Eurokolleg 44(2001) Ways, Byways and Third Ways to a Social and Democratic Europe by Michael Dauderstädt – European integration- not very social and even less democratic – Europe’s social democracy- only half-heartedly European – Third and other ways out of Europe’s various crises – From a contest between locations to competition between policies – Hard ways to a welfare union – Democratising integration Summary 1. The long-lived dominance of liberal (and conservative) policies and the onesided emphasis on market integration have created a deficit of democratic control in Europe, particularly over market processes. The social role of the Union – full employment, social justice – is relatively underdeveloped in spite of certain amendments, above all since the 1997 Amsterdam Treaty. The more unsatisfactory the outcome of marketled development – i.e. rising unemployment, poverty and inequality – the more serious is this situation. 2. This development also reflects the relatively modest influence of European social democracy on the integration process. Its potential influence was undermined at the outset by strong Euroscepticism and divergent national priorities, whereby there were greater differences between the parties over “national policy” issues than over “class” issues(employment, distribution). The more power Social-Democrats have held nationally, the less they have co-operated at European level. This danger is also threatening the most recent attempt at a joint strategy, the “Third Way”. 3. This joint strategy is however largely a fiction. For, as a result of their different structures, the individual Member States are affected differently by Europe’s common crisis of mass unemployment and overstretched social policies. National anti-crisis strategies are equally diverse. Progress was visible everywhere in the late 1990s: virtually all countries brought down their unemployment figures, reduced their budget deficits and rolled back the State. The variety of methods used testifies to the scope still available for national policymaking, while at the same time exacerbating competition in the field of social and employment policy. 4. The overall context of social-democratic policies in Europe is modified by globalisation and enhanced integration Series Eurokolleg 44(2001) 1

(internal market, monetary union). Not only companies but their all-round social and political environments are entering into competition. Admittedly, the EU treaties long ago restricted competition between national policies, yet there is still a threat of a “race to the bottom”, which is due to political perceptions and rhetoric rather than economic constraints. 5. A European welfare union must above all else allow scope for national growth and distribution policies, but must in addition complement these at European level where the national level is overstretched. Monetary and fiscal policy has already been Europeanised to a high degree. In order to achieve social justice, poorer regions must grow faster than the EU average and socially weaker population groups must have a larger share in prosperity. The central problem remains the trade-off between employment and income: this is where national divergences threaten the social consensus in Europe. 6. Given the differences in the nature of national problems, preferences and policies, a social-democratic strategy for Europe must combine scope for the individual players with guarantees that zero-sum games and “races to the bottom” will not occur. Because of their different conceptions of State and democracy, Europe’s Social-Democrats find it difficult to harmonise their views on how to make integration more democratic. Rather than by central directives from Brussels, the process of reform must be guided by dialogue and networking among decision-makers and representatives of those concerned at all levels. Finally, a social and democratic Europe needs a critical public at all policy-making levels. The European market in the early EEC was anything but free. 1. European integration – not very social and even less democratic The conservative/liberal integration project The foundation and initial phase of European integration was guided by ideas and individuals coming primarily from conservative, Christian-democratic political circles: Schuman, Adenauer, de Gaulle, de Gasperi(one exception: Spaak). What came much later to be dubbed the “democratic deficit” was in those days more of a yawning abyss. Moreover, it soon became clear that European law would take precedence over and could even overrule national law. The Common Market stood at the heart of the EEC; however it was not a neo-liberal end in itself, but a tool to preserve peace and freedom. In economic terms the Common Market was intended to achieve lasting, balanced growth. To this end it was embedded in strong sectoral policies(agriculture, energy, coal and steel) which could not in any sense be described as market-oriented. Although social considerations were not central to integration, which was ultimately driven forward by the quest for peace, they do crop up at prominent points in the Treaty text (“economic and social progress”, “constant improvement of the living and working conditions”). These aims were implemented through the Social Provisions chapter of the EEC Treaty(Art. 117-128), in particular the European Social Fund created therein and the Economic and Social Committee set up as an advisory body. Expenditure on the Social Fund, however, has represented only a modest proportion of the budget of the EEC and its successor organisations, the EC(European Communities) and EU(European Union). The growth phase of the 1960s required relatively few social flanking measures. Structural change(above all the unprecedented contraction in agriculture) was cushioned by full employment. The EEC responded to this change by establishing in 1964 the structural part of its agricultural policy. At the same time the social expectations of the population mounted and were reflected in a swing to the left, which was not only accompanied by strikes and unrest but also strengthened social-democratic and leftwing movements(SPD government in Germany, Labour in the United Kingdom, the end of 2 Series Eurokolleg 44(2001)

dictatorships in Greece, Spain and Portugal, The Treaty of Maastricht(1992) took the Socialist election victory in France), which addeepening of Europe one stage further in a vocated the then more modern(Keynesian) biased bid for liberalisation. Economic and economic policies. The EC’s social problems monetary union, in particular the single curchanged with the first enlargement taking in rency, removed yet more barriers to market the UK, Denmark and Ireland in 1972. The forces and expanded the room for manoeuvre Regional Fund was established in 1975 in order above all of businesses and the wealthy. By to help reduce income disparities in the intecontrast, the stability pact and the Maastricht grated area. This task became all the more imcriteria posed fresh constraints to an active portant with the accession of the relativeeconomic policy. Nonetheless, the Structural ly poor Mediterranean Funds increased considecountries Greece, Spain and Portugal, whose political influence strengthened the Community’s redistribution policies. EuroSocial-democratic influence in the 1970s was followed by the free-market trend of the 1980s. rably as a proportion of the EU budget during the course of the 1990s, thanks to the establishment of the cohesion fund and the acpean democracy likewise cession of Austria, Swetook a significant step forward during this periden and Finland. A Social Charter – only later od: the first direct elections to the European endorsed by the United Kingdom – laid down Parliament(1979). certain fundamental social rights of workers, most of them however lying below national The phase of stagnation in the early 1980s, standards. The Parliament’s role in EU decicharacterised by sluggish growth and rising sion-making procedures was also strengthened. unemployment(three million jobs lost between 1981 and 1984), led to a retreat from socialBetween 1992 and 1994 unemployment, which democratic beliefs. Thatcher came to power had fallen in the second half of the 1980s, rose in the UK, Kohl heralded a change of course in from 7.7% in 1990 to around 11% by the mid Germany and Mitterrand had to put an abrupt 1990s, with the loss of five million jobs. Income end to his experiment of “Keynesianism in one distribution within the EU also worsened country”. Europe appeared to be falling behind during the 1980s and 1990s. The adjusted wage the USA and Japan; this was attributed by share fell from around 75% on average in the Conservatives to too much State and too little 1970s to roughly 68% by the end of the 1990s. market. The next step towards integration, the The distribution was further worsened by a European internal market, was designed to shift of the tax burden onto the shoulders of remedy that situation from 1986/87 onwards. labour, while capital enjoyed tax relief. AltThe central principle here was “mutual rehough some poor Member States, especially cognition” of regulations, Ireland, did manage to which in actual fact introduced regulatory compeThe early 1990s were catch up, the gap between Europe’s poorest and ritition where no common notable for increasing chest regions remained larstandards were laid down. Yet here again the domination of Liberals and Conunemployment, injustice and Euroscepticism. gely unchanged. The citizens reacted with growing Euroscepticism: the proservatives was not comportion of those in favour plete; social concerns did also play a part(albeit of EU membership fell on average from over a modest one) in European decision-making 70% in 1990 to under 50% in 1997. procedures. Thus, under pressure from the weaker Member States, the goal of “economic and social cohesion” was enshrined in the Treaties, and the regional policy reform of 1988 The social-democratic change doubled the resources earmarked for the Strucof course tural Funds. Success was such that the freemarketeers appeared to be proved right. The All of this saddened and angered above all those second half of the 1980s brought growth and sections of the population – namely the poor, falling unemployment figures(the EU rate fell wage-earners and recipients of social benefits from 10% in 1985 to 7.7% in 1990). At the same threatened by cutbacks – generally regarded as time Euroenthusiasm among the population the main backers of social democracy and its grew and reached a peak in 1990. potential voters. Government budgets were Series Eurokolleg 44(2001) 3

