europeanization and globalization

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2001 34: 227Comparative Political StudiesDANIEL VERDIER and RICHARD BREEN

UnionEuropeanization and Globalization : Politics Against Markets in the European

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COMPARATIVE POLITICAL STUDIES / April 2001Verdier, Breen / EUROPEANIZATION AND GLOBALIZATION

The authors attempt to sort out three exogenous factors affecting the domestic societies of Euro-pean Union (EU) member countries: market globalization, the European single market, andEuropean supranational institutions. They offer a research design to separate the respective man-ifestations of each factor and apply it to four domestic dimensions: labor market, capital market,electoral competition, and center-local government relations. Although they find systematic evi-dence in the cases of the labor and capital markets supporting the widely shared claim that the EUis an agent of globalization, the results also point to the importance of the voluntarist componentin the electoral and subgovernmental domains.

EUROPEANIZATIONAND GLOBALIZATION

Politics Against Marketsin the European Union

DANIEL VERDIERRICHARD BREEN

European University Institute

The academic debate about European integration no longer bears onwhether there is integration, as it used to until 15 years ago. It also does

not seem to bear on whether the actual agent of this integration is the council,the commission, or the court. The debate bears, instead, on the mechanismthat is responsible for that integration: Is it the market or the will to build apolity?

227

AUTHORS’ NOTE: We thank Geoffrey Garrett, Dennis Quinn, and Duane Swank for supplyingus with some of their data. We thank our colleagues at the European University Institute, JimCaporaso, three anonymous reviewers, and Brian McCormack for useful comments. A draft ofthis article was presented at the 1999 Meeting of the International Studies Association, OmniShoreham, Washington, DC, in February 2000. Correspondence concerning this article shouldbe addressed to Daniel Verdier, European University Institute, Via dei Roccettini 9, 50016 SanDomenico di Fiesole (FI), Italy.

COMPARATIVE POLITICAL STUDIES, Vol. 34 No. 3, April 2001 227-262© 2001 Sage Publications, Inc.



The debate is complicated by global trends. In Europe, as elsewhere, fac-tor markets are being deregulated, partisan identification is eroding, localgovernments are becoming more active, and so forth. Yet from a EuropeanUnion (EU) resident’s perspective, the origins of these ubiquitous changesare unclear. It is unclear whether they reflect global trends, referred to asglobalization, or the play of forces that are directly attributable to Europeanintegration, Europeanization.

When trying to explain changes in EU countries, therefore, observers arefaced with a trinity of plausible factors: global markets, the single market,and the political union. Sorting out their respective effects is a daunting task,to which we give a first crack. We first try to theorize the general implicationsof each effect and then empirically test for their actual occurrence. Althoughwe find evidence supporting the widely shared claim that the EU is an agentof globalization, our results also point to the importance of the voluntaristcomponent.

THE QUESTION

European integration can theoretically proceed in two ways. One is theconstruction of a single market without a political union. The other way is tobuild a political union with a wide range of centralized policies. Althoughreality falls somewhere in between these two ideals, political scientists are ofthe opinion that European integration as of late has leaned toward marketintegration more so than political voluntarism. Apologists praise whatMajone (1996) calls the gradual “depoliticization of the Common Market”(p. 330), which has taken common market countries away from planning,corporatist self-regulation, and the public ownership of natural monopoliestoward the regulation by experts and regulatory commissions of private andprivatized monopolies. Consistent with this line of argument is the creationof a single currency managed by an independent central bank. Critics alikelament what Scharpf (1996) and Streeck and Schmitter (1991) call negativeintegration—the practice of striking down national regulation withoutreplacing it with supranational regulation. The policy of merely purging mar-kets from barriers to competition worked because, as Lange (1992) put it withrespect to social policies, “There is no ‘compelling need’ to harmonize socialpolicies in order for the single market to operate effectively” (p. 253). Theoutcome is even deemed by some as biased toward “big business”: Grahl andTeague (1989) equate European integration with “the gradual erosion ofsocial constraints on the normless self-definition of economic objectives bythe strongest enterprises themselves” (p. 50). The only dissenting voice

228 COMPARATIVE POLITICAL STUDIES / April 2001



comes from two American economists. Alesina and Wacziarg (1999) writethat

Europe is going too far on many issues that would be better dealt with in adecentralized fashion, while it is not going far enough on policies that guaran-tee the free operation of market both across and within the countries of theUnion. (p. 3)

Except for these two, the consensus among Europeanists is that EU institu-tions have promoted an exclusively economic form of integration, doing lit-tle to construct a centralized system of interest representation and decisionmaking in a broad range of issues—a polity.

If Europeanization is de facto synonymous with deregulation (or mar-ket-conforming “re-regulation,” as Majone, 1996, puts it), then its effectsshould be similar to the effects of globalization. The globalization of nationalmarkets is indeed a case of market integration by deregulation, involving theenlargement of the national market to the global market and requiring no(inter-)governmental action other than the deregulation and opening of mar-kets.1 The deregulatory effects of globalization, presently the object of avoluminous literature, are commonly said to be four-pronged. We quicklysurvey these results, temporarily suspending judgment on their empiricalvalidity.

First, the openness of product markets intensifies competition betweenfirms, forcing the path of innovation (see Castells, 1996; M. E. Porter, 1990)and increasing the instability of input markets, in particular, the labor market(see Streeck, 1987). The capacity of firms to locate new investments in wagehavens makes domestic investment sensitive to domestic wage levels (seeChase, 1998; Thurow, 1996). Labor instability creates a demand for govern-ment to insure workers against market risk through unemployment benefits,government employment, and the provision of assorted social services.

Second, and simultaneously, cross-border capital mobility underminesthe capacity of the government to deliver this much-needed insurance. Capi-

Verdier, Breen / EUROPEANIZATION AND GLOBALIZATION 229

1. The identity between globalization and market competition is not absolute. Global mar-kets do not exist in an institutional vacuum but are embedded in NATO, the OECD, the GATT,the World Trade Organization, and the belief, held by the most advanced countries, in the desir-ability of trade and financial openness. The difference between these global regimes and theEuropean Union (EU) is one of degree—the latter has stronger coordination mechanisms thanthe former. Because all EU countries are also members of all global regimes, the potentially spu-rious impact of global regimes on markets is automatically controlled for, allowing the analysisto focus on the added impact of EU regional institutions. Furthermore, although some non-EUcountries are also involved in some form of regional organization (European Free Trade Agree-ment, North American Free Trade Agreement, Mercosur, and so forth), none of these schemeshave reached a level comparable to the EU.



tal mobility increases the elasticity of the domestic tax base with respect tothe tax rate (see Bates & Da-Hsiang, 1985; Rodrik, 1997; Steinmo, 1993).Capital mobility also deters governments from financing budget deficits byprinting money or over borrowing (see Kurzer, 1993; Strange, 1986). Whichof these two forces—the rising demand for public insurance and the sinkingcapacity to meet that demand—prevails is a priori indeterminate and a matterfor empirical research. Both Garrett (1995, 1998) and Swank (1998) arguethat some of the alleged effects, far from being general, are mediated bydomestic institutions.

Third, as markets are becoming more important, governments are becom-ing less so. Loyalty to political parties declines, along with voter turnout andgovernment stability. Politicians are losing the capacity to govern at the sametime as government loses some of its prior relevance to market allocation.

Fourth, greater factor mobility frees up latent economies of agglomera-tion, causing a territorial relocation of mobile factors away from poor ordeclining peripheries to wealthier and upcoming centers (see Fujita,Krugman, & Venables, 1999; Krugman, 1991). Increasing territorialinequalities between local jurisdictions raises the demand for offsetting terri-torial transfers administered by the central government. The capacity of thecentral government to supply these transfers, however, is on the decline. Dis-tricts that win from relocation oppose these transfers (see Bartolini, 1998).Lower dependence on the national market makes secession a credible threat(see Alesina & Spolaore, 1997; Bolton, Roland, & Spolaore, 1996). Which ofthe two forces—the increasing demand for offsetting territorial transfers orthe declining supply of such transfers—wins, here again, seems to be anempirical matter.

All the presumed effects of globalization—the emphasis on labor marketflexibility, bank privatization, financial deregulation, low voter turnout,increasing electoral volatility, the threat of secession—are not unfamiliar toEU countries. These similarities fuel the claims of the above-mentioned liter-ature that Europeanization is globalization by another name. The EU is seenas a simple agent of globalization or an irrelevant intervening factor. Euro-pean economies would have reached a qualitatively similar state of marketderegulation by simply exposing themselves to the global winds withoutengaging in the costly and painstaking construction of Europe. The commis-sion is taking the praise (or alternatively, the blame) for an outcome overwhich it has limited control.

What would be an alternative to globalization? Assuming for a momentthat Europeanization is not reducible to globalization but that the politicalcomponent is as active and as much developed as the market component,what would Europeanization look like? We venture that the strengthening of




the political dimension, had it occurred, would translate into the preservationof the existing (and/or the development of an alternative) interventionistcapability. The reasoning runs like this: Political voluntarism, irrespective ofits substantive goals, is ineffective without a centralized decision-makingprocess, easing coordination among all interested parties—not only thenational governments but also a comprehensive system of interest represen-tation, including the political parties that are temporarily in opposition, tradeassociations and trade unions, employers’ and employees’ peak associations,consumers’ associations, and so forth. The superiority of such a centralizedsystem of interest representation is its unique capacity to produce policiesthat are not enforceable without the consent of the interested parties. Theexistence of such a mechanism was found to be essential to the stabilizationof European economies in the wake of the oil shocks.

