Political Economy of 21st Century Europe

Dermot McCann

• Publisher: Bloomsbury Academic
• Year: 2017
• Print ISBN:
  9781137447951
• Edition: 1
• eBook ISBN:
  9781350311497
• Topic: Economics
• Subtopic: Political Economy
• Index: Economics

A broad-ranging assessment of the complex changes in Europe's diverse and complex mix of national and European capitalisms as they respond to the challenges of globalization and from rising powers, of competitiveness, ageing populations and welfare sustainability compounded by the impact of financial, monetary and sovereign debt crises.

Chapter One

Introduction

Economies must be governed. The rights and responsibilities of socioeconomic actors and the rules determining their interaction must be defined, regulated, monitored and enforced. Complex legal provisions, regulatory standards, mechanisms of oversight and implementation must be established to structure the operation of economies, and to sustain certain forms of interaction between economic actors while prohibiting or inhibiting others. These arrangements are as much political as they are economic in their effects and their origins. Matters such as how firms are governed, how financial and labour markets are regulated, the nature and degree of social protection, when and how states intervene in the economy are all of pivotal importance for the distribution of power, wealth and opportunity in the economy. The particular governance arrangements that develop are the product of political contention and construction. Socioeconomic groups strive to shape institutions and policies to their own advantage. The ‘political economic’ systems that emerge inevitably reflect these struggles, embodying particular patterns of power relations and favouring/disfavouring particular distributive outcomes (Gamble et al. 2002, 2; Clift 2014, 1). While often discussed and justified solely in terms of functional efficiency, major changes to institutions and policies that govern economies invariably carry implications for the distribution of power and economic opportunity among socioeconomic actors and, in consequence, frequently generate conflict and controversy.

In Europe as elsewhere, economic governance has been overwhelmingly the business of states. It is states that have established the basic legal order that determines how markets function and what economic actors can do. It is states that have created many of the institutional arrangements that underpin a given system’s operation. Typically, the political struggles over the shape and content of these arrangements have been contested by political parties, trade unions and employers’ groups which have been organised nationally. They have formulated their interests and objectives within the frame of the nation-state and their victories, defeats and compromises have been embedded in national laws, policies and institutions. The inevitable consequence of this is that Europe’s national political economies have been characterised by a very significant degree of diversity. States have intervened in the economy in different ways to different degrees. The principles underpinning the regulation of financial and labour markets have varied substantially across countries. Power and authority within corporations have been distributed very differently depending on the national jurisdiction in which they are incorporated. While the political economic systems of some states reflect and embody liberal principles, others have been variously characterised as ‘non-liberal’, ‘illiberal’ or ‘coordinated’ in recognition of the central role played by states, interest groups and inter-corporate networks in the governance and functioning of the economy (Streeck 2001; Höpner 2007). The institutional structures and policies of Europe’s political economies have been highly particular, reflecting the distinct dynamics of national economic and political development.

In recent decades, however, waves of reform have served to erode the distinctive character and particularity of these national systems. For a variety of reasons, ranging from structural economic change through geopolitical transformations to the bracing competitive challenges generated by the rise of new economic powers in Asia and beyond, many countries have introduced major institutional and policy changes. Across much of the continent, governments have moved to strengthen the role of market exchange in the allocation of resources and the distribution of wealth. Reforms have sought to facilitate cross-border trade and investment, open up financial markets to international capital, ease labour-market restrictions on employers and render corporate governance regimes more ‘investor-friendly’. At the same time, many states have enlisted in a re-energised regional integration project. Since the mid 1980s, the European Union (EU) has undergone a sustained period of territorial expansion and institutional and policy development. Legal reforms and related policies have been introduced in order to expand the level of cross-border trade; to create more intensive product-market competition; to integrate and liberalise financial markets; to improve labour-market flexibility; to create a European corporate takeover market; and to stabilise and, ultimately, merge national monetary regimes. Though complex in nature and uneven in impact across states and policy areas, these initiatives in combination have effected a major transformation in Europe’s economic governance regimes. Almost all national systems have undergone a significant degree of market-friendly liberalisation: a process substantially boosted by the reincorporation of the Eastern and Central European states into the wider European political and economic system from the 1990s. National economies have become more open to outside forces while their markets are less subject to regulatory restriction or direct governmental intervention. Much of the continent has experienced a substantial, though far from complete, shift from national to European forms of economic governance. By the second decade of the 21^st century, there were 28 EU member states and another 4 participated in at least some aspects of its single, integrated market and were subject to its rules (Iceland, Liechtenstein, Norway and Switzerland). Where once Europe’s political economy was simply the composite of a large, complex patchwork of national political economies characterised by very considerable diversity, the combination of domestic reform and European integration had generated a significantly different reality by the early 21^st century. A new and complex power-sharing arrangement had evolved in which economic governance authority is increasingly exercised by both national and European institutions. The continent’s political economic arrangements had been substantially re-engineered.

