Michael Dauderstädt* Conflicting Distributive Interests in a Deepening and Widening Europe: A Challenge to the Emerging Europolity T he recent split in Europe regarding its foreign and security policy and its Constitution distracts from potential conflict in the core arena of European integration where decisions are made concerning the distribution of wealth and income in the deepe ning and widening Europe. The emerging Europolity will have to manage these conflicts if populism and Euroscepticism are not to endanger the unification of Europe. European politics and EU policies affecting the distribution of wealth and income in Europe If there is one sphere where frustration with politics (“Politikverdrossenheit”) is stronger than in national politics, it is European politics. European elections are characterised by low voter turn-outs. European affairs have little value in domestic political life. The citizens seem simply to ignore Europe. They apparently think that it does not affect their daily lives in a way that merits deeper involvement. Rather fuzzy issues of national pride and prejudice seem to stir up emotions more than hard economic interests. If further proof were needed, the Iraq crisis provided plenty: Europe is far from unified. However, the cleavage between the “old” and the“new” Europe may be a short-lived, transitory affair. The societies of the EU’s present and future member states – let alone their governments – have different preferences, values and interests which may be more fundamental and structural. That this has occurred in the field of foreign policy may be frustrating but should hardly be surprising as foreign and security policy is still a basically national competence. However, the core of the European integration project is the Internal Market with its framework of regulations and supporting common policies(agricultural, structural, commercial and competition policies), and Economic and Monetary Union, at least for the members of the Eurozone. Even in this core business of Europe, there are conflicting interests, some more obvious than others. Up to now, these conflicts arising from European integration have largely been latent and dormant. Political parties in Europe seldom take up European issues in a serious manner, with the exception of such crucial questions as, for example, EU membership, 1 although most parties have more or less strong programmatic positions on European economic and political integration. 2 Even the election campaigns for the European Parliament are mostly dominated by domestic issues and general assertions of support for Europe. But the further European integration progresses, the more painful the adjustment pre ssures and costs are likely to become. The underlying conflicts could become more virulent and require attention from the European political system at all levels, in Brussels, in the member states, and on the regional and local levels. One(dangerous) scenario could be the re emergence of conflicts between nation-states as opposed to a trans-national cleavage between basic political options for Europe(for example, socialist vs liberal, or federalist vs intergovernmental). Unresolved economic conflicts could also spill over into and fuel traditional national/cultural conflicts. EU policies affect the behaviour of European states, households and enterprises in various ways. European integration has changed the competencies of states, the structure of markets, people’s rights and has even introduced a new currency, albeit not yet in the whole EU. Different EU policies affect different member states, and societal segments within member states, in various ways, sometimes directly, sometimes indirectly, * Friedrich Ebert Stiftung, Bonn; International Policy Analysis Unit. 1 While some authors(for example, Marks/ Wilson 2000) see European issues growing in importance for national parties, others see only a limited impact(for example, Mair 2000). These views can be reconciled if one assumes that party systems shape party attitudes towards Europe rather than the other way round. 2 See for an overview Marks/ Wilson/ Ray 2002.

Michael Dauderstädt Conflicting Distributive Interests in a Deepening and Widening Europe Europäische Politik (03/2004) 2 by changing the conditions in which they can pursue State versus state their interests. Direct effects can also be mitigated when those affected are able to pass on the cost to other segments of their own society or to other memStarting point: accession and enlargement ber states or third parties. In the end, all distributional conflicts are between individuals and groups of individuals affected in the same way. Even those conflicts that are supposedly between countries are ultimately between segments of different national societies as they usually burden and benefit only some people, and not all citizens of the countries involved(for example, agricultural subsidies may redistribute wealth from tax payers in one member state to farmers in another). 3 This mixture of direct and indirect effects, effects on whole economies and those that affect only certain sectors or social classes makes the overall impact of European integration on the distribution of wealth and income in Europe less transparent. It is not only difficult to analyse and understand but also difficult to communicate and translate into political action. This basic character of the EU’s impact on the lives of European citizens probably largely explains the lack of inEven if not an EU member, a country might none the less be affected by EU policies(for example, EU trade policy or EU aid), but in the context of this paper we focus on present member states and the candidate countries. Therefore, the starting point for further analysis is the interest of a country(its polity and society) in EU membership. The decision to apply for EU membership and, in the end, to join the EU is one of prime national importance. In many applicant countries, there has been a strong national debate on the issue with conflicting opinions(most recently in Malta) which led in some cases even to a rejection of accession, for example, in Norway. Most candidate countries want to join the EU for general political(or even identity) reasons as well as because they expect substantial welfare gains, including transfer payments which might reach 4% of GDP. terest shown by the European public(if it even makes sense to speak of a“European public”) in European politics. That does not prevent Europeans from approvTable 1: ing or disapproving of the EU and its policies, depending on their perceived effect on the citizens’ welfare. 4 Support for accession in the applicant countries In particular, utilitarian evaluations of the costs and Country 1993 1996 1997 1998 2001 2002 benefits of European integration matter while affective attachment to the EU remains moderate. 5 Statistical analysis shows that support for European integration is Estonia Poland 79 76 29 35 33 39 80 93 70 63 51 61 in fact correlated with perceived benefits that accrue Czech Rep. 84 79 43 49 46 50 from EU policies. Thus, wealthy and highly skilled pe ople, unskilled workers on relatively low wages and farmers tend to favour European integration more Hungary Slovenia 83 80 47 56 60 77 92 79 47 57 41 62 than average as they benefit from market liberalization and the Common Agricultural Policy. 6 The present paper analyses various European policies with regard to their distributional impact on memLatvia Lithuania Slovakia 78 80 34 40 33 54 88 86 35 40 41 53 84 88 46 62 59 69 ber states and particular societal groups in Europe in Bulgaria 76 86 49 57 74 74 order to assess their implications for the political alignment of interests. Romania Cyprus 79 97 80 71 80 84 51 58 Malta 39 47 Turkey 59 71 Average CEE 82,3 84,4 48 53 Source : Eurobarometer. 3 See also Mair 2000. 4 See Eichenberg/ Dalton 1999. 5 See Gabel 1998, Chapter 2. Gabel doubts explanations of public support based on values(for example, Inglehart/ Rabier/ Reif 1991 and Janssen1991). 6 See Gabel 1998, Chapters 3–5, and Conclusion, p. 110. Although support for membership has been volatile (see Tables 1 and 2), most candidate countries are likely to vote in favour of accession, to which few po-

