Wolfgang Merkel& Tobias Ostheim* Policy Making in the European Union: Is There a Social Democratic Space? The Challenges of European Integration for Social Democratic Policy-Making Mainstream research on European integration and European social democracy is unambiguously clear in asserting that, from the mid-1980s, the integration process has evolved to strengthen market forces and has effectively reduced national sovereignty in core areas of policy-making. This applies to the negative economic integration of the Single European Market (1987), but also to positive integration, namely Economic and Monetary Union(since Maastricht 1993) and the accompanying Stability and Growth Pact (1997). These integration steps have reduced the ability of the nation state to intervene in markets and to correct the unwanted results of increasingly liberalized capitalism. This might be a desired outcome for liberal and neo-conservative parties. Even Christian democratic parties might accept it(Kersbergen 1995: 236f). However, for social democratic parties the“European path” taken in the 1980s and early 1990s severely challenges their model of economic regulation, policymaking, and social welfare. Since Dahrendorf's depiction of the“end of the social democratic century”(Dahrendorf 1983) many authors have addressed the issue of whether social democracy is doomed to decline. 1 In support of this thesis the erosion of class-based voting, the declining importance of trade unions, socioeconomic changes, altered party competition and coalition opportunities, and the effects of globalization have been put forward. Thus, “Europe” might simply constitute another chapter in the literature on the“end of social democracy.” However, European integration not only challenge s tried and tested social democratic strategies, but may also provide opportunities for new political strategies to counterbalance the market-liberal orientation of negative integration and to regain the ability to act at the European level(supra-national and intergovernmental), * Social Science Research Center Berlin; University of Heidelberg, Institute of Political Science. 1 See, for example, Przeworski 1985; Scharpf 1991; Merkel 1993; Kitschelt 1994, 1999; Pontusson 1995. something which has been lost at the national level through globalization and Europeanization. The cha llenge for European social democracy is thus twofold: first, to explore and fully utilize what space remains for their political and social goals at the national level, and second, to“reconstitute a conception of collective political agency, aiming to use the EU as a complementary site for decisions and policy setting”(Ladrech 2000: 55). However, this is a difficult task, and not only for social democratic parties. Realization of both aspects of it is impeded by the difficulties of positive integration: There are policy areas that are of crucial importance for the legitimacy of democratic welfare states, in which national problem-solving capabilities are indeed severely constrained by economic integration, whereas European regulation, or even policy ha rmonization, seems to be systematically blocked by conflicts within the underlying constellation of national interests.(Scharpf 1999: 3) There are further major obstacles to such a strategy. First, substantial differe nces of opinion between social democratic or socialist governments have so far prevented them from correcting the clear free-market “bias” of European policies. Thus, social democratic governments do not form a cohesive actor at the European level in Tsebelis’s sense(Tsebelis 2002). Second, in most member states governments are formed by coalitions. In many cases this limits social democratic room to maneuver. Third, realizing a“European strategy” may be electorally costly whenever it obstructs claims for credit for successful policies in national electoral competition. Finally, it is questionable whether social democratic governments would ever challenge the most fundamental and well defended principles of the Community, the four freedoms and competition law, because this might endanger the Community as a whole. However, it is exactly these sacred principles that constitute the greatest obstacles on the social democratic path to market correction. Since the Confederation of Socialist Parties of the European Community(CSPEC) stated in 1990 that “democratic control of the future remains possible,

Wolfgang Merkel& Tobias Ostheim Policy Making in the European Union: Is There a Social Democratic Space? Europäische Politik (03/2004) 2 provided that those elements of sovereignty which can This article is a contribution to the question of no longer be exercised in a purely national framework whether there is a social democratic space in the Euroare pooled”(CSPEC 1990, cited in Ladrech 2000: 4), pean Union. It depicts opportunity structures and insocial democratic parties have, despite all obstacles, vestigates whether the dominance of social democratic increasingly perceived the European Union as an op- governments between 1998 and 2002 has had an importunity. Many of them have abandoned Euroscep- pact on policies at the European level. We will examine tical positions in favor of pro-European ones, despite four policy domains which must be considered core internal party divisions(Ladrech and Marlière 1999; areas of social democratic policy-making because of Notermans 2001). However, they had to wait some their values, programs, and goals, and the particular years until a window of opportunity for European so- interests of their electoral clientele: monetary, tax, emcial democratic policies opened up in the se cond half ployment and social policy. of the 1990s. Electoral successes in a number of A classical social democratic quadrangle would be: member states, including the landslide victories in the(i) to complement the rigid monetarist orientation of United Kingdom(1997) and Germany(1998), demon- the European Central Bank(ECB) by also aiming at the strated that social democracy was at least not elec- economic goals of growth and full employment;(ii) to torally“doomed to decline ,” as many authors had pre- harmonize or coordinate national tax policies in order viously declared. For the first time, the“big four” to avoid a competitive tax“race to the bottom” within the European Union were led by leftist govern- among member states and to secure a solid tax base ments, and in 1999 social democratic/socialist parties for social policies which aim to achieve more equality were leading or participating in 13 out of 15 govern- of opportunity and compensate the undesired consements. 2 quences of the market;(iii) to foster employment growth aiming at full employment and the reduction of unemployment; and(iv) to strengthen and reform the welfare state without dismantling it. In our analysis we focus on the politics of the member state governments in the Council and the European Council. We first show“what has been done,” assessing the impact of social democratic governments. However, we do not provide an encyclopedic overview, but spotlight the most important decisions. We then discuss which policies might be desirable for social democratic parties and which processes and “modes of governance” offer opportunities for realization. As a consequence, they also clearly dominated the Council of the EU, reaching a qualified majority and a qualified double majority. The German presidency of the EU in the first half of 1999 marks the height of this development. All this seemed“to present a rare opportunity to translate their[the social democrats’] concerns into action, that is, to influence the EU age nda in regard to its political-economic orientation”(Ladrech 2000: 116) and to counterbalance the market-driven asymmetry of the Community. 2 The term“social democratic government” is meant to include single-party governments and coalition governments with social democratic or socialist participation. We define"social democratic parties" by applying the criterion of PES membership. What Has Been Done? Employment Policies Over the last ten years social democratic parties have urged“Europeanization”(a transfer of sovereignty to the European level and a coordination of national policies) mainly in the field of employment policy. However, not only have social democratic parties launched important initiatives such as the Larsson report in 1993, the French initiative for a gouvernement économique in 1997, impulses towards a European macroeconomic dialogue in 1998–99 and the Guterres report in 1999, but they were also successful in launching European employment policies with a social democratic profile at the end of the 1990s. This applies to the macroeconomic dialogue of the Cologne Proc-

