eurokolleg - friedrich ebert foundation

1Series Eurokolleg 44 (2001)

Eurokolleg44 (2001)

Ways, Byways and Third Waysto a Social and Democratic Europe

by Michael Dauderstädt

� European integration - not very social and even less democratic� Europe�s social democracy - only half-heartedly European� Third and other ways out of Europe�s various crises� From a contest between locations to competition between policies� Hard ways to a welfare union� Democratising integration

Summary

1. The long-lived dominance of liberal(and conservative) policies and the one-sided emphasis on market integrationhave created a deficit of democraticcontrol in Europe, particularly over mar-ket processes. The social role of theUnion � full employment, social justice� is relatively underdeveloped in spiteof certain amendments, above all sincethe 1997 Amsterdam Treaty. The moreunsatisfactory the outcome of market-led development � i.e. rising unemploy-ment, poverty and inequality � the moreserious is this situation.

2. This development also reflects therelatively modest influence of Europeansocial democracy on the integrationprocess. Its potential influence was un-dermined at the outset by strong Euro-scepticism and divergent national prio-rities, whereby there were greater diffe-rences between the parties over �natio-nal policy� issues than over �class� issu-es (employment, distribution). The more

power Social-Democrats have held na-tionally, the less they have co-operatedat European level. This danger is alsothreatening the most recent attempt ata joint strategy, the �Third Way�.

3. This joint strategy is however large-ly a fiction. For, as a result of their diffe-rent structures, the individual MemberStates are affected differently by Eu-rope�s common crisis of mass unem-ployment and overstretched social po-licies. National anti-crisis strategies areequally diverse. Progress was visibleeverywhere in the late 1990s: virtuallyall countries brought down their unemp-loyment figures, reduced their budgetdeficits and rolled back the State. Thevariety of methods used testifies to thescope still available for national policy-making, while at the same time exacer-bating competition in the field of socialand employment policy.

4. The overall context of social-demo-cratic policies in Europe is modified byglobalisation and enhanced integration

2 Series Eurokolleg 44 (2001)

(internal market, monetary union). Notonly companies but their all-round socialand political environments are enteringinto competition. Admittedly, the EUtreaties long ago restricted competitionbetween national policies, yet there isstill a threat of a �race to the bottom�,which is due to political perceptions andrhetoric rather than economic con-straints.

5. A European welfare union must aboveall else allow scope for national growthand distribution policies, but must inaddition complement these at Europeanlevel where the national level is over-stretched. Monetary and fiscal policyhas already been Europeanised to a highdegree. In order to achieve social jus-tice, poorer regions must grow fasterthan the EU average and socially weakerpopulation groups must have a largershare in prosperity. The central problemremains the trade-off between employ-

ment and income: this is where nationaldivergences threaten the social consen-sus in Europe.

6. Given the differences in the nature ofnational problems, preferences and po-licies, a social-democratic strategy forEurope must combine scope for theindividual players with guarantees thatzero-sum games and �races to the bot-tom� will not occur. Because of their dif-ferent conceptions of State and demo-cracy, Europe�s Social-Democrats findit difficult to harmonise their views onhow to make integration more demo-cratic. Rather than by central directivesfrom Brussels, the process of reformmust be guided by dialogue and net-working among decision-makers andrepresentatives of those concerned atall levels. Finally, a social and democra-tic Europe needs a critical public at allpolicy-making levels.

The conservative/liberalintegration project

The foundation and initial phase of Europeanintegration was guided by ideas and individualscoming primarily from conservative, Christi-an-democratic political circles: Schuman,Adenauer, de Gaulle, de Gasperi (one exception:Spaak). What came much later to be dubbedthe �democratic deficit� was in those days moreof a yawning abyss. Moreover, it soon becameclear that European law would take precedenceover and could even overrule national law. TheCommon Market stood at the heart of the EEC;however it was not a neo-liberal end in itself,but a tool to preserve peace and freedom. Ineconomic terms the Common Market wasintended to achieve lasting, balanced growth.To this end it was embedded in strong sectoralpolicies (agriculture, energy, coal and steel)which could not in any sense be described asmarket-oriented.

Although social considerations were notcentral to integration, which was ultimatelydriven forward by the quest for peace, they do

crop up at prominent points in the Treaty text(�economic and social progress�, �constantimprovement of the living and workingconditions�). These aims were implementedthrough the Social Provisions chapter of theEEC Treaty (Art. 117-128), in particular theEuropean Social Fund created therein and theEconomic and Social Committee set up as anadvisory body. Expenditure on the Social Fund,however, has represented only a modest pro-portion of the budget of the EEC and its succes-sor organisations, the EC (European Commu-nities) and EU (European Union).

The growth phase of the 1960s requiredrelatively few social flanking measures. Struc-tural change (above all the unprecedented con-traction in agriculture) was cushioned by fullemployment. The EEC responded to this changeby establishing in 1964 the structural part of itsagricultural policy. At the same time the socialexpectations of the population mounted andwere reflected in a swing to the left, which wasnot only accompanied by strikes and unrest butalso strengthened social-democratic and left-wing movements (SPD government in Germany,Labour in the United Kingdom, the end of

1. European integration � not very social and evenless democratic

The Europeanmarket in the earlyEEC was anythingbut free.


dictatorships in Greece, Spain and Portugal,Socialist election victory in France), which ad-vocated the then more modern (Keynesian)economic policies. The EC�s social problemschanged with the first enlargement taking inthe UK, Denmark and Ireland in 1972. TheRegional Fund was established in 1975 in orderto help reduce income disparities in the inte-grated area. This task became all the more im-portant with the accession of the relative-ly poor Mediterraneancountries Greece, Spainand Portugal, whose poli-tical influence strengthe-ned the Community�s re-distribution policies. Euro-pean democracy likewisetook a significant step forward during this peri-od: the first direct elections to the EuropeanParliament (1979).

The phase of stagnation in the early 1980s,characterised by sluggish growth and risingunemployment (three million jobs lost between1981 and 1984), led to a retreat from social-democratic beliefs. Thatcher came to powerin the UK, Kohl heralded a change of course inGermany and Mitterrand had to put an abruptend to his experiment of �Keynesianism in onecountry�. Europe appeared to be falling behindthe USA and Japan; this was attributed byConservatives to too much State and too littlemarket. The next step towards integration, theEuropean internal market, was designed toremedy that situation from 1986/87 onwards.The central principle here was �mutual re-cognition� of regulations,which in actual fact intro-duced regulatory compe-tition where no commonstandards were laid down.Yet here again the domi-nation of Liberals and Con-servatives was not com-plete; social concerns did also play a part (albeita modest one) in European decision-makingprocedures. Thus, under pressure from theweaker Member States, the goal of �economicand social cohesion� was enshrined in theTreaties, and the regional policy reform of 1988doubled the resources earmarked for the Struc-tural Funds. Success was such that the free-marketeers appeared to be proved right. Thesecond half of the 1980s brought growth andfalling unemployment figures (the EU rate fellfrom 10% in 1985 to 7.7% in 1990). At the sametime Euroenthusiasm among the populationgrew and reached a peak in 1990.

The Treaty of Maastricht (1992) took thedeepening of Europe one stage further in abiased bid for liberalisation. Economic andmonetary union, in particular the single cur-rency, removed yet more barriers to marketforces and expanded the room for manoeuvreabove all of businesses and the wealthy. Bycontrast, the stability pact and the Maastrichtcriteria posed fresh constraints to an activeeconomic policy. Nonetheless, the Structural

Funds increased conside-rably as a proportion ofthe EU budget during thecourse of the 1990s, thanksto the establishment of thecohesion fund and the ac-cession of Austria, Swe-

den and Finland. A Social Charter � only laterendorsed by the United Kingdom � laid downcertain fundamental social rights of workers,most of them however lying below nationalstandards. The Parliament�s role in EU deci-sion-making procedures was also strengthened.

Between 1992 and 1994 unemployment, whichhad fallen in the second half of the 1980s, rosefrom 7.7% in 1990 to around 11% by the mid1990s, with the loss of five million jobs. Incomedistribution within the EU also worsenedduring the 1980s and 1990s. The adjusted wageshare fell from around 75% on average in the1970s to roughly 68% by the end of the 1990s.The distribution was further worsened by ashift of the tax burden onto the shoulders oflabour, while capital enjoyed tax relief. Alt-hough some poor Member States, especially

Ireland, did manage tocatch up, the gap betweenEurope�s poorest and ri-chest regions remained lar-gely unchanged. The citi-zens reacted with growingEuroscepticism: the pro-portion of those in favour

of EU membership fell on average from over70% in 1990 to under 50% in 1997.

