NEGOTIATING CHANGE:

APPROACHES TO AND THE DISTRIBUTIONAL IMPLICATIONS

OF SOCIAL WELFARE AND ECONOMIC REFORM

A DISSERTATION

SUBMITTED TO THE DEPARTMENT OF POLITICAL SCIENCE

AND THE COMMITTEE ON GRADUATE STUDIES

OF STANFORD UNIVERSITY

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS

FOR THE DEGREE OF

DOCTOR OF PHILOSOPHY

Carol Diane St. Louis

March 2011

http://creativecommons.org/licenses/by-nc/3.0/us/

This dissertation is online at: http://purl.stanford.edu/rw793bx2256

© 2011 by Carol Diane St Louis. All Rights Reserved.

Re-distributed by Stanford University under license with the author.

This work is licensed under a Creative Commons Attribution-Noncommercial 3.0 United States License.

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I certify that I have read this dissertation and that, in my opinion, it is fully adequatein scope and quality as a dissertation for the degree of Doctor of Philosophy.

Isabela Mares, Primary Adviser

I certify that I have read this dissertation and that, in my opinion, it is fully adequatein scope and quality as a dissertation for the degree of Doctor of Philosophy.

Terry Karl, Co-Adviser

I certify that I have read this dissertation and that, in my opinion, it is fully adequatein scope and quality as a dissertation for the degree of Doctor of Philosophy.

David Laitin

I certify that I have read this dissertation and that, in my opinion, it is fully adequatein scope and quality as a dissertation for the degree of Doctor of Philosophy.

Jonathan Rodden

Approved for the Stanford University Committee on Graduate Studies.

Patricia J. Gumport, Vice Provost Graduate Education

This signature page was generated electronically upon submission of this dissertation in electronic format. An original signed hard copy of the signature page is on file inUniversity Archives.

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ABSTRACT Throughout the last decades, advanced industrial democracies have been confronted by the long-term pressures of globalisation, rising and persistent unemployment, ageing populations, rising health care costs, and the severe, but shorter-term shocks of recession, currency runs, and other troubles. The international political economy literature is rife with observations that states are under increasing pressure to reduce taxes and to trim their budgets, and recent austerity efforts in Europe and the United States support the view that governments are responding to these intensifying economic and political incentives by constraining their spending. Simultaneously, governments encounter political pressures to maintain or expand their social welfare safety nets in order to meet the needs of their most vulnerable populations – the unemployed and underemployed, the sick and disabled, pensioners, and the poor. Despite these common pressures, there has been a great degree of divergence over the last decades. Variation endures in terms of the aggregate levels of taxation and expenditures and the distribution of costs and benefits among the citizenry. Reforms have differed in regard to whether they are approached in a confrontational manner by the government alone or in consensual, negotiated process that includes the parliamentary opposition, trade unions, and employers’ associations. Some painful reforms have been met with massive strikes and protests, while other painful reforms have been accepted with relative equanimity. Finally, there has been a great deal of variance in the ability of various governments to adopt and implement their reform packages and to survive the potential backlash in response to these reforms. Considering the cases of France, Italy, and Germany during the 1990s, this dissertation sheds new light on the factors determining the approach to reform, the distribution of costs and benefits, and the likelihood that governments will succeed in their attempts to adopt and implement reforms. Chapter 1 introduces the core questions, presents a brief overview of the theory, and explains the methodology and case selection. Chapter 2 develops a theoretical framework for understanding: (a) the factors that lead governments to adopt a particular approach to a reform, (b) the role that partisanship plays in determining the distributional implications of reform, (c) the effect that the approach and the distributional implications of the reform have upon how the parliamentary opposition, the social partners, and the public respond to the reform, and (d) the role that response plays in determining the ultimate fate of reform – and, in some cases, the fate of that government. Chapter 3 considers the experiences of France, exploring the theory’s ability to explain a case of a typical state facing conflicting economic and political pressures to reform its economic, fiscal, and social welfare policies. Chapter 4 tests the theory’s applicability to Italy, a country undergoing a particularly high level of economic and political stress. Chapter 5 focuses upon the apparently deviant case of Germany, where both the reform approach and the distributional implications of the reform seem to run counter to the theory’s predictions. Deep examination of the role of party factions and shifts in the balance of power within the governing coalition reveals the importance of considering the preferences of the reform leadership rather than the coalition as a whole in order to generate accurate predictions and interpretations. Chapter 6 concludes with an overview of generalisable conclusions and future research directions.

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ACKNOWLEDGEMENTS No dissertation is the product of the author alone. I am immeasurably indebted to a vast number of people and institutions that provided me with the personal, intellectual, and financial support to pursue and complete this project. An easy to place to begin the acknowledgements is with my committee. I benefited greatly from Isabela Mares’ insights into European social welfare policy, which inspired me as I first started my plunge into the topic. I am also immensely grateful for her playing an instrumental role in setting me on my way along the roads of Europe for field research. Terry Karl provided me with an unending stream of positive reinforcement and moral support, and I am profoundly in her debt for her helping me to understand where the project was going without ever imposing a particular perspective. Heartfelt thanks go to David Laitin and Jonathan Rodden for asking interesting questions that made me think and stretch beyond my preconceptions. Graduate school and writing a dissertation can be a frustrating process, but first in Stanford’s classrooms and conference rooms and then in diverse locations across the world, Lou Ayala, Anu Kulkarni, Erin Jenne, and Marie-Joëlle Zahar have been there with whatever was needed – an ear, a shoulder, a spare room and bed, dinner, wine, and food for thought. I adore you all. Immense thanks go to Ora Hurd, Jeanette Lee-Oderman, Judit Sarossy, and Eliana Vásquez of the Stanford University Political Science Department for their administrative skills, their logistical support, and most especially their open doors and warm hearts. Immeasurable help during the big push to write the dissertation was provided by Laura Thal, the counsellors, and the other participants in the Humanities Writing Center’s Dissertation Bootcamp, as well as by the Office of the Vice Provost of Graduate Education for sponsoring the HWC’s wonderful services. I received financial support from a number of sources during my time as a doctoral student. Without funds from Stanford’s University Doctoral Fellowship, the Littlefield International Graduate Fellowship from the Institute for International Studies at Stanford University, the German Academic Exchange Service (Deutscher Akademischer Austauschdienst, DAAD), and a research position with the Wissenschaftszentrum-Berlin für Sozialforschung (funded by the Hans-Böckler-Stiftung), this dissertation would never have been written. One of the greatest pleasures of this project was working with other researchers and academics who were fascinated by the interplay of economics and European politics. The Wissenschaftszentrum Berlin für Sozialforschung (WZB) provided me with an office, research facilities, and a vibrant intellectual atmosphere that I have never stopped missing. I thank David Soskice and Bob Hancké for allowing me to join your research project on the political economy of the Economic Monetary Union and for being my impromptu mentors during my time in Europe. I learned more from you than you’ll ever know. My colleagues and friends from Berlin – Lutz Engelhardt, Robert Fannion, Joe Foudy, Alexandra Hennessy, Kathleen Kollewe, and Mark Vail – made my time there incredibly memorable, instructive, and enjoyable. (Hmm….. I think we need to plan a reunion!) Last, but not least the logistical support and administrative skills of the WZB’s Ilona Köhler, Hannelore Minzlaff, and Christoph Albrecht were invaluable in helping me negotiate German bureaucracy.

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Terry Cole, Michael Penn, and Terry Moe provided welcome encouragement and excellent advice on the trick to finishing a dissertation. I only wish that I had internalised that advice sooner. Particular thanks go to Anu Kulkarni, RobertFannion, Mark Vail, and Shaun Deacon, who had the patience to read my unending drafts of the dissertation, the fortitude to give feedback, and the forbearance to not be too sharp-tongued about its many problems. I am immensely grateful to you for willingness to read my work and to provide apt criticism, useful suggestions, and encouragement. Finally, I thank my parents, William and Judith St. Louis, my grandmother, Evelyn St. Louis, my friends who had the wisdom to avoid academia (and the restraint not to tell me to stop whinging and just flee it), and Furby for lending me support, unending patience, and a sympathetic ear.

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TABLE OF CONTENTS

Abstract v

Acknowledgements vii

List of Tables xi

List of Figures xii

List of Abbreviations xiii

CHAPTER 1 INTRODUCTION 1

CHAPTER 2 THEORISING REFORM 17

CHAPTER 3 FRANCE: EXPERIENCES WITH AUSTÉRITÉ 59

CHAPTER 4 ITALY: THE QUEST FOR RISANAMENTO 111

CHAPTER 5 GERMANY: THE POST-UNIFICATION HANGOVER 165

CHAPTER 6 CONCLUSIONS: CRISES RECUR (OR AUSTERITY IS THE NEW BLACK) 249

References 271

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LIST OF TABLES

Table 1-1 The Cases – Countries and Governments 9

3-1 Government Strength and Predictions Regarding Reform Approach in France

73

3-2 Government Strength, Leadership Style, & Revised Predictions for France

74

3-3 Parties in Government and Political Orientation in France 75

3-4 Convergence criteria compliance in France 104

4-1 Government Strength and Predictions Regarding Reform Approach in Italy

128

4-2 Government Strength, Leadership Style, & Revised Predictions Regarding Approach in Italy

129

4-3 Parties in Government and Political Orientation in Italy 131

4-4 Convergence criteria compliance in Italy 155

5-1 Government Strength and Predictions Regarding Reform Approach in Germany

184

5-2 Government Strength, Leadership Style, & Revised Predictions for Germany

186

5-3 Parties in Government and Political Orientation in Germany 188

5-4 Effect of Party Wings on Predicted Policy Orientation in Germany 188

5-5 The Labour Market in the Neue Länder 201

5-6 Contributions-to-Expenditures Ratio for Unemployment & Pensions 202

5-7 Public Transfers to the Neue Länder (1991-1999) 203

5-8 Social Insurance Contribution Rates 207

5-9 Convergence Criteria Compliance in Germany 243

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LIST OF FIGURES

Figure 2-1 International trade (as % of world GDP), 1960-2008 19

2-2 International investment (as a % of world GDP), 1980-2005 19

2-3 Unemployment rates for selected European countries, 1960-2010 22

2-4 Old-age dependency ratio for EU25, 1970, 2010, & 2050 23

2-5 Public pension expenditures (as % of GDP) for selected European countries, 2000 & 2040

23

2-6 National health spending (as a % of GDP) for OECD countries, 1960-2008

24

3-1 Inflation & long-term interest rates in France, 1970-2000 62

3-2 Exchange rate stability in France, 1970-2000 62

3-3 Unemployment rate in France, 1978-2000 63

3-4 Old-age dependency ratio in France, 1990-2050 63

3-5 Budget balance (as % of GDP) in France, 1970-2000 65

3-6 Debt (as % of GDP) in France, 1970-2000 65

4-1 Inflation & long-term interest rates in Italy, 1970-2000 114

4-2 Exchange rate stability in Italy, 1970-2000 114

4-3 Unemployment rate in Italy, 1970-2000 115

4-4 Old-age dependency ratio in Italy, 1960-2050 115

4-5 Budget balance (as % of GDP) in Italy, 1970-2000 116

4-6 Debt (as % of GDP) in Italy, 1970-2000 116

4-7 Evolution of the Italian party system, 1991 – 2001 130

5-1 Unemployment rate in Germany, 1970-2000 171

5-2 Growth rate in Germany, 1970-2000 171

5-3 Budget balance (as % of GDP) in Germany, 1970-2000 172

5-4 Debt (as % of GDP) in Germany, 1970-2000 172

5-5 Growth Rate in Germany, 1988 2000 204

5-6 Unemployment in Eastern and Western Germany, 1991-1997 204

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LIST OF ABBREVIATIONS

AN Alleanza Nazionale (National Alliance)

AMECO Annual Macro-economic database of the European Commission's Directorate General for Economic and Financial Affairs

ARAN Agenzia per la Rappresentanza negoziale delle Pubbliche Amministrazioni (National Agency for Collective Bargaining)

ASS Allocation de Solidarité Spécifique (Specific Solidarity Allowance)

AUD Allocation Unique Dégressive (Single Digressive Allowance)

B90/Grünen Bündnis 90/Die Grünen (Alliance ‘90/Greens)

BDI Bundesverbandes der Deutschen Industrie (Federation of German Industries)

BMA Bundesministerium für Arbeit und Sozialordnung (Federal Ministry of Labour and Social Affairs)

BMF Bundesministerium für Finanzen (Federal Ministry of Finance)

BMGS Bundesministerium für Gesundheit und Soziale Sicherung (Federal Ministry of Health and Social Security)

CDU Christlich Demokratische Union (Christian Democratic Union)

CFDT Confédération Française Démocratique du Travail (French Democratic Confederation of Labour)

CFTC Confédération Française des Travailleurs Chrétiens (French Confederation of Christian Workers)

CGIL Confederazione Generale Italiana del Lavoro (Italian General Confederation of Labour)

CGT Confédération Générale du Travail (General Confederation of Labour)

CISL Confederazione Italiana Sindacati Lavoratori (Confederation of Italian Workers’ Trade Unions)

CMU Couverture Maladie Universelle (Universal Sickness Coverage)

CNAMTS Caisse Nationale d’Assurance-Maladie des Travailleurs Salariés (National Health Insurance Fund for Salaried Workers)

CNPF Conseil National du Patronat Français (National Council of French Employers)

COLA Cost of Living Adjustment

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COMECON Council for Mutual Economic Assistance

CSG Contribution Sociale Généralisée (General Social Contribution)

CSMF Confédération des Syndicats Médicaux Français (Confederation of French Medical Unions)

CSU Christlich-Soziale Union (Christian Social Union)

DC Democrazia Cristiana (Christian Democracy)

DGB Deutscher Gewerkschaftsbund (Confederation of German Trade Unions)

ECB European Central Bank

ECU European Currency Unit

EIRR European Industrial Relations Review

EMI European Monetary Institute

EMS European Monetary System

EMU Economic and Monetary Union

ERM Exchange Rate Mechanism

EU European Union

EUPHIX European Union Public Health Information System

FDP Freie Demokratische Partei (Free Democratic Party)

FI Forza Italia (Go Italy)

FMF Fédération des médecins de France (Federation of Doctors in France)

FN Front National (National Front)

FO Force Ouvrière (Workers’ Force)

FPTP First-Past-the-Post

FRG Federal Republic of Germany

FSV Fonds de Solidarité Vieillesse (Old-Age Solidarity Fund)

GDP Gross Domestic Product

GDR German Democratic Republic

GRG Gesundheitsreformgesetz (Health Care Reform Law)

GSG Gesundheitsstrukturgesetz (Health Care Structure Law)

IMF International Monetary Fund

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INPS Istituto Nazionale Previdenza Sociale (National Social Security Institute)

IRI Istituto per la Ricostruzione Industriale (Institute for Industrial Reconstruction)

KBV Kassenärztliche Bundesvereinigung (Federal Association of Statutory Health Insurance Physicians)

KV Kassenärztliche Vereinigung (Association of Statutory Health Insurance Physicians)

LN Lega Nord (Northern League)

MDC Mouvement des Citoyens (Citizens' Movement)

MRG Mouvement des Radicaux de Gauche (Movement of Left Radicals)

MSI Movimento Sociale Italiano (Italian Social Movement)

NHS National Health Service

NICE National Institute for Health and Clinical Excellence

NOG Neuordnungsgesetz (Health Care Reorganisation Law)

OECD Organisation for Economic Co-operation and Development

PCF Parti Communiste Français (French Communist Party)

PCI Partito Comunista Italiano (Italian Communist Party)

PDS Partei des Demokratischen Sozialismus (Party of Democratic Socialism)

PDS Partito Democratico della Sinistra (Democratic Party of the Left)

PEJ Programme Emploi Jeune (Youth Employment Programme)

PLI Partito Liberale Italiano (Italian Liberal Party)

PR Proportional Representation

PRC Partito della Rifondazione Comunista (Party of the Communist Refoundation)

PRG Parti Radical de Gauche (Party of Left Radicals)

PRI Partito Repubblicano Italiano (Italian Republican Party)

PS Parti Socialiste (Socialist Party)

PSDI Partito Socialista Democratico Italiano (Italian Social Democratic Party)

PSI Partito Socialista Italiano (Italian Socialist Party)

PV Pflegeversicherung or Soziale Pflegeversicherung (Long-Term Care Insurance)

RC Rifondazione Comunista (Communist Refoundation)

RDS Remboursement de la Dette Sociale (Reimbursement of the Social Debt)

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RMI Revenu Minimum d’Insertion (Minimum Income for Social Integration)

RPR Rassemblement pour la République (Rally for the Republic)

SGP Stability and Growth Pact

SMIC Salaire Minimum Interprofessionnel de Croissance (guaranteed minimum wage)

SML Syndicat des Médecins Libéraux (Union of Self-Employed Doctors)

SPD Sozialdemokratische Partei Deutschlands (Social Democratic Party of Germany)

UDC Union de centre (Union of the Centre)

UDF Union pour la Démocratie Française (Union for French Democracy)

UIL Unione Italiana del Lavoro (Union of Italian Workers)

UMP Union pour un Mouvement Populaire (Union for a Popular Movement)

VAT Value Added Tax

WASG Arbeit und soziale Gerechtigkeit – Die Wahlalternative (Work and Social Justice – the Electoral Alternative)

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CHAPTER ONE

INTRODUCTION

A TALE OF TWO REFORMS

In 1993 French Prime Minister Édouard Balladur introduced a reform of private-sector pensions

that changed the indexation of benefits, raised the retirement age, and increased the number of

years used to calculate pension benefits, changes that would reduce expenditures on pensions.

The reform passed and was successfully implemented with relatively little union or public

opposition. Two years later Prime Minister Alain Juppé, Balladur’s successor, attempted to adopt

the same changes for the public-sector pension system. This reform provoked a full-scale

mobilisation of the unions and a series of strikes and protests that brought the country to a

standstill, and Juppé was forced to withdraw his reform.

Why did the 1993 Balladur reform of private-sector pensions succeed, while the nearly identical

1995 Juppé reform of public-sector pensions fail? While the greater level of unionisation of

public-sector workers doubtlessly played a role, the more important reasons for the divergence in

reform outcomes lie in the difference in these two governments’ approaches to reform and in how

each of these two reforms were packaged with other reforms that had markedly different

distributions of the burden of adjustment.

In 1993 Édouard Balladur chose a consensual approach, including unions in the negotiations

process. In response to union concerns, he agreed to a means-tested minimum pension, the

Old-age Solidarity Fund” (fonds de solidarité vieillesse, FSV) to assist low-income retirees and

ameliorate the burden of adjustment to the new pensions scheme for those who were the most

vulnerable. While some of the more militant union leaders still opposed the reform, the inclusion

of the unions in the negotiations process and the provision of a new benefit gained Balladur the

acquiescence of the more moderate unions. With a divided union movement and a reform

package that could be portrayed as fiscally responsible yet socially just, Balladur’s reform passed

into law.

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By contrast, in 1995 Juppé chose to pursue a confrontational approach, presenting the reform to

the unions as a fait accompli. Instead of addressing the unions’ most pressing concerns about the

reform and making some concessions to buffer the effects of the reform, Juppé introduced a plan

to freeze public-sector salaries, to speed up the pace of privatisation and restructuring of

state-owned enterprises, and to reduce the role of the unions in managing the social security

budget. This combination of reforms was seen as a concentrated assault upon the job security and

benefits of public-sector workers as well as an attempt to marginalise the unions representing

those workers. Outraged by both Juppé’s approach to and the content of the reform package, the

unions were unified and highly motivated in their opposition to the reform. In the absence of

division among unions and with the government’s inability to point to concessions that could be

portrayed as moderating the reform, workers mobilised and the French public supported them.

Juppé and his coalition were confronted by the largest strikes since 1968, forcing Juppé to cancel

his planned pension reform.

THE PUZZLE WRIT LARGE

These two reforms in France were not isolated events. Throughout the last decades, Western

European states have found themselves subject to increasing pressures to reform fiscal and social

policy. Globalisation, the intra-European pressures of the Single Market, shifts in demographics

and employment, and the fiscal and monetary restrictions of the Maastricht Treaty and the

Stability and Growth Pact have all pushed European states to pursue downward convergence in

their taxes, expenditures, social programmes, wages, and labour protections. At the same time,

the ageing of the population, the rise in health costs, and the increasing uncertainty of

employment have intensified public demands for social protection.

Because of the countervailing nature of these sets of pressures, there has been no uniform race to

the bottom. Indeed, in the face of these common pressures, there has been a great degree of

divergence. Variation endures in terms of the aggregate levels of taxation and expenditures,

including in some cases increases in spending and taxes. While some governments have engaged

in retrenchment of the social safety net, others have focused upon recalibrating or retargeting

existing policies, and in some cases governments have expanded the scope of government

intervention by developing new programmes and extending new social rights. Reforms have

differed in terms of the distributional implications for the citizenry of these changes in fiscal,

social, and economic policy with some governments placing the burden of adjustment on

lower-income individuals, while other have targeted the wealthy. Reforms have varied in regard

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to whether they are developed by the government alone or in negotiations with the parliamentary

opposition, trade unions, employers’ associations, and other interested parties. Some painful

reforms have been met with massive strikes and protests, while other painful reforms have been

accepted with relative equanimity. Finally, there has been a great deal of variance in even the

ability of various governments to adopt and implement reform packages.

The periodic need for economic, fiscal, and social welfare policy reform endures as long-term

shifts of economic, budgetary, and social circumstances continue to exert pressure on

governments to adapt their policies to new environments. Economic crises may be transient, but

always recur with new variants, and the severity of their impact will require relatively rapid

responses. In light of this, it is vital to develop answers to the many questions that the reform

process raises. Why do some reform efforts succeed, while others fail? Why are some reforms

met with mass mobilisation in the form of strikes and protests, while others win general

acceptance? Why are some reforms developed in relative isolation and presented as faits

accomplis, while others are the product of open negotiations with opposition parties, unions,

employers’ associations, and other social actors? Who benefits from reforms and who bears the

costs, and what explains the decisions regarding who will bear the burden of adjustment?

THE ARGUMENT

In response to this varied record of social welfare, fiscal, and economic adjustment, this

dissertation proposes a theory to explain why some reforms succeed while others fail. Chapter

Two develops the core arguments of the dissertation in greater detail, but briefly they are:

1. Long-term economic, demographic, technological, and social pressures and periodic, short-term economic crises provide the impetus for governments to reassess and reform their economic policies. These pressures do not, however, create an impetus towards a common solution, rather these pressures are contradictory and countervailing, leading governments to different conclusions, ranging from general conceptions of the role of the state in the economy to specific reforms of the social welfare safety net, taxation, wage policy, regulation, and the myriad other ways in which the state influences the economy.

2. When deciding to embark upon reform, governments have the choice between a confrontational approach – imposing reforms unilaterally with few or no concessions that would make their policies more palatable – or a consensual approach – negotiating reforms with opposition parties or social partners and making concessions to make these reforms more acceptable. Governments with higher levels of power concentration, reformers with greater confidence in their ability to use their governing coalition to impose their preferred reforms, and reformers who prefer a more hierarchical leadership style are more likely to pursue the confrontational approach, while governments with lower levels of power concentration, reformers with less confidence in their ability to rely

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upon their governing to impose their preferred reforms, and reformers who prefer a more collaborative leadership style are more likely to pursue the consensual approach.

3. Partisanship matters. The partisan preferences of governments – whether of the Left - Right ideological type or the Liberal - Conservative/Christian Democratic – Social Democratic type – will lead governments to prefer reforms with different distributional implications. The exigencies of international and domestic pressures and the need to compromise to assure the adoption and implementation of the reform may limit the extent to which the reform can reflect the partisan preferences of the government. Nonetheless, differences in the partisan composition of the government will continue to produce economic, fiscal, and social welfare reform content with quite distinctive implications for the distribution of the burden of adjustment.

4. The parliamentary opposition, the social partners, and the public’s reception of the reform will be a response to the government’s choice of reform approach and content. More confrontational and more sharply partisan reforms (with their starker allocations of costs and benefits) will be more prone to provoking opposition, while more consensual and less partisan reforms are more likely to win general acceptance.

5. In the end, the fate of the reform (adoption and implementation, revision, withdrawal, or repeal) and of the government (survival in office, collapse of government, or failure in the next elections) will be the result of the government’s power concentration and cohesion and its consequent ability to overcome resistance from the parliamentary opposition, the social partners, and the public.

THE RESEARCH DESIGN

The dissertation’s empirical chapters focus upon case studies of eleven governments in France,

Italy, and Germany between 1992 and 1997. Utilising process tracing, the empirical chapters

evaluate the theory’s ability to explain how various factors related to leadership and

governmental confidence affect governments’ approaches to reform, how partisan preferences

and governments’ approach to reform result in differing decisions regarding the content

(distributional implications) of reform, how the combination of reform approach and content lead

to different responses from the reform’s potential opponents (parliamentary opposition, social

partners and public), and how these responses affect the likelihood that these reforms – and,

indeed, these governments –survive or fail. In light of the wide array of fiscal, economic, and

social welfare policy reforms undertaken by these governments during this time, these cases

provide ample opportunity to utilise cross-case and within-case variations to tease out the effects

of different configurations of the independent variables.

The use of large-N datasets was eschewed in this study because these datasets generally do a poor

job of capturing much of the more subtle information that I argue is key to understanding the

dynamics of fiscal, economic, and social welfare policy reform. Large-N datasets do have the

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strength of allowing researchers to test theories against a wider array of cases and time periods.

Use of established datasets also provides researchers with the opportunity to test theories in a

manner where there is less question of researcher bias shading the results. Nonetheless, while

these datasets can denote the parties (and the general policy orientation of these parties) that are

in government, even at times indicating which parties held particular ministries, these datasets

can not capture more subtle matters, such as shifts in the balance of power within or among

parties, let alone shifts in power among different party wings or political leaders.1 Cross-policy

area reform packages – and at times, cross-temporal promises – can ameliorate or exacerbate the

distributional effects of a reform and can affect opposition party, social partner or public

responses to these reforms, and such synergies (or dysergies) are not captured by datasets.

Furthermore, while large-N economic datasets can give insight into general patterns of change in

aggregate spending and revenues, they do a poorer job in providing data on the incidence of

taxation or the distributional effects of social welfare spending, privatisation, and wage policy.

These economic datasets are particularly weak when it comes to disaggregating the effects of

specific reforms that particular governments implement on a delayed or phased-in basis. With the

high turnover of governments in France and Italy, for which I consider four and five

governments, respectively, during the 1992 to 1997 period, these lags can be particularly

problematic. Finally, large-N economic datasets can not capture the effects of reforms that are

not implemented, either because the reform effort fails or because subsequent governments repeal

their predecessors’ policies prior to their full implementation.

While many analyses of social welfare policy focus upon a particular aspect of the welfare state

(e.g. pensions, health care, unemployment) or focus upon aggregate levels of direct statutory

transfers and provision of services, I have chosen to utilise a broader definition of social welfare

policy, including considerations of more general fiscal and economic policies that provide social

protection or that affect the distribution of income. In doing so, I consider not only transfers and

services, but also include taxation, public-sector employment, state-owned enterprises, wage

policy, and price controls because all of these instruments serve to “disconnect or buffer income

streams from market outcomes” (Schwartz 2001, 31). I utilise this more expansive “social policy

writ large” approach for two reasons. First, I am interested in how states respond to pressures to

1 While datasets can denote changes in formal power (e.g. which individual or what party controls particular ministries), these datasets can not capture informal power relationships, where key party officials may gain or lose power without this change being directly reflected in a change in title. (As an illustration of this possibility, Germany’s Wolfgang Schäuble, Chancellor Helmut Kohl’s heir presumptive, started pushing his CDU/CSU colleagues to pursue more market-liberal policies during the run-up to the 1998 election. It was the expectation that he might become chancellor, rather than any formal change in his role in government that gave him influence over his colleagues.)

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restrain spending and taxation. Whether we are discussing competitiveness concerns’ downward

pressure on taxation (and thereby decreased spending to maintain fiscal balance) or whether we

are discussing recession-imposed difficulties in reconciling decreased revenues and increased

demand for social support, governments face pressures to cut aggregate (or even net) spending,

but there is nothing that inherently requires that one policy area be chosen over another.2 A focus

just on one policy area allows detailed comparisons of reforms common to that policy area, but in

doing so misses the bigger picture of governments having to decide which policy area to reform.

Second, a reform process may include or be accompanied by reforms in multiple policy areas.

Focus upon one policy area without consideration of reforms in other areas omits the potentially

synergistic or dysergistic effects of those ‘side reforms,’ thereby reducing our understanding of

the distributional impact of reforms, the response to these reforms, and the likelihood that these

reforms will be successfully adopted and implemented.

CASE SELECTION

The cases of France, Italy, and Germany were selected for cross-case and within-case

comparisons because they are all large, advanced industrial democracies and mature European

welfare states of the Continental or Christian Democratic welfare regime type.3 Larger European

states were chosen because the very size and diversification of their economies means that lessons

drawn from these cases are more likely to be transferable to other states. While small states may

pursue policy innovations that are replicable in other states, some of these innovations may be

niche solutions, successful primarily because the state’s smaller size allows it to exploit options

not available to larger states.4 Mature European welfare states were utilised because these are

2 In response to rising unemployment and a growing budget deficit during a recession, a government could choose among a myriad policies: increase unemployment insurance and low-income assistance expenditures to support the unemployed until the economy improves; increase expenditures on active labour market policies do improve the skills-set and labour market competitiveness of the unemployed; increase early retirement to induce employers hire the unemployed (particularly unemployed youth) as replacements for older (and generally more expensive) workers; decrease unemployment insurance expenditures, early retirement options, and/or other social welfare expenditures in order to (1) decrease the non-wage cost of labour and make employees cheaper for employers and (2) making any employment more attractive for benefit recipients seeing their state support fall; or shift from using payroll taxes to another revenue source in order to lower the non-wage cost of labour for employers. All of these choices have been utilised by various governments over time. A focus solely on pensions or unemployment or tax policy would miss some of the different potential policies a government could select. 3 While some authors have classified Italy as a “Southern welfare regime” (Ferrera 1996, Bonoli 1997a) or “Latin Rim” (Leibfried 1992), given the evolution and characteristics of the Italian welfare state, I am classifying Italy together with France and Germany as a “Christian Democratic” or “Conservative” welfare state, in keeping with Esping-Andersen (1990, 1996b, 1997), Castles & Mitchell (1993), and Korpi & Palme (1998), although I do grant that there remain some differences between the ‘northern tier’ (and more prototypical) Christian Democratic welfare regimes and the ‘southern tier’ of Christian Democratic welfare regimes. See Art and Gelissen (2006) for broad discussion of the different classification schemes and variations in which countries fit into which classification. 4 Whether discussing ‘beggar-thy-neighbour’ policies of currency devaluation or wage restraint to gain competitive advantage, a small export-oriented state free-riding on a larger neighbour’s attempts to engage in a Keynesian fiscal

7

some of the most fully developed welfare states, and consequently it is in these countries that

reformers are confronted with some of the most fully developed constituencies willing to

mobilise and defend the state against austerity measures. States from the same welfare-regime

type were chosen because variation in welfare state regimes creates different starting points that

would complicate cross-case comparisons.

The period of 1992 through 1997 was selected because it was a time of particular effort in fiscal,

economic, and social welfare reform. States continued to confront the long-term pressures of

globalisation, Europeanisation, and rising social welfare costs due to the ageing populations,

accelerating health care expenditures, and high and persistent unemployment. In addition to these

long-term pressures, there was the added economic and fiscal stress of the global recession of the

early to mid-1990s, the European Monetary System shocks of 1992 and 1993, and the fiscal and

monetary straitjacket of the Maastricht convergence criteria5 for states seeking admission into the

Euro-zone. Most specifically it was the decision to include the added stress of the Maastricht

convergence criteria that led to the decision to focus upon the years from 1992 through 1997, the

time period between the signing of the Maastricht Treaty and the deadline for meeting the

Treaty’s convergence criteria. While the fiscal and monetary strictures of the convergence

criteria most directly apply only to Euro-zone candidates, the Stability and Growth Pact (SGP)

was supposed to impose the same fiscal discipline upon Euro-zone members.6 Despite members’

subsequent failure to comply with the SGP and despite the Council’s inability or unwillingness to

impose penalties for violations of the deficit and debt guidelines, these strictures may yet be

re-imposed if policymakers can agree upon a credible enforcement framework in response to the

current debt crises and currency shocks in Europe. Finally, while the specifics of the Maastricht

convergence criteria (and the Stability and Growth Pact) are a somewhat artificial construct that

stimulus during a recession, or the embrace of a low tax and banking secrecy regime to attract foreign capital, small states have some policy options that are useful primarily because they are able to benefit from concentrated benefits (with particularly high per capita payoffs due to the state’s small size), while the costs of those policies are diffused across a much larger regional or global population. 5 To qualify for the entry into the Euro-zone, states had to comply with the Maastricht convergence criteria which required: (1) inflation rates in the candidate country could be no more than 1.5 percentage points higher than the average of the three best performing (lowest inflation) member states of the EU. (2) The ratio of the annual government deficit to gross domestic product (GDP) in the candidate country could not exceed 3% at the end of the preceding fiscal year. (If the deficit ration exceeded 3%, it was at least required to reach a level close to 3%. Only exceptional and temporary excesses would be granted for exceptional cases.) (3) The ratio of gross government debt to GDP for the candidate country must not exceed 60% at the end of the preceding fiscal year. (If the target cannot be achieved due to the specific conditions, the ratio must be declining and approaching the reference value at a satisfactory pace.) (4) The candidate’s exchange rate must be stable. (Applicant countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for two consecutive years and should not have devalued its currency during the period.) (5) The nominal long-term interest rate in the candidate country must not be more than 2 percentage points higher than in the three lowest inflation member states. 6 Under the Stability and Growth Pact (SGP), Euro-zone members must have (1) an annual general budget deficit no higher than 3% of GDP and (2) a national debt lower than 60% of GDP or approaching that value.

8

do not directly transfer to other times and places, they do mimic the sort of fiscal and monetary

strictures that financial markets and adherents to neo-liberal economic policy have sought to

impose on states or that states have agreed to impose upon themselves.7 With these ‘artificial’

constraints essentially being a formalised version of the de facto strictures confronting states, I

argue that the study of countries facing these added constraints provides insights generalisable

well beyond the narrow range of Euro-zone candidates.

The dissertation’s empirical chapters focus upon case studies of eleven governments8 in France,

Italy, and Germany between 1992 and 1997. France, Italy, and Germany provide a particularly

fertile ground for considering attempts to reform welfare spending. All have long been troubled

by rising expenditure levels, ageing populations, growing non-wage costs of labour, and high and

persistent levels of ‘welfare without work.’ With levels of unionisation that fall between the high

unionisation levels of the Scandinavian countries and the low unionisation levels of the

Anglo-Saxon states, the French, Italian, and German unions jealously guard their roles in the

economy and in the social welfare system. Though French, Italian, and German unions are

fragmented or sectorally segmented to varying extents and have suffered from falling

membership levels and a failure to cover the growing population of part-time services-sector

employees, they have remained quite capable of mobilising their members.

These eleven governments if France, Italy, and Germany all were confronted by rising social

welfare expenditures and by pressures to reduce taxes and deficits. As shown in Table 1-1 and

discussed below, the eleven governments considered in the dissertation varied in regard to their

political orientation, their strength (power concentration), and leadership styles. Given their

similar situations, France, Italy, and Germany offer ideal cases for testing the effects of

partisanship and varying levels of government confidence upon both the approach to and the

content of reforms and upon the likelihood that the reform will be successfully adopted and

implemented.

7 Most recently at the G-20 summit in June 2010, states agreed to pursue “growth friendly” fiscal consolidation to address the rise in deficits and indebtedness in wake of the financial crisis and recession, issuing the statement “[s]ound fiscal finances are essential to sustain recovery, provide flexibility to respond to new shocks, ensure the capacity to meet the challenges of aging populations, and avoid leaving future generations with a legacy of deficits and debt” (G-20 2010, 2). 8 The fourth and fifth cabinets of Germany’s Helmut Kohl are treated as two cases. While Kohl IV and Kohl V had the same chancellor, the same coalitions in government, and many of the same ministers in cabinet positions, the 1994 election reduced the number of Bundestag seats held by the government, led party leaders to reassess their party platforms, policy agendas, and negotiating strategies in response to the disappointing electoral results, and produced a shift in the balance of power from the labour wing of the CDU/CSU towards the business wing of the CDU/CSU and the FDP.

9

TABLE 1-1: The Cases – Countries and Governments

HEAD OF GOVERNMENT &

TERM OF OFFICE GOVERNMENT’S POLITICAL ORIENTATION GOVERNMENT STRENGTH

(POWER CONCENTRATION)

FRANCE

Pierre Bérégovoy (4/1992-3/1993)

Centre-Left minority (Social Democratic)

Weak

Édouard Balladur (3/1993-5/1995)

Centre-Right (Christian Democratic / Liberal)

Moderate

Alain Juppé (5/1995-6/1997)

Centre-Right (Liberal / Christian Democratic)

Strong

Lionel Jospin (6/1997-5/2002)

Centre-Left (‘Plural Left’) (mostly Social Democratic)

Moderate

ITALY

Giuliano Amato (6/1992-4/1993)

Centrist/Centre-Left , but increasingly technocratic (weakly Social Democratic)

Moderately weak

Carlo Ciampi (4/1993-5/1994)

Technocratic – Centre-Left dependent (generally Social Democratic)

Weak

Silvio Berlusconi (5/1994-1/1995)

Centre-Right (Liberal / Christian Democratic)

Moderately weak

Lamberto Dini (1/1995-5/1996)

Technocratic – Centre-Left dependent (generally Social Democratic)

Weak

Romano Prodi (5/1996-10/1998)

Centre-Left (generally Social Democratic)

Moderately weak

GERMANY

Helmut Kohl Cabinet IV (1/1991-11/1994)

Centre-Right (Christian Democratic / Liberal)

Moderately strong

Helmut Kohl Cabinet V (11/1994-10/1998)

Centre-Right (Liberal / Christian Democratic)

Moderate

Of these three country cases, France is the most representative of the typical state seeking to

pursue reform, and as such it is both a crucial case and the provider of the most generalisable

results. France during the 1990s was a state undergoing a moderate level of economic stress due

to the long-term rise in persistent unemployment, the ageing population, and the increase in social

welfare costs, as well as the more immediate pressures of global recession and the currency

shocks of 1992 and 1993. While it exceeded the deficit and exchange rate stability targets of the

Maastricht convergence criteria, it was not out of compliance by a great deal and returning to

compliance would not require extraordinary efforts. Though it was buffeted by the standard

political turbulence that governments experience, especially during bad economic times, it did not

undergo serious political or institutional stresses. In response to these economic pressures, the

minority centre-Left government of Pierre Bérégovoy, (1992 to 1993), the Gaullist governments

of Édouard Balladur (1993 to 1995) and Alain Juppé (1995 to 1997), and the plural Left coalition

of Lionel Jospin (1997 to 2002) each pursued some pension, health care, public-sector, and tax

10

reforms. Different levels of government fragmentation and polarisation, electoral considerations,

the role of potential veto players, and leadership style prompted different approaches to reform

with the Bérégovoy, Balladur and Jospin governments pursuing more cautious and consensual

reforms, while the Juppé government pursued a more confrontational approach. As noted by

Jonah Levy (2001), each of these governments has “gone to great lengths to define a social and

economic agenda that is both consistent with its ideology and distinct from the offerings of rivals

and predecessors” (266). As a result, the party alignment of these governments greatly affected

the content and distributional implications of these reforms. In light of the variation among the

four governments in terms of governmental strength (one weak, two moderate, and one strong

government) and partisanship (two centre-left and two centre-right), France provides an excellent

opportunity to test the theory’s predictions regarding the influence of government strength,

leadership style, and partisanship on the approach to and the content of reforms, upon the

subsequent reception of these reforms, and the ultimate outcome of the reforms.

The consideration of Italy tests the theory’s applicability to a country undergoing a high level of

economic and political stress. As a country with a long history of high deficits and a weak

currency, the recession and the currency shocks placed Italy under particularly severe strain.

Indeed, throughout much of the 1990s Italy was in violation of the deficits, debt, long-term

interest rate, inflation, and exchange rate stability criteria. In the wake of judicial investigations,

political scandals, the collapse of all of the parties governing Italy in the early 1990s, and

electoral reform, Italy was enduring a serious degree of political disruption. In response to these

combined economic and political pressures, the centre-left governments of Giuliano Amato

(1992-1993) and Romano Prodi (1996-1998)9, the centre-right (Liberal / Christian Democratic)

government of Silvio Berlusconi (1994), and the technocratic (but left-party dependent)

governments of Carlo Ciampi (1993-1994) and Lamberto Dini (1994-1996) pursued a variety of

pension, collective bargaining10, active labour market, public-sector, and tax reforms. Differing

9 Prodi’s government could also be classified as technocratic, based upon his background, but he was (and remains) more engaged in developing the party apparatus and the long-term durability of coalitions among parties sharing a political orientation. 10 While it may initially seem odd to include Italian collective bargaining reforms in an analysis of welfare state change, reforms in these areas actually reflect a similar logic and followed highly similar patterns. First, while collective bargaining differs from welfare policy in regard to it generally being perceived as having little direct fiscal implications for governments, from the standpoint of unions and workers, collective bargaining and welfare policy do have very similar implications, since both affect workers' incomes (wages as current income, pensions as deferred income, and unemployment, health care, disability, etc. benefits as income-maintaining insurance programmes). Second, deferred income and income-maintaining insurance programmes have historically been used by governments to get unions to agree to wage restraint. Third, while budgetary pressures drove welfare reform and inflation concerns motivated collective bargaining reform, budgetary and inflation issues were highly connected in Italy, due to inflation's pernicious effect on Italy's debt payments and due to the inflationary effects of Italy's historical tendency to finance budget deficits via seignorage. Finally, the Amato and Ciampi governments approached both pension reform and

11

levels of fragmentation and polarisation and varying perceptions of the government’s strength and

claim to legitimacy would prompt differing approaches to reform with the rather weak Amato,

Ciampi, Dini, and Prodi governments pursuing more cautious and consensual reforms, while the

moderately weak Berlusconi government engaged in a confrontational approach to a highly

partisan reform. As in France, the differing party alignments11 and leadership styles had a

profound impact upon the government’s agenda, particularly as Italian parties struggled to

redefine themselves in wake of the political upheavals of the 1990s. The different approaches

selected by governments also had a significant impact upon the reception of the reforms and upon

the governments’ ability to successfully adopt and implement reform. Despite the particularly

severe circumstances under which Italy was operating during the 1990s, the theory nonetheless

explains much of the broad pattern of the approach to reform various governments chose, the

distributional implications of these reforms, the response to reforms, and the ultimate success or

failure of these governments’ reform attempts. In light of the variation among the five

governments in terms of governmental strength (two very weak and three moderately weak

governments) and partisanship (two centre-left, two technocratic left-dependent governments, and

one centre-right), Italy provides an interesting opportunity to test the theory’s applicability to a

state undergoing particularly strong economic and political stresses.

The third country, Germany, was selected because it appears to be a deviant case. Helmut Kohl’s

centre-right (Christian Democratic / Liberal) coalition controlled Germany throughout the entire

1992 to 1997 period (and, indeed, from 1982 to 1998), but its choices in terms of approach to and

the content of reforms seem to run contrary to the theory’s predictions. First, this government

behaved in a more consensual manner during the 1991 to 1994 period, when it was in a strong

position, while it was more confrontational during the 1994 to 1998 period, when it was weaker.

Second, despite the same parties being in the governing coalition from 1991 through 1998, this

government seemed to changes its policy preferences, pursuing reforms that were more social in

their distributional implications during the 1991 to 1994 period and more market-liberal during collective bargaining reform in essentially identical ways, working closely with unions and stressing that without the risanamento (the ‘restoration to health’) of public finances and a rapid and radical reduction of interest expenditures, there would be sizeable costs for business (exponential growth in the wage and non-wage costs of labour would destroy competitiveness) and labour (exponential growth in Italian debt increasingly draining resources from existing and potential social programmes). With this common understanding, the Amato and Ciampi governments were able to get the unions to agree to immediate sacrifices (reforms to the pension system, abolition of the scala mobile, and wage moderation) in exchange for the longer-term goal of budget stabilisation and promises of future concessions in the area of labour market policy, including increased flexibility, initiatives to develop and re-launch employment, and the redistribution of resources. 11 Classifying the partisanship of Italian governments during the 1990s is complicated by the collapse of the Italian party system during this period and by the large number of parties. Coalitions of both the centre-right and the centre-left included former members of the Christian Democrats (DC). Former members of the Socialists (PSI) generally moved into or formed the new parties of the centre-left that later came under the umbrella of L’Ulivo.

12

the 1994 to 1998 period. In examining this apparently deviant case, it becomes clear that there

was a shift of power among factions and parties within the governing coalition. Once this shift in

power within the ruling coalition during the 1994 to 1996 period is taken into account, the

different policy content preferences and the more confrontational approach are shown to be the

result of informal shifts in power from the labour wing to the more market-liberal wings and

parties within the coalition. In the end, a consideration of this apparently deviant case provides

support for the theory. The close examination of the German case also emphasises the

importance of properly assessing government preferences. It is not sufficient to just consider the

general policy orientation of the coalition as a whole. Instead, it is necessary to identify the

policy preferences of the dominant parties or factions and their leaders, features of the coalition

that can shift over time as the balance of power within a coalition changes.

DATA SOURCES

This dissertation relies upon a wide array of primary sources. It also draws extensively upon the

well-developed literature on fiscal, economic, and social welfare reform in Europe, as well as the

broader international political economy, voting behaviour of parliamentarians, and political

institutions literatures.

Primary sources include formal and informal interviews, speeches, government documents,

official statistics, trade union and business association documents, and reports and commentary in

newspapers and magazines. From October 2000 to January 2002 and in July and August 2003, I

engaged in field research in Germany, France, Italy, Belgium, the Netherlands, and Luxembourg.

I conducted interviews with officials in the ministries of Labour and Social Affairs, the European

Central Bank, EUROSTAT, the European Metalworkers’ Federation (EMF), IG Metall,

Gesamtmetall, Confederazione Generale Italiana del Lavoro (CGIL – Italian General

Confederation of Labour), Confederazione Italiana Sindacati Lavoratori (CISL – Confederation

of Italian Workers’ Trade Unions), Confindustria, Federatie Nederlandse Vakbeweging (FNV –

Federation Dutch Labour Movement), and Christelijk Nationaal Vakverbond (CNV – National

Federation of Christian Trade Unions). Union circulars and annuals, business associations’

policy documents and news releases, economic and polling data, transcripts of speeches and press

releases from key politicians and ministries, and articles from newspapers and magazines were

gathered from the Staatsbibliothek zu Berlin, the Pressearchiv of the Otto-Suhr-Institut für

Politikwissenschaft at the Freie Universität Berlin, and online sources. Economic data was drawn

from the Directorate General for Economic and Financial Affairs (ECFIN) of the European

13

Commission, EUROSTAT, the European Monetary Institute (EMI) and European Central Bank,

the International Monetary Fund (IMF), the Organisation for Economic Development (OECD),

and national governments.

Secondary sources include books, journals, working papers, conference and workshop papers,

Ph.D. dissertations, bibliographies, and memoirs, as well as discussions with researchers and

academics at workshops and informal meetings at the Wissenschaftszentrum Berlin für

Sozialforschung (Sciences Centre Berlin for Social Research), Max-Planck-Institut für

Gesellschaftsforschung (Max Planck Institute for the Study of Societies), and the European Trade

Union Institute (ETUI).

OUTLINE OF THE DISSERTATION

This dissertation offers new insight into how advanced industrial democracies respond to

pressures to lower taxation and expenditures while still addressing their citizenry’s expectations

that the state provide economic safety-nets and promote social justice, particularly in times of

economic distress.

Chapter Two develops a theoretical explanation of the political factors that cause divergent

responses to common economic pressures. The chapter starts with an overview of the shared

economic and political pressures that have provided the impetus for governments to pursue an

austerity course of cutting taxation and expenditures, as well as the political factors that have

pushed governments to maintain or even increase expenditures. The chapter then turns to the

core argument of the dissertation, elucidating a framework for understanding (1) the political,

institutional, electoral, and personal factors that lead governments to adopt a particular approach

to a reform, (2) the partisan factors that lead governments to prefer a reform content with specific

distributional implications, (3) the effect that the approach and the distributional implications of

the specific reform have upon how the parliamentary opposition, the social partners, and the

public respond to the reform, and (4) the repercussions that the response to reform have for the

ultimate fate of that reform (and, sometimes, for that government).

The dissertation’s empirical chapters (Chapters Three through Five) analyse how eleven

governments in France, Italy, and Germany enacted a variety of economic reforms in response to

the long-term pressures for austerity, stemming from globalisation, ageing populations, and

persistent unemployment, and as they reacted to the specific challenges of the 1990s: recession,

14

currency shocks, and the restrictive monetary and fiscal requirements of the Maastricht

convergence criteria.

Chapter Three turns to the experiences of France during the 1990s. Consideration of the uneven

reform course in France under the governments of Pierre Bérégovoy, Édouard Balladur, Alain

Juppé, and Lionel Jospin highlights the effects of government strength, leadership style, and

partisanship on these various governments’ approaches to reform, the degree of partisanship and

distributional consequences of these reforms, and the government’s ability to successfully adopt

and implement reform. In 1992 and 1993, the weak centre-left minority government of Pierre

Bérégovoy tried to negotiate a pension reform, but in the last year before parliamentary elections,

parties were unwilling to undertake potentially unpopular reforms, and the effort collapsed. A

more successful reform effort was undertaken by Bérégovoy’s successor Édouard Balladur, who

had a secure, ideologically unified, centre-right majority, but was confronted with cohabitation

with a Socialist president and with presidential elections scheduled in two years. This situation

led Balladur to pursue a consensual approach, negotiating reforms that reflected centre-right

policy preferences but which also included side-payments that addressed some of the key

concerns of unions, the most prominent of the potential opponents to the reform. By contrast, the

subsequent centre-right government under Alain Juppé had the same secure, ideologically unified

majority, but with the support of a Gaullist president and relatively distant elections, Juppé felt

confident enough to embark on a confrontational course and to pursue more sharply partisan

reforms. This combination of confrontational approach and highly partisan content provoked

massive opposition to the reforms, a fall in the government’s popularity, and the failure of some

of Juppé’s most important reforms. Some of these reforms were reversed by the succeeding

government, an ideologically fractious ‘plural left’ government under Lionel Jospin in

cohabitation with a Gaullist president. In light of his government’s more precarious situation,

Jospin chose a more consensual course, negotiating with the social partners and including tax

concessions that made his more leftist reforms acceptable to potential opponents.

Chapter Four analyses the experiences of the governments of Giuliano Amato, Carlo Ciampi,

Silvio Berlusconi, Lamberto Dini, and Romano Prodi in Italy, a country undergoing particularly

great stresses, including severe economic pressures, the collapse of the existing party system and

political demise of a generation of political leaders, and electoral change. Despite this political

and economic turmoil, Amato and Prodi’s fractious centre-left governments and Ciampi and

Dini’s technocratic governments, which relied upon the tolerance and ad hoc support of

centre-left parties, were able to adopt meaningful reforms. Indeed, the very severity of the crisis

15

was artfully used by these four governments, which tailored and sold reforms as shared sacrifices

that would enable Italy to join the Euro-zone and to assure the long-term viability of Italy’s social

welfare system, safe from the sort of currency runs and exorbitant risk premia on debt that were

destabilising Italian public finances during the EMS Shocks of 1992 and 1993. Under the

centre-right Berlusconi government, Berlusconi’s own confrontational leadership style led the

government to pursue a much more confrontational approach to reform and a more sharply

partisan reform package than would have been expected, based upon the relative weakness of the

government. Not only did the Berlusconi government pursue a unilateral approach to a highly

partisan reform package, it sought to divert monies from existing pensions, while providing

substantial tax breaks to businesses. With this more confrontational approach and with this shift

from reforms premised upon shared sacrifice for the common good to reforms that were

perceived as sacrificing the security of the vulnerable (retirees with little or no ability to adjust to

these pension cuts) for the benefit of the comfortable, unions and the parties of the left unified in

opposition to the reform, mass strikes and protests broke out, Berlusconi’s Lega Nord coalition

partners withdrew their support from the reform and the coalition, and the government collapsed.

This chapter thus highlights the role played by economic crisis. While particularly sharp

economic extremis may provide an especially strong impetus for reform, it is no guarantor of

results. The government’s perceived strength, leadership style, and policy preferences still shape

the approach to and the distributional content of reforms, and this combination of approach to and

content of reforms still has a profound impact on the likelihood that a reform will succeed or fail.

Chapter Five assesses the trajectory of reform in Germany. Germany appears to be a deviant case

in two ways. First, despite the same parties being in power throughout the entire 1991 to 1998

period12, the policy preferences of the government seem to shift from being moderately social

under the 4th Helmut Kohl cabinet (Kohl IV, 1991 to 1994) to much more market-liberal during

the 5th Kohl cabinet (Kohl V, 1994 to 1998). Second, the reform approach was much more

consensual during the Kohl IV period at a time when the government was particularly strong,

riding high on its post-unification wave of popularity. It was not until its narrow, last-minute

survival of the 1994 elections that the government turned to a confrontational approach, a change

in approach that is apparently in direct opposition to the theory’s predictions. A closer

examination of the internal politics of the governing coalition, however, reveals the presence of

discrete ideological factions within the governing coalition. The balance of power shifted among

these factions as new leaders gained influence over policy decisions after the 1994 elections and

12 Indeed, Chancellor Helmut Kohl governed with this same coalition from 1 October 1982 to 27 October 1998.

16

again after three 1996 state-level elections. In response, the coalition’s reform approach and

policy preferences shifted, breaking with the patterns of reform that had been pursued during the

Kohl IV period (and, indeed, throughout the Kohl I through III periods13). This chapter thus

stresses the importance of identifying not just the formal labels of the parties in power, but in

considering the possible presence of factions within parties and of differences in policy

preferences of these various factions and parties. With this understanding of intra-coalitional

factions and ideological divides, it becomes clear how a shift in the balance of power within a

governing coalition can lead to dramatic shifts in government reform approach and policy

preferences.

Chapter Six concludes the dissertation with an overview of the common patterns of reform within

and across counties, as well as a consideration of broader applications of the theory and future

avenues for research. While the specifics of the cases are important from a historical perspective,

the insights these cases provide are not solely pertinent to France, Italy, and Germany in the

1990s. Instead, these cases suggest lessons that will continue to be relevant to democracies as

they confront both tensions between public demand for social protection and economic

constraints on government spending and taxation in the long term and as they encounter

heightened pressures in response to new economic crises, including the recession and collapse in

financial markets that challenge countries today.

13 This consensual behaviour was not a response to the unusual circumstances of unification and limited to the Kohl IV period. Rather, it was a continuation of a pattern of policymaking used in earlier Kohl governments.

17

CHAPTER TWO

THEORISING REFORM

INTRODUCTION

Since the 1970s advanced industrial democracies have been confronted by both long-term

economic and social developments and by short-term economic crises which have placed

pressures on states to engage in reform of their economic and fiscal policies. In response, states

have engaged in reform efforts that have ranged from general reconceptualisations of the role of

the state in the economy to specific reforms of the social welfare safety net, taxation, wage

policy, regulation, and the myriad other ways in which the state influences the economy. But

despite facing many of the same economic challenges, governments14 have diverged greatly in

their policy responses.

This chapter seeks to explain the variation in reform processes and outcomes. First, I examine the

long-term and immediate sources of economic, social, and institutional pressures upon

governments that provide the impetus for reform. I then survey the domestic political,

institutional, electoral, and leadership factors that explain the government’s approach to reform

and whether it is more likely to pursue a confrontational course (i.e. a reform developed in

relative isolation and imposed as a fait accompli) or a consensual course (i.e. a reform produced

through negotiations with opposition parties, unions, employers’ associations, and other social

actors and including some concessions). I explain the role that partisan politics and reform

approach play in determining the content of the reforms and the consequent distribution of the

burden of adjustment. I then present a theory regarding the effect that the reform approach and

content have upon the likelihood that the reform will win general acceptance or result in mass

mobilisation in the form of strikes and protests. Finally, I theorise how the combination of reform

approach and the distributional implications of the reform’s content affect the ultimate outcomes

of these reform efforts.

14 Government is defined here as the prime minister and his cabinet, particularly the cabinet ministers whose areas of compétence encompass the policy area being reformed.

18

THE IMPETUS FOR REFORM

In the post-war era, the welfare state has served as the primary means to mediate between the

efficiency pressures of markets and the political desire to pursue social equity and economic

security. Over the course of the 1990s, however, European social welfare and fiscal policy came

under increasing pressure from a variety of sources. Globalisation, Europeanisation (i.e. the

intra-European competitive pressures of the Single Market), technological change, high and

persistent unemployment, ageing populations, rapidly rising health care costs, and the fiscal

restrictions of the Maastricht Treaty (and subsequently the Stability and Growth Pact) have all

pushed European states to engage in fiscal consolidation and social policy retrenchment. At the

same time, many of these same factors have heightened electoral pressures on governments to

increase spending or to develop new programmes in order to provide greater security via the

social welfare safety net. In response to these conflicting pressures, Western European

governments have undertaken a variety of reforms, sometimes engaging in retrenchment, at other

times recalibrating or retargeting existing policies, and in some cases expanding the scope of

government intervention by developing new programmes. Regardless, these long-term economic

and demographic pressures, coupled with recession and other shocks like currency runs or

German unification, have induced governments to pursue reforms.

LONG-TERM PRESSURES FOR REFORM

Long-term changes in the economy, demographics, and society develop slowly. Recognition of

the problems caused by these changes and the need for policy reform may likewise take time.

Societal and political agreement on the proper response to these pressures may take even more

time. Nonetheless, these long-term changes constitute an inexorable challenge to the status quo,

and governments are eventually forced to reconcile themselves to this new environment and to

respond to these challenges by undertaking a course of policy reform.

Globalisation

One of the most profound changes to national economies in recent decades has been the

increasing globalisation of markets. In the post-World War II era, international barriers to the

flow of goods, services, and capital were dismantled, at first slowly but since the 1980s and 1990s

19

with increasing speed. In response, there has been a marked rise in international trade and

investment15 as a percent of world GDP, as seen in Figures 2-1 and 2-2.

FIGURE 2-1: International trade (as % of world GDP), 1960-2008

FIGURE 2-2: International investment (as a % of world GDP), 1980-2005

Source: OECD (2010), 22. Source: Parkinson and Dal Bon (2006).

In an age of globalisation, government intervention in the economy, particularly in the areas of

fiscal policy and regulation, has come under increasing pressure. Aspects of the modern state,

such as social welfare programmes and labour regulations, distort markets. They raise the costs

of businesses, either directly via taxes or indirectly through restricting business decisions on

firing, working hours, etc. States with a strong welfare safety-net (and the higher taxes used to

support it) find themselves confronted by the threats of capital flight and business exit (Rhodes

1995; Esping-Andersen 1996a; Pierson 1997). Progressive income taxes, payroll taxes, and taxes

on capital or wealth fall upon those interests that are increasingly able to evade them through

movement to another political jurisdiction (or at least able to credibly threaten to do so). The

mobility of goods and capital has heightened competitive pressures and enabled firms and

investors to more readily exit one country or region in favour of a more hospitable country or

region that will provide more efficient conditions for business. This understanding of

globalisation’s effects, called the efficiency hypothesis, argues that increased competition in

goods and services markets and the greater mobility of manufacturers and capital will lead states

to engage in a race to the bottom – cutting taxes, social welfare programmes, and regulations – in

order to compete with other states to attract and retain production and investment (Swank 1998).

According to this same logic, unfettered competition and the threat of exit will also force unions

to accept wage restraint and a drawing down of labour market protections, possibly leading to a

‘beggar-thy-neighbour’-style deflationary wage and benefits spiral (Marquand 1994).

15 As discussed in this section, international investment includes foreign direct investment, portfolio investment, investments in national and corporate debt, and investments in currency (bank and money market).

20

But at the same time that there are pressures to dismantle the welfare state and to slash taxation in

the name of efficiency and competitiveness, there are countervailing pressures to retain the

welfare state. Greater integration of goods, services, and capital markets may promote a more

efficient allocation of production or investment, but this shift in resources poses a risk to workers.

Many economists agree that globalisation and increased trade have had significant negative

repercussions on labour, contributing to higher unemployment in Europe and greater income

inequality in the US (Wood 1994, Freeman 1995). In response, unions have demanded

compensation and protection for workers in the form of unemployment benefits, re-training

programmes, or protection from lay-offs. Cameron (1978) noted that trade is associated with

higher levels of welfare spending, and Quinn (1997) and Swank (1998) have found positive

relationships between capital mobility and welfare spending. Consistent with the arguments

made by Ruggie (1983), Katzenstein (1985), Garrett (1998b), and Rodrik (1997), there are clear

political incentives for states to strengthen the social welfare safety-net to compensate the

workers who lose their jobs as a result of globalisation. More complicated relationships between

welfare and globalisation have been found by Hicks and Swank (1992) and by Huber, Ragin and

Stephens (1993), who concluded that partisan politics differentially intervene. Garrett (1998a)

finds that both partisan politics and the strength of organised labour mediate the effects of trade

and capital mobility upon the welfare state.

Furthermore, there are aspects of the welfare state that generate positive externalities for the

business environment, rather than constituting a drain on competitiveness. Under this logic,

state-provided benefits, such as child care, health care, education, and training create a larger,

more productive workforce. Unemployment compensation and low income assistance act as

macro-economic stabilisers, boosting consumption during a recession. Education, low-income

assistance, and ‘social inclusion’16 policies can reduce crime and alleviate the social and political

instability, which might otherwise deter investment. With this understanding of some aspects of

the welfare state, increased state spending may actually be a means to attract investment (Barr

1998; Esping-Andersen 1994; Finegold and Soskice 1988; Garrett 1998b; Gough 1996; Pfaller et

al. 1991).

Finally, welfare spending remains an important means to ‘grease the wheels’ of political

exchange. Provision of welfare provides a buffer for businesses preferring the free flow of trade

and investment and lower levels of labour regulation. By compensating dislocated workers via

16 Social exclusion is the term for long-term unemployment and the isolation from the broader society felt by unemployed and low-income groups as a consequence of their employment and low income status.

21

redistributed profits gained from globalisation, governments are able to forestall a political

backlash against globalisation. Pensions and other welfare benefits have been used as “deferred

wages” to reconcile the interests of employers desiring wage restraint and powerful labour

movements seeking social protection and equity for their members (Alvarez, Garrett, and Lange

1991; Goldthorpe 1984). In a time of neo-liberal dismantling of barriers to the movement of

goods, services, capital, and labour, the welfare state provides a safety net, making intensified

international competition more acceptable to the masses and insulating business from a public

backlash against globalisation’s more negative consequences (Garrett 1998b; Iversen 1997;

Rodrik 1997).

Europeanisation

As was the case with globalisation, the Single European Act’s 1992 removal of barriers to the

free flow of goods, services, labour, and capital within the European Union further intensified

pressures upon the state. Though some goods and services are relatively immobile and though

local tastes may favour some national or local products, trade in goods within the EU has

increased markedly (Fligstein and Merand 2002). Investment within Europe has become

increasingly mobile, although labour has been markedly less mobile. Globalisation created

cross-cutting pressures to cut, recalibrate, or even expand various aspects of the welfare state, and

Europeanisation appears to be reinforcing this process, although there remains lively debate

regarding the full future extent of the effects that Europe’s economic and political integration will

bring about (Leibfried and Pierson 1995; Rhodes 1996, 2002).

High and Persistent Unemployment

Technological change and the reduction in barriers to trade since the 1970s has generally shifted

the labour force in most European economies out of the higher-productivity manufacturing sector

and into the lower-productivity service sector, a development that has lowered productivity and

overall economic growth rates (Baumol 1967; Rowthorne and Ramaswamy 1997; Iversen and

Wren 1998; Pierson 2001b:84). While there has also been a shift to high-productivity technology

jobs, total employment in this sector is relatively low and skills requirements are high and quite

specific. Mismatches between the skills of workers and the needs of firms in these new sectors

have contributed to increasing unemployment and rising social exclusion within Europe.

Unemployment tended to be transitory in the past, but in recent decades unemployment has

become a more enduring problem, both for individuals finding themselves unemployed for longer

22

periods of time and for governments finding slower and weaker declines in aggregate

unemployment after an economic recovery. While there is great national variation, average

unemployment in the EU15 nearly tripled in the 1960 to 1990 period and quadrupled by 2010

(see Figure 2-3).

The rise in unemployment has produced pressures on nation-states to support or re-train these

unemployed workers (Lindley 1999). At the same time, the costs of unemployment insurance,

active labour market, and re-training policies have weighed heavily upon the state’s budget.

Social contributions17 are most often used to finance these policies, raising the cost of labour,

especially at the low end of the pay scale. Perversely, this most negatively affects those

less-skilled workers who are most likely to become stuck in an unemployment trap

(Esping-Andersen 1996b). In times of recession, this funding mechanism also has the unhelpful

effect of raising the non-wage cost of labour at the very time that employers are desperately

seeking to reduce costs. As a result, the general problem of high unemployment in Europe,

coupled with recession in the early 1990s, was an especial problem as governments sought to

bring spending under control.

17 Known more commonly as payroll deductions in the United States, ‘social contributions’ are the taxes paid by employers and employees on wage and salary incomes in order to fund the social welfare safety net (e.g. pensions, unemployment and disability insurance, health care). Self-employed workers may be responsible for paying both the employer and employee share of the tax or may face a different tax rate, specific to the self-employed. These taxes are not paid on investment or property income.

FIGURE 2-3: Unemployment rates for selected European countries, 1960-2010

Source: AMECO (2010).

23

Demographics

Another challenge for European welfare systems has been the rapid ageing of their populations.

Throughout the developed world, the old-age dependence ratio (the ratio of the population over

65 years of age to the population between 15 and 65 years of age) has risen markedly in recent

decades and as noted in Figure 2-4, the old-age dependency ratio in Europe is expected to nearly

double between 2010 and 2050.

FIGURE 2-4: Old-age dependency ratio for EU25, 1970, 2010, & 2050

FIGURE 2-5: Public pension expenditures (as % of GDP) for selected European countries, 2000 & 2040

Source: European Commission (2007), 60. Source: ECFIN and EUROSTAT data as reported in figure

from Börsch-Supan (2005), 14.

Generous pension and health care systems in Europe assured that public pension and health care

expenditures would constitute a large proportion of public expenditures. The ageing of the

population has produced a rise in pension and health care expenditures that has already

contributed massively to fiscal strains. As shown in Figure 2-5, public pension expenditures are

generally expected to continue to rise over the next decades, and the strains on government

budgets will only worsen as the population continues to age (Pierson 1998). Since most pension

systems are structured on a pay-as-you-go basis funded by social contributions, the ageing of the

population worsens the ratio of workers to retirees, necessitating an increase in social

contributions, cuts in pension benefits, new funding sources for the pension system, or some

combination of these changes. The growth in the retirement-age population and the consequent

trend towards rising social contributions has had particularly pernicious effects upon the

non-wage cost of labour and upon the low-wage, low-productivity workers, who are most

vulnerable to long periods of unemployment.

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Health Care Costs

Health care spending has dramatically increased in recent decades (see Figure 2-6). Between the

1960s and the 1990s, health care expenditures as a percent of GDP doubled in OECD countries,

and they are projected to double again between 1995 and 2020 (Oxley and Mcfarlan 1995). This

escalation in health care costs has placed further stress upon national budgets, particularly in

Europe where a higher proportion of the population is covered by public health insurance

(Pierson 1998). The ageing of the population has driven some of this increase in expenditures.

Much more of the blame for this increase must be attributed to (1) the public demand for more

expensive and more interventionist medical procedures, (2) poor incentive structures in some

health care systems that reward health care professionals for the quantity of services provided

rather than quality of outcomes, and (3) a health sector inflation rate far in excess of the general

inflation rate (Rhodes 1997c:64).

FIGURE 2-6: National health spending (as a % of GDP) for OECD countries, 1960-2008

Source: OECD data as reported in figure from Rampell (2009).

As with the unemployment and pension systems, European health care systems are predominantly

funded via social contributions. As a result, the rise in health care costs has further contributed to

the increase in the non-wage cost of labour and the rise in unemployment among less-skilled

workers.

IMMEDIATE PROBLEMS OF THE 1990S

In addition to the longer-term problems addressed above, states have encountered economic

shocks which further strain national budgets, providing governments with greater impetus to

25

reform how they intervene in their economies. Whether crisis strengthens a government’s

ambitions to reform based upon the general desire to overcome the crisis in order to survive the

next election, whether crisis induces governments to consider reform because they assume they

are likely to be voted out of office anyway as a consequence of the recession, or whether crisis

reduces incentives to stall reform (by raising the costs of waiting and fighting a war over reform

under the ‘war-of-attrition’ model of reform18), crises have been observed to lead to stabilisation

(Nelson 1990; Williamson 1994; Tommasi and Velasco 1996; Høj et al. 2006; Hollanders and

Vis 2009).

In the first half of the 1990s, recession troubled economies throughout the world. The costs

associated with German unification led to a dramatic increase in expenditures and indebtedness in

Germany, and the economic repercussions of unification provoked the currency runs of the

European Monetary System (EMS) Crisis of 1992 and 1993 and put pressures on European states

to raise interest rates during a recession. Finally, the goal of joining the Single Currency led

states to undertake reform efforts in order to meet the convergence criteria required of inaugural

members of the European Monetary Union. While governments may respond slowly to the kinds

of long-term changes described above, these short-term shocks and artificial deadlines create a

context where reform is seen as especially vital and time-sensitive.

Recession

The recession of the early 1990s created a more immediate pressure upon the welfare state. As

growth slowed, unemployment rose and tax revenues fell. As the expanding ranks of the

unemployed and underemployed demanded unemployment benefits, active labour market

policies, social (low-income) assistance, and early retirement, state expenditures rose. Caught

between falling revenues and the rising costs social welfare programs, states were forced to make

choices: they could tolerate rising deficits, reduce outlays (i.e. cut benefit levels and tighten

restrictions on the access to benefits), raise revenues (i.e. increase taxes and social contributions),

or pursue some combination of these policies. While the potential political and economic

repercussions of undertaking any of these courses were unappealing, the severity of the economic

18 The ‘war-of-attrition’ model of economic reform posits that political conflict over the type of stabilisation effort (e.g. whether to increase taxes or decrease expenditures, which taxes or expenditures should be targeted, how to focus the burden of increased taxes or lower expenditures) leads to delays. A reform is passed when one of the competing groups is able to impose its preferred policies after the opponents either have exhausted their ability to resist the desired reform or have concluded that the costs of continuing to resist to the reform exceed the benefits of continuing the fight. For development and extensions of the model, see Alesina and Drazen (1991), Drazen and Grilli (1993), Labán and Sturzenegger (1994), Hsieh (2000), and Alesina, Ardagna, and Trebbi (2006).

26

and budgetary crises created additional impetus for reform and afforded governments some

political cover as they sought to address their problems.

German Unification

With the fall of the Berlin Wall in November 1989 and the unification of Germany in 1990,

Chancellor Helmut Kohl’s government sought to transform the communist economy of the

former German Democratic Republic (GDR) and to integrate its 17 million citizens into the social

market economy of the Federal Republic of Germany (FRG). Kohl’s government adopted a

currency conversion policy and an array of fiscal policies that were highly expansionary. While

these currency conversion and fiscal policies unleashed a consumer spending spree that

temporarily insulated the newly unified Germany from the global recession, they also raised

inflation, increased deficits, and led to a long-term rise in the general debt level. Concerns about

the increase in debt and inflation prompted the Bundesbank to tighten monetary policy, raising

interest rates to the extent that the post-unification boom sputtered out well before the integration

plans were fully implemented. Kohl’s vision of a virtually self-financing

Wirtschaftswunder-style turnaround of the Eastern economy, a goal that had perhaps never been

realisable, proved to be an illusion. Germany fell into recession, unemployment rose, deficits and

debt mounted for cyclical as well as unification-related reasons, and the Kohl government was

forced to reconcile itself to the unpleasant prospect of finding a way to finance the substantial

costs of unification over the long term (Sinn and Sinn 1992; Schwinn 1997; Czada 1998). The

combined effects of recession and reunification would require the Kohl government to not only

address the substantial structural problems of the former GDR but also to re-evaluate the FRG’s

existing social welfare safety net, a pair of projects that continue to trouble German governments

to this day.

EMS Currency Shocks

The Bundesbank’s increase in German interest rates was intended to check inflation in Germany,

but its ultimate effect was to destabilise exchange rates throughout the European Union. Under

the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS), members were

supposed to maintain their exchange rates within a ±2.25% (±6% for Italy) band of their central

parity. In response to the recession, most European states had reduced their interest rates, but as

the Bundesbank raised Germany’s interest rates, investment flowed out of the rest of the EMS

states into Germany. Germany’s neighbours found themselves faced with the unpalatable choice

27

of (1) raising interest rates to retain capital and defend their exchange rates, but at the cost of

economic stagnation, (2) maintaining their interest rates and exchange rates at existing levels, a

choice that would eventually exhaust their foreign reserves, at which point raising interest rates or

devaluation would become inevitable, or (3) allowing their currencies to be devalued and to fall

out of the band prescribed by the ERM. Since even the prospect of a devaluation provoked runs

on the currency and higher risk premia on the national debt, this option threatened to dramatically

compound the costs associated with the already rising deficit and debt levels. In the end, this

imbalance in interest rates within a floating peg system, coupled with speculative attacks by

currency traders, forced the United Kingdom, Italy, Finland, Sweden and Norway to float their

currencies by the end of the 1992, required Spain, Portugal, and Ireland to devalue their

currencies, and led to the ERM bands being widened to ±15% in August 1993. All in all, the

EMS Crises of 1992-1993 led to the loss of substantial amounts of foreign reserves as states

sought to defend their ERM pegs. The Crises also dramatically increased debt-servicing costs

(Eichengreen and Wyplosz 1993; Glick and Rose 1998). They would, however, have beneficial

effects for the project of creating a Single Currency. After this reminder of the vulnerability of

individual currencies to speculative attacks and in response to the devastating effect these

currency attacks had upon state finances, states with a history of weak currencies redoubled their

efforts to join the Single Currency. The EMS Crises thus became a powerful argument that could

be used by reformers to sell the idea that short-term sacrifice was vital in order to avoid

catastrophe in longer term.

The Maastricht Convergence Criteria and the Stability and Growth Pact

A final source of pressures upon European welfare states was the fiscal restrictions imposed by

the convergence criteria for Economic and Monetary Union (EMU) and the Stability and Growth

Pact (SGP). To qualify for EMU, states had to have budget deficits at or below 3.0% of GDP and

debt below or converging downward towards 60% of GDP. Under the Stability and Growth Pact,

states were obligated to pursue ‘sustainable’ fiscal policies that would bring down their debt.

Practically speaking, this meant that states were supposed to reduce their general debt levels and

to run a balanced budget with penalties for running budget deficits in excess of 3.0% of GDP.

The tightening of monetary and fiscal policy to meet the Maastricht convergence criteria, the

highly restrictive monetary regime of the European Central Bank, and the strictures established in

the SGP eliminated states’ ability to engage in an expansionary monetary policy and – at least in

theory – limited states’ freedom to pursue Keynesian fiscal policies in times of economic distress

28

(Hall 1998; Soskice 2000).19 The external constraints imposed by the convergence criteria (and

by the SGP, albeit to a lesser extent) served as an inducement for fiscal reform, particularly in the

areas of social welfare costs, in high-deficit, high-debt EU member states.

AN IMPETUS, BUT TO WHAT END?

This combination of long-term stresses, shorter-term shocks, and institutional strictures has

created an impetus for reform. The long-term stresses provide a more general perception of the

need for policy change. The more abrupt shocks of economic and financial crisis or the

immediacy of a specific deadline, as was the case for qualification to the Euro-zone, create a

more time-sensitive context for economic reform. But as discussed above, these pressures are

countervailing. Just as there is pressure to retrench and reduce state spending, taxation,

regulation, and other forms of government intervention in the economy, there are also pressures –

particularly in times of economic crisis or uncertainty – to maintain or expand the role of the state

in order to provide a social safety net and to promote social justice. Government efforts to

reconcile these goals have produced varied results. Despite these pressures, successful

implementation of reform was by no means guaranteed. During the 1990s there were some

spectacular episodes of failed reform attempts. Some reform efforts have been openly

confrontational, excluding unions from the reform process and endangering their future role in

formulating or administering social welfare policy. Other reform efforts were more consensual,

including unions and employers’ associations in the process of reform and within the framework

of new programmes. Likewise, reform varied widely in regard to who bore the greatest share of

the burden of adjustment.