Internationale Politikanalyse International Policy Analysis Unit ess and to European employment policies in a narrow mid-1990s a majority of Europeans preferred to fight sense, that is, the Luxembourg Process and the Euro- unemployment not only on the national, but also on pean Employment Strategy(EES). the European level(Eurobarometer 44.1, 1995). These The breakthrough of the European Employment developments coincide d with a slight change in the Strategy can be clearly associated with the social de- strategic preferences of social democratic parties. By mocratic dominance in the European Union at the end the end of the 1990s, the EU was viewed as“a potenof the 1990s, although its origins date back to the tial asset and means by which to secure certain policy early 1990s when Jacques Delors launched the White objectives”(Ladrech 2000: 79). Since Maastricht, the Book on Growth, Competitiveness and Employment salience of the Europeanization issue in general has (1993). Like the Essen Strategy adopted in 1994, the grown markedly, and social democratic parties have White Book was a rather incoherent mix, a compilation taken a clearer pro-European position. In particular, of the different member states’ approaches. It had no most social democratic parties call for European emclear social democratic profile since the EU was pre- ployment and social policies to counterbalance the dominantly conservative/Christian democratic. How- Single Market and EMU(see, for example, Maurer ever, it did evolve into the main programmatic starting 1998). point of European employment policy. Many elements The enlargement of 1995 slightly shifted the EU’s of the Essen Strategy, such as strengthening vocational center of gravity. Sweden, Austria and, to a lesser extraining and lifelong learning, improving the efficiency tent, Finland had social democratic governments and of labor-market institutions, and measures for specific were pursuing pro-welfare-state, active labor-market target groups, such as young people, the long-term policies in their national arenas. The third enlargement unemployed and women, were given high priority in thus seemed to make the new Community of 15 the EES within a few years. member states more“social democratic.” The European dimension of employment policies Since the launch of the White Book, the PES has inrapidly gained relevance in the mid-1990s, mainly due creasingly played a role in both designing a common to the following – interrelated – reasons: changes in social democratic employment strategy and implementhe perception of problems by governments and public ting it at the European level despite clear divergences opinion, the effects of the 1995 enlargement, the dis- within the party family. During the intergovernmental course within the PES network, and the effects of conference it became evident that the social democcompositional change s in some member-state gov- ratic party group did not fully agree on concrete emernments. ployment policies but repeated contacts helped to The persistent unemployment problem increasingly overcome differences. put many EU governments under pressure. In addition, Finally, the change of government in some member the perception of economic problems and of feasible states had a major impact on employment policy. At cures changed. In the 1980s the predominantly liberal the end of the 1990s the European Parliament had a and conservative governments had assumed that the progressive social democratic majority, and social decompletion of the Common Market would help to mocratic parties dominated in 11 out of 15 member solve essential employment problems simply by foste r- states. Up to 1997–98 the conservative/Christian deing economic growth and deregulating the labor mar- mocratic/liberal governments of Germany, France and ket. In the 1990s, European integration was increas- the UK had been the major players vetoing the ingly perceived as being biased: it stressed market and Europeanization of employment policies(Tidow 1998). monetary integration, while largely disregarding social They lost power in 1997(UK and France) and 1998 and employment policies. The legitimacy of the inte-(Germany). gration project came under threat. Thus, many After a long IGC, in June 1997 the member states member state governments increasingly came to be- finally settled on a compromise, in the form of the lieve that a more focused and active European em- Treaty of Amsterdam, that included an employment ployment strategy was necessary. chapter in the EC Treaty. At an extraordinary summit This altered perception was partly a result of go- on employment in Luxembourg in November 1997, the vernmental changes at the end of the 1990s, though it member states reached agreement on the first emwas not limited to political elites. At the same time, the ployment guidelines. Thus, two important steps forpolitical option represented by European employment ward were taken in 1997: a coordination process was policies increasingly attracted attention in national established and a European employment policy was electorates. Eurobarometer data show that from the given substance with the promulgation of the first guidelines. 3

Wolfgang Merkel& Tobias Ostheim Policy Making in the European Union: Is There a Social Democratic Space? Europäische Politik (03/2004) 4 The coordination strategy does not aim at the flexibility and policies benefiting the socially excluded Europeanization of employment policies(EES) through are examples of this approach(Adnett 2001: 359). a far-reaching transfer of sovereignty to the European The strategy underlying the employment guidelines level but at the coordination of national employment has been called“recommodification”(Aust 2000a: policies and“management by objectives”(Hodson and 24), in contrast to Gösta Esping-Andersen’s(1990) Maher 2001; Best and Bossaert 2002; Mosher and preference for decommodification. However, this does Trubek 2003). Member states are committed to not imply mainly recommodification through tightenattaining quantitative or qualitative employment goals ing means testing and limiting benefit entitlements. laid down in employment guidelines and country- The vital point is the improvement of employability specific recommendations. However, this leaves con- through preventive measures, lifelong learning and acsiderable scope for them to pursue a whole range of tivation actively fostered by the state at different levels, different strategies proposed in the guidelines. The reflecting Giddens’ concept of recommodification member states shall“take[the guidelines] into ac-(1998). This orientation of the EES was already on the count” in their employment policies(Art. 128, 3) but horizon in the first half of the 1990s. It has gained imno sanctions may be applied if they do not follow the portance mainly because the concept of activation is guidelines and recommendations. The expectation of generally compatible with both social democratic some social democratic governments that there would“third way” policies and the“neo-liberal” policies of be compulsory rules was not fully satisfied. The Ge r- non-social-democratic governments, although both man Christian-Democrat/Liberal government was able positions emphasize very different aspects. to water down this aspect of the regulations. Since 2000, the Lisbon Strategy has set a new tarIn contrast to“hard” European law the process is get with the intention of enabling the EU to renot based on coercion. It is intended to encourage the establish the conditions for full employment and to transfer of successful national policies to other mem- strengthen cohesion: the Union shall“become the ber states. It may induce learning effects, enhance most competitive and dynamic knowledge-based knowledge of alternative strategies and increase the economy in the world, capable of sustainable ecopressure on national authorities to carry out a change nomic growth with