Though the importance of these developments is undeniable, the extent and nature of their implications for the character of Europe’s political economic system(s) have been the subject of considerable dispute. Some analysts argue that they represent nothing less than a ‘neoliberal transformation’ (Streeck 2014, 165). National institutions and policies that inhibit the free play of market forces are being systematically dismantled (Scharpf 2009; Höpner and Schäfer 2010). The EU is portrayed as a ‘liberalising machine’ remorselessly constructing a truly integrated European liberal economic governance system (Streeck 2014, 103). The process may not yet be complete but the trajectory of change is deemed to be clear. ‘Diverse Europe’ is giving way to ‘(neo)-liberal Europe’. In contrast, many comparative political economists are sceptical of transformational claims. They emphasise the resilience of national systems, arguing that the particular character of national institutions is often a source of competitive advantage for firms rather than a hindrance to an effective response to new competitive challenges (Hall and Soskice 2001a). Rather than inducing liberal transformation, the self-interest of economic actors serves to buttress and sustain the particularity of national arrangements.

It is the core contention of this book that neither generalisation adequately captures the complex and diverse pattern of political economic reform that has occurred in Europe since the 1980s. Rather than transformation or resilient continuity, what is evidenced is a messy dynamic of ‘hybridisation’, which sees new liberal institutional and policy elements incorporated into national systems even as key aspects of the latter’s distinctive ‘non-liberal’ institutional inheritance are left intact (Clift 2014, 23). While liberalising reforms have been widespread, they have not generated systemic liberal transformation. While few major non-liberal institutions have gone unaltered, significant elements of non-liberal particularity endure. Indeed, what is most striking about the new, ‘power-sharing’, national–European political economic order that has emerged from this process is its fragility rather than its coherence. The financial, economic and monetary crises of the early 21^st century have raised profound doubts about the sustainability and effectiveness of the mix of national and European laws, regulators and policy provisions that has evolved over the last two to three decades.