While the forces creating an impetus to retrench are international, policy responses are generated

at the domestic level. Reform of popular policies exposes governments to the potential wrath of

entrenched interests. In deciding to pursue reform, governments will not only consider the

long-term and immediate economic pressures upon the state (and the resultant but possibly

contradictory political pressures on the body politic). Governments will also be concerned with

the desire to withstand potential opposition and to avoid punishment by the voters in the next

19 Adherence to the fiscal restrictions of the SGP during the 2000s was erratic and the membership of the Euro-zone was unwilling to impose penalties for violations of the SGP, so Euro-zone states did not conform to the SGP’s budget and debt restrictions in the manner that some observers had expected, but the monetary policy of the ECB has consistently been tight. Since 2008 particularly profligate states have, however, been forced by investors and by their fellow Euro-zone members to undertake severe austerity measure to bring their fiscal houses in order and there is the possibility that the current financial crisis, recession, and budgetary overruns will lead to a revision of the SGP, which would provide the authority and capability to monitor compliance with the fiscal targets and to impose penalties upon violators of the targets.

29

election. It is within this context that political leaders choose the approach they take in pursuing

the reform and the content (and consequent distributional implications) of the reform.

EXPLAINING THE APPROACH TO REFORM

When selecting their approach to reform, governments20 have a choice. They can opt for a

confrontational approach, whereby they draft legislation in relative isolation to produce a law that

closely hews to the policy preferences of the reformers. Alternatively, they can embrace a more

consensual approach, negotiating with opposition parties, social partners, and other interest

groups to produce a reform that includes concessions and side-payments that dilute the preferred

policies of reformers, but which make the reform more politically palatable to a wider array of

actors.

My argument is that the choice of whether to utilise a confrontational or consensual reform

approach will be based upon (1) the key reformers’ confidence in their government’s ability to

adopt the reformers’ preferred policy in a relatively unadulterated form without reliance upon the

parliamentary opposition and (2) the leadership style of the key reformers. In deciding how

confident they are that their government will be able to pass the preferred reform, the reformers

will consider the concentration of power in the government’s hands, an assessment made on the

basis of (a) the size and strength of their coalition and the degree of ideological cohesion between

reformers and the members of the government’s coalition, (b) the ability and inclination of veto

players to block reform, (c) the ability of potential opponents of reform to mobilise and make

passage of the reform politically costly for the government, and (d) the proximity of elections.

In brief, reformers are more likely to adopt a confrontational approach when they are more

confident about their strength (i.e. when power is more greatly concentrated in their hands), when

elections are distant, and when key reformers have a more dictatorial leadership style. In these

situations, reformers will feel freer to adopt a confrontational approach in order to try to achieve a

reform that is more partisan in its content, hewing more closely to the reformers and the

governing coalition’s political values and policy preferences. By contrast, reformers are more

likely to pursue a consensual approach when they feel less confident about their ability to

unilaterally pass reform (i.e. when power is less concentrated in their hands), when elections are

proximate, and when key reformers have a more consultative leadership style. Under these

circumstances, reformers will be more inclined to adopt a consensual approach to try to gain 20 Government is defined here as the prime minister and his cabinet, particularly the cabinet ministers whose areas of compétence encompass the policy area being reformed.

30

support from the parliamentary opposition or the social partners in order to ease passage of the

reform, albeit a reform that will include concessions and side-payments.

GOVERNMENT CONFIDENCE AND POWER CONCENTRATION

Strength of the Governing Coalition

For political leaders assessing the strength of their coalitions, the most important issues would be

the coalition’s size and its level of fragmentation (i.e. the number of parties in the coalition, the

level of party discipline within each of these coalition members, and the degree of ideological

cohesion or polarisation within and between the parties). Ceteris paribus, larger majorities afford

the governing coalition somewhat greater leeway by reducing the influence of a few isolated

defections21, while minority governments and governments with narrow majorities will be in a

weaker position. Furthermore, the more parties within a coalition (and the more factions or wings

within parties), the greater the likelihood that inter-party (or intra-party) jockeying for power will

increase the difficulty of developing a coherent reform policy and maintaining the coalitional

cohesion that is essential for the government’s survival (Roubini and Sachs 1989; Weaver and

Rockman 1993:24; Haggard and Webb 1994).

Higher levels of party discipline may not increase ideological agreement on the issue of reform,

but when the party leadership is able to exert pressure on its members in order to induce them to

vote for the reform legislation and when the prime minister has greater leverage over the voting

behaviour of coalition partners, the reform leadership will be more confident of the government’s

strength.

Finally, a reform leadership assessing the strength of its coalition will consider the degree of

ideological cohesion within and between the coalition members (and vis-à-vis the key reformers).

As Tsebelis has noted, cohesion – “the similarity of policy positions of the constituent units of

each veto player” – increases the veto players’ ability to effectively exercise its power to push (or

block) reform (1995:301). When the reform leadership has a large, cohesive majority with high

levels of party discipline and with fewer coalition partners or factions, the government will be

more confident about the strength and stability of its coalition and about its ability to get the

reform beyond that first veto point of passage of the reform in parliament.

21 Larger majorities may be drawn from a wider political spectrum and, therefore, may be prone to greater ideological divergence on reform issues, but this is fundamentally a matter of ideological cohesion within the party or coalition rather than a matter of size, per se.

31

Veto Points

The structure of the political system creates veto points, and these veto points constrain a

government’s policy reform efforts (Tsebelis 1995, 2000). These veto institutions take a number

of forms, including heads of state, federalism, bicameralism, the courts, and even some indirect or

informal veto players, such as central banks or the social partners. Though reform of the status

quo is generally considered to be more difficult as the number of veto points increases (Tsebelis

1995, 2000, 2002), this is only one of many relevant factors the reform leadership will consider as

they assess the ability of veto players to block reform and their inclination to exercise that power.

The ability to block reform increases with the expansion in a veto players’ areas of compétence

(i.e. certain constitutionally-prescribed policy areas versus all policy areas), the extent of that veto

power (a suspensive veto versus an absolute veto), and in cases of veto points composed of

multiple individuals rather than a particular individual, the cohesion within that veto institution.

The inclination to exercise veto power will generally reflect the degree of cohesion within and

congruence among veto players. Thus, a veto point held by actors who are relatively unified in

opposition to the reformers’ proposed legislations poses a much greater threat to the reform

agenda than a veto point held by actors divided on – or even supportive of – the reform.

Executives

In presidential systems,22 the separation of powers reduces the degree of control that the

government can exert over the legislative body. Parliamentarians in a presidential system can

vote against the government without fear of direct repercussions for themselves…at least until the

next election, when the electorate’s memory of the event may be dim. In parliamentary systems,

by contrast, the government is elected by and is responsible to the parliament. Members of

parliament in a presidential system lack the power to bring down a government, but this power of

the parliamentary system comes at a high cost. The absence of divided government in a

parliamentary system clarifies responsibility for failure, making blame avoidance more difficult.

And by virtue of the prime minister’s ability to dissolve parliament and call new elections, a

government in the parliamentary system has a powerful means to convince parliament to support

the government on controversial bills (Lijphart 1984; Weaver and Rockman 1993).

22 None of the cases considered in this dissertation are presidential systems, and throughout the dissertation, the emphasis is on the dynamics of reform in parliamentary democracies. There is, however, no substantial reason to expect that the theories proposed in this dissertation would not be applicable to a presidential system, so this point regarding the difference between presidential and parliamentary systems is included for the sake of comprehensiveness.

32

Dual executives in a parliamentary system are not uncommon. In most cases, including Italy and

Germany, presidents have a largely ceremonial position and primarily play a suasive role in

shaping public discourse. In cases like France, where the head of state has substantial powers, the

president can either support or impede prime ministers’ reform efforts. The president may or may

not have an absolute or a suspensory veto power, but even in the absence of a formal veto,

presidential opposition to a reform may make it more difficult for the prime minister to gain

parliamentary or public support for the reform. Elections on a different basis or at different times

increase the likelihood the parliament and the presidency will be controlled by

ideologically-opposed parties, reducing the degree of congruence (the overlap of preferences)

between these veto players. When there is a high degree of congruence between the prime

minister and the president, the government will have a much freer hand to pursue controversial

policies. In times of cohabitation, when the prime minister and the president come from different

camps (and have a lower degree of congruence), the prime minister may find his options more

limited.

Bicameralism

The structure of the parliament itself may create veto points. Bicameralism can act as a check on

the government, particularly when the second chamber has extensive areas of compétence, when

it has an absolute veto, when it has high cohesion, and when there is low congruence between the

two chambers of parliament. In some cases, particularly when one of the chambers represents

subnational units, the areas of compétence for the upper chamber may limit the extent to which

veto powers are exercised.23 Where the composition and electoral rules of the upper and lower

chambers are similar (e.g. Belgium, Italy, Netherlands), the majorities in each chamber are likely

to be nearly identical, and bicameralism is unlikely to make a difference. Where the two

chambers are elected on different bases (e.g. France, Germany, Switzerland, the United States),

the majorities in the two chambers may be held by different parties, decreasing their likely

congruence. In cases where the upper chamber is indirectly elected by state or local officials, as

is the case in Germany and France, respectively, or where the size of constituencies and

apportionment of seats differs markedly between the two chambers, congruence between may be

23 The Italian and French Senates can amend or refuse to pass any law, and in the Italian Senate this is an absolute veto, whereas in France if the upper and lower chambers can not agree, the lower chamber can override the veto by re-passing the law at the request of the government. By contrast, Germany’s upper chamber of parliament, the Bundesrat, has an absolute veto for laws within the areas of compétence of the Länder (federal states), namely amendments to the Grundgesetz (Basic Law, Germany’s ‘constitution’), policy areas for which the Grundgesetz grants the Länder concurrent powers, or policy areas for which the Länder have administrative powers. For all other policy areas, the Bundesrat has a suspensive veto which can be overridden by re-passing the law in the lower chamber, the Bundestag.

33

low. Congruence between upper and lower chambers can also be lower when elections to the

lower chamber and elections (or appointments) to the upper chamber are staggered.

Federalism

Federalism can also create veto points that restrict the ability of reformers to pursue their agendas.

The areas of compétence of these sub-state veto players may be restricted to issues that directly

affect the state or regions’ rights or the policies which they administer, or the area of compétence

may extend to all issue areas. The veto power of these sub-state actors may be absolute or

suspensory. As variation in the circumstances of federal and sub-state units increases,

congruence between these federalist veto players and the reformers diminishes, making it more

difficult for the government to pursue reform.

The Courts

The role of the courts as a veto point in the area of economic policy reform is generally

considered to be rather restricted, primarily due to the judiciary’s areas of compétence being

perceived as limited to constitutional review. According to this logic, a court can rule on

statutory matters, but legislative majorities can overturn these decisions and it is only in the

relatively narrow arena of constitutional matters that the courts have absolute vetoes. As such,

the judiciary is treated as a potential, but external and ex post veto point (Weaver and Rockman

1993: 26) with courts engaging in the relatively mechanical application of constitutional norms to

invalidate the government legislation (or possibly quite minor aspects thereof) once it has been

passed.

While courts are generally treated as exogenous to the political sphere (Scharpf 1997: 98), they

can indirectly play an ex ante role in policy formation, either by the judiciary advising

governments during the policy-formation process or by the prospect of judicial intervention

inducing governments to tailor their reforms in a manner that will make them more likely to

survive constitutional review (Stone 1992). Composed of legal professionals with highly

specialised training and generally benefiting from long terms of office, the courts are unlikely to

exhibit the congruence with parliament that is more common in governmental bodies more

exposed – and, therefore, arguably more responsive – to the public mood. The strength of

constitutional review-related vetoes and the potential for very low congruence between courts and

reformers might be expected to exert a significant check on reform, albeit one muted by potential

34

restrictions on the areas of compétence of the judiciary or one masked by the relatively subtle

nature of ex ante changes in legislation to avoid judicial intervention later.

Central Banks

Central banks do not possess any direct ability to veto legislation, yet independent central banks

can indirectly influence policymakers via their control over monetary policy. Faced with fiscal,

wage, or other economic policies that they find inflationary, central bankers are not only capable

of responding with tighter monetary policy, they may, indeed, be statutorily tasked with the

responsibility to intervene in order to prevent inflation. In states with long histories of

conservative, independent central banks, governments may generally be deterred from pursuing

highly expansionary fiscal or incomes policies. This deterrent effect is not, however, always

effective. In times of recession a government may be willing to risk tightened monetary policy in

the longer term in an effort to stabilise the economy in the shorter term.24 Furthermore, monetary

policy as a deterrent to expansionary fiscal policy is a blunt instrument, and it is unlikely to be

used in response to relatively narrow reforms that are not expected to have a broad impact upon

the general inflation rate. Finally, in the case of fiscal retrenchments, central banks would not be

expected to intervene, since such reforms would not be expansionary.

Social Partners25

Although typically not understood to be veto points in the classical sense (e.g. Tsebelis 2002;

Jochem 2003) and despite their lack of formal veto powers in the policymaking process, under

certain circumstances, the social partners may act as informal veto players (Béland 2001, Natali

and Rhodes 2004b). In liberal countries the unions and employers’ associations are primarily

relegated to being a few of many competing and freely organised groups operating outside the

policy process, but in states where neo-corporatist concertation has developed, the social partners

are involved in the policy process as recognised, indispensable partners who share some

24 Even Germany, a country with a long relationship with an independent, conservative central bank, has at times openly flouted the anti-inflationary missals of the Bundesbank. Kohl’s unification-related currency conversion and fiscal policies were intensely inflationary. While it may be argued that political concerns or social justice values led the Kohl government to adopt a very generous Ostmark to Deutschmark conversion rate and while it may be argued that the Kohl government honestly believed that a highly expansionary fiscal policy would be a necessary and effective one-time ‘jumpstart’ of the East German economy, the recommendations of the Bundesbank (and, indeed, the Finance Ministry) were largely ignored during this time period, showing that even where there is clear communication of a deterrent threat by an actor fully capable of imposing penalties, such deterrence efforts can fail. For further detail on the policies and decisions related to Germany, see Chapter 5 and see Dornbush, Wolf, and Alexander (1992), Sinn and Sinn (1992), Sinn (1995), Boltho, Carlin, and Scaramozzino (1997), and Schwinn (1997). 25 “Social partners” denotes the trade confederations that represent labour, particularly union members, and the employers’ associations that represent business.

35

responsibility for the development and implementation of government policy (Schmitter 1982;

Regini 1984). Where the political system has relied upon the social partners as administrators of

some aspects of the social-welfare safety net, the social partners can become de facto veto players

and can block reform (or some aspects thereof) by failing to implement it.26 In some countries,

the social partners may even have formal veto power in some policy areas as a result of the

statutory or constitutional extension of rights to these non-governmental actors.27 At the very

least, in states with strong traditions of labour mobilisation or with strong institutionalisation of

the social partners’ role in policy, policymakers ignore the social partners at their own risk.

Alienated social partners may seek to organise opposition in the form of protests, strikes, and

information campaigns, and if they are successful the government may find itself confronted by a

public mobilised against the reform and possibly against the government itself.

Strength of the Opposition

Many of the considerations related to the strength of the governing coalition (size, extent of

fragmentation, level of discipline, degree of ideological cohesion) are also relevant in considering

the strength of the parliamentary opposition and of the social partners. Where opponents of the

reform control a veto point, the greater the degree of cohesion among these opponents and the

lower the degree of congruence between reformers and reform opponents, the more difficult it

will be for the government to overcome resistance to the reform.

But even in cases where the opponents of the reform do not control a veto point, they may be able

to impose political costs on the government. Fritz Scharpf argues that blame for painful reforms

is not automatic, but dependent upon the decision and ability of reform opponents to mobilise the

public (1998:183-185). His theory of democratic accountability posits that “[i]f the opposition

does not oppose a policy…the voters will always ignore it” (Scharpf 1997:193, fn. 5). Cuts in

benefits, if recognised, are likely to incense voters who are current, future, or potential recipients

of these benefits. Political competitors may find this an exploitable opportunity if their partisan

orientation is consistent with the claim that their party would not cut these benefits. The

26 By way of example, the German health-care sector social partners were charged under the Health Care Reform Law (GRG) of 1989 with responsibility to establish, monitor, and enforce compliance with guidelines for cost-effective and ‘clinically-consistent’ care. Their failure to do so essentially gutted much of the cost-savings provisions of this law (Giaimo and Manow 1997:189; Giaimo 2003:107-111). Similarly, the refusal of large export-oriented manufacturers to implement the government’s 1996 Sparpaket provisions reducing sick pay hampered the Kohl government’s efforts to reduce the non-wage cost of labour (Bispinck 1997; Bispinck and Schulten 2000:190; Clasen 1997; Pochet 1998; Streeck 2005:156-158; Swank 2002:177-178). 27 The social partners in Germany are granted complete autonomy in the setting of wages, a right guaranteed in the German Grundgesetz (Art. 9 Abs. 3 GG).

36

possibility of outraged voters exacting punishment at the polls means that would-be reformers

will be mindful of voters who could potentially mobilise even in the absence of ongoing

organised activity (Arnold 1990).

The ability of the opposition to focus blame and impose costs upon the government will depend

upon the strength and unity of that opposition. For political parties in the opposition, strength

would not simply be measured in terms of the number of members in parliament at the time of the

reform; it would also reflect the more general popularity of the opposition parties and their

potential for being able to capitalise on shifts in public opinion to gain a majority (or gain enough

support that they will be able to form a governing coalition) in the next election. Even relatively

small parties, however, could wield influence if they have the potential to draw enough votes

from the governing parties (or drive enough voters away from the governing parties), so that the

government would lose its majority after the next election. For the social partners28, strength

would not just be measured in terms of the number of members, but would also reflect the ability

of the social partners to mobilise their members and sympathisers. Membership in unions and

business associations has been declining in most advanced industrial democracies, but their

ability to mobilise their members has remained impressive.

Fragmentation of the potential opposition undermines the strength of these actors. Internecine

jockeying for power creates incentives for parties or trade unions to not cooperate. Where there

are genuine divides in the ideologies or interests of political parties, unions, and business

associations, cohesion among these potential reform opponents will be low. In such cases, the

opposition may be more susceptible to a divide-and-rule strategy, whereby the government

provides concessions to some opposition parties or to some of the social partners, whose positions

are more congruent with the governments. In doing so, the government may have to sacrifice

some of its priorities, but by co-opting these potential opponents, the government may be able to

claim there is a relatively broad consensus on the need for or the desirability of reform, allowing

it to somewhat depoliticise reform and diffuse blame (Weaver 1986).

Elections

Electoral considerations have a long shadow. Governments care about being re-elected.

Re-election is necessary for the advancement of politicians’ careers and for the propagation of the 28 Though trade unions are the most obvious example of social partners, which measure their strength in terms of the number of members and their ability to mobilize those members, this argument is also relevant to other examples of social partners, including the associations representing health care professionals and other members of the Mittelstand (small and medium-sized businesses).

37

policies and values they prefer. By creating winners and losers, reform efforts can improve or

endanger governments’ re-election prospects. While this can induce reformers to advocate or

eschew particular policies, it also affects the timing of reform efforts.

Haggard and Webb (1994) have observed that the window of opportunity for reform that opens

subsequent to a crisis is generally better exploited by newly elected governments, which

“typically enjoy a period in which the costs of adjustment can be traded against political gains”

(8). The explanations for this observation vary. The political business cycle literature29 suggests

that reforms would be pursued at the beginning of an electoral cycle if these reforms include

fiscal stabilisation that would have a contractionary effect upon the economy. Conversely,

contractionary reforms would be avoided during the run-up to an election. This tendency would

be moderated in cases in countries with staggered elections. Governments at the beginning of

their tenures would be cautious about pursuing deep reforms during the run-up to a particularly

significant election or to a large number of minor elections.30 In cases where staggering or

frequency of elections narrows the window of opportunity, significant reform can become more

politically contentious and difficult.

The war-of-attrition model’s rationale for the effect of electoral cycles on the timing of reforms

focuses on elections as providers of information. Elections which provide clear results may

consolidate the power of a pre-existing government or may replace the old government with a

new one with a strong majority or mandate. Regardless, an election with unambiguous results

provides information to groups supporting or opposing various reforms, and as a result of losing

the election, the weaker group is more likely to concede to the election’s winners. According to

the rationale of the war-of-attrition model, late in the election cycle reform supporters and

opponents have incentives to stall the reform process, in order to see if the election will resolve

uncertainty regarding which group is stronger (Alesina, Ardagna and Trebbi 2006). On the other

hand, members of the opposition may be willing to facilitate (or at least tolerate) reforms if they

recognise that reform is necessary, if their reform preferences are not markedly different to the

29 For discussion of the political business cycle literature, see Nordhaus (1975), Alesina, Roubini, and Cohen (1997), and Drazen (2000). 30 French parliamentary and presidential are staggered, scheduled for every 5 and 7 years, respectively. This creates incentives for reformers to time their efforts in a manner that minimises the potential electoral backlash. Such a strategy becomes more difficult in countries with large numbers of potentially significant elections. Elections in Germany’s Länder are not synchronised with each other or with federal elections. Since the Länder appoint the membership of the Bundesrat, German reformers contemplating a major reform package must consider the composition of the Bundesrat, the partisan composition of the government in the Land with upcoming elections, and whether a reform package would likely have a detrimental effect on the future composition of the Bundesrat. With the increase in the number of Länder from 11 prior to unification to 16 since unification, windows of opportunity for reform have somewhat narrowed.

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reforms proposed by the government, or if they prefer to avoid blame for the reform. In such a

case, the opposition parties in parliament may opt not to strenuously contest a reform in hopes

that the reform will pass before the elections and that they will then be victorious in the elections,

allowing the new government to avoid the need to pursue politically costly reform on their watch.

Regardless of the rationale for an electoral basis for the timing of reforms, I would argue that we

can expect governments to undertake difficult reforms earlier in the electoral cycle. In the cases

of governments elected on a platform of reform or in rejection of the previous governments’

policies, I would expect that the government would take their election as a mandate to pursue a

more sharply partisan and confrontational reform effort. In contrast, for governments with more

ambiguous election results and weak mandates or with no mandate (e.g. a government that came

to power not through election, but due to the collapse of the previous government), I would argue

that the lack of an explicit electoral mandate might moderate partisan inclinations and lead to a

more consensual approach to reform.

LEADERSHIP STYLE

The policymaking process is not a simple mechanised interaction of institutions; individuals and

circumstances play a role in shaping the process and the outcome. As they engage in the policy

making process, reformers may be inclined towards a more hierarchical and dictatorial leadership

style or towards a more participatory and inclusive leadership style. The legacies of inherited

cultural and class traditions, behaviour learned from familial, educational, or professional

experiences, and even psychological quirks may provide leaders with particular interpersonal

skills and predispose them towards particular leadership styles. Nonetheless, leadership is a

dynamic, ongoing process in which the leaders, their colleagues and counterparts, and their

subordinates will change their styles as they encounter and respond to shifting circumstances

(House and Aditya 1997). As a result, theories of leadership and organisations posit that

leadership is not simply a matter of exhibiting certain traits. Rather leaders need to adapt their

leadership styles to the unique situations confronting them (Fiedler 1967, 1977; House 1971,

1977; House and Mitchell 1974; Fiedler and Garcia 1987).

Despite this prescription for effective leadership, there remains the possibility that a leader’s own

inclinations towards a dictatorial leadership style or towards a collaborative style will determine

the approach towards reform efforts, even when the institutional and political circumstances

might warrant a more consensual or confrontational approach. And where the leader’s style and

39

approach is inappropriate to the context, reform efforts may fail. A leader with a highly

hierarchical or ‘dictatorial’ style, who chooses to pursue a confrontational approach to reform

when the context warrants some moderation via negotiations or concessions, may provoke a

backlash that ultimately undermines both the reform process and the leader’s own government.

Conversely, a leader with a participatory, consultative style may prove ineffective in a context

requiring a strong approach, as the leader finds himself unable to mobilise the forces required for

change (Cheema 2009).

APPROACH TO REFORM – SUMMING UP

As governments seek to adapt their state’s economic, fiscal, and social policies to better address

the myriad economic and political challenges discussed above, reform leaders will choose an

approach to reform. They can decide to pursue an approach that is more confrontational,

working in relative isolation to produce a deeper and more focused law that better reflects the

policy preferences of the key reformers and presenting it as a virtual fait accompli to parliament.

Alternatively, they can decide to pursue an approach that is more consensual, engaging in

negotiations with opposition parties, the social partners, and other interested parties to produce a

reform that includes some concessions and side-payments that may make the reform more

politically palatable, but which will dilute the preferences of the key reformers.

My argument is that the choice to utilise a confrontational or consensual reform approach will be

based on (1) the key reformers’ confidence in their government’s ability to adopt the reformers’

preferred policy in a relatively unadulterated form without reliance on the parliamentary

opposition and (2) the leadership style of the key reformers. In deciding how confident they are

that their government will be able to pass the preferred reform, the reformers will consider (a) the

size and strength of their coalition and the degree of ideological cohesion between reformers and

the members of the government’s coalition, (b) veto points and the degree of ideological

congruence on reform between reformers and veto players, (c) the ability of potential opponents

of reform to mobilise and make passage of the reform politically costly for the government, and

(d) the proximity of elections. When the reformers are relatively more confident about their

ability to pass reform (i.e. when power is concentrated in their hands due to their having a large,

stable parliamentary majority, high cohesion within the governing coalition regarding the reform

policy, control over most or all veto points, a fragmented opposition unable to effectively

mobilise its constituents or the general public on the issue) and when elections are distant,

reformers will feel freer to adopt a confrontational approach in order to pursue a reform closer to

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their ideal. In agreement with Giuliano Bonoli (2001) and Duane Swank (2001), I argue that the

concentration of power in the hands of the government enables it to pursue a sharper reform

course and this sharper reform course will be more confrontational in approach and more partisan

in content.

When reformers are less confident about their ability to pass reform because power is less

concentrated in their hands (i.e. when they have a narrow or fractious majority, when they are a

minority government, when the governing coalition is divided on the reform, when reform

opponents control essential veto points, when opponents of the reform are united and able to

mobilise the public on the issue) and when elections are proximate, reformers will be more

inclined to adopt a consensual approach to seek support from the parliamentary opposition or

social partners in order to ease passage of the reform, albeit a reform including concessions and

side-payments. I agree with Peter Starke that concentration of political power also concentrates

political accountability, so that “…dissatisfied voters know very well who [sic] they may blame

for unpopular cutbacks” (2006:109), but I disagree with his conclusion that politically fragmented

systems will likely pursue deeper retrenchment. Blame avoidance can be pursued through

varying means (e.g. delayed or phased-in reforms, outsourcing of some aspects of decision

making to semi-autonomous bodies, introduction of automatic mechanisms that shift discretion

over benefit cuts or tax increases to the relative obscurity of a bureaucracy). However, political

fragmentation makes it more difficult to gain support for serious reform since the profusion of

veto players in a fragmented system creates too many opportunities for the reform to be vetoed or

for the reform to be diluted in order to obtain the assent of veto players. Thus, I argue that greater

fragmentation of power would make reformers more sceptical about their ability to pursue a sharp

reform course, leading them to be more likely to pursue a consensual approach.

Finally, the leadership styles of the prime minister and other key reformers also affect choices

regarding whether the reformers will adopt a more confrontational or more consensual approach

to reform. As discussed above, the literature on theories of leadership and organisations argues

that leaders need to adapt their leadership styles to their changing circumstances (Fiedler 1967,

1977; House 1971, 1977; House and Mitchell 1974; Fiedler and Garcia 1987). Nonetheless, a

leader’s own inclinations towards a dictatorial or collaborative leadership style may lead him or

her to adopt a more confrontational or more consensual approach to reform than would be

expected based solely upon an assessment of the government’s actual ability to pass reform

unilaterally.

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EXPLAINING THE CONTENT OF REFORM – PARTISAN POLITICS

The content of reforms and distributional implications of reform have varied widely. Some

reforms have concentrated more upon increasing revenues, while others have focused upon

cutting expenditures. When seeking new funding sources, some governments relied more upon

regressive taxes, such as social contributions or consumption taxes (e.g. value added tax (VAT),

excise taxes), while others focused upon less regressive taxes, such as income or wealth taxes.

The distributional effects of tax policy have been magnified by some governments’ decisions to

‘claw back’ social expenditures via taxation of pension or unemployment benefits, while other

governments have increased the basic deduction or created tax credits for the poor.31 When

cutting government spending, some reforms have relied upon across-the-board cuts, while others

have focused upon more closely targeting benefits to the needy via means-testing or

income-testing, and still other reforms have added or increased fees for utilising public services

(e.g. introducing or increasing co-payments for health care, raising public transit fares). Even

programmes intended to reduce the state role in the economy, like privatisation of state-owned

enterprises or the introduction of second pillar pensions, have shown great variance in terms of

which groups benefit and which bear the costs. What accounts for these differences in the

distributional implications of reform?

Partisanship matters. This was an uncontroversial observation in the studies of the political

power of Social Democratic, Christian Democratic, and Liberal parties in the construction of

strikingly different welfare regimes during the evolution of the welfare state (Shalev 1983;

Esping-Andersen 1985, 1990; Korpi 1989; Hicks and Swank 1992; Garrett 1998b; Hicks 1999;

Iversen and Cusack 2000). Analyses of the welfare state since the 1970s, however, have found

substantially less evidence for a partisan effect in the “age of retrenchment.” Studies have varied

in their explanations. On the one hand, there is the claim that the existence of the welfare state

created vested interests which check the right’s attempts at retrenchment. On the other hand,

there is the claim that structural factors – the mature welfare state’s ‘growth to limits’, pressures

from globalisation, the post-Fordist transition to a service economy, and demographics – check

the left’s ability to further expand the welfare state. Regardless, the general conclusion is that

convergence pressures are operating on the right and the left (Pierson 1994, 1996, 2001a; Castles

1998; Ross 2000; Huber and Stephens 2001a,b).

31 The US’ Earned Income Tax Credit and the UK’s Working Families Tax Credit are noteworthy examples of the use of tax credits as a transfer mechanism.

42

These studies and conclusions are, however, flawed. Claims that there has been a convergence in

the policies of the left and right are problematic on a theoretical level. There may be more

pressure to constrain total expenditures and there may have been a general shift rightward of all

parties in recent decades, but there is no reason to expect the elimination of a gap in preferences

between left and right. Torben Iversen’s stylised theory of shifts in demand for a social welfare

safety net recognises institutional and structural constraints and a rightward shift in the median

voter that may have prompted a rightward shift in all parties, but still finds no reason that

differences between the parties have necessarily narrowed. While leftist parties may accept some

cuts to the welfare state, parties of the right demand bigger cuts. Not only can the difference

between parties theoretically remain the same, it could even increase (Iversen 2001). Herbert

Kitschelt provides a theoretical rationale for the supposed convergence in party preferences and

for the existence of policies seemingly inconsistent with a left-right divide. His insight is that

leftist support for cuts may be a strategic decision by the left to introduce some pre-emptive cuts

that are relatively small as a means to defuse growing pressures for larger cuts, while the right

may in the short-term resist some cuts as a means to defuse public concerns over unmet demand

for a larger social welfare safety net or public apprehension that the right intends to generally cut

social protections. Despite these individual examples of leftists supporting cuts or the right’s

transient resistance to cuts, a full understanding of differences between left and right must be

based upon a consideration of the broader array of policies those governments implement.

Focusing upon Christian Democratic parties, Social Democratic parties, and Liberal parties rather

than a simple left-right divide, Iversen and Wren (1998) propose a theory that partisan differences

not only remain, but are essential for understanding divergent national responses to increasing

unemployment, inequality, and budgetary restraint. Common to all of these authors are

theoretical justifications for continued partisan differences.

There is empirical support for these claims of continued partisan differences. Analyses of party

manifestos show little or no evidence for a convergence in major parties’ positions on social

justice and the welfare state. Although there has been a general shift towards less expansion or

towards some contraction of the welfare state, a substantial difference remains in terms of the

degree of expansion (or contraction) that these parties support (Budge et al. 2001). And there

seems to be little evidence for claims that these differences in party manifestos amount to cheap

talk. The large array of case studies in Scharpf and Schmidt’s volumes (2000) supports the claim

that there are persistent differences in partisan positions on welfare and employment relations in

Western Europe.

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Cross-national statistical analyses showing convergence in the spending and tax levels of left and

right governments are also flawed. The most common measures of ‘welfare effort’ focus upon

the levels of or change in total public social expenditure or total transfer payments as a percentage

of GDP or focus upon the expenditures on particular programmes as a percentage of GDP

(Garrett 1998; Huber and Stephens 2001 a,b; Swank 2002; Potrafke 2009). Even in some

qualitative studies of cases, there is ultimate reliance upon measures of government spending and

transfer data as a percentage of GDP (Pierson 1996). While some of these studies did control for

changes in the number of beneficiaries,32 variation in GDP growth rates,33 catch-up effects in

countries with less-developed social welfare systems,34 lag between adoption and implementation

of policies,35 and degree of trade and investment openness of individual countries,36 many of the

studies omitted some of these important controls, allowing time-dependent or country effects to

mask partisan differences. Differences in tax structures can also have a confounding effect on

analyses of levels of social welfare effort because they can cause measures of social expenditures

as a percentage of GDP to overstate or understate net transfers.37 Finally, analyses focusing upon

32 Changes in the structure of the dependent population can outweigh changes in per-recipient benefits. Pierson’s studies of Thatcher’s Britain and Reagan’s America (1994, 1996) found that the extent of retrenchment was less than expected. On the other hand, a dramatic rise in unemployment in Britain outweighed the decline in unemployment replacement rates from 48% to 30%. The rise in expenditures on unemployment as a percentage of GDP masks the dramatic decline in per recipient payments during a time when GDP growth was low or negative. Likewise, federal spending on social welfare programmes in the US is highly focused upon retirees, so the rise in the number of pensioners somewhat masks the extent of cuts made in social welfare spending under Reagan. Clayton and Pontusson (1998) offer an assessment of Thatcher and Reagan-era reforms that supports the argument that these two governments of the right cut social welfare programmes to a greater degree than Pierson’s studies suggest. 33 Differences in growth rates make the use of spending as a percentage of GDP problematic because the most developed welfare states generally suffer from lower productivity and diminished growth rates as their countries transition towards a post-industrial service economy. With low growth rates and the provision of state services, particularly health care, which grow more quickly than inflation or GDP, we should expect that these expenditures would grow as a percentage of GDP, even without factoring in increases in the growth of the number of beneficiaries (Iversen and Cusack 2000). 34 Given the variation in levels of welfare spending between countries which industrialised and developed welfare systems earlier and the newly industrialised countries that have only started developing modern welfare state structures in the last few decades, we would expect higher growth of welfare state spending as a percentage of GDP among these late developers. Without careful controls for ‘catch-up effects,’ statistical analyses of partisan effects on welfare state spending are likely to find statistically insignificant differences between left and right (or among Christian Democrats, Social Democrats, and Liberals) because the variance in spending as a percentage of GDP between mature and developing welfare states could mask the partisan differences within these states. 35 While the lag between a government adopting a policy and that policy starting to have an impact upon spending or taxation as a percentage of GDP can theoretically be somewhat controlled for via the introduction of a time-lag variable, variations in the duration of phase-in periods and the adoption by multiple governments of a series of policy reforms with differing phase-in periods make it highly difficult to disentangle the effects of particular governments’ policies over time. Since delayed or phased implementation of unpopular reforms is favoured by governments seeking to avoid blame for painful cuts or taxes, the difficulty of controlling for policy lag in statistical analyses becomes increasingly problematic as the number of lag effects and the duration of the lag increase. 36 Allan and Scruggs (2004) posit that if openness to trade and investment is correlated with left government, differences between left and right parties may be masked by differences in spending and taxation between more and less open countries. 37 Differences in tax systems may mask variations in benefit levels and the disposable income of individuals. In states where pensions or unemployment benefits, per se, are taxed as income, measures of gross social spending will overstate

44

gross or net levels of social welfare expenditure, transfers, or taxation tell us little about the

distribution of costs and benefits.38 Given the differences in constituencies of left and right

parties (or of Social Democratic, Christian Democratic, and Liberal parties), the failure to focus

upon the distribution of costs and benefits is particularly profound because focus upon spending

levels alone tells us little about the outcomes – decommodification, status maintenance, or

poverty relief – that parties actually value.39

Policy Preferences: Left versus Right

Reflecting the differences in their constituencies and their values, parties of the left and right (or,

alternatively, Liberal, Conservative/Christian Democratic, and Social Democratic parties) will

pursue reforms with strikingly different implications in terms of their distribution of costs and

benefits. Traditional theories of partisanship propose a left-right divide where the different

parties align with the interests of labour (or lower socio-economic classes) and capital (or higher

socio-economic classes). Given these differences in constituencies, left parties prefer higher

levels of spending, which they utilise to redistribute market-allocated resources to labour, while

right parties generally prefer lower levels of spending and eschew redistribution. Because of

these differences in constituencies, left- and right-wing parties would exhibit divergent levels of

concern about inflation and unemployment, leading them to prefer different ideal points along the

Phillips curve. More concerned about unemployment than inflation, left-wing parties would

prefer more expansionary fiscal or monetary policies as a means to stimulate the economy and

reduce unemployment. With more concern about inflation’s cross-class redistributive effects on

market-allocated resources, right-wing parties would prefer higher unemployment to higher

inflation and would, therefore, eschew large deficits and strongly counter-cyclical policies (Hibbs

1977; Tufte 1978).

There are certainly grounds for scepticism about the validity of an exploitable Phillips curve and

of the feasibility of partisan cycles, given the rational-expectations critique that fully expected

net expenditure levels (Adema 1998, 2001). Conversely, in countries which have used the tax code as a transfer method (e.g. refundable tax credits for low-income individuals and families), failure to include these transfers in social welfare expenditures will understate the extent of social protection (Howard 1997). 38 To be fair, reservations about the use of public social expenditure, transfer payments, or taxation as a percentage of GDP or expenditures on particular programmes as a percentage of GDP are well documented (Esping-Andersen 1987, 1990; Castles and Mitchell 1992; Clayton and Pontusson 1998). Nonetheless, this data continues to be used because it is the most readily available. With their utilisation of after-tax replacement rates for unemployment and sick pay benefits, Allan and Scruggs (2004) do suggest an alternative approach to measuring ‘welfare effort.’ An expansion of this work to pension, family benefits, and other policy areas would be welcome. 39 Esping-Andersen observed that spending levels were essentially derivative of, and not a good proxy for, the policy goals of Social Democratic, Christian Democratic and Liberal parties. He concluded pointedly “it is difficult to imagine that anyone struggled for spending per se” (1990:21).

45

macroeconomic policies are ineffective (Alesina 1987, 1988). Likewise, there is

country-evidence casting doubt upon the earlier proposition that left governments are fiscally

profligate and right governments are fiscally prudent. As discussed above, the evidence of recent

years suggests that there are growing constraints on spending and taxation that have reduced

left-right variability on the level of taxation or spending, but this does not address the issue of the

potential for partisan differences in the targeting of those taxes or expenditures.

Regardless of the questionability of some aspects of the early variants of the partisan cycle

theory, there remains strong evidential support for the idea of enduring and substantial left-right

variation in preferences for redistribution, as well as continued left-right variation in attitudes

towards the desirability of attempting counter-cyclical fiscal policies, regardless of scepticism

regarding the efficacy of counter-cyclical fiscal policy.40 In regards to the regulation of labour

and financial markets, the left will generally favour higher levels of regulation to support the

goals of social protection and social justice, while the right will more generally favour lower

levels of regulation to advance their goals of competitiveness and economic efficiency. The

ability of both the left and the right to pursue these preferences will, of course, be mitigated by

the presence of the very vested interests and structural pressures that support and motivate their

ideological counterparts.

Policy Preferences in Multi-Party Systems: Liberals, Conservatives / Christian Democrats,

and Social Democrats

More complicated relationships between parties and economic policy preferences tend to be

found in multi-party systems.41 Instead of the stylised, single dimension of politics along a

left-right divide that is the focus of many US-based studies of partisanship, multi-dimensional

concepts of party preferences are more commonly found in studies of countries with multi-party

systems. Esping-Andersen’s typology of welfare states (1990) focuses upon the differences in

socio-economic policies favoured by three broad families of parties: Liberal,

Conservative/Christian Democratic,42 and Social Democratic. While not all advanced industrial

democracies have parties that conform to this typology and many, indeed, have

40 A full review of the partisan cycle literature is beyond the scope of this section. For an excellent overview of research on electoral and partisan cycles, see Franzese (2002). 41 By multi-party systems, I mean political systems in which three or more political parties have the capacity – separately or in coalition – to gain control of government. 42 Depending upon the writer, the term ‘Conservative’ or ‘Christian Democratic’ may be used. To avoid excessively clunky wording and to avoid potential confusion regarding Conservative parties that are not actually Christian Democratic parties (e.g. Britain’s Conservative Party), the term ‘Christian Democrat’ will be used.

46

politically-relevant parties that belong to yet other groupings,43 Esping-Andersen’s typology is

relevant to a significant proportion of consolidated democracies, particularly those with mature

welfare states, including France, Italy, and Germany. As a result, consideration of the fiscal and

social policy preferences of Liberal, Christian Democratic, and Social Democratic parties

provides a useful supplement to the single dimension left-right typology.44

Liberal parties’ core values generally focus upon individual freedom and economic efficiency.

For the most part these parties believe that once individual freedoms and property rights are

protected, market forces are the best way to achieve a just society. They tend to prefer a residual

welfare state, limiting redistribution and mostly leaving individuals with the responsibility to

self-insure against ageing, illness, disability, unemployment, child care, higher education, and

other ‘risks’ of life and the modern economy. Programmes generally provide only minimal

protection and redistribution, namely low levels of income support and basic public health for the

neediest citizens who cannot take advantage of insurance markets. Likewise, unemployment

benefits are minimal, frequently include means-testing, and are of relatively short duration.

Deregulation of labour markets and the alignment of individuals’ incentives towards work via

these limited unemployment benefits are generally the preferred methods of addressing

unemployment. Liberal parties prefer low levels of taxation and a relatively flat tax system,

particularly avoiding targeting of productive factors. To address economic problems and contain

costs, Liberal parties favour market forces (via deregulation) and ‘proper’ alignment of incentives

(via low benefit levels, co-payments on health care, use fees for access to public goods and

services).

43 A greater number of dimensions for party identification is found when Green parties, communist parties (e.g. Germany’s Party of Democratic Socialism (Partei des Demokratischen Sozialismus, PDS), Italy’s Communist Refoundation (Rifondazione Comunista , RC)), nationalist parties (e.g. France’s National Front (Front Nationale, FN), Italy’s National Alliance (Alleanza Nazionale, AN), the Austrian People’s Party (Österreichische Volkspartei. ÖVP)), regional parties (e.g. Italy’s Northern League (Lega Nord, LN), Belgium’s Flemish Bloc (Vlaams Blok, VB), Northern Ireland’s Sinn Féin), agrarian parties (e.g. Finland’s Centre Party (Suomen Keskusta, Kesk.), and other variants are considered. Classifying these parties and grouping them into party families may be difficult, due to the idiosyncratic and, at times, sui generis nature of some of these parties. The smaller parties in France, Italy, and Germany that were politically-relevant during the 1990s will be addressed in the chapters on these three countries. 44 The following generalisations regarding Liberal, Conservative/Christian Democratic, and Social Democratic policy preferences draw to some extent upon the shape of the welfare systems that were developed under governments dominated by these parties during the ‘golden age of welfare’ (Esping-Andersen 1990; Huber, Ragin, and Stephens 1993). Given the differences among the social-welfare systems which Liberal, Conservative/Christian Democratic, and Social Democratic governments constructed and given their continued differences in constituencies, it is logically consistent that these parties would pursue welfare state retrenchment in a manner that continues to reflect their differences in basic values. In recognition that parties and circumstances evolve, these history-informed generalisations about party preferences were also supplemented by consideration of party manifestos and policy proposals in more recent decades.

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Christian Democratic parties generally value maintenance of social order and traditional values

(e.g. family relations, class, religion), and for the most part, they have seen the state as the best

way to protect those interests. These parties have tended to favour comprehensive, compulsory,

universalistic social protection. Intended to maintain the status (and, thereby, differentials in

status) of benefit recipients and their families, pension, unemployment, and disability benefits are

essentially proportional to contributions, limiting the redistributive effect of social policy.45 Their

support for traditional gender roles of the males as breadwinners and females as caretakers within

the family generally leads them to favour pension credits for childcare and per child cash

supplements to parents rather than public childcare. To finance these higher expenditure levels,

Christian Democratic parties favour higher levels of taxation than Liberal parties, and they tend to

favour relatively flat or regressive forms of taxation (e.g. social contributions paid on wages

rather than income taxes, which would tax all sources of income). As pressures upon

competitiveness have grown, there has been some move to reduce marginal rates on corporations

and to reduce the non-wage cost of labour by shifting away from social contributions and towards

consumption taxes that won’t hurt competitiveness. While Christian Democratic parties have

generally been more supportive of regulation of labour markets than Liberal parties, they tend to

regulate less than Social Democrats and they have generally focused more upon regulations

governing firing, working hours, etc. rather than regulations requiring gender-neutral pay and

promotion. While competitiveness and unemployment concerns have led Christian Democratic

parties to support greater labour market flexibility, they are still more supportive of regulation

than Liberal parties.

Social Democratic parties have generally used the state to advance values of equality and social

justice. As a result, they have favoured universalistic coverage schemes that protect all citizens

against market risks, providing everyone with relatively flat benefits and services that redistribute

a substantial amount of income to ensure that even the poorest individuals can have a dignified

existence. Social Democratic parties generally favour more progressive taxation, preferring

income and wealth taxes to the value-added tax (VAT) or social contributions, which

disproportionately impact lower-income individuals. Social Democratic parties have tended to

support more extensive government intervention in public life via private-sector regulation and a

larger public sector in order to advance their social justice goals (e.g. promoting class mobility

45 In social welfare systems developed under Christian Democratic governments, insurance systems were frequently fragmented along occupational lines. In part, this was a result of the phase-in of pension, health care, and other insurance programmes on an occupation by occupation basis, but these structures have also been maintained, serving to create structural impediments to provide higher levels of redistribution across occupations and across social classes.

48

via greater access to free or low-cost tertiary education and to jobs training, pursuing women’s

rights through greater access to tertiary education, public employment, gender-neutral pay, and

public child care). To address economic problems and to contain costs, Social Democratic parties

have favoured means-testing or income-testing benefits, active labour market policy and jobs

training, price cuts or price ceilings on health care services or products, and other methods that

utilise redistribution to protect the most vulnerable.

These are broad generalisations. Parties of the left or right (or of the Christian Democratic, Social

Democratic or Liberal types) may vary on particular aspects of these programmes, based upon

their history, their economic situation, or other factors. In response to changes in the economic

environment or in their constituencies, a party’s view on some values and specific policies may

evolve over time. But while there may be some shifts in the preferred policies of a party, I

maintain that there remain substantial differences among parties’ core values. Over the last

decades, parties in most democracies have shifted towards the right or, to be more specific,

towards liberalism. Recognising the changes in the international economic environment, parties

have come to accept some policies that were previously anathema, but even as they have accepted

these new policies, they have generally sought to adapt those policies in ways that still reflect the

party’s core values and that protect their constituencies.

Three final caveats are in order:

1. Partisanship inclinations may be moderated when the government needs to gain the support of others. As discussed above, a government will be more likely to adopt a consensual approach if is less confident about its ability to unilaterally impose its preferred reform (e.g. due to the ruling coalition lacking a majority or being highly fractious, due to the opposition control of important veto points) or if the reform leadership prefers a more participatory and collaborative leadership style. In these cases, we would expect that the reform’s content and distributional implications would be less partisan, due to the inclusion of concessions and side-payments that address the concerns of opposition parties or the social partners.

2. Partisan preferences of the reform leadership may override government strength in determining the preferred approach to reform. The above discussion of party preferences is stylised. In reality, parties can have different factions or wings with divergent views on some issues.46 Where there is a significant divide within the party, it may be very difficult for a governing party or coalition to develop a reform upon which its members can agree. This may lead to the government adopting a relatively minor reform or failing to pass reform. Alternatively, the reform leadership may find that parliamentarians in the

46 This is particularly likely in large or ‘mass’ catch-all parties or in parties that are undergoing an evolution in their values which has led to a schism between the ‘old’ wing of the party and the ‘new’ wing.

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opposition are more supportive of the reform than the reformers’ own coalition partners.47 In such a case, the reform leadership of a coalition government with a large majority might choose a consensual approach and work with the parliamentary opposition (or with extra-parliamentary actors like the social partners) in order to achieve a reform that would be impossible relying solely upon a coalition majority. Because of the risk of ‘scorned’ coalition partners or party wings rebelling against the prime minister, this cross-party cooperation is only likely when the prime minister feels secure enough in his position or cares sufficiently about the policy that he is willing to risk such rebellion. In such cases of extra-coalition cooperation, the reform would reflect the partisan preferences of the reform leadership’s faction (and of its counterparts in the parliamentary opposition) more than it would reflect the partisan preferences of the governing coalition as a whole.

3. Partisan preferences of the opposition may override government strength in determining the preferred approach to reform. In cases where the reform leadership of the government are inclined to engage in a consensual approach to reform, these desires may be frustrated by an opposition unwilling to cooperate in a reform effort. Particularly in cases when the opposition parties in parliament are unified, when their policy preferences differ markedly to the government’s preferences, and when they believe that they can win the next election, the opposition may prefer to pursue a ‘war of attrition’ regarding reform. Such a situation leaves the government with no choice but to pursue a confrontational approach to reform or to delay reform until after next election in hopes that an electoral victory and a mandate for reform will lead the parliamentary opposition to concede its position on the reform (Alesina, Ardagna and Trebbi 2006).

EXPLAINING THE RESPONSE TO REFORM

The severity of the economic situation facing the country, the content of the reform, and the

approach to the reform will all influence the desire of opposition parties, the social partners, and

the public to oppose the reform. The ability of these potential opponents to check the reform will

depend upon their ability to directly block the reform through the control of veto points or to

impose (or credibly threaten to impose) significant costs upon the government if it proceeds with

the reform.

Severe economic crises may give the government more leeway for painful reforms, particularly if

it engages in a sustained and credible effort to sell the idea that the alternatives (no reform or

reforms proposed by the opposition) would have been worse. For this claim to be credible and

for the government to be able to use the crisis to avoid blame for a painful reform, the reform will

need to be perceived as a genuine, economically responsible reform rather than as an

47 In Germany there have been several instances where there was greater congruence in preferences between particular wings of different parties than there is cohesion within a particular party. Both the centre-right Christian Democratic Union/Christian Social Union (CDU/CSU) and the centre-left Social Democratic Party (SPD) are Volksparteien (‘mass parties’) with trade unionist wings and business wings. On some issues, the trade unionist wings (or the business wings) of these two parties agree with their counterparts form the other party more than they agree with their fellow party members.

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opportunistic response to the crisis. Regardless of the extent of crisis, the reform’s approach and

content can ease (or complicate) the government’s attempts to gain support for (or at least

minimise opposition to) the reform.

In regards to content, I argue that there will be broader acceptance of painful reforms when they

are seen as not clearly partisan in their content, but are instead seen as a national project with an

equitable and solidaristic distribution of the burden of the adjustment, including constituents of

the government among those who bear the costs. In cases of a more partisan reform, where the

government makes painful cuts to one group to the benefit of its own constituencies or while

shielding its constituencies, the public is more likely to perceive claims of economic crisis or

competitiveness concerns as rationalisations for the government’s opportunistic pursuit of

policies which give preference to its constituents.

Left-leaning governments may find it easier to be seen as credible when claiming that painful cuts

are absolute essentials necessitated by economic crisis, as Fiona Ross noted with a ‘Nixon goes to

China’ logic. Simply put, voters may assume that left-leaning governments are engaging in a

genuine national project of economically and fiscally responsible reform rather than

indiscriminately harsh retrenchment, whereas these same voters are more likely to assume that

right-leaning governments are opportunistically pursuing a partisan project when cutting social

welfare programmes (Ross 2000:162-165).48

Some strategies can ease passage of reform. Targeting one particular group for a greater share of

the burden of the reform may be feasible if this targeting is justifiable in terms of fairness (e.g. if

the reform targets groups are perceived as receiving more than their ‘fair share’ from existing

programmes or are perceived as free-riders not paying their ‘fair share’ into the system).

Targeting one group for a large share of the costs of the reform may even be politically preferable

to a solidaristic approach if that group is particularly likely to resist reform regardless of calls for

48 While the left seems to have had somewhat greater credibility in claiming that retrenchment is both fiscally prudent and economically necessary and while they seem to have not faced strikes and protests of the magnitude their right-leaning colleagues have faced, there does increasingly seem to be a price. While parties of the left have successfully introduced significant reforms to stabilise the growth of social welfare spending and to make their economies more competitive, the left’s core constituencies, particularly trade unions and blue collar workers, increasingly appear likely to feel that they have been betrayed by their own party (or parties). While they may not be able to credibly threaten to defect to centre-right parties as retribution for their party’s ‘treachery,’ this rightward (or ‘liberalward’) shift of Social Democratic parties seems to be precipitating the exodus of traditional left-wing voters to the xenophobic parties of the far right, such as France’s National Front (Front National, FN) or Germany’s National Democratic Party (Nationaldemokratische Partei Deutschlands, NPD) or to far-left splinter parties, such as Germany’s Labour and Social Justice – The Electoral Alternative (Arbeit und soziale Gerechtigkeit – Die Wahlalternative, WASG) and the Left.Party (die Linke.), which promise to uphold the social justice values that centre-left parties have ‘abandoned.’

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shared sacrifice and if that group can successfully be isolated from potential allies. Reform is

made easier when a government lowers the visibility of changes or obscures responsibility for

those changes (Pierson 1994) 49, making it more difficult for potential opponents to draw attention

the change and to frame the debate. Reforms that include long delays or have a protracted

phase-in period will likely face less opposition than reforms whose effects are felt immediately

(Natali and Rhodes 2004a; Thelen 2004; Ferrera and Jessoula 2005).50

A more consensual approach is likely to reduce opposition to the government’s reform effort,

while a conflictual approach is more likely to provoke a hostile reception of the reform. The

approach to reform affects the response to reform in several different ways. First, a consensual

approach can ease passage of reform because the more painful or objectionable aspects of the

reform are likely to have been mitigated via concessions or side-payments during negotiations

with the parliamentary opposition or the social partners. Second, if negotiations are successful in

producing a reform with substantial extra-coalitional or social partner input, some of the potential

opponents of the reform will feel a degree of ‘ownership’ of the reform and will be less likely to

fight it. This ‘buy-in’ from some actors outside the government weakens the ability of reform

opponents to present a unified front against the reform. Third, exclusion from negotiations (or

inclusion in only a token effort) alienates and radicalises actors who believe that they have a

rightful role in the reform process. Inclusion in a genuine negotiations process, even if the

negotiations failed to produce a reform broadly supported by the parliamentary opposition or

49 The visibility of and responsibility for changes can be obscured by outsourcing of some aspects of decision making to semi-autonomous bodies or by introducing automatic mechanisms. In the United Kingdom, cost-containment decisions have been outsourced via the creation of National Institute for Health and Clinical Excellence (NICE), a semi-autonomous advising body to the National Health Service (NHS). Tasked with developing guidelines for consistent, high quality, evidence-based health care, NICE makes it easier for the government to avoid or divert blame when coverage for certain medications or procedures are denied on the grounds that they are not yet proven effective or for not being cost-effective. In Germany, a 1989 pension reform changed the indexation of pensions from gross wages to net wages, a mechanism that would automatically reduce the cost-of-living adjustment for pensions whenever social contributions increased. Likewise, a 1997 pension reform effort included a ‘demographic factor’ that took into account changes in the life expectancy of the population when calculating pension benefits. The demographic factor was intended to automatically reduce annual pension outlays to balance increasing longevity, though it never took effect due to its revocation by a later government. In 2004 a ‘sustainability factor’ was introduced, which automatically adjusted pensions in response to changes in demographic developments (life expectancy, migration, birth rates) and changes in the labour market. Though initial passage of legislation related to NICE and these demographic or sustainability factors is visible, the subsequent cost-cutting decisions are outsourced and take place in the relative obscurity and insulation of administrative processes rather than remaining in the spotlight of the political arena. 50 This lower level of opposition to delayed or slowly phased-in reforms may be due to discounting of future costs. It may reflect a successful divide-and-rule effort (e.g. in the case of the phase-in of a new qualification rule) where current beneficiaries are protected and future beneficiaries bear the costs, creating the possibility of a divide that the government can exploit to reduce opposition to the reform. The response may reflect fairness concerns with vulnerable populations (i.e. current recipients of pension, disability, or unemployment benefits), who presumably have less ability to plan and adjust to the reform, being insulated from the costs of the reform while most costs fall on future beneficiaries, who arguably have sufficient time to adjust their expectations and respond to the new constraints imposed by the reform. Alternatively, discounting (or even just short-sightedness) may lead to the public being less concerned about the costs of future cuts in benefits or increases in taxes.

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social partners, can help the government avoid the alienation and radicalisation of these actors

that would likely have occurred in the absence of negotiations. Fourth, the very process of

negotiations can potentially be a chance for the government to make an early start on convincing

the public and key veto players that the reform is a necessary and (at least in the long-run)

beneficial project. At the very least, it provides the government with the opportunity to see which

talking points are most effective in dealing with its various audiences – its own coalition

members, opposition parties in parliamentary, the social partners, and the public. Finally, a

consensual approach is more likely to be seen by the public as a sign of good faith by a

government openly embarking upon a genuine national project of necessary reform rather than a

purely partisan project for the benefit of its constituencies.

By contrast, a more confrontational approach is likely to produce a more partisan reform, which

will face a greater degree of opposition. First, the more confrontational and more sharply partisan

reform produces a clearer pattern of winners and losers because it doesn’t include the

side-payments or concessions that moderate the impact of a reform and provide some

compensation for those who would otherwise be most harmed by the reform. Second, if the

opposition and the social partners were essentially excluded from a reform process that produced

painful adjustments, there is little incentive for them not to publicly criticise the reform. Without

buy-in by some of these actors, there is a clearer divide between the government and reform

opponents (the parliamentary opposition and the social partners), making it easier for opponents

to form a united front against the reform and to mobilise the public. Third, opposition to reform

is not simply motivated by the content of the reform and the absence of moderating

side-payments or concessions. After being excluded (or nominally included but their interests

ignored), opposition parties and social partners are more likely to be alienated and antagonistic

since they feel that their ‘proper’ role in the reform process, as well as the interests and concerns

of their supporters, were not given their due consideration. Fourth, in the absence of negotiations,

the government is more likely to develop the reform in a relatively closed process. While this

may defer informed criticism of the reform by its opponents and by the press, it also delays the

government’s own efforts to sell the reform. Finally, with only the government having had input

in the reform and with only coalition members supporting the reform, the public is more likely to

perceive the reform as a purely partisan project.

The ‘offensiveness’ of both the approach and the content may affect public opinion and make it

easier to mobilise them, but it is the availability of usable veto points and the size, strength and

cohesion of opposition that will determine whether they will be able either to formally block

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reform through a veto or to make reform more politically costly for the government by mobilising

their members and the public against the reforms. The ability of the parliamentary opposition to

block the reform through formal channels may be great or negligible, depending upon the

strength of institutional veto points and whether the parliamentary opposition controls those veto

points. In systems with more and stronger veto points, it will be easier for opponents to block

reform. The government can seek to pursue a divide-and-rule approach when dealing with some

veto points, particularly the upper chamber of parliament, while the opposition will need to focus

upon maintaining cohesion on the reform issue.

Even if it is unable to veto the reform, the parliamentary opposition can still impose costs. The

greater the degree of harm to their constituents, the greater will be the opposition parties’

motivation to politicise the issue and to mobilise their supporters against the reform. The more

unified the opposition parties, the greater their ability to exert influence by shaping public

opinion, encouraging strikes and protests, and threatening electoral retribution. Conversely, if the

opposition is fragmented into a large number of parties and wings, divided ideologically on the

reform, or divided regarding the effects of the reform, it will be more difficult for opposition

parties to form a united front, to develop a consistent and focused criticism of the reform, and to

mobilise their members and the public.

The social partners generally have little power to formally block a reform. The social partners

have compétence over economic policy in relatively few countries.51 More commonly social

partners may have influence over some aspects of the social welfare safety net via a role as

administrators of programmes or distributors of benefits. In these cases, the social partners may

be able to informally block a reform by failing to implement it, though this strategy has the

potential to backfire since the government could potentially decide to respond by limiting or

eliminating the social partners’ role in administering those programmes. The strength of the

social partners lies primarily in their ability to influence policymakers during the period when

policy is being drafted or to impose costs afterward by politicising the issue, mobilising their

members (union members in the case of trade unions and professionals, owners of small and

51 The social partners, particularly the trade unions, in Germany have claimed that the Basic Law’s guarantee of collective bargaining autonomy (Tarifautonomie) gives the social partners sole discretion over covered members’ working conditions and compensation. Interpreting sick pay as falling under Tarifautonomie guarantees, the trade unions have resisted state efforts to reduce sick-time compensation. In response to strikes, many employers agreed in 1996 to continue to honour their previous commitments on sick pay rather than reduce sick pay to the lower levels established by government. The Kohl government did not accept the claims that sick pay fell under Tarifautonomie, but nor did it require employers to reduce sick pay compensation levels down to the new levels. More recently, the issue of a national minimum wage garnered controversy with the Merkel government considering the introduction of a law and the social partners insisting that they have sole discretion over wage policy.

54

medium-size businesses, and the management of corporations for employers associations), and

encouraging strikes.52

Finally, the social partners, particularly the trade unions can seek to shift public opinion. Groups

disadvantaged by proposed reforms are unlikely to mobilise themselves. As Fritz Scharpf argued

“[i]f the opposition does not oppose a policy…the voters will always ignore it” (Scharpf

1997:193, fn. 5). Political parties and social partners possess the ability to provide focal points,

furnishing the information and the organisational capacity that can mobilise constituencies. As a

result, even where they are unable to formally veto a policy, social partners can seek to block

reform and to impose costs upon would-be reformers.

By seeking to turn the public against the reform and the government in general, political parties

and the social partners may be able to swing poll numbers and make a credible threat of electoral

retribution that will lead the governing coalition to withdraw the reform or at least some of its

more objectionable provisions. Alternatively, reform opponents can seek to cause one or more of

the parties in the coalition to withdraw support for the reform or from the coalition altogether.

When there is particularly weak party discipline, it may even be possible for reform opponents to

convince a significant number of individual members of parliament to withdraw support from the

reform or certain provisions thereof.

EXPLAINING OUTCOMES OF REFORM EFFORTS

The reform process is fraught with opportunities for failure. Reforms efforts can collapse early,

while they are still in the process of being developed from nascent ideas into clear legislation.

Reforms that are fully (or nearly fully) developed can encounter strong opposition that causes part

or all of the reform to be abandoned, as parliamentary support for the reform (or even the

coalition’s support for its government) ebbs away. The reform can be vetoed53 and either fail or

in some cases be re-passed, overriding the veto. Reforms can be passed and then either not fully

implemented by those responsible for administration of the relevant policy areas or counter-acted

52 This is generally a strategy used by unions rather than by employers’ associations, since striking would hurt firms more than the government, but it is feasible in cases of professionals like doctors and dentists. 53 Tsebelis’ use of the concept ‘veto points’ extends both to formal and informal veto players (2002). For the purpose of clarity, I will use the word ‘veto’ here to denote any blocking of a reform by a formal veto player, whether it is an explicit executive veto (in the American sense of the word), an upper chamber’s suspensive or absolute veto as a result of its not passing the law, or a court’s overturning of the law on administrative or constitutional grounds. Informal veto players (e.g. social partners with administrative powers over some areas of social welfare, central bankers with the ability to counter expansionary fiscal or regulatory policies via monetary policy, employers with discretion whether they modify their business plans to reflect government policies in the areas of sick pay or apprenticeships) will be discussed as potential blockers of reform, but the term ‘veto’ will be reserved for the formal veto players.

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by actors with compétence over policy areas that affect the intended reform. Reforms can be

passed and then repealed in whole or in part shortly thereafter, either by the original government

or by a succeeding government. Finally, reforms can be passed and implemented, potentially

setting the country’s economic, fiscal, and social welfare systems on a new path.

The ultimate outcome of the reform process will reflect all of the elements that contributed to the

development of the reform. The initial impetus for reform, whether it was based in long-term

mounting of economic pressures or the immediacy of crisis, will continue to influence the

government, the parliamentary opposition, the social partners, and the public’s perceptions of

whether the reform was necessary and whether the reform is preferable to the alternatives of no

reform or reforms proposed by the opposition. The reform approach and the distributional

implications and degree of partisanship of the reform’s content will garner support for the reform

or provide motivation for resistance to the reform. The concentration (or fragmentation) of

government power will affect the degree to which the government is able to overcome the formal

and informal obstacles to the reform’s passage and implementation. Finally, just as elections may

have provided government with a mandate for reform (or convinced them to defer a reform),

elections can have the last word on whether the government and its reform survive.

In the end, reform efforts are most likely to collapse early if the government is very weak.

Particularly in the cases of minority governments, governments with very narrow majorities, and

governments with a highly ideologically fractious coalition, it will be very difficult to develop

and pass potentially unpopular reforms. If the government does pass a reform, the weakness of

the government makes it likely that these reforms will be more piecemeal rather than significant.

A particularly intense economic crisis and a highly determined and competent leadership may

provide the impetus to seek to overcome political fragmentation in order to pursue significant

reform, but in the absence of serious economic pressure and resolute leadership, there is little

reason for a weak government to pursue (or for its coalition members to support) a reform that

may be politically damaging, a problem that intensifies when elections loom.

Governments with a modest concentration of power in their hands and with a measured level of

confidence about their ability to pass their preferred reform will be more likely to pursue reforms

that are consensual in approach and only moderately partisan in content. These reforms will

rarely be deep and sharply transformational; they may, indeed, range from fairly minor to

relatively substantial but with side-payments and concessions that moderate their impact. These

reforms, however, are fairly likely to succeed (i.e. winning passage, avoiding strong opposition

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from a broad segment of the parliamentary opposition or public, surviving veto points, and not

being overturned by a subsequent government). In cases where the parliamentary opposition held

veto points, the government’s negotiations would have made it more aware of the points on which

the parliamentary opposition would not concede and it is more likely to have addressed those

concerns via concessions or side-payments. The consensual approach and the moderation of the

content is more likely to have created some ‘buy-in’ by members of the parliamentary opposition

and social partners that helped shape the reform, while avoiding the sharper levels of alienation

that occur when the parliamentary opposition and social partners are excluded from the reform

process. As a result, the parliamentary opposition is less likely to exercise any formal vetoes they

may have, and with the general depoliticisation of the reform, the public is unlikely to mobilise in

a manner that will cause the government or coalition members to be concerned. One caveat is,

however, warranted: If facing a highly partisan and united opposition, the leadership will be

forced to choose between pursuing a more modest reform while still hoping for some support

from the opposition or seeking a more substantial, but more confrontational reform. In such a

circumstance, the more substantial reform is likely to be received more hostilely by the

opposition and the public than would have been the case if the opposition had been more

moderate or more divided, and the government’s ability to successfully pass and implement the

reform will also be somewhat more in doubt.

Governments with high concentration of power are likely to pursue a more confrontational

approach and more partisan reforms. This choice of approach and partisan content allows the

government to pursue deeper and more thoroughly transformational reforms, but it is also a

higher risk strategy, increasing the likelihood of an alienated, radicalised, and united opposition

that will seek to create a public backlash against the reform. While the high concentration of

power in the government’s hands means that the parliamentary opposition is unlikely to be able to

formally veto the legislation, the politicisation of the reform raises costs for the government and

makes electoral retribution more likely. The reform effort may still fail if the government

overestimated the strength and cohesion of its coalition. Strikes, protests, and unfavourable

polling data may persuade a coalition partner or individual members of parliament to withdraw

their support from the reform or possibly to defect from the coalition altogether.

Governments with a high concentration of power but with leaders who prefer an inclusive and

cooperative leadership style are likely to follow the same path as governments with a moderate

concentration of power, pursuing a consensual approach and an only moderately partisan content.

Again, the opposition’s willingness to cooperate or obstruct reform will influence the public’s

57

receptions of the reform, but due to the high level of power concentration the government is quite

likely to succeed in passing and implementing the reform.

Finally, there may be governments with only a modest concentration of power but with leadership

that is overly confident about government strength or with leadership that prefers a more

hierarchical, ‘dictatorial’ style. With this configuration, the government would be expected to

pursue a confrontational approach in order to implement a deeper, more transformational, and

highly partisan reform. This is a high-stakes and high-risk strategy. As a consequence of the

reform approach and the distributional implications of the reforms contents, the government

would be expected to encounter high levels of united opposition from parties outside the

governing the coalition, from the social partners, and from a public mobilised by the opposition

and the social partners. Unlike a government with a high concentration of power, a government

with only a modest concentration of power is not well positioned to withstand the intensified

opposition to its reform efforts. It is in this case that a government’s reform effort is most likely

to run afoul of (1) veto of the reform by the parliamentary opposition, (2) defection of coalition

partners or individual parliamentarians in response to strikes, protests, and falling poll numbers if

the reform leadership overestimated the coalitional cohesion or party discipline, or (3) electoral

defeat that leads to the repeal of all or part of the reform by a subsequent government.

All in all, government strength may be a weakness. In cases where the reform leaders adjudge

the government as being very strong, they may choose to pursue such sharp reforms or pursue

them in so confrontational a manner that they will radicalise and unify potential opponents to the

reforms. If the reform leadership overestimated its strength and cohesion or underestimated

potential opposition to the reform, the backlash can potentially cripple the reform efforts or lead

to the toppling of the government.54 Governments with a sufficiently high concentration of power

or facing particularly weak opponents55 may be able to successfully pass and implement deeply

transformational reforms, despite the public backlash that results from an approach and content

that are so confrontational and so sharply partisan.56 In many cases, a government facing lower

54 As shall be discussed in later chapters, Juppé’s 1995 pension reform, Berlusconi’s 1994 pension reform, and Kohl’s 1996 austerity package (the Sparpaket) are all examples of failure by governments whose confidence and ambition exceeded their capabilities. While power was fairly concentrated in the government’s hands in each of these three cases, the reform leaders chose such confrontational approaches to reform and such sharply partisan content in the reform that they unified the parliamentary opposition and many of the social partners, who were able to mobilise their members and the public. 55 Within this context, weak opponents can mean opponents that have relatively few seats in parliament or it can mean an opposition that is not organised enough to develop the leadership, party platform, and popular support sufficient to potentially defeat the government in the next election. 56 Thatcher’s deregulation of financial and labour markets, privatisation of state-owned enterprises, cuts to social welfare spending, and legislation to reduce the power of the unions succeeded despite their confrontational approach

58

levels of power concentration may ultimately be more successful than the government with high

levels of power concentration. By pursuing a more consensual approach, a weaker government

may be more successful at laying the groundwork for public support for a significant, though not

sharply partisan, reform. The reform may not be as deep and transformational, but this course is

less fraught with the risk of dramatic failure. Still, too much weakness can also impair reform

efforts. Governments with very narrow or highly fractious majorities and governments facing

imminent elections are unlikely to be willing or able to undertake and follow through on a course

of substantial reform.57

With this understanding of the reform process, the dissertation’s chapters three through five turn

to the cases of France, Italy, and Germany. During the 1990s, eleven governments in these three

countries carried out an array of reforms. Facing varying levels of economic pressures, these

eleven governments’ reform efforts took place within different contexts with great variance in the

power concentration and the partisanship composition of their governing coalitions. When they

undertook reforms, they chose markedly diverse approaches and strikingly disparate

distributional implications, and these reforms encountered different public responses and

outcomes. As a result, examination of the reform efforts in these countries provides an excellent

opportunity to test the argument’s ability to explain reform efforts.

and their deep and sharply partisan content. Though unions and the public mobilised against the reform, a sufficient level of power was concentrated in the government’s hands that the reform effort was able to withstand this opposition. (The government ultimately won the 1983 election. Britain’s victory in the Falklands War, the beginning of economic recovery in spring 1982 and a bitterly split Labour Party which lost voters to the Social Democratic Party and the Liberal Party all played significant roles in the government’s survival.) 57 As shall be discussed later, the 1992 pension reform attempt of France’s Bérégovoy was stillborn, due to the weakness of his minority government and the reluctance of his coalition and potential allies to pursue potentially painful and politically costly reforms during the run-up to an election.

59

CHAPTER THREE

FRANCE: EXPERIENCES WITH AUSTÉRITÉ

INTRODUCTION

At the time the Maastricht Treaty was negotiated in the early 1990s, France was well-positioned

to meet the convergence criteria. With gross public debt at only 40% of GDP and the budget

deficit at 2.1% of GDP in 1991, debt and deficit levels were comfortably below the convergence

criteria ceiling of 60% and 3%, respectively. The franc was relatively stable, not having changed

its central parity since 1986, and both inflation and long-term interest rates were low and

comfortably in compliance with the convergence criteria. In the wake of the recession of the

early to mid 1990s and the EMS Crises of 1992 and 1993, France’s deficits rose to 5 to 6% of

GDP, nearly twice the convergence criteria limit. Debt rose rapidly in response to higher deficits

and the increased interest rates required to defend the franc during the EMS Crises. As a result,

French governments would be faced with the politically unpalatable task of tightening fiscal and

monetary policy during a recession. To meet the 1998 deadline for qualification to the Euro, the

governments of Pierre Bérégovoy, Édouard Balladur, Alain Juppé, and Lionel Jospin pursued an

array of reforms, particularly in the areas of pensions, health care, the tax code, and privatisation

of state-owned enterprises.

The results were mixed with some substantial and successful reforms, some aborted efforts, and

some striking failures. It was the moderately strong centre-right Balladur government and the

moderately strong plural left Jospin government, which used consensual approaches to reform

that were the most consistently successful in passing reforms. The very weak and short-lived

centre-left Bérégovoy government was unable to sustain its pension reform effort. The very

strong centre-right Juppé government generally pursued a confrontational approach to reform and

had the most mixed record with some of its reforms being successfully passed and implemented,

with some of its reforms being met with such sharp protest that the reforms were withdrawn or

greatly scaled down, and with some reforms being passed but repealed or dramatically modified

after Juppé lost power in the next elections. The effects of the reforms were likewise mixed with

60

some reforms shifting the burden of adjustment onto wealthier groups, while others placed more

of the burden on lower-income populations.

To more fully explain the variation in approaches to reform, as well as policy outcomes and

effects, the chapter turns first to the economic context that provided the impetus for reform. The

chapter then focuses upon the French institutional and political context and how these factors

affected various governments’ decisions regarding their approach to and the content and

distributional consequences of reform. The Bérégovoy, Balladur, Juppé, and Jospin governments

and their reform efforts are then examined in light of the economic, institutional, and political

context.

THE IMPETUS FOR REFORM

BACKDROP: THE 1980S

Historically, the French government had pursued a relatively loose monetary policy, a very active

fiscal policy, and dirigisme (state ownership or intervention in key economic sectors) as a means

to foster economic growth, infrastructure and industrial development, and high levels of

employment. In 1981 President François Mitterrand was elected on a platform of full

employment, increases in wages and social benefits, nationalisation of major industrial firms and

banks, and an industrial policy intended to reduce imports. In the next 18 months, Mitterrand,

Prime Minister Pierre Mauroy, and their economic and political advisors, including Pierre

Chevènement, Pierre Bérégovoy, and Laurent Fabius, sought a deal with French labour: moderate

wage demands in exchange for fiscal and monetary reflation of the economy, increased welfare

support, nationalisation of industrial firms and banks, and labour legislation establishing a

minimum wage, a shortened work week, and a right to collective bargaining (Cameron 1989).

Despite EC efforts to reduce state aids to industry, French supports increased by 240% (Stoffaës

1989:85). Social transfers increased by 13% in the first year. Public-sector jobs were created,

working time was reduced to 39 hours per week, paid vacation time was extended to five weeks a

year, and the retirement age was lowered to 60 years (Machin and Wright 1985).

Unfortunately, the government had underestimated the economy’s structural weakness. The

French economy suffered from insufficiently competitive industry, low corporate profitability,

capital market backwardness, and insufficient investment (Machin and Wright 1985). The 10%

increase of the SMIC (the legal minimum wage) and increases in social benefits stimulated

household consumption by 3% in 1981 and 1982, but as imports, particularly of manufactured

61

goods, rose disproportionately and as the French trade deficit grew from FF56 billion in 1981 to

FF92 billion in 1982, France’s trading partners benefited from these changes more than French

manufacturers did (Reland 1998). This economic model had worked relatively well in the

post-war period, in part because of French tolerance of inflation and recourse to devaluations to

restore competitiveness. By the 1980s, however, French policy was out-of-sync with the

economic strategies of its main trading partners, which had pursued restrictive budgetary, wage

and monetary policies. Employment was propped up by Mitterrand’s policies, but growth and the

fiscal stimulus impact of these policies was slight and came at the cost of falling foreign currency

reserves, capital flight, a rising trade deficit, and a growing inflation differential vis-à-vis

Germany (Halimi, Michie, and Milne 1994:101-103).