more and better jobs and greater of policies through benchmarking and the help of a social cohesion.” The guidelines were revised com“peer review program.” Empirically, the impact on na- pletely in 2003. They now aim at the“three overarchtional labor market policies remains unclear. At least in ing and interrelated objectives of full employment, some cases major changes of policy have been induced quality and productivity at work, and social cohesion and backed by the EES(Ostheim and Zohlnhöfer and inclusion,” pointing to the importance of equal 2003). opportunities and gender equality. The member states differ widely in respect of their The EES ha s been designed predominantly by social employment problems, welfare state institutions and democratic governments – but not by social democlabor market regulations. Perceptions of the causes of ratic governments alone. However, reviewing the last persistent unemployment and low employment rates five years, the new European employment policy can and of feasible cures also vary. This has led to the in- be regarded as a success from a social democratic troduction of heterogeneous guidelines which have point of view. First, after the installation of the emonly partially met social democratic goals and strate- ployment chapter and the EES the European agenda gies in the last five years. 3 Despite their heterogeneity looks remarkably different. By laying down the princithe guidelines embody a specifically European way in ples of the coordination process in a treaty, social determs of employment and labor market policies charac- mocratic governments have been able to anchor it terized by modification of the“neo-liberal” project of firmly against the political tide. Employment has reEuropean integration. They are particularly compatible mained a central goal of the Union. with“third way” policies(Adnett 2001; Aust 2000b; Remarkably, the character of the guidelines menTidow 1999; Mosher and Trubek 2003). Demands for tioned above was not watered down in 2002–2003 improved employability through“lifelong learning,”(2003/578/EC), although social democratic parties lost tax relief for those on low incomes, working-time their dominant position in the European Union. On the contrary, the EES today looks even more social democratic: the Union aims explicitly at full employment, a 3 All employment guidelines can be found at http://europa.eu.int/comm/employment_social/employment_st rategy/guidelines_en.htm goal that many social democratic parties had silently given up; equal opportunities, social cohesion and inclusion are laid down as further overarching goals.

Internationale Politikanalyse International Policy Analysis Unit Many strategies recommended in the guidelines con- core of EMU, the European Central Bank(ECB), is prifirm this interpretation. All this could be read as indi- marily committed to price stability. It is the ECB’s phicating a change in political discourse that took place in losophy that sustainable economic growth can be the late 1990s. achieved only on the basis of price stability. Budgetary One might object that this“soft” process does not discipline, safeguarded by the provisions of the Treaty really matter. However, soft coordination fosters coop- and the Stability and Growth Pact, forms the second eration where positive integration is not(or not yet) part of this“sound money and finances” paradigm. possible, and the open method of coordination(OMC) However, the ECB has defined“price stability” more may be only transitory and could in the end lead to rigidly than the US Federal Reserve Bank, thereby “positive integration”(Hodson and Maher 2001; Lin- hampering economic growth in the short and medium senmann and Meyer 2002). Furthermore, it can be terms. At least, this is the interpretation of neoseen as an adequate answer to the question of how to Keynesians and some social democratic governments. deal with the great institutional variety of welfare The informal Pörtschach summit in the fa ll of 1998 states and labor-market regulations among the seemed to mark a paradigm shift in European politics. member states. From a social democratic point of view The European Council, dominated by social democratic the flexibility of the process cannot be judged a disa d- leaders, called for a reduction in interest rates and the vantage. Uniform, binding European employment poli- introduction of more demand-side measures. The cies would not only ignore differences in the nature of German and French ministers of finance, Dominique employment problems in member states, but also rob Strauss-Kahn and Oskar Lafontaine, explicitly called for social democra tic parties of an electorally important lower interest rates with a view to fundamentally issue(see Ladrech 2003: 119–20). The existing EES transforming monetary policy(Lafontaine and Straussmay help to lower the unemployment rate and en- Kahn 1999; Lafontaine 1999: 211–13). After the hance the employment rate and thus allow(national) change of government in Germany 4 (Heise 2001: 390) credit claiming but to some extent it may also allow the member states agreed the macroeconomic dia(European) blame avoidance strategies. logue of the Cologne process in June 1999. It may be Finally, European employment policy has redistribu- regarded as a reaction to the Stability and Growth Pact tive components because the European Social Fund and is inspired by“eurokeynesian”(Aust 2000a) ideas. directly refers to the EES(1262/1999/EC, Art. 1–2), The intention behind it is to enhance coordination though they are moderate at the moment. between the Europeanized monetary policy of the ECB However, there must be some reservations because and member states’ fiscal and wage policies through the substance of the policies pursued with the open meetings of representatives of the Council, the ECB, method of coordination can be diluted or even abol- the social partners and the Commission, to take place ished with a qualified majority by changing the em- twice a year. ployment guidelines. Coordination will work only as The turning point in the EU’s agenda which supposlong as governments generally agree that it is desir- edly manifested itself at Pörtschach can be traced back able. Otherwise, they may ignore demands or block directly to the influential discourse of the PES network the whole coordination process. Furthermore, the new(Ladrech 2000: 127). However, today the process has coordination process tends to enhance the political been condemned to insignificance(see Heise 2001), importance of the(European) Council and to circum- and not only because of the difficulties of multilevel vent the European Parliament, national parliaments coordination(Hall and Franzese 1998) and the declinand the European Court of Justice. It is questionable ing proportion of social democratic governments in the whether this would be desirable for social democratic Council(see Figure 1). Even social democratic parties parties. have not paid much attention to the formalized macroeconomic dialogue in recent years. Furthermore, direct attacks on the ECB’s monetary policy have beMacroeconomic Coordination and Monetary Polcome rare since 1999. The change of policy of 1998 icy seems to have been revised not only in Germany(see Ostheim 2003: 354–56) but also within the social deThere can be no doubt that Economic and Monetary mocratic party family as a whole. Union was not a social democratic project, although many social democratic and socialist parties supported the project of a single currency from its launch at the 4 The new Social Democrat/Green government even restructured some ministries in order to underpin Lafontaine’s Euroend of the 1980s(Notermans 2001). The institutional pean economic strategies(see Ostheim 2003: 354–56). 5