In the context of the EU, such a centralized and comprehensive deci-sion-making process can take one of two forms: intergovernmental or fed-eral. The intergovernmental mode of centralized decision making, the onethat is more prevalent in the present state of bounded federalism, relies on themaintenance of separate centralized interest representation mechanisms ineach member country and their coordination at the supranational levelthrough government delegates (the existing Council of Ministers and derivedcommittees). It is a case in which interest groups and political parties remainlinked to national governments for two reasons. First, these national govern-ments enjoy veto power within the EU legislative process. Second, theabsence of an EU budget makes any compensatory policy the province of thenational government. Among the four issue areas that we survey below, thisintergovernmental decision-making process prevails in three—labor market,financial market, and electoral volatility.

The second type of centralized interest representation is federal. It wouldinvolve the creation of regional forms of interest representation in factor mar-kets and the polity—that is, social corporatism at the union’s level in thelabor market, EU-regulated credit allocation in the capital market, disci-plined parties in the European Parliament, and centralized bureaus inBrussels. This form of interest representation is unknown to Brussels (seeStreeck & Schmitter, 1991; Turner, 1996). Its closest, yet still far remote,approximation is the structural funds policy. This is a rare case in which theEU has a budget and the commission enjoys some real spending power. Cer-tainly, governments decide on country quotas; but mutual suspicion, backedby experience, that funds might be wasted on consumption by national recip-ients forced governments to establish strict standards on spending, relin-quishing monitoring to the commission. Governments also agreed to dele-gate spending authority to subnational jurisdictions and allow direct




bargaining with the commission. The upshot has been the growth of a central-ized system of subnational interest representation in Brussels (see Marks,Nielsen, Ray, & Salk, 1997; Smyrl, 1998).

Although these two modes are usually represented as theoretically anti-thetical (viz. the debate between so-called “intergovernmentalists” and themanifold heirs to Haas’s “neofunctionalism”), they are both distinct fromintegration via market deregulation. Either one could supply European politi-cal elites with a voluntarist capability, enabling them to pursue outcomes inconcurrence with markets or beyond what markets can deliver. There is nonecessary one-to-one correspondence between political voluntarism and fed-eralism or between market liberalism and intergovernmentalism. Theabsence of EU-wide collective bargaining is no evidence that European inte-gration is irrelevant to labor policy in Europe.

We should also note that the intergovernmental and federal facets of polit-ical voluntarism are not empirically incompatible. A regional system ofinterest representation, if any, would have to be built in a first stage on theshoulders of the existing national ones. European peak associations andEuropean parties will be conglomerations of national units for an indefiniteamount of time.

We recapitulate the argument. Europeanization, unlike globalization,walks on two legs—market efficiency and political voluntarism. The markethas decentralizing and deregulating effects, making Europeanization synon-ymous with globalization. In contrast, the polity has centralizing effects, dis-tinguishing Europeanization from globalization.

Equipped with these definitions, we are now in a position to sort out therelative impact of the single market and the political union while controllingfor the impact of globalization. We consider four areas of interest representa-tion—the labor market, the capital market, and the political system, with thelatter subdivided into political parties and subnational governments. In eachcase, we ask two questions: Are any of the changes that are observable ininterest representation attributable to Europeanization as opposed to global-ization? If so, are any of these changes associated with the voluntarist compo-nent of Europeanization as opposed to the market component? We answerboth questions in the affirmative with respect to the party system andsubnational governments only. In factor markets, we find Europeanization tobe globalization by another name.

We first present the research design followed by a quantitative survey ofthe four points of impact of globalization and Europeanization. The articleends with some general conclusions.




RESEARCH DESIGN

Our choice of method should enable us to separate three hypotheticaleffects: market globalization, market Europeanization, and voluntaristEuropeanization. Either of the last two effects, moreover, may either be trig-gered by globalization or be sui generis.2 This makes for five hypotheticalsituations:

1. The first, termed globalization-plus, implies that Europeanization is aregional case of market broadening and deepening—a regional instance ofglobalization. According to this hypothesis, EU-member countries are subjectto two cumulative forms of market broadening—global and regional. As aresult, European countries should evince a stronger case of globalization thannon-European countries. The globalization-plus effect implies thatEuropeanization is driven by the market.

2. The opposite state, dubbed globalization-minus for reasons soon to be appar-ent, implies that Europeanization is an insurance against external marketvicissitudes. According to this hypothesis, European countries are subject totwo opposite demands—globalization and antiglobalization—which forcethem to choose a lower level of globalization than non-European countries.Cases of globalization-minus directly reveal the impact of the voluntaristcomponent of Europeanization.

3. The sui generis market effect implies that Europeanization has effects that areunique to EU countries (that is, an effect associated with Europe that is notcaused by globalization). Two cases are possible depending on whether thissui generis effect is generated by the market or by voluntarist policies.

4. The sui generis voluntarist effect is the second case of sui generis effects.5. Last, the null effect corresponds to the situation in which Europeanization has

no discernible impact one way or another. According to the null hypothesis,European countries should exhibit the same level of globalization asnon-European countries.

We will test for the first, second, third, and fourth hypotheses combinedand the fifth by means of one multiple regression equation. We will then sep-arate the third and fourth hypotheses by resorting to two different specifica-tions of the Europeanization variable.

Our generic equation examines the impact of globalization andEuropeanization together and interactively.

Yt = β1 + β2(Yt – 1) + β3(Globt) + β4(Eurot)+ β5(Globt*Eurot) + β6(Xt) + εt.

(1)


2. We assume that globalization is exogenous to Europeanization.



Our dependent variable is one of the four areas of interest representation(Yt) already referred to—labor, finance, elections, and local governments.Our model specification says that the domestic dimension at time t candepend on its prior value (Yt – 1), globalization (Globt), Europeanization(Eurot), the interaction of globalization and Europeanization (Globt*Eurot),and a set of control variables (Xt) to be specified in each case.

The coefficients β3, β4, and β5 play the central role in tests of our hypothe-ses. The presence of the interaction term between Europeanization and glob-alization means that we can interpret β3 as the effect of globalization whereEuropeanization is absent (see Friedrich, 1982). This is most easily seenwhere Europeanization (Eurot) is simply captured by a dummy variable dis-tinguishing the EU countries (coded 1) from the other countries (coded 0). Inthe case in which Eurot is equal to zero—that is, for the non-EU coun-tries—Equation 1 reduces to:

Yt = β1 + β2(Yt – 1) + β3(Globt) + β6(Xt) + εt. (2)

In Equation 2, the coefficients β4 and β5 do not appear because non-EUcountries have a zero score on the variable to which these coefficients apply.β3 is the effect of globalization in non-EU countries. In the case in whichEurot is equal to 1—that is, for EU countries—the corresponding equation is

∆Yt = β1 + β4 + β2(Yt – 1) + (β3 + β5 )(Globt) + β6(Xt) + εt. (3)

In this case, the coefficient for the EU dummy variable (β4) can be thoughtof as an extra term added to the intercept of the regression model, and theeffect of globalization on EU members is given by the sum β3 + β5. In sum,estimating Equation 1 yields the impact of globalization on EU countries(β3 + β5) and non-EU countries (β3).

The globalization-plus hypothesis implies that the effect of globalizationin the EU countries—namely, the sum β3 + β5—has the same sign as its effecton non-EU countries—β3—and is significantly larger than it (significantlyand significant are used throughout to mean statistically different from zeroat the 5% level).3 In this case, globalization is operating in the same directionwithin and outside the EU, but its effect is stronger within the EU. A specialcase occurs when β3 is not significant but β3 + β5 is. In this case, globalizationwould be having an effect within the EU but not outside it. European mem-


3. The standard error of β3 + β5 is given by the square root of the sum of the variance of β3

plus the variance of β5 plus twice the covariance between these two parameters. These quantitiescan all be obtained from the variance-covariance matrix of the parameter estimates. Note that β3

and β3 + β5 are significantly different if β5 is significantly different from zero because β5 is thedifference between β3 and β3 + β5.



bership would thus be revealing the otherwise latent effect of globalization.Although it is a subcategory of the globalization-plus hypothesis, we willrefer to this case as one of revealed globalization.4

The globalization-minus hypothesis implies (a) that β3 + β5 has the samesign as β3 and that β3 + β5 is significantly closer to zero than β3 or (b) that β3

and β3 + β5 have different signs and are significantly different. In the firstcase, the overall effect of globalization is weaker in the EU than outside it; inthe second, the effect runs in different directions in each.5

If β3 is statistically significant but β5 is not, then the impact of globaliza-tion is the same within the EU as in the rest of the OECD. In this case, neitherthe globalization-plus nor the globalization-minus hypotheses would besupported.