Internationale Politikanalyse International Policy Analysis Unit litical parties in candidate countries are openly opposed. 7 Voter turnout during the referenda in 2003 has often been low(in particular in Hungary in April 2003). In the end, all countries voted in favour, but the borders of the present EU are likely to benefit while regions neighbouring on third countries, such as Ukraine, will suffer from less open borders. 9 The interests of other relevant groups, such as labour and capiTable 2: Evaluation of EU membership in the candidate countries(autumn 2002) and the results of the referenda in 2003 BU ES LA LI MA PO RU SK SN CR TÜ HU CY CC Good thing 74 33 33 41 39 51 80 58 40 46 59 59 51 59 Bad thing 3 14 17 11 31 11 2 5 11 9 14 7 13 10 Neither good 12 38 39 35 25 27 11 28 42 31 18 23 31 22 nor bad Don’t know 9 15 11 13 5 12 8 9 7 13 9 10 5 10 Net support 71 19 16 30 8 40 78 53 29 37 45 52 38 49 Referendum Yes-vote 67 67 91 54 77 92 90 77 84 Turn-out 64 72 63 91 59 52 60 55 46 Yes vote as% 43 49 58 49 46 48 54 43 38 of electorate Source : Oskar Niedermayer:“Die öffentliche Meinung zur zukünftigen Gestalt der EU. Bevölkerungsorientierungen in Deutschland und den anderen EU-Staaten”(Bonn, 2003), Tabelle A13; referenda: http://www.mdr.de/eu/aktuell/938582.html share of supporters in the total electorate remained below 50%, except in Lithuania and Slovenia. This positive attitude and high expectations are seldom based on a thorough knowledge of the EU, its institutions, policies and past record. As knowledge increases and accession gets closer scepticism has often increased, too. 8 In fact, EU membership as such has rarely led to strong growth, let alone a catching up by poor new members with the older, richer member states. Ireland and Greece remained poor or even became relatively poorer after accession, in 1972 and 1981 respectively. Ireland’s economic miracle started only in the mid1990s. There are even strong risks that membership will make catching-up more difficult by preventing the use of certain potentially successful policies(either radical free market ones or highly interventionist ones of the East Asian type), by infecting the new members with the“Dutch disease” or by offering the wrong incentives. Moreover, accession will affect different groups differently, for example, regions closer to the tal, will be dealt with below. Although some of these questions have been addressed in the accession negotiations, the EU has insisted on the adoption of the acquis communautaire and the candidates have accepted this. It is none the less possible, if not likely, that some conflicts will reemerge after accession when the negotiating positions of the new members will be much stronger. In the present member states, support for enlargement has generally been weaker than in the applicant countries(see Table 3 and 4). Again, few parties openly oppose enlargement. Opposition is strongest in France, probably for political rather than socioeconomic reasons. The biggest socio-economic rese rvations concern the threat of migration, and to a lesser extent low-wage competition and budgetary costs. Related fears are strongest in Germany and Austria and have led to the introduction of transitory regulations that postpone freedom of movement for up to seven years. The strongest supporter of enlargement is 7 See Taggart/ Szczerbiak 2001. 8 Ibid., pp. 12–13. 9 For a more detailed analysis of the costs and benefits of accession and enlargement see Dauderstädt 2003. 3

Michael Dauderstädt Conflicting Distributive Interests in a Deepening and Widening Europe 4 Greece, again for foreign policy re asons, namely the desire to get Cyprus into the EU. Europäische Politik (03/2004)

Internationale Politikanalyse International Policy Analysis Unit Table 3: Support for EU enlargement(spring 2002) B DK D GR E F IRL I L NL A P FIN S UK EU For 51 68 43 67 64 40 56 61 55 56 45 57 56 61 38 50 Against 32 23 36 15 14 47 16 19 34 30 36 18 32 27 35 30 Don’t know 17 10 22 17 22 13 29 20 11 14 20 25 12 11 28 20 Net support 19 45 7 52 50-7 40 42 21 26 9 39 24 34 3 20 Source : Oskar Niedermayer:“Die öffentliche Meinung zur zukünftigen Gestalt der EU. Bevölkerungsorientierungen in Deutschland und den anderen EU-Staaten”(Bonn, 2003), Tabelle A14. Table 4: Support for the accession of 13 candidate countries(autumn 2001) B DK D GR Malta 18 32 14 55 Hungary 10 40 28 45 Cyprus 15 8 3 81 Poland 8 50-2 42 Czech Rep. 0 40 8 39 Slovakia-6 28-5 36 Estonia-3 48 3 29 Latvia-3 47 3 30 Lithuania-5 46-1 30 Bulgaria-8 7-22 34 Slovenia-11 8-17 33 Romania-14-1-32 37 Turkey-22-24-32-39 E F IRL I L NL A 33-20 45 38 30 33 20 34-17 29 29 20 22 38 30-27 41 19 12 18 11 34-12 31 26 14 22-20 35-25 27 19 23 19-14 28-31 18 12 10 8-14 26-40 18 3 12 16-9 26-39 19 2 12 15-8 26-38 18 1 10 11-10 33-29 21 13-3-2-33 26-36 16 8 4-2 11 28-32 15 13-7-6-43 16-41 22-11-30 0-25 P FIN 21 19 24 37 21 11 26 18 26 15 18 7 13 47 13 30 15 28 24-4 15-10 22-21 20-30 S UK EU 54 39 23 58 12 20 44 29 13 60 15 13 56 9 11 49-1 2 64-2 2 63-2 1 60-2 1 36 3-2 37-4-3 30-4-7 2 7-12 Source : Oskar Niedermayer:“Die öffentliche Meinung zur zukünftigen Gestalt der EU. Bevölkerungsorientierungen in Deutschland und den anderen EU-Staaten”(Bonn, 2003), Tabelle A15. Malta and Hungary get the most support for accession within the EU, Romania and Turkey the least. Concerns about migration and budgetary costs are likely to fuel the reluctance of current member states to accept these applicants. Otherwise, specific and mostly political relations are important. For instance, Germans and Austrians have strongly welcomed the accession of Hungary, while the French, who are generally opposed to enlargement, are less sceptical regarding the accession of Poland(in 2001; after the diplomatic row in 2003 this might have changed) and Romania. Similarly, Finland supports the accession of the Baltic countries. National budgets and the redistribution of taxes The European Union as a supra-national entity has only weak redistributive powers compared with true federal governments, as in Germany or the US. Its budget amounts to approximately 1.2% of European GNP. However, this sum – about 100 billion Euro – is not inconsiderable, and raising it from member states is not easy. Conflicts over the national contribution to the EU budget are notorious – British Prime Minister Margaret Thatcher wanted her money back – and Germany often complains about its role as the largest net contributor. 5