Wolfgang Merkel& Tobias Ostheim Policy Making in the European Union: Is There a Social Democratic Space? Europäische Politik (03/2004) 6 National fiscal policies under the SGP regime stagnation. In the meantime, ministers have spoken in favor of a reinterpretation of the criteria in the majority In recent years, criticism of the European monetary and of the EU-12 countries. fiscal regime has focused largely on the Stability and This policy development exhibits no clear political Growth Pact. Since twelve countries have entered orientation, although some of the arguments put EMU, social democratic governments rarely cast doubt forward in the discussion have been somewhat mison the general rationality of the Stability and Growth leadingly traced back to social democratic policy initiaPact because“the idea of a stability pact was by no tives(see Ladrech 2003: 121). Social democracy has means alien to them”(Dyson 1999: 202). Instead, a indeed formulated the political discourse, but the SGP debate on an adequate interpretation of the rules has never came under systematic and coordinated attack evolved since it became evident in the second half of from social democratic governments, and social de2002 that Germany and France would miss the 3% mocratic parties have not been collectively opposed to mark. Unsurprisingly, the new conservative French the SGP’s macroeconomic regime in the last few years. government and the German government were the In fact, the alliance formed against it transcends the main driving forces; both proposed to adhere to addi- left–right economic cleavage. Particular national paths tional criteria in the deficit procedure. In 2002, the SGP have had a much stronger influence on public deficits. was formally kept intact by extending the date – from 2004 to 2006 – by which Germany and France had to balance their budgets. Tax policies However, criticism of the SGP continued in 2003 although the Council decided in March that, while ta k- Projected EU integration of capital markets would coning“reasonable account of specific situations,” there stitute a significant restriction of national autonomy. was“no need to change either the Treaty or the SGP, Within integrated capital markets governments have to nor to introduce new budgetary objectives or rules” compete for investment with attractive taxation(Tanzi (Council of the European Union, 6913/03). Chancellor 1995; Deheija and Genschel 1999). As a result, memSchröder stressed that the Stability and Growth Pact ber states can no longer autonomously determine their should be applied“in both of its aspects.” The French taxes. From a theoretical point of view, this leads to tax government followed suit, outdoing German criticism competition and a“race to the bottom”(Ganghoff and refusing to observe the deficit recommendations. 2000; Genschel 2000). This effect is strongest for taxes In the meantime, Silvio Berlusconi entered the field, with a mobile base, including business taxes and tax claiming an exemption and questioning the ECB’s on interest income. We shall concentrate mainly on the commitment to price stability in times of recession or latter: first, because the tax base of other taxes, such stagnation. as value-added tax, is less mobile and so they do not Other member state governments seem increasingly challenge social democratic policies to a comparable worried about unsound finances. Hence, disagreement extent; and second because the most important deciconcerning the SGP has grown dramatically since sions at the European level have been taken on the 2002. Denmark and the Netherlands have complained taxation of interest incomes, although the“Code of about indulgence of France’s failure to meet previously conduct to eliminate harmful regulation of business agreed requirements. This was the first time that taxation” is clearly of relevance to social democratic member states had refused to approve a decision un- policies. der the excessive-national-debt procedure. In light of Within the European Union, different designs of nathese developments, it is not surprising that in Novem- tional tax laws lead, among other things, to tax evaber 2003 the ECOFIN-12 Council decided against sanc- sion because some member states make strategic use tions by a majority, while four smaller states(Austria, of bank-secrecy laws. Member states do not inform Finland, the Netherlands and Spain) voted in favor of the country of residence about incomes, but neither do the Commission’s proposal. they impose a withholding tax on interest incomes. The core commitment to keep budgetary positions This development can be said to be harmful from a so“close to balance or in surplus” seems to have been cial democratic perspective. First, it reduces tax revereplaced by a more indulgent attitude towards the 3% nues in countries with high tax rates and undermines criterion by the governments of the three largest the public expenditure base, hitting costly redistributive members of the Eurozone. A partial reinterpretation of social policies. Governments intending to reduce public the“sound money and finances” paradigm seems set expenditure might welcome this effect. However, for to make possible more flexible fiscal policy in times of social democratic governments such a development

Internationale Politikanalyse International Policy Analysis Unit would be worrying. Second, it has unwanted redis- and multilateral agreements were assigned as conditributive effects if the tax burden increases on wages tions for an adjustment. However, only in January compared to capital incomes because taxation on 2003 did the Council reach agreement. The directive wages and social security contributions cannot be eas- on“taxation of savings income in the form of interest ily avoided. The different levels of mobility of wage payments” was adopted on 3 June 2003. According to and of capital income, pressure to reduce capital taxes this directive automatic exchange of information conand tax evasion opportunities may thus aggravate cerning tax audit tracer notes will be set up by 2005 in voluntary“exclusion at the top”(Giddens 1998). Cor- 12 EU countries in order to ensure taxation in the recting the defects of tax competition, which violates country of residence. A withholding tax of 15% will be the first principle of the ideal social democratic tax sys- raised in Austria, Belgium and Luxembourg, rising to tem(see Merkel 1993: 164f), should thus be a priority 20% in 2007 and 35% in 2010; 75% of the revenue issue for social democratic parties(with the possible from these taxes will go to the country of residence. exception of those who profit from the status quo). In European governments were thus able to reach fact, the PES manifesto for the 1999 European elec- consensus on this greatly disputed issue. However, it is tions demanded“better policy coordination to prevent a consensus based on the lowest common denominaharmful tax competition in the form of unfair tax tor: for the first few years of the transitional period the breaks and hidden subsidies”(PES 1999: 9). The PES rate of the withholding tax in Belgium, Luxembourg EcoFin Group also pointed to the necessity of an and Austria is quite low. In addition, it is an unconvinc“OECD-wide approach to tax policy” to reduce capital ing package due to decision-making procedures that outflows(PES 1998: 6). allow the beneficiaries of the previous regulation to When social democratic parties attained a dominant exercise a veto. In fact, the outcome is more symbolic position in the Council, discussions between member than real. Nevertheless, the directive will facilitate sostates on prevention of tax competition had been go- cial democratic policies in moderating tax competition ing on for more than a decade without significant re- to some extent. sults. France and Italy had been particularly worried But can this favorable result be traced back to social about tax competition and the French socialist gov- democracy? Before the final decision was made, the ernment even threatened to block the directive on chances of an agreement being reached were enliberalization of the capital market. However, the first hanced by reasons other than party influence. Some commission proposals(COM(89) 60) failed(Genschel member states had become more aware of the prob2002: 141–48; Bernauer 2000: 227f). At the end of lems of“harmful tax competition”: among other the 1990s the Commission launched a new attempt to things because taxpayers were increasingly using Luxcoordinate national policies on the taxation of interest embourg as a tax haven(Genschel and Plümper 1999: income within the framework of a“package to tackle 260–62; Deheija and Genschel 1999: 413). However, harmful tax competition.” Its proposal for a“co- this does not mean that there was no social democexistence model”(1997) was intended to introduce an ratic impact. An agreement would have been more difinformation