After three small devaluations during the 1981 through 1983 period and a wage and price freeze

after the 1982 devaluation, Mitterrand faced a difficult choice of whether to continue on a

traditional socialist course or to turn away from it. Continuing the socialist course would mean

removing France from the ERM, floating the franc, and bolstering industry via lower interest

rates, more state aid and trade protection, but Mauroy, Finance Minister Jacques Delors, and the

Treasury cited low reserves and predicted the franc would fall by 20%. With only 39% of the

population favouring a radicalisation, this option was not attractive (Moss 1998:63-71). After a

prolonged hesitation, Mitterrand embarked upon an economic U-turn, reneging on his election

promises and adopting neo-liberal economic policies, tightening monetary and fiscal policies,

ceasing and reversing nationalisation of industry, cutting state aids to industry, and reducing the

recently adopted social transfers.

Monetary policy changed significantly after the March 1983 U-turn. Ceasing to support French

competitiveness and employment via an easy money policy and periodic devaluations, Mitterrand

shifted to a franc fort (strong franc) policy.58 Weaknesses in the French financial system led the

government to initially combat monetary expansion via credit controls and manipulation of

banks’ legal reserve requirements. In 1984 the newly-appointed Finance Minister Bérégovoy

embarked upon a reform of the financial system, increasing businesses’ access to investment

capital and developing a French money market, which allowed the Banque de France, to conduct

monetary policy via short-term interest rate manipulation. As noted in Figure 3-1, inflation,

58 Commonly portrayed as an effort whereby French monetary policy was focused upon the stability of the French franc vis-à-vis the Deutschmark as a means to import credibility from the Bundesbank, there was somewhat greater independence in French currency moves. Though stability vis-à-vis the Mark was a priority, other concerns, including maintaining competitiveness with the dollar-zone countries, played an important role in formulating French monetary policy (Bordes, Girardin, and Marimoutou 1997).

62

which had fluctuated between 9% and 14% during the 1974 to 1983 period, declined from over

13% in 1981 to under 9.5% by 1983, and with the adoption of a tighter monetary policy, inflation

fell to 3% by 1986.59 With the fall in inflation and the stabilisation of the exchange rate (Figure

3-2) after the U-turn, long-term interest rates declined (Figure 3-1).

FIGURE 3-1: Inflation & long-term interest rates in France, 1970-2000

FIGURE 3-2: Exchange rate stability in France, 1970-2000

0

2

4

6

8

10

12

14

16

18

1970 1975 1980 1985 1990 1995 2000

Inflation

Long-TermInterest

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1970 1975 1980 1985 1990 1995 2000

Sources: For inflation, the IMF World Economic Outlook, 2010. For long-term interest rates, European Commission, AMECO database, 2010.

Source: European Commission, AMECO database, 2010. Note: Figure shows units of national currency per EUR/ECU. Parity = 1. Decreases denote currency appreciation and increases denote depreciation.

Fiscal policy also changed after the March 1983 turnaround. Taxes were lowered slightly, and

the tax burden was shifted from businesses to households (Moss 1998:66). Through privatisation

of 70% of its state-owned industries by 1986 (Rand Smith 1990:85) and cost-controls on

public-sector wages over the remainder of the 1980s, the general government’s share of personnel

costs as a proportion of GDP declined slightly (OECD Economic Surveys–France 2000). When

deficits in the various social funds arose, social contribution increases were generally preferred to

social benefit cuts. Unemployment was addressed via the creation of ‘assisted jobs’ for the young

and the long-term unemployed, via direct employment by the state, and via reductions in the legal

age for retirement from 65 to 60 in order to remove the oldest workers to make room for the

59 The franc fort policy was blamed for causing a myriad of problems – high real interest rates, two points above German rates (Fitoussi interview, cited in Moss 1998); rising unemployment, reaching 10% by the late 1980s and 12% in the 1990s; and low growth with an estimated 1% of GDP lost annually (Fitoussi 1995, cited in Moss 1998). It is worth noting, though, that there were ample domestic circumstances that could have contributed substantially to these problems. First, higher real interest rates vis-à-vis the German rates reflected investors demanding a risk premium on their investments, due to the lack of credibility of France’s new monetary stance and scepticism about the stability of the franc’s exchange rate. In the absence of a tightening of French monetary policy, foreign investors (admittedly not a large source of investment in France during this period) would likely have demanded yet higher risk premia. Second, the 10% rise in the SMIC in 1981 and 1982 would also have been a sharp blow to businesses, especially those in the lower productivity sectors, which were most directly affected by the change in the SMIC. Third, unemployment rose under the post-1983 tight monetary policy, but it had started its rise much earlier, tripling to 8% during the easy money period of 1975 to 1982 (OECD Economic Outlook France 1998). Finally, although the high interest rates imposed by the Bundesbank extended and deepened the recession in Europe, the rise in French unemployment in the 1990s is also attributable to slackened demand for goods as a result of the global recession.

63

long-term unemployed and the young. In 1988 the Revenu Minimum d’Insertion (RMI), a

non-contributory, means-tested scheme aimed at those with no or very low income, was created

to provide a minimum basic income to anyone aged 25 or over. Recipients were required to

commit to participating in programmes that would help them enter the workforce, including

job-seeking and vocational training (Palier 2000:120-122). In response to the tight labour market

and government tolerance for early retirement as a means to create jobs for the younger

generation, an increasing number of older workers started retiring at earlier ages. Nonetheless,

after an initial dip in the late 1980s, unemployment rose again in the 1990s (Figure 3-3). As in

the rest of Europe, the French were ageing (Figure 3-4), and this was expected to cause both

pension and health care costs to rapidly rise. With the rapid growth of the RMI,60 with an

increase in early retirement, and with the ageing of the population, the costs of the social welfare

system rose. Despite a profusion of official commissions and reports, many of which made the

same core recommendations, there were no serious efforts to fundamentally reform pension, early

retirement, health care, and unemployment benefits.

FIGURE 3-3: Unemployment rate in France, 1978-2000

FIGURE 3-4: Old-age dependency ratio in France, 1990-2050

0

2

4

6

8

10

12

14

1978 1983 1988 1993 1998

Source: World Bank, World Development Indicators, 2010. Source: European Union Public Health Information System

(EUPHIX), 2010.

In the area of wage policy, the French state encouraged wage moderation to promote

competitiveness, increase firm profitability, and combat unemployment. After high increases in

the SMIC, the minimum wage, in 1981 – and by extension, the general wage structure, since

salaries tend to be indexed to the SMIC – wage moderation was pursued to restore firm

competitiveness and profitability. Between 1983 and 1989 French wages increased by only 6%

in real terms, the lowest in the European Community. The wage share of value-added declined

60 Intended to provide assistance for 300,000 to 400,000 people, the RMI was supporting more than 1.l million people by the end of 1998. With an additional 1 million spouses and children of recipients being covered by and receiving some benefits from the RMI, the programme provided support for nearly 3.5% of the population, leading to cost overruns (Palier 2000:120-122).

EU-25

France

64

from its all-time high of 69.8% in 1982 to 59.8% by 1989. Corporate profitability rose from

22.5% in 1981 to 31.9% in 1989, its highest level ever. Investment, which fell by an annual

average of 2.3% between 1981 and 1984, grew at an average of 5.3% annually between 1985 and

1989, as corporations recovered from recession and began re-investing profits and as investors

overcame their wariness of a government that had engaged in 3 devaluations in 16 months

(OECD Historical Statistics, various years; Reland 1998:89-90; Schulten and Stückler 2000).

As a result of these reforms, France was in a comfortable position for meeting the convergence

criteria at the time that it signed the Maastricht Treaty. With the shift to tighter monetary policy,

the exchange rate had stabilised and both inflation rates and long-term interest rates had fallen.

Although the budget deficit was close to 3% of GDP and the debt was well below the 60% ceiling

in 1991, taxation and state spending remained high and the government had been unable to

seriously address the long-term affordability of its pension, health care, and unemployment

systems. Nonetheless, with rising economic growth and the beginnings of a decline in

unemployment during the late 1980s, the French economic situation looked relatively healthy.

This was not to last.

LOOKING FORWARD: THE 1990S

Throughout the 1990s the French economy came under increasing pressure, making welfare

retrenchment one of the most important issues on the French political agenda. The worldwide

recession began in 1990, but France was buffered from the early effects of the recession in

Europe by strong exports to Germany, which was enjoying a consumption boom in the wake of

unification. It was not until the second half of 1992 that the slowdown, which had started in

France in 1991, deepened into recession. Growth fell from over 4.1% in 1989 to -.9% in 1993,

while unemployment rose to more than 12%.

France’s efforts to combat recession were impaired throughout 1992 and 1993 by the pressures on

the franc exerted by Germany’s post-unification monetary policy and by the subsequent currency

crises. In response to an extraordinarily generous Ostmark to Deutschmark currency conversion

policy, an expansionary fiscal policy, and rising inflation in Germany, the Bundesbank

dramatically increased interest rates. The resultant EMS Crises of 1992-199361 forced the

61 The story of the EMS Crises is far too extensive to fully discuss here. In brief, the expansionary currency conversion and fiscal policies of the German government and the wage settlements by the social partners increased inflation, and the Bundesbank responded with a dramatic increase in interest rates. To prevent investments flowing to Germany, Germany’s partners in the Exchange Rate Mechanism were forced either to choose to raise their own interest rates – an unappealing option when loose monetary policy was preferred to stimulate growth – or to drop out of the

65

Banque de France to raise interest rates to defend the franc, instead of lowering interest rates to

smooth out the recession. Currency runs buffeted France, causing it to nearly exhaust its foreign

reserves and ultimately forcing France and almost every other member of the Exchange Rate

Mechanism (ERM) to move into wider bands vis-à-vis their central parity.

FIGURE 3-5: Budget balance (as % of GDP) in France, 1970-2000

FIGURE 3-6: Debt (as % of GDP) in France, 1970-2000

-7

-6

-5

-4

-3

-2

-1

0

1

1970 1975 1980 1985 1990 1995 2000

Budgetsurplus (+)or deficit (-)Maastrichtdeficit limit

0

10

20

30

40

50

60

70

1980 1985 1990 1995 2000

Debt

Maastrichtdebt limit

Source: European Commission, AMECO database, 2010. Source: European Commission, AMECO database, 2010.

The long-term affordability of the French pension, health care, and unemployment systems had

been a concern throughout the 1980s, and these problems became more serious during the 1990s.

Unemployment and health care costs were already high, and the ageing of the population was

expected to cause both pension and health care costs to skyrocket in the next decades. Recession

increased unemployment, encouraged early retirement, and depressed state revenues, placing

additional stress on the fisc. Budget deficits rose from 1.8% of GDP in 1989 to 6.4% in 1993,62

more than double the convergence criteria’s ceiling. At more than 30% of GDP, French social

spending was one of the highest in continental Europe. High payroll taxes, adding as much as

ERM and allow their exchange rates to float, an option that would cause loss of face for the government, loss of credibility for the currency, and increase risk premia on foreign-held national debt, particularly costly at a time of rising deficits and debt. Throughout 1992 and 1993, speculators bet that countries would not be able to maintain high interest rates in the face of rising unemployment and low growth. Currency runs against the pound sterling, the Italian lira, the Finnish markka, the Swedish krona, the Spanish peseta, the Portuguese escudo, the Norwegian kroner, the Irish punt, the French franc, the Belgian franc, and the Danish krone prompted the expenditures of vast amounts of foreign reserves, abandonment of pegs, exit from the ERM, devaluations, and ultimately the widening of bands from 2.25% to 15%. For further information regarding the EMS Crises of 1992-1993, see Eichengreen and Wyplosz (1993), and Gerlach and Smets (1995). 62 In addition to its deficit worsening dramatically in 1992 and 1993, which happened in most European Union countries, but France also moved into primary deficit in 1992 and continued to do so until 1996, a situation only seen in the UK, which had no intention of joining EMU, or in countries which were widely considered to be basket cases, such as Spain with its 25% unemployment or Greece. Even Germany, caught in the throes of reunification, ceased running a primary deficit in 1992 while Italy had moved into primary surplus in 1991. Of the 12 Maastricht signatories, six ran primary surpluses throughout the entire 1990 to 1997 period, and three were in deficit for no more than two years. France did not start its fiscal retrenchment until 1995 and did not engage in any large-scale fiscal adjustment during the 1990s. A period of large-scale fiscal adjustment is defined by Alesina and Perotti (1997) as (a) “a year in which the cyclically-adjusted primary deficit falls by more than 1.5% of GDP” or (b) “a period of two consecutive years in which the cyclically-adjusted primary deficit falls by at least 1.25% per year in both years” (220).

66

50% to labour costs for low-income workers, hampered attempts to reduce long-term

unemployment among young, low-skilled, and older workers. As the 1997 deadline for meeting

the convergence criteria loomed, a series of governments found themselves under increased

pressure to cut the deficit and to restrain the growth of debt in order to assure that France would

meet the fiscal constraints of the Maastricht convergence criteria.

These combined pressures provided a mounting impetus for these French governments to

undertake serious reform of the pension, health care, labour market, and tax systems, but to

understand the specifics of the approach, content and distributional consequences of these

reforms, we must examine the domestic institutional and political context.

EXPLAINING THE APPROACH TO REFORM – THE FRENCH CONTEXT

As discussed in Chapter Two, the theory predicts that a government will pursue a more

confrontational approach and will draft reforms more partisan in content when that government

feels confident about its ability to attain its preferred policy or when the key reformers prefer a

more hierarchical, ‘dictatorial’ leadership style. The government will feel more confident about

its ability to pass reform – relying wholly or primarily on its governing coalition for votes – and

about its ability to withstand opposition and avoid punishment from unhappy voters when power

is concentrated in its hands and when elections are more distant.

Government Strength – Size and Stability of Coalition

When trying to evaluate the concentration of power in their hands and their ability to pass reform,

governing coalitions will assess the strength and stability of their coalitions, considering the

number of seats held by the governing coalition in the National Assembly, the level of party

discipline among the coalition partners, and the number of parties and the degree of ideological

cohesion within the coalition.

In France in the 1990s, there was a wide variation in the number of seats held by the governing

coalitions. With only 269 out of 555 seats, the two-party, centre-left government of Pierre

Bérégovoy63 was highly constrained, relying upon the support of non-members of the coalition

for passage of legislation. With 472 out of 577 seats, Édouard Balladur and Alain Juppé’s

63 The 1998 election had brought to power a minority government, led first by Michel Rocard, then by Édith Cresson, and finally by Pierre Bérégovoy. This coalition was quite fragile, as evidenced by the high turnover in prime ministers during this period.

67

two-party, centre-right majorities were the largest of the time period being considered, and Lionel

Jospin’s five-party, ‘plural left’ coalition held a comfortable 320 of 577 seats.

Government Strength – Party Discipline

Party discipline in France is relatively high. Where divisions based upon policy or programmatic

differences or due to personal rivalries among powerful leaders arise, expulsion or self-exile of

dissident party members is more likely than party members refusing to follow the party’s line on

significant policy issues. As a result, the government can generally rely upon the votes of

coalition members, even if the tendency towards expulsion or self-exile of party members is

responsible for the relatively frequent party splits seen in France.64

Government Strength – Coalition Cohesion

The number of parties and the degree of cohesion of the coalition is also important when

assessing the likely strength and stability of a coalition. Ceteris paribus, as the number of parties

in the governing coalition increased, we would expect the government to be in a weaker position

as more parties with differing ideologies, party platforms, and ambitions engage in jockeying for

control of policy. In France during the period being considered, Bérégovoy, Balladur, and Juppé

governed with two party coalitions, while the Jospin government relied upon a five party ‘plural

left’ coalition, which would put greater stresses on the government as it sought to find policies

acceptable to all members of the coalition.

The two main parties of the centre-right, Rally for the Republic (Rassemblement pour la

République, RPR) and the Union for French Democracy (Union pour la démocratie française,

UDF), ranged from dirigiste Gaullist and Christian democratic to conservative-liberal in

orientation on economic issues, but parties on the left cover an even greater ideological spread.

While Bérégovoy’s coalition of the Socialist Party (Parti socialiste, PS) and the Movement of

Left Radicals (Mouvement des radicaux de gauche, MRG) are both social democratic in

orientation, they needed the assistance of the far left French Communist Party (Parti communiste

français, PCF) or the centrist Union of the Centre (Union de centre, UDC) to pass legislation, a

64 This splintering impulse is constrained by the need to receive a certain level of support to survive as a party. If these new splinter parties attract little support, their demise (and the return of party members to larger, more established parties or their enforced obsolescence) will reduce the number of parties and serve as a warning to others. Alternatively, the number of parties can be reduced by mergers among parties. A splinter party may return to the parent party as differences in ideology, policy positions, or personal struggles among high-profile politicians are reconciled or wane in importance. Alternatively, splinter parties may find commonalities with other parties and merge with them.

68

circumstance which made passage of controversial legislation difficult both because of the

ideological spread between the governing coalition and its ad hoc partners and because these ad

hoc partners had no reason to loyally support unpopular policies. Jospin’s plural left coalition of

the PS, the MRG’s successor (the Party of Left Radicals or Parti radical de gauche, PRG), the

PCF, the Citizen’s Movement, and the Greens was more fragile. While coalition members voted

for the government’s proposals once they had been agreed upon within the coalition, the broad

ideological spread of these parties made reaching agreement on that policy more difficult.

Veto Points

In assessing the concentration of power in the government’s hands, the coalition leaders will

consider the strength of potential veto players and the congruence in position between the

reformers and the veto player. Regardless of whether reform legislation is developed within

government or parliament, for that legislation to become law it must win a simple majority among

the 57765 members of France’s lower chamber, the National Assembly (Assemblée nationale).

While governments with a cohesive coalition, composed of a majority of members of the

National Assembly generally do not find this problematic, a highly fractious coalition with a very

narrow majority or a minority government may find it difficult to secure the majority needed to

pass legislation. While the National Assembly can theoretically overthrow the government (that

is to say the prime minister and his cabinet) by a vote of no-confidence (motion de censure), party

discipline ensures that such a motion does not arise from within the ranks of the government’s

coalition. Except in cases of minority governments, the opposition lacks sufficient votes to pass a

motion de censure. In light of the size and cohesion of the majorities held by Balladur, Juppé,

and Jospin, the National Assembly did not pose a serious threat to their reform efforts. For

Bérégovoy’s minority government, however, the National Assembly was a very real veto player.

The bicameral nature of France’s parliament adds a further, though relatively minor, veto point.

Throughout the 1990s, the upper chamber, the Senate (Senat), was composed of 321 members,66

each indirectly elected to nine year terms with one-third of senators being indirectly elected every

three years by approximately 150,000 local elected officials (“grands électeurs”), including

regional councillors, département councillors, mayors, city councillors and their delegates in 65 In the last decades there have been some changes to both electoral rules for the National Assembly and to the number of members of the Assembly. The 1986 parliamentary elections used party-list proportional representation, but since 1988 members of the French National Assembly are elected directly to five-year terms via two-round elections in single-member districts. The 1988 law also increased the number of members of the National Assembly from 555 to 577, though this change was not implemented until the 1993 parliamentary elections. 66 Since 2004 the number of senators has been gradually increased to 346, while the length of their terms was reduced to six years with one-half of senators being elected every three years.

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large towns, and deputies of the National Assembly. This system introduces a bias in favour of

rural areas, a factor that has made the Senate more politically conservative than the National

Assembly. As a result, centre-right governments are more likely than centre-left governments to

have a relatively high degree of congruence with the Senate. The Senate, however, constitutes a

weak veto point because it only has a suspensive veto. In response to the Senate’s either

choosing to pass a different variant of the bill or voting against the bill, the government can either

try to resolve the dispute between the two chambers via a process called the commission mixte

paritaire or the National Assembly can override a Senate veto by repassing the legislation. While

a Senate veto highlights the fact that there are partisan differences regarding the reform, it does

not constitute a substantial veto point for the government unless the government’s own coalition

is so fractious that it can’t rely on a majority in the National Assembly. Since France is a unitary

state, subnational governance institutions do not control any veto points that can block a

government’s attempts to adopt and implement policy, except insofar as the lower layers of

government elect the Senate and may, therefore, induce it to utilise its suspensive veto.

In France’s semi-presidential system, the president has stronger powers than in most European

parliamentary democracies, although most of his powers relate to foreign policy. Nonetheless,

the president appoints the prime minister, cabinet ministers, ministers-delegate, and secretaries.

The president can not formally dismiss the prime minister, but when presidents and prime

ministers have been from the same side of the political spectrum, the president has historically

been able to force the prime minister to resign on demand.67 When presidents and prime

ministers are from opposing sides of the political spectrum,68 the president is constrained in his

choice of prime minister; since he must select a prime minister acceptable to the majority in the

National Assembly. The president can’t dismiss the prime minister, but he can dissolve the

National Assembly and call for new elections. Use of this power may change the balance of

power within the National Assembly in favour of the president’s co-partisans, potentially

allowing the president to rid himself of particularly troublesome prime ministers and cabinet

ministers, but this is considered a rather extreme action. In regard to legislation, the president has

a suspensive veto. When the president opposes a law passed by the National Assembly, he can

request another reading (re-passage) of it by Parliament, though only once per law. The president

67 Presidents have historically demanded that prime ministers from their side of the political spectrum submit signed, non-dated letters of resignation prior to their nomination. 68 Historically, cohabitation has been a fairly rare occurrence. Prior to 2002, presidential terms lasted seven years and parliamentary terms were for five years, although new elections could be called early. This staggering of parliamentary and presidential elections made cohabitation more likely in comparison with the electoral rules that were introduced in 2002, making presidential and parliamentary terms five years in duration and synchronising the elections cycle so that presidential and parliamentary elections are separated by only a few months.

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may also refer the law to the Constitutional Council (Conseil Constitutionnel) for review prior to

promulgation. Finally, presidential support for potentially unpopular policies can assist a

government’s efforts by virtue of bringing to bear the prestige and power of the presidency.

When presidents oppose a policy, especially in times of cohabitation, reformers face the informal

pressure of presidential prestige aligned against them, as well as the implicit threat of dissolution

of the National Assembly and new elections.

France’s courts69 play a role in the reform process, both before and after the passage of new laws.

The government’s proposed laws must undergo compulsory advisory review by the Council of

State (Conseil d’État) before being submitted to the National Assembly and the Senate. The

president, the speaker of either chamber, or a delegation of 60 deputies or 60 senators may also

refer the law to the Constitutional Council (Conseil Constitutionnel) for constitutional review

before the law’s implementation. As a result, when drafting reforms the government must keep

in mind the courts’ likely response to its legislation, otherwise reform efforts may be stymied by

the courts’ absolute vetoes. During the 1990s the courts struck down relatively minor aspects of

reforms,70 so the courts are not given extensive attention in this chapter. Nonetheless,

expectations regarding court actions constrain governments’ range of options, even if major

conflicts are generally rarely seen due to governments’ prospective avoidance of potentially

provocative policies and due to the Conseil d’État’s review of legislation prior to its submission

to Parliament.

The Banque de France was traditionally an institution whose policies were controlled by

politicians. After the 1983 economic policy U-turn of François Mitterrand and in preparation for

joining the Euro-zone, it gained increasing autonomy. By the 1990s it was an independent and

fairly conservative central bank. While it lacked direct veto power over fiscal policy, it did have

indirect veto power via its ability to raise interest rates (and, thereby, constrain inflation and

economic growth) in response to inflationary fiscal policy. During the 1990s the Banque de

France’s attention was not, however, primarily focused upon fiscal policy. Instead, its

non-accommodating monetary stance was motivated by the need to defend the franc against 69 France’s rather complex legal system has four courts of last resort, which rule on issues within four spheres of the law: administrative issues, constitutional matters, civil and criminal matters, and jurisdictional issues between the courts. The Council of State (Conseil d'État) provides the executive branch with legal advice and acts as the administrative court of last resort. The Constitutional Council (Conseil Constitutionnel) is the court of last resort for constitutional issues. The Supreme Court of Judicature (Cour de Cassation) is the court of final appeal for civil and criminal matters. In the event of disputes regarding whether the civil or administrative system of justice has jurisdiction, the Jursidicational Court (Tribunal des Conflits) renders judgement on which system is compétent. 70 Though not discussed in great detail in this chapter, one provision of Juppé’s health reform, the collective penalty for cost overruns was introduced, but later struck down by the Conseil d'État, due to this penalty's failure to punish solely those who were responsible for the cost overruns.

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outflows of foreign reserves prompted by the Bundesbank’s post-unification increase in interest

rates and the EMS Crises of 1992-1993.

The French social partners do not control direct or formal veto points, but they have been able to

exercise a role as informal veto players via their role as co-administrators of the funds that

provide the social welfare safety net. Non-implementation or slow and incomplete

implementation of some reforms, particularly in the area of health care, has at times frustrated the

government’s efforts to implement effective reforms. Worker protections built into law enable

unions to act through the workers’ councils to slow or moderate restructuring. Furthermore,

although unionisation has declined over the last decades and ranged between 8 and 10% in the

1990s (Visser 2006:45), unions have retained a great deal of importance within the French polity.

Public-sector unionisation levels remain high, and approximately 80% of all employees are

covered by collective bargaining contracts, even if they are not union members (Boeri,

Brugiavini, and Calmfors 2002; Natali and Rhodes 2004b:4). Finally, the tradition of labour

activism remains strong, and there is a broad public perception of unions as conflictual but

responsible actors, presenting a counterview to liberalism and providing valuable services as the

voice of workers and as coordinators of strikers and protesters. As a result, French unions

generally receive high levels of public support and solidarity, and union-led strikes and protests

can paralyse the country.

Even as employers’ associations include a diminishing proportion of firms, they retain

importance as representatives of the interests of employers. They act as a coordinator of

information for firms, and they communicate employers’ perspectives on policy issues to

government and the public. Physicians’ associations actively lobby for health care policies

friendly to their members and act as conduits of information and organisers of strikes and protests

by physicians. As co-administrators of many of the funds that provide workers with a safety net,

employers’ associations have even been advocates of these policies as a means to address the

economic sources of social unrest (Mares 2003). Finally, through workers’ councils, employers

play a role in implementing (or resisting) state reforms.

In general, there is greater congruence between social democratic and Christian democratic

governments and unions on the one hand and between liberal governments and employers’

associations on the other hand, although as Christian democratic governments have become more

liberal, their affinity with unions has declined and their ties to employers have increased.

Nonetheless, centre-left reforms to constrain the growth in the costs of the welfare state and

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centre-right reforms that have increased businesses’ costs have at times led to the social partners

opposing reforms made by their ideological counterparts in government.

Electoral Timing

The timing of elections can provide a final constraint on governments’ reform efforts because

painful reforms can hurt the governing parties’ chances of re-election and make coalition

members more hesitant about supporting contentious legislation. Prior to a 2000 change of the

electoral system, presidential elections occurred every seven years and parliamentary elections

occurred every five years, although the president could declare early elections. This

discoordination of elections produced the possibility for the presidency and the parliament to be

controlled by different parties, although it was not until the 1980s and 1990s that the first three

such cohabitation periods occurred. In light of the government’s interest in being re-elected and

in light of the government’s interest in providing circumstances conducive to the election of a

president from one of its own parties, governments are likely to be more cautious about pursuing

controversial reform efforts in the last year or two before parliamentary or presidential elections.

Government Strength – Summing up

In the end, there were dramatic differences in the relative strength of the four governments

considered in this chapter. With a minority governing coalition and only one year before

elections, Prime Minister Pierre Bérégovoy’s government was by far the weakest, despite its

having the support of the president. Édouard Balladur had a relatively strong, ideologically

unified majority, but his government was constrained by cohabitation with a president from the

opposing side of the ideological spectrum. With elections scheduled in the relatively near term

(two years), Balladur’s government was moderate in strength. Prime Minister Alain Juppé’s

government was in the strongest position with a large majority, the support of the president, and a

relatively comfortable three years until the next scheduled elections. Lionel Jospin’s government

was moderate in strength. Jospin had a somewhat slim and ideologically fractious five-party

majority, and his government was constrained by cohabitation with a president from the

opposition. On the other hand, Jospin’s government came to power after the electoral defeat of

the highly unpopular Juppé government, arguably giving Jospin a mandate for a different set of

policies. With the next elections schedule for five years thence, the government was somewhat

insulated from the threat of electoral retribution for any reforms it undertook. As is noted in

Table 3-1, there is a great deal of variation in the circumstances of the Bérégovoy, Balladur,

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Juppé, and Jospin governments and these variations lead to different predictions regarding

whether governments will pursue a consensual or a confrontational approach to reform.

TABLE 3-1: Government Strength and Predictions Regarding Reform Approach in France Government & Term of Office

Government Strength Predicted Approach

Bérégovoy (1992-1993)

Weak minority government (--) president from one of the coalition parties (+) parliamentary elections in 1 year (-)

Consensual

Balladur (1993-1995)

Moderate secure, ideologically unified majority (+) cohabitation with president from opposition party (-) presidential elections in 2 years (=)

Consensual

Juppé (1995-1997)

Strong secure, ideologically unified majority (+) president from one of the coalition parties (+) parliamentary elections scheduled for 3 years (+)

Confrontational

Jospin (1997-2002)

Moderate ideologically fractious, 5-party majority (-) cohabitation with president from opposition party (-) electoral mandate (+) presidential and parliamentary elections in 5 years (+)

Consensual

Note: + or ++ denote factors that strengthen a government. - or -- denote factors weakening the government. = denotes factors with relatively little effect. Government strength is evaluated in terms of the National Assembly (size of size of majority in the National Assembly), Senate (size of majority in Senate), party cohesion and discipline, electoral mandate, and length of time from beginning of term in office to next elections.

The theory discussed in Chapter Two predicts that the Juppé government’s strength would lead it

to pursue a more confrontational approach to reform, while the greater constraints on the

Bérégovoy, Balladur and Jospin governments would be more likely to pursue a consensual

approach to reform. Indeed, the profound weakness of Bérégovoy’s minority government and the

prospect of imminent elections suggest that this government might very well be unable or

unwilling to undertake serious reform efforts.

Leadership Style

In these four cases, the personal leadership style of these prime ministers reinforce rather than

counter the predictions of reform approach based upon power concentration and electoral timing.

Prime Minister Alain Juppé was known for his high-handed, ‘dictatorial’ leadership style, a factor

that reinforces the prediction based solely upon the Juppé government’s position of strength.71

71 Alain Juppé was appointed Prime Minister by President Jacques Chirac, who had long considered Juppé his protégé. Both Juppé and Chirac were known for their high-handed and dictatorial leadership style. They also both supported a more liberal economic policy. With these two political actors agreeing on reform content and tending towards hierarchical leadership styles, I would argue that these factors would strongly reinforce the “government strength”-related tendency towards a confrontational approach and highly partisan content.

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By contrast, Bérégovoy,72 Balladur,73 and Jospin74 were known as more collaborative politicians,

which would reinforce the prediction that these governments would be more consensual in their

approach. Thus, as is shown in Table 3-2, leadership style reinforces the predictions regarding

the impact of government strength and electoral considerations on the government approach

toward reform.

TABLE 3-2: Government Strength, Leadership Style, & Revised Predictions for France Government & Term of Office

Government Strength Predicted Approach (based on Government Strength)

Leadership Style Leadership Style’s Effect on Predicted Approach

Bérégovoy (1992-1993)

Weak

Consensual Collaborative Reinforcing

Balladur (1993-1995)

Moderate

Consensual Collaborative Reinforcing

Juppé (1995-1997)

Strong

Confrontational Dictatorial Reinforcing

Jospin (1997-2002)

Moderate

Consensual Collaborative Reinforcing

EXPLAINING THE CONTENT OF REFORM – THE FRENCH CONTEXT

France in the 1990s offers ideal cases for testing the influence of partisan orientation upon the

content of reforms. In France, the leftist minority government of Pierre Bérégovoy (1992 to

1993), the centre-right governments of Édouard Balladur (1993 to 1995) and Alain Juppé (1995

to 1997) and the plural left coalition of Lionel Jospin (1997 to 2002) each pursued pension, health

care, and public-sector reforms, and as noted by Jonah Levy (2001), each of these governments

went “to great lengths to define a social and economic agenda that is both consistent with its

ideology and distinct from the offerings of rivals and predecessors” (266). As a result, the

partisan orientation of these governments would be expected to greatly affect the content and

distributional implications of these reforms. The party composition and policy preferences of the

72 While President François Mitterrand also arguably had a high-handed and arrogant leadership style, the precariousness of the Bérégovoy government and Bérégovoy’s own more collaborative tendencies appear to have outweighed the tendencies towards a confrontational approach that Mitterrand arguably might have introduced. 73 Though Balladur has at times been characterised by the satirical Le Canard Enchaîné weekly newspaper or Les “Guignols de l'info” television programme as aloof and arrogant, he has not generally been seen as having a highly confrontational leadership style. 74 Despite the more high-handed, ‘dictatorial’ Chirac being president during the Balladur and Jospin terms, Chirac’s tendencies do not seem to have notably affected the reform approach or the content of reforms. While the president can use his prestige to champion or oppose a cause, it is still the prime minister that ultimately sets the agenda. I would argue that Chirac’s own preferences were muted by Balladur’s preferences for reforms that were more consensual in their approach and somewhat more moderate in their content and distributional implications. Later, Chirac’s preferences would have been frustrated by Jospin’s preference for reform that was quite different in its content and distributional implications.

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Bérégovoy, Balladur, Juppé, and Jospin governments are summarised in Table 3-3 and discussed

in greater detail below.

TABLE 3-3: Parties in Government and Political Orientation in France GOVERNMENT & TERM OF OFFICE

PARTIES IN GOVERNMENT GOVERNMENT’S POLITICAL

ORIENTATION

Pierre Bérégovoy (4/1992-3/1993)

Socialist Party (PS) Movement of Left Radicals (MRG) with ad hoc support from: Union of the Centre (UDC) French Communist Party (PCF)

Centre-Left (Social Democratic) More centrist or more leftist policy expected when support from ad hoc parties is needed.

Édouard Balladur (3/1993-5/1995)

Rally for the Republic (RPR) Union for French Democracy (UDF)

Centre-Right (Christian Democratic / Liberal)

Alain Juppé (5/1995-6/1997)

Rally for the Republic (RPR) Union for French Democracy (UDF)

Centre-Right (Liberal / Christian Democratic)

Lionel Jospin (6/1997-5/2002)

Socialist Party (PS) Party of the Left Radicals (PRG) French Communist Party (PCF) Citizen’s Movement (MDC) Greens

‘Plural Left’ (Generally Social Democratic)

Note: Balladur’s coalition is labelled ‘Christian Democratic / Liberal’, meaning that the government’s orientation was somewhat more Christian Democratic. Juppé’s coalition is labelled Liberal/Christian Democratic, meaning that the government was more Liberal in orientation. The RPR and the UDF both include members with varying preferences for Christian Democratic versus Liberal policies, and both the Balladur and Juppé governments’ coalitions included the same members of parliament, but as power shifted from Balladur to Juppé, there was a shift in power away from the more Christian Democratic members of the coalition in favour of the more Liberal members of the coalition.

These four cases also provide ample opportunity for considering how the variation in government

strength and leadership style – and the resultant tendencies towards consensual or confrontational

approaches to reform – affect the extent to which these policy preferences may either be

attenuated by the desire for consensus or fully expressed by a government pursuing a

confrontational approach. As discussed above, different levels of power concentration, electoral

considerations, and leadership style prompted different approaches to reform with the Bérégovoy,

Balladur and Jospin governments pursuing more cautious and consensual reforms, while the

Juppé government pursued a more confrontational approach. In light of this, we would expect the

Juppé government to pursue reforms with sharper partisanship and starker distributional

consequences, while the Bérégovoy, Balladur and Jospin governments would be expected to

pursue reforms that are less sharply partisan.

The minority Bérégovoy government was composed of the Socialist Party (Parti socialiste, PS)

and the Movement of Left Radicals (Mouvement des radicaux de gauche, MRG). The PS in the

1990s was a social democratic party, which had largely shifted away from its older, more

traditionally socialist preferences for nationalisation of industry and state-led development. Its

junior partner in the 1988 to 1993 period in government, the MRG was social-liberal in

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orientation, generally agreeing with the PS on most economic issues. Due to his having a

minority coalition, Bérégovoy’s government, as well as the preceding Michel Rocard and Édith

Cresson governments, had a “presidential majority,”75 which relied upon either the Union of the

Centre (Union de centre, UDC) or the French Communist Party (Parti communiste français,

PCF) for passage of legislation. The Union of the Centre was a parliamentary group, composed

of centrist members from civil society and some of the more social-liberal or Christian

democratic members of the Union for French Democracy (Union pour la démocratie française,

UDF), although the UDC’s ministers were dismissed after Rocard’s 1991 resignation. Much

further to the left were the Communists (PCF), which remained staunchly supportive of state

employment, dirigisme, nationalisations of industry, and more rigid labour laws. This

dependence upon centrist or communist support for the passage of legislation meant that policy

under the short-lived Bérégovoy government was generally focused upon broadly centre-leftist

social justice goals of equality and protection of the vulnerable, although its legislation might be

pushed more towards the centre or towards the left, depending upon whether the support of the

UDC or the PCF was sought.

During the Jospin government, the PS’s junior partners were the MRG’s successor, the Party of

the Left Radicals (Parti radical de gauche, PRG), the French Communist Party (Parti

communiste français, PCF), the Citizen’s Movement (Mouvement des citoyens, MDC), and the

Greens. The Citizens’ Movement (Mouvement des citoyens, MDC) was a Eurosceptic social

democratic Party. The Greens (les Verts) were a social progressive environmental party. While

these parties disagreed on the extent to which the state should take a leading role in promoting

employment and economic growth, they did broadly agree that the state should promote social

justice goals of equality and protection of the most vulnerable through the use of the social

welfare safety net and the tax code.

Throughout the 1990s, there were two main parties of the centre-right, Rally for the Republic

(Rassemblement pour la République, RPR) and the Union for French Democracy (Union pour la

démocratie française, UDF).76 RPR was a centre-right, historically Gaullist party. As a Gaullist

party, the RPR had been dirigiste, but under Jacques Chirac’s leadership in the late 1980s and the

early 1990s it had become a largely conservative-liberal party. The UDF was a centre-right

75 A ‘presidential majority’ refers to the situation, whereby the absence of a clear winner in the previous elections leads the president to nominate a prime minister to head a minority government. 76 Small parties, such as Le Pen's National Front (Front national, FN), are not addressed here because they were not in government during this period.

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political party, assembled from the merger of multiple parties77 with an ideological inheritance

that split it between Christian democratic and conservative-liberal inclinations. Under Balladur,

this coalition was balanced between Christian democratic and conservative-liberal party

members, but under his successor Juppé, who had supported Chirac in his move of the RPR away

from Gaullism, power shifted in favour of conservative-liberal elements with Christian

democratic members being largely marginalised and purged from the cabinet.

In response to this difference in cabinet composition and the policy orientation of these two prime

ministers, it would be expected that policies during the Balladur would be more of a blending of

the Christian democratic values of maintenance of social order and traditional values and the

liberal values of economic efficiency and individual property rights, while the Juppé government

would more strongly tend towards liberalism. Reflecting the balance between Christian

democrats and liberals in his cabinet and the necessity of cohabitation with a Socialist president,

Balladur’s policies would, therefore, be expected to still favour state intervention to preserve

status differentials for retirees and the unemployed, while being less interventionist and less

generous than the policies that a fully Christian democratic party would prefer. Reflecting the

unified centre-right control of the presidential and prime ministerial positions and the more liberal

preferences of Chirac, Juppé, and the new cabinet, the Juppé government would be expected to

pursue a reform course favouring a shift towards a residual welfare state, limiting redistribution

and generally leaving individuals responsible for self-insuring against the ‘risks’ of life and the

modern economy, towards deregulation of labour markets, and towards privatisation of

state-owned enterprises.

With this understanding of the power concentration, electoral concerns, leadership styles, and

partisan composition of these four governments and their likely implications for each

government’s preferred reform approach and content, the dissertation now turns to a closer

examination of the Bérégovoy, Balladur, Juppé, and Jospin governments.

THE BÉRÉGOVOY GOVERNMENT (1992-1993) – FRAGILITY, CAUTION, AND IMPOTENCE

At first glance, the period of April 1992 through March 1993 might have been expected to be

eventful ones for reform efforts in France. Recession had descended upon Europe in 1990 and

1991, the EMS Currency Shocks were buffeting most European states, and the deadline for

77 The UDF was composed of the Christian-democratic Democratic and Social Centre (CDS), the conservative-liberal Republican Party (PR), the liberal-leaning Radical Party (Rad.), the centre-left Social Democratic Party (PSD) and the centrist Perspectives and Realities Clubs (CPR).

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qualification for the Maastricht convergence criteria had been set. Instead these years were

remarkably devoid of serious government-led reforms. A very weak government, imminent

elections, and France’s relatively good economic situation in the first half of 1992 were primarily

responsible for the lack of substantial reforms during the short-lived government of Pierre

Bérégovoy.

Pierre Bérégovoy came to power as prime minister after the Édith Cresson’s resignation in April

1992, following the Socialists’ poor showing in regional elections. Rising unemployment since

the 1983 U-turn under Mitterrand had disillusioned many workers who still favoured the ideals of

the Left, but who felt that these values had been betrayed by the Socialists’ turn away from state

interventionism and the defence of employment and wages. The 1992 regional elections reflected

this wide-spread discontent and the three consensus parties, the PS, the RPR, and the UDF,

received the support of only one-third of registered voters. The near-loss of the September 1992

referendum on Maastricht illustrated a growing class divide on government social and economic

policy with the Left’s own constituencies being among the least enthusiastic.78

The third prime minister in the four years since the last parliamentary elections, Bérégovoy

presided over a minority government of the Socialist Party (Parti Socialiste, PS) and the

Movement of Left Radicals (Mouvement des radicaux de gauche, MRG). With the support of the

Socialist President François Mitterrand, Bérégovoy’s government held a “presidential majority,”

which sought the backing of the centrist Union of the Centre (Union du Centre, UDC) or the

French Communist Party (Parti communiste français, PCF), depending on the policy pursued by

the government. This lack of a firm coalition was the reason for the high turnover in

governments since the 1988 parliamentary elections.

With elections scheduled for 1993, Bérégovoy’s chose a highly cautious and consensual approach

to reform. Composed of Socialists and the Movement of Left Radicals and reliant upon either the

leftist Communists or the centrist UDC, the coalition preferred reforms that were centre-left or

social democratic in its distributional implications, even as Bérégovoy continued upon the less

dirigiste and more fiscally constrained course that the parties of the left had pursued since the

1983 U-turn.

78 Sixty-four percent of workers, the very group that had voted for Mitterrand in 1981 and the group that had been most adversely affected by rising unemployment, voted against Maastricht. This vote was less a reflection of nationalism, than an expression of the fears that a single currency and a Bundesbank-style tight monetary policy would further increase unemployment in France. By contrast, two-thirds of managers and professionals voted for Maastricht (Moss 1998).

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As it came into office, the Bérégovoy government recognised the long-term need to reform the

unemployment, pension, and health care systems, but there was no sign of immediate crisis.

Economic growth in France had slowed in 1991, but Germany’s post-unification consumption

boom and the resultant strong French exports to Germany had provided some insulation, despite

the onset of recession throughout most of the rest of Europe. It was not until the second half of

1992 that the slowdown deepened into recession. By then the Bundesbank’s decision to raise

interest rates had essentially eliminated the Banque de France’s freedom to pursue a looser

monetary policy. While concerns about the long-run viability of rising debt levels and the terms

of the Maastricht convergence criteria’s ceilings on deficits and debts put pressure upon the

Bérégovoy government to undertake fiscal austerity measures, the government was also

confronted with the very real impact that slowing growth and rising unemployment were having

on the people – and, of course, the government’s re-election prospects. In the face of the

(presumably) short-term exogenous shock of global recession and its effects upon the French

economy, the Bérégovoy government chose to pursue a Keynesian response, using automatic

stabilisers and a limited discretionary fiscal reflation to smooth out the recession. Though this

allowed the deficit and debt to grow, it also served to buffer the more severe effects of the

recession.

A Pension Reform Attempt

Despite willingness to tolerate temporarily higher deficits and debt during a recession, the

Bérégovoy government was concerned about the long-term threats that rising pension costs posed

for the viability of the pension system. This recognition of the pension system’s problems was

not new. A series of White Papers and consultations with employers and trade unions had taken

place since the Socialists had taken power in 1988. While the National Council of French

Employers (Conseil national du patronat français, CNPF) had welcomed many of the reforms

proposed in a 1989 White Paper, the unions were less supportive. The moderate French

Democratic Confederation of Labour (Confédération française démocratique du travail, CFDT)

had expressed some openness to the idea of pension system reform, but it was critical of many of

the specifics in the various proposals, including raising the retirement age, and its suggestions

included tying purchasing power of retirees more closely to that of the working population and

elimination of non-contributory elements from the pensions scheme, measures which were

unlikely to improve the affordability of the system. The radical Workers’ Force (Force Ouvrière,

FO) and the communist General Confederation of Labour (Confédération Générale du Travail,

CGT) were openly hostile to the reforms. Developed in consultation with employers and the

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unions, the reform published in the 1992 Mission Cottave report had greater buy-in from the

unions, but these reforms were substantially watered-down vis-à-vis earlier recommendations; the

report dropped recommendations for extending the period for calculating reference salary to 25

years, reduced the proposed extension of the qualifying period from 42 years to 40 years, and

targeted only the less-unionised private sector’s pension system for reform, leaving the more

highly-unionised public-sector pensions until later (Bonoli 2000:133-136).

By the time that Bérégovoy came to power, the essential outlines for a pension reform had

already been agreed upon. The unions were willing to accept some reductions in pension

entitlements in exchange for (1) greater control of the social partners over the management of the

pensions system and (2) the removal of non-contributory benefits from the pension system,79

which would reduce the pensions system’s outlays. The unions and the government could not,

however, agree either on the extent to which pension benefits would be reduced or on the

indexation of pensions. The government’s reform, when it was presented in Parliament in

November 1992, created a means-tested minimum pension “old age solidarity fund” (fonds de

solidarité vieillesse, FSV), removing non-contributory benefits from the general pension scheme,

a change which would reduce the deficit in the annual social security budget and make the

pensions system wholly a social insurance scheme, eliminating state subsidies to the scheme and

strengthening union claims that the social partners should have greater autonomy in administering

the old age insurance scheme. While this proposed law reflected the Bérégovoy and previous

socialist governments’ desires to start to reform pensions, it also showed a lack of willingness or

ability to move beyond the very narrow scope beyond which the unions and the government were

in agreement (Bonoli 2000:135-137). At its first reading, the bill was defeated. On the left, the

Communists (PCF) rejected the bill because the removal of the non-contributory minimum

pensions benefit from the general pension system would create “a two-tiered system in

retirement.” The right derided the bill as an “accounting facelift” intended to merely “present a

less alarming budgetary situation,” since the reform would not actually reduce government

pension expenditures, but would instead merely transfer the burden from the pensions system to

another account (Bobin 1992). Without support from either the left or the centre, Bérégovoy’s

minority government could not pass the law and pension reform was shelved until after the 1993

elections.

79 The non-contributory benefits were means-tested supplementary benefits provided to retirees who had been unable to build up a contribution record sufficient for assuring a pension near the minimum level of about 55% of an average net wage.

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Unemployment Benefit Reform

The one significant reform during the Bérégovoy government’s time in office was the 1992

reform of the unemployment system by labour and the employers. Unemployment benefits had

been targeted in 1982, and the wage replacement rate for approximately half of all unemployed

was reduced from 80% to 75% for their first year. Despite several attempts to rationalise the

system over the 1982 to 1992 period, benefits remained very generous.

The 1992 rationalisation of the unemployment system actually began with negotiations in 1991

and 1992 during Édith Cresson’s term as prime minister and were finalised during the Bérégovoy

government’s term in office. The reform was the product of an agreement between the CNPF and

the moderate CFDT, which chose to support reform and pursue alliances with employers in a bid

to outmanoeuvre its rivals, the radical FO and the communist CGT.80 Replacing all other

unemployment benefits with one ‘digressive’ benefit, the new benefit, known as the Single

Digressive Allowance (Allocation Unique Dégressive, AUD), was payable only for a limited

period of time, was tied to the recipient’s history of contributions, and decreased over time. The

AUD was less costly than the prior unemployment support programmes, and its account balance

was even positive in 1993, despite this being a period of growing unemployment. With its

reduction of the income replacement rate over time, the benefit was intended to restructure

incentives to ‘encourage’ a quicker return to employment. Some of the savings and the impact of

the incentives from the AUD were lost, however, due to the continued existence of a

means-tested supplementary unemployment benefit, the Specific Solidarity Allowance

(Allocation de Solidarité Spécifique, ASS), which increasingly provided higher levels of

supplementary income as the AUD cut back the level and volume of benefits over time (Palier

2000). While the government’s finances did benefit from these changes, it was the social

partners, not the Bérégovoy government, that were responsible for the reform.

The Backdrop to the 1993 Parliamentary Elections

In March 1993 parliamentary elections were held. The local elections and the Maastricht

referendum in 1992 had signalled the growing divide between the Socialists and their electorate,

but the 1993 parliamentary elections were an unmitigated disaster for the PS. The economy in

1992 and 1993 had continued to sag, and after a decade of tighter fiscal policy with the Socialists 80 As a result of its cooperation with the employers (CNPF) on this reform, the CFDT gained influence in October 1992 by taking the place of the FO in the management of the Union Nationale pour l'Emploi Dans l'Industrie et le Commerce (National Union for Employment in Industry and Trade, UNEDIC), the administrative board of the national unemployment insurance scheme (Mandin and Palier 2002:33-34).

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turning away from state intervention and defence of employment and wages, the PS’ constituents

were disillusioned. In an election with 31% abstention and a record 5% spoiled ballots, the PS

and their MRG allies’ share of the vote fell from 37.8% in 1988 to 19.1% in 1993 and their share

of the seats fell from 269 out of 555 seats to 57 out of 577 seats (Moss 1998:69; Siaroff

2000:260).

THE BALLADUR GOVERNMENT (1993-1995) – COHABITATION & THE MANIÈRE DOUCE

The 1993 parliamentary elections in France brought to power a large conservative majority. The

centre-right Rally for the Republic (Rassemblement pour la République, RPR) and the Union for

French Democracy (Union pour la démocratie française, UDF) swept into power, winning 20.2%

and 19.6% of the vote, respectively. With 472 out of 577 seats in the hands of the RPR and the

UDF (Siaroff 2000:260), the RPR’s Jacques Chirac was the likely choice for prime minister, but

after his contentious experience of cohabitation with Mitterrand between 1986 and 1988 and his

loss to Mitterrand in the 1988 presidential elections, he refused to accept a second cohabitation.

After Édouard Balladur, Chirac’s Minister of Economy, Finance, and Privatisation during the

1986 to 1988 cohabitation, announced he would not run against Chirac in the 1995 presidential

elections, Chirac and a majority of right-wing politicians signalled their support for Édouard

Balladur of the RPR and Mitterrand nominated Balladur as prime minister. With more than 11%

unemployment and a nearly full point contraction in the French economy in 1993, it was clear

that there would be little public tolerance for budget austerity measures. In light of the

presidential election scheduled for 1995 and the necessity of cohabitation with the long-time

Socialist President François Mitterrand until then, Prime Minister Balladur chose to avoid

extreme or highly confrontational reforms that could provoke a backlash. Desiring to present a

moderate image, Balladur pursued reforms in a consensual manner, consulting with the unions in

the policy-formation stage and making concessions in exchange for union assent to the

government reforms.

General Fiscal and Monetary Policy

Fiscal policy under Balladur was largely the same as under Bérégovoy. In response to the poor

economic climate and public hostility to tightening of fiscal policy, Balladur continued to use

automatic stabilisers and a limited fiscal reflation to smooth out the recession. The resultant rise

in government expenditures and deficits, which had hit their highest point in decades in 1993,

was tolerated in the short-term because the government’s options were few. Monetary policy was

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already devoted to maintaining stable exchange rates, and throughout mid-1993 the Banque de

France continued a tight money policy and high interest rates in response to the runs on the franc

in 1993. Unwilling to target current spending during recession, but concerned about the

long-term problem of rising expenditures and deficits, Balladur turned his attention to reform of

the pension and health care systems.

The 1993 Pension Reform

Throughout April and May of 1993 officials at the Ministry of Social Affairs engaged in

extensive negotiations with employers and unions, constructing a reform of the basic and

supplementary private-sector pensions to be phased in over time and predicted to reduce pensions

costs for the private sector by 33% by 2015 (Palier 1999:397, as cited in Levy 2001:268). The

1993 reform was a carefully constructed package, negotiated with the trade unions, that increased

revenue by increasing the number of years of contributions from 37.5 to 40 years and decreased

expenditures by calculating the reference salary based upon the best 25 years rather than the best

10 years of earnings and by shifting the indexation of benefits from gross wages to prices. A

means-tested minimum pension “old age solidarity fund” (fonds de solidarité vieillesse, FSV)

was created, crediting people for years of child-rearing, army service, and long-term

unemployment. A concession to labour, the FSV replaced the non-contributory benefits that had

previously been paid from the general pension fund. It was financed by an increase in the

contribution sociale généralisée (CSG), a tax on all income sources, rather than being financed

through the social contributions (payroll taxes) paid on wages alone. This measure reduced

benefits for high-wage earners by 7-8%, but maintained minimum-wage workers at the same

level. These changes were phased in over a ten-year period, thus the reform had little immediate

impact, but it was expected to decrease the amount by which social contributions would need to

rise in the future. Instead of needing to increase social contributions by 10% of salary by 2010, it

might only be necessary to increase social contributions by 2.73% to 7.26%. Funding for social

protection was increased with the rise of the CSG from 1.1% to 2.4% (Bonoli 2000:140; Palier

2000:124, 130; Vail 2010:119-124).

The private sector is more weakly unionised than the public sector, making it an easier target for

government reforms, but the approach taken by the Balladur government was also key. The

extensive negotiations with the unions helped the government avoid the appearance of unilateral

action, even if some unions complained that these negotiations were the manière douce (‘gentle

manner’) of imposing pension austerity (Normand 1993). The negotiations also helped the

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government steer clear of measures absolutely unacceptable to unions. The rhetoric of the reform

emphasised the importance of bringing pension costs under control in order to limit the growth of

social contributions and to avoid the negative consequences of high social contributions on

employment. By explicitly discussing the connection between the growing welfare state and the

worsening labour market, Balladur hoped to reassure both unions and the electorate that these

reforms would combat the problem of social exclusion,81 in addition to addressing an impending

social welfare system crisis (Bonoli 2000:137-140, 146-149; Vail 2010:119-124).

The content of the reforms served to open a divide between union leadership and their

membership. Nicole Notat, leader of the large, moderate trade confederation CFDT, argued in

favour of protesting the reforms on the grounds that failing to do so would make unions

responsible for “failing to support pensions in their hour of danger” (Normand 1993). The hike

of a tax-deductible CSG was condemned as being fundamentally unjust because low-income

groups would pay the full increase of the CSG, while high-income groups deducted their CSG

payments from their income taxes. The more leftist CGT complained that the reform “called into

question the acquired rights” of workers, and the militant and highly independent trade union

confederation FO objected to the reforms’ impact on workers and their pensions as earned, but

deferred wages (Le Monde 1993; Bonoli 1997b; Vail 1999).

The rank-and-file union membership, however, did not follow the lead of their unions. The

private sector was weakly unionised, and within the unions there was little enthusiasm for

mobilising on behalf of non-unionised workers. The long phase-in period meant that older

workers and pensioners were exempt from these rules, dividing the private sector between

younger workers affected by the reform and the older workers and pensioners whose pension

benefits would be untouched. Finally, the content of the reforms opened a divide among the

unions. As noted by Giuliano Bonoli, government ministers “were certainly aware of the fact that

a fully consensual solution was not possible” (Bonoli 1997b:117). Expecting the opposition of

the communist CGT and the radical FO, the government pursued a divide-and-conquer strategy,

concentrating upon gaining the support of the CFDT and the neutrality of the other trade

federations. Though the actual pension reform was opposed by most trade federations, the

creation of the FSV was favoured by all but the CGT. Emphasising the threat of skyrocketing

costs (and their negative impact upon the competitiveness of private-sector firms), the

government was able to sell the package to the unions as a measure intended to stabilise rising

81 Social exclusion is the term for long-term unemployment and the isolation from the broader society felt by unemployed and low-income groups as a consequence of their lack of employment and low income.

85

social contributions in order to protect jobs and to prevent social exclusion. With the introduction

of the FSV without an increase in social contributions, a long-standing union demand, and the

granting of some concessions on management and control over pensions, the government was

able to avoid the appearance of the reform as being a right-wing all-out assault upon pensions. In

the end, the government was able to gain the support of the more moderate CFDT and CFTC

(Confédération Française des Travailleurs Chrétiens or French Confederation of Christian

Workers). The CGT and FO firmly opposed the legislation, but in the end, it gained the support

(or grudging acquiescence) of the other confederations. Without a consensus against the reform

among unions and in the absence of a membership willing to mobilise, the 1993 pension reform

passed without significant opposition (Bonoli 1997b).

The 1993 Health Care Reform

The 1993 reform of the health care system was in many ways similar to the pension reform effort.

As with the pension system, the impetus for the reform of the health care sector was the

recognition that the costs of the health care system were rising in an unsustainable manner.

While 4.2% of GDP was spent on health care in 1960, by 1993 the amount had risen to 9.8% of

GDP (Vail 1999:318). Balladur’s 1993 health care reforms resembled the pension system

reforms, utilising a consensual approach that included side-payments, but which also helped

divert blame away from the government. Balladur and his Minister of Social, Health, and Urban

Affairs, Simone Veil, also carefully sequenced reforms to exploit divisions among different

groups. Involving unions in the policy formation stage, Balladur pursued a divide-and-rule

strategy when dealing with the highly segmented doctors’ unions. Reforms were pursued

sequentially, targeting one group at a time. The reforms exploited divides between specialists and

general practitioners, who were represented in separate physicians’ unions, which could be played

off against each other. The reforms also focused upon the divide between the public hospitals,

which were already subject to government-set global budgets, and the ambulatory sector, which

operated on a fee-for-service basis with the government held responsible for the ambulatory

sector scheme’s deficits. These strategies helped Balladur and his Minister of Social, Health, and

Urban Affairs, Simone Veil, avoid the appearance of a wholesale attack on the profession (Vail

1999:317-319; Vail 2010).

Negotiations focused first upon the ambulatory sector and its fee-for-service reimbursement

model, which had driven much of the rise in costs in the French health care sector. The Balladur

government’s negotiations with the health care social partners resulted in an agreement whereby

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the medical unions and the health care unions and the national health insurance fund, the National

Health Insurance Fund for Salaried Workers (Caisse Nationale d’Assurance-Maladie des

Travailleurs Salariés, CNAMTS), agreed to binding ceilings upon health care expenditures in

exchange for their autonomy in determining how to rebalance and allocate payments. The

negotiation of a new Convention was intended to placate the unions, particularly two of the more

important medical unions, the Confederation of French Medical Unions (Confédération des

syndicats médicaux français, CSMF) and the Federation of Doctors in France (Fédération des

médecins de France, FMF), by implicitly emphasising the supposed autonomy and importance of

unions as responsible actors in the health care system. Once agreement was reached with the

ambulatory sector, the public hospital system was targeted. By waiting until after the conclusion

of the Convention with the ambulatory sector, the government ensured that the hospital

physicians would find it difficult to find allies against reforms. Likewise, specialists and

generalists were played against each other as Balladur and Veil pursued a set of reforms that

would reduce physicians’ autonomy vis-à-vis referrals and approved procedures. In June 1993

Veil presented a plan intended to cut the health budget by FF30 billion. Patient reimbursement

rates for approved services were reduced from 75% to 70%, patient co-payments for hospital

stays were increased, hospital administration was reformed, and some hospital beds were

eliminated (Wilsford 1991:105-107; Vail 1999).

Though hospital physicians and some smaller unions opposed the reforms, the Balladur

government was able to successfully implement its reform, largely due to its avoiding an open

confrontation with the unions. It did so by pursuing an apparently consultative approach,

including unions in the reform process and providing concessions. While the prospect of binding

global budgets was unappealing to the health care profession, the health care social partners were

somewhat mollified by the government affirming their autonomy in administering the health care

fund and negotiating the details of reimbursements. Negotiation of a new Convention between

the medical unions and the CNAMTS also allowed the Balladur government to avoid blame for

the specifics of the cost-containment measures that the new Convention would contain. In a

further measure to placate physicians and to avoid the appearance of an assault upon the medical

profession as a whole, the government annulled part of a previous government’s reform package

that had increased state regulation of doctors’ retirement contributions. Sequencing of reforms

enabled Balladur to pursue a divide-and-rule strategy that avoided unifying potential opponents to

reform. The decision to target public hospitals after the adoption of the new Convention with

ambulatory physicians made it more difficult for public hospital physicians to find allies against

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these reforms. The CSMF and FMF’s acquiescence to the reforms served to legitimise the

government’s policies and limited the ability of opponents to mobilise resistance. The consensual

approach – involving consultation with and concessions to the social partners, the use of

side-payments, and the exploitation of divisions between unionised and less unionised sectors,

between different age groups, and among the different unions – had allowed the Balladur

government to pass its reforms (Wilsford 1991:105-107; Vail 1999; Vail 2010).

In theory, this reform spread the costs of retrenchment across health care users purely in

proportion to the amount of health care services the individual used. In reality, however, the

burden of adjustment fell more heavily upon the poor and the long-term unemployed. First, there

is the regressive effect of any tax or expense that is based upon consumption of necessary goods

and services. It simply costs the poor a greater proportion of their income. Second, about 85% of

the French population reduce their co-payments by purchasing supplementary insurance. But for

the 15% of the population unable to afford supplementary insurance, primarily the long-term

unemployed, the cost of co-payments has generally made medical care increasingly unaffordable

(Levy 2001:275).

Assessing the Reforms’ Distributive Implications

The distributive implications of these reforms were mixed. The pension reforms did not affect

existing pensioners or older workers. Reductions in pensions were across-the-board for younger

workers, although the future pensions of low-income workers and the long-term unemployed

would be supplemented by the FSV. With its decision not to finance the FSV via social

contributions, the government was able to present itself as being job-friendly and helping the

long-term unemployed by reducing the non-wage cost of labour and its negative impact on

employability of low-skill, low-wage workers. More problematic, however, was the financing of

these changes via higher consumption taxes on alcohol and gasoline and an increase in the

tax-deductible CSG from 1.1% to 2.4%. Both consumption taxes and social contributions are

regressive in their impact, and in theory consumption taxes depress discretionary purchases,

reducing employment in those sectors. On paper, the CSG is a proportional tax levied on all

income, including investment and property income. While a tax on all income sources is

generally more equitable than a payroll tax, the CSG was made tax deductible, meaning that

low-income individuals paid the full increase while individuals in the highest income bracket

(56%) only paid a net 44% of the CSG increase (Levy 2001:268). The health care reform

reduced compensation to physicians, but increases in co-payments and cuts in reimbursement

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rates, coupled with the lack of supplementary insurance among the poor, made the reform’s

effects particularly pernicious for the poor, the elderly, and the long-term unemployed (Bonoli

1997b; Palier 2000; Levy 2001:275). All in all, balancing cuts in compensation to high-income

groups (i.e. physicians) with the creation of a separate safety net for low-income elderly (i.e. the

FSV) prevented Balladur’s reform from seeming to be a right-wing assault upon workers’

pensions and health care benefits. Nonetheless, the combination of the funding mechanism

(consumption taxes and a tax-deductible CSG) for the pension reform and higher co-payments

and lower reimbursement rates for health care disproportionately hurt the poor.

The Backdrop to the 1995 Presidential Elections

Over the course of Balladur’s term in office, the economy recovered. In August 1993 the ERM

bands were widened from 2.25 to 15%. In late 1993 the Bundesbank dropped its short-term

interest rates by 1.5% as inflation fell in Germany. In response to the widening of the ERM

bands and the loosening of German monetary policy, the currency markets settled and the Banque

de France was able to drop its short-term interest rates by more than 2% in the last quarter of

1993. The French economy grew by 2.2% in 1994 and 2.1% in 1995, but unemployment

remained stubbornly high.82

The disillusionment that had routed the Socialists in the 1993 parliamentary elections persisted.

Workers, the Left’s traditional constituents, had been especially hard-hit by the recession. By the

time of the 1995 presidential elections, workers and the unemployed, particularly in the

de-industrialised regions in the North, East, and Midi, turned to the anti-immigrant National Front

candidate Jean-Marie Le Pen, giving him the plurality of their votes (Moss 1998:69-70). Socialist

President François Mitterrand was defeated in the second round of the presidential election by

centre-right Rassemblement pour la République (Rally for the Republic, RPR) candidate Jacques

Chirac, who had run upon a platform of increased state intervention, decreased privatisation, and

a promise to heal the country’s social fracture. Édouard Balladur had challenged the more liberal

Chirac in the first round of the presidential elections, and in response one of Chirac’s first actions

as president was to support his long-time ally, Alain Juppé, to replace Balladur as prime minister.

Alain Juppé would continue the reform of pensions and health care that Balladur had begun and

would expand his efforts to a broader reform of the public sector and the tax system. The Juppé

government’s reforms differed, however, in that the government followed a more confrontational

82 In light of employment generally lagging behind economic growth, it is unsurprising that economic growth was not immediately accompanied by lower unemployment in France during this period.

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approach and pursued reforms that were much more sharply regressive in their content. As a

result, these reforms were received with much greater hostility and many of these reforms

ultimately failed.

THE JUPPÉ GOVERNMENT (1995-1997) – RÉFORME PAR ORDONNANCE AND CONFLICT

In 1995 Alain Juppé found himself in a comfortable position for forming a cohesive, conservative

government that would be well-positioned to undertake serious economic, fiscal, and social

welfare reform. The next parliamentary elections were scheduled for 1998. He had the same

large centre-right majority in Parliament, the same minimal fragmentation or polarisation within

his government, and the same strong control over the ministers in his coalition that Balladur

enjoyed. Unlike Balladur, Juppé was not hampered by cohabitation with a Socialist President.

The removal of this veto point and the firm backing of the conservative-liberal Chirac

strengthened Juppé, leaving him confident that his government could undertake much more

serious reform efforts. The concentration of power in the hands of the Juppé government and

distant elections gave the government greater leeway for considering a conflictual approach and

deep reforms, and Juppé and Chirac’s own conflictual leadership styles reinforced this tendency.

Over the next two years, Juppé with Chirac’s firm backing embarked upon a fiscal and welfare

reform effort that was more confrontational in approach and much sharper in content and

distributional implications than Balladur’s reform efforts had been.

The General Fiscal and Economic Context

In theory, fiscal reform retrenchment should have started in 1994. After a 0.9% contraction of the

economy in 1993, the economy grew by 2.2% in 1994. The resultant growth in state revenues

arguably should have been directed towards consolidating the budget, but in recognition of

unemployment remaining persistently high and in response to looming elections, Balladur had

directed these resources towards continuing to provide social assistance and unemployment

benefits to those hurt by the recession rather than to reduce the budget deficit. With the

beginning of the economic recovery, these immediate demands upon the social welfare safety net

eased slightly.

Despite the easing in economic circumstances, Juppé and Chirac were concerned with the

long-term implications of high taxes for French growth and employment. The size of the social

welfare system as a proportion of the French budget was growing and was largely responsible for

mounting deficits and debts that were untenable, even in the medium-term. Social contributions

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had risen from 17.2% in 1970 to 44.4% in 1992, and at this level, social contributions were high

enough that they increasingly impaired economic growth and the employability of low-wage,

low-skill workers. As liberals opposed to the growth of the state, Juppé and Chirac saw a need

for reductions in state spending, particularly in the areas of pensions and health care. They also

perceived a dire need to reduce the size of the public sector. They considered public-sector

wages too high, and the early age for retirement and the generous replacement rate for

public-sector pensions made state employees particularly costly.

The 1995 Pension Reform and the Juppé Plan

Juppé’s 1995 pension reform differed from the 1993 Balladur reform in two key respects: its

target and its approach. Whereas Balladur had targeted private-sector pensions, Juppé sought to

apply Balladur’s rules for private-sector pensions to the public sector, which was much more

highly unionised. In contrast to Balladur’s approach of ongoing negotiations with unions, the

inclusion of some concessions to union concerns, and sequencing of reforms through a

divide-and-rule strategy which exploited union fragmentation, Juppé’s approach was openly

confrontational.

The new policy was a “réforme par ordonnance” (“reform by decree”), a reform drafted in

virtual secrecy until the time it was officially proclaimed and imposed from above by the

executive (Bonoli 1997b). Unions, the Left, and even Juppé’s own Ministers of Health and

Generational Solidarity were excluded from the policy formation process. During this stage,

various ministers did have contact with some union representatives, including the CFDT (though

not the CGT or the FO), but the specifics of the planned reforms were not discussed. As noted by

Mark Vail, “Such lack of input from ‘special interests’ (including even members of the

Government) not only alienated workers but prevented strategic policy modifications that might

have limited public resistance to the proposals” (1999:323). Even after Juppé’s planned reforms

had resulted in strikes that brought the country to a standstill, Juppé only offered to hold

roundtables, to appoint mediators, and (eventually) to meet personally with unions to discuss the

best way to implement the reforms (Bonoli 1997b; Pitruzzello 1997; Vail 1999). The decision to

visibly exclude unions from the reform process alienated union leadership and irritated the

rank-and-file. Juppé’s targeting of a highly unionised sector, coupled with concomitant reforms

in other areas, unified his opponents against him.

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Under Juppé’s reform, the public-sector pension standards would be identical to the standards for

private-sector pension implemented by Balladur. Juppé’s reform increased the reference salary

period from the best 10 years to the best 25 years. The indexation of benefits was changed from

gross wages to prices. The statutory retirement age was increased to 65 years of age, the

contribution period for full pensions was raised from 37½ years to 40 years, and the early

retirement age was increased from 50 to 55 years (Bonoli 1997b; Vail 1999).

Despite the content of the public-sector pension reform being identical to Balladur’s

private-sector pension reform, virtually every other aspect of the reform process and the social

context differed. Whereas Balladur had adopted the FSV to ‘sweeten the deal’ for workers and

unions, Juppé simultaneously pursued a variety of measures hostile to union and public-sector

workers’ concerns. The Juppé Plan sought to (1) freeze public-sector salaries for 1996; (2)

eliminate the various régimes spéciaux83 that allowed public-sector workers to retire as young as

50 years; (3) speed up the process of privatising state-owned enterprises to raise revenue and

dump public employees and unproductive firms, a violation of Chirac’s campaign promises; (4)

restructure the loss-making railway sector through privatisation, shedding of unproductive

divisions, and implementing performance-based pay reform to encourage competitiveness,

flexibility, and cost controls; (5) restructure the social security budget, imposing an annual,

Parliament-approved ceiling on spending, and reducing unions’ role in co-managing the system;

(6) introduce a 0.5% tax on all revenues to create a Remboursement de la dette Sociale (RDS)

fund to balance the Sécurité Sociale and to repay and service the accumulated debt (FF250

billion) over the next 13 years; and (7) raise taxes to balance the budget, including an increase of

the VAT from 18.6% to 20.6% and a tax deductible increase of the CSG from 2.4% to 3.4%

(OECD France 1997; Palier 2000:124-125; Pitruzzello 1997:1618-1625).

Although arguably parts of this reform were simply a long overdue and necessary restructuring of

bloated state-owned enterprises and of an overly generous public-sector pension system, the

government’s decision to pursue the Juppé Plan simultaneous to a public-sector pension reform

and without any side-payments made the reforms an unmitigated assault on public-sector

employees in the eyes of the unions and of the highly unionised (and highly activist) public-sector

employees. Furthermore, other aspects of the reform went beyond trimming public-sector

expenditures. The distributional effects of these policies were severely negative for public-sector

employees, unions, and lower-income families, key constituencies of the Left. The changes in

83 Régimes spéciaux were the special pension schemes for public-sector employees that were substantially more generous that the régime général that covered private-sector employees.

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public pension terms and the freeze in public-sector salaries threatened to undermine both the

current and deferred earnings of public-sector employees. Rationalisation and privatisation of

state firms threatened the jobs of state employees. The loss of jobs in the public sector and the

reduction of the role of unions in managing the social security system threatened the size and

historical prerogatives of unions. Although the tax increases would be paid by all French

residents, the regressive nature of the VAT and the tax deductibility of the CSG ensured that the

burden would fall more heavily upon lower-income residents (Bonoli 1997b; Levy 2001). In

1993 Balladur had been able to portray his reform as a way to (1) ensure the private-sector

pension system’s continued viability, (2) meet the social justice goals of preserving a safety-net

for low-income retirees via the FSV, and (3) preserve employment by using the CSG rather than

‘employment-killing’ social contributions to fund the FSV. The Juppé Plan included no new

programme to assist the vulnerable, and it actually had as its goal a reduction in employment via

the efforts to rationalise state-owned enterprises. Finally, in contrast to Balladur’s 1993 reform,

Juppé’s 1995 package was not negotiated with the relevant (mostly public-sector) unions and it

lacked the sort of side-payments that had helped the private-sector unions claim in 1993 that they

had gotten important concessions and a good (or at least acceptable) deal from the government.

All in all, Juppé’s approach to reform and the content of the legislation ensured that no union

would see a reason to support the reforms.

Unsurprisingly, the response from the unions was not favourable. While the CFDT recognised in

principle a need for some reforms of the public sector and of the public sector’s pension system, it

was unhappy with the lack of consultation, the details of the public-sector pension reform, and the

reform’s intended reduction in unions’ roles in managing the social security schemes. The more

radical FO and CGT condemned the whole programme. For six weeks in November and

December, France was paralysed by massive strikes that were the largest since 1968. Juppé’s

harsh policies and high-handed approach lost him public support, and despite the inconvenience

caused by the strikes, popular opinion strongly favoured the strikers and public support for the

government plummeted. Juppé’s austerity measures in the name of fiscal discipline were seen as

endangering the rights and security of workers and the prerogatives of unions without expecting

any similar sacrifices from capital or the state. In the wake of massive opposition, Juppé aborted

the public-sector pension reform and many of the measures in the Juppé Plan. The wage freeze

for 1996 was introduced, the tax scheme to create the RDS to balance the Sécurité Sociale budget

was implemented, France-Télécom was semi-privatised, and the gas and electricity board

EDF-GDF was prepared for commercialisation, but much of Juppé’s public-sector reform

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package failed, including the standardisation of public-sector pensions along the lines of the

private-sector pension system, the elimination of the régime spéciaux, the restructuring of the

railway system, and the creation of a Parliament-approved ceiling on the Sécurité Sociale budget

(OECD, France, 1997; Pitruzzello 1997:1618-1625; Palier 2000:124-125; Levy 2001:269-271).

The difference between Balladur’s successful reform of the private-sector employees’ pension

system and Juppé’s failed reform of the public-sector employees’ pension system was not simply

a matter of the public sector being more highly unionised and better able to use these higher

levels of unionisation and their control over vital public infrastructure to resist reform. It was

Juppé’s unwillingness to engage in consultation or to consider side-payments and his decision to

mount a simultaneous assault on other aspects of public employment that created the union and

public opposition that derailed his efforts. Later administrations were able to adopt reforms of the

public-sector pension system, but they succeeded by pursuing reforms that resembled Balladur’s

reform in approach and content.84

Health Care Reform

Juppé’s reform of health care in 1995 and 1996 was similar in its distributional implications, but

was somewhat more astute in its dealings with unions. The reform of health care sought to

reduce expenditures and expand revenues. An annual parliamentary ceiling was imposed upon

the health care budget. Spending controls on public hospitals were initiated, reducing the

scheduled increase in payments from 3.8% to 2.1% for 1996. Reforms to hospital administration

were implemented, and 19 regional sickness funds were integrated to increase efficiency and

reduce administrative costs and other redundancies. The registration of additional specialists was

required, and in the longer term, doctors’ activities would be controlled via medical guidelines

and monitored through the introduction of personal medical records and electronic health cards.

84 The 2003 Raffarin reform of the public-sector pension system resembled the Balladur reform in approach with the Raffarin government involving the social partners in the negotiation process. The Raffarin reform also resembled the Balladur reform in content with the government offering concessions that were a mixture of cost-containment measures, benefit improvements (e.g. more generous indexation), concessions to particular categories of workers, equity-improving provisions, and a consolidation of the unions’ co-management role. Through this combination of consensual approach and moderate content that addressed particular concerns of the social partners, the Raffarin government gained the agreement of the more moderate CFDT and the small white-collar CFE-CGC (Confédération française d’encadrement/Confédération général des cadres) and the tacit support of the CFTC, while dividing the CGT (although their more militant federations did ensure the CGT inclined more towards conflict than compromise), and failing to win over the FO. There were still impressive strikes in response to the reform package, but after a last set of concessions and the open declaration by CFDT leader François Chéreque that the reform was an acceptable compromise, the protests dwindled (Natali and Rhodes 2004b: 17-18). Admittedly, the Raffarin reform was not sufficient to stabilise the finances of France’s public-sector pension system, but such a critique ignores the fact that the Raffarin reform, like the Balladur reform before it, were part of an ongoing reform process. More reforms will be necessary in the future, but these two reforms constituted steps in the right direction and they suggest lessons for how to achieve these future reforms.