Our third hypothesis—the sui generis European effect—is tested usingthe β4 coefficient. If this is statistically significant, it means that there is a dif-ference between the EU and the other countries in our sample that does notarise as a result of the differential effects of globalization (because these arecaptured in β3 and β5). Specifically, the change in the dependent variablewould, on average, be either larger (β4 positive and significant) or smaller (β4

negative and significant) in the EU than outside it. Note, however, that if β4

were significant and the conditions for the globalization-plus hypothesis,given above, were met, this would be a case in which there were two sorts ofEuropeanization taking place—catalyzed by globalization and sui generis.Similarly, we could also find a globalization-minus effect operating togetherwith the sui generis effect.

Finally, our fourth hypothesis—the null effect—would be supported if inEquation 1, given β3 is significant, neither β4 nor β5 was significant. In such acase, the impact of globalization would not be distinctive in Europe and there


4. The revealed-globalization effect is not to be confused with a sui generis effect ofEuropeanization soon to be presented because the latter does not require the presence of global-ization in order to occur.

5. A (fictitious) example may help visualize the difference between the two cases. Weregreater trade openness to have the overall effect of decentralizing wage bargaining betweenemployers and unions from the national to the plant level, European governments could weakenthat impact by raising trade barriers. In such a case, globalization would decentralize wage bar-gaining outside the EU (β3 is negative and significant) and would have a different impact amongEU countries (β5 is positive and significant), that is, no impact whatsoever (β3 + β5 not signifi-cantly different from zero). Alternatively, European employers could respond to the trade chal-lenge by increasing coordination with the unions at the central level, as in a planned economy. Inthis second case, globalization would still decentralize wage bargaining among non-EU coun-tries (β3 is negative and significant) and would still have a different effect in EU countries (β5 ispositive and significant), that is, to centralize wage bargaining (β3 + β5 is positive andsignificant).



would not be any sui generis European effect. A subcategory of the null effectis no effect anywhere, inside and outside the EU.

The same strategy applies in those cases in which Europeanization is mea-sured as a continuous rather than as a dummy variable. The only minor com-plication is that the effect of globalization will be given by β3 + β5*Eurot

for all countries and, because the coefficient for globalization is then afunction not only of parameters but also of the value of the Europeanizationvariable, its statistical significance will likewise depend on the value ofEuropeanization.

In summary, four of our five hypotheses are tested by focusing on thecoefficients of Equation 1. It remains to explain how we differentiate be-tween Hypotheses 3 (sui generis market effect) and 4 (sui generis volun-tarist effect). We need two distinct measures of Europeanization, differ-ing in terms of their relative sensitivity to each effect. The simplest measureof Europeanization—a dummy variable taking a value of 1 for countries thatare part of the EU and 0 for countries that are not—is a reasonable measure ofthe voluntarist component of European integration. But it is not a good mea-sure of the market component, for it presumes that all member countries havethe same exposure to European market forces when in fact they do not—thelarge countries are much less exposed than the small ones. Conversely, ameasure of the trade dependence of a country on the EU countries is a goodmeasure of the market component of European integration but a poor mea-sure of the voluntarist component of that same integration. It ranks Switzer-land, which is not a member of the EU although almost totally dependent on itfor its trade, above Germany, which although one of the original members ofthe EU, is a large country whose economy is comparatively less exposed toexternal market forces in general. Hence, we will choose between Hypothe-ses 3 and 4 according to whether the sui generis effect is stronger with theEuropean transaction dependence variable or with the EU dummy.

We will pattern the European transaction dependence variable after theglobalization variables. A commonly used measure of globalization is tradedependence, calculated as the sum of a country’s imports and exports dividedby that country’s gross domestic product. The equivalent measure of the mar-ket component of Europeanization can be calculated as the sum of a coun-try’s imports and exports with members of the common market divided bythat country’s gross domestic product. Another common measure of global-ization is dependence on capital flows. Several variations of it are conceiv-able. Quinn (1997) built a yearly index of legal openness that summarizeseach country’s exchange restrictions during the 1950-1993 period. One mayalso use differentials in interest-covered parity (Shepherd, 1994) on thegrounds that the absence of flows does not constitute a priori evidence of




market segmentation. Or more simply, one may use the International Mone-tary Fund and OECD measures of actual capital flows—direct, portfolio,loans, or total. However, there is a problem with all these measures, for theydo not allow for the calculation of an equivalent Europeanization index, thefirst two because a country’s exchange controls and interest rates are undif-ferentiated by countries of destination, the last one (actual flows) because ofdata limitations. Country-by-country breakdowns of capital flows exist fordirect investment only, and flow data are not available before the mid-1970s.Because it takes about 10 years of flow data to calculate a reasonably accuratemeasure of stock, stock data are not available before the mid-1980s or evenlater for many countries.6

The models are tested on the population of OECD countries. The OECD isa club of rich countries, and this makes for a homogeneous sample of cases.The fact that all EU countries are OECD members but not all OECD coun-tries are EU members provides us with the requisite control group, withoutwhich it would be impossible to distinguish between the effects of the twoexternal mechanisms. Moreover, the fact that not all European countries areEU members is also important in separating the effects of EU membershipfrom the effects that derive from a common political history and geographicproximity. All findings reported below are robust to the inclusion of a Euro-pean geopolitical dummy, coded 1 for the countries located in the geographicregion of Europe and 0 for others.

The dependent variables are several dimensions of domestic societies thatare affected by globalization and/or Europeanization. We cover the two fac-tor markets (labor and finance) and, within the political arena, national par-ties and local governments.

The estimation method varies with the type of data and their availability.In the presence of time-series cross-sectional data—our standard—we usegeneralized least squares with panel-corrected standard errors (see Beck &Katz, 1996). We include dummy variables for each country but one to elimi-nate idiosyncratic differences in scale between countries (“fixed effects”).Our standard specification is Equation 1, including the lagged dependentvariable. We will refer to it as the lagged dependent variable model. We willuse it as default, except in three cases.

First, if the coefficient on the lagged dependent variable exceeds 0.9, wetest for cointegration. A coefficient close to one indicates that the dependentvariable has a long memory or is path dependent. We then look for variables


6. Flow (unlike stock) data are also notoriously volatile, making their use hazardous otherthan in the form of 10-year averages. Data were extracted from the annual issues of OECD’sInternational Direct Investment Statistics Yearbook and National Accounts over a 30-yearperiod.



that maintain a predictable relationship (are cointegrated) with the depend-ent variable in the long run and are weakly exogenous to it. The cointegra-tion model we use is identical to the one suggested by Beck and Katz (1996,p. 11):

∆Yi, t = β1 + β3∆Globi, t + β4∆Euroi, t + β5[∆Globi, t*∆Euroi, t]+ β6∆Xi, t + β2(Yt – 1 – γ3Globi, t – 1 – γ4Euroi, t – 1

– γ5[Globi, t – 1*Euroi, t – 1] – γ6Xi,t – 1) + εi, t,

(4)

with, on the right-hand side, coefficients for the change variables measuringshort-term effects (β3, β4, β5, and β6) and coefficients for the lagged variablesmeasuring long-term effects (the β2γs). Cointegration between the dependentvariable and an independent variable is verified when both β2 and the productbetween β2 and the γ coefficient for the lagged independent variable are sig-nificant. If Euro is a dummy variable, Equation 4, like Equation 1, reduces totwo simpler equations, with β2γ3 measuring the long-term impact of global-ization on non-EU countries, β2(γ3 + γ5) measuring that on EU countries, β2γ5

measuring the long-term difference in the way globalization affects EU andnon-EU countries, and β2γ4 measuring the sui generis effect.

Second, if the coefficient does not exceed 0.9, we use the specificationgiven by Equation 1. But following Beck and Katz (1996), we test this modelagainst the more general model in which it is nested. We refer to this as theall-lagged model:

Yi, t = β1 + β2Yt – 1 + β3Globi, t + β4Euroi, t + β5 [Globi, t*Euroi, t]+ β6Xi, t + γ3Globi, t – 1 + γ4Euroi, t – 1 + γ5[Globi, t – 1*Euroi, t – 1]+ γ6Xi, t – 1 + εi, t.

(5)

Finally, if pooling time and cross-sectional series is impractical, weregress the change in domestic dimension against its value at the beginning ofthe period and corresponding changes in the other right-hand-side variables.We will refer to this specification as the cross-sectional change model.7

Although quite intelligible, this method presents two drawbacks. First, itmisses nonlinear changes (that is, changes between the initial and terminalvalue of the dependent variable that bounce around the trend spanning thesetwo values). This is a minor problem, however, in the presence of data exhib-iting trends. A second drawback of the cross-sectional design is the smallnumber of observations that we can feed into it, requiring that we be watchfulfor potential outliers. We want to guard against reporting as finding results


7. It is similar to Equation 1 except that all variables on both sides (except for the laggeddependent variable) appear as first differences, and t-1 refers to the starting value of a multiyearperiod and t to its terminal value.



that are driven by outlying values and against discarding correlations that arehidden by outliers.

ORGANIZATION OF THE LABOR MARKET

There exists a consensus in the labor literature that globalization of mar-kets is forcing employer-employee relations to become less corporatist andmore fragmented. The internationalization of capital is rendering nationallabor confederations irrelevant because these national organizations areunable to coordinate across national boundaries and together establish aninternational labor confederation. As a result, wage bargaining is decentral-ized to lower levels, rates of unionization are dropping, strike activity isdeclining, and government employment is shrinking. On the rise are unem-ployment, part-time employment, and performance-related pay (see Crouch,1993; Ferner & Hyman, 1992; Streeck, 1987). Is this trend equally felt amongEU countries?