The social-democratic changeof course

All of this saddened and angered above all thosesections of the population � namely the poor,wage-earners and recipients of social benefitsthreatened by cutbacks � generally regarded asthe main backers of social democracy and itspotential voters. Government budgets were

Social-democratic influencein the 1970s was followedby the free-market trend of

the 1980s.

The early 1990s werenotable for increasing

unemployment, injusticeand Euroscepticism.


increasingly funded out of their taxes, eventhough their proportion of the national incomewas diminishing. Social-Democrats in fact wonparliamentary elections between 1993 and 1998in Denmark, Germany, Finland, France, Greece,the UK, Italy, Portugal and Sweden. Powerchanged hands in the opposite direction onlyin Spain (1996), Ireland (1997) and Austria(2000), while in the other countries (Nether-lands, Belgium, Luxembourg) the Social-Demo-crats remained in office continuously.

The Social-Democrats� resurgence in Europewas also reflected in the Amsterdam Treaty,which made the first corrections to the liberalmodel. The Labour Party�s victory and the newBlair government meant that the United King-dom too now accepted the Social Charter, andthe Charter was incorporated into the newTreaty. Furthermore, thesocial partners now havethe option of drawing upbinding regulations at theirown initiative. A new chap-ter on employment gavethe Union special responsibility for the labourmarket. Employment guidelines were laid downat the 1997 �Jobs Summit� in Luxembourg, andthe Commission and Council announced severalemployment policy initiatives at the next fewsummits. Similarly, �democratisation� of theUnion made some headway: the Parliament�spowers were further extended, EU citizenshipwas introduced and the Treaty provides forsuspension of an EU country�s membership ifthat country seriously infringes human rights.The full effects of this social-democratic changeof course have yet to be felt. Whereas the econo-mic situation has improved (cf. Table 5, p. 11)and the EU�s approval rating has risen slightly,the underlying crisis has by no means beenovercome yet.

Despite these changes at the end of the decade,the current state of affairs in the Union can bedescribed as only moderately social anddemocratic. At its core it is a market-led exer-cise in liberalisation which is not embedded ina governmental framework. Public policies bey-ond the nation-state are based on intergovern-mental Treaties and in all important fieldsrequire authorisation from the Council, which� although it is composed of representatives of

democratically elected governments � is notitself elected. Members of the EU Commissionare likewise appointed, albeit under Parlia-ment�s scrutiny and with the possibility of dis-missal. From the perspective of EU citizens, theUnion�s decision-making procedure is subjectto very little democratic political control. In-deed, this often enables their own elected go-vernments to abdicate from their political res-ponsibilities, by pointing to European require-ments and constraints.

When all is said and done, the social componentof the integration exercise remains similarlymodest. The body of Union law, the acquiscommunautaire, is intended to consolidate theinternal market. The social consequences mustbe borne by the Member States and their localauthorities, which � especially in the monetary

union � feel compelled tocut costs in order tocompete with other loca-tions. Therefore the Uni-on�s weakness in thesocial policy sphere is

without doubt attributable much less to an aver-sion of the EU institutions to a European socialmodel than to the reluctance of individual Mem-ber States (first and foremost the United King-dom, but often Germany too) to attach greaterimportance to social policy in general and atEU level in particular. Redistribution (transferpayments) is most likely to take place betweenStates which use their political influence to eco-nomic and financial ends.

As a specific manifestation of globalisation,EU integration shares its asymmetry: increa-sing freedom in society � especially for peoplewho are mobile, powerful and rich � throughmarket liberalisation, without at the same timeinternationalising governmental and State struc-tures. Admittedly, the incipient European su-prastate (or, rather, its multi-layer policies)allows for a good deal more political influenceover market processes than does any com-parable institution of global governance (IMF,WTO, ILO, World Bank, etc.) over the inter-national economy, but then again liberalisationon the internal market of Euroland goes muchfurther. Ultimately what prevails is �negativeintegration�, with integrated markets and diffe-rentiated policies.

The late 1990s broughtSocial-Democrats to power in

almost all Member States.

Europeanintegrationreveals socialand democraticdeficits.

Marketliberalisationtakes precedenceover policyharmonisation.


Apart from the trade unions, Europe�s social-democratic parties are the movements whichcould most readily be expected to lend both asocial and a democraticdimension to Europeanintegration. Two factorshave long stood in theway of such influence:

� left-wing Euroscepti-cism in the early days,and

� national dissimilarities, which make itdifficult for all of Europe�s social-democraticparties to harmonise their views and mani-festos.

Thus it was that social democracy in Germanydid not embrace the idea of integration untilthe Godesberg Programme � and even then on-ly to a certain extent. The British Labour Par-ty did not join the Party of European Socialists(PES) until years after the UK�s accession tothe EU. Wherever Social-Democrats have beenable to achieve their aims (social justice, socialdemocracy) in the domestic arena, they havetaken exception to any restriction of this roomfor manoeuvre.

The relative interest in European co-operationshown by Social-Democrats during the periodof conservative dominance declined markedlyin the second half of the1960s. The possibility ofimplementing their ownpolicies nationally, nowthat they were in govern-ment, led to a neglect ofthe European level.Despite the formation ofthe PES in 1974, Eu-rope�s Social-Democratswere unable to agree on a common electionmanifesto for the first direct elections to theEuropean Parliament in 1979. Only in the1980s, when faced with the liberal revival inEurope, were they once again prepared to co-operate. But even in the 1990s Euroenthusiasmwas less in evidence on the Left than amongcontinental Liberals or Christian-Democrats.Only Conservatives (especially in Britain), andof course Communists and right-wing extre-mists, are appreciably more Eurosceptical thanSocial-Democrats.

What is more tenacious is the diversity ofsocial-democratic manifestos and policies,which hampers European co-ordination. These

reflect different nationalproblems, levels of deve-lopment, social and eco-nomic structures and alsothe traditional attitudes toEurope of national elites.A European policy is firstand foremost a foreignpolicy. Apart from the

aim of peace, the basic policy thrust of socialdemocracy � geared to boosting prosperity anddistributing it fairly � contains few original ideason foreign policy, let alone on European policy.On key European policy issues concerning theEU�s institutions and finances, as well as onmany individual policies such as enlargement,national attitudes prevail over party-poli-tical considerations. This is borne out by anoverview of social-democratic positions.

The Table confirms some obvious assumptions:in the more Eurosceptical countries such as theUK or Denmark and in the new Member StatesSweden and Finland (Austria being an excep-tion), Social-Democrats tend to oppose a deep-ening of Europe along the lines of a federalState. This also ties in with a preference forunanimity in the Council, allowing for nationalvetoes blocking EU decisions. More common

ground is apparent on theissue of parliamentaryscrutiny, where almost allparties would like the Eu-ropean Parliament to ha-ve more power; at the sa-me time, however, theEurosceptical countriescall for greater scrutinyby national parliaments.

Whereas a majority of social-democratic partieswould like a more prominent role for the EUin social and labour market policy, attitudeson foreign policy issues vary much more widely.They are all in favour of a Common Foreignand Security Policy (CFSP), but its specificorientation ranges from close links with NATOin the UK�s case to calls for neutrality from thenew Member States. Other contentious pointsinclude co-operation with the Organisation forSecurity and Co-operation in Europe (OSCE)and a merger with the Western European Uni-

2. Europe�s social democracy � only half-heartedlyEuropean

The stronger the influenceof social democracy on

countries� national politics,the less keen it has been to

shape the EU.

Apart from the aim of peace,the basic policy thrust of

social democracy, dominatedby societal concerns, contains

few original ideas on eitherforeign or European policy.

Even Social-Democrats areguided mainly bynational concernsin matters offoreign andsecurity policy.


