Varieties of Capitalism and European Integration

Regan_Aidan HDThe Eurozone crisis has resulted in a shift toward greater market liberalisation and flexibility rather than social protection and security. This seriously calls into question the notion of a ‘social Europe’, and the future direction of European integration more generally. In the study of comparative capitalism there has been a long debate on whether Europe integration has a ‘neoliberal bias’, which promotes convergence toward the Anglo-Saxon model of economic development. If so, there is a limited future for the social democratic countries of Northern European, the coordinated market economy of Germany, whilst it’s business as usual for the liberal market economies in the British Isles.

Most research in the study of comparative political economy, however, has shown that there has not been convergence within Europe. On the contrary, there has been a divergence in  growth regimes and the overall economic performance of member-states (particularly between the north and south of the Eurozone).  The continued resilience of national models of economic governance (for better or worse) is usually attributed to differences in domestic institutions. These are sticky and difficult to change, and if they do, there is a significant time-lag in how they condition macroeconomic outcomes. In this regard, European integration is mediated differently depending national welfare, labour market and industrial relations regimes i.e. national varieties of capitalism.

But does this mean that European integration has no neoliberal bias?

All of this depends on how we measure ‘convergence’. Institutional change is incremental and often hard to capture in large quantitative studies. This has been illustrated by Wolfgang Streeck in his study on ‘reforming German capitalism‘. The conclusion of this study is that it’s no longer possible to describe Germany as a ‘coordinated market economy’. There has been a qualitative shift in how the German political economy is organized, particularly in relation to collective bargaining, corporate governance, labour markets, employment and welfare state provision. This transformation, according to Streeck, has nothing to do with European integration. It is directly related to shifting power relations in the domestic economy. In particular, he ascribes this to weakened trade unions, the fiscal constraints of governing a market economy, and an increase in business power.

All of this goes some way to explaining why Germany is prescribing an adjustment of ‘internal devaluation’ in southern Europe. The reforms they propose are unquestionably premised on the assumption that liberal market economies produce better performance, primarily because the are assumed to break down insider political cartels. Southern European governments, it is argued must pursue and implement the type market liberalizing reforms that have defined German policy for twenty years, if they are to become ‘responsible’ members of the Eurozone club.

All of this assumes, of course, that the problems facing peripheral member-states of the Eurozone are the same; over-priced economies that paid workers too much money and therefore lost the capacity to export. Most empirical research indicates that this is categorically not the case. The only variable that unites Ireland, Italy, Greece, Spain and Portugal is that they ran a current account deficit since entering the EMU.  This is usually taken  to infer that these countries lost competitiveness and export share. But what it really illustrates is  a prior causal mechanism – the import of capital to fund overheating credit fueled domestic consumption. This is directly associated with integrated financial markets in Europe.

The German inspired Euro response has been to promote market convergence as a solution to institutional differences across national varieties of capitalism. What this means is that responsible Euro governments must cut public spending, wages, social protection and liberalize their market. This is not to deny that parts of southern Europe could do with a good dose of market competition and measures to enhance educational and productivity performance. Nor does it deny the comparative advantage of being an export led, demand-compressing stability oriented economy. But it is naive in the extreme to think that Spain will become Germany, or Greece Ireland.

The future direction of European varieties of capitalism, and the capacity of member-states to carve out an autonomous growth strategy in response to the crises, is becoming more and more difficult. This is less associated with a ‘neoliberal Europe’ but the German consensus underpinning the EMU. The politics of the policy response is being implemented by the Commission, but it is ECOFIN where the agenda is being set. If this is the case, then the capacity for national governments to pursue more socially progressive strategies which put the interest of citizens over markets, may require less not more Europe. Furthermore, it is not CME countries like Germany who are losing out from European integration, but the eastern and southern periphery.

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