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As punishment for past cost overruns, the health care industry was targeted for collective

penalties. The pharmaceutical industry had to contribute FF2.5 billion after a sharp increase in

expenditures on prescriptions in 1995, and the government implemented measures to encourage

the use of generic medicines. Juppé’s reform reduced the state’s share of health care costs by

increasing patient co-payments, eliminating reimbursement for certain pharmaceutical expenses,

and raising retirees and unemployed persons’ contribution rates from 1.4% to 3.8%. All in all,

changes in health care policy were expected to make up half of the reduction in social welfare

expenditures (OECD, France, 1997).

As with the Balladur health care reform, the conservative Juppé government’s reform had a

generally regressive effect. Though higher premiums, higher co-payments, and lower

reimbursement rates were borne by all health care subscribers and users, the burden of the

changes was most problematic for low-income people, especially for those unable to afford the

supplementary insurance that would cover these added costs. The increase in retirees and

unemployed persons’ contribution rates likewise shifted the costs of reform onto two groups

which had only a limited ability to adjust to higher costs. On the other hand, by targeting more

privileged groups, such as specialist doctors, the reforms helped the government to avoid the

perception that only patients were bearing the costs of adjustment.

Juppé’s dealings with the medical unions were generally quite confrontational and might have

been expected to unify the highly divided health care unions in opposition to the government’s

plans. The state’s introduction of spending ceilings, the imposition of collective penalties for cost

overruns, and the state’s unilateral approach to reform led health professionals to fear the possible

loss of their role in the policy process and to raise objections regarding the probable negative

impact upon the quality of patient care. CSMF President Claude Maffioli articulated these fears,

stating, “Health care professionals [will be] restricted to merely executing [the state’s] decisions.

They will be able to intercede in neither in spending prioritisation nor health policy formulation.

In short, to the advantage of the state and the omnipotent sickness funds, they will disappear”

(Hassenteufel 1997:341). In fact, the unions were able to unite in opposition to collective

penalties, and the Juppé government did agree to postpone this provision.85 The unions failed,

however, to make common cause against the rest of these reforms because most of the Juppé

government’s other reforms exploited divisions among the unions. The integration of the

regional sickness funds, the changes to registration of specialists, and the imposition of

85 This collective penalty was eventually introduced, but was struck down by the Conseil d'État, due to the penalty's failure to punish solely those who were responsible for the cost overruns.

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parliamentary spending limits were designed to shift the profession’s balance of power away

from specialists whose fee-for-service charges were blamed for France having one of the highest

health care spending levels and one of the highest health care expenditure growth rates in Europe.

Given the French government’s desire to bring the budget deficit and health care expenditures

under control, MG France, the dominant generalists’ union, found it pragmatic to support these

reforms which didn’t target their members. The liberal and specialist-dominated SML (Syndicat

des Médecins Libéraux or Union of Self-Employed Doctors) and FMF joined the trade union

protests against the broader pension and public-sector reforms and organised a protest of their

own, but they failed to mobilise large numbers against the reforms. The defection of MG France

and the generalists and the relatively small number of specialists restricted the ability of the

unions to effectively mobilise large protests. The specialists’ unions also failed to gain the

sympathies of trade unions and the parties of the Left, which tended to see the medical profession

in general and specialists in particular as being privileged. Both the trade unions and the parties

of the Left preferred to see some of the burden of adjustment of cost cutting be placed upon

doctors, especially the relatively well-to-do specialists, rather than upon workers, retirees, and the

poor (Vail 1999; Vail 2010).

The Thomas Law – A Return to Pension Reform

The Juppé government was well aware that the private-sector public pensions in the future would

be smaller due to the cuts to these pensions via reductions in replacement rates, extension of the

period used for calculating benefits, and the indexing of pensions to prices rather than gross

wages. There was concern that these cuts might undermine either the incomes of seniors or lead

to an overburdening of the FSV minimum pensions system, which would prompt demands to

increase the FSV’s funding via the CSG tax. In response Juppé promulgated the Thomas Law to

create private, voluntary, firm-level supplementary pension funds (régimes surcomplémentaires).

The government argued that this measure would increase worker savings and provide French

firms with a source of long-term capital. It did so, however, in a way that was highly

controversial. These funds were exempted from all payroll and income taxes, and unions argued

that the exemption of these company-sponsored pension funds from payroll taxes would divert

revenue and undermine the long-term solvency of existing pension funds. Furthermore, unions

strongly objected to this law on the grounds that these pension funds would be administered

solely by firms, infringing upon an area of public policy where unions and employers had

traditionally shared responsibility for determining contribution and benefit levels. Finally, small

firms objected that they would be unable to reap the benefits of the law because their small size

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prevented them from being able to participate in the programme in a cost-efficient manner (Levy

2001). The Thomas Law was adopted despite opposition from unions and small firms, but it

would not survive long. Union and public unhappiness with Juppé’s reforms was soon registered

at the ballot box, and the next government annulled the law shortly after it came into office.

A Broader View of Budgetary Policy

Throughout Juppé’s term as prime minister, the budget deficit far exceeded the convergence

criteria limit of 3% of GDP and debt continued to mount, though not yet exceeding the 60%

ceiling. The 1995 budget, much of which had been drafted by Balladur, had increased spending

on unemployment (via direct state employment of people in these groups and state-subsidised

employment), renovation of social housing, the public wage bill (due to an increase in the SMIC86

and wages in general, as well as growing numbers of people working for the government),

pension expenditures (due to older workers taking early retirement if they lost their jobs), and

increased assistance to low-income individuals and their families. With the exception of the

growth in expenditures related to the increase in the SMIC, these expenditure increases were the

result of the government’s continued reliance on automatic stabilisers to buffer the recession’s

lingering impacts on employment in the country. The government also lost revenue after a

lowering of the social contributions for low-wage workers, a move intended to encourage

businesses to hire these less-skilled workers. Plans to deduct privatisation receipts from the

budget were cancelled after EUROSTAT ruled that these assets could only be counted against

debt or used for capital injections into public enterprises. The CSG tax on all types of personal

income was raised from 2.4% to 3.4%, the VAT tax was raised from 18.6% to 20.6%, corporate

and wealth taxes were increased, an income tax deduction on pension contribution payments was

suppressed, and the budget increased the social solidarity contribution (cotisation sociale de

solidarité). Temporary tax increases were adopted with the intent to assure France’s reduction of

its deficit in order to qualify for EMU. Overall, taxation increased by nearly 1% of GDP on a

full-year basis with households paying FF70 billion and enterprises paying FF20 billion. During

that year, revenues grew more quickly and unemployment insurance spending fell, but increases

in health spending and continuing economic troubles meant that the deficit of the social security

system remained close to FF70 billion. A transfer of a considerable amount of funds from the

86 The increase of the SMIC, France’s minimum wage, increased wages in general, since wages in many sectors are pegged to the level of the SMIC.

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Caisse des dépôts et consignations,87 a state-owned bank responsible for managing some public

funds, and a change in accounting practices for certain types of government bonds helped the

deficit fall to 5% of GDP. In the end, the budget deficit for 1995 was 4.9% of GDP, smaller than

for 1993 and 1994, but this was due more to cyclical than structural factors (OECD France 1995;

OECD France 1997).

The 1996 budget was intended to restrain spending and to decrease the budget. Government

investment fell in nominal terms, and the central government concluded an agreement with local

authorities to reduce transfers to the localities. Public-sector wages were frozen, although labour

market policies continued to add to the number of public employees and the total expenditures on

public-sector employment. The increasing costs of servicing the French debt also frustrated

efforts to consolidate the budget. Tax increases, including a gasoline tax hike, were relatively

minor, raising approximately FF10 billion. The government also sought to increase tax revenue

by reducing tax incentives, including commercial shipping tax credits and incentives for investing

in French overseas départements. Nevertheless, in 1996 the French economy weakened, and the

budget deficit exceeded 4% of GDP. The outlook for the French budget situation looked

increasingly grim as the French government failed to implement structural reform and as the

‘snowball effect’ of rising debt levels increased debt service payments and hindered fiscal

consolidation (OECD, France, 1995; OECD, France, 1997).

The Backdrop to Early Parliamentary Elections

After the failure of the government to gain union and public approval for the bulk of the Juppé

Plan in 1995 and after insufficient budget tightening in the 1996 budget, it appeared increasingly

questionable whether France would be able to sufficiently reduce its budget deficit in 1997 in

order to qualify for EMU. The next parliamentary elections were scheduled for 1998, but after

less than two years of stalemate, President Chirac was frustrated. Needing a vote of confidence

for drastic social cuts and hoping to catch the Socialists and Communists off guard, Chirac called

an early election for April 1997. He hoped that the public would turn out in large numbers to

re-elect a strong conservative majority, a result that could be taken as a rebuke to the unions and

as a mandate for the Right to continue to pursue its reforms (Moss 1998:75-76).

87 The OECD (France 1997:46) blandly states that the Caisse des dépôts ‘contributed’ a considerable amount of money to the State’s budget. More critical observers described the transaction as a government raid of the social insurance fund (Roche 1996).

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It was Chirac and Juppé, however, who were caught off guard. Chirac had reneged on his 1995

campaign promises to increase state intervention, decrease privatisation, and heal the country’s

social fractures. His violation of these promises – and, indeed, his strong advocacy of decreased

state intervention and increased privation – had damaged the government’s legitimacy and

trustworthiness in the eyes of the people. Furthermore, Juppé’s reforms had been advocated in an

inartful manner. Juppé insisted that the reforms were desirable – essential for French

competitiveness and necessary, regardless of the existence of the Maastricht convergence criteria.

While this was arguably an accurate assessment of the situation, it was also a position which

concentrated responsibility for the policies upon the prime minister rather than allowing him the

political cover of shifting blame for retrenchment onto the convergence criteria, as was done in

other countries (Vail 2010:126-127). The government’s dismissive tone and intransigent refusal

to meaningfully address workers and unions’ concerns had fuelled union and public outrage over

the measures. Had the government been willing to negotiate and make concessions to some of

the unions or the parties of the left, criticism of the government would likely have been more

muted. Additionally, if Juppé had included side-payments that garnered support from some of the

unions or parties of the left, he could have spun the reforms as painful belt-tightening accepted by

responsible actors. Instead, without the division among unions that had characterised the

Balladur pension reform, the public was more easily mobilised against these reforms, particularly

the Juppé Plan. The stark divide between right and left and the clear rift between the government

and the unions meant that the Juppé Plan, the pension reform, and the health care reform became

campaign issues, where the public had a clear choice between political parties with markedly

different positions on the issues of economic, tax, and social welfare reform.

In April 1997 Chirac and Juppé’s hopes were dashed when voters repudiated the right’s reforms.

The RPR and UDF’s share of the vote fell from 20.2% and 19.6% of the vote, respectively, to

15.7% and 14.2% of the vote. Their combined share of the seats fell from 472 out of 577 seats to

248 seats. Chirac’s gamble had not paid off, and a plural left government led by Socialist Lionel

Jospin took power and began to roll back the Thomas Law and various other provisions of

Juppé’s reforms that had made that government so unpopular (Siaroff 2000:260).

THE JOSPIN GOVERNMENT (1997-2002) – CONSENSUAL REFORM, A LEFTIST TWIST

In the wake of Chirac’s failed gamble that a new election would result in the election of a strong

conservative majority with a mandate for reform, the Left took power on a platform opposing

neo-liberal austerity. Lionel Jospin established a somewhat fractious and divided government,

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composed of his own Socialists, the essentially unreformed Communist party (PCF), the Greens,

and two minor parties, the Citizen’s Movement (MDC) and the Party of Left Radicals (PRG).

The coalition held a comfortable 320 out of 577 seats, but had little cohesion. The coalition was

divided between advocates of a large social welfare net on the one hand and those concerned

about the pressures of globalisation and the fiscal restraint demanded by the convergence criteria

and the Growth and Stability Pact on the other hand. During the 1997 campaign, the PS had

moved closer to the PCF. Their joint electoral declaration had called for the creation of 700,000

new jobs, the repeal of the Thomas Law, the introduction of a 35-hour work week without

reduction in pay, an end to privatisation, reduction of sales taxes, an increase of the wealth tax,

wage increases, new rights for workers, and the rejection of the Maastricht Treaty (Moss

1998:75). Jospin had personally promised that he would not be bound by the Stability Pact in

conducting fiscal policy. He also promised that the decision regarding the privatisation of France

Télécom would belong to its employees, who openly opposed its privatisation. In response to the

divisions in his own government and the necessity of cohabitation with the liberal President

Chirac, Jospin chose to pursue reforms that were consensual in approach and moderate, though

left-leaning, in content. Jospin’s ‘new Left’ reform plan accepted fiscal restraint, but sought to

shift the burden of adjustment onto the well-to-do.

A Return to the Thomas Law – The Reform of the Reform

In the area of pension reform, Jospin’s efforts were relatively minor. Keeping a campaign

promise, the government annulled the Juppé government’s Thomas Law, which the unions had

opposed. But in a leftist twist on pension privatisation, the Jospin government then introduced a

modified version of the Thomas Law that addressed many of the objections to the original law.

In response to the concern of small firms that lacked the administrative and financial resources to

operate a fund for supplementary pensions under the terms of the original Thomas Law, the law

was modified to allow inter-company funds, a change that would allow small firms to take part in

the programme in a cost-efficient manner. Addressing unions’ concerns that the Thomas Law

broke with the tradition of unions and employers sharing responsibility for the pensions system,

the Jospin government brought unions into the company-level pension process by requiring

annual negotiations between firms and unions, regarding the establishment of company-level

pensions and the levels of contributions. A further adaptation of the Thomas Law exempted these

firms from CSG, income taxes, and health insurance contributions, but not from the standard

pension contributions. This prevented the creation of company-level pensions from undermining

the general pension system. The new law fulfilled the original intent of promoting worker

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savings and creating a source of long-term capital for firms, but the modifications made it more

widely accessible, more democratic in its management, and didn’t marginalise the unions’

traditional role in the pension system. Union support was gained via the inclusion of unions in

the company-level pension process and the continued financing of the pension system, two

changes which addressed many of the unions’ objections to the original Thomas Law. Finally,

this supplementing of the general pension system had the potential to eventually reduce state

expenditures on income support for lower-income pensioners (Levy 2001).

The 1997 Health Care Reform

Jospin’s health care reform was also relatively consensual, involving unions in negotiations,

although it did follow the Balladur strategy of exploiting divisions among the medical profession

unions. Taking advantage of the divide between generalists and specialists, the Jospin reform

introduced financial incentives for patients to choose a generalist who would act as a gatekeeper

for referrals to specialists. Prescription medications and physician services would be evaluated in

regard to their therapeutic value and their cost in neighbouring countries. Taking on doctors –

particularly the relatively privileged and affluent specialists – and the ‘price-gouging’

pharmaceutical firms was politically comfortable for the Left. More problematic was the

proposal to shift public hospitals from a global budget to the fee-for-service basis used by private

hospitals. Ostensibly, these reforms would make budgets more closely reflect the services

provided, forcing hospitals to combat ‘feather-bedding’ and to economise in the area of

non-billable services. In reality, this measure had the potential to lead hospitals to push

physicians to order extra tests and procedures in order to increase revenue, as the fee-for-service

ambulatory sector was frequently accused of doing. An alternate explanation for the decision to

shift the public hospital system from the global budget to the fee-for-service model is that public

hospitals are staffed by heavily unionised and very militant employees who generally vote for the

Left and who were more likely than ambulatory sector physicians to effectively mobilise for

strikes. In contrast to a 1999 plan to cut FF30 billion from the public hospital budget, Jospin’s

budget for 2000 committed an extra FF10 billion over a three year period to public hospitals

(Bonoli 1997b; OECD France 1997; OECD France 1998; Palier 2000; Vail 2010).

Closing the Budgetary Gap

With the deadline for meeting the convergence criteria looming, the government continued to

target discretionary spending and to seek new sources of income. After five years of freezes on

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real budgeted (non-social welfare) spending, the government instituted a freeze in nominal

spending. Spending in most ministries – primarily the Foreign, Culture, Housing, and Industry

Ministries – and reductions in staffing levels were used to further trim expenditures. Strict

controls on the health care sector and other social expenditures were undertaken. Net capital

expenditures were cut by 0.7% of GDP, bringing them to their lowest level in the 1990s. Excise

taxes were increased by FF5 billion in 1997. Privatisation of state-owned enterprises was

accelerated, and as part of the semi-privatisation of France Télécom, the budget deficit was

reduced by FF37.5 billion (0.5% of GDP) due to a one-off payment to the government in

exchange for the state accepting liability for pensions accrued by employees hired prior to

privatisation (OECD France 1997:49-52; EMI 1998:131).88

Jospin’s welfare state cost-containment measures tended to focus more on means-testing or

income-testing of benefits, rather than the across-the-board cutting of benefit levels or duration.

Under Jospin, family benefits were initially eliminated for wealthy families. In response to the

criticism of pro-family organisations, these benefits were restored, but offset by reductions in the

child income tax deduction for wealthy families. The ‘nanny tax deduction’ for families with

domestic childcare, a deduction claimed almost exclusively by the rich (and by only an estimated

0.25% of the population), was reduced by half (OECD France 1997).

Although elected on a platform that would halt the unpopular privatisations that the Juppé

government had pursued, Jospin continued and accelerated the privatisation of some state-owned

enterprises. He did so, however, in a way very different from Juppé. Whereas the Juppé

government had tended to use privatisation primarily as a means of raising revenue and dumping

unproductive state-owned enterprises, Jospin’s privatisations, as noted by Jonas Levy (2001:273),

contained a “genuine industrial strategy.” The Jospin government’s privatisations tended to

involve the unions in the process of seeking private partners and of negotiating takeover terms.

Whereas privatisations under Juppé had tended to result in closures and lay-offs as the new owner

eliminated ‘excess capacity’ (or simply eliminated competition) in its key regions or sectors,

privatisations under Jospin were the product of a process to seek out private firms desiring

regional or sectoral diversification of their business, a difference in privatisation policy which

88 While EUROSTAT allowed this payment to be counted as revenue for 1997, thereby reducing the deficit for that year, the payment should rightfully have been credited solely against the debt (and only insofar as it might outweigh the increase in accrued liabilities), since it was a one-off proceed from privatisation and since the liability was not included in the accounting. This weakness of the ESA79 accounting rules was not corrected by the ESA95 rules, although in wake of the problems revealed by the 2009 and 2010 crises in Greece and elsewhere, EUROSTAT has been seeking to develop accounting standards more attentive to the problematic implications of allowing an idiosyncratic approach to counting non-recurring fiscal revenues in terms of their immediate impact on the budget rather than solely in terms of their long-term effects.

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generally preserved jobs (Levy 2001). Despite the retention of many of the jobs in these

newly-privatised enterprises, the more traditional leftists in Jospin’s PS and in the PCF were

furious, arguing that privatisation of state-owned enterprises was a betrayal of the traditional

leftist values of state interventionism and the defence of employment and wages.

Constrained by the Maastricht Treaty’s deficit criteria, Jospin used tax-shifting to support

competitiveness and welfare reforms. The CSG was raised from 3.4% to 7.5%, was applied to all

income, and in contrast to the CSG increases of the right, this increase was not income tax

deductible. At the same time, employee health care contributions were reduced from 5.5% to

0.75%. Income tax marginal rates were lowered, but the tax base was widened via the

elimination of many tax deductions and rebates (OECD France 1997:49-52; EMI 1998:131).

These measures were revenue-neutral, but redistributed taxes in favour of the Left’s

constituencies. These reforms also served the purpose of addressing the problem of

unemployment by reducing the non-wage cost of labour.

When the French economy rebounded in 1997 and 1998, producing a FF50 billion windfall, the

Jospin government diverted FF40 billion to reduce taxes and devoted approximately FF10 billion

to new spending. The VAT was lowered from 20.6% to 19.6% with plans to lower it to 18.6% a

year later (OECD France, 1997:49-52). The reduction of the VAT, which had been raised by the

previous conservative government, allowed the Left to not only assist the lower-income groups

which paid out a higher proportion of their income on this consumption tax, but it also allowed

the Left to more broadly present itself as a government of lower taxes.

New Programmes and Benefits

In response to the rebound of the French economy and government revenues, the Jospin

government introduced two new programmes to improve the social welfare safety net. The costs

of these programmes were covered by the windfall in revenue and by absorbing funds from

similar, though less effective, programmes which were phased out and replaced (OECD, France,

1997:49-52). To address the persistent problems of youth unemployment and low levels of job

skills among unemployed youths, the Jospin government introduced the Youth Employment

Programme (Programme Emploi Jeune, PEJ) to provide full-time, long-term (up to 5 years)

employment for young people (under 26 years of age) with little work experience. Expected to

create 350,000 non-profit and public-sector jobs by 2002, the programme was designed to

respond to local needs (e.g. need for assistance to teachers, neighbourhood security,

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environmental and ecological work) in providing on-the-job training for the unemployed young.

Though critics argued that this policy disguised unemployment by increasing state-sector

employment, its proponents argued that the programme would help participants improve their

work skills and gain the experience and work ethic that would make them employable in the

private sector once their five-year jobs concluded (Mandin and Palier 2002).

The second of these new programs was a means-tested health insurance and supplementary health

insurance, the Couverture Maladie Universelle (CMU) introduced by Jospin’s Minister of Social

Affairs, Martine Aubrey. The CMU provided a safety net for the 0.3% of the population who had

no health insurance and the 15% of the population who lacked the supplementary health

insurance policies that reduced the costs of co-payments. These were the two groups which had

been hurt most by the 1993 Balladur health care reform’s increase in co-payments, and the

extension of a safety-net to these groups addressed the objections that leftist parties had raised in

1993. As with the PEJ, the cost of the CMU was covered by the windfall in revenue and through

the absorption of funds from similar, but less effective programmes that the CMU replaced

(Mandin and Palier 2002:34-35).

Assessing the Reforms

The style of reforms reflected extensive negotiation, compromise with union and employers’

concerns regarding existing policies, and careful targeting of reforms to avoid creating a unified

front against reform. In terms of the substance of reforms, Jospin’s reforms showed a clear bias

towards the Left’s constituencies. During the time period when budgets still needed to be

trimmed, cost-containment and debt reduction were carried out through privatisation of

state-owned enterprises, freezes in discretionary, non-social welfare spending, and income-testing

or means-testing of benefits in order to target government resources to the most needy. While

still constrained by a tight budgetary situation, Jospin’s revenue-neutral changes to the tax code

shifted more of the tax burden onto higher income groups. Once the economy recovered, new

programmes were adopted, but 80% of the windfall was used to decrease consumption taxes, a

policy intended to further stimulate the economy and to reduce the tax burden, particularly for the

low-income groups which spend a higher proportion of their income on consumption. While the

Jospin government certainly pursued a variety of measures benefiting labour and lower-income

groups, it also adopted policies that were considered business-friendly, including the revised

Thomas Law, cuts in social contributions (to reduce the non-wage cost of labour), cuts in the

VAT (to increase consumption), and the PEJ (to improve the skills of the labour force).

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ENDGAME: QUALIFICATION TO THE EURO & JOSPIN’S SURVIVAL…AT LEAST FOR A WHILE

In 1998 France was admitted as an inaugural member of the Euro. As noted in Table 3-4, France

clearly met the Maastricht convergence criteria related to inflation, long-term interest rates, and

exchange rate stability, but its compliance with the fiscal criteria was more problematic. In the

reference year 1997, the general government deficit ratio was 3.0% of GDP, precisely at the 3%

maximum, and this was only after EUROSTAT allowed the transfer of 0.5% of GDP’s worth of

assets from the semi-privatisation of France Télécom to be counted as revenue rather than as debt

reduction. The deficit ratio for 1998 was, however, forecast to fall to 2.9% of GDP, a slight

improvement. At 58% of GDP, France’s debt ratio was under the 60% of GDP reference value,

but the increase in French debt from under 36% in 1991 to 58% in 1997 raised questions about

whether France’s fiscal situation was sustainable.

TABLE 3-4: Convergence criteria compliance in France

1991 1992 1993 1994 1995 1996 1997 1998 (projected)

General Government Surplus (+) / Deficit (-), as percent of GDP

-2.1 -3.9 -5.8 -5.8 -4.9 -4.1 -3.0 -2.9

Reference value for general government surplus (+) / deficit (-)

-3.0 -3.0 -3.0 -3.0 -3.0 -3.0 -3.0 -3.0

General Government Debt, as percent of GDP

35.8 39.8 45.3 48.5 52.7 55.7 58.0 58.1

Reference value for general government debt

60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0

CPI inflation, in percent

3.2 2.4 2.1 1.7 1.8 2.0 1.2 1.3

Reference value for inflation rate

4.4 3.8 3.1 3.1 2.7 2.5 2.7 2.7

Long-term interest rate, in percent

9.0 8.6 6.8 7.2 7.5 6.3 5.6 5.5

Reference value for long-term interest rate

10.7 10.7 9.3 10.0 9.7 9.1 8.0 7.8

Exchange Rate Stability Membership in the Exchange Rate Mechanism since 13 March 1979

Note: Shaded areas denote violation of the convergence criteria. Sources: For 1991-1995, European Monetary Institute (EMI) 1996:70. For 1996-1998, EMI 1998:123-137.

France’s bare minimum adherence to the deficit and debt criteria did not, however, result in its

being excluded from membership in EMU.89 On 31 December 1998, the exchange rates of the

89 The debt standard was weakly enforced. The Maastricht Treaty’s convergence criteria required that government fiscal positions be sustainable, and this condition was violated if “the ratio of government debt to gross domestic product exceeds a reference value [defined in the Protocol on the Excessive Deficit Procedure as 60% of GDP], unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace” (Articles 109j and 104c of the Treaty establishing the European Community). Of the twelve countries seeking to join the Euro, only three countries – France, Luxembourg, and Finland – had debt levels below the 60% reference value. Of the remaining nine countries, debt was in excess of the 60% reference value in 1997, and in Germany debt was actually increasing (EMI 1998:6-7). The recession of the early to mid-1990s and the financial repercussions of German unification had made it

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future Euro-zone members were fixed. On 1 January 1999, the Euro was introduced as a

financial currency, and on 1 January 2002, the Euro was introduced as a physical currency in

France and throughout the rest of the Euro-zone.

The Jospin government survived to see the adoption of the Euro, but its ideologically-fractured

coalition lost in elections later that year. More leftist members of the coalition, especially

members of the PCF, charged that Jospin’s ‘New Left’ economic policies, particularly his

privatisations and the continued shift away from dirigisme, were so pro-business and pro-free

market that its policies were not markedly different to those of the right. A large number of leftist

candidates challenged Jospin as he campaigned against Chirac for the presidency. Discouraged

leftist voters either abstained or voted for the far-right Front National and its presidential

candidate Jean-Marie Le Pen. In the first round of the presidential election in May 2002 Jospin

came in third to Chirac and Le Pen. In June 2002 his plural left coalition lost to the liberal Union

for a Popular Movement (Union pour un Mouvement Populaire, UMP).90 As with Mitterrand’s

1995 loss, Jospin and his coalition’s loss were less a repudiation of the Left by moderates than a

repudiation of a moderate centre-left by an old-guard Left that felt its values and priorities had

been betrayed. In contrast to the 1997 defeat of Juppé’s government, which resulted in the repeal

of many of Juppé’s most controversial policies, the Jospin government’s loss was not followed by

a spate of repeals. Indeed, many of Jospin’s policies were continued or expanded upon by his

centre-right successors, a development that can be interpreted as a validation of the Jospin

government’s policies. The policies had broad public support, and the UMP’s victory was not a

mandate for overturning these laws. Alternatively, the survival of so many of Jospin’s policies

can also be interpreted as a validation of the old-guard Left’s complaint that Jospin’s ‘New Left’

economic policies were essentially little different to those of the Right.

CONCLUSIONS

Over the course of the 1990s, France found itself encountering greater than anticipated difficulties

in meeting the convergence criteria for the Single Currency. The immediate shocks of global

more difficult for countries to meet the convergence criteria, and this was a widely acknowledged justification for a somewhat loose interpretation of the criteria. Germany’s own weakness also contributed to the somewhat lackadaisical scrutiny of would-be members of the Euro-zone. Germany had been the country most insistent upon the convergence criteria as preconditions for entry into the Euro-zone, but German finances had deteriorated after unification and its debt was above 60% of GDP and still rising. Germany was in no condition to play a stronger role in policing admission to the EMU in order to exclude monetarily and fiscally profligate states from joining the Single Currency. 90 The UMP was formed from a merger of the conservative-liberal Rally for the Republic (RPR), the conservative-liberal Liberal Democracy (DL), the centrist and Christian democratic factions of the Union for French Democracy (UDF), the social-liberal Radical Party and the centrist Popular Party for French Democracy.

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recession in the early and mid-1990s and the EMS Crises of 1992-1993 complicated the growing

problems posed by the longer-term pressures of an ageing population and rising structural

unemployment. A series of French governments found themselves in the politically difficult

position of trying to balance the need to buffer the effects of the recession and the need to control

the growth of deficits and debt. Their policy responses to this dilemma differed markedly,

however, based upon the government’s strength, leadership style, and partisan orientation.

GOVERNMENT STRENGTH, LEADERSHIP STYLE, THE APPROACH TO REFORM, & OUTCOMES

Government strength and leadership style affected the extent to which governments sought to

impose their preferred policies. Juppé’s large and ideologically-unified centre-right majority

government faced relatively distant elections, and it had the support of centre-right President

Chirac and (arguably) a mandate for reform. Both Juppé and Chirac were known for

authoritarian personal leadership styles, which arguably exacerbated the tendency towards a

confrontational approach to reform that would have been expected, based solely upon the

concentration of power in the government’s hands. As a result, it is unsurprising that the Juppé

government undertook the most confrontational and most sharply partisan reforms. The size of

its majority assured that it was able to adopt and implement some of its reforms, particularly its

health care reform and the privatisation-related aspects of the Juppé Plan, but broad union and

public opposition to its planned public-sector pension reform and to much of the Juppé Plan

caused the government to withdraw these policies. Its ‘réforme par ordonnance’ style of drafting

economic and social welfare reforms in virtual secrecy and presenting them as faits accomplis

alienated unions and prevented the government from proactively including the sort of

side-payments that potentially could have divided unions vis-à-vis these reforms. In the end, the

confrontational approach and the sharply partisan content not only provoked strikes and protests,

but also contributed to the government’s 1997 electoral loss and the repeal of many of its reforms

by the next government.

The governments that successfully implemented reform were the ones which had lower degrees

of power concentration and that were consequently less confident of their ability to impose

reform. The strength of Balladur’s large, ideologically unified majority was attenuated by the

necessity of cohabitation with the Socialist President Mitterrand and by the prospect of elections

in only two years. Jospin’s relatively large majority and electoral mandate was limited by the

lack of ideological cohesion among its five coalition parties and by its cohabitation with the

centre-right President Chirac. In response to these weaknesses, both governments pursued more

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moderate courses, both in terms of their approach, which was generally consensual, and the

content of their reforms. For the most part, their reforms were successfully passed and

implemented, and these reforms survived beyond their governments’ terms in office.

Finally, the weakest of the four governments discussed here was Pierre Bérégovoy’s centre-left

minority government, which had only one year before elections. Despite support from the

Socialist President Mitterrand, Bérégovoy’s reform effort was unable to marshal the

extra-coalitional support that was necessary for passing laws, and this pension reform died. Early

in the recession and more than five years away from the Maastricht deadline for EMU, there was

no sense of emergency to provide the impetus for motivating parties outside government to take

political risks and support a potentially painful reform. In the last months before parliamentary

elections, political necessity outweighed any sense of economic necessity.

All in all, the pattern shown in France throughout this period supports the argument presented in

the theory chapter that stronger, more confident governments are more likely to pursue

confrontational reforms that are more partisan in content, while weaker, less confident

governments tend to pursue reforms that are more consensual in approach and more moderate in

content. Furthermore, while very weak governments may lack the ability to achieve difficult

reforms (and may even lack the confidence or ability to seriously pursue substantive reforms),

government strength can be a liability when their perceived strength leads to a level of confidence

(or overconfidence) so great or when the personal style of the reform leadership is so hierarchical

and authoritarian that the governments choose to pursue reforms in so dramatic and so aggressive

a manner that they provoke a unified opposition they ultimately can not withstand.

PARTISAN ORIENTATION, THE CONTENT OF REFORMS, & DISTRIBUTIONAL IMPLICATIONS

Despite common economic and fiscal pressures, the partisan orientation of the governments

produced discernably different distributional effects. The reforms of the Right governments all

included across-the-board cuts in health care and pension benefits, although the more cautious

and consensual Balladur government balanced his pension reform with the introduction of the

means-tested Old Age Solidarity Fund (FSV) and both the Balladur and Juppé governments’

health care reforms included some cuts that targeted highly paid groups, including the

privately-run ambulatory clinics and specialist doctors. Nonetheless, the Balladur and Juppé

reforms focused upon taxes (VAT and increases in the tax-deductible increases CSG) and

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health-sector changes (increases in co-payments and decreases in reimbursement rates for health

care) that were disproportionately costly for the poor.

The Left governments’ reforms targeted more privileged groups for cuts in benefits and for

increases in taxes, while providing new benefits and assistance to the poor and unemployed.

When cutting expenditures, the Left concentrated more upon means-testing or income-testing of

benefits (e.g. the reduction or elimination of family allowances and deductions for nannies),

structural reform of government payments for goods and services (e.g. caps on pharmaceutical

prices, reductions in payments to doctors), and changes in the structure of programmes that

previously allocated benefits inequitably (e.g. the revised Thomas Law’s enabling participation of

smaller firms). Jospin’s Left government sought to use income taxes rather than consumption

taxes, social contributions, or taxes which were deductible from income taxes.91 When extending

new benefits (e.g. the CMU’s provision of health insurance and supplementary insurance for

low-income individuals) or services (e.g. the PEJ’s creation of jobs for unemployed young

adults), the Jospin government concentrated benefits upon targeting benefits towards the groups

that were at greatest risk of social exclusion.

Even in cases where governments of the Left and the Right nominally pursued the same policy,

differences in how policies were carried out ensured that there were noteworthy differences in the

effects of these policies. Jospin departed from the state-led development and employment

policies that were traditional for Socialists prior to Mitterrand’s U-turn. Indeed, Jospin privatised

more state-owned enterprises and raised more revenue from privatisation than Juppé did.

Concentrating upon privatisation as a means to disengage the state and raise revenue, the Juppé

government tended to sell state-owned enterprises to competing firms, frequently leading to the

elimination of jobs. Jospin’s privatisation efforts sought firms wishing sectoral or regional

diversification, a difference that tended to safeguard jobs and secure more investment rather than

leading to the disinvestment typical of the Juppé privatisations.

Likewise, both Juppé and Jospin proposed policies to create private, firm-level pensions,

but the centre-right Juppé government’s Thomas Law constituted a semi-privatisation of

the pension system in a way that would have diverted revenue away from the existing

pay-as-you-go pension system, endangering the government’s ability to meet its pension

91 It is particularly instructive to look at the difference between the French Right's use of the CSG, which was tax deductible, and the French Left's use of the CSG, which was not tax deductible. By making the CSG tax deductible, the Balladur and Juppé governments created a tax where the lower-income groups paid 100% of the tax increase, but where the wealthiest income group ultimately paid only 44% of the tax increase (Levy 2001:268).

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commitments to retirees and older workers. It also only benefited larger firms and

reduced the unions’ role as co-administrators of pensions. The plural left Jospin

government’s reform of the Thomas Law extended the option of creating tax-advantaged

firm-level supplementary pension funds to all businesses, regardless of size, but these

funds were not exempt from pension contributions, ensuring that resources were not

diverted away from the existing pension system, and unions retained a role in the

co-administration of these funds.

With this understanding of the development of events in France, a country facing the ‘normal’

long-term pressures that confront all advanced industrial democracies, as well as the immediate

economic shocks of recession and the currency crises of 1992-1993, the dissertation now turns to

an examination the case of Italy, a country undergoing particularly severe economic and political

turmoil.

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CHAPTER FOUR

ITALY: THE QUEST FOR RISANAMENTO

INTRODUCTION

At the time that the Maastricht Treaty was being negotiated, Italy virtually epitomised the type of

country that the criteria were intended to exclude or – to judge the criteria and their drafters more

generously – reform. With its history of clientelism, feckless fiscal policy financed by

seignorage, high inflation, and periodic devaluations of the lira, Italy was not expected to qualify

as one of the inaugural members of the Euro. Furthermore, the 1990s were a period of financial

crises and political upheaval for Italy, a backdrop that might well be expected to make it even

more difficult to undertake a serious and electorally painful course of stabilisation of public

finances, inflation, and exchange rates. Yet in 1998, Italy was admitted to the Euro-zone. In an

unexpected turn, financial and political turbulence may have actually made this unanticipated

success easier, though by no means inevitable.

Italy’s unlikely success in meeting the criteria to join the Euro took place in tandem with the

convergence of two factors. The first was a series of upheavals within the Italian party system.

The end of the Cold War prompted the dissolution of the Concordat that had long locked the

Communists out of any governing coalition. Nearly simultaneously, the much-publicised Mani

Pulite (Clean Hands) and Tangentopoli (Bribesville) corruption investigations brought about the

collapse of the Christian Democratic (DC), Socialist (PSI), and other parties that had dominated

Italian politics throughout the post-war era. Within this new political environment, old leaders

were discredited and new actors, including a bevy of technocrats, rose to power. The second

factor was the economic pressures of recession and the series of currency runs, known as the

EMS Crises, which forced the Italian government to expend trillions of liras in foreign exchange

reserves in a failed attempt to defend the currency. This made the Italian government pay

substantially higher interest rates on its debt as bond holders demanded higher risk premia on

Italian debt as a hedge against the risk of devaluation of the currency. Italy’s persistent inflation

and mounting deficits and debt had long been acknowledged as a threat to the continued viability

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of its social welfare system and future economic competitiveness, but a heightened sense of

urgency was lent to the situation by the currency shocks of the early to mid-1990s. This produced

a growing recognition that failure to be among the initial members of the Euro could lead to Italy

being locked out of the Euro for the foreseeable future. It also provoked a realisation that until

Italy joined the Euro, it would continue to face currency attacks and higher risk premia on its

debt.

Serious economic and budgetary reform was a necessary pre-requisite to participate in the Euro

and to assure Italy’s long-term fiscal and budgetary stability. But despite this heightened sense of

urgency, successful reform was by no means predetermined. Between 1992 and the 1998

deadline for qualification for membership in the Euro-zone, Italy had five governments under

Giuliano Amato, Carlo Azeglio Ciampi, Silvio Berlusconi, Lamberto Dini, and Romano Prodi.

During this period there were some notable successes and some striking failures. Government

largesse had traditionally been used as a side-payment to secure agreements with the social

partners, but as recession and rising risk premia on Italian debt caused government finances to

deteriorate precipitously, it became clear that the government would not be in a position to

continue its traditional ways of gaining support for reforms. Instead, governments would have to

find new ways of reaching agreements.

Throughout the 1990s the approach to reform followed two general patterns – consensual and

confrontational. The consensual approach was pursued by the Amato (1992-1993) Ciampi

(1993-1994), Dini (1995-1996), and Prodi (1996-1998) governments. These four prime ministers

and key ministers from their cabinets had technocratic rather than strictly political backgrounds,

and they undertook extraordinary efforts to convince Parliament, the social partners, and the

public that without the risanamento (the ‘restoration to health’) of public finances and a rapid and

radical reduction of expenditures on interest, the future competitiveness of the Italian economy

and the viability of the Italian social welfare safety net were endangered. The Amato, Ciampi,

Dini, and Prodi governments were also careful to consult and develop ideas in concert with

stakeholders, including the social partners and political parties not formally in the governing

coalition. With this common understanding of the dangers facing Italy, the Amato, Ciampi, Dini,

and Prodi governments were able to gain the support of Parliament and the social partners for

sacrifice – both immediate and long-term – in exchange for the longer-term goals of budget

stabilisation, membership in the Euro, and promises of concessions once Italy had recovered from

recession and joined the Euro (Negrelli 1997; Negrelli 2000; Ferrera and Gualmini 2000).

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By contrast, the confident – but ultimately brittle – right-wing coalition of Silvio Berlusconi

(1994-1995) followed a generally confrontational approach to pension and tax reform. Although

the social partners were initially invited to participate in the reform process in a manner that

suggested that the Berlusconi government intended to pursue a consensual approach, the reform

package bypassed consultation and discussions. Instead Berlusconi presented the unions with

faits accomplis which virtually eliminated accrued rights for which the unions had fought long

and hard in the past. In addition to the reliance on the unilateral imposition of reform rather than

the negotiations that had marked the more consensual approach during Amato, Ciampi, Dini, and

Prodi’s governments, the content of the reforms also differed. Instead of shared sacrifice in the

name of common goals, Berlusconi-period reforms concentrated costs upon workers and retirees

while providing tax breaks to businesses and wealthier individuals. This combination of a

confrontational approach to reform and the perceived inequity in the content of the reforms

prompted union and public opposition that culminated in massive strikes, the defection of a

coalition partner, the failure of most of the Berlusconi government’s reform proposals, and

ultimately the collapse of the Berlusconi government.92

To more fully explore this turbulent period, the chapter first turns to the economic context that

provided the impetus for reform. It then focuses upon the Italian institutional and political

context, discussing how these factors affected various governments’ decisions regarding their

approach to reform and the content and distributional implications of these reforms. The chapter

next considers the Amato, Ciampi, Berlusconi, Dini, and Prodi governments, focusing upon the

political composition and balance of power of each government, the leadership style of reformers,

their approach to reform, the distribution of the burden of adjustment of each of these reforms,

and how these factors affected the adoption of the reforms. It concludes with an overview of the

trajectory of the Italian reform efforts and of the progress these governments made towards

meeting the convergence criteria for the Euro.

THE IMPETUS FOR REFORM

As discussed above, Italy was not expected to meet the convergence criteria. At the least, it was

not expected to meet the criteria in time for the introduction of the Euro. After decades of

clientelism, the Italian budget was a disaster. Patronage politics had created a bloated public

sector, ‘baby pensions’ for relatively young public-sector retirees, disability pensions for the

92 While a confrontational approach, mass protests, and the fracturing of his coalition brought an end to Berlusconi’s first term as prime minister, he has since served twice more as prime minister from 2001 to 2006 and from 2008 to present. A confrontational approach continues to mark his periods in office.

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healthy, and ‘no-show jobs,’ particularly in the South. Widespread tax evasion by businesses and

unofficial-sector workers was made possible by corruption at all levels of the Italian government.

As the budget swelled throughout the 1970s and 1980s, taxes rose, albeit not enough to keep pace

with skyrocketing expenditures. To counter this budgetary shortfall, the government relied upon

seignorage, a policy which produced high inflation and which necessitated periodic devaluations

of the lira in order to maintain international competitiveness (Ferrera 1996; Ferrera 1997; Rhodes

1997b).

Italy took its first steps towards reforming its economy in 1979 when it joined the European

Monetary System (EMS) with the intent to reduce inflation and achieve exchange rate stability.

The 1981 ‘divorce’ of the Treasury and the Bank of Italy made the central bank more

independent. Over time the extent of monetary policy financing of the budget deficit was

reduced, forcing the Treasury to pay market rates with higher real interest on bonds sold to the

private sector. Between 1979 and 1991 these policies successfully reduced inflation from 21% to

7% (Figure 4-1) and eventually stabilised the exchange rate (Figure 4-2), but the cost was

increased real and nominal interest rates (Figure 4-1) and higher unemployment (Figure 4-3)

(Vaciago 1998:119-123).

FIGURE 4-1: Inflation & long-term interest ratesin Italy, 1970-2000

FIGURE 4-2: Exchange rate stability in Italy, 1970-2000

0

5

10

15

20

25

1970 1975 1980 1985 1990 1995 2000

Inflation

Long-TermInterest

0.20

0.40

0.60

0.80

1.00

1.20

1970 1975 1980 1985 1990 1995 2000

Sources: For inflation, the IMF World Economic Outlook, 2010. For long-term interest rates, European Commission, AMECO database, 2010.

Source: European Commission, AMECO database, 2010. Note: Figure shows units of national currency per EUR/ECU. Parity = 1. Decreases denote currency appreciation and increases denote depreciation.

In most advanced industrial countries, an ageing population, rising health care costs, and high and

persistent unemployment put pressure on the long-term viability of the social welfare system. In

Italy this problem was particularly severe. In 1991 Italy already had one of the highest levels of

pension expenditures (15.3% of GDP), well above the EU average of 9.2% of GDP (Ferrera

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1997:233), and its population was ageing more rapidly than most, and it was predicted that it

would soon have one of the worst dependency ratios within the EU (Figure 4-4). Generous terms

for seniority (early retirement) pensions for public employees reduced the stream of social

contributions paid into the pension system while raising the number of retirees the state had to

support (Ferrera 1996:26).

FIGURE 4-3: Unemployment rate in Italy, 1970-2000

FIGURE 4-4: Old-age dependency ratio in Italy, 1960-2050

0

2

4

6

8

10

12

14

1970 1975 1980 1985 1990 1995 2000

Source: OECD Labour Force Statistics (MEI), 2010. Source: European Union Public Health Information System

(EUPHIX), 2010.

By 1991 there had been some improvement in Italy’s economic situation, but it was still far from

a prudent and sustainable fiscal and monetary situation. Mismanagement, inefficiency, and

corruption marked much of Italy’s fiscal policies, particularly in the areas of pensions, health

care, unemployment compensation, public works, state-owned enterprises, and tax collection.

Despite the end of seignorage to finance Italian deficits, inflation remained a problem. The scala

mobile (the automatic indexation of wages to inflation) continued to exert a wage-push effect

upon inflation. Persistent inflation undermined the government’s efforts to maintain a stable lira

and to bring the risk premia for Italian debt – and Italy’s debt-servicing costs – under control. In

light of its already high debt load, its poor institutions and traditions in the area of fiscal policy

and tax collection, and demographic pressures, Italian economic policy in general and its fiscal,

social welfare, wage, and tax policies in particular needed serious reform.

The Maastricht Treaty established a process for European Community members joining a single

currency. Membership in the currency union would relieve Italy of much of the vulnerability to

currency runs that had forced devaluations in the past, thereby reducing the risk premia on Italian

debt related to currency instability.93 Membership would thus provide Italy with the means to

93 The risk premia related to devaluations would be reduced, though the risk premia related to the risk of government default on debt would not be affected, as the Greek Debt Crisis of 2010 showed. The Greek Debt Crisis also shows that

Italy

EU-25

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improve the long-term viability of its social welfare model, but membership in the Single

Currency would come at a price. To qualify, Italy would have to meet the convergence criteria of

sustainable public finances (deficits at or below 3% of GDP and debt at or below 60% of GDP or

showing adequate progress in converging towards this target), price stability (inflation that didn’t

exceed by more than 1.5% the average of the three best-performing countries), interest rate

convergence (long-term interest rates that didn’t exceed by more than 2% the average of the three

best-performing countries), and exchange rate stability (maintenance of Exchange Rate

Mechanism margins with no devaluations).

FIGURE 4-5: Budget balance (as % of GDP)in Italy, 1970-2000

FIGURE 4-6: Debt (as % of GDP) in Italy, 1970-2000

-14

-12

-10

-8

-6

-4

-2

0

1970 1975 1980 1985 1990 1995 2000

Budgetsurplus (+)or deficit (-)Maastrichtdeficit limit

0

20

40

60

80

100

120

140

1970 1975 1980 1985 1990 1995 2000

Debt

Maastrichtdebt limit

Source: For 1970-1980, OECD Economic Outlook, 2010. For 1980-2000, European Commission, AMECO database, 2010.

Source: European Commission, AMECO database, 2010.

At the time that the Maastricht Treaty was signed, Italy was poorly position to meet the

convergence criteria. Deficits had stabilised and declined since the mid-1980s, but they remained

in excess of 11% of GDP (Figure 4-5), and debt had risen to nearly 100% of GDP (Figure 4-6).

Inflation had fallen from more than 20% in 1980 to about 6% in the early 1990s, a substantial

improvement though markedly higher than in the more monetarily and fiscally conservative

countries. Nonetheless, long-term interest rates remained stubbornly high, signalling market

scepticism about the long-term prospects for inflation and exchange rate stability in Italy. For

Italy to meet the convergence criteria, it would require a significant contraction in fiscal,

monetary, and wage policy,94 a project that would have been politically costly even in the best

economic times.

risk premia related to devaluations are reduced but not eliminated by EMU. Nonetheless, while the Euro is still vulnerable to currency runs, there is little doubt that the Euro has withstood these runs better than the drachma – or the escudo, peseta, lira, or punt – alone would have. 94 Wage policy is not directly addressed by the Maastricht criteria. Nor is it normally a matter directly under government control. But to bring inflation under control in Italy, the government would need to reduce wage-push

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Throughout the 1990s the Italian economy came under increasing pressure, making economic

restructuring and fiscal retrenchment one of the most important issues on an already-crowded

Italian political agenda. The worldwide recession began in 1990. Economic growth fell from

4.2% in 1988 to -0.9% in 1993, and government expenditures rose from 50.4% in 1988 to 56.3%

in 1993 as demands upon the state increased, a circumstance that made it even more politically

difficult to tighten fiscal policy (OECD 2011).

As in France, Italy’s efforts to combat the recession by loosening monetary policy were stymied

by the Bundesbank’s raising of interest rates in response to expansionary currency conversion and

fiscal policies and to the rise in inflation during that initial post-unification boom. Despite the

recession, Italy had to increase interest rates to prevent an outflow of capital. In 1992 and 1993

currency speculators triggered the ERM Crises, requiring Italy to expend trillions of liras in

foreign exchange to defend its currency before ultimately being forced to abandon the ERM and

to devalue the lira (Eichengreen and Wyplosz 1993).

With the worsening of Italy’s fiscal balance (Figure 4-5) due to recession and the increasing cost

of debt as investors demanded ever-higher risk premia on that debt, Italy in the mid-1990s was

even further from meeting the criteria than it was when the Maastricht Treaty was concluded in

1991. Even as the deficit was gradually trimmed and inflation fell over the course of the 1990s,

debt (Figure 4-6) and the interest rates on Italian debt mounted rapidly. The precariousness of

Italy’s fiscal and monetary situation had, however, been underscored by the ERM Crises, the

collapse of the lira, and the rise in risk premia. Successive governments would use this episode

and the longer-term threats to Italy’s economic future to gain support for reforms and for some

short-term fiscal measures that would ultimately bring Italy into compliance with the convergence

criteria in time for inaugural membership in the Euro-zone.

EXPLAINING THE APPROACH TO REFORM – THE ITALIAN CONTEXT

As discussed in Chapter Two and explored in Chapter Three, the theory argues that a greater

concentration of power in the government’s hands and more distant elections enable a

government to feel more confident about its ability to attain its preferred reform, relying wholly

on its coalition for votes, and about its ability to withstand opposition, to dodge or overcome

potential veto points, and to avoid punishment from unhappy voters. And when the reform

leadership feels confident about its ability to impose their preferred reform or when the reform inflation, which could only be accomplished by convincing the social partners to agree to a less inflationary wage policy.

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leadership prefer a more hierarchical, ‘dictatorial’ style, the government is more likely to utilise a

confrontational approach to reform and to pursue reforms that are more sharply partisan in

content. By contrast, when power is less concentrated in the government’s hand and when

elections are proximate, the government is likely to feel less confident about its ability to achieve

its preferred reform. In such cases, the government is more likely to engage in a consensual

approach to reform, and these reforms are more likely to include concessions that moderate the

impact and reduce the partisanship of the reform.

When assessing their ability to pursue a reform agenda, would-be reformers will assess the

strength and stability of their coalitions, considering the number of seats held by their coalition

and allies in Parliament, the level of party discipline within the coalition members, and the

number of parties and degree of ideological cohesion within the government’s coalition. In Italy

during the 1990s, such an assessment of government strength was more complicated than in other

cases, due to dramatic changes within the Italian political scene over the course of the decade.

Changes in the Italian Political System in the Late 1980s and Early 1990s

Throughout Italy’s post-war history, Italian politics and governments were dominated by the

Christian Democrats (Democrazia Cristiana, DC) in a series of constantly shifting coalitions with

the smaller parties of the centre, the Liberals (Partito Liberale Italiano, PLI), the Republicans

(Partito Repubblicano Italiano, PRI), the Social Democrats (Partito Socialista Democratico

Italiano, PSDI), and the Socialists (Partito Socialista Italiano, PSI). In the name of protecting

democracy from the threat of communism, a Concordat with a conventio ad excludendum was

concluded, locking the Communists (Partito Comunista Italiano, PCI) out of government. Since

the PCI was Italy’s second largest party, the Concordat eliminated the possibility of the sort of

alternation of governments in power that enables an electorate to hold governments accountable

and that allows successive governments to investigate and eliminate the corrupt actors and

practices of previous administrations (Keating 1999).

Over the course of the late 1980s and early 1990s three changes took place that profoundly

transformed Italian politics. The first of these changes stemmed from the demise of communism

in Europe. In response to the waning appeal of Soviet-style communism and the embrace of

perestroika and demokratziya in the Soviet Union and much of Eastern Europe, the PCI under

Achille Ochetto sought to transform itself into a respectable party of the modern European left.

This change in the party’s identity provoked a split between the Democratic Party of the Left

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(Partito Democratico della Sinistra, PDS) – a Western-style, social democratic party – and the

hard-line Communist Refoundation (Partito della Rifondazione Comunista, RC). It also laid the

groundwork for the updated and re-branded PDS to have greater appeal and to it becoming an

acceptable candidate for participation in government (Newell and Bull 1997). Furthermore, with

the end of the Cold War the Concordat’s conventio ad excludendum broke down. Parties critical

of the government – particularly the PDS, but also the separatist Northern League (Lega Nord,

LN) and the ‘post-fascist’ National Alliance (Alleanza Nazionale, AN) – benefited as voters were

freed from the fears inspired by the long twilight struggle between East and West and no longer

felt the need (in journalist Indro Montanelli’s words) to “hold [their] noses and vote for the DC.”

In short, the Cold War’s end challenged the hold on power of Italy’s dominant party, the

Christian Democrats (Democrazia Cristiana, DC), by strengthening challengers to the DC

(Gundle and Parker 1996:7; Keating 1999:229).

The second major development in the transformation of the Italian political context in the early

1990s was a series of scandals that led to the collapse of the DC and PSI, as well as virtually

every other party that had been in government in the post-war period. Anti-mafia and

anti-corruption investigations led to the indictment of more than 100 members of Parliament by

late 1992. With the disgrace of key officials in the DC, PSI, PLI, PRI, and PSDI, the five ruling

parties found themselves haemorrhaging members, financing, and votes. Revelations about the

DC’s role in tolerating (and even supporting) right-wing violence in the past further discredited

the DC and its leadership. By mid-1993 these five parties collapsed, leaving a political vacuum

which was filled by a bevy of new parties and by a new generation of political leaders (Nelken

1996; Rhodes 1997a; Keating 1999).

The third major development in Italy’s political system was a change to its electoral system,

implemented in 1994. In response to decades of corruption, ineffective governance, seemingly

official tolerance of the mafia, rising taxes and debt, and worsening public services, there was

broad popular support for reform, which culminated in a change in the electoral system. Putting

an end to multi-preference proportional representation (PR) as the basis for filling all seats in the

Chamber of Deputies and the Senate, the reforms created a system whereby approximately

three-quarters of members were elected from single-member districts under a first-past-the-post

system (FPTP) with the balance of seats filled by PR. With this change in the electoral system, it

was expected that there would be greater accountability since most members would have to

answer to voters in their district rather than parties determining the rise and fall of their members.

It was also anticipated that the introduction of FPTP voting would eventually reduce the number

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of political parties and promote an alternation in power between different parties (or blocs of

parties) that would improve accountability and bring an end to the partitocrazia95 that had

emerged from decades of the same political parties being entrenched in power (Katz 1996;

Keating 1999; Koff and Koff 2000:64-66).

Government Strength – Size and Stability of Coalition

These three changes in Italian politics made it much more difficult for prime ministers to

establish strong, stable coalitions and for them to accurately assess the number of seats held by

their coalition in Parliament, the level of party discipline within the coalition members, and the

degree of ideological cohesion within the coalition. Giuliano Amato formed a governing

coalition of the DC, the PSI, the PSDI, and the PLI, holding 331 out of 630 seats in the Chamber

of Deputies and 163 of 325 seats in the Senate (Siaroff 2000:312-315). Amato’s successor, Carlo

Azeglio Ciampi formed a government with non-political technocrats in key positions, operated

without a formal political coalition, relying upon ad hoc support of parties of the left and the

centre to govern. The 1994 general elections brought Silvio Berlusconi to power with a coalition

of his own party, Go Italy (Forza Italia, FI), the AN, and the LN, controlling 366 out of 630 seats

in the Chamber of Deputies and 156 out of 326 seats in the Senate (Siaroff 2000:314-316). After

the LN’s defection from Berlusconi’s coalition later that year, Lamberto Dini led a technocratic

government without a formal coalition, although he relied upon parties of the left and the centre

for ad hoc support. The 1996 general election led to the rise of Romano Prodi with his centre-left

coalition of the PDS, the Prodi list (an eclectic combination of minor Christian Democratic,

Social Liberal, and Social Democratic parties), the Dini list (an equally eclectic combination of

minor centre-left Christian Democratic, Centrist Liberal, and Social Democratic parties), and the

Federation of Greens. Prodi’s coalition controlled only 285 of 630 seats in the Chamber of

Deputies and 157 of 326 seats in the Senate, but with the ad hoc support of the RC, the coalition

was able to call upon 320 deputies and 167 senators for votes. The RC’s support could not,

however, be taken for granted and compromise was necessary to retain that backing (Siaroff

2000:316-317).

Based upon numbers alone, the Amato and Berlusconi governments were in the strongest

positions, though their majorities were not large, and in Berlusconi’s case, he did not control a

majority in the Senate. Prodi’s government was in a slightly more precarious position, relying

95 Partitocrazia denotes government of the parties, as opposed to democrazia, government of the people.

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upon the support of a party not in government, and the Ciampi and Dini governments were in the

weakest positions, relying upon informal, ad hoc support for passage of legislation.

Government Strength – Party Discipline

Party discipline was a problem for all of these governments. Historically, it was the party

factionss and their leadership that dominated Italian politics with interparty and intraparty

struggles determining the government’s policy course, allocation of ministerial positions, and the

distribution of funds and sinecures to the party faithful. This feature that led to the observation

that Italy was more of a partitocrazia than a democrazia (Keating 1999). But in the 1990s the

ongoing anti-mafia and anti-corruption scandals led to the disgrace and resignation of deputies

and senators, and these parties collapsed as their leadership was indicted and their finances dried

up, undermining leaders’ ability to guarantee votes (Rhodes 1997a). With the 1994 shift from

multi-preference proportional representation to first-past-the-post election from single-member

districts for approximately three-quarters of seats in the Chamber of Deputies and the Senate,

party discipline was expected to decline as members were made more directly accountable to

voters in their districts rather than to parties.

Government Strength – Coalition Cohesion

When assessing the strength of a coalition, a government will also consider the number of parties

and the degree of cohesion within the coalition. The end of the Concordat and the collapse of

Italy’s major parties led to an explosion in the number of parties and potential coalition members.

Successors to the old governing parties arose in the form of a myriad of splinter parties. Parties

that were previously not considered to be acceptable coalition parties, such as the successors to

the Communist Party and the fascist Italian Social Movement (Movimento Sociale Italiano, MSI),

reformed themselves and splintered, becoming the moderate social democratic PDS, the old-line

communist RC, the right-wing AN, and the old-line fascist Flame (Fiamma). Separatist and

regional parties also filled the vacuum left by the collapse of the old governing parties. These

new or recently reformed parties, many of which had not previously been in government,

splintered, merged, and renamed themselves as they sought to develop their political identities

and prove themselves to voters. As the number of parties increased and as these parties attempted

to develop distinct political identities, the ideological and programmatic differences among

parties proliferated, decreasing the congruence among parties and the cohesion of governing

coalitions (Keating 1999). As a result, the changes in the political environment in the 1990s

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made it highly difficult for governments to rely upon party and coalition discipline when it came

time to pursue painful reforms.

Veto Points

When assessing the concentration of power in the government’s hands, coalition leaders will

consider the strength of potential veto players and the congruence in position between the

reformer and those veto players. The first veto point faced by would-be reformers is the need for

legislation to pass through Parliament. The Italian Parliament is marked by perfect bicameralism.

The two chambers have the same rights and powers, and for legislation to pass, it must be

approved by a majority in both chambers, giving each chamber an absolute veto (Bull and Newell

2005:116-117). Traditionally the prime minister and his government were drawn from

Parliament, although the technocratic Ciampi and Dini governments were exceptions with neither

of these prime ministers nor their cabinets being drawn from Parliament. Each new government

must receive a vote of confidence in both the Chamber of Deputies and the Senate, and if it loses

the confidence of the Parliament, the government must resign. As a result, the two chambers of

Parliament have very strong veto powers. Since governments come to power via a vote of

confidence from both chambers of Parliament, it might be expected that there would be relatively

high congruence between the government and Parliament, but high turnover in Italian

governments makes it clear that parliamentary support for the government can be transitory and

Parliament is willing to use its veto.96 As a result, governments must be particularly attentive

when it holds narrow majorities (or a minority) in one or both chambers or when its coalition is

highly fractious. Despite the change in electoral rules in 1994, the two chambers have similar

bases for election97 and composition of the two chambers tends to be roughly similar (Bull and

Newell 2005:116-117). Nonetheless, minor differences in electoral outcomes can occur, and

96 It might be expected that the prospect of new elections would potentially check Parliament from voting against and causing the fall of governments. Historically, though a government might fall, a new government (frequently with nearly identical membership, albeit with some reshuffling of portfolios) would be named by the president without dissolution of the Parliament and calling for new elections. The fact that the same parties were nearly always in power, regardless of the number of times the government fell, and the use of multi-preference proportional representation meant that the fall of a government held no real costs for parties or for deputies and senators (Furlong 1990:57). With the end of the DC’s monopoly on power and the PCI’s exclusion from power, alternation of parties in power has become a reality. With time, parties may become more wary of casting votes of no confidence with the possibility that parties will come to see real costs being associated with causing a government to fall. Nonetheless, during the 1992 to 1998 period being discussed, such a deterrent to votes of no confidence had not yet evolved. 97 The most notable differences in the bases for these two chambers are (1) different minimum ages for voting for these bodies (18 to vote for a deputy versus 25 to vote for a senator), (2) different minimum ages for running for these positions (25 to run for deputy versus 40 to run for senator), and (3) in addition to the 315 elected members of the Senate, there are senators for life (senatore a vita). These senators for life include all former presidents and a limited number of Italian citizens who are appointed senator for life by the president “for outstanding patriotic merits in the social, scientific, artistic, or literary field.” Throughout the 1992 through 1998 period, there were ten or eleven senators for life (Keating 1999; Bull and Newell 2005:116-117).

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majorities in one chamber do not guarantee a majority in the other chamber. As a result, even

slight variation in the composition of the Chamber of Deputies and the Senate may be important

when the country is relatively evenly divided between party blocs, as was the case in the 1990s.

In cases of narrow majorities (or a lack of a majority in one or both chambers) and in light of the

fractious behaviour of coalition members and the decline in party discipline, the absolute vetoes

held by these two chambers pose serious threats to reform efforts.

In Italy, the President of the Republic (Presidente della Repubblica) is a head of state with fairly

weak powers in the areas of legislation. Intended to represent national unity, the president

generally stays out of the day-to-day political debate, though he can play a suasive role in issues

he considers to be of broad national importance. The president serves a seven-year term and is

elected indirectly98 via an electoral college consisting of both chambers of Parliament and 58

regional representatives who serve seven-year terms. The president names the prime minister

and, on the proposal of the prime minister, the list of candidates for the Council of Ministers

(Consiglio dei Ministri). The president administers the oath of the government and accepts its

resignation if it resigns, but he lacks the power to dismiss a government. If a prime minister loses

a vote of confidence, the prime minister may name another prime minister or may dissolve the

Parliament and call new elections. The staggering of presidential and parliamentary elections and

the difference in electoral rules increase the likelihood that presidents and prime ministers will

come from different parties and, indeed, from different parts of the political spectrum. Despite

this possibility for low congruence between president and the reform leadership, the president

does not constitute a substantial stumbling block for the government because his veto powers are

fairly weak. As president of the judiciary and guardian of the Italian Constitution, the president

does have a suspensory veto power and may refuse to sign bills he considers clearly

unconstitutional, but if the rejected law is passed again by a majority in the parliament, however,

the president must sign it. While the suspensory veto cannot thwart the will of a determined

prime minister with a strong and stable parliamentary majority, it does delay promulgation of the

law and it may draw public attention to the issue or prompt the parliamentary majority to

reconsider the proposed reform (Koff and Koff 2000:140-148).

Sub-state units in Italy have little influence over social welfare and economic policy. Unlike

France, the electoral basis for the Italian Senate is the same as for the Chamber of Deputies rather

98 To be elected, the president must receive a super-majority of two-thirds of votes, though if no agreement is reached after the first three rounds of voting, the required majority is reduced to a simple majority for subsequent rounds of balloting (Keating 1999).

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than local and regional politicians being the electors of the upper chamber. And in contrast to

Germany, smaller sub-state units in Italy are not overrepresented in the upper chamber. Except

insofar as subnational governance institutions in Italy are responsible for administering

government programmes and could block policy by failing to implement it, subnational units do

not control veto points that could block a government’s attempts to pursue reform.

While the Italian legal system has two supreme courts, the Constitutional Court (Corte

Costituzionale della Repubblica Italiana) and the Supreme Court of Cassation99 (Corte Suprema

di Cassazione), it is the Constitutional Court that is relevant as a potential veto player for reforms.

Tasked with passing judgement on the constitutionality of laws, Italy’s Constitutional Court has

an absolute veto over legislation, since there is no right of appeal, but those veto powers and the

volume and frequency of decisions are generally not extensive in comparison with other

advanced industrial democracies (Bull and Newell 2005:115-116). Aware of the possibility that

either the president or the courts may object to the constitutionality of reform legislation, we

would expect that reformers would act prospectively to avoid clashes regarding the

constitutionality of legislation. Whether it is prospective action by reformers to avoid the

Constitutional Court’s absolute veto or the president’s suspensory veto or whether it is due to the

relatively narrow areas of compétence of the court and the president, vetoes of legislation on

constitutional grounds did not play a significant role in the reform process during the 1990s.

Italy’s central bank, the Banca d’Italia, was traditionally an institution whose policies were

directed by politicians, but subsequent to Italy’s joining the European Monetary System in 1979

and the 1981 ‘divorce’ of the Treasury and the Banca d’Italia, the central bank gained increasing

independence. While it never managed to gain a reputation as a truly conservative central bank

prior to the European Central Bank assuming responsibility for monetary policy, by the early

1990s the bank had nearly eliminated the use of monetary policy to finance the budget deficit and

it had forced the Treasury to pay market rates on bonds sold to the private sector, measures that

reduced inflation and stabilised the exchange rate. The central bank never directly acted as a veto

player in government fiscal policy, threatening to raise interest rates in response to deficits and

inflationary governmental policies, as occurred in Germany. Nonetheless, throughout 1990s the

Banca d’Italia did pursue a non-accommodating monetary course as it sought (though ultimately

failed) to defend the lira against the exodus of foreign reserves that was prompted by the

99 The Supreme Court of Cassation is tasked with the duty of ensuring the observation and correct interpretation of the law and as such, it is responsible for ensuring the same application of law in the inferior and appeal courts, as well as resolving disputes regarding the jurisdiction of lower courts (i.e., penal, civil, administrative, military) over a given case (Keating 1999).

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Bundesbank’s high interest rates and the currency runs of the EMS Crises of 1992-1993. The

Banca d’Italia was, however, able to stabilise the lira and gain re-entry for the lira into the

European Monetary System (Vaciago 1998:120-121).

The Social Partners

The social partners do not control formal veto points in Italy, and their role in the administration

and distribution of pension and health care funds is more symbolic than substantial, in contrast to

France where the social partners play a much more significant role in administering benefits.

With responsibility for setting financial and regulatory parameters largely in the hands of the

government, the social partners in Italy have little ability to block reforms through

non-implementation or slow and incomplete implementation of some reforms, as happened with

health care reforms in France and health care and sick pay reforms in Germany. Italian unions

have, however, played a somewhat stronger role in unemployment insurance and an increasingly

greater role in active labour market policy (Ebbinghaus 2006).

The real strength of Italian unions lies in their ability to mobilise large numbers of strikers and

protesters. Unionisation has remained relatively high over the last decades and was about 37%

throughout the 1990s (Visser 2006:45). Public-sector unionisation levels are particularly high,

and approximately 70% of all employees are covered by collective bargaining contracts, even if

they are not directly union members (Boeri, Brugiavini, and Calmfors 2002; Natali and Rhodes

2004b:4). The tradition of labour activism remains strong, and there is a broad public perception

of unions as conflictual but fairly responsible actors, which provide a valuable service as the

protectors of accrued benefits, the voice of workers, and as coordinators of strikers and protesters.

Italian unions, like French unions, have a long tradition of being conflict-prone and can generally

rely on high levels of public support and solidarity. Strikes and protests can paralyse the country.

The main employers’ association, Confindustria, represents the interests of business. Through

workers’ councils and participation in training and employment programmes, employers play a

role in implementing state reforms, particularly in the area of working hours and active labour

market policy. Finally, as co-administrators of many of the funds and programmes that provide

workers with a safety net, employers’ associations play an important in reducing the causes of

social unrest (Ebbinhaus 2006; Natali and Rhodes 2004b).

While in many countries, there is generally greater congruence between centre-left governments

and unions on the one hand and between centre-right governments and employers’ associations

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on the other hand, in Italy there is a long history of the three main trade confederations having

close ties to particular parties. The Italian Confederation of Workers’ Trade Unions

(Confederazione Italiana Sindacati Lavoratori, CISL) and its public-sector workers were most

closely tied to the DC and have since gravitated somewhat towards successors of the DC,

although its relationship with Forza Italia has at times been somewhat confrontational.100 The

Union of Italian Workers (Unione Italiana del Lavoro, UIL) was connected to the PSI and

centrist parties and it remains centre-left in its associations. The General Confederation of Italian

Workers (Confederazione Generale Italiana del Lavoro, CGIL) and its traditional membership of

factory workers were historically closely tied to the PCI and now are closest to the PDS. The

exchange of favourable policy for votes frequently enabled unions to exert influence over

government policy, though CISL and UIL’s connections to parties and their influence over policy

were weakened in the 1990s by the collapse of the DC and the PSI. By contrast, CGIL’s

influence over policy grew as the conventio ad excludendum came to an end and the PDS

established itself as a major party in government. With its base of blue-collar, private-sector

workers, CGIL was willing to cooperate in some reforms, particularly in reforms of pensions and

collective bargaining that sought to stabilise the Italian social welfare system by bringing

public-sector wage and benefits into alignment with those of the private sector (Carrieri

1994:301; Treu 1994:171-174; Bull and Newell 2005:82-85, 93-96).

Electoral Timing

The argument made in the theory chapter proposes that elections provide a constraint on a

government’s pursuit of reforms because painful reforms may (1) hurt the governing parties’

chances of re-election and (2) make coalition members more cautious about supporting reform,

but various features of Italy’s particular situation may have attenuated this usual constraint.

Italian parliamentary elections are scheduled for every five years, but throughout the Cold War

period, there was virtually no electoral constraint on the main parties in government. The

Concordat’s ban of the PCI from government assured that there was no true alternation in power

of competing parties. Italian governments fell frequently, but for the most part, the same parties

and the same political leaders remained in government after each reshuffling of seats (Furlong

1990:57). Since the political system’s transformation in the 1990s – the collapse of the

100 As noted by Baccaro, Carrieri, and Damiano (2002), in response to the Silvio Berlusconi’s victory in the 2001 general election, former secretary general of CISL, Sergio d’Antoni, resigned from his leadership position within the confederation in order to establish Democrazia Europea, a new political party with the explicit goal of reestablishing the Christian Democratic Party (DC).

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established governing parties, the eligibility of the PDS, PCI, and AN for coalition membership,

and the emergence of a large number of new parties – elections have consequences. Alternation

in power has commenced since these changes of the 1990s. As a result, the prospect of electoral

retribution might be expected to gain some strength as a deterrent for governments considering

reform (Bull and Newell 2005:126-128). Parties in Parliament would have to consider which was

the lesser evil: supporting the government’s reforms and potentially facing electoral retribution in

a future election or rejecting the government’s reforms and potentially facing swift electoral

retribution if no new government could be formed and early elections were called.

Further complicating these considerations was the emergence in the 1990s of caretaker and

technocratic governments with prime ministers and cabinet members who arguably considered

the future financial and economic viability of Italy to be more important than their electoral

prospects. The fragility of the political system and the severity of its economic situation might be

expected to have led reformers to have been less concerned about electoral timing than would

have been expected in more stable times. Regardless, of the Amato, Ciampi, Berlusconi, Dini,

and Prodi governments, only one survived a full term in office. The other four fell and were

either replaced by a new government through the president’s appointment of a new prime

minister or the calling of early elections. In light of this, the electoral shadow may not have had a

substantial impact on governments’ decisions regarding when and how to pursue reform.

All in all, these five governments were fairly weak and should have taken relatively consensual

approaches to reform. Amato’s four-party coalition held a narrow majority in both chambers of

the Parliament and elections were scheduled for five years away, but Italy’s historically

governing parties were collapsing as anti-mafia and anti-corruption scandals disgraced the leaders

of these parties and eroded their parties’ electoral and financial support. The Ciampi and Dini

governments were both technocratic governments with prime ministers appointed by the

president. With purely technocratic cabinets and dependence upon the ad hoc support of centrist

and leftist parties, these two governments had no hope of relying upon party discipline for votes,

putting these governments in very weak positions. Berlusconi’s government held a slim majority

in the Chamber of Deputies, but lacked a majority in the Senate. The next elections were distant,

but the fractiousness of Italian politics, ideological divisions within his coalition, and the lack of a

strong majority in Parliament put his government in a moderately weak position. Finally, Prodi’s

government was relatively weak. Prodi took power after his supporters gained a plurality of seats

in elections, but he lacked a majority in either chamber of Parliament and his government was

reliant on the support of the RC, a party not in government and far to the left of Prodi’s coalition.

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Based upon the weakness of these governments, the theory presented in Chapter Two would

predict that the leadership would have little confidence that they would be able to pass reforms

unilaterally. As noted in Table 4-1, such government weakness and lack of confidence would be

expected to be conducive to leaders approaching reform in a negotiated or consensual manner in

order to develop reforms that are relatively moderate in their extent and balanced in their

distributional effects (Table 4-1).

TABLE 4-1: Government Strength and Predictions Regarding Reform Approach in Italy

GOVERNMENT &

TERM OF OFFICE GOVERNMENT STRENGTH PREDICTED

APPROACH

Amato (1992-1993)

Moderately weak narrow majority in Chamber of Deputies (+) narrow majority in Senate (+) ideologically fractious 4-party coalition (-) weak party discipline (-) scandal & indictment-induced breakdown of parties (-) four years to next scheduled parliamentary election (+)

Consensual

Ciampi (1993-1994)

Weak technocratic government, reliant upon ad hoc support by a large number of ideologically fractious parties (--)

weak party discipline (-) three years to next scheduled parliamentary election (+)

Consensual

Berlusconi (1994-1995)

Moderately weak narrow majority in Chamber of Deputies (+) lack of majority in Senate (-) ideologically fractious 3-party coalition (-) elected, arguably with a mandate (+) five years to next scheduled parliamentary election (+)

Consensual

Dini (1995-1996)

Weak technocratic government, reliant upon ad hoc support by a large number of ideologically fractious parties (--)

four years to next scheduled parliamentary election (+)

Consensual

Prodi (1996-1998)

Moderately weak majority in both chambers of Parliament only with support of party outside the governing coalition (=)

ideologically fractious 6-party coalition (-) elected, arguably with a mandate (+) five years to next scheduled parliamentary election (+)

Consensual

Note: + or ++ denote factors that strengthen a government. - or -- denote factors weakening the government. = denotes circumstances with relatively little effect. Government strength is evaluated in terms of the impact of the Chamber of Deputies and Senate as veto players (assessed via size of majorities in Parliament, lack of majority in one or both chambers, or reliance upon an ad hoc coalition), party cohesion (or fractiousness), party discipline, electoral mandate, and length of time from beginning of term in office to next parliamentary elections. Since other veto points were either not as significant in Italy as in other countries or were unlikely to have a differential effect upon these governments, they were excluded.