Two hypotheses are plausible a priori. On one hand, European labor mar-kets are not immune to market shocks but, in fact, are even more affected bythem in light of the more advanced level of product and financial market inte-gration achieved in Europe. On the other hand, prospects for coordinationamong national labor confederations are brighter inside than outside the EU.The existence of intergovernmental institutions, along with the prodding ofthe commission and the court, makes it at least conceivable that enough regu-latory coordination could be achieved to offset the worst effects of capitalinternationalization. The “social pillar” of the 1992 Maastricht Treaty, how-ever fledgling it may look, signals a different choice for Europe. In sum, EUmembership may offer trade unions and their governments additional politi-cal options besides market adjustment, justifying the preservation of socialcorporatism at the national level.

We test these two hypotheses against each other and the null hypothesis ontwo labor market dimensions: trade union density and wage-bargaininglevel. Our findings offer support for the market integration hypothesis. Wefind that Europeanization has no bearing on trade union density. With respectto bargaining level, we find that financial openness has a globalization-pluseffect in which the EU significantly outperforms the rest of the OECD.

We start with union density. We control for the presence of left partiesin government. Because the literature is unanimous about the idea that leftgovernment is positively correlated with corporatism, the test gains in accu-racy if that effect is held constant. We also control for the four cases inwhich the payment of unemployment benefits is administered by the unions—




Belgium, Denmark, Finland, and Sweden. In these countries, unemploymentincreases the incentives for workers to join a union. We finally control forgeographic presence in Europe.8

We use two alternative measures of globalization: nominal capital open-ness and trade dependence. Data availability allows us to pool data for 16countries during 30-plus years of observations. The coefficient of the laggeddependent variable is very close to one, requiring the use of the cointegrationmethod presented in Equation 4.

Two series of results are worth reporting (see Table 1). First, two of thecontrol variables confirm existing claims. Left government is positivelyrelated with trade union density in the long run; it tests significant in thefinancial globalization regression (Equation 1), and marginally so (at the5.6% level) in the trade dependence regression (Equation 2). Long-runupward shifts to the left of the ideological spectrum generate long-runupward growth in trade union density. Also, countries in which unemploy-ment benefits are distributed by the unions show a long-term level of union-ization higher than average. The European geopolitical dummy fails to testsignificant, however, suggesting that there is nothing particular about Euro-pean geography or history with respect to trade union membership.

Second, we find three types of effects of Europeanization—a globalization-plus effect adding to the demobilizing effect of globalization, a sui generis ef-fect pointing to mobilization, and a null effect. The first two effects are foundin Regression 1 (the financial globalization regression). The globalization-plus effect can be read from the coefficients β2γ3, β2γ5, β2(γ3 + γ5); they are allnegative and significant. Nominal capital openness has a significantlygreater negative long-term impact on trade union membership in EU than innon-EU countries. This globalization-plus effect is supplemented with anequally long-term sui generis effect.9 That effect works in the opposite direc-tion of globalization (β2γ4 is positive and significant), canceling the latter atlow values of globalization but being canceled at higher values. The tippingpoint, before which the sui generis effect prevails and past which the global-ization-plus effect predominates, is equal to 8.11.10 Every EU member hadalready passed that threshold by the time it joined the common market, sug-


8. Our fixed-effects specification also controls for all factors that are country specific andtime invariant.

9. The sui generis effect disappears if one substitutes the variable European trade depend-ence for the EU membership dummy, suggesting a political rather than a market origin.

10. The calculation of the tipping point runs as follows. The two effects on EU countries addup to β2γ4 + β2(γ3 + γ5)*Globi, t – 1. When the net effect is equal to 0, Globi, t – 1 is equal to –β2γ4 /β2(γ3 + γ5)—that is, 8.11 in Regression 1.




Table 1Trade Union Density (cointegration model with fixed effects, generalized least squares esti-mates, and panel-corrected standard errors)

Dependent Variable:∆Trade Union Density

1 2

Trade union densityi, t – 1 β2 –0.02 (–2.51)a –0.02 (–2.50)a

∆Nominal financial opennessi, t β3 –0.12 (–1.18)∆Trade dependencei, t β3 0.79 (0.98)∆EU membershipi, t β4 0.17 (0.25) –4.98 (–1.49)∆Nominal financial opennessi, t

*EU membershipi, t β5 0.37 (0.48)∆Trade dependencei, t

*EU membershipi, t β5 30.02 (1.49)∆Left party cabinet portfolioi, t 0.004 (1.42) 0.003 (0.93)Nominal financial opennessi, t – 1 β2γ3 –0.10 (–2.45)a

Trade dependencei, t – 1 β2γ3 –0.81 (–2.03)a

EU membershipi, t – 1 β2γ4 2.19 (2.31)a –0.33 (–0.73)Nominal financial opennessi, t – 1

*EU membershipi, t – 1 β2γ5 –0.17 (–2.08)a

Trade dependencei, t – 1*EU membershipi, t – 1 β2γ5 –0.52 (–0.89)

Left party cabinet portfolioi, t – 1 0.004 (2.10)a 0.003 (1.90)Unemployment benefits paid by

unions (dummy for Belgium,Denmark, Finland, and Sweden)i 1.13 (1.67) 2.46 (3.41)b

Geopolitical Europei (dummy) 0.35 (1.39) 0.77 (0.66)Intercept 1.39 (2.41)a –1.52 (–1.85)

β3 + β5 –0.12 (–1.18) 0.79 (0.98)β2(γ3 + γ5) –0.27 (–3.76)b –1.32 (–2.94)b

Number of observations 592 512Number of groups 16c 16c

Number of time periods 37d 32e

Log likelihood –685.7757 –535.6337Probability (chi-square) 0.0000 0.0000

Note: EU = European Union. The dependent variable is the first difference in trade union densityadjusted for missing data by Golden, Lange, and Wallerstein (1997). Nominal financial open-ness is the level of nominal financial openness coded on a 0 to 12 scale by Quinn and Toyoda(1997). Left power is the percentage of all cabinet portfolios held by left parties; the source isSwank (1998). Trade dependence is the ratio (imports + exports)/gross domestic product; thesource is OECD (National Accounts; see note 6). EU membership is a dummy variable coded 1for member countries at year t, 0 for all others. Geopolitical Europe is a dummy coded 1 for thecountries located in the geographic region of Europe and 0 for others. All the multiplicativevariables are the product of their unstandardized components. Values of z statis-

(continued)



gesting that the net effect of EU membership on trade union membership wasalways negative.

The impact of trade dependence on trade union membership is also gener-ally negative. Regression 2 suggests that trade dependence is cointegratedwith the decline in trade union density within and outside the EU (β2γ3 andβ2[γ3 + γ5] are negative and significant). However, there is no differencebetween EU and non-EU members (β2γ5 is not significant). The findings con-form with the null hypothesis, according to which Europeanization makes nodifference one way or another.

We now turn to the bargaining level (see Table 2). The coefficient on thelagged dependent variable (β2) is well below 0.90, allowing us to bypass thecumbersome cointegration technique. Moreover, tests for residual serial cor-relation suggest that the lagged dependent variable takes out most of theserial correlation from the data.11 We also estimated both the full “all-lagged”model (Equation 5), in which the lagged values for both the dependent andthe independent variables are included on the right-hand side of the regres-sion, and the simpler model (Equation 1), including only the lagged depend-ent variable. We then performed a likelihood-ratio test. The hypothesis thatthe two equations are identical could not be rejected at the 5% confidencelevel. These results allow us to use the simple lagged-dependent-variablemodel of Equation 1. The left government variable tests positive and signifi-cant in Regression 1 and marginally significant in Regression 2. The dummyfor European geography and history tests positive and highly significant inthe second regression.

The story about financial globalization is much the same as for trade uniondensity. Although its impact on non-EU countries (β3) is indeterminate, thaton EU members is significantly different (β5) and negative (β3 + β5)—a typi-cal revealed-globalization effect, that is, a subcategory of globalization-plus.


Table 1 Continued

tics are given in parentheses. All Greek symbols refer to Equation 4 in the text. The unit of obser-vation is the country year.a. z is significant at the 5% level.b. z is significant at the 1% level.c. Australia, Austria, Belgium-Luxembourg, Canada, Denmark, Finland, France, Germany,Italy, Japan, the Netherlands, Norway, Switzerland, Sweden, the United Kingdom, and theUnited States.d. 1955 to 1992.e. 1960 to 1992.

11. We regressed the residuals against their lagged value and found no significantcorrelation.



Simultaneously, the EU dummy exhibits a positive sui generis effect (β4),prevailing over the former effect for values of globalization inferior or equalto 8.33—a threshold barely higher than the one we calculated for trade uniondensity (see Regression 1, Table 1). Once again, because all EU members hadmore or less passed that threshold by the time they joined the common mar-ket, the net effect of EU membership on trade union membership was alwaysnegative.