Michael Dauderstädt Conflicting Distributive Interests in a Deepening and Widening Europe Europäische Politik (03/2004) 6 If one focuses on the net position(net contributor other member states – for example, Germany – which or net beneficiary) of a member state, the perspective want to harmonise tax rates. Luxembourg, for inchanges somewhat as some big contributors are also stance, has sound public finances because it attracts big recipients. Ultimately, net recipients are interested economic activities such as investment which benefit in sustaining and strengthening redistributive policies – from lower taxes on interest or value added. Through in particular structural and agricultural policies, which creative accounting and transfer pricing, multinational make up 80% of the EU budget – while net contribu- firms investing in Ireland or Hungary increase their tors are interested in reforming these policies. Possible profits at the expense of subsidiaries and tax authorireforms aim at reducing the general level of expendi- ties in countries with higher corporate taxes. ture and/or increasing the efficiency of the respective policies. The Common Agricultural Policy(CAP) benefits mostly big farmers and thus has little redistributive Changing growth opportunities: supply side impact in favour of the poor. Regional and structural funds have hardly been able to reduce the income dis- At first glance virtually no European policy affects inparities between the richest and poorest regions in the come distribution between member states, if one disEU, although some countries(in pa rticular Ireland) regards direct redistribution through the EU budget. In have made good use of these funds. fact, national income depends on the volume and proThe EU has generally succeeded in achieving a con- ductivity of factors of production, basically labour and sensus regarding the financing of its budget and the capital, employed in the national economy. Clarificasize and design of its redistributive policies. The neces- tion is needed here: the factors employed might not sary negotiations have been hard and conflicts during belong to the citizens of the respective member state. summits could often only be resolved at the last min- European integration, in particular the four freedoms ute. This was the case at the Berlin summit in 1999 of the Common Market, promote the employment of when Agenda 2000 was decided upon, or at the Co- labour and capital from other member states. In fact, penhagen summit in 2003 when the financial aspects intra-European foreign direct investment(FDI) had alof enlargement were negotiated. However, it is not ready reached 7% of GDP in 2000(European Commisonly the substantive issues which are the subject of in- sion 2002b: 45): the factor income gene rated belongs tense conflicts and negotiations, but also the decision- to those foreign investors. While the GDP of a given making process. In Nice, for instance, Spain insisted on country increases with the domestic use of foreign a unanimous decision on the budget to 2007 to in- production factors, its gross national product(GNP) clude the next planning–budgeting period of the re- may not, as it reflects the income of the citizens, not of gional funds that starts in 2006/7. The EU budget is the state or economic territory. basically decided by the European Council and Parlia- Cross-border flows of capital or labour thus have ment, but the latter has no control over the agricul- opposite effects on GDP and GNP. While the capitaltural funds – this indicates the strong interest some exporting country loses GDP because less capital is governments take in this area. employed within its borders it will later gain GNP as its These distributive conflicts at the EU level are to a capital owners receive a return on their capital from large extent conflicts between member states regard- abroad. The same is true for labour migration. Usually, less of the party political orientation of their govern- the difference between GDP and GNP is minimal as ments. Poorer member states have always argued in only a small share of the national capital or labour favour of“cohesion”, and France, with its relatively stock is employed abroad or is owned by foreigners, large agricultural sector, has supported the CAP. The and inflows and outflows compensate each other. ideological prefe rences of liberals(less state and thus There are exceptions, however, such as Ireland. Small, less redistribution through the state) or social democ- open economies are in any case more likely to be afrats(more social justice and thus less tolerance of a fected by cross-border investment or migration. A poor regressive agricultural policy) have had surprisingly little open economy is a natural recipient of foreign investinfluence on the shaping of these common policies. ment if the productivity level is attractive. EU policies Besides indirect transfers via Brussels between na- not only alleviate those flows but may also increase tional budgets European integration affects the capac- attractiveness through regional and structural funds. ity of national governments to raise taxes. Tax compe- Ireland has used these funds cleverly to improve the tition, in particular regarding corporate taxes and taxes conditions for foreign(and domestic) capital by financon capital income, is becoming increasingly important, ing training and infrastructure. As a result, foreign with Luxembourg, Ireland and the UK in opposition to capital now makes up a large share of all capital in Ire-

Internationale Politikanalyse International Policy Analysis Unit land and the return on that capital – that is, the profits of foreign investors – make up a substantial share of its GDP. Correspondingly, Ireland’s GNP differs strongly – at least in comparison to other advanced economies – from its GDP; more bluntly, Irish citizens(whose income is measured by GNP) are much poorer than the Irish economy(measured in GDP). 10 In a labour-surplus situation(such as Europe has been in for about 30 years) countries compete for capital and investment rather than labour. In an international perspective, competing locations attract capital by offering be tter profits, which result from higher productivity and/or lower wages. In the long run, higher productivity can be achieved through innovation, investment in labour-saving technology, or better management, but in the short run, nominal increases can also be achieved through the externalisation of certain costs(environmental, training, infrastructure), or more directly through lower taxes or more subsidies, and/or less protection of workers (longer hours, less participation, weaker health and safety, shorter holidays, and so on). The EU has laid down a host of rules and regulations that constrain these possibilities in order to prevent“unfair” competition and a“race to the bottom”. Different countries are differently affected by these constraints, depending on their mix of industries, education and financial systems, labour market arrangements, and industrial policy“culture” – in short, depending on their“variety of capitalism”. 11 Poor countries – such as post-communist accession countries – will prefer a less generous supply of public goods and protection of workers and the environment due to a stronger preference for income growth. In particular, societies might have different preferences regarding the translation of productivity growth into less labour input(that is, earlier retirement, longer holidays, shorter daily or weekly working time). Changing growth opportunities: demand side Even when the supply side is working well(sufficient labour and capital are available and used efficiently), growth depends on the demand for potential output. This demand can be managed politically by manipulating state expenditures, monetary growth and external demand, the latter through the exchange rate. All these measures are now constrained – for Eurozone members – by rules set at the European level. Some member states(for example, Sweden) have relied more than others on nominal devaluations to restore their competitiveness. Nominal devaluations can restore price competitiveness that has been lost through high inflation. Conversely, having a rate of inflation lower than one’s trading partners represents a real relative depreciation and allows a nominal appreciation without losing competitiveness(this wa s typically the case with Germany between 1970 and 1990). Different rates of productivity growth