Privatization in the European Union

Theory and Policy Perspectives

David Parker, David Parker

• Publisher: Routledge
• Year: 2002
• ISBN:
  9781134733491
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The book identifies different national characteristics in terms of the motivation to privatise, the scale of privatization and its consequences.
In the opening chapters there is a detailed overview of the theoretical economic issues involved in privatisation and an assessment of privatization across the EU. The remaining ten chapters contain national case studies of EU countries which review the history of state ownership and privatization in each of these countries and evaluate the extent of privatisation. The role of European Commission directives in deregulating markets and stimulating privatisation is also examined.

1 Introduction
David Parker

THEMES AND CONTENT

In terms of the value of state assets sold the UK still leads the rest of Europe, but in recent years privatisation activity has intensified in the other member states of the EU. Interest in privatisation has been stimulated by the UK example, by technological change and by the European Single Market programme, which is concerned with removing non-tariff barriers to trade in the EU. Amongst other things, the Single Market programme has led to policies designed to open up state monopolies to competition, notably in telecommunications, energy, transport, posts, public procurement and financial services. More recently, the trend towards privatisation in the EU has been reinforced by the Maastricht Treaty ceilings on government debt and deficits in the runup to European Monetary Union. The sale of state industries offers one means of reducing the level of outstanding debt.

Major industries including public utilities are being lined up for sale or have already been subject to share flotations in the EU. However, the EU consists of a diverse set of nations with each country’s precise attitude towards state ownership and privatisation dictated by a complex combination of historic, economic, social and cultural factors. The transfer of privatisation as policy across Europe involves, therefore, emulation but not exact copying of any one model. Emulation involves some adaptation in recognition of institutional and structural constraints on policy transfer. In some cases political divisions and trade union pressures reinforce policy inertia.

As a consequence, creation of a horizontal, across industry, ‘EU policy’ on ownership is not occurring. Instead, policy is developing on a sectoral or vertical basis and reflects particular attitudes of member states. France and to a slightly lesser extent Italy have been more reluctant than the UK and Germany to see privatisation and associated liberalisation of markets extended into areas traditionally served by monopoly state providers, notably electricity, postal services and rail transport. Also, privatisation raises important questions about the direction of economic policy which extend beyond matters of immediate economic efficiency gains (static efficiency gains), to encompass issues to do with longer-term industrial performance (dynamic efficiency gains) and income distribution or welfare effects.

Within the EU there are different views about whether privatisation can promote economic prosperity and maintain social cohesion.

The purpose of this book is to provide a comprehensive review of privatisation in the EU member states and to consider different perspectives on privatisation within the EU. To this end privatisation experts in a number of the member states were asked to write about their country’s experience and to place privatisation within a wider historical and economic context. In the cases of the Nordic states it was decided to provide more of a regional perspective. Authors were encouraged to adopt their own approach to the content of their chapters. As one of the main aims of the book is to bring together different perspectives on privatisation, it was important not to attempt to restrict the content by imposing a heavy editorial hand. The result is a series of individual studies which can be read for comparative purposes or as self-contained discussions of privatisation in particular EU states. The chapters have differences in approach reflecting the different attitudes to privatisation within countries and the particular views of the authors. Some include a neoclassical perspective, while others are more institutionalist in nature or more within the tradition of political economy.

Turning to each chapter in detail, chapters 2 and 3 provide a study of privatisation activity across the EU and a theoretical treatment of privatisation respectively. Both chapters are intended to provide a framework for the later country studies. Chapter 2 compares the history, rationale and levels of privatisation activity in each member state and considers EU Commission policy on ownership and market liberalisation. What is clear from this comparative perspective is, first, the extent to which privatisation has come to the fore in economic policy making in Europe in the 1980s and 1990s; second, how both the rationale for privatisation and the precise nature of the policies vary across Europe; and, third, how EU Commission policy is evolving and creating pressures on member states to liberalise markets, which in turn is leading to pressures to privatise long-established state activities. It is clear that the notion prevalent in the UK that privatisation raises economic efficiency strikes a cord in some member states but by no means all. Privatisation within the EU results from other forces including the ‘fashion’ to privatise, evident worldwide, and, more pragmatically, expediency. The latter is most obvious where countries are wrestling to meet the budgetary criteria for monetary union in Europe.