The effect of trade dependence on bargaining level in Regression 2 isunclear, hesitating between a weak case of globalization-minus and the null


Table 2Bargaining Level (lagged-dependent variable model with fixed effects, generalized leastsquares estimates, and panel-corrected standard errors)

Dependent Variable:Level of Wage Bargaining

1 2

Bargaining leveli, t – 1 β2 0.56 (16.94)b 0.56 (15.58)b

Nominal capital opennessi, t β3 –0.009 (–0.60)Trade dependencei, t β3 –0.34 (–1.95)EU membershipi, t β4 0.75 (2.22)a –0.08 (–0.39)Nominal capital opennessi, t

*EU membershipi, t β5 –0.08 (–2.86)b

Trade dependencei, t*EU membershipi, t β5 0.54 (2.05)a

Left party cabinet portfolioi, t 0.001 (2.06)a 0.001 (1.86)Geopolitical Europei (dummy) 0.15 (1.78) 1.23 (3.92)b

Intercept 1.49 (8.45)b –0.13 (–0.36)β3 + β5 –0.09 (–3.57)b 0.20 (0.97)

Number of observations 608 528Number of groups 16c 16c

Number of time periods 38d 33e

Log likelihood –132.2239 –138.5172Probability (chi-square) 0.0000 0.0000

Note: EU = European Union. The dependent variable is the level of wage bargaining coded on a 1to 4 scale by Golden, Lange, and Wallerstein (1997); the higher the number, the more centralizedthe bargaining. Values of z statistics are given in parentheses. All Greek symbols refer to Equa-tion 1 in the text. The unit of observation is the country year.a. z is significant at the 5% level.b. z is significant at the 1% level.c. Australia, Austria, Belgium-Luxembourg, Canada, Denmark, Finland, France, Germany,Italy, Japan, the Netherlands, Norway, Switzerland, Sweden, the United Kingdom, and theUnited States.d. 1955 to 1992.e. 1960 to 1992.



effect. Trade dependence has a marginally negative effect on non-EU coun-tries (β3 is positive but not significant at the 5% level); it affects EU membersdifferently (β5 is positive and significant)—that is, not at all (β3 + β5 is not dif-ferent from zero). Most of the action is stolen by the geopolitical dummy, ofwhich the positive coefficient suggests that bargaining levels in Europe aregenerally higher than elsewhere when controlling for trade dependence.

Taking all results into consideration, trade does not seem to cause much ofa difference between EU members and nonmembers. Financial openness, incontrast, exhibits a prevailing globalization-plus effect on trade union den-sity and wage bargaining. In sum, our analysis lends plausibility to thedetractors of European social policy and the claim that European integrationis essentially market driven. Corporatism in the labor market, along with thepossibility of market-correcting intervention, is declining fast among EUcountries, faster than elsewhere. We found no evidence that labor confedera-tions in the EU are any more capable of coordination across national bound-aries within the EU ambit than outside it. Employees desert national laborunions everywhere, indeed more so within than outside the EU. Europeanintegration does not offer trade unions and their government political optionsjustifying the preservation of social corporatism at the national level.

ORGANIZATION OF THE CAPITAL MARKET

Recent research has shown that capital markets, like labor markets, can bemore or less corporatist (Deeg, 1998; Verdier, 2000b). A corporatist capitalmarket is one in which the interests of various borrowers (savers are neverorganized) are organized and articulated by various centralized institutions.Two types of borrowers compete for cash in capital markets—small- andmedium-sized enterprises, which do not enjoy sufficient visibility to betraded on the market, and large enterprises, which do possess that visibility.These groups are not directly organized into confederations, but their respec-tive bankers are. The bankers for large firms are the large center banks, head-quartered in the national financial center and engaged in fierce competitionwith each other. The bankers for the small- and medium-sized companies, incontrast, are typically sheltered from the competition of the large banks.Their identities vary according to country: In Germany, Austria, Italy, Swit-zerland, and the Scandinavian countries especially, small firms bank with thenonprofit sector, which is composed of the savings banks, cooperative societ-ies, and local banks controlled by local governments. In the United States, theonly country that still allows local governments to charter for-profit banks,small firms also bank with locally chartered for-profit country banks. In




France, Belgium, New Zealand, and the Netherlands, the small borrowers’main banker is (or was) the state credit sector, which includes all the special-ized credit facilities that enjoy state borrowing privileges.12 The relative mar-ket share of each sector varies greatly across countries: In 1990, the competi-tive sector represented 92% of all banking assets in Australia but only 27 % inGermany; the state sector captured 25% of French banking assets but wasnonexistent in Ireland, Sweden, and Switzerland.

Each banking sector in each country is organized in a national trade asso-ciation, whose role is to ensure that the rules of coexistence between sectorslaid down by the central government agencies are not disadvantageous to itsown sector. Unsurprisingly, these sectors hold conflicting regulatory prefer-ences: The large banks favor market mechanisms, whereas nonprofit, local,and state banks favor, indeed need, regulatory protection from the centerbanks.

Capital markets have been greatly affected by financial globalization. Dereg-ulation has caused an increase in competition, forcing banks to concentrateand shift away from lending toward market activities.13 The Basle agreementon capital-assets ratios, one of the few instances of voluntarism in the domainof financial globalization, forced banks throughout the world to strengthentheir solvability. Although the impact of financial globalization is much dis-cussed, that of Europeanization seems nonexistent. Banking and financialregulation has received a lot of attention from the council and the commis-sion, especially in the early 1980s.14 Yet, of the few studies that have lookedfor a European specificity, none has found any. Firms and banks offer as muchdiversity in Europe as outside Europe (Cerasi, Chizzolini, & Ivaldi, 1998).

We argue that the effect of Europeanization is a priori indeterminate; itdepends on which of the market or voluntarist components prevail. Integra-tion through market deregulation is likely to favor the market-oriented,for-profit sector. Although it may lead to greater concentration in that sector,it would also yield a decentralization of interest representation. This isbecause the interests of each class of borrower would no longer be allocatedthrough summit negotiations, involving government regulators along withrepresentatives of the various banking sectors but would be decided by com-petition among a handful of oligopolies. Voluntarist integration, in contrast,is likely to keep intact existing mechanisms for the regulation of credit (orreproduce them at the supranational level in the European Ecofin commit-tee), and thus freeze the existing allocation of market shares between sectors.


12. On the state sector, see Verdier (2000a).13. On concentration, see T. Porter (1993) and Cerasi (1996); on securitization, see Thomp-

son (1995).14. See contributions by and to Underhill (1997).



Therefore, if financial globalization favors concentration and market orienta-tion, it should correlate with a redistribution of market shares away from thesheltered sectors (the local nonprofit, country, and state banks) toward theunsheltered sector (the center banks). If membership in the EU makes a dif-ference, the impact should be significantly distinct in the case of the sin-gle-market countries.

We ran the tests on two sectors, center and state, using respective marketshares calculated in total assets. The coefficient on the lagged dependentvariable being close to one, we use the cointegration model. We used onlytwo measures of globalization—nominal capital openness and trade depend-ence— because various measures of cross-border capital flows variablesyielded no results whatsoever.15 The findings support the two sides of the nullhypothesis (see Table 3). First, long-term increases in globalization correlatewith long-term increases in center banks’ market share and long-term declinein state banks’ market share. Second, European integration makes no differ-ence whatsoever.

Regressions 1, 2, and 3 have a common structure. The long-term impact ofthe global variable on non-EU countries, which can be read from β2γ3, is cor-rectly signed and significant—positive for center banks, negative for statebanks. However, the coefficient on the long-term interaction term (β2γ5) isinsignificant, suggesting an identical impact within and outside the EU.Regression 4 also fails to show a difference between the two groups, detect-ing no impact of globalization anywhere.

These results clearly suggest that the European capital market is an inte-gral component of the global market. Market reform took place among EUcountries at the same speed as among non-EU countries. We found no traceof Europeanization, let alone voluntarism, in financial markets. Furthermore,aside from the isolated negative result of Regression 4, globalization doeshave a long-term deregulatory impact on interest organization among finan-cial institutions.

ELECTORAL TURNOUT AND VOLATILITY

As markets thus become more important in (re)distributing income, polit-ical parties should become relatively less so. One should expect rational indi-viduals to reallocate some of their wealth-maximizing effort away from poli-tics toward markets. Loyalty to political parties should decline, and the


15. The extreme volatility of annual cross-border flows data considerably reduce their effi-ciency as a measure of financial globalization. Stock data are steadier, but time series are tooshort to be used in a time-series cross section.



Tab

le 3

Ban

king

Sec

tors

Mar

ket S

hare

s (c

oint

egra

tion

mod

el w

ith

fixe

d ef

fect

s, g

ener

aliz

ed le

ast s

quar

es e

stim

ates

, and

pan

el-c

orre

cted

sta

ndar

d er

rors

)

Dep

ende

nt V

aria

ble

∆Cen

ter

Ban

ks’

Mar

ket S

hare

i, t

∆Sta

te B

anks

’ M

arke

t Sha

rei,

t

12

34

Cen

ter

bank

s’ m

arke

t sha

rei,

t – 1

β 2–0

.03

(–2.

30)a

–0.5

9(–

3.63

)b

Stat

e ba

nks’

mar

ket s

hare

i, t –

1β 2

–0.0

3(–

2.91

)b–0

.04

(–2.

88)b

∆Nom

inal

fin

anci

al o

penn

ess i

, tβ 3

0.00

04(0

.27)

0.00

03(0

.22)

∆Tra

de d

epen

denc

e i, t

β 30.