among the member states must lead to different growth rates of income. Lower(or higher) productivity translates into lower(or higher) competitiveness, unless it is compensated for by real appreciation or devaluation of the exchange rate. Within Euroland, exchange rate changes are no longer possible and any differentials in productivity growth and/or inflation rates have to be compe nsated for by changes in nominal income and/or prices. In particular, poor member states cannot rely on currency appreciation in order to catch up with richer countries. They thus have to rely on a higher rate of inflation(Balassa–Samuelson effect) which the European Central Bank(ECB) will scarcely tolerate. The Common Monetary Policy of the ECB, together with the accompanying Stability and Growth Pact (SGP), affect economic growth in the member states and ultimately the distribution of income between those countries. As a rule, economies with sluggish growth and high unemployment prefer lower interest rates and higher budget deficits than booming, fullemployment economies. Depressed economies usually show lower inflation rates. Given a certain nominal interest rate set by the ECB, real interest rates will thus be higher in these sluggish economies leading them into a vicious circle of recession and deflation. Conversely, fast growing economies with higher inflation rates(for example, Ireland) enjoy lower real interest rates which promote further investment and growth. 12 As long as business cycles are not synchronous in Euroland different economic situations require different policies. Keeping economies in recession in a monetary and fiscal straightjacket will lead to disgruntlement, to say the least. Popular support for the Euro(see Table 5) reflects these interests. Sweden, Denmark and the UK have not adopted the Euro as they need exchange rate flexibility to maintain competitiveness. In September 2003, the majority of Swedish voters rejected the adoption of the Euro in a referendum. Greece, Spain, Italy and Ireland, which are among the beneficiaries of lower interest rates, show high rates of support. 10 See O´Hearn 2001 and Dauderstädt/ Witte 2002. 11 See Hall/ Soskice 2001. 12 See Bofinger 2003, pp. 4–7. 7

Michael Dauderstädt Conflicting Distributive Interests in a Deepening and Widening Europe Europäische Politik (03/2004) 8 Table 5: Support for the Euro(spring 2002) For Against Don’t know Net support B DK D GR E F IRL I L NL A P FIN S UK EZ* EU 82 52 67 80 80 67 78 87 91 75 72 73 64 49 31 75 67 10 43 24 16 12 28 13 9 6 22 19 19 31 42 52 19 25 8 5 9 4 7 5 9 4 3 4 10 9 5 8 17 6 8 72 9 43 64 68 39 65 78 85 53 53 54 33 7 -21 56 42 * EZ= Eurozone. Source : Oskar Niedermayer:“Die öffentliche Meinung zur zukünftigen Gestalt der EU. Bevölkerungsorientierungen in Deutschland und den anderen EU-Staaten”(Bonn, 2003), Tabelle A17. Table 6: Evaluation of EU membership(spring 2002) B DK D GR E F IRL I L NL A P FIN S UK EU Good thing 58 60 52 64 66 47 78 69 81 71 37 62 40 38 32 53 Bad thing 4 16 9 5 5 14 4 3 3 6 16 7 18 27 21 11 Neither good nor bad 30 21 31 27 23 35 12 22 14 17 41 24 38 32 32 28 Don’t know 7 3 9 4 7 5 6 6 2 6 6 7 4 4 15 8 Net support 54 44 43 59 61 33 74 66 78 65 21 55 22 11 11 42 Source : Oskar Niedermayer:“Die öffentliche Meinung zur zukünftigen Gestalt der EU. Bevölkerungsorientierungen in Deutschland und den anderen EU-Staaten”(Bonn, 2003), Tabelle A12 The fathers of the SGP wanted to make sure that spendthrift governments(or member states) do not get a free ride in the form of relatively low interest rates while those with sound finances are punished by inte rest rates that are higher than they would be if all governments avoided large deficits. The same is true to some extent regarding wage setting. Since the ECB has a low inflation target it will react to strong wage increases(above productivity growth) with a restrictive monetary policy that dampens economic growth. Responsible social partners in centralised wage bargaining syste ms might suffer from the behaviour of less responsible unions and employers who neglect the possible ECB reaction and try to“free ride” on the assumption that, in the larger Euroland, their actions will go unnoticed under the cloak of the more responsible behaviour of others. To sum up, European policies affect the relative economic fates of member states in various ways. National economic policy debates hardly reflect this. Only with regard to such far-reaching choices as EU accession in general and adoption of the Euro in particular, is dissent noticeable. One can, for instance, assume that the Swedish reluctance to accept the Euro is largely due to Sweden’s desire to retain devaluation as part of its economic-policy toolbox. Otherwise, political parties – with the possible exception of some populist ones – have not taken up these questions in their domestic polities. As Table 6 shows, net support for membership is lowest in the UK and Sweden, and, albeit to a lower extent, in Finland and Austria(which also has a strong populist party). Intra-societal conflicts Virtually every redistribution between countries affects domestic distribution within the countries concerned. External economic relations interact with the basic distributional mechanism of the societies involved. In the case of the EU, markets determine the primary distribution(section 3.1 and 3.2) which is then massively corrected by public policies, notably the welfare state(section 3.3). EU policies affect both systems of distribution and re distribution. Labour vs capital In a market economy, growth resulting from higher factor input and increasing productivity can either be distributed between the producers(labour and capital)

Internationale Politikanalyse International Policy Analysis Unit or translated into lower prices, so benefiting consum- increases, in pa rticular in poor regions, by subsidising ers. The big traditional conflict in European polities has investment in infrastructure, training, and so on. In so been between labour and capital, as represented by far as these regulations benefit workers they affect the their organisations(trade unions vs employers’ associa- real distribution between capital and labour, though tions), and the related political parties(liberals and not by increasing money wages. Wages are to a large conservatives vs social-democrats or communists). The extent determined by negotiations between employers EU has provided a European umbrella for all these or- and workers, usually by their representative associaganisations: within the European Parliament, the major tions and unions. Not all member states have minimum transnational groups rely on these cleavages, and the wage legislation, let alone the EU as a whole. Howcivic organisations are well represented in the Eco- ever, the outcome of these negotiations depends on nomic and Social Committee and their roles defined at the relative scarcity of jobs. It is here that the above the European level within the Treaty of the EU(Art. described processes of migration and(re-)location of 138 and 139). investment become crucial. However, the basic features of European integration affect the distribution of income between capital and labour. Liberalising trade, the initial core business of the EU, should, according to classical theory, benefit all Table 7: GDP share of wages in Europe, 1970–2002(%) participating countries. But in order to benefit from these opportunities and realise their comparative advantages, they have to specialise in those activities in which they are most productive. This, in turn, requires Year Belgium 1971 -1980 74.6 1981 -1990 73.6 1991 -2000 72.2 2001 70.7 2002 70.8 that some producers give up their former business and Denmark 74.3 72.6 68.0 67.2 67.1 switch to another. Human and real capital will lose their value in that process. Trade liberalisation is deeper within the EU than generally in the WTO-ruled Germany Greece 73.7 70.9 68.1 67.0 67.0 70.9 73.5 67.2 66.2 66.1 world economy. With enlargement, it will create a level Spain 75.1 70.5 68.4 66.4 66.1 playing field for very heterogeneous players. Nominal wage levels at exchange rates(less so at purcha sing power parities) will differ widely in the enlarged EU. France Ireland 75.5 74.5 69.4 69.0 69.0 76.2 71.5 62.6 55.3 56.4 Trade theory suggests that labour-intensive production will shift to the low-wage locations which specialise in such activities. Unskilled labour in the tradables sector of the richer countries is likely to lose jobs or inItaly 76.6 74.3 70.3 67.2 67.1 Luxembourg 65.9 66.9 64.1 63.4 63.8 Netherlands 73.4 66.9 65.5 66.3 67.0 come while capital owners should benefit from the new division of labour. Conversely, labour in the poorer countries should benefit and local capital lose out as capital becomes less scarce thanks to the inflow from richer countries. 