Chapter 3, by Dieter Bös, looks particularly at agent–principal theory in economics and the way it has been used by mainstream, neoclassical economists to justify wide-scale privatisation. Most of the relevant economics comes from the USA and the UK and Bös identifies both strengths and weaknesses in the literature. In particular, he argues that ‘in my opinion, this neoclassical way of reasoning misses many facets of the most important changes in enterprises which are privatised’. He allows for a change in the regulator’s welfare function and for distributional effects and particularly takes account of the reduction in trade union power when firms are privatised. Whereas neoclassical theories on privatisation assume constant welfare and utility functions, Bös recognises that privatisation decisively changes these functions. While not rejecting neoclassical explanations of privatisation, he concludes that ‘these explanations should refrain from holding things constant whose change is central to the process of privatisation’.

In chapter 4 Karl Aiginger discusses privatisation in Austria. The public sector has traditionally played an important role in the Austrian economy and by the 1980s the country had a peculiarly large share of public ownership of manufacturing industry. Aiginger catalogues the privatisations since the 1980s and emphasises how potential buyers were selected according to whether production capacity and management decision making would remain in Austria. As in the case of a number of the countries discussed in this book, Austria’s privatisation programme has not involved an unconditional acceptance of the omnipotence of competitive capital markets.

Jacques de Bandt’s study of the French experience (chapter 5) stresses the extent to which the policy of privatisation is a reversal of the earlier period of nationalisation after 1981. In a study critical of the drift to privatisation, he shows that before the fall of the socialist government in 1986, industrial policy was in retreat. In this sense privatisation is a continuation of a move away from earlier state involvement in industrial restructuring and regeneration as part of state economic planning in France. State intervention is now on a case by case basis ‘aimed at solving immediate problems, reinforcing existing structures or defending national interests . . . and not within the framework of some well thought out national development strategy’. Yet, he points out that the French state still takes an active interest in its industry, of which the use of favoured groups of shareholders during privatisation sales, the so-called noyaux durs, is one manifestation. He concludes that privatisation in France involves ‘concentrating economic power and providing easy profits to the benefit of a small group of capitalists’. Bandt’s tone is one of scepticism about the rationale and likely outcome of the recent drive to sell state assets in France.

In chapter 6 Josef Esser reviews privatisation in Germany in the light of the country’s ‘social market economy’ model. A model that seems to have been exceptionally successful for much of the postwar period. Esser concludes that so far privatisation in Germany (excluding the former East Germany) has affected no more than a few state-owned concerns and those which are profitable. He also concludes that the new pressures for privatisation and liberalisation may threaten the social consensus within Germany with consequences that are difficult to foresee. Overall he concludes that, unlike in a number of other EU member states, ‘a policy of privatisation was not, from an economic standpoint, of paramount importance in making sure that Germany remained competitive in world markets’. The German case underlines the importance of studying privatisation in the light of each country’s institutional and structural constraints.

Privatisation in Greece is discussed in chapter 7 by Nicholaos Haritakis and Christos Pitelis. They firstly review the theories of state failure in economics prevalent in the 1980s, identifying strengths and weaknesses. Overall, they argue that neither theory nor practice lend unconditional support to what they call ‘privatisation mania’. In relation to the experience in Greece, they explain how privatisation policy has gone through three distinct phases where lessons have been learned and policy has evolved. However, as elsewhere, policy is driven by political considerations and constraints. In November 1993 a government favourable to privatisation was forced to resign after losing its parliamentary majority. Haritakis and Pitelis also identify some of the economic costs of privatisation in Greece, in terms of depressed economic activity and higher unemployment. Their study illustrates that higher resource utilisation and higher profits in privatised firms can come at a cost in both economic and social terms. Nevertheless, they conclude that a speeding up of privatisation in Greece is essential, especially of the loss-making state enterprises.

The Irish case is reviewed by Sean Barrett in chapter 8. Barrett explains how Ireland since independence has built on a state interventionist tradition inherited from British administrations in Dublin. The political culture of Irish policy making from the 1920s encouraged the championing of state-owned enterprises, although a philosophy favouring public enterprises did not develop. Support for state enterprise was pragmatic and related to the perceived need to develop the Irish economy. This view was shared by all of the political parties in Ireland until the 1980s, when the consensus broke down in the face of mounting evidence of economic failure in a number of state enterprises. Barrett provides three case studies of privatisation in Ireland and identifies certain performance improvements. Yet by 1996 privatisation in Ireland had lost impetus in the face of political opposition.