02(1

.73)

–0.0

03(–

0.26

)∆E

U m

embe

rshi

p i, t

β 4–0

.02

(1.2

9)–0

.02

(–0.

88)

–0.0

15(–

0.98

)0.

007

(0.5

6)∆N

omin

al f

inan

cial

ope

nnes

s i, t

*EU

mem

bers

hip i

, tβ 5

–0.0

02(–

0.91

)0.

001

(0.8

6)∆T

rade

dep

ende

nce i

, t*E

U m

embe

rshi

p i, t

β 50.

33(1

.93)

–0.1

1(–

0.80

)N

omin

al f

inan

cial

ope

nnes

s i, t

– 1

β 2γ 3

0.00

2(3

.46)

b–0

.000

9(–

2.48

)a

Tra

de d

epen

denc

e i, t

– 1

β 2γ 3

0.02

(3.4

8)b

–0.0

06(–

1.53

)E

U m

embe

rshi

p i, t

– 1

β 2γ 4

0.00

7(0

.87)

–0.0

06(1

.25)

–0.0

1(–

1.95

)0.

001

(0.3

9)N

omin

al f

inan

cial

ope

nnes

s i, t

– 1

*EU

mem

bers

hip i

, t –

1β 2

γ 5–0

.000

8(–

0.92

)0.

001

(1.9

2)T

rade

dep

ende

nce i

, t –

1*E

U m

embe

rshi

p i, t

– 1

β 2γ 5

–0.0

08(–

1.39

)–0

.002

(–0.

33)

Geo

polit

ical

Eur

ope i

(dum

my)

0.02

(3.0

9)b

c–0

.003

(–0.

64)

c

Dat

a br

eaks

(du

mm

ies)

Inte

rcep

t–0

.01

(–1.

42)

0.06

5(4

.12)

b0.

02(2

.69)

a–0

.008

(–0.

98)

β 3+

β 5–0

.001

(–0.

88)

0.02

(1.7

3)0.

002

(1.2

9)–0

.003

(–0.

26)

β 2(γ

3+

γ 5)

0.00

09(1

.20)

0.01

(2.1

6)a

0.00

04(0

.60)

–0.0

08(–

1.64

)

(con

tinu

ed)

247



Num

ber

of o

bser

vatio

ns53

243

753

243

7N

umbe

r of

gro

ups

13d

13d

13d

13d

Ave

rage

num

ber

of ti

me

peri

ods

41e

33f

41e

33f

Log

like

lihoo

d17

19.6

9814

19.5

2718

43.2

5715

41.9

28Pr

obab

ility

(ch

i-sq

uare

)0.

0000

0.00

000.

0000

0.00

00

Not

e:E

U=

Eur

opea

nU

nion

.The

depe

nden

tvar

iabl

esar

eth

efi

rstd

iffe

renc

esof

the

resp

ectiv

em

arke

tsha

reso

fcen

tera

ndst

ate

bank

s.B

oth

typo

logy

and

data

are

from

Ver

dier

(200

0a).

Val

ueso

fzst

atis

ticsa

regi

ven

inpa

rent

hese

s.A

llG

reek

sym

bols

refe

rto

Equ

atio

n4

inth

ete

xt.T

heun

itof

obse

rvat

ion

isth

eco

untr

yye

ar.

a.z

valu

e is

sig

nifi

cant

at t

he 5

% le

vel.

b.z

valu

e is

sig

nifi

cant

at t

he 1

% le

vel.

c. D

ropp

ed.

d.A

ustr

ia,B

elgi

um-L

uxem

bour

g,D

enm

ark,

Finl

and,

Fran

ce,G

erm

any,

Gre

ece,

Irel

and,

Ital

y,N

orw

ay,S

wed

en,t

heU

nite

dK

ingd

om,a

ndth

eU

nite

dSt

ates

.e.

195

0 to

199

5, w

ith m

issi

ng y

ears

.f.

196

0 to

199

5, w

ith m

issi

ng y

ears

.

Tab

le 3

Con

tinue

d

Dep

ende

nt V

aria

ble

∆Cen

ter

Ban

ks’

Mar

ket S

hare

i, t

∆Sta

te B

anks

’ M

arke

t Sha

rei,

t

12

34

248



floating vote should increase. Europeanization could have a similar effect onaccount of its deregulatory component. But it could also act in the oppositedirection, mobilizing parties and electorates around competing projects ofEuropean integration, on account of its voluntarist component. The mobili-zation we have in mind need not involve the European Parliament, membersof the European Parliament, or European elections. The electoral literaturesees European elections as opinion polls, “second-order national elections,”or tests of the incumbent’s performance, characterized by low stakes and lowturnout (see Eijk, Franklin, & Marsh, 1996; Franklin, Marsh, & McLaren,1994, Reif & Schmitt, 1980). All that is required for the voluntarist leg to tripthe trend toward voters’ disaffection is that European coordination be seen bynational parties and electorates as a plausible alternative to global marketallocation.

We test two hypotheses: Europeanization preserves voter turnout from themarket-engineered disaffection with politics, and Europeanization lowerselectoral volatility. We begin with voter turnout, measured as the percentageof electorate casting valid votes at parliamentary elections (presidential in theUnited States). For years without elections, we use the score of the mostrecent election. Data are available for 18 countries over 38 years(1955-1993). We use the all-lagged model because the lagged dependentvariable has a coefficient lower than 0.90 and the lagged independent vari-ables make a statistically significant difference.16 The single regression ofTable 4 reports the impact of nominal capital openness (the trade variableproduced coefficients with insignificant coefficients, although with identicalsigns). The fixed effect dummies, which we use throughout, are particularlywelcome here in light of the multiple national idiosyncrasies of a legal andcultural nature affecting voter turnout. We also include a measure of risingaffluence in the regression to capture the common idea that embourgeoise-ment demobilizes working-class voters.

The findings, reported in Table 4, point to a clear null effect: A rise infinancial globalization is associated with a drop in voter turnout, but thiseffect is not significantly different within and outside the EU (γ3 is negativeand significant but γ4, γ5, and γ3 + γ5 are not significant; none of the corre-sponding β’s are significant either). Note that wealth has the expected nega-tive impact on voter turnout, as does being a European country, a result thatcan be explained by the fact that European countries used to have higher-than-average turnout rates and have been the most dramatically affected by thetrend toward lower turnout.


16. The likelihood test ratio between the all-lagged and the lagged-dependent variable mod-els allows us to reject the hypothesis that the two models yield similar results at the 1% confi-dence level.



Voter turnout is only part of the story. Are EU voters, those who still vote,also forsaking past, or not developing new, partisan loyalties? Answeringthis question raises a difficult measuring problem. Standard measures ofelectoral volatility do not easily reveal trends. Aggregating variations fromone election to the next in each party’s score, these measures are erratic—thescore is high when the incumbent loses, small when it wins. The infrequencyof elections (one every 5 years on average) makes the use of period averages


Table 4Voter Turnout (all-lagged model with fixed effects, generalized least squares estimates, andpanel-corrected standard errors)

Dependent Variable:Percentage

of ElectorateCasting Valid Votes

Turnouti, t – 1 β2 0.83 (36.20)b

Nominal financial opennessi, t β3 0.42 (1.85)EU membershipi, t β4 3.88 (1.32)Nominal financial opennessi, t*EU membershipi, t β5 –0.38 (–1.21)Gross domestic product per capitai, t 1.21 (1.45)Nominal financial opennessi, t – 1 γ3 –0.49 (2.19)a

EU membershipi, t – 1 γ4 –4.22 (1.42)Nominal financial opennessi, t – 1*EU membershipi, t – 1 γ5 0.48 (1.51)Gross domestic product per capitai, t – 1 –1.68 (–2.00)a

Geopolitical Europei (dummy) –1.94 (–2.59)b

Intercept 20.39 (7.74)b

β3 + β5 0.04 (0.18)γ3 + γ5 –0.02 (–0.07)

Number of observations 594Number of groups 18c

Number of time periods 33d

Log likelihood –938.9915Probability (chi-square) 0.0000

Note: EU = European Union. The dependent variable is the percentage of the electorate castingvalid votes. The source is Mackie and Rose (1991, 1997); the data were compiled by Swank(1998). All the multiplicative variables are the product of their unstandardized components.Values of z statistics are given in parentheses. All Greek symbols refer to Equation 5 in the text.The unit of observation is the country year.a. z value is significant at the 5% level.b. z value is significant at the 1% level.c. Australia, Austria, Belgium-Luxembourg, Canada, Denmark, Finland, France, Germany, Ire-land, Italy, Japan, the Netherlands, New Zealand, Norway, Switzerland, Sweden, the UnitedKingdom, and the United States.d. 1960-1993.



extremely sensitive to the choice of the cutting point and to the occurrence ofnew elections.