13 The combined effect of trade liberalisation and free movement of capital and labour should equalise factor incomes throughout the EU. Austria Portugal Finland Sweden UK 76.3 73.0 69.0 67.1 66.4 82.4 75.2 72.9 69.5 69.4 73.5 71.9 66.2 62.2 62.3 74.8 70.8 68.6 72.2 72.2 73.6 73.4 72.9 73.8 73.8 This theoretical macro-effect is to some extent mitiEU average 74.7 72.5 69.4 68.5 68.5 gated by micro-distortions that sum up to agglomeration advantages that often outweigh the levelling effects of liberalised and integrated markets. Source : European Commission, European Economy 4(2002), Table 32, pp. 182–83. Wage differentials between countries primarily reflect productivity differentials. As explained above, the EU regulates the ways of increasing productivity, for example, by upholding minimum standards regarding health and safety, protecting workers’ rights and regulating working time. EU policies support productivity The effects of free trade – that is, the internal market for goods and services – are compounded by the effects of free movement of capital. Although labour is also free to move, it is less likely to do so: consequently, there is an asymmetry between labour and capital. Capital will thus flee locations with lower returns, notably because of higher wages. Ultimately, is correlated with support for European integration. 13 Gabel, op. cit., has shown that this distribution of advantages any investment might require a Europe-wide(if not 9

Michael Dauderstädt Conflicting Distributive Interests in a Deepening and Widening Europe Europäische Politik (03/2004) 10 global) minimum rate of return while wages have to minimum labour standards. In distributive terms, it adjust. Furthermore, strong competition within the makes sure that productivity gains are not kept by the large internal market, which is additionally wide open producers, who have to share them between wage to the global market, exerts a continuous competitive and profit-earners, but translate into lower prices from pressure to lower costs and prices. All this is likely to which all consumers benefit. This disinflationary policy lead to a decline in unit labour costs, which is in fact stance is reinforced by the ECB’s stability-oriented happening. The share of wages in GDP has on average monetary policy. It benefits everyone with a relatively declined in Europe since the 1970s, from almost 75% secure nominal income, such as recipients of transfer to 68%(see Table 7). payments like pensions and welfare benefits or – to a This does not imply that real wages have also de- lesser extent – asset owners. clined. In fact, they have increased, albeit slowly, on It is a well established tenet of political economy average by about 1% per year. However, the main that producer interests are stronger than consumer inbeneficiaries of declining real unit labour costs have terests. Cuts in the(nominal) income of producers lead been consumers, whose income does not primarily de- to stronger political resistance than cuts in the real inpend on wages. come of consumers due to price increases, which ge nerally affect only a few products and at a low rate. The successful defence of the CAP by European farmers Producers vs consumers proves the point. In this perspective, the dismantling of many rent-providing niches by European integration is, Distributional conflicts between labour and capital are on the one hand, surprising, and on the other likely to not only affected by shifts in factor demand but also lead to more discontent among the affected producers by the size of the“cake”(i.e. value added) available in the future. The outcome of these conflicts depends for distribution. As already mentioned, increasing partly on numbers. With the rises in the number of competition in markets for goods, services, capital and non-producing consumers(for example, pensioners; labour in the EU has constrained the prices producers see also Table 8) there is a chance that present policies can ask. Many niches have been broken up and pro- might continue. There might also be a backlash from tective national standards eliminated. Protected mar- producers, either economically by raising prices or rekets have permitted high levels of profits and wages at nouncing production, or politically by attacking the the expense of consumers, an additional income which policies guaranteeing free markets. could be considered as a rent. In highly regulated markets, workers and capitalists seek such rents and defend them against erosion through competition. National welfare regimes and their clients Although market integration generally increases competition and reduces the opportunities for rents, The domestic distributional aspects which we have the EU has protected certain sectors on a European looked at so far concern primary distribution in the level, and tolerated national protection of some sec- market sphere, albeit through markets regulated by tors. Most notoriously, the Common Agricultural Policy public policies. However, the EU is comprised of we l(CAP) has protected farmers at the expense of tax pay- fare states that not only regulate markets but take ers as well as consumers. To a lesser extent, the same away a large share of national income through taxes can be said of the coal and steel industry and other and obligatory social security contributions and redissensitive sectors, although their protection has been declining over recent decades. However, services of tribute it. The amounts range from 35% in Ireland to 58% in Sweden. 14 Obviously, this gigantic redistribugeneral interest(“öffentliche Daseinsvorsorge”), either tion machinery affects the prosperity of citizens and as public or as semi-public sector activities which benevoters much more than most EU policies and internafit in many countries from protective legislation, have tional economic developments. That is probably the come under attack from European competition policy. reason why national governments have jealously kept Returning to the argument made at the beginning these competencies to themse lves and refused to surof this paper, one might claim that the present Eurorender decision-making power to the EU. pean integration set-up, with its combination of marWith many welfare states under stress, and Euroket liberalisation, common regulation with minimum pean integration affecting the underlying conditions of standards and competition policy, with the support of an active judicial policy on the part of the European Court, dries up the sources of rents while protecting 14 See European Commission 2002a, Table 71b“Total revenue; central government”, p. 290.