Table 1: National social-democratic positions on the goals of European integration and reform of the EU institutions

Party Finalité Functional extent of CFSP Principles of institutional EU citizenship1990-97 integration 1990-97 post-1992 structure 1990-97 (1993-96)

SPD Constitution Internal market, labour Pro CFSP, no merger Two-chamber system, more QMV Catalogue of basic(Germany) market policy, environ- with WEU, co-opera- in Council, dual majority, more rights, strengthen

mental policy, consumer tion with OSCE scrutiny by national parliaments, basic social rightsprotection, social policy list of competences

PSF Federation, Internal market, EMU, Pro CFSP, neutrality, More power for Council, more Catalogue of basic(France) constitution labour market policy, merger with WEU QMV in Council, dual majority, rights, strengthen

fiscal policy, energy EP right of initiative, more basic social rightspolicy, social policy scrutiny by national parliaments,

more subsidiarity, list of compe-tences

PDS (ex-PCI) Federation, EMU, environmental Pro CFSP, European More QMV in Council, dual Catalogue of basic(Italy) constitution policy, social policy army, co-operation majority, less subsidiarity, list rights, EU citizen-

with OSCE of competences ship, strengthenbasic social rights

PvdA Internal market, environ- Pro CFSP, merger with More QMV in Council, dual Strengthen basic(Netherlands) mental policy, energy WEU majority social rights

policy, social policy

PS Constitution Internal market, labour Pro CFSP, co-operation Two-chamber system, more EU accession to(Belgium) market policy, fiscal with OSCE QMV in Council ECHR

policy, social policy

SD Co-operation, Labour market policy, No merger with WEU More QMV in Council, EP right Strengthen basic(Denmark) EU not a State environmental policy, of initiative, more scrutiny by social rights

consumer protection, national parliaments, more subsi-social policy diarity, list of competences

PASOK Constitution Internal market, labour Pro CFSP, merger with Two-chamber system, more Catalogue of basic(Greece) market policy, social WEU, pillar of NATO QMV in Council, more subsi- rights, EU accession

policy diarity to ECHR, streng-then basic socialrights

PSOE Federation, Internal market, EMU, Pro CFSP, co-operation More QMV in Council, dual EU accession to(Spain) more than a environmental policy, with OSCE majority, EP right of initiative, ECHR, EU citizen-

free trade area social policy more scrutiny by national ship, strengthenparliaments, less subsidiarity basic social rights

Labour EU not a State Internal market, labour Pro CFSP More subsidiarity EU citizenship,(Ireland) market policy, environ- strengthen basic

mental policy social rights

Labour Confederation, Internal market, labour Pro CFSP, as a pillar of More QMV in Council, dual EU accession to(United EU not a State market policy, environ- NATO majority, EP right of initiative, ECHR, strengthenKingdom) mental policy, social more scrutiny by national basic social rights

policy parliaments, more subsidiarity

SPÖ Federation EMU, labour market Pro CFSP, neutrality, Two-chamber system, more Catalogue of basic(Austria) policy, environmental co-operation with QMV in Council, EP right of rights, EU accession

policy, social policy OSCE initiative, less subsidiarity to ECHR,strengthen basicsocial rights

SD EU not a State Labour market policy, Pro CFSP, neutrality, More QMV in Council, dual EU citizenship,(Sweden) environmental policy, no merger with WEU majority, more scrutiny by strengthen basic

consumer protection, national parliaments social rightssocial policy

SSP Confederation, Internal market, EMU, Pro CFSP, neutrality More scrutiny by national(Finland) EU not a State labour market policy, parliaments, more subsidiarity

environmental policy,energy policy, socialpolicy

Source: Andreas Maurer: Der Wandel europapolitischer Grundorientierungen nationaler Parteien in der Europäischen Union, in Mathias Jopp, AndreasMaurer, Heinrich Schneider: Europapolitische Grundverständnisse im Wandel. Analysen und Konsequenzen für die politische Bildung, iep Analysen 14,Bonn 1998, pp. 301-364


on (WEU). Even on the issue of EU citizenship,the greatest harmony of views concerns the callfor a strengthening of basic social rights,whereas the parties tend to disagree on otherpoints (catalogue of basic rights, accession tothe European Convention for the Protection ofHuman Rights and Fun-damental Freedoms �ECHR).

Differences of opinionwithin the parties furt-her complicate the pic-ture. Perspectives on Eu-ropean integration rangefrom traditional left-wingscepticism (�capitalist Europe�) to the view thatthe EU can protect its members from globa-lisation and US hegemony, to the aspiration fora pan-European welfare state. Regional partybranches may have different positions fromthose of the national leadership: thus, someGerman Länder governed by Social-Democratsmay prioritise different aspects of Europeanpolicy from the federal government, likewisein social-democratic hands.

These divergences have tended to increase attimes when Social-Democrats have held go-vernmental office in the Member States. It re-mains to be seen whether the convergenceemerging between the various parties in theearly 1990s concerning key �class-related�

aspects of social-demo-cratic policy-making, na-mely social security andemployment, will conti-nue. Most parties havebeen hoping for helpfrom the European level,in view of the crisis inboth these areas causedby mass unemployment.

The Blair-Schröder Document of 1998postulated a new, more liberal consensus amongEurope�s Social-Democrats, while at the sametime emphasising national responsibilities andproposing a mutual learning process. It remainsto be seen to what extent the agreement on spe-cific measures really is sufficient to overcomethe crisis (see below). Until now there has beenmore divergence than convergence in respectof predominantly national policy fields.

Despite their demands fora more social Europe,

Social-Democrats tend in theend to prefer national

solutions to economic andsocial problems.

3. Third and other ways out of Europe�s various crises

The concepts of the �Third Way� and �progres-sive governance� constituted an attempt bySocial-Democrats to find a response to theEuropean crisis of the 1990s devoid of theflaws of the failed remedies attempted duringthe 1973-85 period of stagnation. Any suchstrategy must react to a very multi-faceted crisis:weak growth, which is one of the main causesof mass unemployment; slow structural changeinto an information and service society, whichis likewise contributing to unemployment; thestrain on government budgets, which isprovoked above all by unemployment but is inaddition exacerbated by demographic trends(the growing proportion of elderly people in thepopulation); the opening-up of global markets,which is accelerating structural change, therebyaffecting the composition of unemployment andendangering the taxation basis of the State.

Europe�s various crises

Economic and social circumstances inEurope are anything but uniform. As shownby Table 2, in the crisis year of 1994 the un-employment rate was relatively high everywhe-

re, yet it varied between virtually full employ-ment in Luxembourg and Austria and seriousmass unemployment in Spain. By the sametoken, government debt ranged from worryingdouble-digit sums in Greece and Sweden to analmost balanced budget in Luxembourg. Allcountries bar Ireland were troubled by demo-graphic developments, albeit to different de-grees. The service sector lagged behind, espe-cially in Germany and Spain.

The Social-Democrats� strategic responsesdiffer just as considerably. Admittedly, hardlyany party advocates traditional anti-crisis mea-sures using job creation programmes financedthrough debt. The pressure to comply with theMaastricht criteria, at least in Euroland, rulesout such a course of action. But a variety ofsolutions has been put forward, both within andbeyond the spectrum of what has since 1997been known as the Third Way and since 2000as �progressive governance�, as explained byWolfgang Merkel and Wolfgang Thierse in anSPD document of 1999, which arose as a reac-tion to the 1998 Blair-Schröder document. The-se different approaches are on the one handdetermined by the different structures of socie-

Economic andsocial problemsvary considerablyfrom one MemberState to another.


ties and welfare states in Europe, which are inturn partly the product of past social-democraticpolicies, and, on the other, result from thevarying problems experienced in individualcountries.

The choice of strategy depends first and fore-most on the traditional structures of the welfarestate, its funding and the labour market:

� Welfare states can be divided into threetypes (cf. Esping-Andersen): Anglo-Saxon/liberal, with limited residual protection; Chri-stian-Democratic/corporatist, which is ear-nings-related (central and southern Europe);and social-democratic/institutional (Scandi-navia). The welfare state in the poor countriesof southern Europe, with its low-level bene-fits, could in fact be seen as a fourth category.Each system of social security has a diffe-rent funding method (taxes, contributions,insurance premiums), form of organisation,coverage of persons and risks, level ofexpenditure and structure of expenditure(distribution among individual benefits suchas age, health, unemployment, etc.). Theselast two depend not only on the level of

benefits per recipient but also on the extentof unemployment and the age structure in thepopulation.

� Funding structures range from the Danishmodel, with 75% paid by the State andaround 10% by each of the social partners,to the Dutch model where the Statecontributes only 16% and the employee andemployer rates are almost 50% and 20%respectively. For all that, many of thesecharges are interchangeable: where old-agepensions are funded out of taxation (e.g.Denmark), non-wage labour costs appear tobe lower than in a contributions-based sys-tem. Nationals of the United Kingdom paytaxes rather than contributions to healthinsurance funds, thereby gaining access tothe National Health Service.

� European countries also differ significantlyin terms of their labour market structures� not only their headline unemploymentfigures but also productivity growth, annualworking time (extent of part-time work), acti-vity rate (women�s labour force participation)and age structure. Growth arises in equallyvaried ways: in some instances more as aresult of higher productivity, and in others

Table 2: Europe�s weaknesses

Country Unemployment Government debt Proportion of people Services as aas a % as a % of GNP over 65-year % of GNP

1994 1994 1998 -2015 (1997/8)

Belgium 10,0 -5,1 16,4 - 19,1 70,0

Denmark 8,2 -3,9 15,2 - 19,2 69,2

Germany 8,4 -3,5 15,9 - 20,3 44,1

Finland 18,4 -6,2 14,6 - 20,1 61,7

France 12,3 -5,6 15,6 - 18,4 71,5

Greece 8,9 -12,1 17,1 - 21,4 71,7

UK 9,6 -6,8 16,0 - 18,7 66,7

Italy 11,4 -9,0 17,6 - 22,6 66,9

Ireland 14,3 -1,7 11,4 - 13,6 60,6

Luxembourg 3,2 2,6 14,1 - 17,0 ..