system forwarding information about in- ficult without the change of government in the UK in terest incomes to the tax authorities of the country of 1997. Other social democratic parties also seemed to residence. Member states that did not agree to this be more inclined towards reaching agreement than would instead impose a minimum withholding tax of their liberal, Christian democratic and conservative 20% on the interest incomes of all EU citizens. In June predecessors. The German“red–green” coalition had 2000 the member states in principle agreed to the co- explicitly called for“common and binding measures existence model(European Council 2000), which is against tax dumping” in their coalition agreement based on the Helsinki Principle that“all citizens resi-(SPD/Bündnis 90/Die Grünen 1998). The French Socialdent in a member state of the European Union should ist Party made the most far-reaching proposals conpay the tax due on all their savings income”(European cerning the taxation of interest income. In the negotiaCouncil 1999), but the crucial details of the regulation tions the French government tried to exploit its occuwere still to be worked out. pation of the EU presidency, proposing measures that In November 2000 the Council agreed a future di- exceeded even the Commission’s proposal. 5 Finally, rective concerning the minimum taxation of interest (13555/00/EC) in an attempt to address concerns that a European“solo player” in terms of taxation might 5 The French government not only propose d a withholding tax endanger the competitiveness of European financial of 25% in the transition period and a percentage of 90% of the transferred withholding tax, but also the inclusion of markets: international regulations in terms of bilateral “debt claims of every kind”(see 13555/00). 7

Wolfgang Merkel& Tobias Ostheim Policy Making in the European Union: Is There a Social Democratic Space? Europäische Politik (03/2004) 8 Ladrech points out the contribution of discussions growth, a social market economy, highly competiwithin the PES network(see Ladrech 2000: 124). tive and aiming at full employment and social proHowever, the tax directive is not exclusively or even gress. … It shall combat social exclusion and disprimarily a social democratic project: specific developcrimination, and shall promote social justice and ments in the member states dete rmined the result protection, equality between women and men, solimuch more than partisan differences. darity between generations and protection of children’s rights. It shall promote economic, social and territorial cohesion, and solidarity among Member Social policies States. In recent years, the cumbersome EU social protection policies have shown little evidence of social democratic governments being able to overcome the problems we have described. No breakthrough has been made in social policy since the integration of the Social Charter in the Treaty of Amsterdam and its extension to the UK. However, some decisions can be seen as improvements from a social democratic point of view: for example, changes in the decision-making rules in Nice, decisions taken on European social policies as part of the social policy agenda and the introduction of the open method of coordination in social policies(pensions, poverty and social inclusion). The most important challenge for social democratic policies in the EU is the status of provisions promoting social democratic goals in employment and social policy. While the four economic freedoms, competition policy and, to a lesser degree, the ECB’s monetary policy have quasi-constitutional status and are protected by the ECJ and the Commission, many provisions regarding social and employment policies or the regulation of public services either have a lower status or remain rather vague. 6 This bias could be compensated for only by the inclusion of social protection principles in the treaty. However, treaty reform of this kind would obviously require the unanimous consent of all member states. A window of opportunity opened with the establishment of the“Convention on the Future of Europe” to discuss a future EU constitution. Some social democratic members of the Convention clearly saw this as an indispensable precondition of social democratic policies in Europe(see PES Members’ European Convention 2002a). Indeed, basic social rights and objectives have been included in the draft treaty establishing a constitution for Europe. According to Article 3 of the draft, Some important rights have also been laid down in the EU Charter of Fundamental Rights included in the draft constitution. This is clearly a success from a general social democratic standpoint: although the draft does not contain concrete social provisions which are as enforceable as the market freedoms or the competition rules the Constitution will partly adjust the strong bias of the old Treaty towards market integration. However, after the disappointing December summit the complete failure of the constitutional project seems possible. This would represent a major blow for social democratic parties. What Should Be Done? Today, the political priorities of European social democratic parties seem less clear than they did five years ago. Several goals have been achieved in terms of European employment policy, the Convention has completed its work and all important decisions concerning enlargement have been taken. Social democratic parties have not only lost many elections and thus their dominant position in the Council, but they have also had to accept defeat in the euro referendum in Sweden. Furthermore, congruence in European politics seems to be diminishing as different positions on the “excessive-deficit procedure” and discussions on the draft constitution emerge. This opens up new policy options, but also threatens a number of significant achievements. What, then, remains undone and what are the feasible goals and strategies for social democratic parties at the European level? Employment policies The Union shall work for the sustainable development of Europe based on balanced economic 6 However, some parts of social policy, including the transferability of social security entitlements, come under the four freedoms and thus promote the pro-integration thrust of the Commission and the ECJ. Social democratic parties have discovered Europe as a political space as far as employment policy is concerned. Defending the achievements of recent years against a rollback requires that employment be kept at the top of the agenda, that the constitutive processes continue to work properly and that the integrity of the

Internationale Politikanalyse International Policy Analysis Unit EES be maintained. Within the framework of the European Employment Strategy, social democratic parties should further support integrated policy approaches and a“coherent policy mix,” that is, reviewing, utilizing, coordinating and enhancing the employmentcreation potential of other policies. Policies should propose socially acceptable best practices of labormarket deregulation which meet the multiple targets of job growth, labor-market inclusion and amelioration of the insider–outsider problem without creating an Anglo-Saxon-type working poor. Measures should be taken particularly on the micro-supply side of employment: training programs, partly cofinanced by the EU, for specific problem groups, such as the long-term unemployed and the young unemployed. Within the Union these are feasible options even under the changed composition of the Council. However, the elements of the European Social Model should be more clearly defined. This would help to ide ntify the elements of the European welfare state that must be protected from erosion while allowing for necessary reforms in the future. Fiscal criteria and EMU Social democratic parties can therefore defend the SGP by reinterpreting the criteria, paying more attention to the business cycle; instead of adhe ring rigorously to the 3% deficit criterion, they should keep the option open of reflating the economy in periods of economic downswing. 