Leadership Style

The theory presented in Chapter Two does not, however, consider only factors related to

government strength and confidence; it also includes a consideration of the personal leadership

styles of reformers. As is shown in Table 4-2, an examination of the leadership styles of key

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reformers in these five governments suggests that some attenuation of these predictions is

warranted.

Giuliano Amato, Carlo Azeglio Ciampi, Lamberto Dini, and Romano Prodi were known for their

pragmatism, their expertise in economics, and their respect for the rule of law. At a time when

increasing numbers of Italian politicians were coming under investigation for corruption, these

four prime ministers had reputations as honest brokers rather than as corrupt or ideological

opportunists. As a result, there was potential for these four reformers to be able to utilise their

good reputations and to engage in collaboration with other stakeholders in a manner whereby they

might be more effective than might otherwise be expected. The inclusion of a consideration of

leadership style, thus, reinforces the predictions based upon government strength.

TABLE 4-2: Government Strength, Leadership Style, & Revised Predictions for Italy

Government & Term of Office

Government Strength Predicted Approach (based on Government Strength)

Leadership Style Leadership Style’s Effect on Predicted Approach

Amato (1992-1993)

Moderately weak

Consensual Collaborative Reinforcing

Ciampi (1993-1994)

Weak

Consensual Collaborative Reinforcing

Berlusconi (1994-1995)

Moderately weak

Consensual Dictatorial Countervailing

Dini (1995-1996)

Weak

Consensual Collaborative Reinforcing

Prodi (1996-1998)

Moderately weak

Consensual Collaborative Reinforcing

Silvio Berlusconi, by contrast, was known for an aggressive, hierarchical leadership style.

Berlusconi’s success as a businessman was accompanied by – and quite arguably the result of – a

profoundly conflictual business style and a history of resolute pursuit of his goals, even in the

face of opposition from competitors, trade unions, or the law. New to direct participation in

Italian politics and encouraged by the dramatic emergence of his coalition’s parties within the

power vacuum left by the collapse of the old ruling parties, Berlusconi might have believed that

his party, Forza Italia, and its coalition partners might be able to create a strong, durable

government and to dominate the political scene for the foreseeable future. In such a case,

Berlusconi might have overestimated the strength and stability of his coalition and of its ability to

impose difficult reforms. Regardless, in the case of Berlusconi, evaluations of government

strength and leadership style lead to countervailing predictions regarding this government’s

reform approach.

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EXPLAINING THE CONTENT OF REFORM – THE ITALIAN CONTEXT

During the 1990s in Italy there was an incredible profusion of parties, as new parties emerged and

as old parties sought to re-brand themselves. As Figure 4-7 illustrates, parties merged, split,

evolved ideologically, and renamed themselves continuously (Daniels 1999:77-79; Bull and

Newell 2005:52-59). As a result, a detailed specification of each political alliance and governing

coalition’s composition and the ideological programme for each party within or supporting the

coalition would be a lengthy and complicated enterprise. For the purpose of clarity and

succinctness, the general political orientation of some of the more major parties and groupings is

described rather than focusing upon the political orientation of each party. Where there were

important divisions within these governing coalitions (or between these coalitions and parties that

provided support to the coalition without being formally in government), these differences are

highlighted because they form cleavage lines along which coalition cohesion could break down.

FIGURE 4-7: Evolution of the Italian party system, 1991 - 2001

Source: Bull and Newell 2005:54-55. Note: AD: Democratic Alliance; AN: National Alliance; Bianco.: Biancofiore; Bonino: Bonino List; Casa: House of Freedoms; CCD: Centre Christian Democrats; CDU: Christian Democratic Union; CS: Social Christians; CU United Communists; DC: Christian Democrats; Dem.: Democrats; Dem. Eur. : European Democrats; DP: Proletarian Democracy; DS: Democrats of the Left; FDS: Democratic Socialist Federation; Fed. Lib.: Liberal Federation; FI: Forza Italia; Fiamma: Tricouloured Flame; Gira.: Girasole (Sunflower); Lega: Northern League (LN); Lista Pannella: Pannella List; Marg.: Margherita (Daisy); MID: Italian Democratic Movement; MSI: Italian Social Movement; Pact: Pact for National Renewal; PCI: Italian Communist Party; PdCI Party of Italian Communists; PDS: Democratic Party of the Left; PLI: Italian Liberal Party; Polo: Freedom Alliance; PPI: Italian Popular Party; PR: Radical Party; PRI: Italian Republican Party; PS: Socialist Party; PSDI: Italian Social Democratic Party; PSI: Italian Socialist Party; PSI-n: New Italian Socialist Party; RC: Communist Refoundation (PRC); Rete: Network; RI: Italian Renewal; Riformatori: Reformists; SD: Social Democrats; SDI: Italian Democratic Socialists; SI: Italian Socialists; SVP: South Tyrolese People’s Party; UD: Democratic Union; UdC: Union of the Centre; UDEUR: Union of Democrats for Europe; UDR: Union for a Democratic Republic; Ulivo: Olive Tree Alliance; Unità rif.: Reformist Unity; Valori: Italy of Values; Verdi: Greens (FdV).

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The turbulence in Italian parties during the 1990s provides a good opportunity for testing the

effects of partisanship upon the content of reforms. Under the leftist governments of Giuliano

Amato (1992 to 1993) and Romano Prodi (1996 to 1998) and the technocratic, but centrist and

left-supported governments of Carlo Azeglio Ciampi (1993 to 1994) and Lamberto Dini (1995 to

1996), Socialists, Social Democrats, left-leaning Christian Democrats, reformed Communists,

old-line Communists, and Greens were either formally part of the governing coalition or were

relied upon for support for reforms (Table 4-3).

TABLE 4-3: Parties in Government and Political Orientation in Italy GOVERNMENT & TERM OF OFFICE

PARTIES IN GOVERNMENT GOVERNMENT’S POLITICAL

ORIENTATION Amato (1992-1993)

Quattropartito coalition composed of: Christian Democrats (DC) Italian Socialist Party (PSI) Italian Social Democratic Party (PSDI) Italian Liberal Party (PLI)

Centrist / Centre-Left, but increasingly technocratic (Christian Democratic / Social Democratic)

Ciampi (1993-1994)

Technocratic government with ad hoc support from: left-leaning former Christian Democrats (DC) Italian Socialist Party (PSI) Italian Social Democratic Party (PSDI) The Net (Rete) Greens (Verdi) Democratic Party of the Left (PDS) Communist Refoundation (RC)

Technocratic – Centre-Left dependent (generally Social Democratic)

Berlusconi (1994-1995)

Pole of Freedoms / Pole of Good Government coalition composed of: Forza Italia! (FI) Northern League (LN) National Alliance (AN) Centre-Christian Democrats (CCD) Union of the Centre (UdC)

Centre-Right (Liberal / Christian Democratic)

Dini (1995-1996)

Technocratic government with ad hoc support from: Democratic Party of the Left (PDS) Communist Refoundation (RC) Italian Socialists (SI) Greens (Verdi) left-leaning former Christian Democrats (DC) former Social Democrats (PSDI)

Technocratic – Centre-Left dependent (generally Social Democratic)

Prodi (1996-1998)

Olive Tree Coalition composed of: Democratic Party of the Left (PDS) Italian People's Party (PPI) Italian Renewal (RI) Federation of the Greens (FdV); Italian Socialists (SI) Democratic Union (UD) Support of Italian Republican Party (PRI) Movement for Democracy/The Net South Tyrolean People's Party (SVP) other minor parties which later merged with PDS Ad hoc support from Communist Refoundation (RC)

Centre-Left (generally Social Democratic)

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Among these parties of the centre-left, the relatively large PDS was particularly important. After

being excluded from government for nearly the entire post-war period, the PDS was determined

to establish itself as a major party and as a credible potential coalition partner, capable of

pursuing fiscally responsible reform without betraying its traditional goals of social equity.

While these centre-left parties disagreed on the extent to which the state should take a leading

role in promoting employment and economic growth, they did broadly agree that the state should

utilise the social welfare safety net and its capacity as a provider of services to support the goals

of equality and protection of the most vulnerable.

During the government of Silvio Berlusconi (1994 to 1995), market liberals and right-leaning

Christian Democrats held power. Assuredly, there were divisions between the liberal and

right-leaning Christian Democratic elements within Berlusconi’s Forza Italia (FI), as well as

divisions between the stateist, Christian Democratic preferences of the ex-fascist Alleanza

Nazionale (AN) and the federalist – and at times separatist – leanings of the liberal Lega Nord

(LN). This divergence in preferences produced debate over the extent to which the state’s social

welfare net should be used to uphold family values and to preserve the status differentials for

retirees and the unemployed versus the state’s role being restricted, deregulating labour markets,

privatising state-owned enterprises, and providing only a residual welfare state with limited

inter-class, inter-temporal, inter-generational, and inter-regional redistribution. Despite

expectations that the Berlusconi government would face tensions over the extent to which it

pursued more Christian Democratic or more liberal policies, the policy preferences of this

centre-right coalition would, nonetheless, be expected to differ markedly from the policy

preferences of the centre-left governments that preceded and succeeded them (Table 4-3).

With this understanding of the power concentration, electoral concerns, leadership styles, and

partisan composition of these five governments and of the likely implications for each

government’s preferred reform approach and content, the dissertation now turns to a closer

examination of the Amato, Ciampi, Berlusconi, Dini, and Prodi governments and the reforms

which they undertook.

THE AMATO GOVERNMENT (6/1992-4/1993)

After the 1992 collapse of Giulio Andreotti’s government in response to allegations of mafia ties

and corruption, general elections were held in April and voters sent a rebuke to the

scandal-plagued ‘governmental parties,’ voting for them in historically low numbers, although

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these parties still won a majority of seats. President Oscar Luigi Scalfaro appointed as prime

minister Giuliano Amato, a Socialist leader who had always been considered an outsider and who

had remained untainted by the political scandals. Amato formed a quattropartito governing

coalition of the DC, the PSI, the PSDI, and the PLI, holding 331 out of 630 seats in the Chamber

of Deputies and 163 of 315 seats in the Senate (Siaroff 2000:312-315). During its brief ten month

tenure, the Amato government was forced to operate in an environment of institutional crisis. As

anti-mafia and anti-corruption investigations indicted increasing numbers of important DC and

PSI leaders and led to the collapse of the DC, the PSI, the PSDI, the PLI, and the PRI, a new

generation of politicians came to power and organised interests lost their long-time patrons. A

vice-chairman of the PSI under former Prime Minister Bettino Craxi, Amato was more involved

in party politics than Ciampi or Dini, but he was, nevertheless, a technocrat and a constitutional

law and economics academic. As members of his cabinet were forced to resign due to corruption

charges, he replaced many of them with non-partisan technocrats and academics (Keating 1999).

Citing the extraordinary political and economic problems facing Italy, Amato was able to

convince Parliament to delegate power to him in the areas of pensions, the National Health

Service, local government, and public-sector employment. This delegated power to use

legislative decrees (legge delega) enabled the government to adopt legislation without

parliamentary approval. Parliament could block these changes, but only by a vote of no

confidence that would topple the government, an action that was becoming increasingly

politically and economically costly, due to the political and financial crises the country was

undergoing (Schludi 2005:113).

While the legge delega enabled Amato to bypass much of the difficulty of negotiating reforms

within a system that had long been conducive to patronage, Amato recognised that he would need

to avoid a public or social partner backlash of a magnitude that would lead Parliament to

withdraw the legge delega or to opt for a vote of no confidence. Within this context of instability,

the Amato government launched a series of talks with the social partners in order to seek their

support for (or at least acquiescence to) reforms and to, thereby, avoid the sort of polarisation or

opposition that would undermine the reform process. Emphasising that without a risanamento (a

‘restoration of health’) of public finances and a rapid and radical reduction of inflation and

interest on the national debt, the prospects were grim for the Italian social welfare system and the

Italian economy in general, Amato undertook reforms of pensions, the collective bargaining

system and wage policy, budgeting for local governments, and the health care system (Negrelli

1997; Negrelli 2000; Radaelli 2000; Ferrera and Gualmini 2000).

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Amato’s Pension Reform

It was widely acknowledged that the Italian retirement system needed to be reformed in order to

bring its growth under control was a particular necessity, but past governments had been

unsuccessful in their efforts. Italy’s population was expected to soon have one of the worst

dependency ratios within the EU, and in 1991 Italy already had one of the highest levels of

pension expenditure (15.3% of GDP), well above the EU average of 9.2% of GDP (Ferrera

1997:233). Benefit levels were highly uneven with replacement rates for some pensions reaching

nearly 90%, while the replacement rate of the minimum pension was only 19% of average

earnings (Castles and Ferrera 1006:177; Mira d’Ercole and Terribile 1998). Benefit and

contribution levels and periods for public-sector employees and for the self-employed were much

lower than for private-sector employees. With only the last five to ten years of work life counting

towards the calculation of benefits, it was not uncommon for workers to underreport (or to simply

not report) their incomes for much of their working years. Finally, generous terms for seniority

(early retirement) pensions and ‘baby pensions’ (public-sector pensions after only 20 years of

service) reduced the stream of social contributions paid into the pension system, while raising the

number of retirees the state pension system was supporting (Ferrera 1996:26). In response, nearly

every Italian government since the late 1970s had attempted reform, but cost-containment efforts

had been blocked by the concerted action of members of the Parliamentary Commission on

Pension Reform, which had connections to all major parties, the managers of the National Social

Security Institute (Istituto Nazionale Previdenza Sociale, INPS), the main social security

organisation and the issuer of pensions, unemployment, and other benefits, and various interest

groups. Some reforms, including the elimination of the benefit ceiling for high-income

individuals, the extension of the defined benefit system to the self-employed, had been passed,

but they actually dramatically raised the costs of the pension system (Castellino 1996:133;

Schludi 2005:111).

In 1992 Giuliano Amato’s government undertook the most significant reform of the pension

system in decades. Using the legge delega powers, the Amato government pursued an emergency

fiscal stabilisation package which included a reform of the pension system. While developing

these reforms, he reached out to the social partners to try to gain their support (or at least their

acquiescence) in order to avoid the paralysing strikes and the polarisation of public opinion that

he feared could arise in response to these reforms and which would derail his efforts to avoid

direct parliamentary involvement in the reforms. Though the government did not engage in

formal concertation with the unions, it did hold informal talks with the unions, in which the

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government presented its proposed reform and its economic projections regarding the likely

collapse of government finances in the absence of reform. Workers opposed the reform and held

wildcat strikes throughout the north, but the three major trade confederations – CGIL, CISL, and

UIL – recognised the need for reform and agreed not to organise national strikes. In exchange for

their acquiescence, however, they did extract some concessions (Baccaro 2002a).

The 1992 Amato pension reform increased retirement ages (from 60 years to 65 years for men

and from 55 years to 60 years for women), increased the minimum number of years of

contributions for pensions, changed the indexing of benefits, increased contribution levels, and

used lifetime earnings, rather than the last 5 or 10 years, as the base for calculating benefits

(Ferrera and Gualmini 2000; OECD Italy 2000:94-95). Initially, the reform had included a

modification of seniority pensions that increased the required number of years of contributions.

As concessions to the unions, the government dropped this change to seniority pensions,

established a 10-year phase-in period for the reform, and exempted workers who had already

accrued fifteen or more years of contributions (Cazzola 1995:55; Baccaro 2002a:416-417).

This reform largely standardised the contribution and benefit levels and the eligibility

requirements for public, private, and self-employed workers, eliminating the preferential

treatment of public-sector workers and the self-employed that had previously marked Italy’s

pension system. By concentrating the costs upon the most privileged and by gradually requiring

them to meet the same requirements as the rest of the workforce, the government was able to

argue that its reform had created a more equitable pension system. The reform also reduced the

pension system’s previous incentives for workers to evade taxes and social contributions by

underreporting their income until the last years of their working life, but to then engage in

free-riding off of taxpayers after retirement. The phase-in of the new rules provided workers with

the time to adapt to the new incentive structure. With this combination of penalties and a

transition period, the government could claim that its reform had improved the fairness of the

Italian system while ensuring that the government either increased its revenues (through

improved tax and social contributions collections) or it decreased its expenditures (through

reduced pensions for those who had failed to pay their full contribution into the retirement system

throughout their full working lives). The greatest impact of these changes would be felt by

public-sector employees, who had been favoured by the old system and who would slowly be

transitioned towards the same requirements and benefit ratios as private-sector workers. In the

short- to medium-term this reform was expected to somewhat reduce pension benefits for early

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retirees and to slow the growth of benefits, while increasing pension fund revenues (Ferrera and

Gualmini 2000; OECD Italy 2000:94-95).

There were, however, two key weaknesses to this reform, and both were a consequence of the

concessions that the government had made to the unions. First, the ten-year phase-in period for

the reform with exemptions for workers who had already accrued fifteen or more years of

contributions would seriously delay the impact of the reform, so that most of its savings would

not be realised for years (Ferrera and Gualmini 2000; OECD Italy 2000:94-95). Second, the

retention of the 35-year threshold for seniority pensions while making other requirements stricter

had the perverse effect of making it financially more advantageous for workers to retire early in

order to take a seniority pension. The Banca d’Italia found that the present value of pension

payments for a worker who retired at age 65 after working for 43 years would be 23% lower than

if he or she had taken early retirement eight years earlier at age 57 with 35 years of work (Banca

d’Italia 1995:17). While not all workers would decide to forego eight years of worklife income in

order to receive an additional eight years of pension income, this option was attractive for

workers in pension schemes with particularly high replacement rates. While these weaknesses

seriously delayed the reform’s goal of stabilising the pension system’s financial balance, created

perverse incentives that made early retirement more attractive, and guaranteed that pension

reform would need to be revisited by subsequent governments, these concessions had assured

union acceptance of the first serious reform to constrain pension costs in two decades and it laid

the groundwork for future reforms (Ferrera and Gualmini 2000).

While Parliament’s granting the Amato government the power to adopt these legislative decrees

(legge delega) had provided the government with a means to overcome its own weakness in

Parliament, the consensual approach and concessions to the unions were vital for avoiding the

sort of industrial action that would worsen the economic crisis, polarise political parties, and

make it more likely that parties in the Chamber of Deputies or Senate would feel the need to

pursue a vote of no confidence in response to the policy (Schludi 2005:113). Amato voiced this

view:

I was aware it was increasingly difficult to build consensus through party channels and for that matter even through Parliament itself; I resorted to the social partners as an alternative channel which, at that time, was more directly in touch with public opinion. In a number of cases, this allowed me to follow a totally new procedure in pushing through my policy measures: I discussed them with unions; on the basis of their total or only partial consent I drafted a text which I then presented to Parliament, and – building on the consensus I had reached out of Parliament – asked for a vote of confidence (Fargion 2000:8).

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Collective Bargaining Reform and the End of the Scala Mobile

Reform of the Italian collective bargaining system and the elimination of the scala mobile (the

automatic indexation of wages to inflation) was also a high priority of the Amato government.

The scala mobile exerted a wage-push effect upon inflation. While competitiveness concerns

exerted a deflationary influence in the tradeables sector (particularly in manufacturing), this

wage-push inflation was strong in the public sector and in the non-tradeables sector, leading to

higher public employment costs and depressed employment in the non-tradeables sector (or at

least fostering a predilection for non-tradeables sector employment being ‘unofficial’). In

addition, the scala mobile was contributing to Italy’s problems maintaining a stable lira, and both

inflation and instability of the lira were increasing the risk premia on Italian debt (and Italy’s

debt-servicing costs). While the Banca d’Italia’s increasing monetary autonomy and the end of

seignorage as a means to finance Italian deficits had reduced inflation, further efforts to reduce

inflation had been hampered by the scala mobile and its wage-push effect upon inflation. As a

result, a reform of Italy’s collective-bargaining system was vital.

Negotiations on this issue between 1989 and 1991 had stalled, but the Amato government

undertook new negotiations in which it emphasised the dire fiscal situation of the government and

the very real prospect that the Italian social welfare system would be endangered if Italy were

unable to meet the convergence criteria and become a member of the Euro-zone. If Italy

succeeded in joining the Euro-zone, it would no longer be subject to the extreme exchange rate

instability and the substantially higher risk premia that were so damaging to the public

finances.101 The Amato government was able to convince the social partners to sign the Tripartite

Agreement of 31 July 1992, agreeing to the formal end of automatic wage-indexation and the

freezing of company-level bargaining on wages until December 1993. In exchange for the

union’s accepting the end of the scala mobile and a temporary moratorium on company-level

bargaining and wage hikes, the government and employers agreed to talks the following year to

develop a new, long-term framework for the collective-bargaining system (Treu 1994; Regini and

Regalia 1997:213-215; Ebbinghaus and Hassel 1999:14-15).

Given Italy’s history of inflation, workers perceived the end of the scala mobile as a serious

threat to their incomes. Many workers were also concerned that unions were ceding a key

101 Euro-zone members could still be subject to differences in interest rates, based on variation in risk premia demanded as compensation for divergence in the perceived risk of default, but membership in the Euro-zone dramatically reduced interest rates for historically high-inflation countries by lowering interest rate risk premia related to fears of devaluation.

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symbol and source of union power. Vast portions of rank-and-file unionists opposed the

agreement and engaged in wildcat strikes. But both the content and the tone of the agreement102

showed a sense of urgency regarding Italy’s economic and financial future. The fact that the

three union confederations signed the agreement over the objections of their own members

demonstrates the Amato government’s success in convincing unions of the seriousness of the

situation (Negrelli 1997; Regini 1997; Negrelli 2000; Ferrera and Gualmini 2000).

Reform of Public-Sector Budgeting and Employment

The Amato government also sought to reform the budgeting process for local governments, one

of the root causes of Italy’s financial problems. Traditionally, the central government financed

localities almost exclusively through grants. Politicians in these localities had no incentives to

save the government any money. They had no control over the raising of taxes that financed

them. Moreover, fiscally irresponsible municipalities were frequently and repeatedly bailed out,

meaning that there was no penalty for such profligacy. Italian accounting did not include these

bail-outs in the annual budget, despite their very real effect on gross debt levels (Bordignon 1999;

Hallerberg 1999). Furthermore, public employment, grants, and the selective application of

regulations had been used as part of the patronage system that ensured votes for the governing

parties, particularly the DC and the PSI. Parliamentary rules were modified in 1989 and then

progressively interpreted and applied in a more restrictive way with the result that parliamentary

amendments regarding budgetary decisions were required to respect the deficit limit (OECD

Economic Surveys Italy 1997:103). In 1990 Law 241/90 sought to make the activity and

functioning of public administration more open, transparent, predictable, and subject to consumer

participation (OECD Economic Surveys Italy 1999:65).

Under Amato the Framework Law was promulgated, and Parliament gave the government special

powers to reform public administration, setting the stage for deeper public-sector reforms in 1993

and 1994 (OECD Economic Surveys Italy 1999:65). Financing of local governments was

reformed, hardening budget constraints for municipalities by increasing their financial autonomy.

By making localities responsible for raising some of the funds they spent and forcing them to

justify tax hikes within their own jurisdictions, the Amato government sought to eliminate the 102 The preamble of the Agreement of 31 July 1992 clearly establishes the perceived need for reform: “In an economic and financial situation which is liable to deteriorate further, exacerbating already considerable weakness and instability, the Government deems it essential to act immediately to check inflation and substantially reduce the national deficit. The aim is not only convergence towards the Maastricht Treaty criteria. It is – as is now manifest – also to safeguard our growth potential, so as not to decline into an uncontrollable spiral which, for years to come, would jeopardise what has been built up by the Italian workforce in recent decades as well as the economic prospects of a large section of the national community.”

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moral hazard problem in municipalities that had previously led to persistent budget overruns

(Bordignon 1999; Hallerberg 1999:19). Decree 29/93 reformed the civil service, seeking to

depoliticise public employees by changing the collective bargaining system so that new labour

contracts would be bargained collectively at the national and local level with the National Agency

for Collective Bargaining (ARAN) representing the state in negotiations, a break with the

tradition of collective bargaining agreements being legislated annually by Parliament, a practice

that encouraged clientelism. A new performance evaluation system was introduced to enable a

shift to merit-based pay. While many of these provisions were not fully implemented until 2001,

this reform was intended to transform Italy’s civil service from a relatively bloated and corrupt

system of patronage to an efficient, modern, and professional civil service (OECD Economic

Surveys Italy 1999:65; OECD 2001:148).

The reform of local government and public-sector budgeting – enabled by the legislative decrees

(legge delega) – and the freezing of public-sector salaries as part of the suspension of the scala

mobile, together with an extraordinarily restrictive budgetary bill trimmed the projected growth of

the deficit by 6.2% of GDP (Radaelli 2000). This tightening of fiscal policy was also aided by a

fortuitous side-effect of the anti-corruption investigations. For decades, political parties financed

themselves with tangenti, rake-offs paid to secure contracts for public works projects and

low-level officials ‘expedited’ development licenses in exchange for a bustarella, an envelope of

cash. As the anti-corruption investigations expanded and disgraced an ever-growing number of

politicians and bureaucrats, public officials were nervous about approving any projects that could

subject them to scrutiny (Keating 1999). As a result, there was a substantial reduction in the

public expenditures that normally would have flowed to public works projects.

Health Care Reform

In autumn 1992 after three years of debates and negotiations, a health care reform was passed that

mirrored the local government and civil service reforms that sought to fix budgets, improve local

responsibility, and professionalise state personnel. Local health units were given greater

organisational autonomy and financial responsibility. No longer run by political committees, they

would be run by a general manager, hired by the regions on the basis of professional

qualifications and with a five-year contract, renewable if performance was deemed acceptable.

Hospitals were required to operate with balanced budgets. Surpluses could be used for

investment or staff development, while deficits would jeopardise their continued autonomy. The

central government would retain overall planning and financial responsibility, and the regions

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would receive allocations from the central government roughly proportional to their populations.

If the regions’ expenditures exceeded their allocations, they would no longer receive bail-outs,

but would be expected to make up the shortfall through increases in taxes, social contributions, or

co-payments. Regions and the local health units’ general managers were encouraged to pursue

innovation in order to contain costs and improve efficiencies in their provision of health care.

The regions and local health units were also encouraged to experiment with contracting out some

services. Starting in 1995 health care consumers would be allowed to opt out of the National

Health Service, either individually or on an occupational basis, with reductions in social

contributions. Many of the measures included in this reform predated the Amato government and

reflect a more general trend toward the reform of the Italian budgeting process and of the civil

service, imposing greater administrative and financial responsibility on the regions and the local

health units, combating the moral hazard problem created by bail-out provisions, and

professionalising a management that had previously been politicised and part of the patronage

system (Ferrera 1995:282-284).

Debate regarding some aspects of this health care reform was intense, despite the attempt to

reduce the politicisation of reforms to the National Health Service by allowing legge delega to be

used. Moves to reduce patronage in the health care system and to professionalise the general

managers of the local health care units were becoming less controversial, due to anti-corruption

scandals, which had focused upon corruption in the administration of hospitals, and due to the

collapse of the DC and PSI, the very parties that had the greatest history of patronage ties to the

health care sector. The elimination of bail-out provisions somewhat troubled the PDS and RC,

since poorer, less-developed regions would face the double disadvantage of generally sicker,

more expensive populations and a lower tax base, although they were somewhat mollified by

provisions that made some adjustments to the per capita funding mechanism. By contrast the

more liberal parties, particularly the LN, wished to see further measures to ensure fiscal

responsibility and to improve efficiencies, including the introduction of competition among local

health units. The PDS and the RC also strongly opposed opt-out provisions, arguing that

allowing individuals to opt for purely private health insurance would create a two-tier health care

system – one for the privately-insured upper classes and one for the publicly-insured lower

classes – and that private insurers would engage in ‘creme skimming,’ leaving the sickest and

most expensive patients to be covered by a public system that had been starved of resources by

the exodus of the wealthier and generally healthier insurees. By contrast, the LN supported the

introduction of much broader choice and opt-out provisions and wanted the waiting period

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eliminated. Only after extensive negotiations among parties was Amato able to gain sufficient

support for a compromise reform allowing a partial and delayed opt-out, although that

compromise was sufficiently disputed that the PDS and the LN each started a campaign to gain

signatures for national referenda on the repeal of various aspects of the health care system that

each opposed (Ferrera 1995:294).

The reforms implemented under the Amato government did relatively little in the short term to

bring Italy into compliance with the convergence criteria, but these efforts did lay the

groundwork for future reforms. Amato convinced unions and employers of the dire situation that

faced the country. He was able to gain support for the idea that shared sacrifice would be

necessary in order for Italy to be admitted into the Single Currency and to assure the future

viability of Italy’s economy and its social welfare system. The Amato government also

established a pattern of reform that emphasised a consensual, negotiated approach to reform and

an equitable distribution of the burden of adjustment. When the government fell after only ten

months in office, it was not due to any backlash against the reforms, rather it was in response to

the anti-corruption investigations that were dominating the headlines. Amato’s ties to the PSI,

particularly his efforts to defend his one-time mentor, former Prime Minister and PSI leader

Bettino Craxi, undermined Amato’s position. Against the backdrop of a mounting number of

indictments of members of Parliament and the collapse of the DC and PSI (as well as the smaller

PSDI, PRI, and PLI), Amato’s government also fell.

THE CIAMPI GOVERNMENT (4/1993-5/1994)

After the collapse of the Amato government, President Scalfaro appointed as prime minister the

former Banca d’Italia governor, Carlo Azeglio Ciampi. Ciampi formed a government with

non-political technocrats in key roles. Lacking an electoral mandate, operating without a formal

political coalition, and with only a year until elections, Ciampi relied upon the cooperation of

unions and the support of centre and left parties for legitimacy. In response to its very real

weakness, the Ciampi government continued the consensual approach initiated by Amato.

Pension Reform

In 1993 the technocratic Ciampi government introduced minor cost-saving modifications to the

pension system, adding new penalties for seniority pensions and increasing monitoring of

invalidity pension claims. Neither of these reforms fundamentally challenged the ‘acquired

rights’ of workers, and the social partners acquiesced fairly quickly to these measures. A

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somewhat more fundamental change to the pension system was the introduction of a legal and

fiscal framework for second pillar supplementary pensions. With this reform, the social partners

now had the option of establishing supplementary pension funds at the branch or company level

to complement the existing pension system. The government subsidised these supplementary

pensions via preferential tax treatment. Involving both unions and employers’ associations in the

decision-making process and providing them with benefits for their members (supplementary

pensions for workers and a source of long-term capital for firms), this reform provided the social

partners with new opportunities without undermining the government’s existing commitments

(Ferrera 1997:241; Ferrera and Gualmini 2000; OECD Italy 2000:94-95).

Collective Bargaining Reform and the Scala Mobile’s Less Inflationary Successor

In the area of collective bargaining, the Ciampi government continued the consensual approach

pursued by the Amato government, as it honoured the obligations assumed by the Amato

government under the 1992 agreement that suspended the scala mobile. Ciampi government

representatives, the unions, and the employers’ associations met in order to develop “a stable

architecture for incomes policy” (Regini and Regalia 1997:214). The resulting Tripartite

Agreement of 23 July 1993 delineated the new collective bargaining system. The social partners

would meet with the government twice a year “to define common objectives concerning the

expected inflation rate, the growth of GDP and employment” and “to verify the coherence of

behaviour by the parties engaged in the autonomous exercises of their respective responsibilities.”

National industry-level contracts (of two-year duration for wages and four-year duration for other

matters) would adjust pay scales by the expected inflation rate and, in some cases, by the

productivity improvements in the industry. A second set of negotiations, at the company or local

level, would include profitability as a factor in wage contracts. As a concession to social partner

concerns, the Ciampi Agreement included a commitment to changes in labour policies, including

reform of the vocational training and public job systems, and the introduction of grants for job

creation in the Mezzogiorno, but in recognition of the severe fiscal crisis, the social partners

accepted that this commitment would be delayed until macroeconomic and fiscal conditions

improved. Large portions of the union rank-and-file membership continued to oppose the end of

the scala mobile, but despite opposition from the membership and some wildcat strikes, the union

leadership remained committed to an agreement that they believed was necessary to the future

health of the Italian social welfare system and economy (Regini and Regalia 1997:214; Ferrera

and Gualmini 2000:195).

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Public-sector Reform and Privatisation

During its short term in office, the Ciampi government continued Amato’s project of reforming

the public sector. Building upon changes instituted by the 1992 Framework Law, the government

introduced techniques of private-sector management, including service charters, which defined

quality standards for services rendered by all government agencies at the national and local

levels. Under this policy, agencies were tasked with designing their own standards based upon

quality indicators that were set at the national level. By June 1997 almost 7,000 government

agencies, including those delivering gas, electricity, mail, health care, education and pensions

services, had introduced their own service charters (OECD Economic Surveys Italy 1999:65).

The Ciampi government also pursued a serious strategy of privatisation of state-owned

enterprises. These firms had been touted in the past as a means to promote economic

development of Italy, but they had more frequently been used for the purposes of patronage.

Previous governments had sought to reduce deficits and to privatise these inefficient and heavily

subsidised state-owned enterprises that were losing money, but it was only after the collapse of

the patronage-addicted party machines that these privatisation efforts became substantial. Under

Ciampi, about the equivalent of $6 billion in state holdings were sold (Brush 1994:11), reducing

future demands on the Italian fisc and allowing the government to offset the mounting deficit and

debt levels. While these reforms were justified on the basis of the severity of the crisis and the

need to stabilise government expenditures, it was the collapse of the patronage networks in the

wake of the implosion of the old governing parties that made these reforms possible.

Health Care Reform

Cost containment in the health care system continued along the trajectory that had been

established in 1978 with the introduction of co-payments. After corruption scandals in the health

care and pharmaceutical industries, the Therapeutical Catalogue was revised, assigning all

medications into one of three categories: Class A (essential, relatively inexpensive drugs, usually

for chronic conditions), which were exempted from co-payments; Class B (drugs of proven

therapeutic value), subject to a co-payment of 50%; and Class C (all other drugs), which were not

covered by the National Health Service. In December 1993 co-payments were increased,

deductibles of 100,000 lira (about $65) for high income users were introduced on

pharmaceuticals, diagnostics, and specialised care, and an annual charge of 85,000 lira (about

$55) was instituted to cover general practitioner services. Low-income retirees received 16

vouchers (later raised to 24) to subsidise prescription medication co-payment costs. These

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reforms prompted complaints from the poor about the inconvenience and embarrassment of the

vouchers. The middle and upper classes objected to problems applying the income-test on

benefits and to the shift from guaranteed free care to co-payments for most services without any

compensating decrease in their social contributions. In response, the rules were revised in

January 1994, shifting from an income-based system to an age-based system. Children under ten

years and adults over 60 years were exempted from cost-sharing, and all others were subject to

charges. In response to further complaints regarding the pernicious effect for the poor of this

highly regressive change, means-tested exemptions from co-payments, deductibles, and annual

charges were restored in January 1995 (Ferrera 1995:286-288).

Reflecting on the Amato and Ciampi Reforms

A key aspect of the pensions and the collective bargaining reforms under Amato and Ciampi was

the government’s support for the social partners’ roles in the reform process. Not only were

reforms negotiated with social partners, but the changes in the frameworks of pensions and

collective bargaining systems assured the continued importance of the social partners. The

Ciampi government’s creation of an occupational supplementary pension system resembles the

revised Thomas Law passed by Jospin. Juppé’s original Thomas Law had aroused union

opposition because of the law’s excluding unions from playing a role in administering the new

occupational pension system. Jospin’s reformed Thomas Law and the Ciampi government’s

second pillar supplementary pensions included the unions in the administration of these funds. A

second key aspect of the reform process was the perception that the reforms were ‘fair’ ones,

supporting social equality and not expecting sacrifices from labour while allowing more

privileged groups – public-sector workers and firms – or the state itself to avoid its share of the

burden of reform. The new standards for wage negotiations at the company or local-level were

seen as supporting this ideal of fairness by providing workers with an opportunity to get a share

of company profits.103 Both the targeting of the more generous public pensions system and the

long phase-in period for the Amato and Ciampi pension reforms (with their protection of retirees

and older workers) were also seen as socially responsible and fair because they shifted more of 103 Allowing greater wage differentiation was sold by the government and Confindustria as a measure that would reward workers in more productive sectors and at more profitable firms for their efforts. It was also sold as a measure that would help preserve the viability of firms, particularly in the Mezzogiorno, which could not compete with the growth rates and more industrial profile of firms in the North. At the same time, unions criticised these reforms for rewarding less productive firms by enabling them to avoid paying their workers wages and salaries commensurate to those in more efficient firms. The unions also sharply criticised the reform for its likely consequence of increasing the income gap between North and South. Unions, however, accepted these measures. They recognised the need to join EMU and were somewhat mollified by the Ciampi government’s commitment (later honoured by the Prodi government) to make changes in Italy’s labour policies, including the reformation of the vocational training system and public job schemes, and the introduction of grants for job creation in the Mezzogiorno.

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the burden of reform onto the more privileged workers and because they protected those who

were too late in their working lives to be able to adjust to the new system. This emphasis upon

affirming the role of unions and upon fairness would be largely absent in the Berlusconi

government’s proposed reforms.

THE BERLUSCONI GOVERNMENT (5/1994-1/1995) – REFORM ATTEMPTS

The 1994 elections brought to power a conservative coalition of the liberal and right-leaning

Christian Democratic Forza Italia (FI), the liberal federalist Lega Nord (LN), the stateist,

ex-fascist, right-Christian Democratic Alleanza Nazionale (AN), and two small centre-right

successors to the defunct Christian Democratic party, the Centre-Christian Democrats (CCD) and

the Union of the Centre (UdC). The coalition had won a clear majority in the Chamber of

Deputies, but lacked a majority in the Senate (Daniels 1999:82-85; Siaroff 2000:314-316). It was

only after abstention of four members of the Partito Popolare Italiano (Italian People’s Party,

PPI) that FI founder and businessman Silvio Berlusconi was able to win the vote of confidence in

the Senate and become prime minister. Bolstered by the right’s electoral success and supporting

a liberal policy agenda, Prime Minister Berlusconi and his Finance Minister Lamberto Dini

favoured an abrupt policy of shock therapy to reform Italy’s fiscal and pension system. President

Oscar Luigi Scalfaro, Labour Minister Clemente Mastella, and the LN preferred a gradualist and

consensual approach to reform, but Berlusconi’s preferences dominated the reform process.

Pension Reform

Berlusconi initially tried to convey an image of cooperation, inviting the social partners to

participate in the reform process. This rhetoric, however, was not matched by the reality. When

meeting with the social partners to discuss the government’s economic plan, the social partners

found that the government had included provisions in the legge finanziaria that would essentially

eliminate seniority pensions (early retirement). The use of the legge finanziaria to pursue a

reform completely bypassed union participation in the policymaking process, challenging the

basic tenets of Italian social relations. Unions and leftist parties in Parliament recognised the

need for welfare and pension reform in order to stabilise Italy’s fiscal situation and to maintain

international competitiveness, but they objected to the way in which Berlusconi pursued reform

(Regini and Regalia 1997:215-216).

The government’s pension reform would prove even more objectionable. The proposed reform

increased retirement age to 65 years for all workers; raised the number of contribution years from

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35 years (or as low as 15 to 25 years, but slowly increasing, for public-sector workers) to 40

years, essentially eliminating seniority pensions (early retirement); cut pension payments from

80% of replacement wage to 60% of replacement wage; and started a change of the pension

system to a multi-layered, semi-privatised system. Between the seniority pension provisions of

the legge finanziaria and the general pension reform, the government sought to reduce pension

expenditures by 25% in one year. Whereas the Amato and Ciampi reforms had portrayed the

pain of reforms as a necessary and a shared cost in order to achieve the common goal of Italian

membership in EMU, the Berlusconi government pursued this reform while backing away from

the goal of joining the Single Currency. Instead, the government planned to engage in

widespread privatisations and proposed using the monies from privatisation and pension cuts to

reduce taxes, rather than for the deficit reduction that would be required to enable Italy to join the

Euro-zone and reduce its exposure to the currency fluctuations that were increasing the cost of

financing government debt. The government’s tax reductions were perceived by unions and the

public as benefiting employers and the wealthy while expecting sacrifice from labour with the

vast majority of the burden of adjustment falling upon workers and retirees (Pittruzello 1997;

Regini and Regalia 1997; Ferrera and Gualmini 2000; Regini and Regalia 2000).

The severity of the cuts and the lack of protection for existing pensioners and older workers

threatened to undermine the social rights that the unions considered vital. The unions favoured

smaller cuts and a longer phase-in period to give workers time to adapt. They also proposed

finding alternative sources of funding, including eliminating tax inequalities and cracking down

on tax evasion. Berlusconi’s attempt to “change the unwritten rules of the game that had

regulated the Italian social security system” (Regini and Regalia 1997:216), prompted union calls

for protest. The abrupt and drastic cuts, the lack of protections for retirees and older workers, and

the perception that workers’ sacrifices would be used to line the pockets of businesses and

wealthier individuals unified opposition to the reforms. Public opinion was harshly critical of

Berlusconi’s proposal. Workers staged general and wildcat strikes, especially in the industrial

north, where the LN was based. Pensioners protested nation-wide. The general strike of 14

October 1994 mobilised 3 million participants and the November demonstrations in Rome had

more than 1.5 million participants, making these the largest strikes and protests in post-war Italy.

In response to these protests and strikes, Confindustria, the main employers’ association which

had initially supported the reform, and members of Berlusconi’s own coalition withdrew their

support for the unilateral reform effort (Pittruzello 1997:1612-1618; Levy 1997:254-255; Ferrera

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and Gualmini, 2000:191; Regini and Regalia 1997:216-217; Regini and Regalia 2000:377-378;

Baccaro 2002a:417).

Divisions between Berlusconi and Dini’s hardline stance and the more moderate positions of

Scalfaro and Mastella weakened the government’s ability to push its agenda. With its popular

basis in the north, where strikers had been particularly active, the Lega Nord chose to side with

the unions, breaking with its coalition partners and forming an alliance with the Progressive Party

to defeat the government in a vote on the legge finanziaria. Faced with an unravelling reform

effort and a collapsing coalition, Berlusconi decided to postpone his pension reform plans and

threatened to force a vote of confidence. He hoped that the vote of confidence would coerce the

LN into surrendering its position, since a failed vote of confidence would require new elections.

The LN insisted upon the postponement of the pension reform and the inclusion of the unions in

future negotiations. Threatening to resign, Berlusconi pushed for passage of the legge finanziaria

without the pension reform and offered direct negotiations with unions on pension reform.

Berlusconi met with the unions in late November, pension reform was postponed, and the unions

called off the strikes, but the conservative government had suffered a clear defeat and had had to

limit itself to temporarily blocking access to seniority pensions. Weakened by protests and

strikes, falling popularity, and an increasingly fractious coalition, the Berlusconi government

collapsed soon thereafter (Pittruzello 1997:1612-1618; Ferrera and Gualmini, 2000:191; Regini

and Regalia 1997:216-217; Regini and Regalia 2000:377-378).

In retrospect, the government’s decision to pursue a confrontational approach, despite its own

internal divisions, seems a surprising one. Arguably, it was a matter of leadership style with

Berlusconi’s experience as a businessman but not as a politician leading him to seek to impose a

solution from above. Another possibility is that the upheaval in the Italian political situation led

Berlusconi to misperceive the relative strength of the government and the unions. With a recently

elected conservative coalition in a brave new world devoid of the old major parties, Berlusconi

may have underestimated the divisions within his own coalition and overestimated the

weaknesses of unions, which he believed to be fragmented and weakened by the loss of their ties

to the old major parties. Regardless, the Berlusconi government’s decision to impose from above

a dramatic and abrupt pension reform and an extensive privatisation programme while also giving

tax breaks to the wealthy and to businesses created a unified front among public and

private-sector workers, retirees, older workers, and younger workers, union leadership, union

rank-and-file, and non-unionised workers. This was a mistake which would not be repeated in

the 1990s.

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THE DINI GOVERNMENT (1/1995-5/1996)

In wake of the collapse of the conservative Berlusconi government, Berlusconi’s former Finance

Minister Lamberto Dini came to power. Although he had initially favoured unilateral, shock

therapy pension reforms, Dini had learned from the mistakes of the Berlusconi government. The

harshness of the reforms and the lack of protections for older workers and retirees, coupled with

tax breaks to firms and wealthier individuals, had provoked a united front of union and popular

outrage over reforms that seemed to demand more sacrifice from workers than from business.

The battle over the Berlusconi reforms had also proven useful to the unions, which by using the

conflict “in the name of concertazione” were able to affirm their role in the reform process

(Braun 1996:212). The collapse of the conservative coalition also convinced Dini that he would

have to engage the unions and the leftist parties, especially the large and relatively moderate

former communist Democratic Party of the Left (PDS), in order to pass reforms. Governing with

an unelected, technocratic government, lacking a firm coalition, and dependent upon the votes of

centre and left parties, Dini realised that his government would need to be flexible and

conciliatory. Despite Dini and many in his government coming from the centre-right, his

government survived more than a year with the support of the leftist parties of the PDS, RC, SI,

FdV, and other small parties of the Progressive Alliance, and this success can largely be

attributed to the pragmatic and consensual approach to the development of policies that sought to

rein in Italy’s growing spending, while also paying close attention to the left’s concerns about

issues of social equality (Siaroff 2000:314-316).

Pension Reform

Utilising a strategy of negotiations and concessions, Dini was able to gain the unions’ acceptance

for a wide array of pension reforms. Starting in 2013, pensions would start to switch from the

‘defined benefit’ method (linking pensions to earnings) to the ‘defined contributions’ method

(linking benefits to contributions). Starting in 2008, workers would not qualify for retirement

benefits until they reached the minimum age of 57 years, but they would be allowed a flexible

retirement age of 57 to 65 years. Rules for private, self-employed, and public-sector pensions

were standardised. Finally, the reform instituted restrictions on disability and survivor’s benefits,

including a means test for survivors (OECD Italy 2000:99-101, 172 fn.47; Ferrera and Gualmini

2000:192).

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The Dini reforms resulted in some profound changes in the Italian pension system. A particularly

important innovation was the shift to the ‘defined contributions’ method, which penalised early

retirees and addressed the rather severe problems of workers who under-reported their incomes.

The further standardisation of pensions for public, private, and self-employed workers eliminated

many of the inequalities of the old system, which had greatly privileged public-sector and

self-employed workers with pensions far in excess of their contributions. Means-testing, the

change in the indexation of benefits, and the shift to ‘defined contributions’ also supported the

goal of more closely tying benefits to the state’s ability to finance those benefits. The Dini

government was able to gain the agreement of the unions by allowing greater flexibility in some

of the standards (e.g. the retirement age), by protecting low-income retirees (means-testing some

benefits, rather than just cutting benefit levels), and by deferring the phase-in of the new rules

(OECD Italy 2000:99-101, 172 fn.47; Ferrera and Gualmini 2000:192). As Regini and Regalia

note, the “key condition for obtaining trade-union consensus was, in fact, retention of the

previous pension system as far as more elderly workers were concerned, with the introduction –

total or partial – of a new and more rigorous system for younger workers” (Regini and Regalia

1997:217). Confindustria¸ the main employers association, however, rejected the agreement on

the grounds that the reform was insufficiently radical. Confindustria refused to sign the

agreement, which had been signed by the government and the unions. The government converted

the agreement into a bill, which was approved in Parliament, and the unions submitted the

agreement to a referendum in the workplaces, where it won a majority (Regini and Regalia

1997:216-217; Regini and Regalia 2000:377-378).

Though Confindustria, perhaps disappointed by the proposal’s lack of resemblance to the

Berlusconi plan, rejected the Dini reform, the unions’ acceptance of such a broad array of

measures was possible because of the more strategic way in which Dini pursued reform. Unlike

the Berlusconi effort, Dini’s reform effort avoided fundamentally challenging the existing system.

The government’s inclusion of the unions in the negotiation process helped it avoid policies that

the unions would find absolutely unacceptable, and it prevented unions’ right to involvement

from again becoming an issue, in and of itself. In addition, the government carefully avoided

creating a united front against the pension reform. Protections for older workers and retirees and

a long phase-in period created a divide between the younger workers who would be affected by

the reform and the older workers and retirees who would remain in the old system. The

elimination of remaining differences among the private-sector, public-sector, and self-employed

workers exploited a split between the private-sector workers who contributed more and received

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less than the public-sector and self-employed workers. The shift to a defined contributions

system helped create another divide, this one between workers with a good record of

contributions who were more likely to be unionised and workers with a poor record of

contributions, such as the long-term unemployed, ‘informal’ or ‘grey’ sector workers,

self-employed workers, and part-time workers, who were less likely to be unionised (OECD Italy

2000: 99-101, 172 fn 47; Ferrera and Gualmini 2000:192). With the leadership of CGIL, CISL,

and UIL supporting the reform, the rank-and-file accepted the reform. The preliminary

agreement between the unions and the government was submitted to unionised and non-unionised

workers and retirees for a referendum, ultimately garnering 64% approval, though it

unsurprisingly found much greater support among retirees (91%) than it did among workers

(58%) (Baccaro 2002b:344).

The 1995 reform was a very important step towards ensuring the long-term viability of the

pension system. It was anticipated that in the long term, the reform would keep expenditures on

pensions below 16% of GDP and reduce pension costs by 3% of GDP vis-à-vis the level

projected after the Amato pension reform (OECD Italy 2000 as cited in Schludi 2005:116).

Nonetheless, the very delay in implementation that made passage of the reform possible also

prevented it from improving Italian finances in the near term. Acute budget pressures and

looming EMU deadlines would force the next government to pursue yet another round of pension

reform.

In January 1996, Lamberto Dini resigned as prime minister. President Scalfaro appointed the

social-liberal Antonio Maccanico of the PRI to succeed Dini, but Maccanico was unable to

muster a majority. Scalfaro dissolved Parliament and called an early general election for April

1996 with Dini continuing to serve as prime minister until a new government could be formed.

THE PRODI GOVERNMENT (5/1996-10/1998)

The 1996 elections brought to power the centre-left Olive Tree coalition government of Romano

Prodi. As with Giuliano Amato, Prodi had a technocratic background, but he was also very much

a politician. His coalition included a wide political spectrum, ranging from some of the more

leftist successors of the DC to the large and influential former communists, the PDS. He faced,

however, one very significant problem in Parliament, his coalition had not been able to win a

majority in either chamber. To gain passage of legislation and to withstand votes of no

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confidence, his government was dependent upon the support of the still fairly radical

Rifondazione Comunista (RC) (Daniels 1999:85-89; Siaroff 2000:316-317).

Pension Reform

With a 1995 budget deficit of 7.7% of GDP and a projected 1996 deficit of more than 6%, well

above the 3% maximum required to meet the convergence criteria for Economic and Monetary

Union, Romano Prodi established a high-profile committee of experts, dubbed the Onofri

Commission (Commissione Onofri). The commission developed a reform proposal that

emphasised immediate reductions in pension outlays, including early rather than long phase-in

periods for the reforms adopted by the Amato, Ciampi, and Dini governments, including the

tighter rules for seniority pensions and the shift from defined benefits to defined contributions.

The Onofri Commission also called for a change in the pension system to improve its

inter-generational fairness, the complete harmonisation of pension schemes, thorough reforms of

unemployment benefits and employment policy, rationalisation of the incentives of the health

care system, and a reform of the social assistance system that would introduce a guaranteed

minimum income financed by general taxation (Mira d’Ercole and Terribile 1998).

This pension reform proposal met immediate opposition, particularly from unions, the LN, the FI,

and the RC. The unions argued that the Onofri Commission represented a move towards

technocracy and towards exclusion of the social partners from the reform process, thus

constituting a break from the consensual policymaking style of the Amato and Ciampi

governments, which had included the social partners. Past reforms had hinged upon concessions

to the unions that retirees and older workers be shielded from the reforms. While this had been

justified by arguing that these workers and retirees lacked the ability to be able to adjust to new

rules for retirement, unions also desired this reform because disproportionately large portions of

their membership were older or retired. If older workers were subject to the new rules, the unions

could expect much greater internal resistance to the reforms. The LN and FI had already declared

it would vote against any budget that increased the VAT. The RC opposed any sort of cuts to

pensions or to the welfare state in general. Instead, the RC called for the conversion of the

Istituto per la Ricostruzione Industriale (IRI), a state holding company, into a development

agency for the Mezzogiorno and for the reduction of the work week from 40 hours to 35 hours

(The Economist 1997a:54).

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Prodi recognised that concessions would be necessary to address unions’ complaints and to

overcome the opposition of the RC, whose support was necessary to attain a parliamentary

majority (Ferrera 2006:100). The Prodi government engaged in extensive negotiations and made

concessions on both the reform proposed by the Onofri Commission and in other areas of

government policy. While some progress was made in negotiations with the social partners, the

RC was intransigent, leading Prodi to announce his plans to suspend negotiations and resign. The

crisis was resolved after a few days. After being granted concessions on 35-hour work week

legislation104 and exemptions on seniority pension cuts for blue-collar workers and recipients of

Cassa Integrazione Guadagni funds,105 the RC agreed to an early implementation of seniority

pension reforms. The Dini reform had originally established 2008 as the start year for the

implementation of a minimum age of 57 years to obtain a seniority pension after 35 years of

contributions; the Prodi reform would apply these new rules as of 2002 for private-sector

employees and as of 2004 for public-sector employees. In its final form, the reform made no new

changes to pension benefit calculations, but it did accelerate the harmonisation of pensions,

reducing the differences among public, private, and self-employed pensions. It established a

phased increase in the contributions for the self-employed to 19% and imposed a temporary

freeze on the indexation of higher pensions. Some benefits were subjected to means-testing,

based upon a new index that reflected individuals or families’ income and assets (OECD Italy

2000:99-102).

The RC’s unwillingness to allow cuts to the social welfare and pension systems and unions’

opposition to imposing the new pension rules on older workers could have dealt a fatal blow to

Prodi’s efforts to reform pensions, but several factors contributed to the government’s ultimate

success in passing pension reform. The leadership of the RC had come under pressure from its

own supporters, who were concerned about the implications of the RC bringing down the Prodi

government. The Prodi government was the first elected leftist government since World War II,

and if the RC toppled it, there was the potential that a right-wing government with more

unacceptable policies would replace it. Also, after the end of decades of exclusion from being in

a governing coalition, it would be ironic for the RC to now prove itself fecklessly unreliable,

unable to even support a leftist government (The Economist 1997b:51). As with the RC, the

104 Interestingly, the unions were not particularly thrilled by the RC having achieved a reduction in the work week. While a 35-hour work week had at times been supported by the unions, its introduction by the government was criticised by both unions and employers’ associations as an infringement on the collective bargaining rights of the social partners (Schludi 2005:119). 105 Italian labour law makes it highly difficult for firms to dismiss excess employees. Instead the Italian state provides Cassa Integrazione Guadagni funds to support these workers, who will retain their affiliation with the firm and will not formally be considered unemployed, despite having lost their normal work status.

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unions were forced to seriously consider the likely reforms a new government might pursue if

union opposition helped lead to the Prodi government’s replacement by a more conservative one.

The government’s decision to negotiate with the unions after its initial reliance upon the Onofri

Commission had somewhat mollified the unions. The concessions, particularly exemptions for

blue-collar workers, had addressed some of their objections, even if the unions were still

concerned that allowing the elimination of seniority pensions for older workers would undermine

the unions’ own internal support (Radaelli 2000; Schludi 2005:118-121). Finally, the Prodi

government had undertaken a concerted effort to emphasise the necessity of passage of the reform

if Italy were to have any chance of qualifying for EMU. The message was clear and won

acceptance, even if that acceptance was sometimes grudging; cuts in pension benefits were the

necessary price of admission to EMU membership, and without EMU membership the future

viability of the Italian social welfare system was in doubt (Pitruzello 1997; Ferrera and Gualmini

2000).

In the end, the Prodi reform enabled the government to cut 0.2% of GDP from its expenditures on

pensions from 1998 onwards, helping Italy inch its way towards meeting the Maastricht criteria

(Ebbinghaus and Hassel 1999:19-20; OECD Italy 2000:99-102; Schludi 2005:118-121). While

this was a relatively small amount when compared to the size of the deficit, the reform was

intended to change the trajectory of growth of Italian pension expenditures in the long-run, and

the reform also was intended to send a signal to Europe that Italian debt was being brought under

control and would not pose a long-term challenge to the country’s financial stability.

Employment Policy and Honouring Ciampi’s Commitments

Though budget constraints limited the financial resources that the government could use to

address unemployment problems, the Prodi government was able to honour the Ciampi

Agreement’s commitment that the government would reform labour policy. In launching the

Patto per il Lavoro (Pact for Work) and the Treu Law, the Prodi government loosened labour

market restrictions in order to reduce business’ reluctance to hire workers that they would be

unable to fire if recession started. Addressing issues of unemployment, particularly among

youths and in the Mezzogiorno, the government and the social partners agreed in the Agreement

for Work (Accordo del Lavoro) to dismantle the public monopoly on the system mediating labour

supply and demand, to introduce temporary work, to promote working-time reductions, to reform

vocational training, to introduce grants for job creation in the Mezzogiorno, and to reorganise

public job schemes. A new and experimental Reinsertion Minimum Income scheme was

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introduced to support the locally-administered safety nets for the poor and the unemployed.

Reforms between 1995 and 1997, particularly of the territorial pacts (patti territoriali) and the

area contracts (contratti di area), sought to encourage investment, job placement, and greater

wage and labour market flexibility to promote the creation of new jobs in regions with low

development and high unemployment (Regini and Regalia 2000:378-379; Ferrera and Gualmini

2000:195).

Last-Minute Budget Cutting

The pension reform, coupled with the reforms of local government budgeting, health care, and

public-sector employment, had all improved the fiscal balance of Italy. The dramatic decrease in

the risk premia for Italian debt after its rejoining of the Exchange Rate Mechanism also helped

reduced demands upon the fisc. But in 1996 and 1997 Italy still did not expect to meet the

convergence criteria. In December 1995, the European Council announced that all counties

would be assessed “as soon as possible in 1998” on the basis of “the most recent and reliable

actual data for 1997,” meaning that Italy needed to complete its fiscal adjustment in 1997 rather

than 1998 (European Parliament 1995:annex 1, paragraph 6). Efforts by Lamberto Dini earlier in

that year to propose a delay of the deadline for EMU had been rejected by Chirac and Kohl. In

1996 Prodi and Ciampi voiced the reasoning that Italy might not be the only country with a

deficit slightly above 3% of GDP and argued for a ‘political’ interpretation of the threshold, but

these hopes were crushed by German Finance Minister Theo Waigel’s September 1996 statement

of the German position that “three percent means three point zero” (Ahrens and Ohr 2003:57).

Later that month Prodi met with Spanish Prime Minister José Maria Aznar to try to convince him

to form a southern strategy, whereby Italy, Spain, Portugal, and Greece would work together to

exert pressure to either extend the deadline or loosen the criteria, but Aznar rejected the plan,

stating that Spain would meet the criteria with no difficulties and that Portugal was also set to

qualify. Learning that Italy would be the only state other than Greece to fail to qualify,106

increasingly concerned about talks of a two-speed Europe, and worried about how long failed

first-round applicants might be left in the EMU ‘waiting room,’ Prodi undertook a series of

last-minute efforts to meet the criteria (Chiorazzo and Spaventa 1999:131-133).

Throughout the remainder of 1996 and all of 1997, Prodi, Ciampi at the Treasury, Dini in the

Foreign Ministry, and Vincenzo Visco, who was in charge of tax policy, undertook a massive

106 As Greece was seen as a basketcase, being the only country other than Greece not to qualify would put Italy in unenviable company.

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project of cutting the budget deficit from a projected 4.4 % to 3%. The government implemented

a series of one-off measures, including accelerating the privatisation of state-owned enterprises, a

temporary income surtax (the ‘Eurotax’) that it promised would be repaid in the future, a

temporary freezing of pension and public-employment salaries, deferral of expenditures on

infrastructure, accounting ‘reclassifications’ of certain expenditures and debts, and ‘Treasury

operations’ (Fx Manager 1996; Riley 1996; Tett 1996). With tax increases, improved tax

enforcement, reductions in the cost of debt financing, pension reform, cuts in public employment,

and increased pressure on budgets for local governance, including infrastructure and the National

Health Service, Italy met the criteria (Radaelli 2000; Chiorazzo and Spaventa 1999).

ENDGAME: QUALIFICATION FOR THE EURO

In 1998 Italy was admitted as an inaugural member of the Euro. As shown in Table 4-4, it had

met the inflation and long-term interest rate criteria, although its late re-entry to the ERM meant it

had not fully complied with the exchange rate stability criterion. The general government deficit

ratio was 2.7% of GDP for the reference year 1997, this was forecast to fall to 2.5% in 1998.

Italy’s debt ratio was well above the 60% of GDP target, but its decrease from 125.5% in 1994 to

a projected 118.1% in 1998 was seen as a noteworthy improvement, even if this decrease had

largely been accomplished via non-replicable efforts, such as privatisation of state enterprises.

TABLE 4-4: Convergence criteria compliance in Italy

1991 1992 1993 1994 1995 1996 1997 1998 (projected)

General Government Surplus (+) / Deficit (-), as percent of GDP

-10.1 -9.6 -9.5 -9.2 -7.7 -6.7 -2.7 -2.5

Reference value for general government surplus (+) / deficit (-)

-3.0 -3.0 -3.0 -3.0 -3.0 -3.0 -3.0 -3.0

General Government Debt, As percent of GDP

101.4 108.5 119.3 125.5 124.9 124.0 121.6 118.1

Reference value for general government debt

60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0

CPI inflation, in percent

6.4 5.4 4.2 3.9 5.4 3.9 1.7 2.1

Reference value for inflation rate

4.4 3.8 3.1 3.1 2.7 2.5 2.7 2.7

Long-term interest rate, in percent

13.3 13.3 11.2 10.5 12.2 9.4 6.9 6.7

Reference value for long-term interest rate

10.7 10.7 9.3 10.0 9.7 9.1 8.0 7.8

Exchange Rate Stability

Exited the ERM: 17 September 1992 Re-entered the ERM: 25 November 1996

Sources: For 1991-1995, European Monetary Institute (EMI) 1996, 74. For 1996-1998, European Monetary Institute (EMI) 1998, 153-169. Note: Shaded areas denote violation of the convergence criteria.

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While compliance with the inflation, long-term interest rates, and exchange rate stability criteria

had been the culmination of a series of reforms, Italy’s adherence to the fiscal criteria was

substantially more last-minute and problematic. In its last year, it had undertaken extraordinary

efforts to meet the Maastricht convergence criteria. Italy was widely criticised for engaging in

dubious ‘budgetary fudges,’ and statements by Italian public officials did little to allay these

concerns.107 The reduction of the budget deficit was not, however, purely the result of tricks and

one-off efforts. Between 1991 and 1997, deficits were cut from 10.1% of GDP to 2.7%,

comfortably below the 3.0% deficit ceiling. Italian budgetary fundamentals show a large primary

surplus since 1992 with deficits being largely the result of the rise in risk premia on Italian debt.

While Italy’s meeting of the Maastricht criteria was overwhelmingly accomplished through

measures increasing revenue and while a large proportion of these revenue increases were

attained through one-off measures, its 1997 finance bill indicated structural reduction of

expenditures equivalent to 1.4% of GDP, an increase in permanent revenue (as opposed to

one-off measures, like the Euro-tax) of 1.0%, and a decrease in debt-servicing costs of 1.3%, due

to reductions in the interest rate risk premia. With the reforms of health care, pensions, and of the

central government’s budgetary practices and of the financing of local governments, the Italian

state had made noteworthy steps towards more sustainable finances (Radaelli 2000; Chiorazzo

and Spaventa 1999).

With a projected 121.6% of GDP’s worth of general government debt for 1997, Italy failed to

meet the debt criteria. This did not, however, result in its being excluded from membership in the

Euro. Enforcement of the debt standard was notably weak. The Maastricht Treaty’s convergence

criteria required that government fiscal positions be sustainable, and this condition was violated if

“the ratio of government debt to gross domestic product exceeds a reference value [defined in the

Protocol on the Excessive Deficit Procedure as 60% of GDP], unless the ratio is sufficiently

diminishing and approaching the reference value at a satisfactory pace” (Articles 109j and 104c

of the Treaty establishing the European Community). Of the twelve countries seeking to join the

Euro, only three countries – France, Luxembourg, and Finland – had debt levels below the 60%

reference value. Italy’s debt level was one of the highest of all candidate countries, but nine

countries exceeded the 60% of GDP debt ceiling. With a 1998 debt target of 118.1% of GDP,

Italy was projected to have lowered its debt by 7.4% of GDP since its debt peaked in 1994. By

107 Italian Prime Minister Romano Prodi’s own statements certainly illustrated a cynical attitude toward the accounting rules used to calculate budget deficits: “‘If others carry out window-dressing we can do the same,’ he [Prodi]says. ‘If no-one does then we won't.’ Some L13,000bn of the 1997 Italian budget, a fifth of the total package, is due to come from what are blandly termed ‘treasury operations.’ ‘If the French get away with it, then we can show them a trick or two as well,’ he says with a chuckle” (Financial Times 1996:17).

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contrast, France’s debt had grown by 9.6% of GDP during that time and Germany’s debt had

grown by 10% of GDP (EMI 1998). Though the recession of the early to mid-1990s had not hit

Italy as hard as it had hit many other EU countries, the EMS Crises had devastated Italian

finances with investors demanding higher risk premia on Italian debt in the expectation that the

lira would devalue or that Italy might default on its debt. Admission into the Euro-zone was

expected to largely eliminate the risk premium related to exchange rate risk, a development that

would assist Italy’s efforts to stabilise and reduce its debt. The EMI’s report evaluating

compliance with the convergence criteria noted that Italy had implemented some important

reforms of the pension system, but it also seriously questioned the future fiscal stability of Italy

and emphasised the need for continued reform (EMI 1998:158).

To an extent, Italy could thank Germany’s own weakness for its admission to the Euro-zone. At

the time that the convergence criteria were being drafted, it was Germany that had been the most

insistent that strict fiscal and monetary criteria be used as preconditions for the Single Currency.

Quite simply, the German government, particularly its central bankers who had played a key role

in drafting the criteria, had no desire to see fiscally and monetarily profligate states join the

Euro-zone. The Bundesbank’s own report on progress towards the convergence criteria was

highly negative regarding the sustainability of Italy’s debt, and in his address to the Finance

Committee and the Committee for European Union Affairs of the Deutscher Bundestag,

Bundesbank President Hans Tietmeyer stated, “In the estimation of the Bundesbank, the progress

achieved so far by Belgium and Italy is insufficient to dispel serious reservations about the

sustainability of the government financial situation in these countries” (Tietmeyer 1998). But

Italy was hardly the only country that had engaged in dubious budgetary practices, so accusations

of Italian ‘fudging’ would have opened up the potential for that accusation to be turned against

most other would-be qualifiers.108 With weak finances, with debt above 60% of GDP and still

rising, and with its own financial fudges, Germany was in no condition to strictly police

admission to the Euro-zone in order to exclude monetarily and fiscally profligate states. On 31

December 1998 the exchange rates of the future Euro-zone members were fixed. On 1 January

1999 the Euro was introduced as a financial currency, and on 1 January 2002, the Euro was

introduced as a physical currency in Italy and throughout the rest of the Euro-zone.

108 Italy was certainly not the only country with questionable ‘one-off’ measures. Belgium sold some of her gold reserves; France included a one-off transfer (sometimes referred to as a seizure) of the France Telecom pension fund to public-sector accounts; Germany revalued its gold reserves and reclassified hospital debt, taking billions of DM of debt out of the public sector; and Spain privatised a series of state-owned companies (Dafflon and Rossi 1999). According to the European Monetary Institute, eight of the eleven countries that ‘met’ the convergence criteria had relied upon these one-off measures for one-quarter to one-half of the total deficit reductions for 1997 (EMI 1998).

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The Prodi government survived to see Italy’s approval for membership in the Euro-zone, though

it did not survive long enough to see the introduction of the Euro. His government fell in October

1998 when the old-line communist RC withdrew its support, and a new government was formed

under the reformed communist PDS’ Massimo d’Alema, whose political leanings and policy

preferences were more in tune with the RC’s.

CONCLUSIONS

Over the course of the 1990s, Italy underwent profound political and economic stresses that posed

difficult challenges, but also provided unexpected opportunities. The collapse of the traditional

governing parties placed the Amato, Ciampi, Berlusconi, Dini, and Prodi governments in a

precarious situation without strong, stable majorities, but this breakdown in the old parties also

opened up opportunities for reform, as the old patronage networks likewise broke down. The

financial and monetary stresses the country underwent in response to the global recession of the

early and mid-1990s and the EMS Currency Crises of 1992-1993 increased debt to a devastating

extent. They also provided these governments with an impetus to act and a clear rationale that

could at times be used to sell reforms to social partners and a public which might otherwise have

been highly resistant to reforms that profoundly challenged a social welfare and wage policy

status quo ante that had been achieved through decades of determined effort. The breakdown of

the existing party system and the disgrace of the old political leadership enabled the emergence of

new leaders from outside the political arena. As political outsiders, these new leaders were

arguably much more concerned about implementing profound reforms than they were about their

own careers or the patronage networks of political parties, a circumstance which appears to have

enabled reforms to be pursued to a degree that would not have been feasible under more

governments that were more bound by the traditional concerns about re-election. But despite

these five governments confronting the same difficult political and economic environment, their

policy responses differed markedly, reflecting the perceived strength of their governments, the

leadership style of their prime ministers, and the partisanship of the government’s supporters.

GOVERNMENT STRENGTH, LEADERSHIP STYLE, THE APPROACH TO REFORM, & OUTCOMES

Government strength and leadership style affected the extent to which governments were able to

impose their preferred policies. All five governments were weak or moderately weak, a situation

that would lead the theory to predict that reform efforts would either be called off early as weak

governments found themselves unable or unwilling to overcome opposition to reform or these

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reforms would be approached in a consensual manner and would be moderate in content. Within

this context, differences in leadership style played a very important role in explaining outcomes.

The more collaborative styles of the Amato, Ciampi, Dini, and Prodi led these governments to

pursue formal or informal negotiations with the social partners, particularly the unions,

throughout the development of their reforms. As part of that consensual approach, they made

concessions that would enable them to gain the support (or at least forestall the open opposition)

of the social partners. These governments also sought public support for these reforms, selling

them as a means to achieve social justice goals (e.g. fairness, protection of the most vulnerable)

or as a shared sacrifice for shared goals (EMU membership and its stabilising effect on Italian

finances).

Whether it was based upon a misperception of the relative strength and cohesion of his coalition,

a misperception of the relative strength of the unions after the loss of their patronage links to the

defunct DC, the PSI, and PLI, or a matter of a highly dictatorial leadership style overriding the

incentives created by his weak government, Berlusconi pursued a confrontational approach. He

eschewed negotiations with the unions, although he did work with Confindustria. He sought to

minimise unions’ role in Italian social welfare policy by using the legge finanziaria to pass

reforms and by seeking to semi-privatise the pensions system. In addition to seeking to minimise

unions’ role in policymaking then and in the future, his reform packages included no concessions

to address their concerns and instead compounded the perceived regressiveness of his reforms by

not only making across-the-board cuts for existing retirees, but by cutting taxes upon businesses.

Instead of shared sacrifice for shared goals, Berlusconi’s goal was seen as a raiding of the

pensions on behalf of the wealthy.

The difference in approach between the Berlusconi government on the one hand and the Amato,

Ciampi, Dini, and Prodi governments was not just a matter of policy preferences leading to

different reform approaches and content. Lamberto Dini had been Berlusconi’s Finance Minister

and had favoured many of the reforms pursued by the Berlusconi government, but once the

Berlusconi government fell and Dini rose to prime minister, he pursued a course that was more

consensual in approach and that made concessions to the unions and the centrist and leftist parties

upon whom he relied for a majority in parliament.

The chapter underscores the importance of leadership style in a government’s selection of its

approach to reform. The leadership styles of Bérégovoy, Balladur, Juppé, and Jospin in France

and of Amato, Ciampi, Dini, and Prodi in Italy reinforced the predictions regarding how

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perceived government strength would affect the government’s approach to reform. Berlusconi’s

more hierarchical or ‘dictatorial’ leadership style and the relative weakness of the government ran

counter to each other. Governmental weakness was a factor that led other leaders to pursue more

cautious, consensual approaches to reform and to seek reforms that were more moderate in

content. Berlusconi’s preferences for a more hierarchical style and the impact of this preference

on the reform process show that it is necessary to consider leadership style in addition to factors

related solely to government strength when seeking to predict a government’s approach to reform.

The chapter also underscores the importance of approach for the content and distributional

outcomes of reform and for the response to and ultimate success or failure of the reforms. The

more consensual approach and the inclusion of side-payments and concessions enabled the

Amato, Ciampi, Dini, and Prodi governments to gain the support (or at least the acquiescence and

relative silence) of political parties and social partners. Without this support (or acquiescence),

passage of the reforms would likely have been substantially more difficult. While protests or

wildcat strikes did occur in response to some of these reforms, the support or silence the PDS,

RC, and union leaders reduced the extent to which reform opponents were able to unify and

mobilise. By contrast, Berlusconi’s more confrontational style and lack of side-payments and

concessions assured the alienation of political parties and social partners and the mobilisation of

their members.

PARTISAN ORIENTATION, THE CONTENT OF REFORMS, AND DISTRIBUTIONAL IMPLICATIONS

Common economic and fiscal pressures confronted governments of the Left and the Right.

Despite these common pressures and despite these governments pursuing the same goals of

cutting budget deficits and constraining the long-term rise in social welfare costs, the partisan

orientation of the governments and their supporters produced reform efforts with discernibly

different distributional effects.

The social welfare reforms of the centre-left Amato and Prodi governments and the centre-left

supported Ciampi and Dini governments focused upon constraining costs and increasing

revenues, but the ways in which this was done could frequently be justified in terms of social

justice. Amato and Dini’s efforts to standardise the public, private, and self-employed workers’

pension systems reduced benefit ratios and increased retirement age and number of years of

contributions for public-sector and self-employed workers, two groups which had previously

benefited from much more generous terms and which could be cast as undeservedly privileged

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under the old pension system. Amato’s increase in the number of years of working life used to

calculate the basis for pensions, Ciampi’s addition of penalties for seniority pensions and

monitoring of invalidity pensions, and Dini’s shift of the pension system from a defined benefit

system to a defined contribution system put the burden of adjustment on workers considering

early retirement or fraud (i.e. false invalidity claims or underreporting their incomes to avoid

paying higher taxes and social contributions). With these changes, incentives were realigned with

workers being made aware that they would pay in the form of lower pensions in retirement for

their decision to retire early, claim invalidity benefits while still able-bodied, or dodge taxes. If

workers responded to these incentives by working until the standard retirement age and by

declaring their full incomes (or at least more of their income), the pension system would benefit

from increased revenues. If despite the change in incentives workers chose to retire early, falsely

claim disability, or underreport their incomes, the pension system would benefit from decreased

expenditures on these individuals. Regardless, these reforms reduced free-riding and preserved

higher benefit levels for those workers who did ‘play by the game’ and pay their full share of

social contributions throughout their working lives. Prodi’s more modest pension reforms mostly

concentrated upon accelerating the implementation of Amato, Ciampi, and Dini’s pension

reforms. This placed more burden of adjustment on older workers, who had previously been

allowed to continue to operate under the old pension rules, but exemptions for blue-collar

workers with long work histories and for the not-quite-unemployed recipients of Cassa

Integrazione Guadagni funds protected those workers who were most vulnerable. The other

aspects of Prodi’s pension reform increased contribution rates for the self-employed, who had

historically paid lower rates than had been paid on the salaries of private-sector and public-sector

workers, once employer and state contributions were included in the calculation. Prodi’s

temporary freeze on the indexation of higher pensions and the subjecting of some benefits to

means-testing were intended to quickly reduce state expenditures in order to help Italy meet the

convergence criteria’s deficit ceiling, but these cuts still placed the burden of adjustment on more

‘privileged’ individuals while maintaining the safety net for those who were in a more financially

precarious situation.

The reforms of the collective bargaining system under Amato and Ciampi led to a temporary

freeze in wages and to the replacement of the scala mobile with a new collective bargaining

system that was expected to slow the increases in wages and allow greater wage differentiation,

reflecting industry productivity and profitability in the company or region. While unions had

agreed that reducing the wage-push inflation of the scala mobile was important for the

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stabilisation of Italy’s financial situation and the government’s efforts to join EMU, these

measures did fall more heavily on lower-income workers. Unions, however, accepted these

measures. They recognising the need to join EMU and were somewhat mollified by the Ciampi

government’s commitment (honoured by the Prodi government) to make changes in Italy’s labour

policies, including the reformation of the vocational training system and public job schemes, and

the introduction of grants for job creation in the Mezzogiorno. While the promised side-payment

of state policies to promote growth in employment were consistent with the social justice goals of

the left, the collective bargaining reforms as a whole were more consistent with the sort of

principles favoured by liberals. Though training as economists likely informed Amato and

Ciampi’s preferences for a liberal reform of the collective bargaining system, the reform’s

rhetoric and side-payments focused upon more social values and goals, including the continued

viability of the social welfare system and improvements to the job skills of the unemployed.

