As European economic integration deepens, national capacities to offer social protection to offset the risks of market integration, weakens. This is what scholars often mean when they talk about “compensating” the losers of globalisation. It is the global trilemma that we discussed in weeks 1 and 2: As markets expand, national politics shrinks.
Why then do nation-states not transfer public policymaking capacities (think of it as problem solving capacities) to the European level? This is what we call “Europeanisation”. It’s the ability to harmonise rules, regulations and rights at the European level, such as what has occurred with monetary policy.
The core reading for this week is Fritz Scharpf (2010) “The asymmetry of integration: Why the EU Cannot be Social Market Economy“. The abstract of the paper is as follows:
Judge-made law has played a crucial role in the process of European integration. In the vertical dimension, it has greatly reduced the range of autonomous policy choices in the member states, and it has helped to expand the reach of European competences. At the same time, however, ‘integration through law’ does have a liberalizing and deregulatory impact on the socio-economic regimes of European Union member states. This effect is generally compatible with the status quo in liberal market economies, but it tends to undermine the institutions and policy legacies of Continental and Scandinavian social market economies. Given the high consensus requirements of European legislation, this structural asymmetry cannot be corrected through political action at the European level.
Political science research, in the institutionalist tradition, suggests that governance at the international level is constrained by conflicts of interest (public and elite preferences) among nation-states. This is no different in the EU.
The EU have harmonised problem solving capacities in in those policy areas where member-states have an interest in protecting: agriculture and fisheries. Further, the EU has developed problem solving capacities in monetary, banking, fiscal and social policy.
Nevertheless, the Euro crisis has exposed the limited problem-solving capacities of the EU when it comes to macroeconomic, fiscal, security, and social policy.
Problem solving capacity in a multilevel polity
This has led some scholars, such as Fritz Scharpf, to argue that the member-states of the EMU are stuck in the worst of all worlds: nether national nor European policymakers have the problem-solving capacity to deal with important policy problems.
In particular, they do not have the effective capacity to assert control over financial-capital markets (such as a fully fledged banking-capital market union).
Does the Euro crisis illustrate this loss of effective problem-solving capacity in a multi-level polity? What has been the response?
When political scientists refer to the effectiveness of national governments in the EU, they are referring to the problem-solving capacities of the political system to deal with problems that arise from market liberalisation.
These are problem solving capacities typically associated with the social state.
Effective governments are those that are perceived to manage/regulate the economy efficiently and deliver public goods typically associated with the social state. The capacity to raise tax revenue is the fundamental characteristic of how contemporary democracies manage capitalist markets. Weak states struggle to raise revenue and provide services.
The simplest way to measure the role of the state in the economy is to look at the total amount of taxes relative to national income. The figure below shows the total amount of taxes as a percentage of national income in Sweden, France, Britain and the USA.
Prior to WW1 the state had no real role in economic and social life. With taxes equivalent to 7-8 per cent of national income, the state could just about manage those “regal” functions of managing a police force and an army.
The state existed to maintain social order and defend property rights.
Between 1920-1980 the share of national income that rich countries began to devote to social spending grew substantially. It increased by more than a factor of 5 in Nordic countries. But between 1980-2010 the tax share stabilized almost everywhere. The EU consolidated during this period also, but never developed tax revenue raising capacity.
Positive and negative integration.
One way to think about this is to distinguish between positive and negative integration. Positive integration refers to those market correcting mechanisms of political intervention, whereas negative integration refers to market making mechanisms of economic integration.
In the context of the EU, market correcting requires political agreement on contested social and economic policies in the Council (what many refer to as “Social Europe”), whereas the latter relies on regulatory policies and judicial activism (market liberalization). In simple terms, the former requires institution building, the latter liberalisation.
The EU is very effective at negative integration, not positive integration.
Product regulation: race-to-the-top
Think about the economics of European integration in terms of product market competition.
National “product regulations” may not be affected by negative integration, and under certain conditions, can lead to a race to the top, rather than a race to the bottom. National regulations may actually serve as a certificate of superior product quality, such as the Denominación de Origen (DO) for Spanish wine.
Hence, some policy fields are immune from the “deregulatory” pressure associated with European market integration, particularly those policy areas with high political salience. For example, research suggests that environmental protection and superior quality standards tend not to lead to regulatory competition among states.