European integration reveals social and democratic deficits. Market liberalisation takes precedence over policy harmonisation. increasingly funded out of their taxes, even though their proportion of the national income was diminishing. Social-Democrats in fact won parliamentary elections between 1993 and 1998 in Denmark, Germany, Finland, France, Greece, the UK, Italy, Portugal and Sweden. Power changed hands in the opposite direction only in Spain(1996), Ireland(1997) and Austria (2000), while in the other countries(Netherlands, Belgium, Luxembourg) the Social-Democrats remained in office continuously. democratically elected governments – is not itself elected. Members of the EU Commission are likewise appointed, albeit under Parliament’s scrutiny and with the possibility of dismissal. From the perspective of EU citizens, the Union’s decision-making procedure is subject to very little democratic political control. Indeed, this often enables their own elected governments to abdicate from their political responsibilities, by pointing to European requirements and constraints. The Social-Democrats’ resurgence in Europe When all is said and done, the social component was also reflected in the Amsterdam Treaty, of the integration exercise remains similarly which made the first corrections to the liberal modest. The body of Union law, the acquis model. The Labour Party’s victory and the new communautaire, is intended to consolidate the Blair government meant that the United Kinginternal market. The social consequences must dom too now accepted the Social Charter, and be borne by the Member States and their local the Charter was incorporated into the new authorities, which – especially in the monetary Treaty. Furthermore, the union – feel compelled to social partners now have the option of drawing up binding regulations at their own initiative. A new chapThe late 1990s brought Social-Democrats to power in almost all Member States. cut costs in order to compete with other locations. Therefore the Union’s weakness in the ter on employment gave social policy sphere is the Union special responsibility for the labour without doubt attributable much less to an avermarket. Employment guidelines were laid down sion of the EU institutions to a European social at the 1997 “Jobs Summit” in Luxembourg, and model than to the reluctance of individual Memthe Commission and Council announced several ber States(first and foremost the United Kingemployment policy initiatives at the next few dom, but often Germany too) to attach greater summits. Similarly, “democratisation” of the importance to social policy in general and at Union made some headway: the Parliament’s EU level in particular. Redistribution(transfer powers were further extended, EU citizenship payments) is most likely to take place between was introduced and the Treaty provides for States which use their political influence to ecosuspension of an EU country’s membership if nomic and financial ends. that country seriously infringes human rights. The full effects of this social-democratic change As a specific manifestation of globalisation, of course have yet to be felt. Whereas the econoEU integration shares its asymmetry: increamic situation has improved(cf. Table 5, p. 11) sing freedom in society – especially for people and the EU’s approval rating has risen slightly, who are mobile, powerful and rich – through the underlying crisis has by no means been market liberalisation, without at the same time overcome yet. internationalising governmental and State structures. Admittedly, the incipient European suDespite these changes at the end of the decade, prastate(or, rather, its multi-layer policies) the current state of affairs in the Union can be allows for a good deal more political influence described as only moderately social and over market processes than does any comdemocratic. At its core it is a market-led exerparable institution of global governance(IMF, cise in liberalisation which is not embedded in WTO, ILO, World Bank, etc.) over the intera governmental framework. Public policies beynational economy, but then again liberalisation ond the nation-state are based on intergovernon the internal market of Euroland goes much mental Treaties and in all important fields further. Ultimately what prevails is “negative require authorisation from the Council, which integration”, with integrated markets and diffe– although it is composed of representatives of rentiated policies. 4 Series Eurokolleg 44(2001)

2. Europe’s social democracy – only half-heartedly European Apart from the trade unions, Europe’s socialWhat is more tenacious is the diversity of democratic parties are the movements which social-democratic manifestos and policies, could most readily be expected to lend both a which hampers European co-ordination. These social and a democratic reflect different national dimension to European integration. Two factors The stronger the influence problems, levels of development, social and ecohave long stood in the of social democracy on nomic structures and also way of such influence: • left-wing Euroscepticism in the early days, countries’ national politics, the less keen it has been to shape the EU. the traditional attitudes to Europe of national elites. A European policy is first and foremost a foreign and policy. Apart from the • national dissimilarities, which make it aim of peace, the basic policy thrust of social difficult for all of Europe’s social-democratic democracy – geared to boosting prosperity and parties to harmonise their views and manidistributing it fairly – contains few original ideas festos. on foreign policy, let alone on European policy. On key European policy issues concerning the Thus it was that social democracy in Germany EU’s institutions and finances, as well as on did not embrace the idea of integration until many individual policies such as enlargement, the Godesberg Programme – and even then onnational attitudes prevail over party-polily to a certain extent. The British Labour Partical considerations. This is borne out by an ty did not join the Party of European Socialists overview of social-democratic positions. (PES) until years after the UK’s accession to the EU. Wherever Social-Democrats have been The Table confirms some obvious assumptions: able to achieve their aims(social justice, social in the more Eurosceptical countries such as the democracy) in the domestic arena, they have UK or Denmark and in the new Member States taken exception to any restriction of this room Sweden and Finland(Austria being an excepfor manoeuvre. tion), Social-Democrats tend to oppose a deepening of Europe along the lines of a federal The relative interest in European co-operation State. This also ties in with a preference for shown by Social-Democrats during the period unanimity in the Council, allowing for national of conservative dominance declined markedly vetoes blocking EU decisions. More common in the second half of the ground is apparent on the 1960s. The possibility of implementing their own policies nationally, now that they were in government, led to a neglect of Apart from the aim of peace, the basic policy thrust of social democracy, dominated by societal concerns, contains issue of parliamentary scrutiny, where almost all parties would like the European Parliament to have more power; at the sathe European level. few original ideas on either me time, however, the Despite the formation of the PES in 1974, Euforeign or European policy. Eurosceptical countries call for greater scrutiny rope’s Social-Democrats by national parliaments. were unable to agree on a common election Whereas a majority of social-democratic parties manifesto for the first direct elections to the would like a more prominent role for the EU European Parliament in 1979. Only in the in social and labour market policy, attitudes 1980s, when faced with the liberal revival in on foreign policy issues vary much more widely. Europe, were they once again prepared to coThey are all in favour of a Common Foreign operate. But even in the 1990s Euroenthusiasm and Security Policy(CFSP), but its specific was less in evidence on the Left than among orientation ranges from close links with NATO continental Liberals or Christian-Democrats. in the UK’s case to calls for neutrality from the Only Conservatives(especially in Britain), and new Member States. Other contentious points of course Communists and right-wing extreinclude co-operation with the Organisation for mists, are appreciably more Eurosceptical than Security and Co-operation in Europe(OSCE) Social-Democrats. and a merger with the Western European UniEven SocialDemocrats are guided mainly by national concerns in matters of foreign and security policy. Series Eurokolleg 44(2001) 5