Netherlands 7,2 -3,4 13,6 - 18,5 70,0

Austria 3,8 -4,4 14,7 - 17,8 68,1

Portugal 7,0 -5,8 15,4 - 18,2 60,9

Sweden 9,8 -10,8 17,4 - 21,8 71,2

Spain 24,1 -6,3 16,5 -19,7 25,1

Source: Eurostat, UNDP


Table 3: Minimum income levels and social expenditure in the EU

Country Minimum income as a % of Social expenditure as a % ofaverage per capita income Gross Domestic Product

1995 1997

Belgium 30,9 28,5

Denmark 43,7 31,4

Germany 14,6 29,9

Finland 20,7/21,7 29,9

France 19,3 30,8

Greece 23,6

UK 20,7 26,8

Ireland 29,9 17,5

Italy 25,9

Luxembourg 29,8 24,8

Netherlands 38,7 30,3

Austria 20,1 28,8

Portugal 15,4 22,5

Sweden 24,7 33,7

Spain 20,8-30,5 21,4

Sources: Pierre Guibentif/Denis Bouget: Mindesteinkommen in der Europäischen Union � ein sozialpolitischerVergleich, Lisbon 1997; Göran Therborn: Die Gesellschaften Europas 1945-2000, ein soziologischer Vergleich,Frankfurt am Main 2000

thanks to a more extensive use of labour;here, rates of pay are crucial in influencingthe distribution of these factors.

Then, against this backdrop, there is also thepart played by the respective parties� nationalpreferences and political/ideological tradi-tions and basic inclinations. The variety ofpolicies pursued, especially among social-de-mocratic parties in government (either alone orin coalition), is remarkable. When in opposition,even less realistic notions are reasonably easyto sell; when in power, however, a party pro-gramme must stand the test of social and eco-nomic reality. Nonetheless, even the policies ofsocial-democratic governments reveal an im-pressive array of approaches.

Many ways out of the crisis

In key economic and social policy areas,Europe�s individual social-democratic partiespursue a policy mix consisting of certain simi-larities (e.g. a tight fiscal policy) but also sig-

nificant differences, e.g. in the ratio of govern-ment expenditure to GDP (in 1994, Irelandunder 40% and Sweden over 70%) and theensuing room for manoeuvre and resourcesavailable to governments. On the monetarypolicy front the main difference is between thecountries participating in monetary union andthose outside of it � the UK, Sweden and Den-mark � which were able to revive their econo-mies after the 1992 crisis by devaluing theircurrencies against the ECU/Euro.

The State was being rolled back in almost allMember States (with the exception of Portugaland Luxembourg) until the year 2000, by anaverage of 5% of Gross Domestic Product(GDP). The EU average fell from 51.3% in1994 to 46.3% in 2000. The largest relativereduction in State expenditure took place inthe Scandinavian countries (Sweden by 15%,Finland by 13% of GDP) and in the Netherlands(almost 9% of GDP). Those countries also sawthe greatest decline in social expenditure rela-tive to GDP, whereas it continued to rise inGermany and certain other countries.

The State has beenrolled back inalmost all MemberStates.


Table 4: Overview of social-democratic governments� economic and social policies

Country Monetary policy Fiscal policy Labour market policy Social policy

UK Independent Central Bank, Sound/restrictive Wage spread, but minimum Investment in educationOriginator of the cautiously in favour of euro wage and health, �welfare toThird Way work�

SwedenThe social-democratic Independence Tendency for budgets to High proportion of employees Pension reform, presermodel par excellence, balance in the long term in State sector and a very vation of qualifying periodsreformed but not active policy of job placeabandoned ment and retraining

Denmark Independence Anti-cyclical, but deficits Moderate pay policy, Social benefits cut, but highSuccessful inclusive limited in terms of time and reduction of labour supply wage replacement high wagemodel quantity (incl. early retirement, time replacement high wage

off) and active skills training replacement taxation

Netherlands Hard currency policy, pro Tight Pay restraint (Wassenaar Restriction of previouslyThird Way avant la euro Agreement 1982), flexibili- very generous and muchlettre sation and more part-time abused regulations, mix of

work basic State cover and addi-tional private provision

France Pro euro, but in favour of No longer Keynesian policies, Shorter working hours Only limited reforms �State-oriented ECB pursuing a growth- but tax increases apart from a reform of

oriented policy unemployment benefit

Germany Pro euro Austerity policy, tax reform, Youth unemployment pro- Reversal of some conser-Homeland of the eco-tax gramme, Alliance for Jobs vative cutbacks, pension�Neue Mitte� reform(New Centre)

Austria Hard currency policy, pro Consolidation for Maastricht No major changes to a Further extension ofContinuity of welfare euro and post-recession in mid successful policy welfare statestate 1990s: fair burden-sharing

The policies of many governments (not onlysocial-democratic ones) have borne fruit. In theyear 2000 unemployment was lower inEurope; government budgets were healthierand relatively smaller. Table 5 shows thechanges compared with 1994. It is noteworthythat many countries managed at one and thesame time to reduce con-siderably the share of Sta-te expenditure and govern-ment budget deficits andto bring down unemploy-ment. The main reasonwas that growth picked upin many countries, espe-cially in the poorer countries Portugal, Spainand Ireland, but also in Scandinavia, the Nether-lands and � not problematical in the first place� Luxembourg. Greece suffered job losses eventhough it enjoyed healthy growth. This successconflicts with the traditional social-democratic/Keynesian assumption that job creation can beachieved only � or primarily � through additio-nal State expenditure, whereas austerity policiesdestroy jobs. In Germany and Austria growthwas weak and unemployment began to rise oncemore.

The Maastricht Treaty did of course place tightconstraints on the fiscal and monetary policiesof would-be euro zone members, but the varietyof methods used demonstrates how much roomfor manoeuvre still attaches to national policiesin the fields of greatest concern to Social-Democrats (employment, social equilibrium).

Indeed, policy competi-tion in these fields ismore intense than everin Europe. A critical pub-lic consisting of the me-dia, academics, interna-tional organisations andvoters compares national

attempts at solutions and awards marks to evermore sensitive governments and elites. Thispolicy competition is played out under evenharsher conditions within the monetary union,since classic policy instruments have beendenationalised while at the same time it hasbecome easier to compare results and compe-tition has intensified.

In view of this competition, is there in fact anyneed for European Social-Democrats to uniteto bring about prosperity, social justice and

Increasingly intense policycompetition in Europe is being

played out less in themarketplace than in public

debate.


democracy in Europe? Is not the national arenaadequate for that purpose, even after the intro-duction of the euro and eastward enlargement?Or would it not be simpler to ensure that theEuropean level allows national players suffi-cient scope, rather than going to great pains todevise an integrated European strategy? Thegoal of a social and democratic Europe has oftenbeen a prisoner of its own history in this respect.Integration within the Union to date has createdconditions which make national policies more

difficult to control. The abdication of powerover national economic policy in favour ofmarkets and supranational institutions haswithout doubt progressed further within the EUthan anywhere else, but does still allow a gooddeal of scope for appropriate national solutions.Nonetheless, unless European rules are drawnup to prevent success being achieved at theexpense of neighbours/competitors, there willbe a risk of �races to the bottom� and zero-sumgames.

4. From a contest between locations to competitionbetween policies

Globalisation has exacerbated competitionon all markets, intensifying the risk of suchconflicts. The anti-crisis strategies of MemberStates governed by Social-Democrats arethemselves part of an intricate contest, wherebythe goal-posts of each country�s success areconstantly shifting.