The reforms of the right-wing Berlusconi government included across-the-board cuts in pension

benefits for existing retirees, dramatically sped up the increase in retirement ages and the number

of years of contributions, and sought to transform Italy’s pension system into a multi-layered,

semi-privatised system. Instead of these cuts in benefits and increases in revenues being used to

pursue the broadly-supported goal of reducing deficits to enable Italy to join the Euro-zone, the

proceeds were to be directed towards cuts in taxes on businesses and the wealthy. While cuts in

taxes on businesses would arguably have been conducive to economic growth that would have

increased employment, the policy as a whole was seen as directing resources from the most

vulnerable populations to those who were among the most comfortable. The across-the-board

cuts in pension benefits for existing retirees did somewhat maintain income differentials among

retirees, a result consistent with Christian Democratic preferences for policies that maintain

traditional social order and status differentials. The plan to semi-privatise the pension system and

the use of the proceeds from retirement system cuts to finance reduction in business taxes were

more broadly consistent with the policy preferences of market liberals. Regardless, the difference

in ideologies between the leftist or left-supported Amato, Ciampi, Dini, and Prodi governments

and the more market liberal centre-right Berlusconi government produced reforms with markedly

different distributional effects.

The pattern of reforms in Italy throughout this period highlights the role played by economic

crises and by common goals. While particularly sharp economic extremis and common goals

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may provide an especially strong impetus for reform, they are no guarantor of results. The

government’s perceived strength, leadership style, and policy preferences shape the approach to

and the distributional content of reforms, and this combination of approach to and content of

reforms has a profound impact on the likelihood that a reform will succeed or fail. Successful

reforms were carried out in a consensual manner and produced reforms that reflected the partisan

orientation of the government’s supporters, but did so in a moderate manner, including

concessions to reform opponents and emphasising shared sacrifice for common goals. Reforms

failed when they were pursued in a confrontational manner, when the reform package eschewed

concessions that might soften the more pernicious effects, when reforms ceased to be pursued for

common goals, and when the reform was seen as benefiting privileged populations at the expense

of sacrifice from more vulnerable populations.

With this understanding of the development of events in France and Italy, countries which appear

to conform well with the theory’s predictions, the dissertation now turns to the apparently deviant

case of Germany, where a government’s approach and the distributional implications of its

reforms appear to run contrary to the theory.

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CHAPTER FIVE

GERMANY: THE POST-UNIFICATION HANGOVER

INTRODUCTION

At the time that the Maastricht Treaty was being negotiated, Germany expected to have little or

no difficulty meeting the convergence criteria, which it had demanded as a precondition for any

state seeking to join the Single Currency. By the time that compliance with the criteria was being

assessed, Germany found itself in a very different position. The unification of Germany had been

unexpectedly expensive. The difficulties of unifying two quite disparate economies were

exacerbated by the global recession of the 1990s, and both unification and recession complicated

German efforts to address the long-term problems of an ageing population and rising

unemployment. The combination of these stresses brought Germany out of compliance with the

Maastricht Treaty’s fiscal and inflation criteria. As a result, the government was forced to come

to the harsh realisation that Germany’s qualification for the Single Currency was in doubt. As in

France and Italy, the German government found itself in the politically difficult position of

needing to tighten fiscal policy at a time of slumping economic growth and high and persistent

unemployment. But despite resembling France and Italy in terms of facing difficulties meeting

the convergence criteria, the German government’s reform efforts followed a pattern markedly

different to those seen in France and Italy.

Part of the divergence between the pattern seen in Germany and the pattern seen in France and

Italy can be explained by Germany being governed by a centre-right/liberal coalition throughout

the entire period, whilst France and Italy had both centre-left and centre-right governments during

this time, but the differences go beyond this. In France and Italy, centre-right governments

tended to pursue reforms more regressive in their distributional effects and more confrontational

in their approach when they had relatively large, stable majorities and distant elections.

Centre-right governments in these two countries pursued more consensual reforms that were

moderate or relatively progressive in their distributional effects when they had more precarious

majorities and when elections were expected in the relatively near future.

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The German reforms, however, followed the reverse pattern. Between 1991 and 1994 Chancellor

Helmut Kohl’s coalition of the centre-right Christian Democratic Union/Christian Social Union

(Christlich Demokratische Union / Christlich-Soziale Union, CDU/CSU) and the liberal Free

Democratic Party (Freie Demokratische Partei, FDP) had a large majority. Surprisingly, at a

time when it had a strong mandate to rule and a secure grip on power, this centre-right

government periodically cooperated with the opposition Social Democratic Party of Germany

(Sozialdemokratische Partei Deutschlands, SPD) in order to adopt fiscal and social welfare

policy reforms that were largely consensual in approach and fairly social (progressive) in their

distributional effects. When the 1994 elections returned the Kohl government to power with a

narrow majority and little claim to a mandate, it did not pursue a cautious tack in response to its

weakened position. Instead between 1994 and 1998 the Kohl government’s fiscal and social

policy agenda was much more confrontational in its approach and more regressive in its

distributional effects.

These observations raise questions regarding why the Kohl government acted in apparent

contradiction to the pattern seen in France and Italy during this same period. Specifically, this

apparent anomaly evidences itself both in terms of the expected approach to reform and in the

expected content of reform. This raises two questions:

1. Why did Kohl’s government behave in a consensual manner during the 1991-1994 period when it was relatively strong but behave in a confrontational manner during the 1994-1998 period when it was in a weaker position? Both the theory presented in Chapter 2 and the examples of the French and Italian cases would suggest that it would behave in a more confrontational manner when it was strong and in a more consensual manner when it was weak.

2. Why did Kohl’s centre-right government pursue reforms that were more social (progressive) in their redistributive effect during the 1991-1994 period when its strong majority and mandate would suggest that this government would have pursued a more business-friendly and less social reform course? And why did it later turn to more regressive reforms after its majority and mandate were weakened by poor election results? Again, both the theory presented in Chapter 2 and the examples of the French and Italian cases would suggest that this centre-right government would be relatively consistent in its preference for a more business-friendly and less social policy agenda, but it would be better able (and more likely) to pursue such an agenda when it was strong.

The explanation for this divergence in the patterns of reform lies in the differences in the internal

structure and relative ideological cohesion of the countries’ parties. In France the major parties

were relatively ideologically uniform with clear differentiation between right and left. In Italy

after the collapse of the DC and the PSI in wake of the anti-corruption investigations of the early

1990s, the number of parties increased dramatically, but most of these parties were clustered

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either on the left or the right with relatively sharp policy differences between them, although

some of the small successor parties of the DC straddle the ideological divide and have been

somewhat fickle allies in centre-left coalitions.

In Germany by contrast, the two largest parties – Kohl’s centre-right CDU/CSU and the

centre-left SPD – are both Volksparteien (mass parties) with business, trade unionist, women’s

and youth wings. Particularly in the late 1980s and the first half of the 1990s some of the wings

within each Volkspartei differed substantially from each other in regard to their social and fiscal

policy preferences. As a result the more social wings, namely the trade-unionist, youth, and

women’s wings, often shared more of their policy preferences with their counterparts in the other

Volkspartei than they did with their fellow party members from the business wing. As the

balance of power within the CDU/CSU and between the CDU/CSU and the liberal FDP shifted,

different policy agendas were pursued, despite the apparent continuity in which parties were in

government.

Thus, Germany’s pattern was distinct. As we shall see in this chapter, as the balance of power

between wings of the CDU/CSU shifted in the 1990s, the government’s policy preferences and its

approach to reform also changed. During the Kohl IV (1991-1994) period, the trade unionist,

women’s and youth wings were dominant as they generally had been since 1982 when Kohl’s

CDU/CSU-FDP coalition first took power. While most policies were developed within the

CDU/CSU-FDP governing coalition, when the government turned to fiscal reform, particularly

social welfare policy reform, the trade unionist, women’s and youth wings in the CDU/CSU

pushed for agendas that were more social than would have been possible if the FDP and the

business wing of the CDU/CSU had been dominant. After the 1994 Bundestag election returned

the CDU/CSU-FDP to government with a reduced majority and in wake of Land-level elections

that favoured the FDP, the business wing of the CDU/CSU and the liberal FDP were in the

dominant position in government. And after the FDP’s marginalisation on several significant

social welfare reforms in the 1991 to 1994 period, the business wing of the CDU/CSU and the

FDP, led by new, more assertive and more strongly market-liberal politicians, were determined to

change fiscal and social policy in a more market-liberal, business-friendly direction. Although

the CDU/CSU-FDP government had a precarious majority during the Kohl V (1994-1998) period

and although their reforms were somewhat moderated by their need to retain support in the

Bundestag from the social wings of the CDU/CSU, the FDP and the business wing of the

CDU/CSU undertook a confrontational approach to a business-friendly social welfare and fiscal

reform agenda that brought the government into conflict with the SPD and the unions.

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In the end, it was the capacity to create extra-coalitional alliances and it was the changes in which

party wings were in ascendance that account for Germany’s apparently anomalous reform pattern.

This difference in the party structures and the importance of the balance of power within the

CDU/CSU and within the governing coalition explain why the centre-right Kohl governments’

policy preferences appear less stable than would otherwise have been expected. These factors

also explain why the centre-right Kohl governments’ policy preferences and approach to reform

appear inconsistent with the general trend of centre-right governments in France and Italy during

this same period.

In order to demonstrate my argument, this chapter first turns to a brief overview of the German

economic context which provided the impetus for reform during the 1990s. The chapter then

focuses upon the institutional and political context and how these factors affected the

governments’ decisions regarding their approach to reform. The next section discusses the

political party system, the changes to the parties over the course of the 1990s, and the

implications of these factors for the policy preferences of the Kohl governments. The chapter

then turns to a brief consideration of the pre-unification Kohl III government,109 followed by a

detailed examination of the reforms undertaken by the Kohl IV and Kohl V governments.

THE IMPETUS FOR REFORM

At the time that the Maastricht Treaty was negotiated, Germany appeared to be in an excellent

position to meet the convergence criteria. It had a strong, stable currency that was the anchor of

the European currencies in the Exchange Rate Mechanism. With the Bundesbank’s strict

monetary policies, Germany anticipated no difficulties meeting the inflation and long-term

interest rate criteria. Germany’s fiscal situation was healthy and expected to be stable for the next

decade. In light of these circumstances, Germany was expected to easily meet the convergence

criteria. Indeed, it was Germany that had strenuously insisted upon conditions, including a new

central bank that resembled the Bundesbank in structure and mission and upon strict fiscal,

109 Because unification was such a massive project, there is the potential that outside observers might expect that the “all-German project of unification” was undertaken in a non-partisan manner and that any signs of extra-coalitional bargains during the immediate post-unification Kohl IV period might be the product of a decision to depoliticise policy in the name of unity. Under such a logic, the more conflictual policy course of the Kohl V period might be considered a return to normalcy with the more collaborative Kohl IV period being the anomaly. I disagree with this interpretation of events. Instead I would argue that the pattern of generally consensual bargaining during the Kohl IV period largely continues an older pattern of reform that was followed by the Kohl III government (as well as prior to that). Furthermore, it was at the end of the Kohl III period that unification took place and many of the decisions undertaken at this time helped create the economic problems to which the Kohl IV and Kohl V governments were responding. To support the argument regarding continuity in patterns of reform and to lay the groundwork for understanding the economic problems of the 1990s, some of the key reforms and unification-related decisions of the Kohl III period will be given somewhat greater attention than the pre-1992 economic policies of France and Italy were given.

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monetary, and exchange rate criteria that would presumably ensure a currency that was “so stark

wie die Mark” (“as strong as the Mark”) in Finance Minister Theo Waigel’s words (BMF 1996).

As a result, Germany was expected to not only be an inaugural member of Economic and

Monetary Union, but to also act as the de facto enforcer of a strict interpretation of the

convergence criteria.

Germany had achieved this enviable position after a series of fiscal and social welfare reforms in

the 1980s that were undertaken in response to a precipitous rise in unemployment, inflation, and

budget deficits during the stagflationary economic crises of the 1970s. In October 1982 Helmut

Kohl utilised FDP unhappiness with Helmut Schmidt’s economic and foreign policies to topple

Chancellor Helmut Schmidt’s SPD-FDP government in a vote of no confidence. Throughout the

1980s the Kohl government was able to claim credit for the successful passage of several

important, though not revolutionary, reforms in the areas of unemployment and early retirement,

survivors’ benefits, child-rearing credits, and family policy. More extensive reforms were passed

in the areas of health care and pensions after the 1987 federal elections returned the Kohl

government to power for its third term.

Unification

Chancellor Kohl promised a quick and easy integration of the Neue Länder, the ‘new states’ of

the former German Democratic Republic (GDR). He assured East and West Germans that the

asymmetric exogenous shock of German unification would be easily overcome with the strong

economy and sound fiscal institutions of the Federal Republic of Germany (FRG) providing the

necessary motor for a second Wirtschaftswunder (‘economic miracle’). He argued that this would

be possible without any need for increases in taxes or cuts in expenditures, and he promised that

there would be prosperity and a blühende Landschaft (blooming landscape) in the Neue Länder

within five to ten years (Walker 1992:359-360 and UBS International Finance 1990:3).

Unfortunately, these expectations proved to be excessively rosy. First there was a profound (and

perhaps somewhat wilful) underestimation of the difficulties that would be involved in

transforming the GDR’s command economy and integrating it into the FRG’s social market

economy.110 Second and more significantly, the Kohl government made some early decisions

110 The GDR had been the strongest economy in COMECON, but its apparent strength masked profound weaknesses. Productivity levels were only about one-third of the FRG’s. Many firms suffered from antiquated equipment, insufficient capitalisation, excessive staffing, and management who were ill-trained for adapting to and competing in a market economy. Production, particularly in the chemical industry, one of the GDR’s most important sectors, was highly polluting and in violation of the FRG’s environmental standards. The transportation, communications, and

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regarding unification that were politically and electorally convenient, but which proved

economically disastrous.111

Developed, adopted, and implemented under intense time pressure, the critical details of German

Economic and Monetary Union embodied a shock therapy approach to reform with the

expectation that the Federal Republic’s strong institutions and economy could essentially be

seamlessly transferred to the Neue Länder. The key provisions were:

1. an institutional transfer that extended virtually all of the Federal Republic’s legal and organisational framework to the East,

2. the quick introduction of the Deutschmark to replace the GDR’s Ostmark, and

3. massive but temporary fiscal transfers to provide a ‘jumpstart’ for the Neue Länder

Under the principle of ‘institutional transfer,’ the Grundgesetz (the Basic Law, Germany’s

‘constitution’), West German law, and the entire organisational framework of the FRG replaced

the GDR’s laws and institutions, dramatically transforming the role of government in society and

the economy throughout the Neue Länder. The FRG assumed responsibility for the social

welfare system, providing pensions, health care, unemployment and disability insurance, and

low-income assistance to the residents of the Neue Länder. Subsidies and price ceilings on

housing, food, energy, transportation, and other necessities were phased out. State-owned

property was privatised by the Treuhandanstalt (Trusteeship Agency). To bring the Neue Länder

into compliance with FRG regulations and standards, the federal government implemented a

wide-ranging set of programmes in the areas of modernisation of transportation, communications,

and energy infrastructure, environmental clean-up, and research and development.

When the Deutschmark replaced the East German Ostmark, a set of conversion rates was chosen,

despite the Bundesbank’s objections, that were far more generous than would have been expected

energy infrastructure was obsolete and in disrepair. The GDR had very low debt levels, but its population was older than the FRG’s population and the state did not have the financial reserves to meet its pension and other social obligations. A particularly prescient analysis of the fiscal implications of unification for East Germany was presented in an August 1990 forecast by the GDR’s last Finance Minister, Walter Romberg. His analysis predicted that the legal terms of social union vastly exceeded the resources of the Eastern Länder and would result in a massive increase in public debt. As a result, he asked for a commitment to higher transfers to the East. Most political actors, including the FRG’s Finance Minister, Theo Waigel, knew that the Eastern Länder would not be able to meet the financial obligations of the social union, but the impending elections led them to pressure Lothar de Maizière, the GDR’s head of government, to not pursue these issues in his bargaining demands (Schwinn, 1997:81-83). 111 Many of the more serious mistakes were the result of decisions by Kohl and his government to pursue politically expedient and electorally advantageous policies at the expense of economic pragmatism. As Economics Ministry senior civil servant Otto Schlecht said in 1990, “We deceived ourselves about the size and depth of the restructuring crisis. We gave prominence to the positive elements [of East Germany's economic situation] and forced the negative ones into the background. This was because we wanted people to take heart – and because there was an election campaign” (Marsh 1994:75).

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based on the official exchange rate, the black market exchange rate, or the exchange rate that had

been recommended based upon the relative productivity of the two regions.112 While this

generous exchange rate was popular and beneficial in terms of morale in the East, it would

ultimately prove damaging to the competitiveness of Eastern labour and businesses and to the

government’s fiscal position.

The third key element of unification was the ‘jumpstart’, the initiation of a set of massive

transfers of funds to the Neue Länder to finance the institutional transfer, to fund the agencies

tasked with bringing East German political, economic, and administrative institutions into

alignment with the West, to stabilise the economy, and to provide a safety net during the

transition from a command economy to a social-market economy.

These policies were adopted in the run-up to unification on 3 October 1990 and the all-German

elections of 2 December 1990. While the core principles behind many of these policies were

sound, essential details regarding the implementation of these policies were much more

problematic, ultimately resulting in the loss of competitiveness of Eastern labour, a very slow and

costly privatisation process, low levels of investment, deindustrialisation of much of the Neue

Länder, a massive rise in unemployment in the Neue Länder (Figure 5-1), and a precipitous

decline in growth (Figure 5-2).

FIGURE 5-1: Unemployment rate in Germany, 1970-2000

FIGURE 5-2: Growth rate in Germany, 1970-2000

Source: OECD Labour Force Statistics (MEI), 2010. Note: Vertical line indicates date of unification.

Source: OECD Key Short-term Economic Indicators, 2010. Note: Vertical line indicates date of unification.

112 Wages, salaries, stipends, rents, leases, and pensions were converted at a one Ostmark (OM) to one Deutschmark (DM) rate. Savings, financial assets, and liabilities up to a certain amount (2,000 OM for persons under 15 years of age, 4,000 OM for persons 15 to 58 years and 6,000 OM for those 59 years or older) were also converted at a one to one rate. Deposits accrued after 31 December 1989 by residents outside of the GDR were converted at 3 OM to 1 DM. All other assets were converted at 2 OM to 1 DM. Both the official exchange rate and the relative productivity of the two regions suggested that a conversion rate of 3 OM to 1 DM was appropriate. The black market rates ranged from 5 to 10 OM per DM, reflecting scepticism as to the value of the Ostmark. In the end and over the Bundesbank’s objections, a set of conversion rates was chosen that was much more generous than either the official or black market rates (Heilemann and Jochimsen 1993:61).

0

2

4

6

8

10

12

1970 1975 1980 1985 1990 1995 2000

-2

-1

0

1

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1970 1975 1980 1985 1990 1995 2000

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This transition was seen as a short-term crisis that needed swift and decisive action. It was

expected that this crisis would be followed by a quick turnaround with unification becoming an

essentially self-financing process after a small initial infusion of capital that could be financed by

government borrowing. As a result, the transfer of funds was never fully financed by taxation.

Instead, the government relied on the social welfare system, particularly its unemployment and

pension pillars, and on a variety of off-budget ‘special funds’ which bypassed the normal

ministerial, parliamentary, and administrative analysis and oversight processes for budgets and

which contributed to the substantial rise in German indebtedness (Perotti, Strauch, and von

Hagen 1998; Sturm 1998). The collapse in the East German economy precipitated the

destabilisation of Germany’s social welfare system and social contribution rates, leading to a

massive rise in Germany’s deficits (Figure 5-3) and debt (Figure 5-4). The unexpectedly severe

repercussions of these policies only became apparent over the course of the subsequent Kohl IV

government, and it is these problems that necessitated a series of reforms that continue to this

day.

FIGURE 5-3: Budget balance (as % of GDP) in Germany, 1970-2000

FIGURE 5-4: Debt (as % of GDP) in Germany, 1970-2000

Source: European Commission, Economic and Financial Affairs, AMECO database, 2010. Note: Vertical line indicates date of unification.

Source: European Commission, Economic and Financial Affairs, AMECO database, 2010. Note: Vertical line indicates date of unification.

EXPLAINING THE APPROACH TO REFORM – THE GERMAN CONTEXT

As discussed in Chapter Two and explored in Chapters Three and Four, the theory argues that

greater concentrations of power in the government’s hands and more distant elections enable

governments to feel more confident about their ability to attain their preferred reforms, relying

wholly on their coalition for votes, and about their ability to withstand opposition, to bypass or

overcome potential veto points, and to avoid punishment from unhappy voters. When the reform

leadership feels confident about its ability to impose their preferred reform or when the reform

leadership prefer a more hierarchical, ‘dictatorial’ style, the government is more likely to utilise a

0

10

20

30

40

50

60

70

1970 1975 1980 1985 1990 1995 2000

Debt

Maastrichtdebt limit

-6

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-1

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1970 1975 1980 1985 1990 1995 2000

Budgetsurplus (+)or deficit (-)Maastrichtdeficit limit

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confrontational approach to reform and to pursue reforms that are more sharply partisan in

content.

Government Strength – Size and Stability of Coalition

In assessing their ability to pass reform, governing coalitions will assess the strength and stability

of their coalitions, considering the number of seats held by the governing coalition in the

Bundestag, the level of party discipline within the coalition members, and the number of parties

and degree of ideological cohesion within the coalition.

In Germany in the 1990s, there was substantial variation in the number of seats held by the

governing coalition. With 269 out of 497 seats, the Kohl III government (1987-1991) had a

relatively comfortable majority. The Kohl IV government (1991-1994) held a large majority of

398 out of 662 seats. During the Kohl V government (1994-1998), the coalition held a much

reduced 341 out of 672 seats (Siaroff 2000:273-278).113 In Germany, as shall be discussed below,

the number of federally-viable parties has increased over the last decades, making it more

difficult for the major parties to create a large, stable coalition. While this was not a problem for

the Kohl IV government, it did play a role in the smaller majority of the Kohl V government.114

Government Strength – Party Discipline

Party discipline in Germany is moderate in strength. Half of all Bundestag representatives are

elected via Land-level, party-list proportional representation, while the remainder are elected

from single-member districts under a first-past-the-post voting system.115 Members elected via

direct mandates (from single-member districts) arguably have a greater degree of autonomy than

members dependent upon placement on their party’s list. This autonomy may be attenuated in

some cases if members are concerned about remaining on good terms with the party leadership in

order to have a chance of cabinet appointments in the future or in order to assure themselves of

good positions on the Land-level party list as a safety net in the event that they fail to win a

plurality of votes in their district in future elections.

113 As part of unification, the number of seats in the Bundestag increased from 496 to 656 seats. A quirk of the German electoral system adds extra ‘overhang mandate’ seats to the usual number of seats when a party wins more constituency seats in the first vote of a particular Land than the number of seats it is entitled to according to the proportional allocation it received in the second vote. 114 Though it is beyond the scope of this chapter, this problem has further escalated in the more than a decade since the end of the Kohl V period. 115 For a party to have any representation it must meet the threshold of three ‘direct mandates’ (elections from single member districts) or 5% of the national popular vote for the party.

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Government Strength – Coalition Cohesion

The number of parties and the degree of cohesion of the coalition is also important when

assessing the likely strength and stability of a coalition. Germany’s two largest parties, the

Christian Democratic Union/Christian Social Union (Christlich Demokratische Union /

Christlich-Soziale Union, CDU/CSU) and Social Democratic Party of Germany

(Sozialdemokratische Partei Deutschlands, SPD), have both been large, ‘catch-all’ parties, which

have traditionally included business and social wings that shared more of their values and policy

preferences with their counterparts in the other Volkspartei than with their fellow party members

from other wings or with other members of their coalition. This is particularly true for social

welfare and economic policies, where the social wings of the CDU/CSU and the SPD have

generally shared quite similar policy preferences, while the liberal Free Democratic Party (Freie

Demokratische Partei, FDP) and the business wings of the CDU/CSU and the SPD have also

shared roughly similar policy preferences. At times, this division within the CDU/CSU has led to

fractious behaviour with coalition members preferring to develop reforms outside their coalition.

During the Kohl era, this happened repeatedly, though only with his acquiescence. It is this quirk

of the German system that makes this case an apparently deviant exception to the theory.

Veto Points

Agenda-setting power is vested in the chancellor and in his cabinet, the Bundeskabinett, which is

drawn from the Bundestag. While the Federal President (Bundespräsident) formally has the role

of selecting the chancellor, the position is inevitably filled by the chancellor candidate from the

party which received the largest share of the vote. The chancellor then forms his government

either from his party alone or more frequently as the senior partner in a coalition. Under Article

65 of the Grundgesetz, the chancellor determines and is responsible for the direction of all

government policies, and formal policy guidelines from the chancellor are legally binding

directives that must be implemented by cabinet ministers. Nevertheless, under the principle of

‘ministerial autonomy,’ each minister has authority over ministerial operations and related

legislative proposals without cabinet interference as long as the ministers’ policies remain

consistent with the chancellor’s guidelines. Under the ‘cabinet principle,’ disputes among federal

ministers over jurisdictional or budgetary matters are settled within the cabinet. Delegation of

portfolios among ministers from different parties within the governing coalition and overlap of

issue areas among different portfolios creates checks and balances (‘negative coordination’)

among cabinet ministers and their ministries. The shifting balance of power among ministers

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within the governing coalition is not always clearly evidenced via actual changes in leadership,

but is seen more indirectly as contending ministers get more (or less) support for their agendas

from the chancellor (Scharpf 1997).

When assessing the concentration of power in the government’s hands, the coalition leaders will

consider the strength of potential veto players and the congruence in position between the

reformers and the veto player. For legislation to become law it must win a simple majority in the

lower chamber, the Federal Diet (Bundestag). While governments with a cohesive coalition,

composed of a majority of members of the Bundestag, generally do not find this problematic, a

highly fractious coalition with a very narrow majority or a minority government may find it

difficult to secure the majority needed to pass legislation. Due to the Grundgesetz’s rules

regarding votes of no confidence, rejection of legislation does not precipitate a governmental

crisis.116

The bicameral nature of Germany’s parliament adds a further veto point. The Bundesrat,

Germany’s upper chamber, provides representation at the federal level to the Länder and their

governments. Subordinate to the Bundestag, the Bundesrat does have some veto power vis-à-vis

the government and the Bundestag, particularly in cases where the policy impinges on the rights

of the Länder. The Bundesrat has an absolute veto for any law that affects policy areas for which

the Grundgesetz grants the Länder concurrent powers or for which the Länder have

administrative powers. If the absolute veto is used, a joint committee may be convened to

negotiate a compromise which is then voted upon by both chambers. These

zustimmungspflichtige (approval-requiring) laws originally constituted about 10% of all federal

legislation, but a broad interpretation of the range of legislation affecting Land interests has led to

an expansion of the Bundesrat’s powers, and by the 1990s about 55% of all laws were

zustimmungspflichtig (Schindler 1999:2430 Table 2). For all other laws, the Bundesrat can

invoke a ‘suspensive veto’ which can be overridden by re-passing the law in the Bundestag. A

suspensive veto of two-thirds by the Bundesrat can only be overridden by a two-thirds vote in the

Bundestag. Constitutional changes must be passed by two-thirds of all votes in both chambers,

giving the Bundesrat an absolute veto (Schindler 1999).

116 While the Bundestag can theoretically overthrow the government (that is to say the prime minister and his cabinet), the rules for this require an affirmative vote of no confidence, wherein the members must not only pass a vote of no confidence but also agree on the selection of a new chancellor. Party discipline has generally made this a rare event, and as of Kohl’s time in power, this had only happened twice, although his government had come to power as a result of such a vote of no confidence.

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The Bundesrat is composed of delegates selected by each Land’s governing coalition and the

composition of the Bundesrat can potentially be altered in wake of each Land election.

Consistent with its nature as the provider of representation at the federal level for the Länder and

their governments, the Bundesrat is more likely to exercise its power to block legislation when

the policy is seen as much more disadvantageous to the Länder than to the federal government or

when opposition parties (meaning the parties out of government at the federal level) dominate the

Land governments and hold a majority in the Bundestag. Since Land elections are coordinated

with neither the federal elections nor with each other, the composition and control of the

Bundesrat can potentially change multiple times over the course of a single Bundestag session.

Land elections also provide voters with the opportunity to register their unhappiness with the

federal government, so it is not unusual for the Bundestag and Bundesrat being in the control of

different parties, particularly when difficult economic circumstances or contentious policies

provoke a backlash against the ruling coalition. This tendency is, however, moderated by

political power in many Länder is firmly in the hands of one party or coalition of parties.117 This

discoordination of federal and Land elections does pose some challenges for the Bundestag.

Generally, governments face incentives to pursue expansionary fiscal policy and to avoid painful

reforms in the year prior to elections. In Germany, it is not just the year of federal elections that

is important; this tendency towards electoral cycles can also be seen when there is a particularly

critical Land election (i.e. elections where control of a Land and control of the Bundesrat are near

a tipping point). This tendency towards electoral cycles is even stronger during a Superwahljahr

(a year in which there is a particularly large number of Land and local elections in addition to the

federal elections). When the staggering of elections and the fragility of control over the

Bundestag create an atmosphere of a constant campaign, the incentives to engage in expansionary

fiscal policy and to avoid reform can become particularly pronounced and problematic.

Congruence between the Bundestag and the Bundesrat may be quite low, due to the different

bases of the Bundestag and the Bundesrat and due to the discoordination of federal and state

elections.

The Federal President (Bundespräsident) is a head of state with relatively weak powers. While he

is responsible for the proposal and appointment of the chancellor (Bundeskanzler) as head of

government and in the dissolution of the Bundestag after an affirmative vote of no confidence, his

role in the formation of policy is for the most part limited to a suasive one as an elder statesmen

117 The CDU has been dominant for long periods of time in Baden-Württemberg, Rhineland-Palatinate, Schleswig-Holstein, and Saarland. Bavaria is firmly in the hands of the CSU. The SPD has tended to be dominant in Bremen, Hamburg, and Lower Saxony.

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voicing a vision for the country’s future, rather than any substantive influence over or ability to

obstruct policy.

Unlike France and Italy, Germany is a federal state. The Länder have some

constitutionally-reserved rights which prevent the federal government from legislating in those

areas, although relatively few of these reserved rights relate directly to economic policy or social

welfare spending. A much broader array of policies are subject to Länder intervention via their

representatives in the Bundesrat, as described above.

The German Federal Constitutional Court (Bundesverfassungsgericht) does not play an active

role in policy formation. Its role is generally limited to judging legislation’s conformity with the

Grundgesetz. Particularly in areas regarding the fairness of social welfare and taxation policy, the

Bundesverfassungsgericht has forced the government to revisit its fiscal reforms to make minor

changes, as well as to consider and pre-emptively address the objections that the Court might

raise in response to future reforms. In the end, although the Court can exercise veto power by

striking down certain aspects of legislation, this power is not exercised frequently and it generally

has fairly minor consequences for the overall reform effort. For this reason, relatively little

attention will be paid to the Bundesverfassungsgericht, except insofar as its actions prompted the

government to re-examine and renegotiate an issue.

Though the formal veto players are the only ones which can actually block reform, the German

system also contains informal veto players, who are able to blunt the impact of reform or impose

costs on the government that can, at times, lead it to consider modifying its policy in order to

make it more acceptable to these informal veto players. The Bundesbank lacked any formal role

in the formulation of fiscal or social welfare policy. The Bundesbank did exert indirect influence

over the government’s fiscal policy and the social partners’ wage agreements via its role as an

independent central bank with sole control over monetary policy,118 a strongly conservative

monetary ideology, and a mandate to maintain a stable currency. Any fiscal policy or wage

agreement that was sufficiently generous that the Bundesbank deemed it unacceptably

inflationary risked a Bundesbank response of higher interest rates, causing a contraction in the

money supply that would act as a check upon business investment, economic growth, and

employment. Knowledge of the Bundesbank’s likely response tended to produce restraint by the

118 The Bundesbank retained this power until 1 January 1999, at which point its authority over monetary policy shifted to the European Central Bank as the Euro came into existence as an accounting currency. (The Euro was not introduced as a paper currency until 1 January 2002, but the European Central Bank assumed central bank powers for all Euro-zone countries at the time of the Euro’s inception as an accounting currency.)

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government and social partners.119 There are some clear cases of expansionary fiscal and wage

policies that were undertaken despite the Bundesbank’s expected response, and the

post-unification currency conversion, spending, and wage spree is a particularly striking example

of this. These instances, however, seem to be relatively limited in number and a response to

particularly dramatic external circumstances that led the government or the social partners to act

in so short-sighted a manner.120

Due to the long terms, somewhat limited compétence, and highly specialised academic and

professional training of members of the Bundesbank and the Bundesverfassungsgericht, there was

little or no change in the cohesion of these veto players, but the congruence between these two

bodies and policy makers in the Bundestag and Bundesrat was occasionally strained as the

exigencies of German unification and the turn towards more neo-liberal ideology generated

policies in conflict with the long-standing views of the central bank and Germany’s highest court.

The Social Partners

The social partners have no formal role in the drafting of social welfare, fiscal or economic

policy, except in the area of wage agreements where the Grundgesetz guaranteed the social

119 The Bundesbank played not only an ex post role in limiting the macroeconomic effects of fiscal policy and wage agreements, it also played an ex ante role in constraining government and the social partners by causing them to choose more modest policies and agreements to avoid Bundesbank tightening of monetary policy (author’s interview with David Soskice). Evidence for non-events is always somewhat tenuous, but this observation regarding the Bundesbank acting as a check upon the behaviour of fiscal authorities and wage-setters is generally confirmed by interviews with German central bankers, government officials, and social partners and cross-country studies of the effects of central banks on inflation and of the relationship between central banks and the behaviour of fiscal authorities and wage-setters. 120 The extraordinarily generous Ostmark-to-Deutschmark conversion rate, the massive (and decidedly underfinanced) fiscal transfers from West to East, and the highly expansionary wage settlement of the early 1990s resulted in the Bundesbank sharply raising it interest rates. Arguably the immediate post-unification period was something of an anomaly with the government and social partners acting to protect their interests in the Neue Länder. As will be discussed in greater detail later in this chapter, the CDU was highly concerned about gaining popularity in the Neue Länder in the run-up to the referendum on unification, the March 1990 elections in the Neue Länder, and the December 1990 all-German elections. Western trade unions, moving into the vacuum created by the old East German unions losing credibility and support due to their ties to the communist party and the state, sought to rapidly establish union membership in the Neue Länder by convincing workers that the unions of the old Bundesländer would look after their interests. Though Western employers’ associations were not as desperate to establish themselves in the East as the CDU and unions, the German economy was in a post-unification boom, making higher Western wage settlements more acceptable and they very strongly wished to see Eastern wages rise in order to prevent the Neue Länder from becoming low-cost competitors to firms based in the West. Although the Bundesbank’s response was predictable, all actors knew that it would take some time for these interest rate hikes to take effect, and it seems likely that short-term concerns about establishing a new context (i.e. party support, union membership, a less dramatic wage gap) outweighed longer-term concerns about the likely repercussions of an interest rate hike. Regardless, this short-term opportunism has not been repeated since the immediate post-unification period. While there is no doubt that a strong role has been played by other factors – Maastricht restrictions on federal deficits and debt limiting the government’s ability to engage in expansionary fiscal policy, increasing stridency of the FDP putting pressure on the government’s spending, and recession, deflationary wage settlements in neighbouring countries, and more aggressive leadership within the employers’ associations restricting unions’ ability to get generous wage agreements – concern over the Bundesbank’s expected response has also likely influenced decisions on the margin.

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partners autonomy in setting wages (Tarifautonomie). Unions have claimed that some areas of

social welfare policy fall under the jurisdiction of wage policy, and changes to sick pay, paid

holidays, deferred benefits (pensions), and social insurance (unemployment, disability, and health

insurance) are often negotiated with social partners in order to avoid industrial action. Even if the

German government does not necessarily accept labour’s claims that accrued benefits fall under

the wage autonomy provisions of the Grundgesetz, labour has continued to be deeply concerned

and active on these issues. Furthermore, some policy areas, particularly active labour policy,

need the support of employers and labour in order to succeed. Unions can organise strikes and

protests in response to policies they oppose, an action that can potentially impose costs on

governments. The electorate itself has no formal ability to block reforms, but the threat of

retribution at election time – with protest against reforms (or proposed reforms) as a proxy for the

credibility of this threat – has at times caused governments to attenuate or withdraw their

proposed reforms. Unions can also seek sectoral or branch-level agreements to negate or blunt

the impact of a reform. Employers can reduce the impact of government policy in some limited

areas.121 In recognition of this informal role played by the social partners, the government has

often included them in reform discussions and in the administration of some funds and

programmes. Labour has largely remained hostile towards the prescriptions of neo-liberal

economics and has continued to see the role of the state as a bulwark against the vicissitudes of

economic insecurity. Employers by contrast have been more supportive of neo-liberal economic

ideas, though not to the extent seen in the US or the UK. Over the last decades, there has been a

widening of the ideological spread between the social partners and between unions and the

political parties. As a result there has been a decline in the cohesion of the social partners and the

congruence of unions and governments which favour a more liberal course.

When assessing their ability to pursue a reform agenda, would-be reformers will evaluate the

strength and stability of their coalitions, considering the number of seats held by their coalition

and allies in parliament, the level of party discipline within the coalition members, and the

number of parties and degree of ideological cohesion within the government’s coalition. In

Germany during the 1990s, such an assessment of government strength was more complicated

than in other cases, due to unification-related factors that changed the degree of cohesion within

the governing coalition and the degree of congruence between reformers and potential veto

players.

121 As discussed later, after the government’s 1996 decision to reduce statutory sick pay to 80%, many employers unilaterally decided to ‘top up’ sick pay to 100% in order to avoid conflict with the unions.

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Unification-related Changes in the German Political System

The efforts to meet the convergence criteria occurred within the immediate context of German

unification. Unification did not fundamentally change the Federal Republic’s institutions.122 The

Grundgesetz and FRG laws, regulations, and state institutions were extended to the East with

little or no change. Western political parties, unions and employers’ associations likewise sought

to establish themselves in the East with the intent to replace or subsume any Eastern counterparts

or competitors. Despite unification not altering the number or extent of veto points in the

German political system, cohesion and congruence became more problematic.

First, unification widened the ideological spread of the electorate by adding the 17 million new

citizens of the former GDR. While a plurality of these new voters supported the centre-right

CDU in their first post-unification election, this party preference was fleeting and mostly a

response to Kohl having championed a quick unification with very generous terms for the

economic integration of the Neue Länder into the Federal Republic.123 East Germans had,

however, been socialised in an environment where unemployment and social exclusion were

virtually unknown. As recession hit Germany and unemployment increased markedly,

particularly in the East, the residents of the Neue Länder had much higher expectations than their

Western counterparts regarding the extent of government intervention that was warranted. These

more social preferences of Germany’s 17 million new citizens put pressure on the government

and on all political parties to shift leftwards, and they created political space for more leftist

parties willing and able to fill the vacuum left by centre-left parties – the Social Democrats and

the Greens – which were anchored by their Western supporters to the centre-left.

122 Unification was carried out under Grundgesetz Article 23 which was related to accession, whereby the new Länder were integrated into the FRG’s existing constitution and institutions. In 1948 and 1949 the division of Germany was considered a temporary matter and the Grundgesetz was drafted and adopted as a temporary Basic Law to guide the three Western-controlled Occupation Zones until all four Occupation Zones were free to reunite. The Grundgesetz’s Article 146 was foreseen as the process whereby the four Occupied Zones would negotiate a permanent constitution to govern this united Germany. In the end, Article 23 was used because (1) it was much more expedient to retain existing institutions and laws at a time when the East was seen as increasingly politically and economically fragile and (2) much of the GDR’s leadership was seen as lacking the legitimacy necessary for them to participate in the drafting of a new set of institutions. 123 While Kohl’s desire to pursue a very quick accession of the East into the Federal Republic was likely a pragmatic response to the rapidly deteriorating political and economic circumstances in the East, his decision to pursue highly generous currency conversion and fiscal policy appears to have been more political in its motivation. The East was a region which for religious and class reasons had voted Social Democratic in the pre-1938 and 1945-1949 periods. While East Germans had voted for the end of the GDR and to join the FRG, Kohl was concerned that the citizens of the Neue Länder would favour economic policies much more consistent with the Social Democrats than with the Christian Democrats and the Free Democrats. This concern was heightened by poll results throughout 1989 and early 1990 that showed the CDU/CSU-FDP coalition trailing the SPD. Kohl’s promise of no tax increases or spending cuts for the West and his provision of generous currency conversion and fiscal policy for the East appear to have been calculated to improve his government’s electoral chances. In the wake of these promises and policies, the position of the ruling parties in the polls improved strongly (Kopstein and Richter 1992: 363-367, 373-379).

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Second, a long-standing trend in West Germany further widened the ideological spread. The

increasing globalisation (and Europeanisation) of the flow of goods, services, and capital – and of

labour within the EU – sharpened concerns about competitiveness and sparked the

Standortdebatte (a debate over Germany as a competitive business location), increasing support

for – or at least tolerance of – neo-liberal economic fiscal and regulatory policy. The roots of this

shift can be traced back to the late 1970s and 1980s when stagflation and rising deficits prompted

most advanced industrial democracies to slow or even reverse their expansion of the welfare

state, to privatise state-owned enterprises, and to move towards less regulation of the economy,

but in the 1990s and 2000s globalisation, Europeanisation, and concerns about competitiveness

increased markedly, putting pressure on political parties to move towards the right regarding

social and fiscal policy.

Third, Germany’s party system began a transformation from a traditional ‘two-and-a-half party’

configuration to what could be called a ‘two-and-three-halves party’ configuration, a change that

made it more difficult to form large, stable, and relatively ideologically cohesive governments.

For most of its post-war history, German politics was dominated by the two Volksparteien, the

CDU/CSU and the SPD, with the FDP frequently playing the role of junior partner in a coalition

government. The Greens had emerged in the Bundestag in the 1980s, but their viability as a

durable party at the federal level was in question, Germany in 1989 still essentially seemed to be

a two-and-a-half party system.

After the fall of the Berlin Wall, this pattern began to change. In the first all-German elections

most East Germans voted for one of the two Volksparteien, especially Kohl’s CDU. The Greens

were, however, successful in gaining supporters in the East, becoming the Alliance ‘90/Greens

(Bündnis 90/Die Grünen, B90/Grünen) by allying with many of the pro-democratic proto-parties

that had emerged from the protest movements which had brought an end to communism. The

former communist party of East Germany ousted its hardline communist leadership, publicly

embraced democracy, and became the Party of Democratic Socialism (Partei des Demokratischen

Sozialismus, PDS). Though the PDS did rather poorly in the first post-unification election,124 its

fortunes improved as economic conditions in the Neue Länder deteriorated and as it garnered

votes, mostly in the East, from voters who were increasingly unsatisfied with rising

unemployment and the cuts in health insurance, unemployment benefits, labour rights, and

124 In the 1990 a one-time exception was made to the threshold rule for representation. Parties were allowed representation if they won three direct mandate seats or if they won at least 5% of the party vote in either the East or in the West rather than needing to gain 5% of the national party vote. This exception enabled representation of both the Greens and the PDS in the Bundestag during the Kohl IV (1990-1994) government.

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subsidies for housing, food, and electricity. Though its tarnished reputation as the successor to

the East Germany communist party led to the PDS being seen as koalitionsunfähig (incapable of

being included in a governing coalition, the party filled a gap left in the ideological spectrum that

the centre-left parties were unwilling or unable to fill. The PDS’ existence and growing presence

in the Bundestag reduced the number of members of the Bundestag (Abgeordnete) who could join

in a governing coalition, making it more difficult for the government to form a strong, stable

coalition.

Fourth, Germany’s political parties’ ideology and policy preferences began to shift in response to

pressures exerted by unification and by globalisation/Europeanisation. These pressures did not

exert a uniform influence upon Germany’s political parties, rather they affected some parties

more than others, transformed some parties at an earlier point in time than others, and precipitated

divisions within some parties while leaving others highly ideologically cohesive. Over the course

of the 1990s, the two Volksparteien (the centre-right CDU/CSU and the centre-left SPD) found

themselves increasingly split as their business wings embraced the shift towards neo-liberalism,

while their social wings sought to continue to be advocates for unions, women, the elderly, youth,

and social justice issues as had been their traditional role in West Germany and as was highly

desired by Germany’s new citizens in the Neue Länder. For both of these Volksparteien this

division resulted in a struggle among wings over the party agenda that in both cases eventually

resulted in a rightward shift of the parties on economic issues. In the CDU/CSU this struggle and

shift manifested itself in a shift in the balance of power in 1994. While the social wings of Kohl’s

CDU/CSU in the late 1980s and early 1990s had dominated social policy and had frequently

cooperated with their ideological counterparts in the social wings of the SPD, from 1994 until the

end of the Kohl V government in 1998, power and control over social and fiscal policy shifted to

the CDU/CSU’s business wing and to the FDP. A similar struggle for power and control over the

party’s leadership and doctrine occurred in the SPD, particularly in the first year of Gerhard

Schröder’s SPD-Green government that defeated Kohl in 1998.125 The FDP, long the champion

of the interests of the Mittelstand (small and medium-sized businesses), traditionally considered

itself a social liberal party, favouring deregulation, low taxes, and a modest role for government

125 As in the CDU/CSU, Schröder and his business wing were able to dominate the coalition’s social and fiscal policy agenda, which ultimately led to the departure of Oskar Lafontaine and other more social-leaning members of the SPD. Lafontaine eventually formed a new party, the WASG (Arbeit und soziale Gerechtigkeit – Die Wahlalternative or Work and Social Justice – the Electoral Alternative), which sought to challenge the SPD by calling for a return to the traditional social democratic values and policies that the SPD, dominated by Schröder’s business-wing, had ‘abandoned’. The WASG has since merged with the ex-communist PDS to form The Left. Party (Die Linke.). While Die Linke. is a minor party with relatively low support in the West, it has been accepted as koalitionsfähig on the Land level, most notably in Berlin.

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as a buffer to the market economy. After unification the state took a much more active role in the

economy and in society, as it sought to transform the former GDR into a modern social market

economy and democracy. The consequent rise in deficits and taxes led to a backlash within the

FDP which would make it an increasingly vocal advocate for a market-liberal agenda of smaller

government, particularly after changes in leadership in the mid-1990s. The B90/Greens have not

dramatically shifted their position on social welfare and economic issues. They have supported

some more liberal initiatives to lower tax burdens and government spending and to deregulate the

economy, but only insofar as these policies did not come into conflict their core values of

environmentalism and social justice. The PDS with its strong emphasis on ‘democratic

socialism’ has been the strongest advocate for social safety nets and regulation, leaving the PDS

the sole (but vocal) advocate for a strong role for the state in the economy.

Unification and globalisation have thus wrought changes within the German party system and

within the parties that have made reform more difficult. The ideological spread within parties

increased, due to the addition of Eastern members in the CDU, the SPD, and the B90/Greens and

due to the rightward shift of the CDU/CSU and the SPD’s business wings. The number of parties

usually represented at the federal level increased from three to five, diluting the electoral share of

each party and making it more difficult to form strong, stable governing majorities with only one

or two parties. As a result, it has become increasingly difficult for governments to achieve the

cohesion and congruence that Tsebelis stresses are vital to overcoming obstacles to reform.

Finally, employers and unions each adjusted their positions on various issues in response to the

challenges posed by unification, recession, globalisation and the Standortdebatte (the debate

regarding factors affecting the attractiveness of Germany as a location for business and

investment) and the convergence criteria for the single currency. Changes in leadership within

some employers’ associations prompted a shift towards more liberal policy preferences.

Concerned about the effects of competition on employment and unionisation levels, unions have

accepted some more liberal policies that were previously taboo, but they have resisted a general

shift towards liberalism. As congruence among the governing coalition, employers’ associations,

and unions declined in the 1990s, reform became increasingly difficult.

In addition to declining cohesion and congruence making reform more complicated, unification

exacerbated the pre-existing difficulties of frequent Land elections creating incentives to engage

in expansionary fiscal policy and to defer painful reforms. First, unification expanded the number

of Länder from 11 to 16, increasing the frequency of Land elections. Second, party allegiance

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was weak in the Neue Länder, so election outcomes were much more volatile in comparison with

the established Western federal states, increasing the proportion of elections that could potentially

put control of the Bundesrat in play. In the longer-run these changes have given rise to the

perception that the German political system has become enmeshed in a constant campaign, but in

the 1990s there was a greater focus on 1994 as a Superwahljahr (a year in which federal elections

coincide with a large number of significant Land elections). These large number of elections did,

indeed, make 1994 a turning point in the balance of power among the different factions in Kohl’s

coalition, as well as a turning point in the Kohl government’s approach to and the distributional

consequences of economic reform.

Evaluating the strength of Kohl’s governments is, thus, a complicated matter. With 269 out of

497 seats, the Kohl III government (1987-1991) had a relatively comfortable majority in the

Bundestag, and the Bundesrat was in the hands of Länder controlled by the government parties.

The Kohl IV government (1991-1994) held a large majority of 398 out of 662 seats after the

historic first election of a unified Germany, thereby giving the government some claim to a

mandate for continuing the economic and social policies that had been the focus of the first

all-German election. The governing parties’ loss of control in the Bundesrat after a few months

called into question the strength of that mandate. During the Kohl V government (1994-1998),

the coalition held a much reduced 341 out of 672 seats and the Bundesrat continued to be

controlled by the parliamentary opposition.

TABLE 5-1: Government Strength and Predictions Regarding Reform Approach in Germany

Government & Term of Office

Government Strength Predicted Approach

Kohl III (1987-1991)

Strong fairly large 2-party majority (++) government majority in Bundesrat (+) next scheduled federal elections in four years (+)

Confrontational

Kohl IV (1991-1994)

Moderately Strong large 2-party majority (+++) Bundesrat majority shifts to the opposition in spring 1991 (-) next scheduled federal elections in four years (+)

Confrontational

Kohl V (1994-1998)

Moderate narrow 2-party majority (+) Bundesrat majority held by opposition (-) next scheduled federal elections in four years (+)

Consensual

Note: +, ++ or +++ denote factors that strengthen a government. - or -- denote factors weakening the government. = denotes circumstances with relatively little effect. Government strength is evaluated in terms of the Bundestag (size of size of majority in the Bundestag), Bundesrat (control of Bundesrat by governing parties), party cohesion and discipline, and length of time from beginning of term in office to next elections. Since other veto points were either not as significant in Germany as they were in other countries or were not have likely to have a differential effect upon these governments, they were excluded.

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While it is debatable whether the Kohl III or Kohl IV government was in the stronger position,

both of these governments were clearly stronger than the Kohl V government with its much

reduced majority, little claim of a mandate and not control over the Bundesrat. As noted in Table

5-1, based on the relative strength of these three governments, we would expect the Kohl III and

Kohl IV governments to take a more confrontational approach to reform and to pursue reforms

that were more partisan in content. With its relative weakness, the Kohl V government would be

expected to take a more cautious and consensual approach to reform, and it would be expected to

accept side-payments and concessions that moderate the extent of partisanship of its reforms.

Leadership Style

Over his 17 years as chancellor, Helmut Kohl demonstrated an extraordinary level of flexibility

and pragmatism. While it is traditional for ministers to have a great deal of autonomy in the

formulation of policy specifics, Kohl still had broad control over the general form of the reform.

In response to the successes (or frustrations) of past reform efforts and adjusting to shifts in the

balance of power within his coalition, Kohl would either direct (or provide leeway to) his

ministers as they chose the partners with whom they would develop reform. As a result, it was

not just Kohl, whose leadership style and preferences were relevant. Other key reformers include

Minister of Labour Norbert Blüm, Minister of Health Horst Seehofer, Minister of Finance Theo

Waigel, FDP Secretary General Guido Westerwelle, and Kohl’s would-be successor Wolfgang

Schäuble. Norbert Blüm and Horst Seehofer of the CDU/CSU’s social wing often preferred

extra-coalitional cooperation with the SPD because they could pursue their policy preferences

more easily through negotiations with the SPD than with the more business-friendly elements of

the CDU/CSU and the FDP. During the Kohl III and Kohl IV governments, the social wing of

the CDU/CSU was large enough that it could gain a majority by working with the SPD, while

gaining some moderate CDU/CSU votes via the backing of the chancellor.

During the Kohl V period, power shifted in favour of the business wing of the CDU/CSU and the

FDP. Under the leadership of the market-liberal Guido Westerwelle and Wolfgang Gerhardt, the

FDP became a much more aggressive partner, threatening to break the coalition if it did not have

a greater say in policy. Waigel, Westerwelle, and Schäuble were much less inclined to

negotiations with the social partners, and they preferred to develop social welfare and economic

reforms without consultations outside the coalition. In response, Kohl directed his cabinet

ministers to develop reforms within the coalition rather than supporting extra-coalitional

negotiations. He also gave freer rein to more liberal ministers, including Finance Minister Theo

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Waigel of the FDP, thereby allowing them to exert greater influence over the approach to and the

content of reforms. As a result of these dynamics and as is noted in Table 5-2, leadership styles

countervail the predictions based upon government strength.

TABLE 5-2: Government Strength, Leadership Style, & Revised Predictions for Germany

Government & Term of Office

Government Strength Predicted Approach (based on Government Strength)

Leadership Style Leadership Style’s Effect on Predicted Approach

Kohl III (1987-1991)

Strong

Confrontational Generally Collaborative Countervailing

Kohl IV (1991-1994)

Moderately Strong

Confrontational Generally Collaborative Countervailing

Kohl V (1994-1998)

Moderate Consensual Relatively Dictatorial Countervailing

EXPLAINING THE CONTENT OF REFORM – THE GERMAN CONTEXT

Within this institutional context, Germany’s political parties pursued their policy and electoral

goals. For most of its post-World War II history Germany operated with a ‘two-and-a-half’ party

configuration, composed of the two Volksparteien (large ‘mass’ or ‘catch-all’ parties), the

centre-right Christian Democratic Union/Christian Social Union (CDU/CSU) and the centre-left

Social Democratic Party, and the much smaller liberal party, the Free Democratic Party (FDP).

As a centre-right party, CDU/CSU historically followed a conservative social policy, focused

upon Christian Democratic principles of the state as an upholder of traditional social values, of

the government playing a subsidiary role in the economy, and of the market economy needing to

be combined with social concern. Christian Democratic social policies were premised upon a

status preservation and male breadwinner family model. Christian Democratic governments

pursued pension, disability, and unemployment policies that provided benefit levels pegged to the

work-life income of the breadwinner in a manner that preserved the relative status of individuals

rather than providing equal benefits to all individuals. While economic deregulation and

privatisation have increasingly been favoured by the CDU/CSU, particularly since the 1980s, the

CDU/CSU has generally remained committed to a social market economy.

The much smaller Free Democrats are a liberal party with a strong emphasis on the market

economy, free enterprise, and private property. While it historically supported some social

policies to ameliorate the vicissitudes of the market economy, its interpretation of a social market

generally focused much more upon the market than upon the social. As a result the FDP has been

to the right of the CDU/CSU on socio-economic issues, but their traditional support for civil

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rights, individual liberties and a secular state brought more into accord with the SPD’s positions

on these issues. While the FDP has governed in coalition with the CDU/CSU for more years than

it has governed with the SPD, the FDP’s more social orientation in the late 1960s and throughout

the 1970s did enable an SPD-FDP coalition to govern from 1969 to 1982, until the FDP’s

growing market orientation led to a split with the SPD over social spending levels and rising

budget deficits. Over the course of the 1990s, the FDP turned increasingly market liberal,

particularly after the rise of Guido Westerwelle and Wolfgang Gerhardt to the top of the party

leadership.

The Social Democratic Party historically favoured a greater degree of state intervention in the

economy. While it dropped its early preferences for widespread state nationalisation, control, and

planning of the economy at the Bad Godesberg party conference, it nonetheless remained more

supportive of state-owned infrastructure (post, communications, and rail) and of state regulation

of the economy. Its tax and social policy preference have generally focused upon ensuring

generous minimum thresholds for benefits so that even low-income individuals are able to

maintain a decent standard of living rather than focusing upon a strict replacement rate formula to

maintain previous work-life status.

While other small parties did exist, few managed to consistently meet the threshold of 3 direct

mandate seats or 5% of the national vote.126 None of these parties, however, were either in

government or had any significant impact on policy during the time period under consideration,

so they are omitted from this discussion of party orientation and policy preferences.

German unification did not fundamentally change the state’s institutions, but the political and

economic repercussions of unification created new pressures and realities that have transformed

Germany’s parties, pushing the CDU/CSU, the FDP, and the SPD toward greater support for (or

acceptance of) more liberal policies, including deregulation, privatisation, an emphasis on

individual responsibility, and market forces to reduce expenditures on social welfare spending.

Since Kohl’s CDU/CSU and FDP coalition governed throughout the period being examined, we

126 The Green Party did representation in the Bundestag for the first time in 1983. Having evolved from the peace and environmental movements of the 1960s and 1970s, the Greens are strongly committed to social and economic equality, participatory democracy, pacifism, and environmental protection. As of the 1980s and early 1990s, however, the Greens were not widely considered koalitionsfähig (capable of being a partner in a governing coalition), because of its perceived ideological extremism, its very small size, and the dubiousness of its ability to continue to be represented in the Bundestag over the longer term. The PDS, the successor to the East German communist party, did gain representation in the Bundestag during the 1990s, but it was widely considered to not be koalitionsfähig, due to its history, so its Abgeordnete and its much more social and stateist policy preferences were virtually wholly ignored throughout the period under consideration.

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might expect policy preferences to reflect the Christian democratic and liberal composition of his

coalition, as is suggested in Table 5-3.

TABLE 5-3: Parties in Government and Political Orientation in Germany

Government & Term of Office

Parties in Government Government’s Political Orientation

Kohl III (1987-1991)

Christian Democratic Union / Christian Social Union (CDU/CSU) Free Democratic Party (FDP)

Centre-Right (Christian Democratic / Liberal)

Kohl IV (1991-1994)

Christian Democratic Union / Christian Social Union (CDU/CSU) Free Democratic Party (FDP)

Centre-Right (Christian Democratic / Liberal)

Kohl V (1994-1998)

Christian Democratic Union / Christian Social Union (CDU/CSU) Free Democratic Party (FDP)

Centre-Right (Christian Democratic / Liberal)

The presence in the CDU/CSU of powerful party wings with quite different policy orientations on

social welfare issues requires some modifications of this prediction. During the Kohl I through

Kohl IV periods, the social wings of the CDU/CSU frequently dominated the social welfare

policy discourse and policymaking process and they alternately chose to work with the SPD or

the FDP and the CDU/CSU’s business wing, depending upon which partner would best help

reformers achieve their goals. As a result, we would expect social welfare policy in the period up

through the 1994 election to reflect Christian democratic preferences, but these policies would

sometimes include social democratic or liberal tendencies, reflecting the participants in that

reform. After the 1994 elections and the shift in power in favour of the CDU/CSU’s business

wing and the FDP, we would expect the government to pursue Christian democratic policies with

a much stronger and more consistent liberal orientation. As a result, predictions regarding policy

orientation of the government are modified to reflect the effect of party wings, as is noted in

Table 5-4.

TABLE 5-4: Effect of Party Wings on Predicted Policy Orientation in Germany

Government & Term of Office

Parties in Government

Dominant Wings/Parties Revised Predictions regarding Policy Orientation

Kohl III (1987-1991)

CDU/CSU FDP

Social wings of the CDU/CSU Christian Democratic with alternation between Social Democratic and Liberal tendencies

Kohl IV (1991-1994)

CDU/CSU FDP

Social wings of the CDU/CSU Christian Democratic with alternation between Social Democratic and Liberal tendencies

Kohl V (1994-1998)

CDU/CSU FDP

Business wing of the CDU/CSU, FDP

Christian Democratic with strong Liberal tendencies

With this understanding of the factors determining the approach to and the policy preferences of

the Kohl governments during the 1990s, we now turn to the specifics of these governments.

Though Kohl IV and Kohl V will be the focus of the case discussion, this chapter now turns to a

brief overview of the Kohl I through Kohl III governments because many of the patterns seen

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during this period continued into the Kohl IV era. This background is important because without

this context, an observer might attribute the cooperation of the Kohl IV period to the unusual

circumstances of unification. While unification was publicly discussed as a national project, I

argue that consensual reform efforts during the Kohl IV period are not an anomaly unique to the

unification era,127 but are a continuation of the previous era.

KOHL I THROUGH III – EXTRA-COALITIONAL COOPERATION, REFORM, & REUNIFICATION

In October 1982 Helmut Kohl utilised FDP unhappiness with Helmut Schmidt’s foreign policy,

with his economic policies, and with the stagflation of the 1970s to topple Chancellor Helmut

Schmidt’s SPD-FDP government in a vote of no confidence. The FDP defected from the SPD

and switched their support to a CDU/CSU-FDP government under Kohl, who had promised a

market-liberal redefinition of the economy that would constrain the growth of the welfare state,

reduce the non-wage cost of labour, and loosen labour regulations.

Despite rhetoric regarding a market-liberal redefinition of the economy, the social wing of the

CDU/CSU dominated much of the reform process of the 1980s, sometimes working with its

coalition partners and sometimes working with the social wings of the SPD. The government

pursued cost-containment, but the social wing of the CDU/CSU ensured that the reforms would

be consistent with the more social Christian Democratic traditions of their wing of the CDU/CSU,

emphasising the ideas of shared sacrifice and the protection of disadvantaged groups.

Throughout the 1980s the Kohl government was able to claim credit for the successful passage of

several important, though not revolutionary, reforms in the areas of unemployment and early

retirement,128 survivors’ benefits, child-rearing credits,129 and family policy.130

127 See Manow 1996 for an example of this argument. 128 The 1984 reforms of the early retirement and unemployment systems extended the duration of benefits for older workers, allowing them easier access to early retirement. Intended to assist older workers whose job skills might be somewhat out-of-date, this policy also sought to reduce unemployment and to make the German workforce and the German economy more competitive by bringing into the workplace younger workers, who were presumably more skilled with new technology. Throughout the 1980s firms used this opportunity to downsize and reduce the age of their workforces without having to face substantial resistance from unions and works councils, and they were able to do so at government expense, since the costs were borne by the pension system rather than by firms (Streeck 2005:145-146; Ebbinghaus 2002). 129 A 1985 reform of pension benefits imposed means-testing of survivors’ benefits, increased child-rearing credits, and ended differential treatment of widows and widowers. While this reform was intended to cut costs, its advocates could also point to improvements in fairness with wealthier survivors receiving less and with women, who had traditionally been disadvantaged under Germany’s pension system, and widowers, who traditionally were not given the same survivors benefit rights as widows, receiving higher pension benefits. (The cost of these two latter measures was somewhat offset by the resultant reduction in social (low-income) assistance to survivors who would otherwise have qualified for social assistance.) This reform was also intended to address the problem of declining fertility, the resultant ageing of the German population, and the related threat to the sustainability of the pension system. 130 Concerns about declining fertility, the ageing of the population, and the long-term sustainability of the pension system also led the Kohl government to adopt more generous family policy reforms. Child rearing costs were

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The 1987 federal elections returned the Kohl government to power for its third term with a

comfortable 269 of the Bundestag’s 497 seats. The government then focused upon the health care

and pension systems, undertaking its most extensive reforms of the social welfare system up to

that point. The effort was led, however, by Labour Minister Norbert Blüm, who came from the

social wing of the CDU, assuring the reforms would be developed with an eye toward fairness via

shared sacrifice and the extension of rights and protections to the disadvantaged.

Health Care Reform – The GRG of 1989

The Health Care Reform Law (Gesundheitsreformgesetz or GRG) of 1989, the product of

intra-coalitional political infighting between the social wings of the CDU/CSU – especially Blüm

and his Ministry of Labour – and the FDP and business wing of the CDU/CSU, introduced patient

co-payments, some limited competition among medical providers, and a mandate for the health

care social partners – insurers, drug manufacturers, and physicians’ associations – to establish,

monitor, and enforce compliance with guidelines for cost-effective and ‘clinically-consistent’

care. The introduction of co-payments for patients, a reform strongly pushed by the FDP,

violated the traditional parity financing of health care by shifting a greater share of costs onto

patients, but Blüm and the labour wing of the CDU/CSU acceded to this change only in exchange

for the concessions that the co-payments would be relatively small and that there would be

hardship exemptions for low-income patients (Webber 1989; Giaimo 2001:353; Giaimo

2002:108-111; Aust et al. 2002:18). Though Blüm had hoped to utilise the health care sector

social partners’ bargaining powers for cost containment, the FDP and the business wing of the

CDU/CSU substantially gutted this reform by including a consent clause for the guidelines and by

establishing that only 2% of physicians per quarter would be monitored for compliance with the

guidelines (Giaimo and Manow 1997:189; Giaimo 2003:107-111; Jochem 2007:6-7).

Pension Reform

When the government turned to pension reform the following year, Blüm – with Kohl’s support –

bypassed the FDP and business wing of the CDU/CSU and instead reached out to the opposition

SPD to craft a reform that would have broad cross-party consensus and that would more closely

reflect the preferences of Blum’s labour wing of the CDU/CSU. After extensive negotiations

with unions and employers’ associations, the social wings of the CDU/CSU and SPD agreed upon subsidised by introducing a parental allowance (Erziehungsgeld) and child tax credits (Kinderfreibetrag) and by expanding the existing child allowance (Kindergeld). Parental leave (Erziehungsurlaub), as well as pension credits for time spent caring for children and elderly parents, were introduced to support and encourage the provision of care within the family (Leibfried and Obinger 2004:209).

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and passed the Rentenreform 1992 (Pension Reform Law of 1992). This reform was intended to

assure the long-term stability of contribution levels and to maintain intergenerational fairness. It

maintained pensions at 70% of previous earnings, but linked cost-of-living adjustments (COLAs)

to net rather than gross earnings, establishing an automatic – and, therefore, less visible and less

blame-attracting – mechanism that scaled back COLAs whenever social contributions were

increased. To more closely tie receipt of full pension benefits to work history, the reform also

implemented a phase-in of a higher retirement age, deductions for early retirement, and reduced

pension credits for time spent in university. It was expected that these changes would lower

pension contributions vis-à-vis the status quo ante a full 1.7% by 2000 and approximately 10% by

2030.

These reforms, particularly the health care and pension reforms, were expected to stabilise social

expenditures, social contribution levels, and the general budget’s outlays for the social welfare

system. In particular, the pension reform was believed to be sufficiently deep and effective that

no further reforms to the pension system would be necessary for at least a decade. Ironically,

within hours of the passage of the Pension Reform Law of 1992, an event occurred that ultimately

upset all of these expectations. On the night of 9 November 1989, the Berlin Wall fell. Less than

one year later, the two Germanys united. The costs of integrating the East into the Federal

Republic, coupled with global recession in the 1990s, disrupted all calculations regarding

Germany’s fiscal health, cast into doubt its ability to meet the Maastricht convergence criteria,

and would require several new sets of reforms throughout the course of the next eight years.

KOHL IV – AN UNEVEN COURSE FROM ‘BLÜHENDEN LANDSCHAFTEN’ AND

EXTRA-COALITIONAL COOPERATION TO ‘STANDORT DEUTSCHLAND’ AND CONFLICT

Kohl’s fourth term as chancellor began with incredible optimism. Trailing in the polls less than a

year before, his CDU/CSU and FDP coalition won 398 of the 662 in the enlarged,

post-unification Bundestag. The CDU/CSU and FDP held a majority in the Bundesrat. While the

rest of the world was sliding into recession, Germany was experiencing its strongest growth since

the early 1970s. At the European Community level, German negotiators had agreed to a future

European Monetary Union on the condition that participating states meet a strict set of

anti-inflationary convergence criteria that would assure that this future Single Currency would be

‘so stark wie die Mark’ (as strong as the Mark). With its strong fiscal, monetary, and economic

position, German officials not only believed Germany would easily meet the criteria but that it

would be in so strong a position that it would be able to act as the de facto enforcer of the criteria,

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able to exclude the historically profligate Southern European states from being inaugural

members of the Single Currency. Domestically, the Kohl government focused upon a wide array

of policies and a massive set of investments and transfers to modernise and integrate the Neue

Länder, to raise Eastern living standards, and to assist in the transition from a command economy

to a social market economy with the goal of assuring that the post-unification boom would be

sustainable and bring about a second Wirtschaftswunder for Germany.

But the rosy hopes of blühenden Landschaften and a second Wirtschaftswunder ultimately proved

to be mistaken. The costs of unification grew ever higher. To start to cover the costs of

unification, Kohl and his government raised taxes. The CDU/CSU-FDP government’s popularity

fell, and the CDU/CSU and FDP lost their majority in the Bundesrat. The initial boom ended,

and the Eastern economy went into crisis. No longer insulated from the global recession by the

Eastern spending spree, the rest of Germany slid into recession. The traditional social-market

approach to the economy was increasingly criticised for being too generous and expensive and for

being too restrictive in its regulations, undermining Germany as a competitive business location.

Frustrated after repeatedly being bypassed by the CDU/CSU’s social wings in favour of the SPD

and encouraged by a growing liberal critique of the social-market approach to the economy, the

FDP and the business wing of the CDU/CSU radicalised in terms of their policy preferences and

grew more assertive in their tactics vis-à-vis social welfare, fiscal and economic policy. As shall

be discussed in the remainder of this section, while the Kohl IV period began with a continuation

of the earlier pattern of informal, extra-coalitional cooperation between the social wings of the

CDU/CSU and the SPD on social welfare, fiscal, and economic policy, during the later years of

the Kohl IV government a struggle emerged between the CDU/CSU’s social wings on the one

hand and the FDP and CDU/CSU business wing on the other hand to control the direction of

reform in these policy areas. As the FDP and the CDU/CSU’s business wing gained more

influence in these policy areas, reforms became more contentious in their approach and more

liberal in their distributional content.

Initial Boom

Throughout 1990 and 1991 the Neue Länder seemed to be embarking on the hoped-for

Wirtschaftswunder. The generous currency conversion had preserved and increased the value of

income and savings in the East. Eastern pension, unemployment, and disability payments, which

had been lower than in the West, were rapidly raised with the expectation that they would soon

reach Western levels. Massive federal investment projects were undertaken in the East to bring

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the legal, judicial, administrative, and education systems into accord with the Federal Republic’s

standards. The transportation, communications, energy, and health care systems were renovated

and modernised, and after decades of rampant pollution, the government undertook efforts to

clean up the environment. The Federal Republic’s wage bargaining system had been extended to

the East, and the social partners quickly agreed on a timeline for extending the Western wage

structure to the East so that wage levels and wage differentiation would converge on the Western

standard by 1994 (SVR 1992:107-110).131

The combined financial windfalls of the generous currency conversion rate, the social partners’

wage convergence policy, and federal transfers and investments proved quite expansionary.

Initially, many economists assumed that the generous currency conversion rate would largely

remain in savings. Of the OM160 billion held in 24 million personal savings accounts, 60% of all

savings was held as retirement savings by 20% of the population, and it was believed that this

retirement savings would not likely be used for a spending binge. ‘Target savings’ – longish-term

savings for the purpose of purchasing relatively expensive consumer durables (e.g. cars,

refrigerators, televisions) – were hoped to be resistant to binges with people continuing to save

for these large purchases. In regard to the remaining savings, it was hoped that much of it would

be held as ‘precautionary savings’ against the possibility of unemployment (OECD Economic

Surveys, Germany 1989/1990, 64-65). Likewise, it was hoped that much of the increase in

Eastern workers’ take-home pay brought about by the wage convergence policy would be

channelled into precautionary savings. These expectations and hopes were disappointed. In the

wake of this substantial windfall and in response to decades of pent-up demand for consumer

goods, East German consumption increased precipitously. In addition to private savings being

redirected to consumption, nearly two-thirds of the large-scale federal fiscal transfers intended for

capital investment were poorly targeted and were instead used to support consumption

(Eschweiler 1993, 29). The combined effect of these currency conversion, wage convergence,

and fiscal policies was an Eastern consumption boom of such magnitude that as recession brought

131 Western unions and employers’ associations both had a strong interest in raising wage levels in the East. Western unions were concerned that low-wage Eastern labour would undercut wage growth in the West either by their moving westward to get better jobs (and, thereby, increasing the labour supply in the West) or by attracting to the East businesses seeking cheaper labour (and, thereby, decreasing demand for labour in the West). Furthermore, the unions wished to increase Eastern wages in order to gain favour with workers in the Neue Länder. Unification resulted in members of East German unions being transferred, thereby becoming members of their Western counterparts, but the unions wanted to be sure to retain these new members. Western employers’ associations also supported raising Eastern wages in order to assure that Western employers would not be undercut by low-cost Eastern firms. In addition to supporting higher wage levels, Western unions and employers’ associations sought to redress the relatively undifferentiated wage levels. The social partners were concerned that unless the Eastern wage compression was ended, there would be an exodus of highly skilled and highly educated workers from the East to the West that would imbalance the labour markets of the regions.

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the global economy to a halt and as foreign demand for the Federal Republic’s products

plummeted, Germany nonetheless prospered, experiencing its strongest growth in two decades

(Walter 1995, 55).

Throughout this period, the Kohl IV government largely pursued the same policies and goals as it

had in the last year of the Kohl III government. Although Kohl and his cabinet were quite aware

of – and, indeed, were insisting upon – the constraints on budget deficits, debt, and inflation that

the Maastricht Treaty would require of would-be members of the Single Currency and although

the worldwide recession had caused a precipitous decline in Germany’s exports, Kohl’s

government and the Federal Republic’s administrative apparatus were primarily focused upon the

overwhelming project of integrating the Neue Länder into the Federal Republic’s existing

system.132 Communist-era subsidies and price controls on food, rent, electricity, and health care

were phased out. The Treuhandanstalt (Trusteeship Agency) was established to privatise the

former GDR’s more than 12,000 state-owned enterprises. Bureaucracies were created or

reorganised to administer the social welfare system and to bring the Neue Länder into compliance

with the Federal Republic’s safety, environmental, and labour standards.

As a result of the massive investments, social welfare transfers, and transition expenditures,

Germany’s budget balance shifted from a .07% surplus in 1989 to a 2% deficit in 1990 (OECD

Economic Outlook – Germany, December 2004, dataset no. 76) and estimates of a 5% budget

deficit for 1991, a 4.5% deficit for 1992, and a 4% deficit for 1993 (von Hagen, Strauch, and

Bünger 2005, table 9). Though the actual deficits for 1991 through 1993 ended up being lower

(3.1% for 1991, 2.6% for 1991, and 3.2% for 1993), these figures were, nonetheless, well above

the levels of the 1980s (BMF, various years).

While Kohl acted at times in a somewhat high-handed manner, concentrating decision-making

and budgetary power in the Chancellery and bypassing the usual oversight by parliamentary

committees and ministries, the process was still seen as largely consensual. As discussed above,

Kohl had justified the use of taskforces, roundtables, and off-budget ‘special funds’ on the

grounds that they were an essential streamlining of the decision-making and budgetary process in

132 The full range of the efforts undertaken to convert a command economy into a social-market economy, to transform an authoritarian government into a democracy, and to integrate one country into the existing framework of another country is well beyond the scope of this chapter, but it is important to note that the sheer extent of the project was massive, encompassing not only the measures mentioned above, but also including such matters as the re-education or replacement of teachers, judges, police, and security forces, the dismantling of the GDR’s extensive spying apparatus, the review of prison sentences and honour pensions (supplementary pensions for individuals who had – in the eyes of the state – performed especial service to society), and such minutiae as the standardisation of crosswalk lights and the review of place names to eliminate those which were no longer politically correct.

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response to the unification’s unprecedented need for extraordinarily swift and decisive action.

The key reason, however, for the lack of conflict despite this centralisation of power was that

unification was pursued using the principle of ‘institutional transfer’, which essentially left the

status quo ante of the Federal Republic untouched, and which, thereby, posed no fundamental

challenge to the interests of the established political and social actors (Lehmbruch 1992).

The most notable change in the government’s fiscal and social welfare policy between the last

year of Kohl III and the first year of Kohl IV was that there was a growing public

acknowledgment that the cost of restructuring the former GDR would be greater than was initially

projected. In response to higher than expected expenditures and to rising debt levels, the Kohl

government turned away from the original plan to use debt-financing of unification with the

expectation that a massive fiscal jumpstart would initiate a second Wirtschaftswunder. Instead

the government instituted a series of changes in taxation to bring the budget deficit under control.

During the 1990 campaign, Kohl had promised that taxes would not be raised to pay for

unification, but less than three months after that election the Kohl government adopted the

‘Solidarity Tax’ (a one-year 7½% surcharge on personal and corporate incomes), increased the

general VAT from 14% to 15%, and increased taxes on insurance premiums, tobacco, fuel and

electricity (OECD Economic Surveys, Germany 1991:66).