Table 1: National social-democratic positions on the goals of European integration and reform of the EU institutions Party SPD (Germany) PSF (France) PDS(ex-PCI) (Italy) PvdA (Netherlands) PS (Belgium) SD (Denmark) PASOK (Greece) PSOE (Spain) Labour (Ireland) Labour (United Kingdom) SPÖ (Austria) SD (Sweden) SSP (Finland) Finalité 1990-97 Constitution Federation, constitution Functional extent of integration 1990-97 Internal market, labour market policy, environmental policy, consumer protection, social policy Internal market, EMU, labour market policy, fiscal policy, energy policy, social policy CFSP post-1992 Pro CFSP, no merger with WEU, co-operation with OSCE Pro CFSP, neutrality, merger with WEU Federation, constitution EMU, environmental policy, social policy Pro CFSP, European army, co-operation with OSCE Internal market, environmental policy, energy policy, social policy Pro CFSP, merger with WEU Constitution Internal market, labour market policy, fiscal policy, social policy Pro CFSP, co-operation with OSCE Co-operation, EU not a State Labour market policy, environmental policy, consumer protection, social policy No merger with WEU Constitution Internal market, labour market policy, social policy Pro CFSP, merger with WEU, pillar of NATO Federation, more than a free trade area Internal market, EMU, environmental policy, social policy Pro CFSP, co-operation with OSCE EU not a State Internal market, labour market policy, environmental policy Confederation, EU not a State Internal market, labour market policy, environmental policy, social policy Federation EMU, labour market policy, environmental policy, social policy Pro CFSP Pro CFSP, as a pillar of NATO Pro CFSP, neutrality, co-operation with OSCE EU not a State Labour market policy, environmental policy, consumer protection, social policy Confederation, EU not a State Internal market, EMU, labour market policy, environmental policy, energy policy, social policy Pro CFSP, neutrality, no merger with WEU Pro CFSP, neutrality Principles of institutional structure 1990-97 EU citizenship (1993-96) Two-chamber system, more QMV in Council, dual majority, more scrutiny by national parliaments, list of competences Catalogue of basic rights, strengthen basic social rights More power for Council, more QMV in Council, dual majority, EP right of initiative, more scrutiny by national parliaments, more subsidiarity, list of competences Catalogue of basic rights, strengthen basic social rights More QMV in Council, dual majority, less subsidiarity, list of competences Catalogue of basic rights, EU citizenship, strengthen basic social rights More QMV in Council, dual majority Strengthen basic social rights Two-chamber system, more QMV in Council EU accession to ECHR More QMV in Council, EP right of initiative, more scrutiny by national parliaments, more subsidiarity, list of competences Two-chamber system, more QMV in Council, more subsidiarity More QMV in Council, dual majority, EP right of initiative, more scrutiny by national parliaments, less subsidiarity More subsidiarity More QMV in Council, dual majority, EP right of initiative, more scrutiny by national parliaments, more subsidiarity Two-chamber system, more QMV in Council, EP right of initiative, less subsidiarity More QMV in Council, dual majority, more scrutiny by national parliaments Strengthen basic social rights Catalogue of basic rights, EU accession to ECHR, strengthen basic social rights EU accession to ECHR, EU citizenship, strengthen basic social rights EU citizenship, strengthen basic social rights EU accession to ECHR, strengthen basic social rights Catalogue of basic rights, EU accession to ECHR, strengthen basic social rights EU citizenship, strengthen basic social rights More scrutiny by national parliaments, more subsidiarity Source: Andreas Maurer: Der Wandel europapolitischer Grundorientierungen nationaler Parteien in der Europäischen Union, in Mathias Jopp, Andreas Maurer, Heinrich Schneider: Europapolitische Grundverständnisse im Wandel. Analysen und Konsequenzen für die politische Bildung, iep Analysen 14, Bonn 1998, pp. 301-364 6 Series Eurokolleg 44(2001)

on(WEU). Even on the issue of EU citizenship, These divergences have tended to increase at the greatest harmony of views concerns the call times when Social-Democrats have held gofor a strengthening of basic social rights, vernmental office in the Member States. It rewhereas the parties tend to disagree on other mains to be seen whether the convergence points(catalogue of basic rights, accession to emerging between the various parties in the the European Convention for the Protection of early 1990s concerning key “class-related” Human Rights and Fun- aspects of social-demodamental Freedoms – ECHR). Despite their demands for a more social Europe, cratic policy-making, namely social security and employment, will contiDifferences of opinion Social-Democrats tend in the nue. Most parties have within the parties further complicate the picture. Perspectives on European integration range end to prefer national solutions to economic and social problems. been hoping for help from the European level, in view of the crisis in both these areas caused from traditional left-wing by mass unemployment. scepticism(“capitalist Europe”) to the view that The Blair-Schröder Document of 1998 the EU can protect its members from globapostulated a new, more liberal consensus among lisation and US hegemony, to the aspiration for Europe’s Social-Democrats, while at the same a pan-European welfare state. Regional party time emphasising national responsibilities and branches may have different positions from proposing a mutual learning process. It remains those of the national leadership: thus, some to be seen to what extent the agreement on speGerman Länder governed by Social-Democrats cific measures really is sufficient to overcome may prioritise different aspects of European the crisis(see below). Until now there has been policy from the federal government, likewise more divergence than convergence in respect in social-democratic hands. of predominantly national policy fields. 3. Third and other ways out of Europe’s various crises The concepts of the “Third Way” and “progressive governance” constituted an attempt by Social-Democrats to find a response to the European crisis of the 1990s devoid of the flaws of the failed remedies attempted during the 1973-85 period of stagnation. Any such strategy must react to a very multi-faceted crisis: weak growth, which is one of the main causes of mass unemployment; slow structural change into an information and service society, which is likewise contributing to unemployment; the strain on government budgets, which is provoked above all by unemployment but is in addition exacerbated by demographic trends (the growing proportion of elderly people in the population); the opening-up of global markets, which is accelerating structural change, thereby affecting the composition of unemployment and endangering the taxation basis of the State. Europe’s various crises Economic and social circumstances in Europe are anything but uniform. As shown by Table 2, in the crisis year of 1994 the unemployment rate was relatively high everywhere, yet it varied between virtually full employment in Luxembourg and Austria and serious mass unemployment in Spain. By the same token, government debt ranged from worrying double-digit sums in Greece and Sweden to an almost balanced budget in Luxembourg. All countries bar Ireland were troubled by demographic developments, albeit to different degrees. The service sector lagged behind, especially in Germany and Spain. The Social-Democrats’ strategic responses differ just as considerably. Admittedly, hardly any party advocates traditional anti-crisis measures using job creation programmes financed through debt. The pressure to comply with the Maastricht criteria, at least in Euroland, rules out such a course of action. But a variety of solutions has been put forward, both within and beyond the spectrum of what has since 1997 been known as the Third Way and since 2000 as “progressive governance”, as explained by Wolfgang Merkel and Wolfgang Thierse in an SPD document of 1999, which arose as a reaction to the 1998 Blair-Schröder document. These different approaches are on the one hand determined by the different structures of socieEconomic and social problems vary considerably from one Member State to another. Series Eurokolleg 44(2001) 7

Table 2: Europe’s weaknesses Country Belgium Denmark Germany Finland France Greece UK Italy Ireland Luxembourg Netherlands Austria Portugal Sweden Spain Unemployment as a% 1994 10,0 8,2 8,4 18,4 12,3 8,9 9,6 11,4 14,3 3,2 7,2 3,8 7,0 9,8 24,1 Government debt Proportion of people as a% of GNP over 65-year 1994 1998-2015 -5,1 16,4- 19,1 -3,9 15,2- 19,2 -3,5 15,9- 20,3 -6,2 14,6- 20,1 -5,6 15,6- 18,4 -12,1 17,1- 21,4 -6,8 16,0- 18,7 -9,0 17,6- 22,6 -1,7 11,4- 13,6 2,6 14,1- 17,0 -3,4 13,6- 18,5 -4,4 14,7- 17,8 -5,8 15,4- 18,2 -10,8 17,4- 21,8 -6,3 16,5-19,7 Services as a % of GNP (1997/8) 70,0 69,2 44,1 61,7 71,5 71,7 66,7 66,9 60,6 .. 70,0 68,1 60,9 71,2 25,1 Source: Eurostat, UNDP ties and welfare states in Europe, which are in turn partly the product of past social-democratic policies, and, on the other, result from the varying problems experienced in individual countries. The choice of strategy depends first and foremost on the traditional structures of the welfare state, its funding and the labour market: • Welfare states can be divided into three types(cf. Esping-Andersen): Anglo-Saxon/ liberal, with limited residual protection; Christian-Democratic/corporatist, which is earnings-related(central and southern Europe); and social-democratic/institutional(Scandinavia). The welfare state in the poor countries of southern Europe, with its low-level benefits, could in fact be seen as a fourth category. Each system of social security has a different funding method(taxes, contributions, insurance premiums), form of organisation, coverage of persons and risks, level of expenditure and structure of expenditure (distribution among individual benefits such as age, health, unemployment, etc.). These last two depend not only on the level of benefits per recipient but also on the extent of unemployment and the age structure in the population. • Funding structures range from the Danish model, with 75% paid by the State and around 10% by each of the social partners, to the Dutch model where the State contributes only 16% and the employee and employer rates are almost 50% and 20% respectively. For all that, many of these charges are interchangeable: where old-age pensions are funded out of taxation(e.g. Denmark), non-wage labour costs appear to be lower than in a contributions-based system. Nationals of the United Kingdom pay taxes rather than contributions to health insurance funds, thereby gaining access to the National Health Service. • European countries also differ significantly in terms of their labour market structures – not only their headline unemployment figures but also productivity growth, annual working time(extent of part-time work), activity rate(women’s labour force participation) and age structure. Growth arises in equally varied ways: in some instances more as a result of higher productivity, and in others 8 Series Eurokolleg 44(2001)