Rather than measuring electoral volatility directly, we focus instead on itsconsequences for government stability. We use an index developed byVerdier (1995). For each government, each year, we calculate a position on aleft-right continuum. This number is a weighted average of the relative posi-tion of the parties forming the government coalition. Each party’s relativeposition, in turn, is determined by how much it scored at the last election.This way of positioning parties requires no outsider’s judgment on the par-ties’ ideological orientation except for how parties are rank-ordered on aleft-right continuum (we used Leonard & Natkiel, 1986, for the ranking).Consider, for instance, a simplified system of two parties, left and right, eachpolling half of the votes. The left party position on the 0-1 axis (0 for extremeleft, 1 for extreme right) is its median voter—the middle of the space it occu-pies on the continuum—that is, 1/4. The right party being to the right of theleft party, its position is 1/2 (the position of the right party’s most leftist voter)plus 1/4 (the distance between the party’s most leftist voter and its medianvoter), that is, 3/4. Were the two parties to govern in a grand coalition, thegovernment position would be the simple average of their respective medianvoters (1/4 + 3/4 = 1/2) each year for the duration of the government or thelegislature, whichever ends first. Were the two parties of different electoralsize, we would weigh their presence in the government by the size of theirrespective electoral shares. Once we have generated a number summarizingthe government position for each year, we calculate its standard deviationover two different periods (1950-1979 and 1980-1996).17 The differencebetween the two standard deviations measures the change in political volatil-ity between the two periods. The technical presentation of the variable is leftto a footnote.18

Because we have only two data points for the dependent variable, we usethe cross-sectional change model. Globalization is measured by foreigndirect investment stocks (the foreign direct investment–flow measurereached comparable yet outlier-sensitive results, whereas the trade and nomi-nal financial openness variables displayed no association whatsoever). TheSwiss observation is an outlier, reflecting its strong international financial


17. The two periods were chosen to fit data availability for the independent variable.18. The dependent variable is the first-order difference between the average standard devia-

tion of the government partisan orientation for the period 1950-1979 and that for the period1980-1996. The index was calculated by first assigning to each party a positive integer i (i ∈ Z+)according to the ordinal pattern: 1 to the most leftist party, 2 to the next to the most leftist, and soforth until all parties are ordinally arranged on a left-right axis (we excluded unclassifiable otherparties but made sure that the category “other” always remained below 5%). Each i was then



specialization, out of line with the rest of the economy. Switzerland is alsoruled by a stable coalition, making regular elections (as opposed to refer-enda) less prone to convey changes in electoral behavior than in other coun-tries. As previously, we control for the initial value of the dependent variableand for being part of the European region at large. We also control for thegrowth in affluence, although the sign of the effect is a priori indetermi-nate—rising affluence lessens loyalty but also makes voters less likely tooust incumbents (the main source of instability).

The results, presented in Table 5, first point to a case of conditional con-vergence: That is, countries with much political volatility in the past exhibitless today and vice versa. Second, there is no significant sui generis effect (β4

is not significant) but a clear case of globalization-minus. An increase in thefinancial globalization variable is associated with an increase in volatility innon-EU countries (β3 is significantly greater than zero) but not in EU coun-tries (β5 is significant and of opposite sign) where there is no impact (β3 + β5 isinsignificant). EU members were, on average, insulated from the effects ofincreasing financial exposure that elsewhere were associated with higherelectoral volatility. The results thus unambiguously point to the impact of thevoluntarist component of Europeanization. Financial liberalization is notassociated with the dealignment of EU voters the way it is with non-EU vot-ers. We do not observe a clear effect of the control variables—the Europeangeopolitical dummy and growth in affluence.

This is not a truly surprising result. It reflects the fact that irrespective ofwhether European integration is driven by Adam Smith’s “invisible hand” orby government, there is a political center that is there to take the praise (oralternatively, the blame) for most of what happens in relation to integration.It is less plausible for EU voters to sacrifice politics to markets in the face ofgreater market openness than it is for non-EU voters. The simultaneous inte-


assigned a positive real number pi (pi ∈ R: 0 < pi < 1) to reflect each party’s share of the electorateaccording to the formula

pr

rii

jj

i

=

+

=

−

∑2 0

1

,

with ri party i’s percentage of votes and j an integer representing the parties on the left of i, with0 ≤ j < i and rj = 0 if j = 0.

Last, the government orientation index pg (pg ∈ R: 0 < pg < 1) was calculated by averagingthe pis for those parties in government at any point during the given period:

( )pT

p Gg it iti

N

t

T

=

==

∑∑1

11

* ,

with Git = [0,1], depending on whether party i at time t is part of the government (Git = 1) or not(Git = 0), T = the number of years, and N = the number of parties.



gration of markets and governments in Europe maintains voters’ loyalty totheir political parties. Because it is quite plausible that the lower turnout dis-proportionately affects voters without partisan loyalty, this would explain thediscrepancy between turnout, indiscriminately lower, and volatility, loweroutside the EU. Voters seem to expect something to come out of thevoluntarist component of Europeanization.

STATE DECENTRALIZATION

Local governments constitute another important level of interest articula-tion. How is their power affected by globalization and Europeanization?There is an emerging consensus across disciplines that modern production


Table 5Change in Electoral Volatility Between the 1950-1979 and 1980-1996 Periods (cross-sectionalchange model with ordinary least squares estimates)

Dependent Variable:∆Volatilityt

Volatilityt – 1(1950-1979 average) β2 –1.12 (–4.49)b

EU12 β4 0.08 (1.42)∆FDI stockst (1980-1995) β3 0.005 (2.96)a

∆FDI stockst*EU12 β5 –0.005 (–2.37)a

Gross domestic product per capita growtht (1980-1995) 0.000 (1.43)Geopolitical Europe (dummy) 0.009 (0.22)Intercept 0.08 (0.12)

β3 + β5 –0.0003 (–0.19)Adjusted R-squared 0.52Number of observations 18c

Note: The dependent variable is the difference between the volatility ratio defined in Note 18calculated over the 1950-1979 period and that same ratio for the period 1980-1996. Sources forvolatility include Mackie and Rose (1991, 1997) and Woldendorp, Keman, and Gudge (1993,1998). The lagged dependent variable is the average for the first period. ∆FDI stocks is thefirst-order change over the 1980-1995 period of the ratio (total direct investment stocks in + totaldirect investment stocks abroad)/gross domestic product; source is United Nations (1995).EU12 is coded 1 for the 12 EC members of the late 1980s and 0 for all others. Values of t statisticsare given in parentheses. All βs refer to Equations 1-3 in the text.a. t value is significant at the 5% level.b. t value is significant at the 1% level.c. Australia, Austria, Belgium-Luxembourg, Canada, Denmark, Finland, France, Germany,Greece, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Sweden, the United King-dom, and the United States.



has a territorial, local dimension, reinforcing economic disparities betweendistricts. M. E. Porter (1990) writes that “more open global competitionmakes the home base more, not less, important” (p. 58). Krugman (1991)shows that the decline in transportation costs makes firms want to agglomer-ate. Students of flexible specialization stress the importance of geographicalconcentration in attracting talented people and the role of proximity in theproduction of learning and innovation (Sabel, 1989; Saxenian, 1994; Storper,1995). Amin and Thrift (1992) write that “the world economy may havebecome decentralized, but it is not necessarily becoming decentered” (p. 576).Economies of agglomeration have severe redistributional consequences forlocal districts. Those with an already dense industrial base may see it furtherreinforced, whereas those with a weak one risk losing what they have, andthose without any might remain barren. The most favored areas are thoselocated around large metropolitan regions (Tödtling, 1994). Less favored arethe industrial districts located at the periphery. The upshot is an end to thepostwar consensus. The losers of globalization want more territorial transfersand thus more tax revenues redirected to the central government, whereas thewinners resist any further centralization, or even ask for less of it.

Like globalization, market integration within the EU causes a need for ter-ritorial transfers aiming at a reduction of income disparities. An essential dif-ference, however, is that EU members have set up a common budget to whichthey all contribute according to means and from which they draw accordingto needs, with the result that some members are net contributors whereas oth-ers are net beneficiaries. Another difference is that these transfers have adecentralizing impact on state structures. About half of the so-called struc-tural funds that are distributed by Brussels are earmarked for local govern-ments, thereby forcing centralized states to revitalize local government.France, Spain, and Britain, among others, have recently implemented decen-tralizing reforms. The rationale for such decentralization, which in the late1980s went hand in hand with a shift of monitoring power toward the com-mission, hides no antigovernment motive but can be studied as a commit-ment mechanism that governments resorted to in order to allay mutual suspi-cions of waste and corruption (Tsoukalis, 1993).

Therefore, whereas market integration should have the universal effect ofincreasing central government’s control over the flow of tax funds, politicalintegration among EU countries should weaken it. One can assess the relativeimportance of the market and voluntarist components of European integra-tion by tracking which of the centralizing or decentralizing effects is empiri-cally more pronounced.

Our measure of centralization is the ratio of central government receipts togeneral (central and local) government receipts. Although available on an




annual basis, the time series are plagued with multiple breaks, considerablyweakening efficiency. Our attempts to run pooled models bore no fruit, yield-ing contradicting and unintelligible results. We use instead the cross-sec-tional change model, a simpler and more manageable model. The dependentvariable is the difference in state centralization between the 1994 and 1970values. The base model includes the 1970 value of this variable and the Euro-pean geopolitical dummy as control variables.