In a way, this tax hike signalled the end (or at least the beginning of the end) of the unification

euphoria. The decision to raise taxes was an attempt to mitigate the unification-induced increase

in deficits, and the decision represented the government’s emerging recognition that unification

would not be as easy and painless as claimed in the chancellor’s ‘blooming landscapes’ rhetoric

of 1990. But this tax hike was also a direct abrogation of Kohl’s election year promises that

unification’s ‘blooming landscapes’ would be achieved without raising taxes or cutting benefits.

Kohl’s violation of his campaign pledge not to raise taxes resulted in sharp criticism. SPD

opposition leader Hans-Joachim Vogel called the tax increases “the largest and most bare-faced

deception since the beginning of the Federal Republic (das gröβte und unverfrorenste

Täuschungsmanöver seit Beginn der Bundesrepublik).” The generally CDU/CSU-friendly Bild

raged about Kohl’s “tax lies.” In wake of the criticism regarding the broken campaign pledge,

Kohl’s popularity and public support for his coalition fell (Leuschner 2005:224-225).

Second thoughts about unification – or at least second thoughts about the hastiness with which it

was undertaken – emerged, particularly in the West. In Land elections in April and May of 1991,

the CDU and FDP disastrous election returns. As a result, the government lost the

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CDU/CSU-FDP majority in the Bundesrat, which it had held throughout the entire time since

Kohl had taken power in 1982. In April 1991 the CDU/CSU-FDP could still claim a majority in

the Bundesrat with the support of states controlled by a CDU-led Grand Coalition, but after the

May 1991 electoral losses at the Land level, control of the Bundesrat shifted to states governed by

the SPD or by SPD-led coalitions. While the social wings of the CDU/CSU had chosen in the

past to work on social welfare issues with their like-minded counterparts in the SPD rather than

with their more liberal CDU/CSU business wing and the FDP, now the cooperation of the SPD

would be needed in regard to any policy area where the Bundesrat held veto rights. The business

community, especially the Mittelstand (small and medium-sized businesses) blamed Germany’s

high and rising taxes for Germany’s falling exports and for their economic woes.133 The FDP, as

the champion of business in general and the Mittelstand in particular, was immensely unhappy

with the rise in taxes and blamed their falling electoral fortunes on the tax hikes.

One final noteworthy change took place during these early days after unification, and this change

too was outside of the Kohl government’s influence. Germany’s highly independent and very

monetarily conservative central bank, the Bundesbank, raised interest rates. While the Eastern

consumption boom had insulated Germany from the global recession and produced the highest

GDP growth rates in decades, it had also prompted a rise in inflation which reached 4.4% in 1991

and 4.5% in 1992 with expectations of 3.7% for 1993 and 3.1% for 1994. The Bundesbank

decided to slam the brakes upon what it perceived as run-away spending and inflation precipitated

by irresponsibly expansionary fiscal, currency conversion, and wage policies.134 The

government’s currency policy was criticised by the Bundesbank as an increase of the money

supply far in excess of what could be justified based upon the relative productivity of the Federal

Republic and the German Democratic Republic. The social partners’ wage convergence policy

raised Eastern wages by 33% in 1991 and by 27% in 1992, while generous wage settlements

133 As discussed in greater detail in the section on the Standortdebatte, the deterioration of Germany’s trade balance in the 1990 to 1992 period was largely the result of falling international demand for German products during the recession, coupled with increased intra-German demand as Easterners purchased West German, West European, and US goods that had been unavailable under communism. Once the worldwide economy recovered from recession, Germany returned to its historic pattern of strong exports. 134 Inflation levels of 3.1 to 4.5% are not particularly bad by international standards, but the Bundesbank was an institution haunted by the memories of the uncontrolled fiscal and monetary policies and the resultant hyperinflation of the inter-war period. As a highly conservative monetary institution tasked with protecting the nation’s price stability, the Bundesbank was very concerned by inflation being well in excess of the institution’s target of 2% inflation (United Nations Economic Commission for Europe 1992:31). Likewise, the money supply was growing far in excess of the Bundesbank’s target of 5.5%, reaching 9% in 1992 (Javetski et al. 1992:34-35). The differences between the Bundesbank’s much more conservative approach and the more relaxed views on inflation of outside observers are clearly evidenced in the Bundesbank’s own statements in its Monatsberichte versus OECD and UN statements in OECD Economic Surveys, Germany and the UN Economic Commission for Europe’s Economic Survey of Europe throughout the 1991 through 1994 period.

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during the post-unification boom raised Western wages by 6.5% in 1991 and by 5.6% in 1992

(EIRR, “Collective Bargaining in.…”, various years). In neither the East nor the West were the

wage increases commensurate with productivity improvements, and in the eyes of the

Bundesbank they were inflationary and irresponsible. The federal government’s debt-financing

of transfers, which were used more for consumption than for investment, also did not meet

Bundesbank standards of responsible fiscal behaviour. The price index and inflation rate had

risen above the Bundesbank’s targets, despite unification’s increase in the labour supply and the

recession’s reduction in demand for German goods (and the resultant conversion of the trade

balance from surplus to deficit). In response the Bundesbank repeatedly raised the nation’s

interest rates as it sought to bring inflation and the runaway money supply under control.135

This increase in the interest rates checked inflation, but it also stalled private-sector investment

and economic expansion at the very point when Eastern consumer spending was already slowing.

The Neue Länder went into economic crisis. The unification euphoria was over.

Crisis in the East

The initial post-unification spending spree and the resultant economic boom had disguised the

cracks in the Eastern economy, but those cracks became increasingly apparent over the course of

1991 and 1992. While much of the economic trouble of the Neue Länder was the inevitable

consequence of it being an inefficient and sheltered command economy, early missteps in the

unification process substantially exacerbated the difficulties intrinsic to the transition to a social

market economy.

Demand for East German goods started collapsing almost as soon as the Wall fell. Able for the

first time to freely buy consumer goods made outside the GDR or other COMECON countries,

East Germans shunned Eastern-produced goods in favour of Western brands, even where there

was no difference in quality (Der Spiegel 1990a:64).136 Lacking name recognition, a reputation

for high quality products, and experience competing in Western markets and deprived by the

135 The Lombard rate was raised from 8.5% in early 1991 to 9.75% throughout most of 1992, while the discount rate was raised from 6% to 8.75% by third quarter 1992, its highest rate in post-war times (Deutsche Bundesbank, Report of the Deutsche Bundesbank for 1991:14ff; Deutsche Bundesbank, Monthly Report of the Deutsche Bundesbank, December 1992:10; United Nations Economic Commission for Europe 1992:31). 136 In many areas of consumer goods, the quality and availability of these goods in East Germany were decidedly low. The difference in quality between a Mercedes and a Trabant provides a clear example of why East Germans would prefer Western goods to Eastern ones. Yet there were areas in which East German goods were competitive. Many household goods, like honey or pickles, were comparable in terms of quality, but the shift in tastes towards the formerly unavailable Western products depressed demand for the Eastern-produced goods in the short term. With this shift in tastes and the shuttering or sale of state-owned enterprises, many of these goods were discontinued, although some have been reintroduced since the mid-1990s and have been quite successful.

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generous exchange rate of the ability to compete as a low-cost producer, Eastern firms had little

luck breaking into markets in the West (OECD Economic Surveys, Germany 1991:28; OECD

Economic Surveys, Germany 1992:12-13; Deutsche Bundesbank 1990:25 fn.1). Finally, Eastern

European demand for GDR goods first dropped as the fall of the Iron Curtain freed former

COMECON countries to purchase from the West, then fell further as the currency conversion

dramatically increased the cost of goods from the former GDR, and then plummeted as the

politically democratising and economically liberalising former trade partners’ economies

collapsed under the twin strains of transition to a market economy and the global recession.

After unification Eastern businesses found it difficult to compete not just because of shifts in

tastes away from Eastern-produced goods, but also because of rising costs. East German

technology and infrastructure were generally obsolescent. Communist-era practices of

labour-intensive rather than capital-intensive investment and ‘featherbedding’137 and the tendency

towards a somewhat dubious work ethic among employees138 had combined to make Eastern

firms’ productivity about one-third that of West German firms. The generous currency

conversion rate overvalued Eastern wages, costing Eastern businesses any competitive advantage

that lower wage levels would have given them (BMA 1998). The 1991 agreement between the

social partners to raise Eastern wages to Western levels was abrogated in 1993 when

Hans-Joachim Gottschol, president of the metal-sector employers’ association (Gesamtmetall),

announced the unilateral cancellation of the agreement. Wage levels had, however, already risen

by 33% in 1991, 27% in 1992, and 12.5% in 1993 (EIRR “Collective Bargaining in…” various

years), and Eastern goods had become even less competitive. The phased removal of price

ceilings and subsidies increased the cost of rent, food, energy, transportation, health care, and

other necessities, raising costs for businesses. The extension of West German (and European

Community) laws and regulations to the Neue Länder further increased costs for businesses,

particularly factories, in violation of the Federal Republic’s health, workers’ safety, or

environmental standards. As a result, entire industries were essentially eliminated, particularly

the one-time flagship of the Eastern economy, the chemical industry. 139

137 Under East German law, the citizenry were generally required to work and the state guaranteed the availability of employment. Featherbedding – the practice of hiring more workers than are needed to perform a given job or of adopting excessively complex and time-consuming work procedures to employ additional workers – and the use of labour-intensive rather than capital-intensive production methods assured the availability of the requisite jobs. 138 Throughout the communist bloc, the guaranteed right to employment and the lack of performance-based rewards for more productive or more highly-skilled workers undermined the work ethic. The quip “we pretend to work and they pretend to pay us” seems to have been nearly ubiquitous throughout the Communist Bloc. 139 The chemical industry, one of the GDR’s most profitable sectors, were so highly polluting that it was uneconomical to try to bring them into compliance with the new laws. Some standards (e.g. vehicle emissions) were phased in, allowing individuals to keep their highly polluting Trabants and Wartburgs, but the production of new goods

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A combination of perverse incentives,140 slow privatisation, poor manpower practices under

communism and lack of clarity regarding property rights141 led to a dramatic fall in employment

as the government’s Treuhandanstalt (Trusteeship Agency) privatised more than 1 million

state-owned properties, including 12,000 state-owned enterprises. Treuhand closed the plants it

considered commercially unviable, cut ‘feather-bedding’ at the more viable plants, and sought to

sell these plants to firms with Western management experience in the same industry (Dyck 1997).

Treuhand liquidated or sold all but 60 firms by the end of 1994, and economists have noted that it

generally left a legacy of viable, well-run firms. Critics of the privatisation effort point out that

by 1994 more than 3.5 million jobs, constituting roughly 40% of all employment in the East were

lost as former state-owned enterprises were privatised (Swank 2002:175), although arguably

much of this was financially necessary for the new owners, which were primarily West German

companies (Carlin 1994).142 Rather than accruing the DM600 billion in profits from privatisation

and the operation of factories were subject to West German standards. The costs of some reforms were assumed or subsidised by the government with particular focus upon the clean-up of GDR-era dump sites, the construction of new water and soil treatment plants, and the modernisation of old ones. Other reforms, which focused upon ongoing emissions from housing and factories, sought to reduce the amounts of brown coal consumed and stop the dumping of industrial waste. The environmental situation in the Neue Länder soon improved, but much of this improvement stemmed less from the introduction of these new environmental standards than from the closing of the outmoded plants that had caused much of the pollution. 140 Administration by Treuhand of the more viable properties until they could be sold was difficult, due to the large number of properties involved and the massive scale of the effort required to keep firms running and other properties in good condition. Knowledge that a firm would be sold provided former managers and workers with little or no incentive to protect the value of the firm, let alone to invest money or effort into modernising the firm. 141 The government’s decision to follow a ‘restitution before compensation’ approach to properties expropriated by the Nazi regime or by the GDR undermined the goal of a quick and efficient privatisation process. Though ‘restitution before compensation’ was intended to uphold the property rights of those oppressed by previous regimes, the policy created uncertainty about property rights that slowed the privatisation process, deterred some businesses from purchasing former state-owned enterprises, and resulted in lower prices for those enterprises which were sold. With the Unity Treaty, the Agreement Treaty of 28 September 1990, the Treuhandgesetz, and the Joint Declaration for the Regulation of Open Property Questions of 15 June 1990, the Kohl government established a policy of ‘natural restitution before compensation’ for property confiscated by the state during the 1933-1945 and 1949-1990 periods (Thomerson 1991:125-127). Uncertain property rights posed a particularly severe barrier to privatizing state-owned property and encouraging investment in the Neue Länder. Determining the rightful owner (or his/her heirs) was made quite difficult by poor record keeping, the destruction of documents in war, alteration of documents by unethical government officials, and the potential for property to have several claimants, due to the possibility of the same property being subject to numerous expropriations over time. Multiple competing claims in the absence of complete documentation meant that litigation could drag on for years. Although the Hemmnisbeseitigungsgesetz did loosen the principle of natural restitution to give more rights to investors, uncertainty remained, and investors considering a promising venture had to consider the prospect that the title to the firm or other property could eventually become disputed and become the target of litigation. As late as 1995, of the 2.5 million claims on 2.1 million properties, more than 1.1 million claims on 1.3 million properties were unresolved. The expectations that many of these disputes would not be resolved for at least a decade contributed to many West German firms looking to Eastern Europe rather than the Neue Länder for investment opportunities (Dempsey 1995b, 2; Dempsey 1995a). Indeed, difficulties regarding property rights in the Neue Länder contributed to Volkswagen investing more money in one Škoda plant in the then-Czechoslovakia than it did in the entirety of the Neue Länder in the years that followed unification. For further details regarding privatisation of property, the ‘natural restitution before compensation’ policy, and the problems related to these policies, see Sinn and Sinn (1994), Papier (1991), Thomerson (1991), and Doyle (1992). 142 While some smaller firms remained in the hands of Easterners, larger firms were mostly bought by West German firms. Weighting by employment, 74% of former state-owned enterprises were bought by West German firms or families, 20% by Eastern buyers, and 6% by non-German buyers (Carlin 1994).

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that were predicted by Treuhand’s first head, Detlev Rohweder, Treuhand incurred DM265

billion in losses (Eisenhammer 1995:7).

As discussed above, the combination of wage increases,143 the phase-out of subsidies and price

ceilings, and the initial consumption boom prompted a rise in inflation which reached 4.4% in

1991 and 4.5% in 1992 with expectations of 3.7% for 1993 and 3.1% for 1994 (Eschweiler 1993,

29). This rise in prices shocked a population accustomed to controlled prices and provoked anger

towards the ‘profiteers’ who were the nascent capitalists in the new market economy of the Neue

Länder (Der Spiegel 1990b:62). Over time this rise in prices increasingly exerted downward

pressure on Eastern consumers’ disposable income.144 The Bundesbank’s response was to

dramatically increase interest rates, choking off access to cheap credit. Coinciding with the

depletion of the ‘savings overhang’ that had fuelled the Eastern consumption spree, the rise in

interest rates acted as a brake upon inflation, contributing investment and economic expansion

stalling in the East.145

The combination of declining demand for Eastern products, rising costs, unexpectedly low levels

of private investment in the East, and rising interest rates were deadly to the economy of the Neue

Länder. Throughout the East, unemployment rose. Between 1989 and 1992 more than 3 million

jobs were lost as the number of jobs declined by one-third from 9.3 million to 6.2 million (Kocka

1994:181).

The Kohl government’s decision to immediately extend the entirety of West Germany’s social

welfare institutions to the East had disastrous repercussions for the economy of the Neue Länder,

143 The social partners’ wage convergence policy raised Eastern wages by 33% in 1991 and by 27% in 1992. Generous wage settlements during the post-unification boom raised Western wages by 6.5% in 1991 and by 5.6% in 1992 (EIRR, “Collective Bargaining in.…”, various years). 144 While the rise in the cost of living would appear to be more than offset by the rise in incomes due to the currency conversion and wage convergence policies, consumers did not always perceive the situation in this manner. First, these policies were phased in at different times, and by the time that the cost of living rose, consumers had become used to their post-currency conversion increased standard of living and now they had to retrench. Second, by the time that price ceilings and subsidies were cut, individuals may have become unemployed. Third, there is the general psychological factor that losses (increases in the costs of living) are felt more keenly than gains (increases in wages and pensions). Finally, in some cases the increase in costs might outweigh the increase in income (e.g. the impact of the phase-out of health subsidies could outweigh the increase in retirement income for pensioners who were chronically, but not critically ill). 145 Monetary policy experts generally prescribe interest rate increases to control inflation. It has also been argued that increases in interest rates are used by monetary authorities to punish expansionary fiscal policy by governments and expansionary wage policy by the social partners and to seek to deter such expansionary policies in the future (author’s interview with David Soskice). In this particular case, however, the policy proved highly problematic. In a time of global recession and with a transitory boom fuelled by unsustainable exuberance and a savings overhang that was quickly exhausted, the increase in interest rates exacerbated post-unification bust. Its effects on other European economies were highly pernicious, forcing other countries in the Exchange Rate Mechanism to raise their interest rates during the recession and ultimately unleashing the wave of currency speculation that caused the EMS Crises.

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the stability (and viability) of the social welfare system budget, and the federal government’s

fiscal balance. Rather than using unification as a rationale for reassessing the long-term

appropriateness or viability of the existing social welfare system, the government operated under

the general assumption that West German governance institutions needed no modification or

adaption when they were transferred to the East (Schäuble 1991:115-116). Under the principle of

‘institutional transfer’ (Lehmbruch 1992:41), the entire legal and organisational framework that

had been developed in response to conditions in the West was transplanted to the East without

consideration regarding whether the different conditions in the East – an older population, lower

productivity, and, eventually, higher unemployment – might result in these institutions being

unsuitable.

The overly generous exchange rate also weakened the government’s fiscal position. Pension,

unemployment, and other social security claims were based upon the individual’s previous

income level, so the higher conversion rate automatically increased the cost of the social welfare

system, both in terms of immediate demands and in terms of future liabilities (BMA 1998).

Generous unemployment insurance and unemployment aid with high replacement rates left the

unemployed better off staying in the East, where the cost of living was lower, rather than moving

to the West to seek employment. Investment in the East was weak, and privatised firms failed to

provide the jobs needed to ensure unemployment would be transitory. The expected dip in the

Eastern economy became a freefall. Rising unemployment made consumers cautious about their

purchases. Falling sales caused businesses to reduce their workforce or to fail. In the end,

unification led to mounting and persistent unemployment (Table 5-5).

TABLE 5-5: The Labour Market in the Neue Länder 1991 1992 1993 1994 Economic Context Unemployment rate 10.3 14.8 15.8 16.0 Employment Participation rate 51.7 48.0 47.1 48.0 Active Labour Market Measures Employees in part-time work (in thousands) 1616 370 181 97 Employees in job creation schemes (in thousands) 183 388 260 280 Employees in training schemes (in thousands) 169 425 345 241 Employees in early retirement or transitional old-aged schemes (in thousands)

554 811 853 650

Source: table from von Hagen, Strauch, and Bünger 2005:table 8; data from SVR 2000, Deutsche Bundesbank 1998, Autorengemeinschaft 1998, Arbeitsgrüppe VGR der Länder.

As noted in Table 5-5, official unemployment figures significantly understated the extent of

economic dislocation in the East. Under the auspices of the Bundesministerium für Arbeit

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(Ministry of Labour), public works and job training programmes were extended to approximately

350,000 unemployed Easterners in 1991, increasing to more than 800,000 in 1992. The early

retirement and transitional retirement systems absorbed more than 500,000 laid-off older

Easterners in 1991; by 1993 more than 850,000 were reliant upon these programmes. Combined,

these measures prevented unemployment in the East from rising a further 8 to 20%, but this was

at the cost of rising public-sector employment, active labour market, and pension expenditures

(Lauk 1994:71-72; Knuth 1997:71-73; Hemerijck and Vail 1998:16-18; von Hagen, Strauch, and

Bünger 2005:15-16 & table 8).

Expenditures on unemployment insurance, social assistance, and early retirement pensions grew

beyond the ability of the Neue Länder to support them. Unemployment was disproportionately

concentrated in the Neue Länder, and the GDR’s residual pension, social assistance, and

unemployment funds had not been structured with the post-unification context in mind. As a

result, these funds were too small to cover the stark increase in the number of covered individuals

and the notably higher benefit levels.146 Unemployment insurance and pension contribution rates

were raised, but while the increase in unemployment insurance contribution rates meant that the

West contributed far more to unemployment insurance than was being paid out, in the East

unemployment insurance contributions covered only between 7 and 15% of the expenditures on

unemployment benefits. Throughout Germany pension expenditures outpaced contributions, but

in the East these contributions covered far less of the costs than was the case in the West (Table

5-6). Neither pension nor unemployment insurance was specifically intended to provide regional

transfers, but these funds effectively became massive channels for regional income redistribution

(Sinn 1995; Hemerijck and Vail 1998:16; von Hagen, Strauch, and Bünger 2005:15-16).

TABLE 5-6: Contributions-to-Expenditures Ratio for Unemployment & Pensions 1990 1991 1992 1993 1994 1995 1996 1997 Unemployment Insurance Western Länder 92.6 148.7 154.1 129.4 133.6 131.1 120.5 127.5 Eastern Länder 50.4 15.2 7.2 7.1 9.0 11.1 10.2 9.5 Pension Fund Western Länder 86.0 85.0 83.4 78.9 81.0 80.7 81.8 84.0 Eastern Länder - 80.9 69.4 65.4 62.2 57.8 55.6 56.0 Sources: Deutsche Bundesbank, Monthly Report, 3/1990, 10/1996, 8/1997, 4/1998.

146 At the time of unification, the GDR lacked sufficient funds to fully cover the future pension costs for its rapidly ageing population. The increase in the size of pensions after unification further exacerbated the magnitude of this shortfall (Sinn 1995; von Hagen 1998). Likewise, GDR funds for unemployment insurance were insufficient, once unification’s privatisation policy dramatically increased the number of unemployed and once the convergence towards Western wage levels and the adoption of Western unemployment replacement rates raised compensation levels. (In the GDR lower pension, unemployment, and social assistance levels had been offset by the low cost of living that resulted from subsidies and price ceilings on rent, food, electricity, coal, health care, and other necessities.)

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The reforms that had been adopted to integrate the Neue Länder into the FRG’s market economy

and regulatory framework had not resulted in the desired Wirtschaftswunder and blühenden

Landschaften. Instead the East had become a drain on the Western economy. The costs of

reunification, including the net transfers to cover the shortfall in the Eastern social welfare

system, far exceeded the Kohl government’s initial expectations. Massive amounts of money

were transferred from West to East. As noted in Table 5-7, throughout the 1990s, the German

government annually spent in the Neue Länder between 110 and 150 million DM, equivalent to

4.1 to 5.4% of the GDP of the Western Länder (Institut für Wirtschaftsforschung Halle 2000;

OECD Economic Surveys, Germany 2001:121). And instead of these expenditures being

concentrated on infrastructure and other long-term investments, the economy in the East was so

weak that approximately half of these transfers were used just to support the social welfare safety

net of the Neue Länder.

TABLE 5-7: Public Transfers to the Neue Länder (1991-1999)

1991 1992 1993 1994 1995 1996 1997 1998 1999 Gross and net transfers by source1 (DM million) Expenditures Federal government 75.1 90.0 115.7 115.9 136.7 136.7 129.6 130.8 140.0 Western states and communities 5.3 5.7 10.3 13.5 11.2 11.3 11.6 11.5 11.6 German Unity Funds 31.0 24.0 15.0 5.0 0.0 0.0 0.0 0.0 0.0 Social security system (net) 2 18.7 34.2 23.0 29.8 33.3 30.9 34.7 31.9 36.0 EU 4.0 5.0 5.0 6.0 7.0 7.0 7.0 7.0 7.0 Treuhandanstalt 8.8 13.7 23.0 23.8 0.0 0.0 0.0 0.0 0.0 Revenues Federal government 33.0 39.1 41.4 45.2 46.8 48.2 47.8 48.6 50.6 Transfers Gross 142.9 172.6 192.0 194.0 188.1 186.0 183.0 181.2 194.6 Net 109.9 133.5 150.6 148.8 141.3 137.7 135.1 132.6 144.0 As percent Western GDP3 4.2 4.8 5.4 5.2 4.7 4.5 4.4 4.1 4.4 Gross transfers by function (percent of total) Social transfers 45.4 54.1 54.3 54.4 49.5 49.7 49.7 49.1 51.4 Business-related infrastructure 12.4 9.9 8.6 10.1 13.0 13.3 13.2 12.9 12.6 Support to enterprises 2.5 4.7 7.6 7.5 8.0 7.0 6.3 6.4 5.8 Non-earmarked transfers 28.0 22.3 20.0 19.5 23.5 24.6 25.0 25.8 24.5 Not attributable 11.7 9.0 9.3 8.4 6.0 5.4 5.8 5.8 5.7 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1 Excluding special depreciation allowances, debt servicing expenditures and credits 2 Without the contributions by the federal and state governments 3 GDP of Western Germany excluding Berlin Source: Institut für Wirtschaftsforschung Halle (2000); OECD Economic Surveys, Germany (2001), 121.

By the time that the full extent of the problems in the Neue Länder became clear to the Kohl

government, recession had taken hold in the West and this would make the German government’s

political situation substantially more difficult than it had been when the boom in the West had

been able to somewhat offset the East’s economic difficulties.

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Contagion to the West

Without the insulation that the post-unification boom had provided against the global recession

and the decline in demand for German exports in response to the global recession, in 1992 and

1993 the Western Länder succumbed to recession. As shown in Figure 5-5, annual real GDP

growth in Germany fell from 5.0% in 1991 to 2.2% in 1992 and then to -1.1% in 1993 (EMI

1996:64). After an initial decline in unemployment in the Western Länder during the

post-unification boom, Western unemployment rose from 6.3% in 1991 to 9.2% by 1994 (Figure

5-6). While unemployment in the Eastern Länder briefly stabilised, the national unemployment

continued to rise (Bispinck and Schulten 2000:188). In response to declining growth and rising

unemployment, the government’s deficit and debt balance deteriorated with debt rising from

41.5% of GDP in 1991 to 50.4% by 1994 (EMI 1996:64).

FIGURE 5-5: Growth Rate in Germany, 1988-2000

FIGURE 5-6: Unemployment in Eastern and Western Germany, 1991-1997

-2

-1

0

1

2

3

4

5

6

1988 1990 1992 1994 1996 1998 2000

0

5

10

15

20

25

1991 1992 1993 1994 1995 1996 1997

National

West only

East only

Source: OECD Key Short-term Economic Indicators, 2010. Note: Vertical line indicates date of unification.

Source: Bispinck and Schulten 2000:188.

THE GOVERNMENT’S RESPONSE: SLOW AND UNEVEN

The Kohl government’s initial response to the increasingly serious economic situation was slow.

In part this was due to the fairly standard problem that formal recognition by a government of a

recession frequently has an eight month to year lag, due to reliance on data and definitions that

only provide definitive answers well after the fact. Furthermore, given the associated difficulties

of falling public support, few governments want a recession, so wishful thinking arguably

delayed the government’s recognition of reality, but two other specific factors were involved in

this case. First, some drop in production and employment was expected as an inevitable part of

the post-unification transition process. It was anticipated, however, that this unemployment

would mostly be transitory with new businesses and more competitive firms soon hiring the

unemployed. It was only with the passage of time that it became apparent that the drop in

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production and employment was becoming an enduring problem. Second, the Federal Republic’s

social welfare system provided extensive automatic stabilisers to counter economic downturns in

general and the Kohl government had already adopted the policies it believed were appropriate

for handling the specific problems related to the Neue Länder’s transition to a social market

economy. It took time for the government to realise (1) that these policies were insufficient for

addressing the full magnitude of the problem and (2) that some of the government’s policies

were, indeed, exacerbating the economic situation.

Once the gravity of the situation became clear, the government responded in a manner that

appeared increasingly erratic. Pension benefits were generally increased, but some Eastern

pension benefits were cut and then partially restored. Social assistance and unemployment were

targeted for cuts and placed under an increasing number of restrictions. Health care was once

again reformed in 1992 because of concerns about rising expenditures and increasing social

contribution levels, but two years later a new social welfare benefit – long-term care – was

adopted, increasing the federal government’s expenditures and the level of social contributions.

Family policy benefits were first increased and then decreased, while an array of taxes were

raised and lowered in a highly inconsistent manner.

Some of the reason for this apparent inconsistency is that at a time of such significant change, not

all policies were as well-considered as they could have been. Revision of the policies was a

logical response to the haste with which they had been developed, but much of this apparently

erratic policy behaviour was actually due to (1) different parties having varying levels of

influence over particular policy areas and (2) the FDP becoming more assertive in some issue

areas. In the end, three patterns of policy reform become clear:

1 Unification-related measures exhibited a broad continuity with initial post-unification course. The government’s focus remained on integrating the East into the FRG’s existing system in a manner that would ensure all citizens would be treated equally. While there were some realignments, they were relatively minor. The cuts and increases in spending were primarily matters of social justice and fine-tuning rather than an attempt at large-scale cost-cutting.147 Some changes, particularly in regard to privatisation, were undertaken to streamline policies in a way that would better promote investment in the East.148

147 A particularly notable example of this was the elimination and subsequent partial restoration of the politically unpalatable ‘honour pensions’ for those who had provided ‘particular service’ to the East German state. Broadly seen as the GDR’s special treatment of SED officials and the state security forces, honour pensions had also been used to reward non-political recipients like health care professionals, who had provided necessary services to GDR citizens, but who were under-compensated under communism. 148 This meant that there was some sacrifice of the original justice issues addressed via the ‘restitution before compensation’ policy, but in government there was increasing concern that uncertain property rights was undermining

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2 Reforms in the areas of health care and long-term care represented a continuation of the government’s concern with long-term problems, particularly the rise in health care expenditures and related social contributions, as well as the increasing fiscal burden on the Länder and local governments, due to the rising number of chronically ill elderly placing stress on social assistance budgets. In both of these reform areas, the Kohl government followed the approach utilised with the 1989 pension reform effort, working closely with the opposition SPD rather than with its FDP coalition partners.

3 In the areas of social assistance, unemployment assistance, family policy, and taxation, the pattern of reform appears the most inconsistent, but there is a logic. In these policy areas, the FDP had greater influence than the SPD and throughout the 1990s, the FDP became increasingly market liberal rather than social liberal in its policy preferences. The CDU/CSU also found itself under increasing pressure to clamp down on expenditures in these areas, where the popular perception was that asylum seekers, refugees, and foreigners without residence permits were taking advantage of Germany’s liberal asylum and generous social welfare policies.149 As a result, in these policy areas there was a rightward shift. The government generally reduced social assistance, unemployment benefits, and early retirement provisions for the purposes of cost-cutting, but the sharpest measures were applied to those asylum seekers, refugees and foreigners without permanent residence rights. The SPD and Greens opposed some of these measures, but even with SPD dominance in the Bundesrat, the SPD was unable to block the measures.150

First Steps

As the economy deteriorated, revenues were exceeded by the federal government’s general

budget, the social welfare budget, and the Land and community-level budgets, which provided

social assistance to low-income individuals. In 1991 the Kohl IV government had resigned itself

to abandoning debt-financing of unification and adopted the 7.5% Solidarity Tax on personal and

corporate incomes, increased the general VAT from 14% to 15%, and increased taxes on oil,

tobacco, and some insurance premiums. In response to rising social welfare expenditures, the

social insurance contribution rates were repeatedly increased. As is noted in Table 5-8, the total

rate for social contributions increased from 35.6% in 1990 to 38.9% by 1994, reaching 42.1% by

1998.151

investment in the East and depressing development and economic recovery. The Kohl government eventually concluded that this problem posed a greater threat to social justice than providing monetary compensation instead of natural restitution of the expropriated properties. 149 The combination of (1) lean economic times precipitated by recession and (2) an influx of peoples fleeing the wars of the former Yugoslavia and the economic troubles of the former Soviet Union and Eastern Europe precipitated a xenophobic spasm to which Kohl was slow to respond. 150 The measures applied to policy areas where the Bundesrat held only a suspensory veto. 151 The pension contribution rate decreased in 1991 due to the adjustments to the pension system made by the Pension Reform Law of 1992 that was passed in late 1989. Some downward adjustments (or, at times, containment of upward adjustments) were produced by subsidisation of the pension system via the VAT and shifting of some of the costs for unemployment to the active labour market policies of the Bundesministerium für Arbeit.

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TABLE 5-8: Social Insurance Contribution Rates 1990 1991 1992 1993 1994 1995 1996 1997 1998 Pensions 18.7 17.1 17.7 17.5 19.2 18.6 19.2 20.3 20.3 Unemployment 4.3 6.8 6.3 6.5 6.5 6.5 6.5 6.5 6.5 Sickness 12.6 12.2 12.7 13.4 13.2 13.2 13.5 13.5 13.6 Social Care - - - - - 1.0 1.7 1.7 1.7 Total 35.6 36.7 36.7 37.4 38.9 39.3 40.9 42.0 42.1 Source: SVR (1996, 2004); Deutsche Bundesbank, Monthly Report, various years. Notes: Traditionally, half of social insurance contributions are paid by the employer and half by the employee. The Social Care (Pflegeversicherung) Pillar was adopted in 1994, and the social contributions to pay for it were phased in over the course of 1995 and 1996. After the adoption of the PV, employees in Saxony paid a slightly higher proportion of the social contributions, as a result of the decision not to eliminate one holiday.

Despite these measures to increase revenues, the deficits continued to grow. Facing a stagnant

economy, rising deficits and debt, and a severe political backlash, Kohl recognised that his

government could not simply wait for the end of the recession. Instead he and his administration

would need to directly address some of the sources of the rising expenditures.

Health Care Reform – The GSG of 1992

In 1992 the Kohl government turned its attention again to reforming health care. The passage in

1988 of the Health Care Reform Law (Gesundheitsreformgesetz or GRG) of 1989 had been

expected to reduce the rising health care costs and health care social insurance contributions, but

the reform had proven ineffective at achieving these goals. The failure of the GRG was attributed

to health care social partners – physicians’ associations and insurers – reneging on their

commitments to implement the GRG to reduce costs. The FDP’s intervention on behalf of

physicians’ associations and the insurers was blamed for having diluted the reform, making it

possible for the social partners to avoid their commitments. Deficits in the health insurance fund

had continued to rise despite the GRG of 1989, and the government feared that if these deficits

were left unchecked, they would result in increases in health insurance contributions that could

undermine business competitiveness (Der Spiegel 1993a, 1993b) and lead to declines in net

wages and pensions that would reduce incomes of workers and of pensioners, a core CDU

constituency.152 The prospect of health insurance hikes, coming in addition to the 7½% solidarity

surcharge on income, threatened the government’s position as it faced the Superwahljahr (‘super

election year’) of 1994 with its 14 local, Land, and European elections, followed by a federal

parliamentary election. As a result, Kohl was determined that health care be reformed, and he

152 The Pension Reform of 1992 (passed in late 1989) had mandated that pension adjustments would be realigned to reflect net wages. As a result, whenever rising health insurance contributions led to a decline in net wages, pensions would automatically be cut.

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was not willing to tolerate the obstructionism that had prevented the GRG from being effective

(Iglehart 1991:504; Giaimo 2002:111).

In spring 1992, Horst Seehofer was chosen to replace the largely ineffectual Gerda Hasselfeldt as

Minister of Health. With his background in the trade unionist wing of the CSU and after a

frustrating experience in the GRG negotiations, Seehofer was convinced that reform was

necessary and that the intransigence of the health care providers – namely the physicians,

hospitals, and pharmaceutical and medical equipment manufacturers – was responsible for the

failure of the GRG. As a condition of his accepting the post of Minister of Health, Seehofer

insisted upon and received (1) a free hand to pursue a sweeping reform of the health care system

and (2) a promise from the chancellor to actively support the reform project (Kurbjuweit 1992).

In May 1992 Seehofer led a round of closed-door negotiations with a coalition working group of

social policy experts from the CDU/CSU and FDP and a policy expert from the Ministry of

Health. In these negotiations Seehofer faced three barriers to the adoption of an effective reform.

First, the coalition working group was sharply divided between the social wing of the CDU/CSU,

particularly its trade unionist wing, and the business-wing of the CDU/CSU and the FDP. This

fragmentation weakened the coalition working group and the government’s ability to withstand

the lobbying efforts of the physicians’ associations and the insurers. Second, the major interest

groups representing physicians, the sickness funds, and hospitals were consulted, but as their

proposals changed from week to week, the coalition commission – and Seehofer in particular –

grew frustrated and began to draft their reforms without further input. Third, the SPD-controlled

Länder threatened to block the reform in the Bundesrat unless the government addressed their

concerns, particularly the Länder’s demands that the health insurance funds be reorganised in

order to reduce the cost to local authorities of insuring the poor.153 As it became clear that some

parts of the reform, particularly the reform of the hospital sector, would make the reform

zustimmungspflichtig and thus require the support of the SPD for passage in the Bundesrat,

Seehofer commenced a second round of talks that included the SPD and the Länder (Hassenteufel

1997; Giaimo 2002).

The inclusion of the SPD in these health care reform negotiations signalled a break with the

negotiation process that had produced the GRG, but it mirrored the process that in 1989 had

153 Though most of Germany’s social welfare programmes – pensions, health insurance, unemployment, and disability insurance – are centralised with funding at the federal level, local authorities and Länder are responsible for low-income assistance (social assistance and unemployment assistance). As a result, it was the Länder and the local authorities that provided the health contributions for the poor.

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produced the Pension Reform Law of 1992. Honouring his commitment to support Seehofer’s

reform efforts, Chancellor Kohl telephoned Rudolf Scharping, the SPD’s party chairman,

assuring him that the SPD’s role in the negotiations would be genuinely consequential rather than

for show. With his background in the trade unionist wing of the CSU and in response to his

frustration with the health care providers’ intransigence, Seehofer was able to find much more

common ground with the Social Democrats’ health care experts than with the experts of his more

business-friendly coalition partners. Throughout the subsequent negotiations, Seehofer reached

an agreement with the SPD that led to the FDP and their constituents – the physicians and other

health care providers – largely being marginalised as an extra-coalitional agreement on the reform

was reached by the CDU/CSU and the SPD (Der Spiegel 1992b:160-161). By September 1992,

the Lahnstein Compromise (named after the town where the closed-door negotiations took place)

was reached, and after a brief consultation period the Health Care Structural Reform Law

(Gesundheitsstrukturgesetz or GSG) was passed, taking effect on 1 January 1993 (Giaimo 2002).

The GSG required the health sector social partners to incorporate cost-containment measures in

their collective agreements. The Kassenärztliche Vereinigungen (KVs), the associations

representing the statutory health insurance physicians were again required to adopt guidelines for

physician prescribing of pharmaceuticals and treatments in a cost-effective and ‘clinically

consistent’ manner and to monitor physicians for compliance with these guidelines. The GSG

also required the Federal Association of Statutory Health Insurance Physicians (Kassenärztliche

Bundesvereinigung, KBV) to set reference prices on all medications and to assume responsibility

for the siting of new high-tech equipment in hospitals. The GSG established uniform regulations

for all insurance funds when negotiating reimbursement agreements with KVs in order to end

substitute funds’ setting more generous payments in their separate collective agreements with the

KVs. The GSG required that the social partners establish a new formulary for setting uniform

payments for treatment of specified illnesses and operations, ending the per diem payment system

that had encouraged excessive billing (KBV 1993; Giaimo 2002; Hinrichs 2002).

The prominent role of the SPD in the creation of the GSG did not, however, lead to a complete

loss of influence for the FDP and business wing of the CDU/CSU. Market-oriented measures

were implemented that were intended to increase competition among the various health funds.

The GSG allowed blue collar workers choice of a wider array of insurers and mandated that

substitute funds accept all prospective insurees.154 A financial risk-adjustment scheme was

154 Company and professional funds could continue to confine their membership to their existing clienteles, but if they chose to accept new enrolees outside their traditional membership, they were required to accept all new applicants.

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imposed to transfer money among health funds to improve the solidarity and equity principles of

the health insurance funds and to eliminate the unfair advantage of health funds whose members

were wealthier and healthier. Finally, the GSG increased patient cost-sharing by moderately

increasing the co-payments established by the GRG, but it retained the hardship exemptions set

down in the GRG (KBV 1993; Der Spiegel 1993c; Giaimo 2002; Hinrichs 2002).

Many of the cost-saving measures of the GSG resembled the reforms included in the failed GRG,

but just as the approach to the GSG and its reliance on an extra-coalitional agreement was a break

with the GRG’s use of an intra-coalitional agreement of the GRG, the GSG also signalled a break

regarding the content of the reform. The GRG had relied on the health care sector’s social

partners for implementing the cost-saving measures of guidelines for prescribing medications and

treatments, for establishing price schedules for prescription medications, and for monitoring

physician compliance with the guidelines. The KV and insurers’ failure to implement these

measures led the government to take a stricter approach. With Kohl’s support, Seehofer adopted

a measure that abrogated the health care sector social partners’ traditional corporatist

self-governance by using the state’s reserve powers to impose global budgets in most areas of the

health care system for three years. The GSG set the budget so that expenditures could not exceed

the revenues of the sickness funds, pegged the growth of the expenditures to wage and salary

developments, cut prices, and imposed a two-year price freeze on medications, and rebalanced the

fee schedule for physicians, increasing compensation levels for primary care while cutting

compensation for specialists and for technical services. The temporary removal of the health care

sector social partners’ autonomy and the cuts and price freezes served as a warning to the social

partners that the state was willing to intervene and suspend their autonomy if they did not meet

their obligations as the traditional managers of the health care budget in order to enact cost-saving

measures (Giaimo 2002).

The health care industries responded to the GSG with harsh criticism. Their input in the first

round of negotiations had been more limited than in the past, and they were nearly completely

shut out of the second round of negotiations at Lahnstein. While minor details of the GSG (e.g. a

ceiling on KV doctors’ liability if they exceeded the pharmaceuticals budget during the first year)

could be claimed as concessions by the government, representatives of the health care providers’

associations had been unable to forestall any of the more substantial reforms in the GSG, which

they had previously blocked with their non-implementation of the GRG. In the end, it was

anticipated that the GSG would result in 11 billion DM in health care savings in 1993. Of that 11

billion, only one-sixth was to come from increased patient contributions; the overwhelming

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majority of the burden of adjustment would be borne by the health care providers, whom Kohl

and Seehofer held responsible for the GRG’s failure (KBV 1993:11; Giaimo 2002:115-117).

Faced with frozen budgets, guidelines, and monitoring that would constrain their incomes and

reduce their autonomy in deciding on courses of treatment, physicians opposed the GSG and

blamed their associations for failing to protect their interests. The KVs and the KBV opposed the

GSG, arguing that its mandate of guidelines, price schedules, monitoring, and especially the

establishment of a 3-year global budget violated the traditional co-determination autonomy of the

social partners. The KBV sought to reopen negotiations on the reform, and when that failed, it

tried to mobilise KV physicians with statements and publications that warned that office-based

physicians would be dramatically harmed by the cost-cutting measures of the GSG. The

Bundesärztekammer (Federal Chamber of Physicians) threatened a physicians’ strike, and the

Hartmannbund, a particularly militant voluntary association of physicians, engaged in highly

inflammatory rhetoric (Giaimo 2002).

In the end, however, the attempted resistance to the reform was ineffective. While the public was

initially alarmed by the claims of the medical profession’s representatives that

medically-necessary treatments and medications would be denied, the media soon turned against

the medical profession’s claims that the reforms would impoverish physicians and drug

companies. Physicians were divided in their response to the reform. Primary care physicians

came to favour the reform as they realised that their incomes would rise under the GSG. The

media highlighted this divide, noting that resistance was primarily coming from specialists whose

level of income was particularly high under the old system of payments which had compensated

specialists much better than generalists. With Kohl’s CDU/CSU and the SPD united in support

of the reform, both the senior party in government and the primary opposition party were able to

communicate a unified message that it was the intransigence of the wealthiest health care

providers after the 1988 passage of the GRG that had led to rising health insurance deficits and

that had made the GSG necessary. Finally, Seehofer brought pressure to bear on KV doctors,

reminding them that if they went on strike and abrogated their contractual obligations, they could

lose their permit to treat national health care patients for six years on the grounds of dereliction of

duty. As the media, as well as members of the CDU/CSU and the opposition SPD, praised

Seehofer for his taking on the ‘health care lobby’ and for his skill in crafting an extra-coalitional

compromise, public opinion shifted in favour of the reforms and in opposition to the strikes

(Blanke and Perschke-Hartmann 1994; Giaimo 2002:115-121; Czada 2005:182-183). Physicians

accepted the reform, but many of them, particularly specialists, remained hostile towards the

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reform and towards Seehofer and Kohl. Their anger was manifested in the toppling of KBV

chairman Ulrich Oesingmann and his replacement by Winfried Schorre in the hope that Schorre

would be more forceful and effective in defending the interests – and the incomes – of KV

doctors (Spiegel 1993a:203; Spiegel 1993c:65; Giaimo 2002:119-121).

Just as many health care providers were bitter about the outcome of the GSG, the FDP was

furious about the manner in which its coalition partner had marginalised it during the drafting of

the GSG, rendering the FDP unable to protect the interests of some of its key constituencies.

After the ‘traumatic experience’ of the Lahnstein compromise (Lehmbruch 1998:172), the FDP’s

leadership resolved that the party could not afford to allow the CDU/CSU to circumvent it again

on issues of such deep importance. Highly aware of the unhappiness of the FDP and the doctors

and fully conscious that the GSG was only a stop-gap measure, Kohl recognised that future health

care sector reforms would need to address the grievances of the FDP and the doctors.

As unemployment mounted in the East and then in the West, as the costs of unification mounted

far beyond initial expectations, and as the global recession took hold in Germany, rising

expenditures and falling revenues led to a rise in deficits and debt that the Kohl government could

no longer ignore, and in 1993 it turned from health care to a series of programmes to reorganise

the federal, state, and off-budget accounts, to raise new revenues, and to cut some expenditures.

Budgetary Consolidation Programmes: An Erratic Course of Reforms

Although Kohl’s CDU/CSU had been able to win the cooperation of the SPD when reforming

health care, Kohl was not able to convince the SPD to make the financing of German unification

a ‘national project,’ whereby the SPD would take some of the responsibility for the unpopular,

but desperately needed increases in taxes to finance unification. During the run-up to the 1990

election, the SPD had supported a slow and cautious approach to unification with the warning that

tax increases would be necessary to pay for unification. Chancellor Kohl’s promise (and the

CDU/CSU platform) of ‘blooming landscapes’ and a ‘second economic miracle’ without any

need for tax hikes had contributed to the CDU/CSU-FDP’s overwhelming victory in the 1990

elections. When the SPD’s more sober analysis proved to be correct, the SPD was unwilling to

depoliticise this issue which many in the party believed to be the primary reason for their losses

in the 1990 election (Zohlnhöfer 2005:12). After the Kohl government’s adoption of tax

increases in early 1991, the SPD utilised Kohl’s ‘tax lies’ as a campaign issue in the Land

elections in Hesse and Rhineland-Palatinate. The SPD’s victories in these Länder shifted the

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balance of power in the Bundesrat from CDU-controlled Länder to Länder governed by the SPD

or co-governed by SPD-dominated Grand Coalitions (Decker and Blumenthal 2002).

Unable to get SPD support in 1991 and 1992 for a comprehensive array of tax increases to

balance the budget, the Kohl government relied upon a strategy of blame avoidance, utilising

indirect financing and off-budget accounting to obscure the true cost of unification. The costs of

the economic dislocation of Eastern workers in wake of decommunisation and unification were

largely borne by the unemployment insurance system or by the pension system in the case of

older workers who turned to early retirement when they lost their jobs. The burden of the GDR’s

under-funded pension system was transferred to the pension system rather than being directly

addressed in the general budget as a specific, inherited cost of unification. The privatisation of

state-owned properties, the clean-up of heavily polluted areas, the renovation and replacement of

antiquated or incompatible Eastern infrastructure, and much of the rest of the costs incurred to

integrate the Neue Länder into the FRG were financed off-budget via special funds (e.g. Germany

Unity fund, Treuhandanstalt, the Kreditabwicklungsfonds, and the Erblastentilgungsfonds).

Since special funds were used to fund a large proportion of the transfers to the Neue Länder, an

increasingly large amount of government spending eluded the usually thorough channels of

budgetary decision-making and oversight by the Finance Ministry or the Bundestag’s budget

committee.155 While the federal, state, and local governments’ total debt remained essentially

stable during the first four years after unification, these off-budget accounts had contributed debt

in excess of 12% of GDP by 1993 (von Hagen and Strauch 1999).

Despite the initial attempts to avoid responsibility for the rising debt, by 1993 the Kohl

government found it necessary to make its first serious efforts to bring the unravelling public

finances under control. Piecemeal measures, including the 1991 adoption of a one-year 7½%

‘solidarity tax’ on personal and corporate income and increases in the taxes on insurance

premiums, mineral oil, and other goods, had been implemented, but these measures were far too

155 Though some of these special funds were nominally under the financial control of committees in the Bundestag, these controls were often not as thorough as the budget committee’s normal procedures were. Treuhandanstalt, the agency overseeing privatisation of ex-socialist enterprises in the East, provides an extraordinarily clear illustration of the weaknesses of oversight of these off-budget accounts. The Treuhand Committee was vested with financial control of Treuhandanstalt, but the committee only had authority over the amount of debt that Treuhandanstalt was allowed to raise. It did not have control over how the agency spent those funds. In 1993 during a dispute between Treuhandanstalt and the committee, Treuhandanstalt threatened to limit its support of public works agencies if it did not receive more assets. Treuhandanstalt was also confrontational in its relations with the Treuhandanstaltleitungsausschuβ, the advisory committee of the Finance Ministry that monitored privatisations of by Treuhandanstalt. When the advisory committee and later the Ministry itself requested information on Treuhandanstalt’s credit commitments and the usage of funds that Treuhandanstalt had borrowed, the agency refused to provide the information (Czada 1994).

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little. A December 1992 Finance Ministry report predicted that federal debt would rise to DM43

billion in 1993 (von Hagen and Strauch 1999). The Bundesbank had repeatedly increased interest

rates in response to the government’s massive increase in spending, and this increase in interest

rates raised the cost of financing the FRG’s rising debt levels and threatened to send the FRG’s

weak economy into a deeper recession.

In early 1993 the Kohl government was able to achieve a consensual extra-coalitional agreement,

largely due to the federal government’s recognition of the need to consolidate and rein in the

unravelling public finances and to the Western Länder’s concern that there was a need to

restructure the federal finances to stop the haemorrhaging of Western revenues to the Neue

Länder. The Solidarity Pact (or Federal Consolidation Programme) laid the groundwork for

returning to the FRG’s traditional budgetary mechanisms. The Solidarity Pact transferred funds

to the off-budget accounts that had been utilised for the transition of the Neue Länder into the

FRG and set the schedule for integrating these accounts into the formal budgetary process, an

action that would add greater transparency to the budgetary process. This would also place these

accounts under the oversight of the Finance Ministry, the Bundestag’s budget committee, and the

Bundesrat. This was an issue of particular interest to the Western Länder, which were concerned

about how the growing flow of off-budget funds had shifted resources towards the Neue Länder

and away from the Western Länder. From 1995 onwards the Neue Länder would be integrated

into the VAT revenues-sharing scheme between the federal and Land levels. Simultaneously, the

Länder’s share of the VAT revenue was increased from 37% to 44%, a response to the Western

states’ concerns that the financial equalisation aspect of the VAT revenue sharing system was

diverting a significant proportion of the funds away from the Western Länder. To address the

continued rise in unemployment, 2 billion DM were dedicated to subsidies to employers hiring

the long-term unemployed (Eingliederungsgeld). The law urged municipalities to instruct their

social assistance agencies to introduce ‘work obligations’156 in order to test social assistance

recipients’ willingness to work.157 To pay for the programme and to narrow the budget deficit,

the 7½% solidarity tax on personal and corporate income was scheduled to be reintroduced in

1995, a date noteworthy for being after the 1994 federal election (Gunlicks 2000:540; Aust,

Bönker, and Wollman 2002:43-44).

156 ‘Work obligations’ are not regular jobs with labour contracts. Instead they are a measure introduced to require some work in return for a nominal compensation for expenses and as a condition for the continued receipt of social assistance. 157 The government initially tried to require that municipalities impose ‘work obligations’ for all unemployed recipients of assistance, but since this affected municipalities, the law was zustimmungspflichtig (required the approval of the Bundesrat), and the Bundesrat vetoed this measure, due to the programme not covering the cost to municipalities of administering and providing compensation for these work obligations (Aust, Bönker, and Wollman 2002:44, fn32).

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But before the Solidarity Pact even reached the statute books, Finance Minister Theo Waigel

conceded that the federal deficit would likely reach 70 billion DM rather than the 43 billion DM

forecast in December 1992, and the government continued its efforts to rebalance taxes and

consolidate the budget (von Hagen and Strauch 1999). In July 1993 the Bundestag approved the

Standortsicherungsgesetz (Investment Location Act) with the intent to improve Germany as a

business location via a simplification of the tax code and via a reduction in corporate and business

profits tax rates.158 The measures to simplify the tax code closed some tax loopholes –

particularly depreciation allowances – thereby reducing opportunities for tax avoidance and

broadening the tax base. This simultaneous broadening of the tax base and lowering of marginal

tax rates was drafted in a manner intended to make the Standortsicherungsgesetz largely

revenue-neutral, while ensuring that the statutory marginal tax rates on businesses and

corporations would decline. This was an issue of particular importance to businesses at a time

when Germany’s rising social expenditures, deficits, debt, and tax rates, including the 7½%

solidarity tax, were seen as damaging Germany’s attractiveness as a business location (Aust,

Bönker, and Wollman 2002; OECD Germany 1994).

To more directly address the widening budget deficit, the Federal Consolidation Programme of

1993 was followed by the Savings, Consolidation, and Growth Programme in the 1994 budget.

Expected to yield some DM21 billion (0.6% of GDP) in budget savings, the Savings,

Consolidation, and Growth Programme imposed a wage freeze for civil servants with a 1% cut in

jobs, but the vast majority of the savings, some DM15 billion, came from social spending cuts

with reductions in the level and duration of unemployment benefits, reductions in the level of

unemployment assistance,159 the introduction of more stringent obligations for receiving

unemployment compensation,160 and direct and indirect cuts in child benefits, housing

allowances, and student grants (Giordano and Persaud 1998:50-51; Swank 2002:177). While the

FDP was particularly supportive of these measures because they believed that reductions in

unemployment assistance would realign incentives, these measures were problematic for the

158 Corporate tax rates on undistributed profits were reduced from 50% to 44%, corporate tax rates on distributed profits were reduced from 36% to 30%, and the top income tax rates on business profits was lowered from 53% to 44%. 159 Unemployment benefits were reduced by more strictly restricting the duration of benefits and by reducing the replacement rates from 68% to 67% for those with children and from 63% to 60% for those with children. Unemployment assistance benefits were cut to 57% (for those with children) and 53% (for those without children). 160 Traditionally, the unemployed were not required to accept job offers that would employ them in positions substantially below their previous employment, but increasing restrictions were placed upon recipients of unemployment compensation, whereby compensation could be cut off if recipients did not accept jobs which paid substantially less, which were not commensurate with the previous job, or which were in a different field. The Savings, Consolidation, and Growth Programme made work obligations a condition for the continued receipt of unemployment compensation.

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unemployed at a time when the level and duration of unemployment was rising throughout

Germany.

In the wake of the financial difficulties of the mid-1990s, it was clear that some priorities would

need to be sacrificed, but the course of initial increases and subsequent cuts in both benefits and

taxes was erratic. At times, it appeared to be based more upon ad hoc rather than larger

conceptual considerations, and many of the tax and expenditure changes were inconsistent with

the priorities and policies that the government had pursued as little as a year or two before

(Schwinn 1997). The 1993 decision to reimpose the 7½% ‘solidarity tax’ on personal and

corporate income in 1995 was followed in 1994 by the Standortsicherungsgesetz’s reductions in

business marginal tax rates by 6 to 9%. The rise in reliance upon the unemployment social safety

net in the wake of the failed economic miracle in the East and mass layoffs in the West had

prompted Kohl to complain that the future could not be assured if the country was organised as a

collective leisure park (“Wir können die Zukunft nicht dadurch sichern, daβ wir unser Land als

einen kollektiven Freizeitpark organisieren”). Yet it was the Kohl government’s own

underestimation of the difficulties of unification that had produced much of the unemployment.

The 1992 extension of the duration unemployment benefits was motivated by the Kohl

government’s recognition that the worsening economy would make it more difficult for the

unemployed to quickly return to work; the 1994 reduction in duration of unemployment benefits

at a time when unemployment was worsening was in direct contradiction to the logic of the policy

course the government had pursued just two years before. Similarly, the increases in child

benefits in 1992 had been intended to provide support for families with children, reflecting the

view that a higher birth rate was needed to slow the ageing of the German population and the

resultant difficulties of funding pensions with an ever-shrinking working-age population; the

1994 budget reform undermined this policy agenda. Likewise, starting in 1993 Easterners were

allowed to claim housing allowances, a measure intended to offset the financial difficulties

associated with the phase-out of communist-era price ceilings on rent161, but the 1994 Saving,

Consolidation and Growth Programme introduced direct and indirect reductions of this

allowance. Finally, the increase in student grants just a few years before had been intended to

improve the skills sets of the new generation to make Germany more competitive, but the 1994

reform reversed the previous effort.

161 Between September 1991 and January 1993, price ceilings on rent had been raised with the result that the overall level of rent had risen by 500%, and a full convergence with Western rent legislation was set for 1995 (OECD, Economic Survey: Germany 1992-1993, 128).

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While Schwinn (1997) dismisses this changing course as erratic with the selection of programmes

being on a mostly ad hoc basis rather than following a larger conceptual consideration, it is also

possible to interpret this change in course as an early sign of market liberal policy preferences of

the FDP and the business wing of the CDU/CSU starting to gain influence and supplanting the

more social preferences of labour, youth, and women’s wings of the CDU. Still, while there were

efforts underway to restrain expenditures in some areas of social welfare spending, expansions

continued in other areas.

Long-Term Care Reform – The Pflegeversicherung (PV) Law of 1994

Despite the intensifying deficit problems of the 1990s, the Kohl IV government did not devote

itself to a consistent philosophy of retrenchment. Minister of Labour Norbert Blüm had long

been an advocate for vulnerable groups, and in 1994 he focused upon honouring earlier

commitments to address the problems facing the chronically, though not critically, ill and

disabled elderly.

In 1994 the social wings of the CDU/CSU and the SPD introduced a new pillar to the social

insurance system, Long-Term Care Insurance (Soziale Pflegeversicherung, PV). Historically,

‘illness’ was defined in German law as a temporary condition, so health care insurance did not

cover chronic disability. The chronically ill had to rely on informal care, particularly by family

members, or they had to rely on personal or family financial resources to purchase care at home

or in an institution. The state only stepped in once personal revenues were exhausted and the

individual qualified for social assistance from the municipalities (Ostner 1998:116-118). Though

discourse regarding the problems of long-term care dated back to the mid-1970s, for most of this

time debate was focused on whether to provide care and the risk that the statutory provision of

long-term care insurance would undermine the willingness of family members to provide care at

home, prompting a shift to greater usage of institutional care with its associated increase in costs

(Aust et al. 2002:15-19; Götting, Haug, and Hinrichs. 1994; Haug and Rothgang 1994:2-12;

Meyer 1996:153-170; Rothgang 1997:12-17). In the late 1980s and early 1990s the discourse

shifted from whether to provide coverage to how to provide coverage. Though the Health Care

Reform Law (GRG) of 1989 had largely failed in its primary goal of reducing the increase in

health care costs, the Law did include a measure that had required the sickness funds to pay the

chronically ill and disabled 400DM per month for informal domiciliary care and 750DM per

month for professional care. Despite the introduction of some coverage of long-term care costs,

problems remained. The costs of care greatly exceeded the amount provided by the sickness

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funds, and the chronically disabled continued to pose a problem for the financial security of their

immediate family and of the municipalities, once savings were exhausted and the individual

qualified for social assistance. The combined trends of an ageing population, shrinking families,

greater mobility of the workforce, and higher female participation in the workforce had all

contributed to real spending on social assistance for people needing long-term care increasing by

370% between 1973 and 1993 (Roth and Rothgang 2001:292) with every sign that the problem

would worsen dramatically in the coming decades.

In the run-up to the 1990 election, Blüm had announced the government would pursue a new

insurance scheme to provide long-term care for the elderly. This move was strongly supported by

municipalities and the Länder, which had long advocated the federal government taking

responsibility for the cost of providing long-term care. The governing coalition, however, was

intensely divided on the issue. The social wing of the CDU/CSU, which made up the

overwhelming majority of the CDU/CSU at the time, had come to favour a social insurance

scheme modelled on the public statutory health insurance scheme.162 The FDP and the business

wing of the CDU/CSU favoured compulsory private insurance instead of social insurance in order

to avoid the resultant increase in social contributions which would raise the non-wage cost of

labour. Outside the governing coalition, policy preferences varied widely. The SPD was split

between favouring an entitlement programme financed by progressive taxation and a fully

encompassing social insurance scheme that would include the high-income earners and

self-employed who frequently opted for private insurance rather than statutory insurance when it

came to health insurance. Although they had previously preferred a tax-financed entitlement, by

the early 1990s the Greens favoured a social insurance approach, but they argued for more

generous benefits (and, consequently, higher contribution rates) than the plans discussed by either

the CDU/CSU or the SPD. The ex-communist PDS argued for a tax-financed entitlement (Alber

and Schöhlkopf 1999:136-142, 162; Götting, Haug, and Hinrichs. 1994:292-294; Wilke 1999).

The wide gap in preferences between the social wing of the CDU/CSU and the more liberal FDP

and business wing of the CDU/CSU made it clear to Blüm that finding intra-coalitional

agreement on long-term care would be difficult, if not impossible. Foreseeing the difficulty of

developing a reform that would pass the Bundesrat if the Länder’s preferences were not taken

into account, Blüm followed the same strategy that Seehofer had pursued during the Health Care

162 Under Germany’s health insurance system, most employees were enrolled in the public statutory scheme, which was funded via social contributions which were equally shared by employers and employees and with benefits based on need, not contributions. The self-employed and higher income earners could opt for private insurance instead of the statutory scheme.

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Structure Law (GSG) of 1992. He bypassed the FDP and instead reached out to the SPD, which

controlled the Bundesrat and which shared much more in the way of policy preferences with the

Blüm’s social wing (Alber and Schöhlkopf 1999:136-142, 162; FAZ 1993; Götting, Haug, and

Hinrichs. 1994:292-294; Wilke 1999).

The negotiations took place in an environment of intense lobbying. Employers preferred private

insurance or a tax-financed entitlement over a social insurance scheme that would raise social

contributions. Unions favoured a tax-financed entitlement rather than either a private insurance

scheme that would place the whole cost upon workers or a social insurance model that would

raise the non-wage cost of labour and depress employment. Municipalities and the Länder

desired to be freed of much of the burden of providing social assistance to those who had been

bankrupted by the costs of long-term care. The municipalities and Länder, therefore, sought

generous benefits in order to reduce the number and expense of those qualifying for social

assistance, due to their need for long-term care. Municipalities and Länder were somewhat split

between their ruling parties’ preferences for private insurance, social insurance, or a tax-financed

entitlement and their own preference for social insurance, based upon the general concern of

many Länder that a tax-financed entitlement would put greater strain on the general pool of

revenues, which was already being drained by the expenses of unification. Although more

conservative Länder like Baden-Württemberg preferred private insurance, most Länder

concluded that private insurance would do little for them or the municipalities in the short-term

since the current generation of elderly would not likely be eligible for insurance, leaving the

municipalities and Länder to bear the burden for the indigent elderly (Alber and Schöhlkopf

1999:136; Ostner 1998:116-118)

After protracted haggling between Blüm’s social wing and the SPD, an agreement was reached.

The new long-term insurance scheme made insurance compulsory. Its essential features most

closely resembled the health insurance model that the CDU/CSU’s social wing favoured. Most

people would be required to enrol in the statutory scheme, funded by a social contribution of

1.7%, evenly shared between employers and employees with a ceiling on the size of

contributions. Self-employed and higher-income earners would have the option of private

insurance instead of the statutory scheme. Family members with little or no income would be

insured free of charge by the statutory scheme. As with health care, benefits were universal, were

not means-tested (unlike social assistance), and were not related to contributions (unlike the

status-maintaining insurance approach of the German pension and unemployment systems).

Benefits levels would be determined by doctors, based upon twice-yearly needs-assessments and

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take into account three types of care (informal domiciliary, professional domiciliary, and

institutional), three levels of degree of need (considerable, severe, and extreme), and three kinds

of benefit provision (cash, in-kind, or mixed) depending upon the type of care needed. Benefits

would not fully cover long-term care expenses and were intended to reduce (but not fully

eliminate) the financial burden to individuals and their families or to municipalities. The

statutory insurance funds would be required to contract for services with all accredited service

providers, and commercial care providers would operate with the same rights and privileges as

the traditional welfare associations that long dominated the industry. Heavy emphasis was placed

upon the sustainability and stability of contributions. Benefits would be phased in with the intent

to build up reserves sufficient to avoid any increase in the contribution rate until 2010. Although

contributions were evenly split between employers and employees, employers would be

compensated for this increase in social contributions by the elimination of one paid public

holiday.163 Quality of care would be monitored with Länder being responsible for assuring

sufficient infrastructure for services, but they were not required to finance this infrastructure

(Bönker and Wollmann 2000; Mager 1999; Ostner 1998:120-122; Rothgang 1997:25-38; Schulte

1996:161-164).

This agreement on long-term care was made possible by several important factors. First, Blüm

had Chancellor Kohl’s support to pursue this reform via a cross-party deal. Second, the social

wing of the CDU/CSU was dominant in the party and in the coalition. Third, party and coalition

discipline were strong enough that the social wing of the CDU/CSU could bypass their coalition

partners and work with the opposition without excess concern that the FDP or the CDU/CSU’s

business wing would defect from the coalition over this issue. At the same time, the intricacies of

the negotiations and the ultimate package reflected Blüm’s recognition of the constraints posed

by Germany’s upper chamber. The consent of the Bundesrat was necessary for the reform to

pass, and control of the Bundesrat had shifted from CDU-governed Länder to Länder governed

by the SPD or co-governed by an SPD-CDU coalition. Finally, as discussed above, a reform that

integrated the private insurance preferences of the FDP and the CDU/CSU’s business wing would

provide little fiscal relief to the municipalities and the Länder and would, therefore, have little

hope of passing the Bundesrat.

163 The eliminated holiday was chosen by each Land. When Saxony chose not to select a holiday, employers were compensated with employers paying .35% and employees paying 1.35% rather than the .85% for employers and for employees in other Länder.

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In the end, the essentials of the new long-term care pillar were closest to the health

insurance-style system preferred by the social wing of the CDU/CSU rather than the SPD’s

preferences for a statutory system that included all self-employed and higher income earners or

the FDP and business wing of the CDU/CSU’s preferences for a mandatory private system. But

the shift of much of the burden of covering long-term care from municipalities and Länder to the

federal level produced support for the reform among the Länder. The strong support of the

Länder and the Land-level SPD for this reform put pressure on the federal-level SPD to go along

with Blüm’s reform, even if it allowed the self-employed and higher-income workers to opt for

private insurance. Party discipline and a lack of real opportunity to block the reform prevented

the CDU/CSU’s business wing from mounting a serious opposition to the reform. The FDP, as

the only vocal opponent of the reform in the Bundestag and with little leverage in the Bundesrat,

found itself largely marginalised, although the abolition of one paid public holiday somewhat

assuaged the concerns of employers and allowed for some keeping of face by the FDP and the

business wing of the CDU/CSU (Bruns 1994; FAZ 1993; Forster 1994; Götting, Haug, and

Hinrichs 1994:297-304; Meyer 1996). The reform was started rather grudgingly at the national

level in response to the dire financial circumstances of the chronically ill and disabled and of the

municipalities and the Länder. The reform process was also quite lengthy – in part due to the

initial lack of consensus on what form the new scheme should take – but Blüm’s perseverance led

to the extension of a new benefit during a time otherwise dominated by austerity. By the end of

the reform process, both the SPD and the CDU, particularly its social wing, were able to claim

credit for the reform.

Unbeknownst to the participants in this reform, the creation of a Pflegeversicherung benefit was

the last hurrah of the extra-coalitional consensus. The 1994 federal elections would lead to

changes in the balance of power and in party leadership that would make such extra-coalitional

consensus impossible.

The Standortdebatte and the Radicalisation of the Employers and the FDP

Throughout 1993 and early 1994 the economic situation in Germany deteriorated and increasing

attention was focused upon the long-term implications of Germany’s low economic growth, the

marked rise in unemployment, the decline in net investment, and the deterioration of its trade

balance in the early 1990s. The discussion, termed the Standortdebatte, focused on whether

Germany would need to engage in a dramatic reformulation of its economic model in order to

remain an attractive location for business and investment. Although this debate had somewhat

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emerged before unification, it sharply intensified as the costs of unification and the effects of the

recession made themselves felt. Nearly all key aspects of the ‘German model’ came under attack

because they supposedly no longer fit into the ‘new constraints’ of a globally integrated economy.

In particular, German labour market institutions were accused of making German wages

uncompetitively high and its labour regulations too rigid (Lauk 1994; Flecker and Schulten 1999).

The government was in a quandary regarding its social market model and its costs. Unit labour

costs in the Western Länder were higher than in any of its main competitors, and between 1989

and 1993, German unit labour costs rose more quickly than in any of its competitors, excepting

Japan (Tuselman 1995:12-13). In part this was due to an appreciating exchange rate, but it was

also partly due to the negotiated increases in wages and the sharp rise in the non-wage costs of

labour as social contributions were increased (1) to finance the extension of unemployment,

pension, and health care benefits to the East, (2) to finance the costs of rising unemployment in

the West after 1992,164 and (3) to cover the costs of the new long-term care (Pflegeversicherung

or PV) benefit. Increases in health care expenditures and adverse demographics (increasing life

expectancy and declining fertility) were seen as posing threats to Germany’s fiscal position and

the stability of social contributions over the long-term, but the sharp rise in unemployment posed

a more immediate problem. Increasing unemployment raised unemployment compensation,

forcing the government to increase social contributions and perversely suppressing employment

as employers found it more expensive to hire workers, particularly the low-skill, low-wage

workers most likely to be among the long-term unemployed. At the same time, higher social

contributions depressed work incentives because post-tax earnings in the low-wage sector were

not markedly higher than the level of unemployment insurance, unemployment assistance, and

social assistance payments. Concern was voiced that this pattern could result in a vicious cycle

with detrimental effects on the work ethic, skills, and employability of the long-term unemployed.

At the same time, Germany’s labour market institutions came under attack for being too rigid,

making it excessively difficult and expensive for employers to shed unneeded or less productive

workers. The FDP and employers, particularly among the Mittelstand, the small and

medium-sized businesses that are the FDP’s strongest constituency, argued that sharp adjustments

to social welfare expenditures, social contributions, and labour regulations would be necessary to

prevent the decline of Germany’s competitiveness as a site for production and investment

(Flecker and Schulten 1999).

164 Because Germany, as a Bismarckian social welfare system, relies overwhelmingly on social contributions to fund social programmes, labour becomes more expensive as social welfare expenditures increase.

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In retrospect, the evidence regarding the claims made in the Standortdebatte is mixed. On the

one hand, the ageing of the population, coupled with rising early retirement and unemployment,

had led to a disturbing fall in the ratio of wage-earners to welfare recipients. Whereas in 1975

there were 1.5 wage earners to every welfare recipient, the ration was 1.2 wage earners to 1

welfare recipient in 1985, 1.1 to 1 in 1997, and projected to reach 0.9 to 1 in 2003 (BMGS 2004).

On the other hand, German competitiveness and productivity remained strong. After an initial

rise in unit labour costs in the first half of the 1990s, Germany experienced a dramatic drop in

real labour costs over the remainder of the 1990s. The decline in exports and the increase in

imports in the first few years after unification were due more to declines in global consumption

and an increase in domestic consumption, the natural result of the worldwide recession and of an

internal post-unification boom.165 The somewhat more troubling dip in investment in Germany

seems to have been motivated more by new investment opportunities in Eastern Europe and by a

desire to gain improved access to foreign markets than by an unattractive investment climate at

home or by a desire to shift production away from Germany (Heise 1995:691-711).

Nevertheless, Germany’s economic troubles continued and the Standortdebatte intensified. The

leadership of Germany’s employers’ associations became markedly more market liberal. In 1992

Gesamtmetall, the metal-sector’s employers’ association, replaced Werner Stumpfe, who had

agreed to East-West wage parity, with Hans-Joachim Gottschol, who came from the Mittelstand,

which included the firms most frustrated with labour costs and regulations. Gottschol adopted a

harder line in negotiations with IG Metall, the metal-sector union. In 1995 Hans-Olaf Henkel, a

long-time advocate for reduced wages and social benefits, became president of the Federation of

German Industries (Bundesverbandes der Deutschen Industrie, BDI), the umbrella organisation

for industrial employers (Thelen 2000:141-144). Over the remainder of the 1990s negotiations

between the social partners became more troubled as radicalised rhetoric and leadership reduced

the space for compromise (Bispinck 1997; Bispinck and Schulten 2000).

The 1994 Federal Elections

In the run-up to the 1994 elections, prospects for the governing parties were grim. The weak

economy, the rise in taxes, the threatened and actual cuts in social welfare spending since

165 Even at the time, some economists and much of the SPD maintained that conditions for production remained solid. Once the global recession eased, Germany’s trade balance returned to its normal level of surplus, and subsequent studies have shown that German export performance remains impressive (Bispinck and Schulten 2000:189). The Deutscher Gewerkschaftsbund (DGB) report Standort 2001:Deutschland in solider Position cites data indicating that German exports in 1999 totalled US$6598 per capita, compared to per capita exports of $3299 and $2546 for Japan and the US (DGB 2001:2).

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unification, and the broken promise of ‘blooming landscapes’ without the need for sacrifice had

led to discontent with the governing parties. At the same time, there was the feeling that Kohl,

who had become chancellor in 1982, had simply been in office too long and that he and the

CDU/CSU had run out of ideas. Indeed, these feelings had already been present in 1990, and

some commentators have argued that it was only unification euphoria that had prevented a defeat

then. Prospects for the 1994 federal elections seemed even more dire as both the CDU and the

FDP suffered losses in the Land elections in 1993 and 1994 (Green, Henson, and Jeffery 1995;

Dittberner 2005:245-253).

But after some signs of economic recovery starting in the spring of 1994 and in wake of poor

campaigning by the SPD chancellor candidate Rudolf Scharping, the CDU/CSU-FDP coalition

fared much better than expected. Its victory, however, was a narrow one. The initial count of

ballots yielded only one seat more for the coalition partners than for the opposition, although once

overhang mandates were calculated, the CDU/CSU-FDP coalition held a larger – though still

precarious – 10-seat majority (Conradt 1996:26-37; Siaroff 2000:273-278). The weakness of the

CDU/CSU and the FDP throughout 1993 and 1994 and the SPD’s disappointment at its

unexpected loss would unleash a host of recriminations and a shift in the balance of power within

and between the parties, which would change the approach to and the content of the reforms that

the CDU/CSU-FDP coalition would pursue in the fifth Kohl government (Braunthal 1996:48-57).

KOHL V – INCREASING MARKET LIBERALISM AND CONFRONTATION

During the Kohl V period, governing became increasingly difficult and social welfare reforms

became increasingly confrontational. In part, this was due to the continued economic weakness

of the Federal Republic and the approach of the deadline for meeting the Maastricht Treaty’s

convergence criteria. More importantly, however, this increasingly difficult and confrontational

reform course was the product of the shifts within the governing coalition, among the leadership,

and in the relative power of wings within the parties that precipitated a change in policy

preferences and political approach.

SHIFTS IN PARTY POSITIONS AND THE BALANCE OF POWER

Within the CDU and CSU, the election brought about a shift in the balance of power from the

trade unionist wing to the business wing of the parties. The poor electoral results were attributed

to public frustration over the continued worsening of the economy and to the increase in taxes and

social contributions to finance unification and counter the recession. Against the background of

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the sharpening Standortdebatte during the first half of the 1990s, the neo-liberal ideas and

policies associated with the US’ Reagan and the UK’s Thatcher had gained some traction in

society and among the political parties. The business wing of the CDU/CSU blamed the

continued weakness of the German economy on the expansion of the state since unification and

argued that in wake of the electoral results, the CDU/CSU could not afford to continue to pursue

the more social policies advocated by the party’s trade unionist, youth, and women’s wings.

Though the Kohl V cabinet continued to include members from the more social wings of the

CDU/CSU, particularly Labour Minister Norbert Blüm, power shifted towards the business wing

of the CDU/CSU. Wolfgang Schäuble saw himself as Kohl’s likely successor and as the CDU’s

next chancellor candidate. Seeking to raise his political profile and to distinguish himself from

Kohl, Schäuble started rejecting Kohl’s more moderate stance and generally consensual style and

instead supported a more rightward, business-friendly agenda.