Regulated competition betweenlocations in the internal market

Companies and locations deploy a profusionof measures and mechanisms to boost theirmarket position, their proceeds and profits,thereby generating not only progress but also

Table 5: Europe�s progress

Country % change in Reduction in government Average annualunemployment budget deficit as a % growth since 1996

of GDP since 1994

Belgium -1,5 4,6 +2,7

Denmark -3,8 1,5 +2,4

Germany +0,2 2,5 +1,9

Finland -9,5 10,3 +4,7

France -2,3 4,1 +2,7

Greece +1,1 10,8 +3,5

UK -3,8 7,7 +2,8

Italy -0,5 7,5 +1,9

Ireland -9,6 3,4 +8,2

Luxembourg -0,6 0 +5,2

Netherlands -4,8 4,4 +3,6

Austria +0,2 2,7 +2,4

Portugal -3,5 4,3 +3,4

Sweden -3,5 13,2 +2,8

Spain -10,3 5,6 +3,5

EU -2,8 5 +2,6

Source: Eurostat


problematical externalities. In order to keep thelatter under control, States and supranationalorganisations have devised a profusion of regu-lations, which are mainly a burden on companiesbut do also protect them. Conversely, publicinstitutions produce important inputs whichimprove competitiveness. On the positive sidethese combine to form �systemic competitive-ness�; on the negative side they produce distor-tions of competition, which do at least giveshort-term advantages to individual companiesbut are harmful when they become more wides-pread. As a rule, national policy regulation ob-viates a whole series of distortions of compe-tition and market failures at home � as listedbelow � but readily turns a blind eye when thedamage occurs on the other side of the border.Such problems are the subject of numerousregulations in the EU internal market (cf. Boxp. 13).

In addition to competition affecting mobile pro-ducts and investments, there is in Europe com-petition � albeit weaker � involving mobilecitizens and workers:

� as tax-payers, wealthier citizens in particulartry to move their place of residence to where-ver the tax burden is lightest;

� as recipients of social benefits, they try tomaximise the real value of payments re-ceived, which is why national social securityadministrations wish to prevent the �expor-ting� of claims and payments (e.g. under theGerman system of nursing care insurance,benefits are paid out to carers and not to pa-tients);

� as wage-earners they become migrantworkers, moving to wherever pay and em-ployment opportunities are best � althoughnot usually in such numbers that levels ofpay are equalised. The EU has already put acheck on wage competition with its postingdirective.

A contest between locations inthe European social space

Achieving a social Europe means taking theseproblems into account at two levels: externallyand on the internal market.

� On the external front, many Social-Demo-crats hope that, because it is so large andhence less dependent on foreign trade, Eu-rope�s economy is less vulnerable to glo-balisation. Similarly, the EU carries more

weight than individual Member States whenit comes to putting forward its interests ininternational economic negotiations and atthe relevant organisations (WTO, IMF, etc.).It is able in these forums to press for bettersocial and environmental standards and forgrowth-oriented solutions to balance of pay-ment and debt crises. But it remains vulne-rable to international financial markets, who-se �verdict� has already severely depressedthe rate of the euro. Euroland can howeverafford to let the exchange rate mechanismrun its course: devaluation improves pricecompetitiveness, thereby increasing exportsand employment, albeit at the cost of terms-of-trade losses and inflation risks which pushdown real incomes in relative terms. Onecould in fact conclude that Euroland has amercantilist economic foreign policy (tightfiscal policy, moderate wage policy, under-valued currency). Euroland would be betterable than an individual Member State tocombat a short-term economic crisis. Mone-tary policy is already centralised, and fiscalpolicy can more easily be co-ordinated ifindividual finance ministries no longer haveto worry about the external value of theircurrencies and if the interest rate risk is con-tained. Lastly, the EU would also be in abetter position than any individual countryto reclaim sovereignty over economic po-licy, which it or its Member States have re-linquished to the market or to internationalorganisations during the lengthy phase ofliberalisation since 1970.

� Global competition pales in comparison withthe contest between different locationswithin the EU and above all in Euroland,with its common currency. Exchange raterisks, transaction and transport costs are farlower in this area than in the internationaleconomy, where the protection they affordlocal traders should not be underestimated.This increases vulnerability to activitieswhich distort competition, especially on thepart of the State at all levels. To the extentthat the EU Member States turn into com-petitor countries which see it as their maintask to safeguard and boost the competiti-veness of their companies and their loca-tion, there is potential for the Union to beco-me dangerously conflict-prone, above all be-cause of the threat of �races to the bottom�.But government action can sometimes devia-te from this logic. For instance, certain Mem-ber States charged companies very dearly forthe purchase of UMTS licences and attractedcriticism of adverse distortions of competition.

MercantilistEuroland � animporter ofemployment.


Competitive risks and their regulation in the EU

� Companies can attempt to sell their products more cheaply by reducing the quality. This can also be done by means ofcertain production processes (e.g. by using poorer inputs). To the extent that consumers could be harmed, State regulationson consumer protection are enacted. But these must not hinder access by consumers to products which are not harmfulbut merely cheaper or different (e.g. beer not brewed in accordance with Germany�s Reinheitsgebot legislation). Themarket must be allowed to operate, while the State must ensure transparency where appropriate (e.g. labelling). In thisarea the EU has already regulated competition in the internal market to a large extent since 1992.

� Matters become more complicated when companies cut costs by altering their production processes in ways whichpartly externalise costs, e.g. to the detriment of the environment. Here there is a need for State controls, harmonisedinternationally, even where product quality is unaffected. This is a particularly critical aspect of international tradepolicy, since it permits only product-related discrimination. The acquis communautaire limits competition in Europe byrestricting straightforward externalisation of costs.

� All companies are keen to reduce labour costs. Here too there is a plethora of surveillance measures, some of theminternational, to forestall or restrict harmful practices (neglect of health and safety, child labour). Minimum wage ratesprotect pay levels to some degree. Working hours and time off are subject to statutory minimum standards and collectiveagreements. Ever since 1957 the Treaties have contained an article compelling Member States to comply with the ruleson paid holidays (Art. 120 EEC Treaty). A number of other provisions guarantee minimum employment standards(health and safety in the workplace), which increase labour costs at least indirectly. Labour costs can in addition beaffected by methods of taxation and methods of funding social security.

� Naturally, employees attempt through their representative bodies (works councils, trade unions, etc.) to safeguard andincrease their pay and to ease working conditions. All these social and national constellations of industrial relationstherefore have an impact on competition and need to be regulated in the European internal market. Despite the (limited)introduction of European Works Councils, EU progress in this area has been very meagre (e.g. on EU company law).

� One classic problem of competition is augmented market power resulting from dumping, price-fixing, cartels, take-overs and mergers, monopoly positions, etc., all of which are the subject of national and European competition policies.

� Competitive problems are often created not only by the selfish conduct of companies but also by government businesssupport schemes. Financial subsidies (grants, cheap loans, etc.) or tax relief in the form of general reductions inbusiness taxation or specific tax-breaks (e.g. rules on writing off or deducting certain costs, etc.) are of direct relevancehere. But infrastructure or cheap inputs provided by the State (e.g. energy, water) have a similar effect. National orEuropean controls not only prevent distortions but also protect municipalities, regions or Member States from beingplayed off against each other by potential investors. But where should the dividing-line be drawn? Education, health andresearch likewise produce public goods which give companies a competitive edge. This is where we encounter systemiccompetitiveness, which today�s business location policies are designed to maximise.

� Finally, economic policy sometimes pursues a �beggar thy neighbour� strategy, aiming to solve its employment problemsat the expense of trading partners. It may attempt to give the national economy a competitive advantage by means ofcustoms duties and trade barriers. This is now quite impossible in the EU and increasingly less feasible worldwide. Buta competitive edge can still be obtained on foreign markets by devaluing the national currency or lowering inflation.Inasmuch as economic policy strives to do this by suppressing domestic demand (restrictive fiscal, monetary and incomepolicies), it may trigger harmful competition which ultimately curbs demand worldwide. Such mercantilism mightappear pointless in the monetary union, but it still remains a threat.

But �competition is good for business�. Poli-cies must not aim to align competitive condi-tions in an economic area. On the contrary, theaim should be to build on the different advan-tages and existing capabilities of individual lo-cations, companies and persons � for everyone�sbenefit wherever possible, of course. The suc-cess of capitalist economic development con-sists in continually improving productivity by

devising new products and processes. In extre-me cases, if the economy or individual compa-nies are burdened with too many obligationsand costs, they will cease production. That mayeven be desirable in certain instances, wherethe externalities outweigh the value added. Butit would be fatal to demand, for example, that apoorer and less productive EU Member State(or a future member in central and eastern


Europe) must pay the same wages, grant thesame social benefits and meet the same envi-ronmental obligations as the richest and mostproductive economies. The catching-up processin fact demands that, during the transitionalphase, poor locations are attractive becausecosts are lower there.

On the contrary, regional policy in most coun-tries � and most notably in the EU � makesdeliberate provision for distortions of compe-tition in favour of weaker locations, sectorsor companies; these may and should be sup-ported with subsidies, tax relief and infrastruc-ture facilities. At EU level this raises the prob-lem of deciding who is entitled to receive whatassistance, and for how long; moreover, whatsacrifices a rich location (i.e. one not receivingpreferential treatment) should make for the sakeof potential competitors. After all, consumersin rich regions can also benefit from subsidisedand hence cheap goods produced in poor loca-tions, as long as this leads to lower prices andnot merely to higher factor income, but they

might pay for it through a loss of income if theirown producers are forced off the market. Thisdistribution problem must be solved politicallysince it is created politically.