7 They might also compromise in terms of a moderate shift in monetary policy. This could even mean a discretionary use of European monetary policy in a moderate neo-Keynesian manner. This implies, in particular, a more equal balance between the three macroeconomic goals. Some authors have proposed the amendment of other ECB goals. Notermans(Notermans 2001) declares that this might be the best solution for the growth problem as it would change economic expectations regarding future growth, thus positively influencing investment. This strategy is intended to facilitate real investment. This might involve enforcing the fiscal goals of the Stability and Growth Pact more strictly in order to prevent increasing interest rates that might cancel out monetary policy measures. However, this partial change of the EMU regime does not seem feasible at the moment. Differing interpretations of the costs and benefits of Tax policies public debt and budget deficits make it difficult for social democratic parties to reach a common position. In recent years, harmful tax evasion and tax competiOn the one hand, a persistently high public debt is not tion within the Union have been curbed. However, guaranteed to promote social democratic goals. Defi- large loopholes still exist. Social democratic parties cits may allow public spending in pursuit of social de- should insist that they be closed and that taxable inmocratic goals, but they restrict the fiscal base of come be more successfully controlled. It is very future public expenditure. Social democratic parties important that the information system be extended to should avoid the trap of being forced to make radical all member states as quickly as possible. Renegotiation cuts in public expenditure counter to their spending of the tax directive to enhance its scope and make the preferences. On the other ha nd, the existing monetary“code of conduct” enforceable is a desirable, but not a and SGP regime can plausibly be criticized for its defi- particularly feasible option. ciencies. It is not strong enough to ensure fiscal con- The harmonization of income taxes might be a selfsolidation in times of strong economic growth and defeating strategy for high-tax countries since such gives too little leeway in times of stagnation. In addi- harmonization would be imposed – if at all – only at a tion, the Union’s goals of growth and employment are lower level. Continental social democrats should theresubordinate to the goal of price stability, at least as far fore follow the Scandinavian model of raising VAT. In as the ECB is concerned. Finally, social democratic gov- times when capital income and the personal income of ernments face a dilemma in fiscal adjustment: non-wage earners are increasingly difficult to tax, VAT although expenditure-based adjustments that rely on could compensate progressive tax evasion perpetrated cuts in transfers and public wages are more effective by those on higher incomes. VAT at least cannot – easand sustainable(as induced by the SGP), they tend to ily – be evaded and government revenues would ingenerate more income inequality. Revenue-based ad- crease. The unavoidable regressive distributional efjustments, in contrast, have been less successful in fects of a flat-rate tax appear to be the lesser evil. terms of economic growth, but create less income inequality(Mulas-Granados 2003). 7 Although this goal is already laid down in the SGP, it is mostly ignored. 9

Wolfgang Merkel& Tobias Ostheim Policy Making in the European Union: Is There a Social Democratic Space? Europäische Politik (03/2004) 10 Social policy highly institutionalized welfare states providing social security benefit entitlements. Social democratic gov“Redistributive social policies” on the European level ernments therefore tend to focus on the national cannot be expected in the foreseeable future. The EU arena and often neglect using“European space” to will continue to focus on a“regulative social policy.” pursue their political goals. But which instruments Harmonization of national social welfare systems could be used successfully to attain social democratic should not be expected due to major institutional dif- aims at the European level? ferences and the heterogeneity of welfare claims and benefits within member states. However, social democratic parties should try to strengthen the compulMethods and degrees of Europeanization sory aspect of the European treaties and European secondary law concerning minimum standards of social Basically,“Europeanization” policies can be differentiprotection. Above all, they should do everything to ated with respect to two“methods” and three desafeguard the social goals of the Convention draft. grees of Europeanization:“hard” European law – that Structural impediments, legal entitlements and the is, directives and regulations – are obligatory and can scarce financial resources of the poorer member states be enforced, while“soft” European methods are prevent harmonization of social welfare systems at the based on recommendations, guidelines and communiEuropean level. However, European regulations could cations. These methods can be used to attain different be used to prevent ruinous competition among mem- degrees of Europeanization: harmonization of policies, ber states’ social regulatory and welfare systems. Fritz convergence of outcomes while allowing for different W. Scharpf(1997: 33) suggested some years ago that strategies – for example, with obligatory minimum EU member states should make a binding agreement standards or the less committed“management by obaccording to which all countries must avoid welfare jectives” of the open method of coordination – and, retrenchments which would push overall social finally, strengthening, activating and informing naexpe nditure below a certain threshold.(The threshold tional reform debates, for example, with“best pracwould be defined in terms of the countries with the tices” and peer review without binding objectives. lowest share of social expenditure in total public Generally, we cannot say which method and which expenditure.) Such a minimum standard would prevent degree of implementation best fits social democratic some countries from using welfare cuts to enhance interests. It depends on the policy domain, the institutheir international competitiveness and attract more tions involved and the concrete constellation of actors. investment at the expense of social protection. Such a Where regulation of the four economic freedoms or rule could be complemented by an agreement defining market competition are at stake“hard European law,” the minimum share of all taxes in capital and business obligatory directives and harmonization are the rule. incomes. A competitive“race to the bottom” in terms However, as far as core social democratic objectives of tax and social dumping could thus be avoided. are concerned, such as employment or social policy, in Similarly, though more demanding, quantitative stan- respect of which social democracy has a distinctive dards could be set for education spending. The trend identity compared to conservatives(and to a lesser exfrom social consumption towards social investment tent compared to Christian democrats) and liberals, the could be strengthened to create more equal oppor- open method of coordination, minimum standards or tunities and life chances for children from poorer best practices in the form of non-obligatory guidelines families. Both goals would be acceptable to modern dominate. social democrats committed to more effective social Taking into account the impact of“constitutionaljustice than has been achieved by continental and ized” market freedoms and competition rules on ecoAnglo-Saxon welfare states alike(Merkel 2002). nomic and social welfare in the member states, social democratic parties ought to try to counterbalance the How Should It Be Done? strong trend towards deregulated markets 8 on the level of the Treaty or even that of the constitution. The convention draft can thus be regarded as a definite Coordination or harmonization of member states’ tax step forward. However, the general bias towards free policies, reform of the welfare state and social deregulation of the labor market in high unemployment countries seem inevitable. However, these reforms must be realized in the context of a great variety of 8 Of course, the Common Agricultural Policy is the very antithesis of free-market liberalism. However, the heavily regulated common agricultural market serves neither social justice in general nor social democratic aims in particular.