Table 3: Minimum income levels and social expenditure in the EU Country Belgium Denmark Germany Finland France Greece UK Ireland Italy Luxembourg Netherlands Austria Portugal Sweden Spain Minimum income as a% of average per capita income 1995 30,9 43,7 14,6 20,7/21,7 19,3 20,7 29,9 29,8 38,7 20,1 15,4 24,7 20,8-30,5 Social expenditure as a% of Gross Domestic Product 1997 28,5 31,4 29,9 29,9 30,8 23,6 26,8 17,5 25,9 24,8 30,3 28,8 22,5 33,7 21,4 Sources: Pierre Guibentif/Denis Bouget: Mindesteinkommen in der Europäischen Union – ein sozialpolitischer Vergleich, Lisbon 1997; Göran Therborn: Die Gesellschaften Europas 1945-2000, ein soziologischer Vergleich, Frankfurt am Main 2000 thanks to a more extensive use of labour; here, rates of pay are crucial in influencing the distribution of these factors. Then, against this backdrop, there is also the part played by the respective parties’ national preferences and political/ideological traditions and basic inclinations. The variety of policies pursued, especially among social-democratic parties in government(either alone or in coalition), is remarkable. When in opposition, even less realistic notions are reasonably easy to sell; when in power, however, a party programme must stand the test of social and economic reality. Nonetheless, even the policies of social-democratic governments reveal an impressive array of approaches. Many ways out of the crisis In key economic and social policy areas, Europe’s individual social-democratic parties pursue a policy mix consisting of certain similarities(e.g. a tight fiscal policy) but also significant differences, e.g. in the ratio of government expenditure to GDP(in 1994, Ireland under 40% and Sweden over 70%) and the ensuing room for manoeuvre and resources available to governments. On the monetary policy front the main difference is between the countries participating in monetary union and those outside of it – the UK, Sweden and Denmark – which were able to revive their economies after the 1992 crisis by devaluing their currencies against the ECU/Euro. The State was being rolled back in almost all Member States(with the exception of Portugal and Luxembourg) until the year 2000, by an average of 5% of Gross Domestic Product (GDP). The EU average fell from 51.3% in 1994 to 46.3% in 2000. The largest relative reduction in State expenditure took place in the Scandinavian countries(Sweden by 15%, Finland by 13% of GDP) and in the Netherlands (almost 9% of GDP). Those countries also saw the greatest decline in social expenditure relative to GDP, whereas it continued to rise in Germany and certain other countries. The State has been rolled back in almost all Member States. Series Eurokolleg 44(2001) 9

Table 4: Overview of social-democratic governments’ economic and social policies Country Monetary policy UK Originator of the Third Way Independent Central Bank, cautiously in favour of euro Sweden The social-democratic model par excellence, reformed but not abandoned Independence Denmark Successful inclusive model Independence Netherlands Third Way avant la lettre Hard currency policy, pro euro France State-oriented Germany Homeland of the “ Neue Mitte ” (New Centre) Austria Continuity of welfare state Pro euro, but in favour of ECB pursuing a growthoriented policy Pro euro Hard currency policy, pro euro Fiscal policy Sound/restrictive Labour market policy Wage spread, but minimum wage Social policy Investment in education and health, “welfare to work” Tendency for budgets to balance in the long term Anti-cyclical, but deficits limited in terms of time and quantity Tight No longer Keynesian policies, but tax increases Austerity policy, tax reform, eco-tax High proportion of employees in State sector and a very active policy of job place ment and retraining Pension reform, preser vation of qualifying periods Moderate pay policy, reduction of labour supply (incl. early retirement, time off) and active skills training Social benefits cut, but high wage replacement high wage replacement high wage replacement taxation Pay restraint(Wassenaar Agreement 1982), flexibilisation and more part-time work Restriction of previously very generous and much abused regulations, mix of basic State cover and additional private provision Shorter working hours Only limited reforms – apart from a reform of unemployment benefit Youth unemployment programme, Alliance for Jobs Reversal of some conservative cutbacks, pension reform Consolidation for Maastricht and post-recession in mid 1990s: fair burden-sharing No major changes to a successful policy Further extension of welfare state The policies of many governments(not only The Maastricht Treaty did of course place tight social-democratic ones) have borne fruit. In the constraints on the fiscal and monetary policies year 2000 unemployment was lower in of would-be euro zone members, but the variety Europe; government budgets were healthier of methods used demonstrates how much room and relatively smaller. Table 5 shows the for manoeuvre still attaches to national policies changes compared with 1994. It is noteworthy in the fields of greatest concern to Socialthat many countries managed at one and the Democrats(employment, social equilibrium). same time to reduce con- Indeed, policy competisiderably the share of State expenditure and government budget deficits and to bring down unemployment. The main reason was that growth picked up Increasingly intense policy competition in Europe is being played out less in the marketplace than in public debate. tion in these fields is more intense than ever in Europe. A critical public consisting of the media, academics, international organisations and in many countries, espe- voters compares national cially in the poorer countries Portugal, Spain attempts at solutions and awards marks to ever and Ireland, but also in Scandinavia, the Nethermore sensitive governments and elites. This lands and – not problematical in the first place policy competition is played out under even – Luxembourg. Greece suffered job losses even harsher conditions within the monetary union, though it enjoyed healthy growth. This success since classic policy instruments have been conflicts with the traditional social-democratic/ denationalised while at the same time it has Keynesian assumption that job creation can be become easier to compare results and compeachieved only – or primarily – through additiotition has intensified. nal State expenditure, whereas austerity policies destroy jobs. In Germany and Austria growth In view of this competition, is there in fact any was weak and unemployment began to rise once need for European Social-Democrats to unite more. to bring about prosperity, social justice and 10 Series Eurokolleg 44(2001)

Table 5: Europe’s progress Country% change in unemployment Belgium Denmark Germany Finland France Greece UK Italy Ireland Luxembourg Netherlands Austria Portugal Sweden Spain EU Source: Eurostat -1,5 -3,8 +0,2 -9,5 -2,3 +1,1 -3,8 -0,5 -9,6 -0,6 -4,8 +0,2 -3,5 -3,5 -10,3 -2,8 Reduction in government budget deficit as a% of GDP since 1994 4,6 1,5 2,5 10,3 4,1 10,8 7,7 7,5 3,4 0 4,4 2,7 4,3 13,2 5,6 5 Average annual growth since 1996 +2,7 +2,4 +1,9 +4,7 +2,7 +3,5 +2,8 +1,9 +8,2 +5,2 +3,6 +2,4 +3,4 +2,8 +3,5 +2,6 democracy in Europe? Is not the national arena adequate for that purpose, even after the introduction of the euro and eastward enlargement? Or would it not be simpler to ensure that the European level allows national players sufficient scope, rather than going to great pains to devise an integrated European strategy? The goal of a social and democratic Europe has often been a prisoner of its own history in this respect. Integration within the Union to date has created conditions which make national policies more difficult to control. The abdication of power over national economic policy in favour of markets and supranational institutions has without doubt progressed further within the EU than anywhere else, but does still allow a good deal of scope for appropriate national solutions. Nonetheless, unless European rules are drawn up to prevent success being achieved at the expense of neighbours/competitors, there will be a risk of “races to the bottom” and zero-sum games. 4. From a contest between locations to competition between policies Globalisation has exacerbated competition on all markets, intensifying the risk of such conflicts. The anti-crisis strategies of Member States governed by Social-Democrats are themselves part of an intricate contest, whereby the goal-posts of each country’s success are constantly shifting. Regulated competition between locations in the internal market Companies and locations deploy a profusion of measures and mechanisms to boost their market position, their proceeds and profits, thereby generating not only progress but also Series Eurokolleg 44(2001) 11