For example, very few countries produce wine in Europe with the intention of competing on “cost”. Rather the objective is to compete on “quality”. The latter, requires regulatory standards that regulate against a race to the bottom. The politics of this can be observed in the recent EU/USA TTIP negotiations.
Process regulation: race-to-the-bottom
This “race to the top” is less likely in what are often called “process regulations” associated with the factors of production. In particular, taxation, social and employment protection are not immune from cost competition among states and firms in the EU.
If the taxes of one state can be avoided by moving the tax base to another state, all states have an incentive to cut taxes in the hope that this will attract investment and increase their total tax revenue. The logical end game is that all states will end up having lower rates, or no tax rates, particularly in small open economies.
Social policy regulations that increase the payroll costs of firms are also highly vulnerable to the pressures of international regulatory competition.
The same is true of those social policies that interfere with managerial and employer discretion (i.e. works councils and other forms of corporate governance).
Those who advocate a “Social Europe” recognize this problem, but it is generally assumed that national problem solving capacity can be re-gained through re-regulation at the European or international level. This can only be achieved through intense political negotiations among national governments in the Council.
European wide problem-solving is most effective in the achieving the harmonization of product standards. It is least effective in harmonizing social and fiscal policies.
The asymmetry of integration
Collective political agreement that are aimed at making rules that would harmonize tax, social, wage, and welfare policies are generally met with political resistance i.e. positive integration.
These represent policy areas where national capacities are economically constrained by downward pressure of EU competition, and where European action remains blocked by conflicts of interest (veto’s) among national governments.
The outcome is a decline in problem-solving capacity in both the nation-state and the EU.
But where exactly do these conflicts of interest among governments originate?
Researchers who come from a comparative political economy perspective would argue that asymmetry of integration (between market-making and market-correcting) capacities can be traced to differences in national varieties of capitalism and the institutional architecture of the EU itself.
Fritz Scharpf (2010), puts significant emphasis on the role of European law in explaining this asymmetry.
To avoid a situation whereby member-states would agree to market liberalisation (removing borders to the free movement of peoples, goods and services) but fail to implement it, the European community has enshrined it in legal treaties, which are then monitored by the European Court of Justice (ECJ).
In certain cases (liberalization of public services) market-making regulations cannot be achieved through the Council, and depend on unilateral action by the Commission and the ECJ.
European law tends to preserve the status quo in liberal market economies (LMEs), whereas it tends to undermine the political compromises in social market economies (SMEs). Hence, in “social democratic” economies, the political left tend to be far more sceptical of European integration than their counterparts in southern Europe.
The European Court of Justice (ECJ)
The ECJ became a core engine of European market integration, as it ensured that member-states did not have to keep going back to the Council for consensus agreements on trade liberalization and political legislation. It is the defender of “liberalisation”.
The ECJ is the first of its kind, and a core reason why the EU is far more than an international organisation. In the absence of an EU-wide government, judicial activism, has, for some scholars, become a mask for politics, with the implications that judicial decisions are immune from political objections.
Unlike national law, where decisions can be reversed politically through parliamentary majorities, ECJ decisions can only be reversed by Treaty amendment.
Most of ECJ judicial action aims at extending negative integration, whereas political integration requires consensus in the Council, where all member-states have a veto.
For example, would the Danes agree to a federal agreement of social transfers? Would Germany agree to a fiscal union? Would Ireland agree to corporate tax harmonisation?
It is important to note how this judicial activism occurred; the ECJ, over time, has reinterpreted the commitment of member-states to create a common market as defending the subjective rights of individuals and firms against their member states.
Liberalization expanded far beyond an economic rationale.
For radical pro-Europeanists, this is to be welcomed. The loss of national autonomy was always going to be weighed by real and anticipated benefits of Europeanization.
However, this optimism got a shock when the French and Dutch rejected the proposed EU constitution, and when the Irish rejected Lisbon, and when the UK voted for Brexit.
In France, the dominant discourse against the EU constitution was that it was perceived as impeding upon their national social rights. Legally, and institutionally, the EU was perceived as incapable of responding to political preferences that sought to defend “Social Europe”. For many, the latter is not possible, given the legal constraints of the EU.
What this all of this suggest?
It implies that the structural constraints of European integration have cut off access to a European wide social market economy, precisely where Christian and Social Democratic political parties want to go. It suggests the EU cannot be a social market economy.
Discuss: do you agree?