Internationale Politikanalyse International Policy Analysis Unit their functioning, this“natural” division of competencies has slowly started to erode, from two sides: Social that is changing the welfare regimes of its member states. Given the wide diversity of these regimes, 15 any Democrats have insisted on the EU’s engagement in institutional pressure towards equalising the various social affairs and added goals such as employment and systems will face substantial opposition from the benesocial inclusion to EU tasks. Liberals, who see suppos- ficiaries of current structures. edly bloated welfare states as prime obstacles to However, these pressures are arguably increasing. growth in Europe, have put their reform on the EU Clients(that is, consumers of public services and reagenda, for example, in the framework of the Lisbon cipients of public transfer payments) will move from process, to make Europe the most competitive knowl- country to country. Providers located or registered in edge-based economy. one country will start to offer their services to potential clients in other member states. Let’s consider some baTable 8: Major welfare state clienteles(Persons, 1995) sic features of we lfare states: • Health: Provision of health services is organised in Income groups Pensions Sweden 1 584 304 Germany 21 630 000 USA 43 388 000 very different ways across the EU, ranging from a single National Health Service in the UK to mixes of private and public provision with a variety of volunDisability 408 576 1 180 000 5 876 656 tary and obligatory insurance schemes. In an open Unemploy ment Social assistance 37 734 474 159 1 990 000 2 080 000 7 900 000 4 869 000 European market, insurance as well as the supply of health services should be free to all suppliers from member states. There are already certain areas supPublic welfare employment 1 245 800 1 590 000 2 540 000 plementing the core health systems, such as the “market” for pharmaceuticals or non-prescription Total Electorate 3 750 573 6 551 591 28 470 000 64 554 656 56 090 000 196 089 000 treatments(for example,“wellness”) which are relatively free. The more access to health products and services is left to the market(that is, the decision of Percentage 57.25 50.76 32.92 consumers to buy and of suppliers to sell) the more Source : Paul Pierson,“Coping with Permanent Austerity. Welfare State Restructuring in Affluent Democracies”, in Paul Pierson (ed.), The New Politics of the Welfare State (Oxford, 2001), p. 413 they will be open on a European scale. This will lower costs as cheaper suppliers enter the market (for example, health services from or in Central and Eastern Europe, such as dental treatment, massage, spas). It is also likely to reduce the income of certain Given these contradictory views and the powerful interests involved, the EU has wisely chosen a careful approach that respects national particularities, known as the open method of coordination(OMC). Within the framework of this method, targets and indicators are chosen by conse nsus, then national governments elaborate National Action Plans to achieve these targets; implementation is then controlled by peer review using the indicators previously agreed upon. This method allows for diversity but still exerts pressure on laggards and offers examples of best practice to poor performers. It is, however, not very democratic. Basically, governments can set targets and choose indicators without(or only selectively) involving national parliaments and/or“civil society”(namely trade unions, employers’ associations, welfare organisations, and so on). Up to now, the impact of the OMC in the field of social policies has been marginal. Outside a group of still sheltered suppliers in richer old member states. Insurance that has redistributive elements(same entitlements, different premiums) cannot compete with insurance schemes that are less burdened with solidarity requirements. More generally, the entitlement of residents and citizens to health care will eventually have to be regulated at the European level, corresponding to the free movement of pe ople. This is also likely to involve a degree of solidarity or public subsidy in the case of people who are not – or not sufficiently – insured and too poor to pay market or cost prices. • Education: The problems arising in health care arise in education, too. The re is already a market for such services alongside the public system. The mix varies across Europe. Conditions for establishing institutions offering education are required as well as rules that regulate the access of residents and citizens to educational services(including fees or prices). interested specialist institutions and organisations there has been little debate concerning the EU as an agent 15 See Gösta Esping-Andersen 1990. 11

Michael Dauderstädt Conflicting Distributive Interests in a Deepening and Widening Europe Europäische Politik (03/2004) 12 • Pensions: Different member states have different possibility of social welfare migration triggered by high systems, ranging from pay-as-you-go(PAYG) to funded systems. While PAYG systems provide better levels of protection and generalised entitlements for all 16 EU citizens(residents?) feared by some observers. benefits when economies(and wages) grow rapidly, To sum up, European regulation affects the relative the return of funded systems depends on growing strength of societal groups in distributive struggles asset prices, high real interest rates and profits. The within their respective societies. The EU defines rights, monetary policy of the ECB crucially affects this sets standards for industrial relations and, probably choice. In many countries mixed systems offer pubmost important, changes market opportunities by exlic minimum pensions that can be supplemented by posing firms to more competition. The latter process private insurance which is either obligatory or volunwill increasingly infringe upon basic features of natary. Life insurance is basically a se rvice with a tional we lfare regimes. National parties are forced to Europe-wide market. The return on capital of fight for their preferences in both the European and funded schemes depends to a substantial degree on the national arena, and have to decide whether to opt the regulations constraining investment opportunifor the preservation of national regulation or the adopties. In many countries pension funds are required tion of European regulation. by law to invest a certain proportion of their capital in bonds(public debt) and stocks, as well as in domestic and foreign instruments. Within an internal Responses of the eme r ging Europolity market for financial services, some of these requirements cannot be upheld. As pressures on pen- As we have seen, European integration has substa nsion systems increase with the ageing of Europe, all tially affected – and this is only likely to increase – the policies affecting the chances of securing a relatively risks to and opportunities for prosperity of different prosperous retirement will be hotly contested. member states and specific groups or people within member states. In many cases, deepening and widenSimilar problems arise in a wider range of social ser- ing Europe has changed and will continue to change vices