The close interlinking of national economies (ifindeed one can still refer in Europe to nationaleconomies) inevitably means that action takenby one country affects the interests of anothercountry more rapidly, triggering reactions andconflicts which must be solved politically. Buta retreat from economic integration is virtuallyunimaginable. The only solution left, therefore,is better European management of competi-tion, whereby �better� signifies above allmore social but also more democratic. Thenumber one task of such management must beto distinguish between those problems reallycaused by competition and those passed off bythe rhetoric of globalisation and competitivenessas international problems, but which are in truthhome-grown and can be solved by taking per-haps painful decisions on distribution at domes-tic level.

Conflicts in Europecan be avoided bydrawing a cleardistinctionbetween home-grown problemsand ones causedby foreigncompetition.

5. Hard ways to a welfare union

A social-democratic strategy cannot be confinedto managing conflicts between nationalstrategies for more growth, employment andjustice in Europe. After all, European policy ismore than the sum of national efforts. But evena guarantee of national scope for a policy ofsocial justice would be an importantcontribution to a social Europe which createsprosperity for all under the conditions of anintegrated market and a common currency. Sucha �welfare union� must facilitate two things:growth and fair distribution, ensuring that allof Europe�s citizens have a share in increasingprosperity � perhaps not to the same degree,but at least in a way that excludes as few aspossible. This means first and foremost that theincomes of poorer Europeans should rise by anabove-average amount, both those of poorminorities in richer countries and those of themajority in poorer countries. In the long termthis would bring us a little closer to the ideal ofequality of opportunity.

Ultimately the distribution of capital andlabour in Europe determines the distributionof income and standard-of-living opportunities;these should be promoted in the following areas,to be explored in depth below:

a) Investment should be facilitated throughmonetary policy and intensified by industrialpolicy,

b) with its regional distribution leading to asrapid as possible an equalisation of income;

c) this depends on labour market strategies,which often evaluate employment and inco-me differently,

d) immediately raising the social policy ques-tion of income for persons not in work.

a) Wooing investors

On the supply side, growth occurs as a result ofan increased and/or more productive use of thefactors of production, mainly capital and labour.But this supply requires demand, in the form ofconsumption, investment and exports. In themonetary union, this process is now influencedto a high degree by the economic policies ofthe European Central Bank, whose monetarypolicy affects the use of capital on the supplyside, and, on the demand side, influences inparticular investment and � through exchangerate policy � exports.

European policies strive above all else to fores-tall disruptions to growth. Monetary union will

A welfare unionis more than thesum of nationalstrategies forgrowth andjustice.


prevent exchange rate disruption internally andmitigate it on the external front. National fiscalpolicies have reduced deficits and indebtednessunder pressure from the Maastricht criteria andthe stability pact. Wage rises have been lowerthan productivity growth and have thereforetended to be deflationary. Both of these factorshave eased monetary policy, allowed interestrates to fall and encouraged investment, in turnboosting growth andemployment. Eurolandhas nevertheless attrac-ted relatively little for-eign capital; conversely,the weak euro has provo-ked a rise in exports. Whatcould be a cause for con-cern, however, is weak domestic demand,especially if the export boom subsides.

National growth strategies aim particularly tomake their own location attractive to investors.Foreign labour, by contrast, is normally soughtout only when serious bottlenecks occur; labourmarket and employment policies are geared tobetter use of domestic labour (on this point see�Working, but not poor�, p. 16). When pro-moting investment it is necessary to avoid aform of competition which seeks to lure inves-tors solely through lower taxes, and to supporta public policy which guarantees favourableinvestment conditions and competitive produc-tion through an efficient use of tax revenueand through appropriate regulation. Varioustiers of government in different Europeanlocations are offering the whole gamut of publicgoods and services to this end, from socialsecurity to health, education, research andinfrastructure. A contest between locationscould, on the one hand, cause these public pro-viders to improve their services: the opening-up of public procurement in the internal markethas already entailed savings for public entitiesas customers. On the other hand, public serviceproviders will attempt to defend themselvespolitically against this pressure, especially whenthey come into competition with private opera-tors, maybe from other Member States.

This is where traditional and progressivesocial democracy are most likely to clash.Whereas classic social democracy wishes toprotect this sector for various reasons (ideolo-gical preference for the public sector, favouredrelations with its employees and political ma-nagement), proponents of the Third Way areeager � in a bid for progressive governance �to reform the public sector, making it more cus-

tomer-oriented and more efficient. Liberalsexpect only the pressure of competition to forcethe public sector into reforms, and they wel-come competition in Euroland for this reason.The alternative would be policy competition inwhich democratic public opinion (elected repre-sentatives at various levels, the media, civil so-ciety organisations, supervisory bodies such ascourts of auditors, higher-level authorities, etc.)

pushes through �bestpractice� reforms on thestrength of other coun-tries� experience. Wherepublic services are pro-vided by private opera-tors in competition withpublic ones and on com-

mercial terms, this can hamper access by mar-ginal population groups which either live inremote areas or are too poor to afford expensi-ve services.

b) Regional solidarity

If the destiny of locations is left to the marketalone, a problem of distribution soon arises:attractive locations receive more tax revenueand can use it to offer additional and betterinputs or to reduce their taxes, thereby beco-ming even more attractive. Desirable thoughthis virtuous circle may be from the point ofview of the successful location, the resultinggeographical inequality of economic develop-ment is likely to be all the more problematical.If the Union or one of its Member States adoptscountermeasures in the interest of a socialjustice, it not only distorts competition but mustalso ask itself whether or not it is contributingto an inefficient supply of public products (andto the patronage which might lie behind it) inweaker locations, rather than promoting realdevelopment (e.g. as happened for many yearsin Greece). It should however also be clear that,once they have successfully caught up, thenewly enriched locations must in turn showsolidarity with poorer regions and graduatefrom recipient to donor. There can be little jus-tification, particularly in employment terms, incontinuing to use EU resources to entice foreigninvestors and migrant workers to locations suchas present-day Ireland, which have alreadycompleted the virtuous circle and have alreadyexhausted their own labour potential.

A socially just Europe, keen to reduce regio-nal income disparities, must devise suitablesolutions for this problem, which will be greatly

Europe needs policycompetition, since it optimises

public service provision byspreading best practice.


worsened by eastward enlargement. It is easierto interest richer countries and regions in pro-moting development processes in poorer onesif resources are put to effective and efficientuse. Productive locations will in any event beburdened with extra charges, but they shouldalso gain sales opportuni-ties. Where developmentis successful, competingoperators with subsidi-sed cost structures emer-ge; this is in fact advan-tageous to consumers inricher locations too.Should underdevelop-ment persist, there is a likelihood of migratoryflows away from poor regions, which do partlysolve the problem but at the same time createnew problems of adjustment in rich regions.

There are two opposing strategic alternativeshere:

� A liberal policy would have faith in themarket forces which cause poor people tomigrate to rich regions and capital to flowinto poor regions. This presupposes at thevery least that such migration does not harmthe poor regions (no brain drain) and thatcapital yields are higher there but will declineafter the influx due to diminishing marginalreturns. It is up to regional economic policyto solve its own problems � on pain of con-tinued underdevelopment. From thisperspective, policy competition in the Uni-on exerts healthy pressure.

· Market sceptics would argue that migrationtends to deprive a region of human capitalwhich is important since it is active and ad-venturous; furthermore, despite lower inputcosts, capital yields are no higher becauseof low productivity, and in many cases risingmarginal returns cause producers to congre-gate in successful locations. Economic policyin poor locations suffers equally from a lackof good people and from a lack of funds. TheUnion�s task should be to support the publicauthorities with aid and to limit policycompetition through harmonisation, while atthe same time accelerating the spread of�good� policies.

The catching-up process (i.e. incomes rising bymore than the average) in the monetary unioncalls for regionally differentiated inflation rates.Whereas in the past alignment of incomes wasachieved in particular through the revaluationof a poorer country�s currency in the wake of

development, in Euroland it can be broughtabout only through higher inflation in poorerregions. European monetary policy has to per-mit this. In a monetary union where incomedisparities are set to increase dramatically follo-wing enlargement, it is crucial to the social

justice that these pro-cesses should occur ra-pidly. Aid should be ac-companied by controlsand incentives to use itefficiently and to preventits distribution by patro-nage. Such dangers couldbe averted by means of

greater transparency, democratic participationand networking of all the players. Wage subsi-dies, which push wage costs below productivity,would be preferable to capital subsidies, whichhamper labour-intensive production and aremore susceptible to corruption.

c) Working, but not poor

Employment and labour market policiescontribute to growth, on the one hand by fullyexploiting or even augmenting the potentialsupply of labour and, on the other, by boostingits productivity. These two components maycome into conflict with one another. For instan-ce, a high-wage policy can foster growth in pro-ductivity, in which employees will then � allbeing well � participate. If well-paid jobs arein short supply, the activity rate remains relati-vely low and/or unemployment high. Low-wagepolicies (such as for example in the Netherlands)even enable less productive workers to be em-ployed. Conversely, productivity gains can beconverted into increases partly in income percapita and partly in paid �non-work�/leisure,which may in itself mask shorter annual workingtime for employees, higher unemployment, alower activity rate or a different age structure(higher proportion of under 15 and over 65 year-olds).