Internationale Politikanalyse International Policy Analysis Unit markets and economic liberalism will not change in the not only for employment, but also for social inclusion near future as agreement is unlikely to be reached on and social security systems. changing the core principle of free markets in the trea- However, it seems unlikely that such a new proceties or the“constitution”. dure can be established successfully. First, it is highly Closer cooperation between some members will questionable whether unanimity will be reached as represumably not help to overcome the constitutional gards amending the treaty. Second, member states asymmetry of pro-market“hard” law and market cor- might still block effective“framework directives.” In recting measures. As Fritz W. Scharpf(2002) has ar- addition, from a social democratic point of view it is gued, such closer cooperation between some member questionable whether the party composition of states must respect the acquis und so cannot simply be member-state governments will give rise to framework used to curb or correct any of the negative effects of directives that foster social democratic goals. the acquis on the four freedoms and competition law. Although their impact on national policies is reAt least in some areas further steps towards major- stricted, this again points to the importance of“open ity voting seem possible. This might open up the way methods” for social democratic strategies in respect of for more substantial regulations in the field of regula- which coordination with“hard” governance is not tive social policy or tax policy(taking into account the possible. However, we have shown that a strong and draft constitution) backed by the Commission and the direct impact is not always a preferable option for soECJ against future erosion. cial democratic parties for electoral reasons. The open However, it is questionable whether social democ- method of coordination is normally more flexible than ratic parties should follow a strategy of harmonizing European secondary law and thus allows for necessary social and employment policies. This would imply far- variation between member states’ policies. Furtherreaching changes to national welfare states and de- more, from a social constructivist perspective, fostering prive social democrats of core policies with which“learning” and“policy transfer” strategies seem to be electorate s tend to associate them, risking electoral a valuable and effective instrument. Thus, OMC procdecline. In pursuit of these policies, social democrats esses may in the long run help to overcome the fact thus ought to pay more attention to strategies aiming that social democratic parties still diverge on most poliat minimum standards and“management by objec- cies. Finally, the open method of coordination does not tives.” The“corridor” model(Busch 1998) has been necessarily have to end in“neoliberal” competition proposed as an alternative(for example, Frenzel 2003) and deregulation, but may also help to propagate sucto precisely defined minimum standards. According to cessful social democratic goals and strategies. The PES this model, three or four“corridors” with different members of the Convention have thus plausibly minimum standards should be established, allowing for claimed that“policy coordination should be introduced differences in economic prosperity. 9 However, such a into the treaty,” using the established open method harmonization strategy, with hard, enforceable but dif- with common aims, benchmarking and the formulafering targets, does not seem to be a feasible option in tion of guidelines(PES Members’ European Convention most policies. 2002b). To overcome these problems Fritz Scharpf(2002) has proposed relatively general rules(called“framework directives”), a combination of the open method Pragmatic European policies instead of a Europeanized of coordination and“hard” Community law, that PES would also pay attention to differences in countries’ economic situation and institutions. This would allow The EU’s decision-making rules mean that new decisome flexibility while changing the asymmetry be- sions that are unwanted by some member states can tween hard law that is mostly pro-market and the easily be prevented while existing provisions of primary market-correcting substance of some soft coordination and secondary law are difficult to change. Given the processes. Therefore, the treaty has to be amended: changing majority in the Council(and the European directives setting minimum standards have to be issued Parliament) it can be concluded that the window of opportunity has already closed – even for policies that 9 An upper and lower limit of social expenditure(“corridor”) require only a qualified majority. As a consequence, should be determined for each member of this group. The social democratic governments have both to reach percentage of employers' social contributions should be the agreement within the social democratic party family same in all member states. Within these corridors member states can decide on the level of social expenditure and how it and to establish alliances with parties of a different poshould be distributed. litical orientation. Demands for uniform European so11

Wolfgang Merkel& Tobias Ostheim Policy Making in the European Union: Is There a Social Democratic Space? Europäische Politik (03/2004) 12 cial and fiscal policies and a fully“Europeanized” PES proposals, as already mentioned). The social partners, (for example, Frenzel 2003) are utopian. The realiza- who have gained in importance in European politics, tion of such strategies is unlikely as a consequence of might be another ally. Although the search for allies at the variance of national institutional contexts and the the European level will generally not help to solve the different programmatic positions of social democ- electoral dilemma of social democratic parties, the inratic/socialist PES member parties, and the diverging volvement of these social partners may offer a“distinct interests of parties in government/opposition and of and positive role for organized labor in the regulation single party/coalition governments. In addition, a trans- of economic and social relations” that is the precondiformation of national party systems into a European tion for ties between leftist parties and unions(Howell party system has not yet taken place and will not take 2001: 9). This might help to moderate the opposition place in the foreseeable future, although the European of“veto players”(see Tsebelis 2002) and make inevilevel is increasingly important in most policies(Ladrech table reforms less electorally costly. 