and services of general interest that are less di- the functioning of distribution and redistribution rather rectly related to welfare in the narrow sense(for ex- than the eventual outcome. As business, households ample, placement services, transport, communication, and governments learn and adjust, the effects of the low-cost housing, water, energy, waste disposal, and new integrated economy will become bigger. To give so on). The more these services are provided through an example: instead of devaluing the national currency the market by private business and the more clients are a country might now be forced to cut costs(including required to pay for these services, the more will risk be wages) directly and in nominal terms to become comprivatised and individualised, and poorer people are petitive again. In both cases, real wages will eventually likely to have less access to these services. To avoid so- suffer but the ways in which prices and nominal incial exclusion, poorer people will need more cash come change are different and affect different groups benefits as in-kind redistribution through free services partially and temporarily. erodes. Of course, many of these changes can and do From the political perspective, this should be suffitake place through domestic reforms that have no in- cient for the emergence of political conflicts as the aftrinsic relation to the EU. However, the more some fected groups will want to shape European policies. In member states switch to the market the more will fact, even on economic issues conflicts between memEuropean regulations be needed, since the domestic ber states still dominate the European political system. market cannot be separated from the internal market. These conflicts primarily concern basic questions of acIn most member states, there are domestic rules cession, enlargement, adoption of the Euro and direct about the minimum entitlements(“social rights”) pos- redistributive policies(budget, CAP, structural and resessed by every citizen(and to a lesser extent every gional funds). Conflicts along party lines are observed resident) in relation to the national welfare system. Of- much less often. ten these rights are enshrined in the national constitution. With the emerging European constitution presImportant national groups and parties that are 17 strongly either pro- or anti-European can be observed ently being elaborated by the Convention social rights in those member states whose political-economic instimight be established on a European scale. Their level is likely to be set at the level of the least generous member state(minimum standard) while leaving it open to national law to be more generous. That still leaves the 16 See Sinn 2000. 17 The most often quoted empirical survey has been done by Leonard Ray(1999).

Internationale Politikanalyse International Policy Analysis Unit tutions(“variety of capita lism”) 18 are less compatible The two underdeveloped cleavages in the Europolity with the hybrid European system, such as the UK, are the federalist–intergovernmental and the left–right Denmark, and Sweden. They are either more frag-(that is, social-democratic vs liberal-conservative) cleavmented,“free-market”, and less coordinated than the ages. Both exist in a nascent and/or distorted form. EU as a whole(the British case) or more coordinated, • The first exists as the more radical pro- vs antiinterventionist, and centralised(the Scandinavian case). European cleavage we have discussed above. In its In the remaining member states, usually of the triple-C purest form, it emerges during national debates bevariety(continental–Catholic–corporatist), European fore accession. As such it is not a“Euro-loyal” integration remains largely unquestioned. Political cleavage that would find a constructive role in the cleavages regarding Europe are usually stronger before EU political system, of the kind played by similar accession than afterwards. In old member states, most cleavages(Hamilton vs Madison/Jefferson) in early big parties have accepted EU membership and its main consequences as an unalterable fact of life. 19 In the transition/candidate countries, there are large minoriUS history. It is distorted as a government attitude (for example, the UK; see above) or as a populistright or hard left position elsewhere. 21 Moderate ties against accession but few opposed political parties, eurosceptic parties should favour intergovernmenwith the exception of a few populist ones(for examtalism in order to preserve national capacities to ple, in Poland), whose motivation in opposing accesshape policies. sion is usually nationalist–cultural rather than socio• The second exists in a formal way as the two big economic. As Paul Taggart and Aleks Szczerbiak(2001) party families have European umbrella organisashow, there is little correlation between public- and tions, the“Party of European Socialists” and the party-based Euroscepticism; and even in the party sys“European Peoples Party”. But they hardly differ in tems they consider highly Eurosceptic the“hard” optheir programmes for Europe. The differences are ponent parties are not very strong(the strongest being nuances rather than full-fledged alternatives. While the Czech and Moravian Communist Party with 11% the social democrats favour equality and cohesion, of the vote). Probably, a strong party with a good the conservatives stress cultural identity, family valchance of forming a government will avoid a hardline ues, law and order but are less clear regarding free anti-EU position(Taggart/Szcerbiak 2001: 11-12). A markets. Ultimately, they tend to converge on the special case is Malta where one major party, the Lamedian voters’ positions, as their national compobour Party, has been opposed to EU membership. nent parties usually do. In this regard, there seems to be some convergence between old member states(not necessarily“old Europe”) and candidates, namely in so far as populists The classical picture of the European party landscape as elaborated by Hix, 22 where parties are posiare the most important Eurosceptic forces. When in tioned in a two-dimensional system with a vertical sovpower – usually in coalition with centre-right parties – ereignty–integration axis and a horizontal left–right they have dampened their criticism of European inteaxis, shows a concentration of major parties in the upgration somewhat. Their basic instincts are parochial, per(namely pro-integration) centre. Except for extremracist or nationalistic; none the less, populism has so20 cial and economic roots. Losers from modernisation ist and strictly anti-European parties, there is hardly any substantial choice regarding the core questions of inalso see their access to public goods and services entegration. Following Marks and Wilson(2002), it seems dangered by neo-liberal retrenchment policies as well plausible that social democrats would support deepenas competition from immigrants. Although their values ing in order to establish a market-correcting force at differ dramatically, populists might join forces with the the European level as the internal market has become anti-globalisation movement which also abhors the irreversible. Liberals should support the establishment more open trans-national markets entailed by Euroof an internal market and a single currency(that is, pean integration and fears negative effects on equality “negative integration”) while opposing any further and ecology. strengthening of supra-national governance of these integrated markets. They would prefer a regime com18 See Brinegar/ Jolly/ Kitschelt 2002. 19 For instance, social democratic parties in EFTA countries have been more or less eurosceptic before accession, both in the petition that exerts pressure on national regimes which would become even stronger with the widening of first enlargement(UK and Denmark) and in the most recent one(Finland, Norway, Sweden, Austria); see Marks/ Wilson, 21 See Mair, op. cit., p. 34. op. cit., p. 445. 22 See Hix/ Lord 1997, Figure 2.1, p. 50. Similarly Hooghe/ Wil20 See Cuperus 2003. son 2001, p. 124 and pp. 163–86. 13

