Global Finance and Social Europe

Global Finance and Social Europe

New Directions in Modern Economics series

Edited by John Grahl

With global finance reshaping the world economy, this insightful new book provides a full account of the EU’s financial integration strategy, together with a critical assessment arguing the case for social control over global finance. Written by acknowledged experts in European finance, this book discusses key issues from finance to general social developments, encompassing social security systems, employment relations, household saving and borrowing, and the question of economic stability. Thus far, America has been pre-eminent both in global financial markets and international banking – so how should the European Union meet this challenge? Global Finance and Social Europe constructively argues that an active response is required and highlights the importance of an integrated European financial system.

Chapter 11: The Impact of Financial Change on European Employment Relations

John Grahl

Subjects: economics and finance, financial economics and regulation, post-keynesian economics, social policy and sociology, economics of social policy


John Grahl ECONOMIC AND IDEOLOGICAL FACTORS AND STANDARDS 11.1 In attempting to assess the impact of financial change on employment relations in Europe, it is necessary to recognize that this change has more than one dimension: clearly there are both economic and ideological aspects to the new salience of security markets and shareholders. Also of great importance is the issue of standards of practice where economic and ideological forces are combined. Finance and Corporate Behaviour The direct economic aspects are related to the constraints and opportunities in the financial environment of an enterprise. From the late 1950s, many mainstream economists thought that financial mechanisms would have little or no impact on corporate behaviour or corporate strategies. This was the implication of the Miller–Modigliani theorem which states that the value of an investment (and by extension, of an enterprise as an assembly of investment projects) is unaffected by the way in which it is financed.1 Were this the case, changes in the system of corporate finance would have no economic impact on employment relations. However, the Miller–Modigliani theorem depends on the absence of asymmetric information. Information may be incomplete without being asymmetric so that investments involve risks but, by assumption, both the suppliers and users of finance assess these risks in the same way. When this assumption is not made, that is, when it is recognized that the enterprise as a user of funds will probably have more information than the suppliers of finance, the result no longer holds....

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