Furthermore, the book will contend that the hybrid and fragile character of Europe’s new political economic arrangements is largely a consequence of political factors. Irrespective of the intensity of economic reform pressures, change requires political action. Yet the outcome of such action will be deeply affected by the distinctive dynamics of political institutions and the process of policymaking. At the national level, differences in constitutional orders, political party systems and interest group structures will strongly influence the nature and degree of reform that is possible. Thus, for example, the ability of opponents to drive through or block reform initiatives will be strongly affected by the structure of the state and its dominant ideologies, the type of governments that tend to emerge, and the extent to which different socioeconomic actors are organisationally (dis)unified, powerful or marginalised (Culpepper 2011; Kornelakis 2014; Beramendi et al. 2015a). The particular characteristics of national political systems will generate distinctive responses to common pressures for change. At the European level, the character of politics and decision-making institutions play an equally important role in shaping reform outcomes. In ‘normal’ times, the desire of states to limit their loss of control, and to protect the interests of national socioeconomic actors, is manifested in the frequently slow and painful process of EU policy formulation and implementation. In more turbulent periods, the determination of states to protect what they deem to be vital national interests can threaten the very stability of Europe’s power-sharing political economic system. The painful fallout from the financial, monetary and fiscal crises that began in 2007–8, for example, has shaken the EU to its foundations. The demands of crisis management saw long-established differences between national political economies, which in the past had largely been unproblematic, become the focus of conflict. Among the eurozone states in particular, the nature of labour-market and welfare arrangements, the quality of financial governance, the effectiveness of the taxation system, etc. in any single state became far more central to the economic well-being of every other state. Highly destabilising tensions between ‘north and south’, the ‘core and the periphery’, Germany and Greece rapidly emerged. Moreover, the destabilising impact of these crises was magnified by Britain’s decision in June 2016 to leave the EU. This choice represented a blunt rejection of the long dominant view that European integration formed a vital and necessary part of any effective response to the challenges presented by the process of economic globalisation, the rise of new economic powers and the development of new productive technologies. It is evident that the desire of many states to protect the character of their national economic governance institutions, and the political compromises that they embody, exercises a profound constraint on the feasibility of deeper forms of liberalisation and stronger institutions of common governance in Europe.

This book will substantiate these contentions through an analysis of political economic change in Europe over the last two to three decades. It will explore both the extent of liberal reform that has been realised and the factors that have constrained its fuller realisation. Chapter Two will contextualise the analysis of political economic change by exploring the nature and extent of diversity across European states in the final decades of the 20^th century. It will examine the meaning and significance of concepts of institutional governance, and ‘models’ and ‘varieties’ of capitalism. How do they differ across European states and with what consequences for the distribution of socioeconomic power, the productive strategies of firms and national economic growth models? It will then consider why so many national governments have embarked on such extensive programmes of reform in recent decades. What were the principal sources of pressure for change? Chapter Three will focus on the changing role of the state as economic ‘director’ and regulator. Many contend that the internationalisation of trade and investment flows, the strengthening of EU governance authority, the growing influence of neoliberal ideas and the intensification of inter-state competition for investment, all threaten the capacity of European states to maintain their established role within the political economic order. National states are often characterised as being in irreversible ‘retreat’, incapable of intervening and shaping the development of the economy in the way that they had done in the past. While the policies and reform strategies of governments will be a concern throughout the book, this chapter will focus on two key aspects of their role: the formulation and implementation of industrial development strategies – so-called ‘industrial policies’ – and the capacity to extract tax revenue from mobile capital in an increasingly globally integrated financial environment. Chapter Four will then focus on one of the most remarkable manifestations of authority transfer between national states and European institutions that has occurred, namely the creation of the euro currency. Although only affecting 19 states, the creation of the single currency represented an enormous change in the governance of Europe’s political economies. Many critics portray its creation as the embodiment of neoliberalism’s triumph in Europe. ‘Sound money’ is said to have been given priority over employment and economic security. But whatever the validity of these claims, it is certainly the case that in its short history the euro’s troubles have raised the most profound questions about the durability of Europe’s new political economic architecture.

The following chapters will focus on three key political economic policy domains: finance, corporate governance, labour markets and related social protection policy. They will explore the nature and extent of liberal change in national systems across the continent over the last two to three decades. Are national financial systems now fully open and integrated into regional and global ones? Are the interests of shareholders better protected and more favoured than they had commonly been in many states and is the power of management within the firm less fettered? Are employment conditions and levels of pay determined to a much greater extent by prevailing market conditions? They will also explore the extent to which the influence of extant national institutions and domestic political factors has mediated, refracted or even confounded, pressures for liberal reform. Finally, they will assess the sources of threat to the stability and durability of the new governance arrangements. In respect of finance, in particular, there is clear evidence of growing tension among states, and between states and the EU, over the governance principles that the new arrangements should embody. What underlies these tensions and what do they reveal about the character and sustainability of Europe’s developing political economic ‘condominium’?