It is actually relatively easy to create jobs, aslong as the potential workers can be persuadedto accept low incomes. However, if one wishesat the same time to achieve social justice, theoptions look rather different. The least painfulsolution is to raise the productivity of theunemployed through education, so as to makethem attractive to employers even on higher pay.Another alternative is the Swedish pattern ofemployment in the State social services sector,where productivity is less crucial than a delibe-

Aid for poor regions fromrich ones must not amount

to internal EU horse-trading.It is politically acceptable

only if it promises realsuccess.

The catching-upprocess in themonetary unioncalls for higherinflation to bepermitted in poo-rer regions.

The centraldilemma is how tocreate more jobswithout loweringincomes.


rate socialisation of demand. In a great manycases, where this cannot be done, ways must befound to improve the lot also of (low) wage-earners in the private sector.

Three options suggest themselves at this stage:

� redistribution through taxation: tax sys-tems are already progressive now, i.e. the richare supposed to pay more income tax thanthe poor. In addition, many countries haveintroduced negative income tax (or compa-rable subsidies) into their labour marketpolicies, so as to raise the incomes of lowearners to a level higher than that of alterna-tive incomes (social assistance).

� strengthening the market power of la-bour: a labour shortage can be amplifiedthrough various types of policies to reduceworking time: longer training periods, earlierretirement, shorter weekly working hours,more leave. All such measures diminish thesupply of labour and augment the marketpower of the remaining suppliers. On theexternal front, the labour supply can becurbed through restrictions on immigration.However, if in the long term strong tradeunions push up wages in excess of produc-tivity gains, they can of course boost the inco-mes of employees but might do so at the costof growing unemployment.

� wealth distribution: the distribution bet-ween labour and capital would be less con-tentious if their owners did not belong to twodifferent groups. If workers possessedenough capital for the returns to compensatefor modest wages, they would be morereceptive to a redistribution in favour of ca-pital. Yet asset formation among workingpeople is proceeding � if at all � at snail�space. Meanwhile new capital owners areinheriting enormous wealth through no effortof their own. Radical inheritance taxes wouldbe a major step towards establishing equalityof opportunity. Another possibility would betaxation of wealth, which � in this era of glo-bal capital mobility � would have to focuson immovable assets (land, buildings, plant).

Whilst some of these measures could be imple-mented nationally without any excessive effectsat European level, others would benefit consi-derably from a uniform approach within theEU. Tax competition in particular is already athreat. To the extent that taxes are levied in orderto finance additional public inputs for produc-tion in the marketplace, one could leave it upto the trade-off between low taxes and poor pub-

lic infrastructure on the one hand and highertaxes and good provision on the other to strikea balance. If it is a matter of solidarity withweaker members of society, the trade-off doesexist � in the form of social peace � but is likelyto be too weak. An incomes policy which syste-matically attempted to gain a competitive edgeas a result of low wage rises lying well belowinflation plus productivity, and perhaps evenoffset by taxation, would immediately lead toconflict. Restricting the labour supply by impo-sing immigration controls would in any eventrequire European agreement in view of the free-dom of movement within the Union.

d) Social Justice

The apparent burden on competitiveness (oron a location) caused by high wages, and aboveall by high non-wage labour costs, taxes andsocial benefits, must be regarded as particularlyominous from a social-democratic point ofview. In the monetary union such general costdivergences can no longer be offset by deva-luing or revaluing currencies. EU competitioncompares gross nominal wages in Euros: thesedetermine companies� labour costs and are lar-gely attributable to productivity. What is ofinterest to employees, however, is the net realincome which results when taxes and socialcontributions are deducted, cost-free publicservices (education, health, etc.) added in, andprice levels � perhaps lower in less developedregions � taken into account. These public ser-vices constitute the most effective means ofsocial redistribution in most EU Member States.Social justice in Europe requires that a down-ward spiral in these net real incomes be pre-vented. The differential between gross nomi-nal and net real incomes becomes especiallylarge when wage-earners finance benefits forthird parties through their taxes and contri-butions (e.g. unification costs in Germany) andnarrows when, by contrast, public services arefunded out of taxes paid by everyone (e.g.through taxes on consumption) or indeed towhich the rich contribute disproportionately(e.g. through wealth taxes).

As indicated above, social security systems inEurope vary considerably; yet this diversitymust not stand in the way of a fair distributionof prosperity. Social expenditure as a proportionof GNP rises in step with income per capita.This correlation is relatively close for overallexpenditure, although it cannot be proved forindividual components of expenditure. Since

Yes to competitionbringing efficientgovernment action;no to a contestbringing lesssolidarity!


social expenditure can hamper competitiveness,it has been proposed that � in order to avoid a�race to the bottom� � the EU Member Statesshould be allowed a �corridor� (Busch) withinwhich social expenditure should operate, or elsea �lower limit� (Scharpf). The corridor or lowerlimit would rise with GNP, thus protecting poo-rer countries from competitive disadvantages,while richer countries would be expected toshow solidarity with them. Admittedly, such adirective could scarcely be made mandatory;rather, it would serve to exert pressure in thepolitical process. Countries with fewer socialproblems will rightly point out that their lowexpenditure corresponds to this state of affairs.A country with few elderly, poor and unem-ployed people can hardly be expected to disbur-se as much as a country with many. But a cut-back in benefits per recipient would not be anacceptable argument. In this way rates could bealigned with national average incomes (on thedifferences see Table 3, p. 9).

Ultimately it is a question of what volume andwhat quality of public goods and Services, riskcoverage and social equilibrium a society canafford and wishes to provide. All of this mustbe paid for through shifts in consumption andin investment, but these may very well increaseproductivity (thanks to additional public inputs)and quality of life (thanks to social peace andsecurity). Generally speaking, poorer countries

can spend relatively less on these items thanrich ones. The configuration of risk coveragesystems and societal solidarity mechanismsshould be determined nationally. Internatio-nal comparisons are in fact only useful in respectof systemic efficiency, in other words whetherone system provides similar or better benefitsat lower cost than another. The method of fun-ding and organisation may play a role here, forinstance if costs are so lacking in transparencythat benefit recipients are prompted to lodgeexcessive claims or that classic forms of abusesuch as �moral hazard� or �free riding� areencouraged. A social Europe could lay downquantitative limits for the differential betweengross nominal and net real incomes (as de-fined above), so as to restrict on the one handreal subsidies which distort competition and, onthe other, real impoverishment.

The level of social expenditure is less importanthere than its method of funding and utilisation.Thus the level does not correlate with the scaleof unemployment � as liberal critics of thewelfare state like to assume. Funding throughincome-related deductions (as in Germany) doeshowever push up labour costs, which above alllessens the demand for poorly paid and lessproductive labour in the service sector. Conver-sely, public social services funded through taxa-tion can create jobs (e.g. in Scandinavia).

6. Democratising integration

Given the differences in the nature of nationalproblems, preferences and policies, a social-democratic strategy for Europe must combinescope for the individual players with guaran-tees that zero-sum games and �races to thebottom� will not occur. There is a need not somuch for central directives from Brussels as fora rational networking of decision-makers andrepresentatives of those concerned at all levels.In this respect the same problems arise in amulti-layer policy for Europe as are central tothe debate about the Third Way or �progressi-ve governance�: the relationship betweenState, market and civil society. A distaste forexcessively direct and extensive involvementof the State is combined here with a desire forcitizens to shoulder more responsibility. Yetreturning responsibility to society presupposesthat society is properly informed and is itselfable to exert influence � not only over the State

but also over the marketplace, and, for thatmatter, beyond the impact of very unevenlydistributed purchasing power.

The disagreement among Europe�s Social-De-mocrats as to the principles for building aEuropean democracy (cf. Table 1, p. 6) ultima-tely reflects dissimilarities in the constitutionof the State and in the conception of democracyfrom one European country to another. Germa-ny�s federalism arouses different expectationsand interests than the relatively new and weakregionalisation in France and the United King-dom. When it comes to the democratisation ofEurope, these differing conceptions vie with oneanother on all the important issues: constitution,basic rights, relations between the legislative,executive and judiciary, list of competences(subsidiarity).