Mercantilist Euroland – an importer of employment. 12 problematical externalities. In order to keep the latter under control, States and supranational organisations have devised a profusion of regulations, which are mainly a burden on companies but do also protect them. Conversely, public institutions produce important inputs which improve competitiveness. On the positive side these combine to form “systemic competitiveness”; on the negative side they produce distortions of competition, which do at least give short-term advantages to individual companies but are harmful when they become more widespread. As a rule, national policy regulation obviates a whole series of distortions of competition and market failures at home – as listed below – but readily turns a blind eye when the damage occurs on the other side of the border. Such problems are the subject of numerous regulations in the EU internal market(cf. Box p. 13). In addition to competition affecting mobile products and investments, there is in Europe competition – albeit weaker – involving mobile citizens and workers: • as tax-payers, wealthier citizens in particular try to move their place of residence to wherever the tax burden is lightest; • as recipients of social benefits, they try to maximise the real value of payments received, which is why national social security administrations wish to prevent the “exporting” of claims and payments(e.g. under the German system of nursing care insurance, benefits are paid out to carers and not to patients); • as wage-earners they become migrant workers, moving to wherever pay and employment opportunities are best – although not usually in such numbers that levels of pay are equalised. The EU has already put a check on wage competition with its posting directive. A contest between locations in the European social space Achieving a social Europe means taking these problems into account at two levels: externally and on the internal market. • On the external front, many Social-Democrats hope that, because it is so large and hence less dependent on foreign trade, Europe’s economy is less vulnerable to globalisation. Similarly, the EU carries more weight than individual Member States when it comes to putting forward its interests in international economic negotiations and at the relevant organisations(WTO, IMF, etc.). It is able in these forums to press for better social and environmental standards and for growth-oriented solutions to balance of payment and debt crises. But it remains vulnerable to international financial markets, whose “verdict” has already severely depressed the rate of the euro. Euroland can however afford to let the exchange rate mechanism run its course: devaluation improves price competitiveness, thereby increasing exports and employment, albeit at the cost of termsof-trade losses and inflation risks which push down real incomes in relative terms. One could in fact conclude that Euroland has a mercantilist economic foreign policy(tight fiscal policy, moderate wage policy, undervalued currency). Euroland would be better able than an individual Member State to combat a short-term economic crisis. Monetary policy is already centralised, and fiscal policy can more easily be co-ordinated if individual finance ministries no longer have to worry about the external value of their currencies and if the interest rate risk is contained. Lastly, the EU would also be in a better position than any individual country to reclaim sovereignty over economic policy, which it or its Member States have relinquished to the market or to international organisations during the lengthy phase of liberalisation since 1970. • Global competition pales in comparison with the contest between different locations within the EU and above all in Euroland, with its common currency. Exchange rate risks, transaction and transport costs are far lower in this area than in the international economy, where the protection they afford local traders should not be underestimated. This increases vulnerability to activities which distort competition, especially on the part of the State at all levels. To the extent that the EU Member States turn into competitor countries which see it as their main task to safeguard and boost the competitiveness of their companies and their location, there is potential for the Union to become dangerously conflict-prone, above all because of the threat of „races to the bottom“. But government action can sometimes deviate from this logic. For instance, certain Member States charged companies very dearly for the purchase of UMTS licences and attracted criticism of adverse distortions of competition. Series Eurokolleg 44(2001)

Competitive risks and their regulation in the EU • Companies can attempt to sell their products more cheaply by reducing the quality. This can also be done by means of certain production processes(e.g. by using poorer inputs). To the extent that consumers could be harmed, State regulations on consumer protection are enacted. But these must not hinder access by consumers to products which are not harmful but merely cheaper or different(e.g. beer not brewed in accordance with Germany’s Reinheitsgebot legislation). The market must be allowed to operate, while the State must ensure transparency where appropriate(e.g. labelling). In this area the EU has already regulated competition in the internal market to a large extent since 1992. • Matters become more complicated when companies cut costs by altering their production processes in ways which partly externalise costs, e.g. to the detriment of the environment. Here there is a need for State controls, harmonised internationally, even where product quality is unaffected. This is a particularly critical aspect of international trade policy, since it permits only product-related discrimination. The acquis communautaire limits competition in Europe by restricting straightforward externalisation of costs. • All companies are keen to reduce labour costs. Here too there is a plethora of surveillance measures, some of them international, to forestall or restrict harmful practices(neglect of health and safety, child labour). Minimum wage rates protect pay levels to some degree. Working hours and time off are subject to statutory minimum standards and collective agreements. Ever since 1957 the Treaties have contained an article compelling Member States to comply with the rules on paid holidays(Art. 120 EEC Treaty). A number of other provisions guarantee minimum employment standards (health and safety in the workplace), which increase labour costs at least indirectly. Labour costs can in addition be affected by methods of taxation and methods of funding social security. • Naturally, employees attempt through their representative bodies(works councils, trade unions, etc.) to safeguard and increase their pay and to ease working conditions. All these social and national constellations of industrial relations therefore have an impact on competition and need to be regulated in the European internal market. Despite the(limited) introduction of European Works Councils, EU progress in this area has been very meagre(e.g. on EU company law). • One classic problem of competition is augmented market power resulting from dumping, price-fixing, cartels, takeovers and mergers, monopoly positions, etc., all of which are the subject of national and European competition policies. • Competitive problems are often created not only by the selfish conduct of companies but also by government business support schemes. Financial subsidies(grants, cheap loans, etc.) or tax relief in the form of general reductions in business taxation or specific tax-breaks(e.g. rules on writing off or deducting certain costs, etc.) are of direct relevance here. But infrastructure or cheap inputs provided by the State(e.g. energy, water) have a similar effect. National or European controls not only prevent distortions but also protect municipalities, regions or Member States from being played off against each other by potential investors. But where should the dividing-line be drawn? Education, health and research likewise produce public goods which give companies a competitive edge. This is where we encounter systemic competitiveness, which today’s business location policies are designed to maximise. • Finally, economic policy sometimes pursues a “ beggar thy neighbour” strategy, aiming to solve its employment problems at the expense of trading partners. It may attempt to give the national economy a competitive advantage by means of customs duties and trade barriers. This is now quite impossible in the EU and increasingly less feasible worldwide. But a competitive edge can still be obtained on foreign markets by devaluing the national currency or lowering inflation. Inasmuch as economic policy strives to do this by suppressing domestic demand(restrictive fiscal, monetary and income policies), it may trigger harmful competition which ultimately curbs demand worldwide. Such mercantilism might appear pointless in the monetary union, but it still remains a threat. But “ competition is good for business ”. Policies must not aim to align competitive conditions in an economic area. On the contrary, the aim should be to build on the different advantages and existing capabilities of individual locations, companies and persons – for everyone’s benefit wherever possible, of course. The success of capitalist economic development consists in continually improving productivity by devising new products and processes. In extreme cases, if the economy or individual companies are burdened with too many obligations and costs, they will cease production. That may even be desirable in certain instances, where the externalities outweigh the value added. But it would be fatal to demand, for example, that a poorer and less productive EU Member State (or a future member in central and eastern Series Eurokolleg 44(2001) 13