In their study of privatisation in Italy, in chapter 9, Massimo Marrelli and Francesca Stroffolini further underline the importance of studying privatisation in relation to the history and politics of the country. As they acknowledge: ‘To many foreign observers the Italian political economy model has always been something rather mysterious and somewhat incomprehensible.’ They go on to demonstrate that privatisation in Italy with its stop–go nature and contradictions can only be rationalised and explained once the peculiar characteristics of the Italian political system and institutions are recognised. They reinforce their study be proposing a political economy model which rationalises the choices being made. They build a model in which public ownership of firms allows the ruling party to extract private benefits from localisation and employment policies. The welfare outcomes of privatisation depend upon the effectiveness of liberalisation and regulatory processes.

Chapter 10 is a regional study of privatisation in Scandinavia encompassing a comparative analysis of policy in Finland, Sweden and Denmark. Johan Willner explains that in spite of a reputation for welfarism and public intervention, these countries have been affected by the spirit of privatisation. In the past state-owned enterprises were fostered, not for ideological reasons, but to create companies that would not have existed under pure market conditions. State ownership was therefore an integral part of industrial policy with the objective of developing the countries’ economies. Willner concludes that a significant group of companies will remain in public ownership, in particular in Finland and Sweden. He also demonstrates through an economic model, where the state enterprise maximises a weighted sum of its profits and wages, that competition is not incompatible with wider objectives. Competition can make it easier for a company with wider objectives to break even. This flies in the face of the usual argument in Europe that liberalised markets reduce the scope for non-profit objectives. This finding is clearly controversial.

Turning to chapter 11, Vincente J. Montes Gan and Amadeo Petitbò Juan look at privatisation in Spain. They review the structure of the Spanish state sector until the 1990s and consider the different approaches to privatisation adopted. Their chapter provides a detailed discussion of the 1995 reorganisation of public sector industrial groups and the state enterprise sector modernisation programme of 1996. They also explain the methods of privatisation used and emphasise the role of shareholder ‘hard cores’. Hard cores in Spain are comparable to the noyaux durs in France and are stable shareholder groups chosen to assume control of former state enterprises with the aim of maintaining them under national ownership. While Spain’s privatisation process has helped improve efficiency in the business sector and has reduced the public deficit, different routes have been pursued to achieve these ends. Some former state-owned firms operate freely in competitive markets, but in other cases the state has attempted to retain a degree of control through specific-rights shares or defined shareholder hard cores.

Privatisation in the UK is discussed by Paul Cook in chapter 12. The UK’s experience has provided a model and indeed an inspiration for privatisation programmes elswhere. Cook looks at the background to the 1980s’ privatisations, the evolution of UK policy and the methods of sale. He also considers the extent to which the government’s objectives have been met, especially in terms of raising economic efficiency. In addition, he discusses the role of state regulation of privatised monopolies in the UK. The UK model of regulatory offices, operating ‘price caps’ to control prices in the privatised natural monopolies, has been studied closely by many countries planning their own privatisations of public utilities. Cook explains how the development of a regulatory environment to curb monopoly abuse has been a necessary accompaniment to privatisation in the UK. He concludes that in general terms the UK experience suggests that privatisation can bring about significant economic gains, but privatisation needs to be adopted ‘in a selective and pragmatic manner. Experience has indicated that there are a host of constraints to successful privatisation that need to be recognised and controlled . . . and that serious consequences for the credibility of the broader economic management of the economy arise if privatisation is mismanaged.’ This conclusion could be applied to all of the countries studied in this book.

Finally, in chapter 13 Willem Hulsink and Hans Schenk study privatisation in the Netherlands. The Netherlands is a highly ‘open’ economy, very dependent upon international trade and in which a number of large, transnational corporations are located. Hulsink and Schenk explain how and why the country is moving towards deregulation and privatisation and how this is combined with a stronger ‘but still ineffectual’ competition policy. Through case studies of electricity, gas and telecommunications they demonstrate the relationship between ownership and competition and privatisation and EU directives. They conclude that in the Netherlands privatisation is pragmatic and opportunistic rather than ideologically driven.

PRIVATISATION AS INDUSTRIAL POLICY: SOME UNANSWERED QUESTIONS

There can be no doubting the impact privatisation has already had in terms of industrial restructuring in Europe. In a number of cases privatisation is providing an opportunity to rejuvenate once sleepy state industries. This will be of long-term benefit to competitiveness within the EU, but at the same time, cash-strapped governments have a certain penchant for ‘selling the family silver’ rather than the alternatives of raising taxes or cutting public spending to reduce public deficits. It is also disturbing that such a large-scale change of ownership of economic assets is occurring without serious consideration of its impact on the competitiveness of member economies and of the EU as...