Important policies at the interface between EU and Member State

� On economic policy, the growth and stability pact extended the centralism and the deflationary thrust of monetarypolicy into the fiscal domain. However advantageous this decision-making structure may have been in the second halfof the 1990s, it could be a cause for concern if a classic recession were to occur. For all that, fiscal policy has remainedunder the control of the Ecofin Council, which comprises elected and hence accountable politicians. One might envisagehere an additional or superior form of European �economic governance�, which would feel more committed to growththan to combating inflation. It would be useful to have an economic policy instrument geared to correcting asymmetricshocks causing dips in demand concentrated in certain regions; this remains a task for the Member States. Should oneMember State be affected in its entirety, all the Ecofin Council could do would be to dispense with its sanctions againstan expansive fiscal policy; it could not itself authorise transfers to the country concerned (except in the case of a balanceof payments crisis).

� On taxation policy, the Member States oppose harmonisation. Therefore the risk with taxes on wealth and high incomesis that taxable persons or their capital will move to whichever Member State offers the most favourable terms. Even ifno decision can be reached on harmonisation, greater transparency would help to reveal who is evading taxation in theirhome country by these means, and on how much income and wealth. In the long term such openness would exertpolitical pressure, which would alter either the conduct of taxable persons themselves or the policy of the countriesprotecting them, eventually leading to a re-inclusion of the rich among the tax-paying population.

� On employment policy, the Amsterdam Treaty provides for co-ordination of national policies: the Member States areobliged to produce regular reports reviewing, among other things, their implementation of the European guidelines. Theguidelines adopted in Luxembourg in 1997 and Cardiff in 1998 are somewhat vague, and at the Cologne summit in 1999the Member States refused to commit themselves to verifiable quantitative targets. Such targets would indeed have to beformulated in a highly complex manner in order to take account of trade-offs between social objectives such asemployment, leisure and income. What is preferable here is an open process, one which operates with benchmarkingand the spread of best practice in certain sectors but leaves it up to those concerned to set social policy targets. This alsomeans involving groups in civil society � in particular trade unions and employers� associations � as already happens inmany national dialogue forums (e.g. Germany�s �Alliance for Jobs�).

� On social policy, the EU mainly confines itself to certain narrow areas such as health and safety, equal treatment and soforth, together with the adaptation of social security systems to freedom of movement in the EU. The key theme ofpoverty and income distribution did not really surface at all until 1998. At the Lisbon summit in 2000 the EU decidedon measures to combat social exclusion. The action plan provides above all for research, better statistics and moreexchanges among Member States, in particular the networking of interest groups. In this sphere too, the EU�s approachis one of informal processes. What is still completely missing is any debate about wealth distribution and how to correctit so as to move towards long-term equality of opportunity.

� Regional policy in the EU has long been the battleground of national budgetary concerns, where it is more a matter ofclawing back resources from the EU budget than of meaningful regional support. Since successful development dependsprimarily on the conduct of local and regional players (politicians, companies, intermediary institutions and civil societyorganisations), they should take on the main responsibility but should also be exposed to vigorous policy competition.The task of higher-level bodies would merely be to ensure that such competition does not push down standards butamounts to a competitive effort to achieve better organisation, higher productivity and more rapid adjustment. Whateverone�s point of view, weaker locations should not be relieved of their responsibilities. However, responsibility alsopresupposes powers and room for manoeuvre at local level; in many countries these have been appropriated by thecentral government.


In the multi-layer polit of Europe the struc-tures for the distribution of power and respon-sibility are further complicated by the interac-tion between the Union, its Member States andtheir citizens. Only the modest beginnings of aEuropean civil society are perceptible. Europe�s�multi-layer democracy� lacks a �demos�, a so-vereign population. On the other hand, no na-tional population can exist where there is nonation-state, even though EU citizenship consti-tutes an initial step in this direction. The long-lived discussion about subsidiarity demonstrateshow difficult it is to distribute tasks meaning-fully among the various layers of Europe�s sys-tem of governance.

When it comes to shaping specific policies, theopportunities for participation have alreadyprogressed somewhat further. European asso-ciations are involved in devising rules and stan-dards for the internal market. The social partnersare able to draw up Europe-wide social policyregulations which the Commission must thenadopt, subject to certain conditions. The Unionis increasingly trying to involve the MemberStates, not through fixed decisions but by en-gaging them in dialogue or by using instrumentssuch as the new �open method of co-ordination�(Lisbon 2000), benchmarking and the criticalreview of national action plans. The inter-connection between Member States� adminis-trations and policies is becoming ever closer,and the bureaucrats and politicians responsiblefor them are exposed to peer-group pressure,which often � as in the case of Austria � imposesmore painful sanctions than those permitted bythe EU�s own legislation and institutions.

At grass-roots level there is a need to safeguardand consolidate the EU citizens� rights andopportunities for involvement. A Charter ofBasic Rights might help achieve this aim, butit would likewise have to be binding on the EUitself and the Member States. If integration isto have a social dimension, appropriate rightssuch as freedom of association and the right tostrike or decent minimum social provisionwould be particularly important. Social rightsshould also protect weak and excluded indivi-duals from the �dictatorship� of the sociallybetter-off majority which can come about in ademocracy. In the liberal tradition, rights serveto protect citizens from the State. By contrast,the rights of weaker participants in the market-place are underdeveloped in the face of strongerones. Here we refer not only to consumers buy-ing products on the market but also to employ-ees confronting companies:

� Consumer protection is overwhelminglybased on competition or national minimumstandards. Without going to the US extremeof product liability, greater transparency con-cerning product features (including produc-tion conditions) would be helpful, allowingconsumers to decide whether they wish torun certain risks and what price they areprepared to pay for a cleaner or more socialproduct. Such transparency could be ensuredby institutions or organisations from eitherthe public sector or civil society; manufac-turers would of course be liable for claimsthey make about product features.

� Some slow progress was made during the1990s in terms of safeguarding the rights ofemployees, such as the posting directive andthe rules on European Works Councils. ManyEuropean countries also have a minimumwage, which could similarly be introducedEU-wide � albeit differentiated according tolevel of development.

Key questions about respective powers stillremain unanswered concerning the relation-ship between the Union and the MemberStates. Some Social-Democrats hope that theUnion will be able to compel the Member Statesto adopt more socially oriented policies. Othersfear that integration opens the door to policycompetition bringing about a �race to the bot-tom�. Even the introduction of minimum stan-dards arouses qualms that countries with higherstandards might be prompted to lower them tothe prescribed minimum level. Looking at indi-vidual policy areas of relevance to a welfareunion, a mixed picture emerges (see Box p. 19):

A more democratic Europe means a decen-tralised Europe in which subsidiarity is takenseriously, since maximum involvement is achie-ved by tackling issues at the level closest to thecitizens. It also means a flexible Europe, inwhich like-minded people come together topursue their common interests even where Eu-rope-wide action is inappropriate because ofstructural differences. But a social Europe alsoneeds strong European policy-making bodies,so as to prevent local solutions being pursuedto the detriment either of socially weaker indi-viduals there or of other regions and countries.Such effects can be countered first and foremostby creating a European public. This public mustthen decide, in a democratic process, where theactions of social players should be circumscri-bed by binding governmental regulations andwhere the pressure of democratic public opinionis sufficient to pave the way to a social Europe.

Europe�s �multi-layer democracy�lacks a �demos�,a sovereignpopulation.


Bestellformular


The Series Eurokolleg addresses important aspects of the process of European unification. The aim is to illuminate theproblems and policy options of complex European issues.

This issue is based on the results of the conference �A Social Democratic European Policy: Constraints, Conflicts,Challenges�, organised by the Friedrich-Ebert-Stiftung together with the Alfred-Mozer-Stiftung and the Wiardi-Beckmann Stiftung on 15 June 2000

The translated from �Wege, Umwege und Dritte Wege zu einem sozialen und demokratischen Europa� (ReiheEurokolleg 44, 2000) was done by Janet Aldman.

The author, Michael Dauderstädt, is Head of the International Policy Analysis Unit of the Friedrich-Ebert-Stiftung inBonn

Order free of charge: Friedrich-Ebert-Stiftung, Abteilung Internationaler Dialog, Eva Meiners, 53170 Bonn,Fax: 0228-883538, Internet: http://www.fes.de

Editing: Anne Seyfferth, Friedrich-Ebert-Stiftung, Abteilung Internationaler Dialog

Copyright: Friedrich-Ebert-Stiftung

Printing: Druckerei Plump Rheinbreitbach

ISSN: 0939-7493ISBN:3-86077-995-8

eurokolleg - friedrich ebert foundation

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