Conflicts in Europe can be avoided by drawing a clear distinction between homegrown problems and ones caused by foreign competition. Europe) must pay the same wages, grant the same social benefits and meet the same environmental obligations as the richest and most productive economies. The catching-up process in fact demands that, during the transitional phase, poor locations are attractive because costs are lower there. On the contrary, regional policy in most countries – and most notably in the EU – makes deliberate provision for distortions of competition in favour of weaker locations, sectors or companies; these may and should be supported with subsidies, tax relief and infrastructure facilities. At EU level this raises the problem of deciding who is entitled to receive what assistance, and for how long; moreover, what sacrifices a rich location(i.e. one not receiving preferential treatment) should make for the sake of potential competitors. After all, consumers in rich regions can also benefit from subsidised and hence cheap goods produced in poor locations, as long as this leads to lower prices and not merely to higher factor income, but they might pay for it through a loss of income if their own producers are forced off the market. This distribution problem must be solved politically since it is created politically. The close interlinking of national economies(if indeed one can still refer in Europe to national economies) inevitably means that action taken by one country affects the interests of another country more rapidly, triggering reactions and conflicts which must be solved politically. But a retreat from economic integration is virtually unimaginable. The only solution left, therefore, is better European management of competition, whereby “better” signifies above all more social but also more democratic. The number one task of such management must be to distinguish between those problems really caused by competition and those passed off by the rhetoric of globalisation and competitiveness as international problems, but which are in truth home-grown and can be solved by taking perhaps painful decisions on distribution at domestic level. A welfare union is more than the sum of national strategies for growth and justice. 5. Hard ways to a welfare union A social-democratic strategy cannot be confined to managing conflicts between national strategies for more growth, employment and justice in Europe. After all, European policy is more than the sum of national efforts. But even a guarantee of national scope for a policy of social justice would be an important contribution to a social Europe which creates prosperity for all under the conditions of an integrated market and a common currency. Such a “ welfare union ” must facilitate two things: growth and fair distribution, ensuring that all of Europe’s citizens have a share in increasing prosperity – perhaps not to the same degree, but at least in a way that excludes as few as possible. This means first and foremost that the incomes of poorer Europeans should rise by an above-average amount, both those of poor minorities in richer countries and those of the majority in poorer countries. In the long term this would bring us a little closer to the ideal of equality of opportunity. Ultimately the distribution of capital and labour in Europe determines the distribution of income and standard-of-living opportunities; these should be promoted in the following areas, to be explored in depth below: a) Investment should be facilitated through monetary policy and intensified by industrial policy, b) with its regional distribution leading to as rapid as possible an equalisation of income; c) this depends on labour market strategies, which often evaluate employment and income differently, d) immediately raising the social policy question of income for persons not in work. a) Wooing investors On the supply side, growth occurs as a result of an increased and/or more productive use of the factors of production, mainly capital and labour. But this supply requires demand, in the form of consumption, investment and exports. In the monetary union, this process is now influenced to a high degree by the economic policies of the European Central Bank, whose monetary policy affects the use of capital on the supply side, and, on the demand side, influences in particular investment and – through exchange rate policy – exports. European policies strive above all else to forestall disruptions to growth. Monetary union will 14 Series Eurokolleg 44(2001)

prevent exchange rate disruption internally and tomer-oriented and more efficient. Liberals mitigate it on the external front. National fiscal expect only the pressure of competition to force policies have reduced deficits and indebtedness the public sector into reforms, and they welunder pressure from the Maastricht criteria and come competition in Euroland for this reason. the stability pact. Wage rises have been lower The alternative would be policy competition in than productivity growth and have therefore which democratic public opinion(elected repretended to be deflationary. Both of these factors sentatives at various levels, the media, civil sohave eased monetary policy, allowed interest ciety organisations, supervisory bodies such as rates to fall and encouraged investment, in turn courts of auditors, higher-level authorities, etc.) boosting growth and pushes through “best employment. Euroland has nevertheless attracted relatively little foreign capital; conversely, Europe needs policy competition, since it optimises public service provision by practice” reforms on the strength of other countries’ experience. Where public services are prothe weak euro has provospreading best practice. vided by private operaked a rise in exports. What tors in competition with could be a cause for conpublic ones and on comcern, however, is weak domestic demand, mercial terms, this can hamper access by marespecially if the export boom subsides. ginal population groups which either live in remote areas or are too poor to afford expensiNational growth strategies aim particularly to ve services. make their own location attractive to investors. Foreign labour, by contrast, is normally sought out only when serious bottlenecks occur; labour b) Regional solidarity market and employment policies are geared to better use of domestic labour(on this point see If the destiny of locations is left to the market “Working, but not poor”, p. 16). When proalone, a problem of distribution soon arises: moting investment it is necessary to avoid a attractive locations receive more tax revenue form of competition which seeks to lure invesand can use it to offer additional and better tors solely through lower taxes, and to support inputs or to reduce their taxes, thereby becoa public policy which guarantees favourable ming even more attractive. Desirable though investment conditions and competitive producthis virtuous circle may be from the point of tion through an efficient use of tax revenue view of the successful location, the resulting and through appropriate regulation. Various geographical inequality of economic developtiers of government in different European ment is likely to be all the more problematical. locations are offering the whole gamut of public If the Union or one of its Member States adopts goods and services to this end, from social countermeasures in the interest of a social security to health, education, research and justice, it not only distorts competition but must infrastructure. A contest between locations also ask itself whether or not it is contributing could, on the one hand, cause these public proto an inefficient supply of public products(and viders to improve their services: the openingto the patronage which might lie behind it) in up of public procurement in the internal market weaker locations, rather than promoting real has already entailed savings for public entities development(e.g. as happened for many years as customers. On the other hand, public service in Greece). It should however also be clear that, providers will attempt to defend themselves once they have successfully caught up, the politically against this pressure, especially when newly enriched locations must in turn show they come into competition with private operasolidarity with poorer regions and graduate tors, maybe from other Member States. from recipient to donor. There can be little justification, particularly in employment terms, in This is where traditional and progressive continuing to use EU resources to entice foreign social democracy are most likely to clash. investors and migrant workers to locations such Whereas classic social democracy wishes to as present-day Ireland, which have already protect this sector for various reasons(ideolocompleted the virtuous circle and have already gical preference for the public sector, favoured exhausted their own labour potential. relations with its employees and political management), proponents of the Third Way are A socially just Europe, keen to reduce regioeager – in a bid for progressive governance – nal income disparities, must devise suitable to reform the public sector, making it more cussolutions for this problem, which will be greatly Series Eurokolleg 44(2001) 15

The catching-up process in the monetary union calls for higher inflation to be permitted in poorer regions. The central dilemma is how to create more jobs without lowering incomes. worsened by eastward enlargement. It is easier development, in Euroland it can be brought to interest richer countries and regions in proabout only through higher inflation in poorer moting development processes in poorer ones regions. European monetary policy has to perif resources are put to effective and efficient mit this. In a monetary union where income use. Productive locations will in any event be disparities are set to increase dramatically folloburdened with extra charges, but they should wing enlargement, it is crucial to the social also gain sales opportunijustice that these proties. Where development is successful, competing operators with subsidised cost structures emerge; this is in fact advanAid for poor regions from rich ones must not amount to internal EU horse-trading. It is politically acceptable cesses should occur rapidly. Aid should be accompanied by controls and incentives to use it efficiently and to prevent tageous to consumers in only if it promises real its distribution by patroricher locations too. Should underdevelopsuccess. nage. Such dangers could be averted by means of ment persist, there is a likelihood of migratory greater transparency, democratic participation flows away from poor regions, which do partly and networking of all the players. Wage subsisolve the problem but at the same time create dies, which push wage costs below productivity, new problems of adjustment in rich regions. would be preferable to capital subsidies, which hamper labour-intensive production and are There are two opposing strategic alternatives more susceptible to corruption. here: • A liberal policy would have faith in the market forces which cause poor people to migrate to rich regions and capital to flow into poor regions. This presupposes at the very least that such migration does not harm the poor regions(no brain drain) and that capital yields are higher there but will decline after the influx due to diminishing marginal returns. It is up to regional economic policy to solve its own problems – on pain of continued underdevelopment. From this perspective, policy competition in the Union exerts healthy pressure. · Market sceptics would argue that migration tends to deprive a region of human capital which is important since it is active and adventurous; furthermore, despite lower input costs, capital yields are no higher because of low productivity, and in many cases rising marginal returns cause producers to congregate in successful locations. Economic policy in poor locations suffers equally from a lack of good people and from a lack of funds. The Union’s task should be to support the public authorities with aid and to limit policy competition through harmonisation, while at the same time accelerating the spread of “good” policies. The catching-up process(i.e. incomes rising by more than the average) in the monetary union calls for regionally differentiated inflation rates. Whereas in the past alignment of incomes was achieved in particular through the revaluation of a poorer country’s currency in the wake of c) Working, but not poor Employment and labour market policies contribute to growth, on the one hand by fully exploiting or even augmenting the potential supply of labour and, on the other, by boosting its productivity. These two components may come into conflict with one another. For instance, a high-wage policy can foster growth in productivity, in which employees will then – all being well – participate. If well-paid jobs are in short supply, the activity rate remains relatively low and/or unemployment high. Low-wage policies(such as for example in the Netherlands) even enable less productive workers to be employed. Conversely, productivity gains can be converted into increases partly in income per capita and partly in paid ‘non-work’/leisure, which may in itself mask shorter annual working time for employees, higher unemployment, a lower activity rate or a different age structure (higher proportion of under 15 and over 65 yearolds). It is actually relatively easy to create jobs, as long as the potential workers can be persuaded to accept low incomes. However, if one wishes at the same time to achieve social justice, the options look rather different. The least painful solution is to raise the productivity of the unemployed through education, so as to make them attractive to employers even on higher pay. Another alternative is the Swedish pattern of employment in the State social services sector, where productivity is less crucial than a delibe16 Series Eurokolleg 44(2001)

