim it wasn't the UK's fractious labour relations and social unrest of the 1970s which made companies so uncompetitive – Italy and France had similar industrial tensions – but that so many British companies started competing in a particular way – exporting jobs and factories abroad following entry to the EEC in 1973.

In their new book, Globalization and Varieties of Capitalism: New Labour, Economic Policy and the Abject State, Dan Coffey of Leeds University and Carole Thornley of Keele University say it's time to explode the myth of Thatcherism. It wasn't a planned political philosophy, but rather an opportunistic response to a series of historical coincidences which occurred during industrial unrest and the loss of our manufacturing base in the 1970s. The reason the British economy came undone was that our style of capitalism was so different from the state-backed European models that an almighty clash between varieties of capitalism resulted – and the UK lost.

Across the Channel, the French and Germans kept their industries because their governments exerted pressure on firms to maintain a big domestic presence, and protected them. Dr Coffey argues that Thatcher seized on this loss of industrial strength to Europe by exposing the need to tackle the unions and privatise industries, instead of adopting the approach followed on the Continent of dispensing favours. Thus the founding premise of Thatcherism was a fundamental misdiagnosis based on false assumptions – albeit one made with genuine intellectual intent.

New Labour not only adopted the argument, but has used it as the basis for many of the party's policies. In many ways, New Labour went even further than the Conservatives in encouraging free markets, particularly the light-touch regulation in the City, leading to the credit boom, and then crunch.

But the really new, and meaty bit of their analysis is why and how the UK went through such a rapid de-industrialisation. In 1970, Britain had a trade surplus in cars but by 1975 it was in deficit, while the balance of trade for the automotive sector as a whole had fallen into a deficit by 1982. Contrary to the orthodox view, the UK had many top-tier firms in the automotive and aerospace industries, companies such as GKN and Lucas, which were productive and competitive. (Only British Leyland was the real lame duck.)

But it was when our successful companies decided to be even more competitive by moving production activities from Britain to Europe that we came a cropper. GKN bought facilities in Germany and took on Bosch, and Lucas expanded into France, Italy and Spain, while the big US car makers, Ford and GM, gave up much of their UK capacity in favour of Europe. But the moves were not reciprocated as after EEC entry the UK had more imports from Europe, but fewer factories. By contrast, Europe got fewer of our exports, but more factories.

Why was this? Dr Coffey, himself a car-industry expert, says it was because the attractions of moving production to the Continent made sense for UK companies, not just to be close to other big car production hubs but also because of the favours which the governments in Europe gave to their manufacturers.

The authors also suggest that Britain's economy is more unstable than we fear. Manufacturing was collapsing even before the crash, and now we have lost much of our financial services industry. Since the crash, we are not only weaker than our European peers but we have serious issues caused by poor productivity, declining investment and ragged income distribution.

If Europe was the problem, then it could also be the solution. As the authors say, if we understand the situation we can find better answers. The best option would be to push the EU to redress the imbalances. It's in Europe's interest to help, because an unstable UK destabilises the whole region. Or we go the eurosceptic route, and break away.

Their account has big implications for today's policy-makers who still think they can export the UK's permissive free-market approach to the EU. It's obvious that this doesn't work, as the crowing from Nicolas Sarkozy and Angela Merkel over the collapse of the Anglo-Saxon model illustrates all too well.

It's a controversial but fascinating book. There's lots to disagree with and, hopefully, it will cause frissons across the political spectrum, but even so, it should be a must-read for all our politicians – David Cameron, Kenneth Clarke and the shadow Europe minister, Mark Francois, come to mind as they head for government. How ironic if the Tories were the party which could challenge Europe by pushing for and borrowing some of it's more clever practices to get us growing again. The book is pricey- at £55 – but I'm sure they can find a way of putting it on expenses. It can be bought at www.palgrave.com.

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