Chapter Two

Diverse Europe Under Stress

Introduction

An analysis of Europe’s political economy must begin with the recognition that, at least until very recently, it has been composed of highly diverse and essentially nationally based systems that differ significantly in their governance institutions. Across the continent, states have organised and governed their labour markets in very different ways; legal provisions concerning the constitution and governance of corporations have varied substantially from country to country; industrial relations practices have reflected very different operational principles; financial markets have been characterised by quite distinct structural features. Moreover, although the end of the Cold War saw the triumph of liberal democratic capitalism across the continent, it only added to this diversity of institutional form and policy. States in Central and Eastern Europe crafted a variety of distinct strategies as they sought to transform themselves from state-run to market economies and to insert themselves into wider regional and global structures of finance and trade, adding to the complex mosaic of governance arrangements that have long marked the continent.

This chapter has two principal purposes. Firstly, it will explore the nature, extent and significance of this diversity. It will identify the key points of distinction between national regimes and examine how these shape the functioning of economies and the distribution of power and opportunity among socioeconomic actors. In the course of this exploration, it will address a series of basic conceptual and empirical questions. What are economic governance institutions and why does their diversity across states matter? How do institutional differences affect the way economies function? What is the relationship between different forms of governance and the growth strategies pursued by states? What are the implications of different governance systems for the distribution of power and opportunity within the economy and how do they influence processes of change and adaptation? The limits of diversity across Europe will also be examined. Though national particularity lies at the heart of the European experience, significant similarities in governance arrangements exist among sub-groups of states. Analysts have discerned a range of country ‘clusters’ characterised by important institutional and policy commonalities. An analysis of these clusters, and the similarities that underpin them, will help clarify the institutional and policy features that are most significant in determining the nature of a political economic system.

The chapter’s second purpose is to identify the major challenges to the integrity and sustainability of national systems that have emerged in recent decades. Many reforms undertaken in the last two to three decades have been prompted by the widespread belief among analysts and policymakers that national systems of governance are no longer effective and efficient in the contemporary economic environment. Institutions and policies ‘that had worked to Europe’s advantage in the age of extensive growth’ after 1945 are now seen to pose ‘obstacles to successful economic performance’ (Eichengreen 2007, 7). Three interrelated developments are deemed to have been particularly problematic for national systems. The most fundamental is the unfolding dynamic of economic integration across the globe, which has fostered rising levels of cross-border trade and investment and a massive expansion in financial flows. This process has presented a profound challenge to the capacity of nationally rooted institutions and policies to exercise effective control over the national economy and socioeconomic actors. Another source of challenge is the growing power and authority exercised by the EU. It increasingly competes with national institutions for competence in an expanding range of domains, from trade through finance to money. Finally, national systems have been subject to enormous strain as a consequence of a decade of economic, financial and monetary crisis. The stability of governments and the validity of long-established political and economic development strategies have been challenged by the turbulence that they have unleashed. The nature and implications of these trends and events for Europe’s diverse national political economic systems will be explored in turn.

Institutional diversity

The constitution and governance of market economies are subjects that have attracted considerable attention from comparative political economists in recent years. While conceptualisations of the issues involved vary greatly, two core contentions are commonly shared. Firstly, it is argued that far from being universal in nature, capitalist economies are deeply enmeshed in the wider institutional structures of the society in which they operate. Economic activity is embedded within a specific social context and is mediated and shaped by the particul...

Table of contents

• Cover
• Half Title
• Series Title
• Title Page
• Copyright
• Dedication
• Contents
• List of Tables
• Acknowledgements
• 1 Introduction
• 2 Diverse Europe Under Stress
• 3 The Liberal(ising) State: Industrial Policies and Tax Competition
• 4 Europe’s Money and the Crisis of Political Economic Strategy
• 5 Financial Systems: From Fragmentation to Crisis
• 6 Corporate Ownership, Control and Governance: Shareholders, Stakeholders and Liberal Transformation
• 7 Labour Markets and Social Models: The Triumph of Liberalisation?
• 8 Conclusion
• References
• Index