Michael Dauderstädt Conflicting Distributive Interests in a Deepening and Widening Europe Europäische Politik (03/2004) 14 Europe. Given the present depth of integration, that References could lead to an alignment of cleavages with social democratic“deepeners” against liberal“flatteners/wideners”. This situation reflects the still embryonic state of the Europolity, including the notorious“democracy deficit”. Of the two ways the electorate can influence European decisions(directly through the European Parliament or indirectly via national elections and governments) the indirect way is more important. From that Bofinger, Peter(2003):“The Stability and Growth Pact Neglects the Policy Mix between Fiscal and Monetary Policy”, in Intereconomics Review of European Economic Policy 1 (2003), pp. 4–7. Brinegar, Adam P./ Jolly, Seth K./ Kitschelt, Herbert(2002): “Varieties of Capitalism and Political Divides over European Integration”, Ms., Durham. Cuperus, René(2003):“The Populist Deficiency of European Social Democracy”, in Internationale Politik und Geselstill dominant national perspective, EU decision making schaft 3/2003, pp. 83-109. remains in the realm of foreign policy whose democratic control is traditionally weaker than core domestic issues such as fiscal or social policy. Although most EU regulation has to be translated into national law and actually makes up an increasing part of national legislation, it is hardly seen as a Europe-wide issue. The Europolity does not yet show features known from the German federal system, where the voting behaviour of federal states( Bundesländer ) in the cha mDauderstädt, Michael(2003):“Die wirtschaftliche und soziale Dimension der EU-Osterweiterung”, in WSI-Mitteilungen. Monatszeitschrift des Wirtschafts- und Sozialwissenschaftlichen Instituts in der Hans-Böckler-Stiftung 1(2003), pp. 16–23. Dauderstädt, Michael/ Witte, Lothar(eds, 2002): Work and Welfare in the Enlarging Euroland. Friedrich Ebert Stiftung, Bonn. Eichenberg, Richard C./ Dalton, Russell J.(1999):“Europeans and the European Community: The Dynamics of Public ber of states( Bundesrat ) is often subordinated to party positions. There are no fully developed and mutually Support for European Integration”, in International Organization 74, No. 4(Autumn 1999), pp. 507–534. opposing social-democratic and liberal-conservative strategies of European integration that would lead to coordinated voting behaviour by, for instance, social democrats in the European Parliament and memberstate governments led by social democrats in the Council. Moreover, even the selection of the European Commission, its president and the Commissioners is far from fully politicised. Bigger member states have even sent two Commissioners of different party affiliations to the Commission(for example, the UK). To sum up, all this gives European voters little say in Esping-Andersen, Gösta(1990): The Three Worlds of Welfare Capitalism. Cambridge. European Commission(2002a): European Economy 4(2002). Luxembourg. European Commission(2002b): European Union Foreign Direct Investment Yearbook 2001. Luxembourg. Gabel, Matthew J.(1998): Interests and Integration. Market Liberalization, Public Opinion, and European Union . Ann Arbor. Hall, Peter A./ Soskice, David(eds, 2001): Varieties of Capitalism: The Institutional Foundations of Comparative Advantage . Oxford.. European affairs. With no choice of strategic alternatives they are overwhelmed by a plethora of technoHix, Simon/ Lord, Christopher(1997): Political Parties in the European Union . Basingstoke: Macmillan. cratic choices. Lobbying groups with strong prefe rHooghe, Liesbeth/ Wilson, Mark(2001): Multi-Level Governences regarding specific regulations take over the field. ance and European Integration. Oxford. Seemingly national preferences mingle with group Inglehart, Ronald/ Rabier, Jacques-Rene/ Reif, Karlheinz preferences(workers, employers, farmers, consumers, pensioners). European umbrella parties are not(yet?) able to amalgamate such a variety of positions across various cleavages and to resolve the inherent conflicts. As the effects of European integration on political pa rties are to a large extent indirect they threaten to depoliticise European affairs.23 This seeming unaccountability of European politics could undermine the legiti(1991):“The Evolution of Public Attitudes toward European Integration 1970–86”, in Karlheiz Reif and Ronald Inglehart(eds), Eurobarometer: The Dynamics of European Public Opinion . London. Janssen, Joseph I.H.(1991):“Postmaterialism, Cognitive Mobilization and Support for European Integration”, in British Journal of Political Science 21(1991). Mair, Peter(2000):“The Limited Impact of Europe on National Party Systems”, in West European Politics 23, No. 4 macy of both(traditional) political parties and Euro(2000), pp. 27–51. pean integration. In this perspective, the very complexMarks, Gary/ Wilson, Carole J.(2000):“The Past in the Preity of European integration provokes a populist reaction that offers simplistic pseudo-choices. sent: A Cleavage Theory of Party Response to European Integration”, in British Journal of Political Science 30, No.3 (2000), pp. 433–59. 23 See Mair, op. cit., pp. 48-49.

Marks, Gary/ Wilson, Carole J./ Ray, Leonard(2002):“National Political Parties and European Integration”, in American Journal of Political Science 46, No. 3(July 2002). Niedermayer, Oskar(2003): Die öffentliche Meinung zur zukünftigen Gestalt der EU. Bevölkerungsorientierungen in Deutschland und den a nderen EU-Staaten. Bonn. O´Hearn, Denis(2001):“Economic Growth and Social Cohesion in Ireland”, in Michael Dauderstädt/ Lothar Witte, (eds.): Cohesive Growth in the Enlarging Euroland. Friedrich Ebert Stiftung, Bonn. Pierson, Paul(2001):“Coping with Permanent Austerity. We lfare State Restructuring in Affluent Democracies”, in Paul Pierson(ed.), The New Politics of the Welfare State . Oxford. Ray, Leonard(1999):“Measuring Party Orientation towards European Integration: Results from an Expert Survey”, in European Journal of Political Research 36, No. 2(1999), pp. 283–306. Sinn, Hans- Werner(2000): EU Enlargement and the Future of the Welfare State . Center for Economic Studies, Munich. Taggart, Paul/ Szczerbiak, Aleks(2001):“Parties, Positions and Europe: Euroscepticism in the EU Candidate States of Central and Eastern Europe”, SEI Working Paper No. 46, Sussex. Internationale Politikanalyse International Policy Analysis Unit 15