rate socialisation of demand. In a great many cases, where this cannot be done, ways must be found to improve the lot also of(low) wageearners in the private sector. Three options suggest themselves at this stage: • redistribution through taxation: tax systems are already progressive now, i.e. the rich are supposed to pay more income tax than the poor. In addition, many countries have introduced negative income tax(or comparable subsidies) into their labour market policies, so as to raise the incomes of low earners to a level higher than that of alternative incomes(social assistance). • strengthening the market power of labour: a labour shortage can be amplified through various types of policies to reduce working time: longer training periods, earlier retirement, shorter weekly working hours, more leave. All such measures diminish the supply of labour and augment the market power of the remaining suppliers. On the external front, the labour supply can be curbed through restrictions on immigration. However, if in the long term strong trade unions push up wages in excess of productivity gains, they can of course boost the incomes of employees but might do so at the cost of growing unemployment. • wealth distribution: the distribution between labour and capital would be less contentious if their owners did not belong to two different groups. If workers possessed enough capital for the returns to compensate for modest wages, they would be more receptive to a redistribution in favour of capital. Yet asset formation among working people is proceeding – if at all – at snail’s pace. Meanwhile new capital owners are inheriting enormous wealth through no effort of their own. Radical inheritance taxes would be a major step towards establishing equality of opportunity. Another possibility would be taxation of wealth, which – in this era of global capital mobility – would have to focus on immovable assets(land, buildings, plant). Whilst some of these measures could be implemented nationally without any excessive effects at European level, others would benefit considerably from a uniform approach within the EU. Tax competition in particular is already a threat. To the extent that taxes are levied in order to finance additional public inputs for production in the marketplace, one could leave it up to the trade-off between low taxes and poor public infrastructure on the one hand and higher taxes and good provision on the other to strike a balance. If it is a matter of solidarity with weaker members of society, the trade-off does exist – in the form of social peace – but is likely to be too weak. An incomes policy which systematically attempted to gain a competitive edge as a result of low wage rises lying well below inflation plus productivity, and perhaps even offset by taxation, would immediately lead to conflict. Restricting the labour supply by imposing immigration controls would in any event require European agreement in view of the freedom of movement within the Union. d) Social Justice The apparent burden on competitiveness(or on a location) caused by high wages, and above all by high non-wage labour costs, taxes and social benefits, must be regarded as particularly ominous from a social-democratic point of view. In the monetary union such general cost divergences can no longer be offset by devaluing or revaluing currencies. EU competition compares gross nominal wages in Euros: these determine companies’ labour costs and are largely attributable to productivity. What is of interest to employees, however, is the net real income which results when taxes and social contributions are deducted, cost-free public services(education, health, etc.) added in, and price levels – perhaps lower in less developed regions – taken into account. These public services constitute the most effective means of social redistribution in most EU Member States. Social justice in Europe requires that a downward spiral in these net real incomes be prevented. The differential between gross nominal and net real incomes becomes especially large when wage-earners finance benefits for third parties through their taxes and contributions(e.g. unification costs in Germany) and narrows when, by contrast, public services are funded out of taxes paid by everyone(e.g. through taxes on consumption) or indeed to which the rich contribute disproportionately (e.g. through wealth taxes). As indicated above, social security systems in Europe vary considerably; yet this diversity must not stand in the way of a fair distribution of prosperity. Social expenditure as a proportion of GNP rises in step with income per capita. This correlation is relatively close for overall expenditure, although it cannot be proved for individual components of expenditure. Since Yes to competition bringing efficient government action; no to a contest bringing less solidarity! Series Eurokolleg 44(2001) 17

social expenditure can hamper competitiveness, it has been proposed that – in order to avoid a „race to the bottom“ – the EU Member States should be allowed a “corridor”(Busch) within which social expenditure should operate, or else a “lower limit”(Scharpf). The corridor or lower limit would rise with GNP, thus protecting poorer countries from competitive disadvantages, while richer countries would be expected to show solidarity with them. Admittedly, such a directive could scarcely be made mandatory; rather, it would serve to exert pressure in the political process. Countries with fewer social problems will rightly point out that their low expenditure corresponds to this state of affairs. A country with few elderly, poor and unemployed people can hardly be expected to disburse as much as a country with many. But a cutback in benefits per recipient would not be an acceptable argument. In this way rates could be aligned with national average incomes(on the differences see Table 3, p. 9). Ultimately it is a question of what volume and what quality of public goods and Services, risk coverage and social equilibrium a society can afford and wishes to provide. All of this must be paid for through shifts in consumption and in investment, but these may very well increase productivity(thanks to additional public inputs) and quality of life(thanks to social peace and security). Generally speaking, poorer countries can spend relatively less on these items than rich ones. The configuration of risk coverage systems and societal solidarity mechanisms should be determined nationally. International comparisons are in fact only useful in respect of systemic efficiency, in other words whether one system provides similar or better benefits at lower cost than another. The method of funding and organisation may play a role here, for instance if costs are so lacking in transparency that benefit recipients are prompted to lodge excessive claims or that classic forms of abuse such as “moral hazard” or “free riding” are encouraged. A social Europe could lay down quantitative limits for the differential between gross nominal and net real incomes(as defined above), so as to restrict on the one hand real subsidies which distort competition and, on the other, real impoverishment. The level of social expenditure is less important here than its method of funding and utilisation. Thus the level does not correlate with the scale of unemployment – as liberal critics of the welfare state like to assume. Funding through income-related deductions(as in Germany) does however push up labour costs, which above all lessens the demand for poorly paid and less productive labour in the service sector. Conversely, public social services funded through taxation can create jobs(e.g. in Scandinavia). 6. Democratising integration Given the differences in the nature of national problems, preferences and policies, a socialdemocratic strategy for Europe must combine scope for the individual players with guarantees that zero-sum games and “races to the bottom” will not occur. There is a need not so much for central directives from Brussels as for a rational networking of decision-makers and representatives of those concerned at all levels. In this respect the same problems arise in a multi-layer policy for Europe as are central to the debate about the Third Way or “progressive governance”: the relationship between State, market and civil society. A distaste for excessively direct and extensive involvement of the State is combined here with a desire for citizens to shoulder more responsibility. Yet returning responsibility to society presupposes that society is properly informed and is itself able to exert influence – not only over the State but also over the marketplace, and, for that matter, beyond the impact of very unevenly distributed purchasing power. The disagreement among Europe’s Social-Democrats as to the principles for building a European democracy(cf. Table 1, p. 6) ultimately reflects dissimilarities in the constitution of the State and in the conception of democracy from one European country to another. Germany’s federalism arouses different expectations and interests than the relatively new and weak regionalisation in France and the United Kingdom. When it comes to the democratisation of Europe, these differing conceptions vie with one another on all the important issues: constitution, basic rights, relations between the legislative, executive and judiciary, list of competences (subsidiarity). 18 Series Eurokolleg 44(2001)