Table 6 reports results for the nominal financial openness variableonly—none of the other measures of globalization test significant. Regres-sion 1 displays the distinctive signs of a null effect—β3 is positive and signifi-


Table 6Change in State Centralization, 1970-1994 (cross-sectional change model with ordinary leastsquares estimates)

Dependent Variable:∆State centralizationt

1 2

State centralization, 1970 β2 –0.17 (–1.02) –0.14 (–1.14)∆Nominal financial openness,

1973-1993 β3 0.03 (2.18)a 0.0256 (2.37)a

EU12 β4 0.13 (1.72)∆Nominal financial openness*EU12 β5 –0.023 (–1.61)Structural funds, 1990 β4 0.0028 (2.49)a

∆Nominal financial openness*Structural funds β5 –0.00042 (–2.34)a

Geopolitical Europe (dummy) 0.006 (0.15) 0.02 (0.56)Intercept –0.03 (–0.28) –0.02 (–0.30)

β3 + β5 0.009 (1.20)Adjusted R-squared 0.25 0.31Root MSE 0.05411 0.04929Number of observations 19c 19c

Note: The dependent variable is the first-order change over the 1970-1994 period of the ratiocentral government receipts/(central and local government receipts – transfers from central tolocal governments); the source is OECD (National Accounts; see Note 6). Structural funds is avariable equal to per capita receipts in ECU of EC structural funds (regional, social, and agricul-tural) in 1990 for the 12 European Union countries and coded 0 for all others (Commission of theEuropean Communities, 1994). Values of t statistics are given in parentheses. All βs refer toEquations 1-3 in the text.a. t value is significant at the 5% level.b. t value is significant at the 1% level.c. Australia, Austria, Belgium-Luxembourg, Canada, Finland, France, Germany, Greece, Ire-land, Italy, Japan, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, the UnitedKingdom, and the United States.



cant, whereas β5 and β3 + β5 are insignificant. We first consider the globaliza-tion effect. It has two dimensions. First, an increase in nominal financialopenness is positively related with a centralizing impact on states (β3 is posi-tive). This is a result in line with the mainstream economic literature on econ-omies of agglomeration. Second, this centralizing effect seems absent inEuropean countries (“seems” because although negative, β5 in Regression 1is significant only at the 13% level). As suggested above, a possible causemight be the decentralizing effect of the structural funds policy. We examinethis hypothesis in Regression 2. Rather than using the dichotomous “EU12”dummy (EU = 1, non-EU = 0), we try a semi-dummy variable that takes intoaccount the varying importance of the structural funds for each EU member.This second variable takes, for non-EU countries, a zero value and, for EUcountries, a positive, continuous value representing the per capita receipt ofEC structural funds in 1990 (the value varies between ECU10 for the Nether-lands and ECU209 for Ireland). Unsurprisingly, the results are similar to,although sharper than, those in the previous regression: β3 is positive and sig-nificant, and although we cannot calculate a fixed value for the globalizationcoefficient in the case of EU countries because that coefficient (β3 + β5

*Struct Funds) varies with the structural funds variable, β5 is negative andsignificant, suggesting that structural funds either cancel or reverse the over-all effect of globalization. This is a case of globalization-minus.

But the fact that the EU variable is now a real variable with respect toEuropean countries allows us to say more about why European countries dif-fer from other OECD countries. The coefficient for the financial globaliza-tion variable can be rewritten as

(0.0256 – [0.00042 * Structural]).

From this, it is clear that the impact of financial globalization is positivefor low values of structural funds, whereas it turns negative for sufficientlyhigh values. The threshold, which is equal to 60.95 (=0.0256/0.00042), iscrossed by four countries—Spain, Portugal, Greece, and Ireland. Put simply,an increase in financial openness has a centralizing impact on states except inEuropean countries receiving substantial structural funds, where this effect isoffset.

The globalization-minus effect exists in concurrence with a positive suigeneris effect—β4 is significantly greater than zero. This suggests that at zeroor low values of the financial variable, the structural funds policy has a cen-tralizing effect on EU countries. Indeed, the effect of structural funds on cen-tralization can be rewritten as

(0.0028 – [0.00042 * ∆Nom fin op]),




suggesting that structural funds have a centralizing impact for increases innominal financial openness inferior to 6.67 (=0.0028/0.00042) but a decen-tralizing impact for values beyond it. Only two countries fall in the lattercategory—Spain and Portugal.19

These two seemingly contrary results—one says that a high value of struc-tural funds cushions the otherwise centralizing impact of globalization,whereas the other says that a high value of globalization cushions the other-wise centralizing impact of structural funds—have one claim in common:Only when values of globalization and structural funds are high simulta-neously do we observe decentralization. Both values are high in the case offour countries—Spain, Portugal, Greece, and Ireland. In fact, as shown inFigure 1, there is a general correlation between an increase in nominal finan-cial openness and the importance of structural funds. Fitting a line betweenthe log value of the structural funds variable and the nominal financial open-ness variable yields a t value that is significant at the 3% level. The reason isthat the countries that opened last were also the most backward and thus themost eligible for structural funds.

We conclude that the structural funds policy is associated with decentral-ization. Whereas globalization tends to be generally associated with greatercentralization, the funds reduce centralization in accordance with the sumsinvolved. This is a clear instance of market-correcting, redistributive policy.It testifies to the relocation in Brussels of a centralized decision-making pro-


Figure 1. Structural funds and financial openness.

19. The sui generis effect disappears if one substitutes the measure of European tradedependence for the structural funds variable, suggesting a political rather than market origin.



cess in which governments no longer are the main channels of interest repre-sentation, as testified by their willingness to accept less centralization. Note,however, that the policy has little or no decentralizing impact on the pol-icy-making process of the core countries’ institutions. It is only at very highlevels of geographic redistribution, possible only for small and/or compara-tively backward countries, that the structural funds policy seems to modifythe relative distribution of resources between the central government and thelocal governments.

CONCLUSION

There is a consensus among Europeanists that the integrative spurt of thelast 20 years has been mostly due to the market and only secondarily, if at all,to political will. The first goal of this article was to propose a research designto help us separate the respective manifestations of the two mechanisms. Tothat effect, we hypothesized that a market-driven integration would haveobservable decentralizing effects, making Europeanization synonymouswith globalization, whereas a voluntarist process would have centralizingeffects, distinguishing Europeanization from globalization. We set up aresearch design allowing us to differentiate between the two hypotheseswhile holding constant the additive and interactive effects of globalization.We argued that the market-driven hypothesis would be supported in twocases: if Europeanization adds to globalization (globalization-plus andrevealed globalization) or has effects of its own attributable to market vari-ables. In contrast, the voluntarist hypothesis would be supported in twocases: if European integration cancels or reverses the impact of globalization(globalization-minus) or if it has effects of its own attributable to nonmarketvariables. Although these tests are equally valid for institutional and policyvariables, in this article, we limited our empirical foray to institutional vari-ables—the representation of organized interests in labor markets, capitalmarkets, and the polity.

Equipped with these tools, we then looked for manifestations of the mar-ket and political facets of European integration. As in the rest of the literature,we found no significant instances of political voluntarism in the integrationof factor markets. Our institutional hypothesis, that voluntarism, when any,works to strengthen the interventionist capability of European institutions,found no support in the labor market. Furthermore, trade unions also are notsheltered against the dilution of membership, and neither is the decentraliza-




tion of wage bargaining checked. In fact, in keeping with the faster growingfinancial openness of member economies, we found that corporatism wasdeclining faster within than outside the EU. Likewise, we found no trace ofstate-correcting intervention in EU capital markets. The deregulation ofinternal capital markets proceeded at the same pace within and outside theEuropean single market. This is a case in which European integration seemsto make no difference.

However, we found evidence that market-based integration has so farspared the more political arenas of interest representation—political partiesand local governments. We found that globalization had a general dealigningimpact on the electorate, except in Europe. Although voter turnout seems tohave been negatively affected everywhere, electoral volatility, in contrast, isnot declining in relation to globalization as much within than outside the EU.EU voters have so far been immune, or less vulnerable, to the global call for“exit” from partisan politics, exhibiting instead greater partisan loyalty. Last,we found evidence for political voluntarism in the centrifugal effects of theEU structural funds policy. This effect runs contrary to the consolidatingeffect at the national level that greater economic openness seems to generallyhave on state budgets in response to the rising disparity between localeconomies.

In sum, the overall effect of globalization on interest representation is neg-ative in the labor and capital markets; it demobilizes voters and breaks thesubnational governments’ common front in relation to the political center.The effect of Europeanization on interest representation is equally demobi-lizing in factor markets (actually worse in the labor market) where prospectsfor corporatism seem remote. Absent any centralized system of interest rep-resentation and bargaining, it is unlikely that EU policy in factor markets cantake a path different from that pursued by non-EU governments in responseto the challenge of global market integration.

In contrast, European countries are maintaining a comparatively vibrantsystem of voter and local government representation. Voter representation isnational and intergovernmental, whereas local government representation issupranational. The existence or endurance of these two systems of interestrepresentation is the product of EU institutions and policies. Yet, they mayfeed back on European integration, orienting it in an institutional and policydirection different from that pursued by non-EU countries. Indeed, by nurs-ing or preserving a market-correcting capacity, EU countries are likely to betempted to use it accordingly.




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Daniel Verdier is an associate professor in the Department of Social and Political Sci-ences at the European University Institute, Florence. He is working on a book on the pol-itics of banking and finance in comparative and historical perspective.

Richard Breen is an associate professor in the Department of Social and Political Sci-ences at the European University Institute, Florence, and professor of sociology atNuffield College, Oxford University. His current research project is on national patternsof social mobility.




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