2000). Thus, although European policies have started to play a more prominent role in national elections there is no room for a Europeanized party in national party competition. Social Democracy and the European Union in the Future Search for allies at the European level Coalitions that rely primarily upon social democratic actors have poor prospects not only because of European decision-making rules and the consequences of numerous electoral defeats in the last three years that have drastically changed the composition of the Council. In addition, the end of the long-standing collaboration with the EPP has changed the role of the PES in the European Parliament. Furthermore, social democratic parties have fairly heterogeneous preferences on many issues and this will only get worse with enlarge ment. Social democrats should try to forge coalitions with different actors and multiple institutions in the EU’s multi-level system of governance. In the past, the European Parliament, and to some extent also the Commission, turned out to be“natural” allies. Prima facie, the Commission has“the potential to seriously interfere[only] with those parts of the national economies that are not predominantly structured by market principles,” and it has acted as a strong defender of these rules. However, its policies can be traced back to its compe tences regarding market liberalization, not to an ideological commitment(Schmidt 2000: 45). A closer look shows that the Commission may also be an ally of social democratic parties: it is – like the Euro pean Parliament – not only theoretically biased towards further integration for the purpose of enhancing its own competences(see Schneider and Werle 1989), but also has tried to promote market-correcting rules (for example in its initiatives within the framework of the EES seeking more concrete and binding measures – see Ostheim and Zohlnhöfer 2003 – or its tax policy At the end of the 1990s a window of opportunity seemed to have opened for social democracy. Social democratic parties led the governments of 12 of the member states and constituted a majority in the European Parliament(until 1999). Excessive social democratic expectations of conquering European political space, and so compensating for the loss of national sovereignty in policy-making, proved to be an illusion. Nevertheless, a number of decisions have been taken which can be regarded as“social democratic” successes: the European Employment Strategy(EES) can be attributed to social democratic dominance at the end of the decade. Based on the principle of soft coordination, the EES introduced an institutional arena in which best-practice diffusion can be organized, mutual learning processes strengthened and pressure on national employment policies enhanced through indicative guidelines, benchmarking and peer review. Less visible progress has been made in tax policy. However, a first step was made in 2003 to avoid unfa ir and harmful tax competition among the member state s, after long and complex negotiations. The directive on “taxation of savings income in the form of interest payments” took further steps to establish an automatic system of tax audit tracer notes between 12 countries to curb tax evasion. Furthermore, it paved the way for implementation of a withholding tax in Austria, Be lgium and Luxembourg to minimize the unfair taxation practices of some countries. Although the directive is oriented towards the lowest common denominator, it may trigger further spillovers in the direction of better coordination of taxation within the European Union. No major successes can be reported in European social policy since the Social Charter was introduced into the Treaty of Amsterdam and extended to the UK. Only some additional protective regulations for EU migrant

Internationale Politikanalyse International Policy Analysis Unit workers,“gender mainstreaming,” safety in the workplace and increase d expenditure on the European Social Fund have been implemented(Falkner 2000). However, the Office for the Protection of Competition (OPC) opened up a new arena in which national regulatory social policies can“infiltrate” European rules at all levels and ultimately contribute to diminishing the strong market and free competition bias of the European Union. This may take place in the context of an overarching“social policy agenda.” The open method of coordination in particular could open up new ways of strengthening the coordination of social and employment policies beyond the treaties and“hard” European laws – OMC spillovers can be expected in the future. However, in comparison with the impact on European and national policy-making of the Single European Market, European monetary policy and the Stability and Growth Pact these are very minor steps. The Office for the Protection of Competition cannot compete with hard European law which protects the four economic freedoms and liberalized markets(with the exception of the Common Agricultural Policy). The imbalance between negative and positive integration remains unchallenged. Eastern European enlargement will prevent further deepening in many policy areas. It cannot be regarded as a“social democratic project” to the extent that it prevents or at least decelerate s the deepening of the EU. Reaching the necessary conse nsus or even compromises for re regulating fiscal, social and employment policies at the European level will become more complex and difficult in a more heterogeneous Union. Despite some progress in“socially democratizing” some fields and methods of policy making, the trend towards a more market driven and less political Union continues. The failure of the first attempt to pass the draft constitution could be“the writing on the wall” as far as the further deepening of political Union is concerned. If this is true, social democratic strategies which seek to make the European Union more“social” should look to a“two-speed Europe” as the most promising“social democratic option” for the future. References Adnett, Nick, 2001: Modernizing the European S ocial Model. Developing the Guidelines. In: Journal of Common Market Studies 39: 353–64. Aust, Andreas, 2000a: Die Europäische Beschäftigungs- und Sozialpolitik nach dem Gipfel von Amsterdam – Versuch einer ersten Bilanz. In: ZSR 46: 13–37. Aust, Andreas, 2000b:‘Dritter Weg’ oder‘Eurokeynesianismus’? Zur Entwicklung der Europäischen Beschäftigung spolitik seit dem Amsterdamer Vertrag. In: ÖZP 29: 269–83. Bernauer, Thomas 2000: Staaten im Weltmarkt. Zur Handlungsfähigkeit von Staaten trotz wirtschaftlicher Globalisierung , Opladen: Leske+ Budrich. Best, Edward, and Bossaert, Danielle 2002: Introduction: Making the Employment Strategy Work. In: Edward Best and Danielle Bossaert(eds), From Luxembourg to Lisbon and Beyond. Making the Employment Strategy Work , Maastricht: EIPA, 1–13. Busch, Klaus 1998: Das Korridormodell – ein Konzept zur Weiterentwicklung der EU-Sozialpolitik. In: Schmid, Josef and Niketta, Reiner(eds), Wohlfahrtsstaat: Krise und Reform im Vergleich , Marburg: Metropolis, 273–95. Dahrendorf, Ralf 1983: Die Chancen der Krise. Über die Zukunft des Liberalismus , Stuttgart: DVA. Dehejia, Vivek H. and Genschel, Philipp, 1999: Tax Competition in the European Union. In: Politics and Society 27:. Dyson, Kenneth 1999: Benign or Malevolent Leviathan? Social Democratic Governments in a Neo-Liberal Euro Area. In: Political Quarterly 2: 195–209. Esping-Andersen, Gösta, 1990: The Three Worlds of Welfare Capitalism , Cambridge: Polity. European Commission 2002: Impact Evaluation of the European Employment Strategy. European Council 1999: Santa Maria de Feira European Council Presidency Conclusions. European Council 2000: Helsinki European C ouncil Presidency Conclusions. Falkner, Gerda 2000: EG-Sozialpolitik nach Verflechtungsfalle und Entscheidungslücke. Bewertungsmaßstäbe und Entwicklungstrend. In: Politische Vierteljahresschrift (PVS) 2 (41): 279–301. Frenzel, Martin 2003: Verzweifelt gesucht: Ein ge meinsames Konzept für Europa. Die europäische Sozialdemokratie zwischen neoliberaler Marktanpassung und transnationaler Selbstbestimmung. In: Vorgänge , 2/2003: 62–71. Ganghoff, Steffen 2000: Adjusting National Tax Policy to Economic Internationalization: Strategies and Outcomes. In Fritz W. Scharpf and Vivien A. Schmidt(eds), Welfare and Work in the Open Economy II: Diverse Responses to Common Challenges , Oxford: Oxford University Press, 597–645. Genschel, Philipp 2000: Der Wohlfahrtstaat im Steuerwettbewerb. In: Zeitschrift für Internationale Beziehungen 7: 267–96.Genschel, Philipp 2002: Steuerharmonisierung und Steuerwettbewerb in der Europäischen Union , Frankfurt/New York: Campus. 13

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