Important policies at the interface between EU and Member State • On economic policy, the growth and stability pact extended the centralism and the deflationary thrust of monetary policy into the fiscal domain. However advantageous this decision-making structure may have been in the second half of the 1990s, it could be a cause for concern if a classic recession were to occur. For all that, fiscal policy has remained under the control of the Ecofin Council, which comprises elected and hence accountable politicians. One might envisage here an additional or superior form of European “economic governance”, which would feel more committed to growth than to combating inflation. It would be useful to have an economic policy instrument geared to correcting asymmetric shocks causing dips in demand concentrated in certain regions; this remains a task for the Member States. Should one Member State be affected in its entirety, all the Ecofin Council could do would be to dispense with its sanctions against an expansive fiscal policy; it could not itself authorise transfers to the country concerned(except in the case of a balance of payments crisis). • On taxation policy, the Member States oppose harmonisation. Therefore the risk with taxes on wealth and high incomes is that taxable persons or their capital will move to whichever Member State offers the most favourable terms. Even if no decision can be reached on harmonisation, greater transparency would help to reveal who is evading taxation in their home country by these means, and on how much income and wealth. In the long term such openness would exert political pressure, which would alter either the conduct of taxable persons themselves or the policy of the countries protecting them, eventually leading to a re-inclusion of the rich among the tax-paying population. • On employment policy, the Amsterdam Treaty provides for co-ordination of national policies: the Member States are obliged to produce regular reports reviewing, among other things, their implementation of the European guidelines. The guidelines adopted in Luxembourg in 1997 and Cardiff in 1998 are somewhat vague, and at the Cologne summit in 1999 the Member States refused to commit themselves to verifiable quantitative targets. Such targets would indeed have to be formulated in a highly complex manner in order to take account of trade-offs between social objectives such as employment, leisure and income. What is preferable here is an open process, one which operates with benchmarking and the spread of best practice in certain sectors but leaves it up to those concerned to set social policy targets. This also means involving groups in civil society – in particular trade unions and employers’ associations – as already happens in many national dialogue forums(e.g. Germany’s “Alliance for Jobs”). • On social policy, the EU mainly confines itself to certain narrow areas such as health and safety, equal treatment and so forth, together with the adaptation of social security systems to freedom of movement in the EU. The key theme of poverty and income distribution did not really surface at all until 1998. At the Lisbon summit in 2000 the EU decided on measures to combat social exclusion. The action plan provides above all for research, better statistics and more exchanges among Member States, in particular the networking of interest groups. In this sphere too, the EU’s approach is one of informal processes. What is still completely missing is any debate about wealth distribution and how to correct it so as to move towards long-term equality of opportunity. • Regional policy in the EU has long been the battleground of national budgetary concerns, where it is more a matter of clawing back resources from the EU budget than of meaningful regional support. Since successful development depends primarily on the conduct of local and regional players(politicians, companies, intermediary institutions and civil society organisations), they should take on the main responsibility but should also be exposed to vigorous policy competition. The task of higher-level bodies would merely be to ensure that such competition does not push down standards but amounts to a competitive effort to achieve better organisation, higher productivity and more rapid adjustment. Whatever one’s point of view, weaker locations should not be relieved of their responsibilities. However, responsibility also presupposes powers and room for manoeuvre at local level; in many countries these have been appropriated by the central government. Series Eurokolleg 44(2001) 19

Europe’s “multilayer democracy” lacks a “demos”, a sovereign population. In the multi-layer polit of Europe the structures for the distribution of power and responsibility are further complicated by the interaction between the Union, its Member States and their citizens. Only the modest beginnings of a European civil society are perceptible. Europe’s “multi-layer democracy” lacks a “demos”, a sovereign population. On the other hand, no national population can exist where there is no nation-state, even though EU citizenship constitutes an initial step in this direction. The longlived discussion about subsidiarity demonstrates how difficult it is to distribute tasks meaningfully among the various layers of Europe’s system of governance. When it comes to shaping specific policies, the opportunities for participation have already progressed somewhat further. European associations are involved in devising rules and standards for the internal market. The social partners are able to draw up Europe-wide social policy regulations which the Commission must then adopt, subject to certain conditions. The Union is increasingly trying to involve the Member States, not through fixed decisions but by engaging them in dialogue or by using instruments such as the new “open method of co-ordination” (Lisbon 2000), benchmarking and the critical review of national action plans. The interconnection between Member States’ administrations and policies is becoming ever closer, and the bureaucrats and politicians responsible for them are exposed to peer-group pressure, which often – as in the case of Austria – imposes more painful sanctions than those permitted by the EU’s own legislation and institutions. • Consumer protection is overwhelmingly based on competition or national minimum standards. Without going to the US extreme of product liability, greater transparency concerning product features(including production conditions) would be helpful, allowing consumers to decide whether they wish to run certain risks and what price they are prepared to pay for a cleaner or more social product. Such transparency could be ensured by institutions or organisations from either the public sector or civil society; manufacturers would of course be liable for claims they make about product features. • Some slow progress was made during the 1990s in terms of safeguarding the rights of employees, such as the posting directive and the rules on European Works Councils. Many European countries also have a minimum wage, which could similarly be introduced EU-wide – albeit differentiated according to level of development. Key questions about respective powers still remain unanswered concerning the relationship between the Union and the Member States. Some Social-Democrats hope that the Union will be able to compel the Member States to adopt more socially oriented policies. Others fear that integration opens the door to policy competition bringing about a „race to the bottom“. Even the introduction of minimum standards arouses qualms that countries with higher standards might be prompted to lower them to the prescribed minimum level. Looking at individual policy areas of relevance to a welfare union, a mixed picture emerges(see Box p. 19): At grass-roots level there is a need to safeguard and consolidate the EU citizens’ rights and opportunities for involvement. A Charter of Basic Rights might help achieve this aim, but it would likewise have to be binding on the EU itself and the Member States. If integration is to have a social dimension, appropriate rights such as freedom of association and the right to strike or decent minimum social provision would be particularly important. Social rights should also protect weak and excluded individuals from the “dictatorship” of the socially better-off majority which can come about in a democracy. In the liberal tradition, rights serve to protect citizens from the State. By contrast, the rights of weaker participants in the marketplace are underdeveloped in the face of stronger ones. Here we refer not only to consumers buying products on the market but also to employees confronting companies: A more democratic Europe means a decentralised Europe in which subsidiarity is taken seriously, since maximum involvement is achieved by tackling issues at the level closest to the citizens. It also means a flexible Europe, in which like-minded people come together to pursue their common interests even where Europe-wide action is inappropriate because of structural differences. But a social Europe also needs strong European policy-making bodies, so as to prevent local solutions being pursued to the detriment either of socially weaker individuals there or of other regions and countries. Such effects can be countered first and foremost by creating a European public. This public must then decide, in a democratic process, where the actions of social players should be circumscribed by binding governmental regulations and where the pressure of democratic public opinion is sufficient to pave the way to a social Europe. 20 Series Eurokolleg 44(2001)

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The Series Eurokolleg addresses important aspects of the process of European unification. The aim is to illuminate the problems and policy options of complex European issues. This issue is based on the results of the conference “A Social Democratic European Policy: Constraints, Conflicts, Challenges”, organised by the Friedrich-Ebert-Stiftung together with the Alfred-Mozer-Stiftung and the WiardiBeckmann Stiftung on 15 June 2000 The translated from „Wege, Umwege und Dritte Wege zu einem sozialen und demokratischen Europa“(Reihe Eurokolleg 44, 2000) was done by Janet Aldman. The author, Michael Dauderstädt, is Head of the International Policy Analysis Unit of the Friedrich-Ebert-Stiftung in Bonn Order free of charge: Friedrich-Ebert-Stiftung, Abteilung Internationaler Dialog, Eva Meiners, 53170 Bonn, Fax: 0228-883538, Internet: http://www.fes.de Editing: Anne Seyfferth, Friedrich-Ebert-Stiftung, Abteilung Internationaler Dialog Copyright: Friedrich-Ebert-Stiftung Printing: Druckerei Plump Rheinbreitbach ISSN: 0939-7493 ISBN:3-86077-995-8 24 Series Eurokolleg 44(2001)