The FDP was traditionally a social-liberal party. While most of its time in government had been

in coalitions with the centre-right CDU/CSU, the FDP had also governed with the SPD. In

response, however, to the skyrocketing inflation and debt of the late 1970s, the FDP’s leadership

reshaped the party and its membership in a way that made the party increasingly market-liberal.166

Unification initially benefited the FDP with it receiving its highest vote share ever, but the fiscal

burden of integrating the Neue Länder posed philosophical challenges to a Liberal party.167 As

the economy in the East deteriorated, a backlash against the FDP severely damaged its electoral

prospects,168 precipitating an identity crisis that led to the emergence of new party leaders,

166 In 1982 the FDP defected from Helmut Schmidt’s SPD-FDP coalition, precipitating the collapse of Schmidt’s government and its replacement by a CDU/CSU-FDP coalition under Helmut Kohl. The FDP pursued a fairly moderate course over the 1980s, but the party started to shift rightward. At the 1982 party convention, referred to as the Parteitag der Tränen (Party Congress of Tears) by the FDP’s social-liberal members, the platform of the more leftist elements of the party was rejected. Approximately 15,000 social-liberal members of the FDP were pushed out or chose to leave the party, and the FDP recruited new members from the Mittelstand that preferred a more market-liberal economic policy (Dittberner 2005:66-70). 167 The unification of Germany was a double-edged sword for the FDP. On the one hand, unification was massively popular during the run-up to the 1990 all-German election, and as a part of the governing coalition and as the party of Foreign Minister Hans-Dietrich Genscher, the FDP benefited from an increase in public support that led it to capture 11% of the vote, its best results ever. On the other hand, unification posed a profound challenge to the FDP. The integration of 17 million new citizens and the transformation of a communist state with deep economic, environmental, and infrastructure troubles into a modern, competitive market economy constituted a complicated and expensive project which would require a level of government intervention and support that was inimical to the FDP’s philosophy. Indeed, in 1992 Genscher resigned, largely because he could see no way to balance the FDP’s principles with the policies that would be necessary to integrate the Neue Länder into the FRG (Dittberner 2005:80-84). Klaus Kinkel, Genscher’s successor as the FDP’s Party Chairman, would likewise find it difficult to reconcile the FDP’s principles with the exigencies of reunification. 168 The FDP – as champion of the Mittelstand, a class largely absent from the Neue Länder – had no natural constituency in the East. With Genscher’s 1992 departure and with the increasing familiarity of Easterners with the party and its image as the party of the well-heeled – exacerbated by FDP Secretary General Werner Hoyer’s public description of the FDP as the “Partei der Besserverdienenden” (the ‘Party of the Better Earners’ or the ‘Party of the Well-Heeled’) – the FDP’s popularity suffered throughout Germany, but particularly in the more economically

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particularly Guido Westerwelle and Wolfgang Gerhardt, and a starker shift towards market

liberalism.169

The SPD’s disappointment over the 1994 federal election results unleashed recriminations and a

fratricidal struggle for power among failed Chancellor candidate Rudolf Scharping, Lower

Saxony’s Minister-President Gerhard Schröder, and Saarland’s Minister-President Oskar

Lafontaine. Schröder and Lafontaine attributed the SPD’s unsuccessful bid for power to

Scharping’s uninspiring campaign and to his failure to sufficiently differentiate his positions from

those of his CDU opponent, Helmut Kohl. As a result, the SPD’s past cooperation with the

CDU/CSU on pension and health care reform came to be seen in a more sceptical light, and the

SPD leadership became much less willing to work with the CDU/CSU to find extra-coalitional

alliances on reform (Braunthal 1996:46-57).

With the shifts in party positions and with a tenuous majority in the Bundestag, Kohl faced a

choice. He could rely upon high party discipline and the support of the FDP to pass legislation

and to avoid the risk of a vote of no confidence. Alternatively, he could continue to work with

the SPD. The more social wings of the CDU/CSU would have preferred to continue to

periodically bypass the CDU/CSU’s business wing and the FDP to work with the SPD, but after

depressed Länder of the East (Dittberner 2005:84; Leuschner 2005:239). In Hamburg in 1993 and in Bavaria, Brandenburg, Lower Saxony, Mecklenburg-Vorpommern, Saarland, Saxony, Saxon-Anhalt, and Thuringia in 1994, the FDP suffered electoral defeats, many severe enough that the party lost its representation in the Land parliaments (Leuschner 2005:240-244). In response to the FDP’s descent into its Tal der Tränen (Valley of Tears), Werner Hoyer was replaced as Secretary General of the FDP by Guido Westerwelle. The October 1994 federal election was a brief respite for the FDP with it receiving 6.9% of the national vote and remaining within the governing coalition, but though this was a vast improvement over the Land results of 1993 and 1994, this was still a substantial decline vis-à-vis its 11% victory in 1990. The FDP’s 3.5% showing in the East (versus 7.7% in the West) reinforced concerns that the FDP was in danger of becoming a Western regional party (Dittberner 2005:84-86). 169 In response to the disastrous Land election results and the disappointing federal results, an extraordinary party congress was held in Gera. An intense debate took place within the party regarding the future of liberalism. The FDP’s remaining social liberal wing called for a return to social liberalism, but the party’s elites had little sympathy for that view, and the social-liberal wing was again marginalised (Dittberner 2005:85-87). From within the FDP’s right wing, former public prosecutor Alexander von Stahl argued for a more conservative stance, particularly in regard to using the state more actively to protect the citizenry against criminality, a distinct departure from the FDP’s traditional view of itself as a defender of the citizenry against state intrusion upon personal freedoms. Advocating the use of the state to defend the Germans against multiculturalism and the weakening of German values, right-wing groups sought to ‘Haiderise’ the FDP, hoping to transform it into a national liberal party along the lines of Austria’s xenophobic ÖVP (Austrian People’s Party) (Dittberner 2005:90-94; Leuschner 2005:232). Bolstered by the sharply market liberal tone of the intensifying Standortdebatte, the party elites, including Guido Westerwelle, advocated a market liberal course of protecting the citizenry against the unnecessarily redundant bureaucracy’s ‘zeal for regulation’ and ‘greed for taxes and social contributions.’ In the end, the only agreement that seemed to emerge from the party congress was that the party needed to return to being a programmatic party and not merely a functional provider of majorities for the Volksparteien. When the 1995 Land elections in Bremen and North Rhine-Westphalia continued the disastrous trend of the 1993 and 1994 elections, FDP Chairman Klaus Kinkel resigned and was replaced by Wolfgang Gerhardt. With Westerwelle as Secretary General and Gerhardt as Party Chairman, the FDP was set on a course of becoming the party of deregulation and lower taxes, even if its market-liberal approach was uncomfortably constrained by Kohl and his CDU/CSU’s more social approach to social welfare issues. Over the remaining time of the CDU/CSU-FDP coalition, the FDP would push the CDU/CSU towards a much more aggressive course of deregulation, lower taxes, and social welfare cuts than the coalition had pursued up to that point (Søe 2000:59-61; Dittberner 2005:102-104).

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the 1994 election, this latter option ceased to be feasible. An increasingly assertive FDP insisted

that its policy priorities be given greater consideration, else it might very well choose to

orchestrate the government’s fall. At the same time, the election loss galled the SPD, leaving it

unwilling to continue to engage in extra-coalitional cooperation under the aegis of the CDU.

Unable to rely upon the tacit support of the SPD, the trade unionist wing of the CDU/CSU could

not bypass its business wing or the FDP. With the trade unionist wing’s loss of options, the

business wing found its position strengthened.

Shifting Approach to Reform

With these shifts in the balance of power among parties and with the change in leadership within

parties, particularly the FDP and SPD, the course of reform shifted. Policy negotiations were

dominated by the business wing of the CDU/CSU and by the FDP. The SPD was largely

excluded from policymaking. Policies were developed so that they would avoid directly

impinging on the powers and prerogatives of the Länder in order to assure that these laws would

not be zustimmungspflichtig, thereby allowing the government to bypass the veto point held by

the SPD-controlled Bundesrat.170

While 1995 was a rather quiet year in terms of reform, the continuing recession and the ongoing

increase in unemployment in the West sharpened the Standortdebatte. The FDP and the business

wing of the CDU/CSU pushed for a more market-liberal approach. The looming deadline for

meeting the Maastricht convergence criteria and Germany’s persistent deficits and increasing

debt concerned the government. Throughout 1995 the Kohl V government focused on

developing (1) an action programme to reduce taxes and social spending and to deregulate many

aspects of the economy and (2) a new set of reforms in the health care sector. Over the course of

1996 and 1997, these plans came to fruition with the implementation of increasingly

market-liberal reforms.

170 In times when the Bundesrat is controlled by the opposition party and when there is little consensus on policy reform between government and opposition parties, reform becomes increasingly difficult. While the strategy of devising reforms that bypass the Bundesrat are sometimes feasible, at other times it is necessary to address issues that fall within the compétence of the Länder, which makes the law zustimmungspflichtig and gives the opposition the opportunity to block reform via a veto in the Bundesrat. Strategies to try to avoid this ‘Reformstau’ (reform traffic jam) include splitting reforms into zustimmungspflichtig and non-zustimmungspflichtig portions or seeking to buy off individual Länder, which may be controlled by the opposition party, but which may be amenable to some concession or side-payment that addresses issues of particular concern to their individual Land. A combination of these two last strategies was successfully used in 1999, allowing the Red-Green government of Gerhard Schröder to pass the Pension Reform Law of 2001, despite opposition control of the Bundesrat.

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An Erratic Course: The Bündnis für Arbeit (Alliance for Jobs) and the Sparpaket

The transition from the occasionally extra-coalitional and relatively social Christian Democratic

efforts of the Kohl III and Kohl IV governments to the more market liberal policy orientation of

the Kohl V period was not always a smooth one. The government’s own uncertainty over its

future course made it difficult for it to make commitments and cooperate with the social partners,

and its policies followed an inconsistent course. One of the most dramatic clashes during this

period arose out of the government initially pledging to support the Bündnis für Arbeit (Alliance

for Jobs) social pact proposed by IG Metall President Klaus Zwickel, but then apparently

reneging on its commitments, when it introduced its Sparpaket reform package. The shift in the

government’s course and the unions’ unhappiness with the details of these reforms led to some of

the largest protests since 1968.

The boom and bust trajectory of the German economy in the first half of the 1990s had prompted

an erratic and highly contentious series of wage negotiations and settlements that had raised

tensions between the social partners, particularly in the metal-working sector.171 IG Metall

President Klaus Zwickel recognised that these tensions posed a challenge for the union’s

interests. The continued weakness of the economy and the rising unemployment in the West

undermined wage developments and job security for union members and the continued strength

of the union. Zwickel was also concerned that the government might shift to a more market

liberal course of deregulation and cuts to social expenditures and active labour market policies.

Seeking to forestall such unwanted developments, in November 1995 Zwickel suggested a social

pact in the metal sector to address the growing unemployment in Germany. The Zwickel

Initiative proposed that over the next three years businesses in the metal sector would: (1) not

announce any new redundancies for economic reasons, (2) create 300,000 new jobs, (3) employ

30,000 unemployed, and (4) increase by 5% per year the number of trainee positions available.

The federal government would undertake a binding commitment to: (1) not reduce unemployment

benefits or welfare payments, (2) not tighten social security criteria when amending the

Arbeitsförderungsgesetz (Employment Promotion Law), (3) keep social contributions under 40%, 171 After the rather large jump in wages in 1992 and a bitterly fought 1993 negotiation round in response to Gesamtmetall’s unilateral abrogation of its previous commitment to convergence of Eastern and Western wages, IG Metall, accepted two years of wage moderation. In 1995 and despite the continuing recession, IG Metall called for a 6% wage increase. Gesamtmetall responded with demands for union concessions on flexibility before the wage increase issue could even be discussed. It was only after successful strikes and Bavarian employers refusing to defend Gesamtmetall’s hardline – and, indeed, with some employers showing more solidarity with their workers than with other employers – that Gesamtmetall bowed to internal pressures and settled in Bavaria, accepting a 2-year deal which gave a 3.4% increase in wages for the first year, a further 3.6% for the next year, and no concessions from the unions on flexibility. The Bavarian deal was accepted elsewhere, but with harsh criticism and frustration from the metal sector employers (Thelen 2000:147-152).

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and (4) provide active labour market policies to support the proposed training programme

employers would offer. In return for these concessions, the union offered: (1) wage restraint,

whereby wages would only keep pace with inflation172 and (2) acquiescence to employers hiring

the long-term unemployed at rates below the union standard wage, albeit for a fixed duration

(Bispinck 1997:64; Lehmbruch 2003:145-146).

Zwickel’s proposal was highly controversial, even in his own union, but the logic of the Initiative

gained favour with the Confederation of German Trade Unions (Deutsche Gewerkschaftsbund,

DGB), most union members, the public, and with Kohl. The Zwickel Initiative appealed because

of its apparently fair-handed and pragmatic approach that allowed employers to utilise the savings

from wage restraint and no increases in social contributions in order to maintain and expand

employment. It was predicted that this wage moderation and stabilisation of social contributions

would help employers weather the recession, while providing them with the resources to provide

the greater job security and increased employment that the unions argued would stimulate

domestic demand. Given IG Metall’s traditional role as a precedent-setter for wage negotiations,

it was hoped that a successful agreement within the metal sector could lead to similar pacts being

adopted by the social partners in other sectors.

The initial response of the Kohl government and employers was positive. Kohl put the proposal

on its agenda of Kanzlergespräche (informal, non-binding talks among government, unions, and

employers), and the Zwickel Initiative was developed into the Bündnis für Arbeit talks among

labour, employers, and government (Bispinck 1997:66). This effort was stymied, however, by

the increasing assertiveness of the FDP, the CDU’s Wolfgang Schäuble, and Hans-Olaf Henkel of

the Federation of Germany Industry (Bundesverband der Deutschen Industrie, BDI). In March

1996, the FDP was strengthened by favourable Land elections in Baden-Württemberg,

Rhineland-Palatinate, and Schleswig-Holstein. Bolstered by these successes, the FDP’s Guido

Westerwelle and Wolfgang Gerhardt showed an increased assertiveness and a decreased

willingness to cooperate with the unions. Within the FDP and the business wing of the CDU,

these electoral successes were interpreted as support for a market liberal response to the recession

and Germany’s deteriorating social welfare and fiscal situation. The CDU’s Wolfgang Schäuble,

who saw himself as Kohl’s likely successor as the CDU candidate for chancellor, sought to

distinguish himself from Kohl by rejecting Kohl’s more consensual style and by instead

172 Wage demands by unions were normally based on the inflation and some of the productivity increase for that year. Higher demands were sometimes made after wage restraint in previous or when the wage share of national income had declined.

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advocating a series of painful social reforms. The new long-term care insurance

(Pflegeversicherung) and the high wage increase IG Metall won in 1995 had exacerbated tensions

among the more cost-conscious Mittelstand. With the FDP under Westerwelle and Gerhardt

having taken a starkly more market-liberal policy position, the BDI’s Henkel sensed an

opportunity to exploit shifts within the governing coalition and to take a harder line in the BDI’s

negotiations with government and the unions. Consequently, the employers’ associations started

to push the government for cuts in welfare programmes, reductions in labour costs, and the

deregulation of statutory employment and welfare standards (Bispinck 1997:67-70; Streeck

2005:156-158; Lehmbruch 2003:146-147).

By April 1996 pressure from the FDP, Schäuble, and Henkel resulted in an austerity package, the

Programme for Economic Growth and Employment, commonly referred to as the Sparpaket,

which included wide-ranging changes in labour law, pension insurance, health insurance,

unemployment, insurance, social security, child benefits, sick pay, and statutory employment

protection. The programme’s most important measures included a loosening of workers’

protections against dismissal, the raising of the retirement age for women, cuts to some types of

preventive health care, reduction in unemployment assistance benefits via a change in the

methods used to calculate benefits, a tightening of work requirement for recipients (a 25%

reduction in benefits when ‘suitable employment’ was refused), an attempt to improve work

incentives by allowing social assistance recipients to continue to receive benefits for six months

after they retuned to work, restrictions on early retirement, and a reduction in the employer-paid

first six weeks of sick pay from 100% to 80% of current earnings. The FDP successfully

advocated a reduction of the Solidarity tax from 7.5% to 5.5%, although they failed to block an

increase of the VAT to 16%. They also succeeded in gaining the passage of an extension of

maximum duration of temporary employment contracts from 18 months to 24 months, a

temporary freeze on COLAs for social assistance, and the early phase-in of a reduction in the

number of years of pension credits education (Bispinck 1997; Pochet 1998; Streeck

2005:156-158; Dittberner 2005:87).

The response to the reform was decidedly negative. Some of these measures were acceptable to

the unions and the SPD. The government and the social partners had negotiated the restrictions

on early retirement, but the unions strongly opposed the reduction in sick benefits. Arguing that

sick pay had long been a part of the wage negotiations between unions and employers’

associations, the unions maintained that government intervention in the area infringed upon the

Grundgesetz-guaranteed right of Tarifautonomie. But even for those who didn’t perceive the

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government’s interventions in sick pay as a violation of Tarifautonomie, the Kohl government’s

decision to unilaterally cut sick pay was seen as an assault on accrued rights. Moreover, the

entire package was seen as the Kohl government reneging on its Bündnis für Arbeit commitment

to play a supportive role for workers and to not cut benefits. Both unions and the parties of the

left came out in strong opposition to the plan, and more than 350,000 demonstrated against the

plan in Bonn (Bispinck 1997:67-72).

After extended negotiations, the Programme passed with the sick pay income replacement level

being reduced to 80% if it was agreed to in private employee-employer bargaining. Following the

government’s lead, employers pursued a harder line in their Bündnis für Arbeit negotiations.

Seeing the government as having broken its promises and the employers as being intransigent, the

unions broke off talks with the government and the Bündnis für Arbeit collapsed (Bispinck 1997;

Bispinck and Schulten 2000:190; Clasen 1997; Pochet 1998; Streeck 2005:156-158; Swank

2002:177-178).

After the collapse in the Bündnis für Arbeit talks and unions’ offer of wage restraint, the 1996

collective bargaining round witnessed Gesamtmetall urging its members to introduce into their

work contracts the reduction in sick pay. Though now sanctioned by law, the cuts in sick leave

were in violation of the existing sectoral level agreements and were seen as an assault upon the

accrued rights of labour.173 As employers brought up sick pay reductions and some of the other

changes passed in the Sparpaket, workers responded with massive strikes and work stoppages,

including some that involved several hundred thousand employees within a single week. In the

end, metal-sector employers agreed to continue sick pay at 100% of current earnings, unions

agreed to a downward revision of Christmas bonuses and paid holidays, and both agreed to

modest pay settlements for the year despite the collapse in the Bündnis für Arbeit talks. The

metalworking sector frequently sets the tone for negotiating rounds in the other sectors, and in

1996 tensions soon spread to the other sectors with the unions undertaking protests and warning

strikes to block the proposed wage freezes and elimination of accrued benefits in the areas of

sick, holiday, and Christmas pay.174 By its end, the 1996 collective bargaining round resulted in

173 Historically, blue-collar workers received no compensation for their first three sick days, while white-collar workers were not subject to this waiting period. After a hard-fought strike – at 114 days, the longest strike since the founding of the FRG – the metalworkers won equal treatment in 1956. The decision to cut sick pay was, therefore, seen as an infringement on a right the union’s perceived as being of great symbolic importance (Lehmbruch 2003:146). 174 Relations between the public-sector unions and the government deteriorated with warning strikes in the public sector as DAG and ÖTV demanded 4.5% pay increases and the harmonisation of Eastern and Western pay rates, while opposing the government’s proposed wage freeze, the elimination of two days of holiday pay, and cutbacks in sick, holiday and Christmas pay (EIRR 1996a; EIRR 1996b). Warning strikes were also undertaken in the private banking sector with DAG and HBV demanding pay increase of 5.5% and job guarantees, while employers were seeking

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modest pay settlements, some working time agreements to preserve employment, and a nearly

total retention of 100% sick pay coverage, albeit with some sectors agreeing to cuts in Christmas

bonuses and paid holidays (Bispinck 1997:72-77).

With the collapse of the Bündnis für Arbeit and the Kohl V government’s reduced commitment to

active labour market measures, the number of people employed in part time work, training and

job creation schemes fell, while unemployment continued to rise in both the East and the West.

While the rest of the provisions of the Sparpaket were implemented, the government failed in its

attempt to intervene in pre-existing sectoral agreements to cut sick pay. The industrial unrest

over the issue of sick pay, the government’s failure to fully implement its Sparpaket reform, and

Kohl’s decision to pursue a confrontational reform at the expense of the Bündnis für

Arbeit resulted in a great deal of commentary regarding the Kohl government’s judgment and its

ability to implement needed reforms. Alternatively, some commentators blamed the problem of

Reformstau (reform ‘traffic jam’) upon the structure of the German state or upon the behaviour of

the parliamentary opposition and the social partners (Bispinck 1997; Thelen and Kume 1999:489;

Hege 1999:70; Lehmbruch 2003:147-148).

This semi-successful adoption of this reform was, however, part of the much broader change in

the balance of power within the governing coalition. The Sparpaket – and its break with the

government’s commitments to the Bündnis für Arbeit – was one sign of the growing power and

increasing assertiveness of Schäuble, Kohl’s heir apparent in the CDU, and of the FDP’s

Westerwelle and Gerhardt, but throughout 1996 and 1997 it became clear that it was only the first

sign of the coalition’s turn towards a more market liberal reform agenda with its consequent

change in the distribution of the burden of adjustment. The shift in policy preferences was also

evidenced in the debate over the Health Care Reorganisation Acts (NOGs) throughout the 1995 to

1997 period and the adoption in 1997 of the Pension Reform Law of 1999.

Health Care Reform – The Health Care Reorganisation Laws (Neuordnungsgesetze, NOGs)

In 1995 the government found itself revisiting health care reform for the third time in a decade.

While the experiences with earlier reform efforts informed the political and policy discourse in

1995 and reinforced the policy preferences of many of the key actors in the health care debate, it

was the change in the balance of power within the governing coalition that had the most profound

reductions in bonuses, retention of the 39-hour week in the West and the 40-hour week in the East, working time flexibility, cuts in sick and holiday pay and a pay freeze for trainees (EIRR 1996b).

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effect upon the course of the reform, and it was this change that led to a policy outcome that was

markedly different to the earlier reforms.

Even in 1992 when the GSG was developed, it was seen as a stopgap measure (Giaimo 2002). As

part of the reform, the Kohl government had sought to lay the groundwork for long-term reforms

that included cost containment measures, particularly more patient cost-sharing and a mandate for

the KVs to set treatment and prescribing guidelines for physicians and for the KVs to monitor

physician compliance with those guidelines. But it was the three-year fixed global budgets for

much of the health care budget and the two-year freeze on drug prices that provided cost savings

in the short term. It was hoped that these short-term fixed budgets would: (1) contain costs while

the KVs developed and enforced their new physician prescribing guidelines as part of their

sectoral self-governance responsibilities and (2) be an implicit threat to the health care sector

social partners that failure to vigorously honour their self-governance responsibilities could lead

to future abrogation of the health care social partners’ traditional autonomy in managing the

sickness funds via the continuation of government-set global budgets. Health care costs stabilised

in the first two years after the passage of the GSG (Pfaff, Busch, and Rindsfüβer 1994;

Altenstetter 1999), but the budget discipline imposed by the global budgets did not resolve the

health care system’s structural problems, namely an ageing population, rising unemployment that

reduced revenues for the health care system, health care sector cost increases that greatly

exceeded the general inflation rate, and physician-ordered treatments and prescribing that exceed

the government’s targets (Der Niedergelassene Arzt 1996:13 14; Jeschke 1996:613 615; Giaimo

2002).175 By 1996 cost overruns in the hospital and drug budgets produced a health care system

deficit of DM6.3 billion (Manow 1997).

A simple resumption of the fixed global budgets was not a viable option. The GSG had left

physicians, hospitals, drug manufacturers, and the FDP highly unhappy. The revision of the fee

schedule to shift resources to primary care had infuriated the specialists whose incomes fell and

became much more unpredictable as a result of the flexible conversion factor (Der

Niedergelassene Arzt 1996:13-14; Jeschke 1996:613-615). The GSG had produced tensions

between physicians and the KVs to an extent that it threatened to undermine corporatist

governance of the health care system. Likewise, the FDP remained bitter both about the content

175 If anything the shift of resources to primary care and the imposition of a flexible conversion rate for specialty services exacerbated the problem since specialists then billed for ever more procedures as they sought to maintain their incomes. Yet, this very increase in volume further undermined the security of specialists’ incomes because the conversion rate plunged as the volume of procedures skyrocketed (Der Niedergelassene Arzt 1996:13-14; Jeschke 1996:613-615).

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of the GSG and about the process that had produced it, since the Lahnstein Compromise had

essentially excluded the FDP from having any meaningful influence over the GSG. The resultant

law had hurt FDP constituents and undermined the FDP’s ability to credibly claim to effectively

protect the interests of its constituents. Though the Kohl government confronted essentially the

same problems that had led to the Lahnstein Compromise and the GSG of 1992, the balance of

power among the political parties had shifted. Kohl was mindful of these factors as the

government’s attention returned to health care in 1995, and as a result the approach to and the

content of the health care sector reforms in 1995 and 1996 differed markedly to the GSG of 1992

(Giaimo 2002:117-124).

Ideally, Health Minister Seehofer would have preferred to continue the approach to reform that

had produced the GSG. Working with the SPD, Seehofer might well have returned to the 1992

SPD plan to strengthen corporatist governance of the health care system by transforming the

existing federal hospital association (KBV) from a voluntary body into a strongly corporatist

body with compulsory membership and with the authority to negotiation with the sickness funds

to create agreements that were binding on hospitals and physicians. Seehofer had also shown

interest in proposals to create a global hospital budget for each Land rather than individual

hospital budgets or to shift the funding of the health care system to a single source rather than the

existing system where health care was funded both by the sickness funds and the Länder, a

measure that would reduce the number of conflicting interests involved in the health care system.

Seehofer had also shown some support for proposals to improve coordination between inpatient

and outpatient care providers. The Länder, however, objected to measures that would change the

role of the Länder in the health care system, and the FDP and the business-wing of the CDU/CSU

opposed measures that could strengthen corporatist governance, arguing that corporatist

structures would be too rigid and state-centric and that market solutions and improved ‘individual

responsibility’ measures should be pursued instead (Giaimo 2002:127-130).

In contrast to 1992 when Seehofer with Kohl’s support was able to forge a health reform deal

relying upon an extra-coalitional consensus between the CDU/CSU’s trade unionist wing and the

opposition SPD, in 1995 and 1996 Seehofer had no recourse but to pursue a reform developed

within the coalition. As discussed earlier, concern regarding the economic situation and its

impact upon the CDU/CSU’s electoral fortunes had strengthened the business wing of the CDU

vis-à-vis the trade-unionist wing (Giaimo 2002:128). The FDP’s ‘near death experience’ in 1993

and 1994, the change in leadership with the rise of Wolfgang Gerhardt and Guido Westerwelle,

and the replacement of the FDP’s old-guard social liberals with market liberals from the

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Mittelstand produced a much more ideologically-driven party. The FDP attributed its success in

the three Land elections in spring 1996 to its more strongly market liberal policy agenda, so when

the government’s attention returned to health care, the leadership made it clear that it would

rather allow the government to fall than to tolerate another Lahnstein Compromise. In light of the

weakness of the CDU/CSU’s position after the election, the FDP’s threat to topple the

government was one which Kohl took seriously (Roberts 1996:79; Giaimo 2002:128-129).

Finally, Seehofer’s trade-unionist wing likely would not have had a partner if he had sought to

pursue another extra-coalitional alliance because of the SPD’s Schröder and Lafontaine

attribution of the SPD’s 1994 election disappointment to insufficient differentiation of the party’s

policy positions from those of Kohl and the CDU/CSU and their consequent reluctance to

cooperate on future reform efforts (Braunthal 1996:46-57).

In light of the shifts in the balance of power among partners and between the trade unionist and

business wings of the CDU and in recognition of how the policy orientations of these parties and

wings had hardened, Kohl concluded that his coalition would not likely survive if he marginalised

the FDP again during a major reform effort. As a result, when Health Minister Seehofer

undertook a round of talks for the newest health care reform, Kohl instructed Seehofer that he

should develop a reform that would win the FDP’s support (Giaimo 2002:128-129).

With the shift in power in favour of the FDP and the business wing of the CDU/CSU, employers,

medical professionals, the sickness funds, and manufacturers of pharmaceuticals and medical

devices found a sympathetic ear. Employers, as co-financers and co-administrators (via the

sickness funds) of the health care system, were considered to have a legitimate claim to having

their concerns addressed in the health care reform debate, particularly since the unification and

recession-induced rise in non-wage labour costs had already disproportionately burdened them.

Medical professionals, particularly specialists, the KVs, and manufacturers of pharmaceuticals

and medical devices had borne the burden of the bulk of the costs of the 1993 GSG after these

actors had failed to implement the cost-saving measures of the 1989 GRG (Giaimo 2002:129).

The FDP’s preferred reform would have relieved employers of all responsibility for co-financing

the health insurance of their employees. Ending the system of compulsory insurance with parity

financing, the new system would have relied upon individual insurance paid for by workers with

a wage subsidy compensating employees for this new expense. (This would have shifted some of

the cost from employers to the state, reducing the non-wage cost of labour by shifting much of the

cost to employees and to the state’s general budget.) As would be expected, this proposal was

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strongly opposed by the unions and the SPD, but the reform was also opposed by employers, the

very group the FDP’s proposal would presumably most benefit (FAZ 1995b:1-2; FAZ 1995c:1;

Giaimo 2001:353-354). Employers argued that this proposal would actually intensify the

problem of labour costs with unions using the collective bargaining arena to demand higher

wages as compensation for the substantial new health insurance costs borne by labour. Secondly,

employers reasoned they would lose representation on sickness boards and lose their leverage

over health policy in general (Spiegel 1995:30-31). Even within the governing coalition, there

was division on this proposal, since the trade union wing of the CDU opposed the proposal on the

grounds that it violated the principles of parity financing and administration of health care.

Seehofer fundamentally opposed the FDP’s neo-liberal vision of individual responsibility and the

market provision of health care (FAZ 1995a:1; Spiegel 1995:30-31; Giaimo 2001:354-355). In

response to low support within the coalition and from employers for this measure to shift away

from parity-financing of the health sector, this radical change to the financing of the health care

system was abandoned and the coalition turned to the more limited goal of reform of the hospital

sector.

When the health care talks turned to fundamental changes to the hospital sector, the SPD

threatened to block the reform in the Bundesrat. The reform would greatly affect the Länder, due

to their role in co-financing the sector, and would, therefore, require the approval of the

Bundesrat, which was dominated by SPD-controlled governments. At that point, Kohl instructed

Seehofer to develop a reform which would not be zustimmungspflichtig¸ thereby allowing the

government to pursue a reform that would not need the approval of the Bundesrat. This removed

the SPD’s ability to impede reform and obviated any need to work for a reform which would

address the concerns of the SPD (Oldiges 1996; Schirmer 1997; Giaimo 2002:129).

In the Petersburg talks that produced the two Health Care Reorganisation Acts (the

Neuordnungsgesetze, NOGs 1 and 2), health care stakeholders were included to a much greater

degree than they had been during the Lahnstein talks. Consequently, both the insurers and the

KBV were able to secure concessions that made the NOGs more generous to these stakeholders

than the GSG had been. On the other hand, the relative weakness of the more social wings of the

CDU and the marginalisation of the SPD had the effect that the burden of adjustment fell on

patients to a greater extent than had been the case with the GSG (Giaimo 2002:129-130).

The passage of NOG1 in December 1996 and of NOG2 in April 1997 and their implementation in

June 1997 represented a shift in the health care system towards a restoration of the traditional

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corporatist self-governance of the health care system, towards the greater use of market forces,

and towards greater cost-sharing by patients and away from the parity financing of health care by

employers and employees. The NOGs lifted the state-set global budgets and drug price freezes.

In a return to traditional corporatist management of the health care system, responsibility for

cost-containment was placed on the sickness funds which were tasked with negotiating regional

budgets with the KVs. Under NOG2 the KVs would set budgets with each doctor, taking into

account the doctor’s area of specialty. These budgets set fixed compensation amounts up to a

pre-specified volume of procedures and with floating scale conversion factors on procedures in

excess of this set volume in order to restrict the amount of compensation. In a repeat of earlier

reforms, KVs were tasked with monitoring physician prescribing for compliance with guidelines.

Corporatist governance was also extended with sickness fund peak associations negotiating

collective bargains for compensation with providers of rehabilitation, physical therapy, home

care, and spa cure services (Erstes Gesetz zur Neuordnung von Selbstverwaltung und

Eigenverantwortung in der gesetzlichen Krankenversicherung 1996; Zweites Gesetz zur

Neuordnung von Selbstverwaltung und Eigenverantwortung in der gesetzlichen

Krankenversicherung 1997).

Suspending the use of state-set global budgets, the government turned to market forces to restrain

the growth of health care sector expenditures. The statutory funds were allowed greater leeway in

differentiating their products, as private insurers already did. The NOGs were accompanied by

the 1996 passage of the Contribution Relief Law (Beitragsentlastungsgesetz) which required that

contribution rates be lowered by 0.7% in 1997 and shifted ‘marginal benefits’ from the

mandatory list of benefits to a list of supplementary benefits which patients could purchase. The

lowering of contribution rates was intended to promote increased employment by decreasing the

non-wage costs of labour. At the same time, the shift of ‘marginal benefits’ from the mandatory

to a list of optional supplementary benefits was expected to reduce fund expenditures by

eliminating the funds’ responsibility for covering these expenses as part of the mandatory

programme. It also allowed the funds to raise more revenue by selling these benefits in exchange

for additional premiums. The logic of market forces was used with the claim that these reforms

benefited consumers by cutting the costs of the mandatory system, while allowing consumers

more choice with statutory funds offering a wider array of insurance options and competing with

private insurers. Finally, under the NOGs the statutory funds were allowed to explore

reimbursement schemes, including plans with deductibles but correspondingly lower contribution

rates, reimbursements made to patients rather than to health care providers, and rebates to

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customers who utilised health care services at low levels (Erstes Gesetz zur Neordnung 1996;

Zweites Gesetz zur Neordnung 1997; Jost 1998:702; Giaimo 2002:124-126).

The share of costs borne by patients was increased. NOG2 raised co-payments on prescribed

medications, medical transportation, hospital stays, physical therapy, massage, spa services, and

dental equipment and services, although at the insistence of the trade unionist wing of the

CDU/CSU patients’ total annual co-payments were capped at 1% of income and hardship

exemptions were extended to more people than had previously qualified (Giaimo 2001:355).

These co-payments were also set to automatically increase via the introduction of indexation to

wage developments scheduled to start in 1999. Under NOG1 cost increases among insurers and

cost-sharing by the insured were made more transparent with a new measure that would require

funds to increase co-payments by the same amount that they increased contribution rates.

Continuing earlier measures to give consumers greater choice, insurers were required to accept a

wider range of applicants and waiting periods for changing insurers were reduced, allowing

consumers to switch insurers in response to rate and co-payment hikes (Erstes Gesetz zur

Neordnung 1996; Zweites Gesetz zur Neordnung 1997; Jost 1998:702; Giaimo 2002:124-126).

Phased increases in co-payments and the indexation of co-payments to wage developments were

intended to utilise market forces to constrain the growth in health care expenditures. First, higher

co-payments would make consumers more aware of the cost of health care and would, thereby,

discourage them from over-consumption. Second, the prospect of consumers switching funds in

response to co-payment hikes was expected to deter insurers from raising contribution rates (and,

consequently, increasing co-payments) and to instead encourage insurers to pursue greater cost

efficiencies elsewhere.176 These changes to co-payments were expected to yield DM9 to 14

billion in savings to the health budget. At the same time, the delay in implementation of the

indexation until after the next election, the automaticity of future co-payment hikes (since

176 The ability of these measures to actually contain costs was always somewhat dubious since co-payments apply to services or drugs prescribed by physicians, a point at which patients are likely to defer to the judgement of their doctors. Doctors’ visits do not require co-payments, and this is the very decision where the patient is most actively engaged. Likewise, while the linking of patient co-payments to insurers’ increases of contribution rates is supposed to lead customers to exert pressure on insurers to cut costs in order to avoid losing patients, it is unclear how much actual leeway the insurance funds have in cutting costs, since the funds have a statutory responsibility to accept any applicant, a core set of benefits which they must offer (even if they are allowed to charge extra for supplementary benefits), and a mandate to pay providers according to legally established formulae. Finally, the use of co-payments to discourage ‘over-consumption’ may lead to patients deferring treatment. In the long-run, such delays of treatment may result in a much sicker populace with substantially more expensive conditions. The trajectory of the health care expenditures does not seem to have been checked by the reform. Indeed, one of the first responses of the funds to the NOGs was to immediately raise premiums before the NOG1’s linking of contribution rates and co-payments took effect (Jost 1998:701-703). The true capability of the NOGs to contain costs can not, however, be fully assessed, since they were never completely implemented as a result of the repeal of most of the NOGs’ provisions almost immediately after the 1998 election which brought Gerhard Schröder and his SPD/Green coalition to power.

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indexing would obviate the need for future governments to directly act to increase co-payments),

the application of a cap on total expenditures on co-payments, and the extension of hardship

exemptions helped the government minimise the immediacy, visibility, and severity of the reform

and to reduce public and union opposition to the reform.

While these reforms did seek to introduce market forces to make both consumers and insurers

more cost conscious, regulation of the health care insurers was also strengthened. The mandated

core benefits remained essentially untouched, even if some ‘marginal benefits’ had been switched

to being fringe benefits which could now be provided in exchange for supplementary payments

by consumers. A risk-adjustment scheme reflecting members’ socio-demographic characteristics

was added to compensate insurers and local funds whose memberships were sicker or poorer

(Moran 1999:77-78; Giaimo 2002:136-138). As a result of these regulations, the NOGs thus

sought to prevent a ‘race to the bottom’ in covered services and to remove financial incentives to

engage in ‘creme skimming,’177 ensuring that the core tradition of health security was maintained.

In the end, the NOGs represented a mixture of continuity and a break with both past health care

reforms and the traditional health care system. By ending the GSG’s state-imposed global

budgets, the NOGs were a move away from the more intrusive state role of the GSG (although

those global budgets had been intended to be temporary). The NOGs increased co-payments and

implemented measures to automatically increase co-payments in response to wage developments

and contribution rate hikes by insurers shifted an increasing proportion of the burden of the health

care system, but this break with the tradition of parity financing of health care also represented

the continuation of a process begun with the GRG of 1989. The core issue of social justice and

equal access to health care was largely maintained as a result of the co-payment hikes being

balanced subject to the caps on co-payments and to the extension of hardship exemptions for a

larger proportion of consumers. The SPD’s opposition to the NOGs in 1996 and 1997 had not

blocked the reform or attenuated it, except in regard to forcing Seehofer to focus upon measures

that did not require the approval of the Bundesrat. The SPD’s dissatisfaction with the reforms

did, however, help the party differentiate itself from the CDU, and after the 1998 elections

brought Gerhard Schröder’s SPD/Green coalition to power, one of its first actions was to repeal

many of the NOGs’ provisions (Giaimo 2002:130).178

177 ‘Creme skimming’ is the practice of insurers luring away healthier and wealthier customers by offering lower contribution rates and leaving other funds with the sicker, more expensive patients. 178 Many of the co-payment hikes were reduced or eliminated. Likewise, the new government abolished the linkage of contribution rate hikes to co-payments and the indexation of co-payments to wage developments. Measures that encouraged cream-skimming – contribution rebates for ‘under-utilisers’ of health care services, lower contribution rates

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Pension Reform – The Pension Reform Law of 1999

When the Pension Reform Law of 1992 was passed in 1989, it was believed that no further

reforms to the pension system would be necessary for at least a decade. After unification the

budget balance worsened, due to rising transfers to fund the restructuring and renovation of the

East. Rising unemployment, health care, and pension costs throughout Germany forced the

government to increase social contributions. Indeed, between 1995 and 1997, social

contributions rose by 2.4% and the pension insurance contribution exceeded the psychologically

significant threshold of 20%.179

While there was broad recognition of a need for a new round of pension reforms, there was little

left of the consensus that had produced the Pension Reform of 1992. The FDP favoured cuts in

pensions in order to forestall increases – and preferably in order to decrease – pension

contributions and the federal grant. Inspired by the privatisation of pensions in Chile and by the

American discourse on the topic, the most market liberal elements of the FDP and the business

wing of the CDU/CSU started advocating a shift from reliance upon public pensions and towards

a greater focus upon employer-sponsored or individually-funded pensions. The trade-unionist

wing of the CDU/CSU, led by Labour and Social Affairs Minister Norbert Blüm, found itself

under increasing pressure from the FDP and the business wing of the CDU/CSU and a return to

extra-coalition compromise with the SPD was not feasible. The SPD’s own views on pensions

and social insurance had not shifted, while the CDU/CSU’s positions had changed. The SPD also

wished to avoid an unpopular reform in anticipation of the 1998 elections, and it wanted to

clearly differentiate the SPD from the CDU/CSU in advance of elections. As a result, the SPD

rejected any cuts in pension levels and argued in favour of making up for funding shortfalls by

increasing the federal grant, extending coverage of the statutory pension system, changing

survivors’ pensions, and by reforming economic policy to increase employment and to reduce the

dependency ratio (Aust, Bönker, and Wollman 2002).

Concerned about the increase in social contributions and Germany’s high and rising budget

deficits, Finance Minister Theo Waigel of the FDP put pressure on Labour and Social Affairs

Minister Norbert Blüm to adopt a pension reform that would introduce large benefit cutbacks.

Waigel even threatened to start taxing public pension benefits if Blüm failed to propose cuts that

in exchange for high deductibles, etc. – were scrapped. Instead, the government returned to the use of state-imposed sectoral budgets to contain costs (Giaimo 2002:130). 179 Total social contributions were above 40%, but since half are paid by employers and half by employees, the rate is also discussed at times in terms of the rate paid just by the individual.

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would produce immediate savings on pension expenditures. In response to this pressure, Blüm,

the most powerful and popular member of the CDU’s trade-unionist wing, suggested that he

would resign if Waigel insisted upon taxing pensions instead of increasing the federal transfers to

the public pension system (Hering 2003:23-24).

After Waigel convinced Kohl that Germany would be unlikely to meet the convergence criteria

without these cuts, Kohl resolved the impasse between Waigel and Blüm. After the contentious

experiences with the aborted Bündnis für Arbeit and the incomplete adoption of the Sparpaket

and in response to criticism that after 14 years in power the governing coalition was running out

of ideas and capability to the extent that a new government was needed, Kohl was determined to

demonstrate his ability to enact reforms. In the face of increasing fractiousness within his

governing coalition and the firm desire to ensure that Germany would meet the Maastricht

convergence criteria, Kohl sided with Waigel. In early 1996 he unilaterally accelerated the

implementation of the phase-in of higher deductions for early retirement and the decrease in

pension credits for education, as had been agreed upon in 1989 with the passage of the Pension

Reform of 1992 (Schmähl 1999:109-114; Hering 2003:23-24).

Kohl rejected the consensual approach to pension reform that his government had practised in

1989 and the intra-party consensus that had dominated many of the efforts of the immediate

post-unification period, and he endorsed Waigel’s support for immediate pension cuts. With

Kohl’s endorsement of Waigel’s call for immediate pension cuts, Blüm was overruled. The

Pension Reform Law of 1999 was developed and passed with a coalition majority rather than an

extra-coalitional majority. The reform introduced a ‘demographic factor’ by taking average

remaining life expectancy into account when calculating benefits. This would phase in automatic

reductions of the standard pension from 70% of average net earnings in 1997 to 64% of average

net earnings by 2030. The reform tightened eligibility for disability payments, while increasing

credits for child rearing. In the short to medium term, this would reduce the federal government’s

expenditures by several billion Marks per year, assisting the government’s efforts to reduce the

deficit and debt. Blüm, however, remained an important figure in the reform. As the only

remaining member from Kohl’s original cabinet in 1982, he had a high profile and prestige. He

was chairman of the CDU’s largest Land-level party organisation, the most prominent member of

the trade-unionist wing, and highly popular with voters, particularly with retirees. Blüm was able

to leverage his position to get Kohl’s support to induce Finance Minister Waigel to raise the VAT

by one percentage point and to use these additional funds to maintain the federal grant to the

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public pension fund. All told, these measures were expected to decrease contribution rates by

3.2% by 2030 (IMF 1997:144-167; Schmähl 1999:109-114; Hering 2003:23-25).

During the 1989 pension reform, the SPD had generally avoided politicising reforms. In part, this

was because there had been a cross-party consensus between the social wings of the two

Volksparteien regarding the direction of reform. The SPD had also recognised a need for reform

and preferred to acquiesce in 1989 to broadly acceptable reforms, rather than politicising these

reforms and later facing the prospect of needing to adopt pension reforms alone, which would

expose them to the risk of alienating their constituencies and with no way to shift blame. By

1997, however, circumstances had changed. The alternation in the balance of power within the

governing coalition and Kohl’s determination to push reform via a coalition majority rather than

an extra-coalitional agreement left the SPD with a reduced ability to influence reforms.

Moreover, there were few reform options that would be acceptable to both the SPD and the more

market-liberal elements ascendant in the governing coalition. Consensus on pension reform

between the CDU/CSU and the SPD was over (Hinrichs 1998:20-27). At the same time, the

public’s increasing discontent with Germany’s economic situation and with the Kohl government

provided the SPD with an opportunity. The increase in the federal grant was consistent with the

SPD’s preferences, but the reduction in pensions via the introduction of the ‘demographic factor’

and the tightening of disability pension requirements were seen as a violation of the social

contract between government and retirees and were, therefore, unacceptable to the SPD.180 The

SPD was unable, however, to block the reform in the SPD-dominated Bundesrat because the

reform did not affect the financial burdens of the Länder and was, therefore, not

zustimmungspflichtig (Hinrichs 1998:20-27; Vail 2003:54-55).

Faced with an unappealing reform package which had been developed in a reform process from

which they were excluded and faced with the prospect that the approach to and content of the

Pension Reform Law of 1999 would likely continue in the future, the SPD decided to exploit the

unpopularity of the Kohl government and upcoming elections and made the unusual decision to

politicise the Pension Reform Law of 1999. During the run up to the 1998 elections, the SPD

explicitly campaigned upon the repeal of the ‘demographic factor’ and the new restrictions on

disability pensions. In the end, the unpopularity of the Pension Reform Law of 1999 contributed

to the CDU/CSU and FDP’s electoral defeat in the 1998 elections, and one of the first acts of the

180 An alternative interpretation is that instead of the cuts being seen as a violation of the social contract between government and retirees and, therefore, being unacceptable to the SPD, the cuts were easily portrayed as a violation of the social contract and such rhetoric was politically advantageous in the run-up to an election.

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SPD and the Greens once they took office was to suspend the ‘demographic factor’ and the new

restrictions on disability pensions.

ENDGAME: QUALIFICATION FOR THE EURO…AND AN ELECTION LOSS

In 1998 Germany was admitted as an inaugural member of the Euro. While it clearly met the

Maastricht convergence criteria related to inflation, long-term interest rates, and exchange rate

stability, its compliance with the fiscal criteria was more problematic (see Table 5-9). In the

reference year 1997, the general government deficit ratio was 2.7% of GDP, well below the 3%

maximum, and the deficit ratio was forecast to fall to 2.5% of GDP in 1998. At 61.3% of GDP,

Germany’s debt ratio exceeded the 60% of GDP reference value. Although the government

forecast a 61.2% of GDP debt ratio for 1998, the precipitous increase in German debt over the

course of the 1990s raised questions about whether a turnaround in German finances was truly

likely. Furthermore, while the Maastricht convergence criteria did allow leeway for countries

whose debt exceeded the 60% reference value if these countries’ debt levels were converging

downward, Germany’s debt level had not yet actually declined.

TABLE 5-9: Convergence Criteria Compliance in Germany

1991 1992 1993 1994 1995 1996 1997 1998 (projected)

General Government Surplus (+) / Deficit (-), as percent of GDP

-3.1 -2.6 -3.2 -2.4 -3.3 -3.4 -2.7 -2.5

Reference value for general government surplus (+) / deficit (-)

-3.0 -3.0 -3.0 -3.0 -3.0 -3.0 -3.0 -3.0

General Government Debt, As percent of GDP

41.5 44.1 48.0 50.2 58.0 60.4 61.3 61.2

Reference value for general government debt

60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0

CPI inflation, in percent

3.6 5.1 4.5 2.7 1.8 1.5 1.8 2.3

Reference value for inflation rate

4.4 3.8 3.1 3.1 2.7 2.5 2.7 2.7

Long-term interest rate, in percent

8.5 7.8 6.5 6.9 6.8 6.2 5.6 5.6

Reference value for long-term interest rate

10.7 10.7 9.3 10.0 9.7 9.1 8.0 7.8

Exchange Rate Stability Membership in the Exchange Rate Mechanism since 13 March 1979

Sources: For 1991-1995, European Monetary Institute (EMI) 1996, 64. For 1996-1998, European Monetary Institute (EMI) 1998, 79-88. Note: Shaded areas denote violation of the reference value.

Germany’s violation of the debt criteria did not, however, result in its being excluded from

membership in the Euro. The enforcement of the debt standard was weak. The Maastricht

Treaty’s convergence criteria required that government fiscal positions be sustainable, and this

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condition was violated if “the ratio of government debt to gross domestic product exceeds a

reference value (defined in the Protocol on the Excessive Deficit Procedure as 60% of GDP),

unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory

pace” (Articles 109j and 104c of the Treaty establishing the European Community). Of the

twelve countries seeking to join the Euro, only three countries – France, Luxembourg, and

Finland – had debt levels below the 60% reference value, and in France the debt ratio in 1997 was

58.0% of GDP and trending upward. Of the remaining nine countries, debt was in excess of the

60% reference value in 1997, but only in Germany was debt increasing (EMI 1998:6-7). The

extraordinary asymmetric shock of unification was cited by the EMI as the basis “to a large

extent” for Germany’s exploding debt over the course of the 1990s, but the EMI did note that

“further substantial progress in consolidation” would be necessary to bring the debt ratio below

60% of GDP within an appropriate period of time (EMI 1998:77). The unique circumstances of

unification appear to have provided sufficient cover for the decision not to exclude Germany on

the basis of violation of the debt criterion, but realistically a Single Currency without Germany,

the largest European economy and the very country whose currency was the anchor of the EMS,

was inconceivable and would have substantially gutted the rationale for the Single Currency. At

the same time, it was Germany that had been most insistent upon strict criteria for qualification

for the Single Currency. The criteria had not focused upon bringing potential members into real

economic convergence in a manner that would make the Euro-zone an optimal currency area;

instead, at Germany’s insistence, the criteria had focused upon excluding countries with

inflationary fiscal and monetary policies. Germany’s own weakness on the debt criteria and the

questionability of its long-term fiscal situation may have prevented it from acting as the de facto

enforcer of the criteria. But while it was unable to play a stronger role in policing admission to

the Euro-zone in order to prevent the inclusion of the historically profligate Italy, Spain, and

Portugal, at least it did not truly have grounds to fear its own exclusion from EMU.

The creation of the Euro and Germany’s participation as an inaugural member of the Euro-zone,

though seen by Kohl as a capstone to his chancellorship, filled few Germans with enthusiasm.

The traumatically high inflation of the interwar period had led to the creation of the Bundesbank

as a highly conservative guardian of the Deutschmark’s external and internal stability. Large

proportions of the Germany population viewed with suspicion the prospect of the Mark’s

replacement by an unproven European currency with historically fiscally-profligate and

high-inflation countries having a say in the European Central Bank’s management of the new

currency. A group of German economists even sued the government before the

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Bundesverfassungsgericht, attempting to stop Germany’s accession to the Euro on the grounds

that the abandonment of the Mark was in violation of the Basic Law. With the

Bundesverfassungsgericht’s ruling in favour of the government and with the formal approval of

Germany as sufficiently meeting the criteria, Germany became an inaugural member of the

Euro-zone. On 31 December 1998, the exchange rates of the future Euro-zone members were

fixed. On 1 January 1999, the Euro was introduced as a financial currency, and on 1 January

2002, the Euro was introduced as a physical currency.

The Kohl government did not survive to see the fruition of its efforts to join the Single Currency.

After lacklustre economic performance and persistently high unemployment throughout much of

the Kohl IV and V governments, there was a widespread perception that Kohl and his ministers

had run out of fresh ideas. The Kohl V government’s reform efforts – the failed Bündnis für

Arbeit and the broadly unpopular Sparpaket, NOGs, and Pension Reform of 1999 – had eroded

support for the government and mobilised the opposition. In 1989, towards the end of the Kohl

III government, the CDU/CSU and FDP coalition had last seen its popularity ebb as the people

questioned whether Kohl and his government had run out of fresh ideas after eight years in

power. The collapse of East Germany and the euphoria of unification saved Kohl’s government.

But in 1998 there was no dramatic event to save the government. Instead, the CDU/CSU suffered

its worst electoral outcome since 1949, and the FDP saw its share of the federal vote fall to its

lowest level since 1969. With the SPD winning 40.9% of the federal vote and 298 seats, the

SPD’s Chancellor candidate Gerhard Schröder formed a governing coalition of the SPD and the

Alliance 90/Greens.

While this new ‘red-green’ government continued on the course to join the Single Currency,

Schröder had campaigned upon a platform of repealing many of the provisions in the NOGs and

the Pension Reform Law of 1999. Among its first actions in government, the red-green coalition

honoured its campaign promises. It repealed many of the NOGs’ more market-oriented

provisions, including its contribution rebates and deductible schemes that rewarded low

utilisation of health care. Many of the co-payments were reduced or eliminated and the planned

dynamisation of co-payments was cancelled (Giaimo 2002:130). In regard to the Pension Reform

Law of 1999, the SPD-Green government suspended the demographic factor, which had been

designed to lower pensions from 70% of post-retirement salary to 64% by 2030, and it cancelled

the tighter requirements for disability pensions. The most market-liberal policies of the FDP and

the business wing of the CDU/CSU were soundly rejected as a more social government took

power.

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CONCLUSIONS

Over the course of the 1990s, Germany found itself encountering much greater than anticipated

difficulties in meeting the convergence criteria for the Single Currency. The unexpectedly high

costs of unification exacerbated the immediate problem of global recession of the 1990s and the

longer term problems of an ageing population and rising structural unemployment. As in France

and Italy, the German government found itself in the politically difficult position of having to

tighten fiscal policy at a time of slumping economic growth, high and persistent unemployment,

and heightened dependence upon government support. But as is discussed in this chapter, despite

Germany resembling France and Italy in terms of facing difficulties meeting the convergence

criteria, the patterns of reform in Germany were markedly different to those seen in France and

Italy.

In France and Italy during this period, centre-right governments generally pursued reforms more

regressive in their distributional effects and more confrontational in their approach when they had

relatively large, stable majorities and distant elections. Centre-right governments in these two

countries pursued more consensual reforms that were moderate or relatively progressive in their

distributional effects when they had more precarious majorities and when elections were expected

in the relatively near future.

The comfortably large CDU/CSU-FDP majority during the Kohl IV period had a strong mandate

to rule and a secure grip on power, but this centre-right government pursued fiscal and social

welfare policy reforms, including the GSG health care reform, the extension of a new long-term

care benefit, and tax changes that were largely consensual in approach and fairly social

(progressive) in their distributional effects. But after the 1994 elections left the CDU/CSU-FDP

coalition with only a narrow majority and little claim to a mandate, the Kohl V government’s

fiscal and social policy agenda – including the two NOG health care reforms, the Sparkpaket’s

myriad benefit changes, cuts to social assistance and unemployment compensation, the Pension

Reform Law of 1999, and a slew of tax reforms – were more confrontational in their approach

and more regressive in its distributional effects.

As was discussed in this chapter, the explanation for this difference in the pattern of reforms

between Germany on the one hand and Italy and France on the other hand lies in the size and

historical ideological diversity of Germany’s two largest parties – the centre-right CDU/CSU and

the centre-left SPD –with their business, trade unionist, women’s and youth wings. With some

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wings of these Volksparteien at times sharing more of their policy preferences with their

counterparts in the other Volkspartei than they did with their fellow party members or coalitional

partners, extra-coalitional agreements were a very real possibility. As a result, it was not just the

composition of the governing coalition that determined the policy preferences and approach to

reform. Instead, the balance of power among the wings of the Volksparteien and the balance of

power between coalition partners were key determinants of the approach to and the distributional

content of reform.

Thus, Germany’s pattern was distinct. The balance of power between wings of the CDU/CSU

shifted in the 1990s, and the government’s policy preferences and its approach to reform also

changed. During the 1991 to 1994 period, the trade unionist, women’s and youth wings were

dominant as they generally had been since 1982 when Kohl’s CDU/CSU-FDP coalition first took

power. While most policies were developed within the CDU/CSU-FDP governing coalition,

when the government turned to fiscal reform, particularly social welfare policy reform, the trade

unionist, women’s and youth wings in both Volksparteien pushed for agendas that were more

social than would have been possible if the FDP and the business wing of the CDU/CSU had

been dominant. After the 1994 Bundestag election returned the CDU/CSU-FDP to government

with a reduced majority and particularly in wake of the March 1996 Land-level elections that

favoured the FDP, the business wing of the CDU/CSU and the increasingly market liberal FDP

were in the dominant position in government. The Kohl I through Kohl IV (1982-1994) period

with the dominance of the social wings of the CDU/CSU had been a matter of frustration for the

FDP. Particularly after the FDP’s marginalisation on several significant social welfare reforms in

the 1991 to 1994 period, the FDP (and the business wing of the CDU/CSU) were determined to

change fiscal and social policy in a more market-liberal, business-friendly direction. Although

the CDU/CSU-FDP government had a narrower majority and although their reforms were

somewhat moderated by their need to retain support in the Bundestag from the social wings of the

CDU/CSU, the FDP and the business wing of the CDU/CSU were, nonetheless, able to pursue

their more market-liberal social welfare and fiscal reform agenda which brought the government

into conflict with the SPD and the unions. It was within this context that the government

introduced the Sparpaket a mere four months after the government had agreed not to cut the

social welfare safety net as part of the Bündnis für Arbeit talks. More to the point, the Sparpaket

was introduced a mere month after the FDP’s highly successful results in three Land elections. A

more sharply market-liberal policy preference was also in evidence with cuts to the social welfare

safety net under the Social Assistance Law, cuts to future pension levels under the Pension

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Reform Law of 1999, and a shift of the burden of health care from parity between employers and

employees to employees shouldering an increasing proportion of the cost.

Larger majorities and more distant elections prompted reforms that were more confrontational in

approach and more sharply partisan in their distributional content in the French and Italian cases.

The German case is an apparent anomaly because it was during the 1994 to 1998 Kohl V period –

when the coalition held a much narrower majority – that the government took a more

confrontational approach and pursued policies that were more sharply regressive in content. But

as is seen in this chapter, it was the sheer size and ideological diversity of Germany’s two

Volksparteien that made it possible for extra-coalitional alliances and changes in which party

wings were in ascendance. It is this difference in the party structures and the importance of the

balance of power within the CDU/CSU and within the governing coalition that explain why the

centre-right Kohl governments’ policy preferences and approaches to reform appear less stable

than would otherwise have been expected. These factors also explain why the centre-right Kohl

governments’ policy preferences and approach to reform appear inconsistent with the general

trend of centre-right governments in France and Italy during this same period.

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CHAPTER SIX

CONCLUSION: CRISES RECUR (OR AUSTERITY IS THE NEW BLACK)

INTRODUCTION

Throughout the last decades, Western European states have encountered long-term and immediate

economic, social, and institutional challenges that have confronted them with conflicting

demands. The manner in which these governments respond to these pressures has very real

implications for the future economic success of their countries and for the living standards of

their citizens. The preceding chapters have sought to shed new light on the factors determining

how reforms are achieved, the distribution of costs and benefits, and the likelihood that

governments will succeed in their attempts to adopt and implement reforms that will set their

countries on a trajectory that will ensure their countries’ future prosperity.

Three countries were examined in this study. Though aspects of their economic and political

situations differed, France, Italy, and Germany were all faced with intense pressures to balance

their budgets, reduce unemployment, and re-establish economic growth. While these three

countries’ responses sometimes differed in terms of their specific policy areas or the details of

their reform packages, there were also broad areas of commonality among them. Within each of

these countries, governments experienced dramatic differences in their ability to successfully

adopt and implement reforms that were intended to enable these countries to embark on

sustainable new courses. In all three countries, there were some extensive reforms which passed

with relatively broad acceptance, but there were also reforms that were met with mass

mobilisation in the form of strikes and protests. Within each of these countries, there were some

reforms which were developed in relative isolation and presented as faits accomplis, while other

reforms were the product of collaboration with opposition parties, unions, employers’

associations, and other social actors. And in all cases, there were great variations in the

distribution of the costs and benefits of reforms.

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This chapter, based upon the information presented in the country chapters, discusses the

conclusions that can be drawn from the variations and commonalities in these reform experiences.

In the first part of the chapter, I discuss the role that economic impetus played in the reform

process. In the second part, I review the conclusions that can be drawn from the role that

political, institutional, and leadership factors played in determining whether a government would

pursue a consensual or confrontational approach to reform. In the third part, I turn to the insights

that can be drawn from the case chapters’ discussion of the role that the partisan orientation of

policymakers played in the distribution of costs and benefits of reforms. In part four, I discuss

the effect that the combination of reform approach and content had upon the parliamentary

opposition, the social partners, and the public’s response to the reform. In the part five, I examine

how the response to the reform affected the ultimate outcome for the reform and, in some cases,

the fate of that government. In the final parts, I reflect on remaining questions and the enduring

importance of understanding the politics of economic reform.

THE ROLE OF ECONOMIC IMPETUS IN THE REFORM PROCESS

France, Italy, and Germany were all confronted with profound challenges that prompted them to

engage in serious reform efforts in order to adapt their economies and social welfare safety nets.

Economic pressures provided governments with incentives to engage in reform, even painful

reforms, because failure to respond would have had very real consequences for the country’s

economic health, the citizenry’s material well-being, and the government’s political future.

Economic pressures in general, and crises in particular, gave governments more leeway for

painful reforms, particularly when they engaged in a sustained and credible effort to convince

stakeholders and the public that the alternatives would have been worse.

In France, Balladur’s extensive negotiations with unions, coupled with his willingness to balance

pension retrenchment with the establishment of a new, separately funded minimum pension,

enhanced his credibility. It was the long-run affordability of the pensions system that

fundamentally motivated the reform, but the recession had underscored the fragility of the

economy and the country’s fiscal circumstances. His emphasis on shared sacrifice, while

simultaneously enhancing the protection of the poorest elderly, allowed him to successfully

portray his reform as being a responsible response to conditions that threatened the viability of

the pension system rather than the reform being seen as a wholesale and opportunistically partisan

assault on the retirement security of the elderly.

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The recession, the EMS Shocks’ effects upon the lira and upon the risk premia for Italian debt,

and the massive rise in deficits and debt burdened Italian governments with a need to retrench,

but they also provided governments with clear evidence of crisis that could be used to persuade

the public that reform was necessary to assure the continued viability of the Italian economy and

the future survival of the social welfare safety net. In this case, the project of Economic and

Monetary Union and the clear targets of the Maastricht convergence criteria provided these

governments with a comprehensible programme for ‘rescuing’ Italy from the dangers of currency

runs and high interest rate risk premia. Citing the need to rein in inflation and explaining how

this would assist Italy in meeting the convergence criteria and, thereby, reduce the country’s

unsustainably high deficits, Giuliano Amato and Carlo Ciampi succeeded in convincing the

unions to give up the scala mobile, even in the absence of any ability by their governments to

provide side-payments at that time. The Ciampi, Dini, and Prodi governments were successful in

passing health care and pension reforms after a concerted effort to explain how those reforms

would improve the long-term sustainability of these programmes while maintaining a ‘socially

just’ distribution of the burden of adjustment. Though those reforms have not solved Italy’s

long-term problems of a high and rising social welfare budget, they started Italy upon a course

that has brought it closer to making its budgets and debt more sustainable and they laid the

groundwork for future reforms.

In Germany, the Pension Reform Law of 1992 and the GSG health care reform were able to

garner broad acceptance, despite the fact that these reforms would reduce programme benefits.

The government’s clear message of the need to assure the future stability and affordability of the

system was coupled with a safety net that ensured that the most vulnerable parts of the population

were still protected. Indeed, in the case of the Pension Reform Law of 1992, the reform improved

the safety net for the poorest elderly. With the GSG reform, most Germans knew they would be

paying higher out-of-pocket costs, but the reform gained broad acceptance (or at least

acquiescence) as a result of the Kohl government’s careful balancing of his messages of shared

sacrifice to assure the sustainability of the health care system, of continued or expanded

protection for the sickest and poorest, and of higher burdens of adjustment for the wealthier

groups which had subverted past reforms.

Throughout the successful cases of reform, there runs a constant thread. Opposition parties,

social partners, and the public were willing to support reforms that included benefit cuts, when

the government clearly and consistently communicated that their reform was for the common

good (e.g. ensuring the long-run sustainability of the programme) and that these changes

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protected the most vulnerable groups in society. A strong impetus helped the government by

providing it with evidence to support its claims about the need for reform.

Successful adoption and implementation of reform was not guaranteed solely by the presence of a

strong impetus for reform.

France, Italy, and Germany all enacted reform that successfully navigated potential veto points

and avoided widespread public opposition. On the other hand, in all three counties there were

reform efforts that provoked such strong resistance from the parliamentary opposition, the social

partners, the public, or even their own coalition members that the governments were forced to

retract part or all of their proposed legislation.

In France, Juppé’s public-sector pension reform took place against the backdrop of rhetoric and a

campaign platform that were openly hostile to the public-sector unions. The coupling of the

public-sector pension reform and the Juppé Plan’s cuts to the public sector added to the

appearance that the reform effort was an unmitigated assault upon the rights and privileges of the

constituents of the government’s political opponents. While there was broad recognition that the

existing public-sector pension system was not sustainable, the reform effort failed to win support

from the opposition parties, the unions, or the public. Reform of the public-sector pensions

system was not impossible; indeed, as briefly noted, a later French prime minister was able to

reform these pensions. The problem lay in the rhetoric and the specific details of the Juppé

pension reform and the Juppé Plan’s package of public sector reforms. The reasons for the failure

of the reform lay in the government not having created a reform or a rhetoric that convinced

potential opponents that these reforms were socially just and an equitable distribution of the

burden of adjustment. As a result, these policies were so unpopular that the government had to

withdraw substantial portions of its proposed reforms. Indeed, the backlash against these reforms

was so severe that it arguably played a substantial role in the Juppé government’s electoral defeat

less than two years later, and Lionel Jospin, Juppé’s successor, repealed considerable portions of

those reforms which Juppé had managed to get adopted.

The economic and fiscal circumstances in Italy were particularly dire, but this did not ensure the

passage of all reforms. The Berlusconi government’s pension programme would have been a

difficult sell due to its deep cuts in benefits, but this was not the sole cause of the reform’s failure.

Berlusconi’s confrontational approach in dealing with the unions and his simultaneous tax cuts

for the largest businesses and wealthiest individuals undermined his credibility when he claimed

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that the reform was motivated by economic necessity and the common good rather than being

driven by his desire to benefit his constituents, particularly Italy’s wealthiest people and firms, at

the expense of the most vulnerable. In the end, Berlusconi’s pension reform proved so

contentious that one of the government’s own coalition partners withdrew its support for the

reform, leading to the collapse of both the reform and the government.

Finally, in Germany the situation may not have been as severe as in Italy, but at the height of its

unemployment and deficit crisis, the government found itself increasingly unable to marshal

support for its reform efforts. The unions and employers’ associations were arguably willing to

make concessions in the Bündnis für Arbeit talks, but the government upset these negotiations

when it unilaterally violated the terms of its agreement with the social partners by introducing the

Sparpaket. The NOG health care reforms and the Pension Reform Act of 1999 further alienated

the public by introducing policy changes that were perceived as predominantly benefiting

wealthier populations, while increasing medical co-payments and decreasing the basic pension.

The government’s credibility was undermined when it claimed that reforms were economically

necessary and for the common good because there was a growing perception that the government

was engaged in an increasingly broad and politically motivated market-liberal assault upon

unions, workers, retirees, and the basic tenets of the existing social welfare system. These

reforms were perceived as continuing to benefit the privileged (i.e. doctors, wealthier individuals

who could afford the risk of a semi-privatised pension system), while expecting sacrifice and

acceptance of risk by poorer individuals, who were less able to adjust to the new incentive

structures of these reforms. As in France and Italy, these highly contentious reforms arguably

contributed to the government’s electoral loss in 1998, and many of these reforms’ key provisions

were repealed almost immediately after the next government took power.

Despite the risks to governments of undertaking widely unpopular policies, all three governments

attained some level of retrenchment.

France was able to constrain the growth of its pension and health care system, although reforms

to the public-sector pensions remain necessary. And until the 2008 recession, France was

actually able to reduce unemployment and stabilise its debt. Italy dramatically reined in its

inflation and real interest rates. While its debt level remained high at the end of the 1990s (and

remains high to this day), Italy did start to reduce its debt, something that it had not been able to

do in past decades. Since EMU Italy’s unemployment rate has even fallen. Germany’s reforms

did start to constrain the growth in the costs of the social welfare system, but the massive rise in

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Eastern unemployment has never been overcome. Although there have been some reductions in

the national unemployment rate and in the gap between Western and Eastern employment levels,

these reductions in unemployment have been transient over the last twenty years and continued

high unemployment has continued to exert upward pressure on deficits and debt.181

Although these problems of unemployment, deficits, and debt have been persistent, the

combination of long-term pressures, the immediate crises of the 1990s, and the artificial

constraint and deadline of the convergence criteria did induce substantial reforms that helped

‘bend the curve’ of social welfare expenditures and debt.

Despite the pressures to reduce deficits and tax levels, all three of these countries introduced new

programmes and benefits to address the problems of vulnerable populations.

In France, a youth employment program (PEJ) was created to provide jobs and training for a

population that suffered disproportionate levels of unemployment and that was considered to be

in risk of becoming a ‘lost generation’ of workers, along the lines of that generation of

unemployed youths in Thatcher’s Britain who never learned the job skills or had the opportunities

for social mobility that previous generations had had. In Italy, new active labour market

programmes were introduced to provide vocational training, temporary work, more efficient

employment agencies, and grants for job creation, particularly in the Mezzogiorno, a region that

has long been troubled by high unemployment and low economic growth. In Germany, long-term

care insurance (PV) was adopted to assist the chronically, though not critically, ill who had

previously been forced to deplete their savings before they could qualify for assistance.

While states may be under pressure from international economic forces – or from supranational

political institutions, as was the case for these countries – democratic governments are ultimately

answerable to their people. The economic and fiscal exigencies of the time remained a

consideration. In France, the new youth jobs scheme was adopted after the recession had eased,

and the costs of the programme was offset by the elimination of related, but less effective

programmes. In Italy, these new active labour market programmes were not provided

immediately; they were adopted in the latter half of the 1990s, after the EMS Crises were over,

but still during the period of belt-tightening as Italy sought to meet the Maastricht criteria

deadline. In Germany, the creation of long-term care insurance shifted to the federal government

some of the burden that had previously fallen on the Länder and municipalities. For all of these

181 In all three countries, the recession and the credit crisis contributed to a massive rise in indebtedness, but this is hardly a unique situation since virtually all advanced industrial economies are going through the same difficulties.

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three cases, there was a fiscal and economic logic to these improvements in the delivery of

government support, but this does not negate the fact that all three states undertook expansions of

their safety nets at a time when resources were scarce and retrenchment was ongoing.

DETERMINANTS OF APPROACH

Power concentration and the proximity of elections affect a government’s confidence in its ability

to unilaterally impose policy change, leading it to choose a more confrontational or consensual

approach to reform.

Governments with high power concentration and relatively distant elections were more likely to

feel confident about their ability to act unilaterally and to overcome potential opposition in order

to impose a reform hewing closely to its ideal point. As a result of this confidence in their

government’s strength, reformers were more likely to undertake a confrontational approach to

reform, developing reforms in relative isolation, presenting them as faits accomplis, and relying

on their coalition’s strength and stability and their control over veto points as the means to

overcome opposition.

Governments with lower levels of power concentration and more proximate elections were less

confident about their ability to overcome veto points and to bear the costs imposed by mobilised

resistance from opposition parties, the social partners, and the public. These less confident

governments were more likely to engage in a consensual approach, whereby they consulted or

partnered with potential reform opponents and they made concessions and side-payments in order

to gain broader support for (or at least minimise resistance to) their reforms. While these

consensual efforts might dilute their preferred reforms, governments could be more certain that

the reform would pass and that the political costs – strikes, protests, or electoral backlash – would

be minimised.

Leadership styles of reformers can override power concentration and electoral-related

considerations, leading policymakers to pursue more confrontational or more consensual

approaches than would otherwise be expected.

The consideration of the leadership style of key reformers (the prime minister or the cabinet

ministers with relevant portfolios) introduces a means to understand apparently deviant cases,

where relatively weak governments may still undertake a confrontational approach to reform or

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where strong governments still engage in a consensual approach to reform.182 A policymaker’s

leadership style may reinforce the predictions regarding a government’s approach to reform that

are based upon an assessment of the concentration of power and electoral timing, as was the case

for the Amato, Ciampi, Dini, and Prodi governments in Italy and the Bérégovoy, Balladur, and

Jospin governments in France. Alternatively, the leadership style of key decision-makers may

countervail and override the tendencies towards a particular approach, based upon an assessment

of the concentration of power and electoral timing, and this was the case for Italy’s Berlusconi

government, France’s Juppé government, and Germany’s Kohl V government.183

DETERMINANTS OF CONTENT

Globalisation does not mean the end to partisanship’s role in producing different economic

policies with distinct distributional implications.

Despite the globalisation and Europeanisation-related pressures to provide a ‘more hospitable’

environment for international business and investment, there is little evidence that there was a

182 The introduction of leadership style into the framework for understanding a government’s reform approach is both problematic and powerful. The use of leadership style as a variable is problematic because (1) the coding of this variable is a matter of subjective judgement and (2) leadership style is not determinative. As was discussed in the theory chapter, the literature on leadership style posits that leaders need to adapt their leadership styles to the unique situations confronting them, but they do not always do so. Although the idea of a rational actor with perfect information is a useful assumption for modelling the behaviour of actors, there are also very good reasons why subsequent models will then start to relax assumptions regarding rationality and information. Imperfect rationality may contribute to a leader selecting a particular reform approach, even when political and institutional circumstances are not conducive to that approach. Incomplete information may lead a leader to miscalculate the strength of his coalition or the costs and benefits of a particular approach. In such a situation, the leader may make mistakes, though a learning process may lead him to adapt his approach. While this variable is problematic because it is somewhat subjective and not determinative, it still provides greater insight into the formulation of a government’s strategy regarding how to approach reform. As a result I would argue that refinement rather than rejection of this variable is warranted. 183 The specific circumstances of Germany – with its mass parties, party wings in the CDU/CSU and SPD with greater congruence to their counterparts in the other party than with the other wings within their own party, and the shifts in the intra-coalition balance of power – raise questions regarding whether it was leadership style or policy preferences that led to the deviation between the expected and actual approach. Blüm and Seehofer from the CDU/CSU’s social wing chose to work closely with the SPD on the Pension Reform Law of 1992 and the GSG rather than to work with the business wing of the CDU/CSU and the FDP. During this time, the governing coalition had sufficient concentration of power that a confrontational approach might have been expected. These particular reformers, however, came from the social wings of the CDU/CSU. While the social wings were strong enough at that time that they could opt to work with the parliamentary opposition without fear that their coalition partners or the chancellor would overrule this decision, they were still weak enough within the coalition that they stood a better chance of achieving a desirable reform if they worked with the opposition SPD rather than with their own coalition partners. Seehofer and Blüm later guided the development of the NOG health care reforms and the Pension Reform Law of 1999, and the approach to these reforms was more confrontational. This change in approach seems less a matter of these two reformers’ individual leadership styles than it was a matter of party structure and balance of power. During the Kohl III and Kohl IV governments, circumstances were conducive to the establishment of an ad hoc alternate coalition in order to draft the Pension Reform Law of 1992 and the GSG. By contrast, the Kohl V government’s NOG health care reforms and Pension Reform Law of 1999 seem to be a case of a weak government pursuing a confrontational reform effort because of the highly aggressive leadership style (and potentially the overconfidence) of Guido Westerwelle and Wolfgang Gerhardt, two increasingly powerful liberal party leaders who were threatening withdrawal from the government if they did not get reforms reflecting their policy preferences.

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‘race to the bottom’ in the areas of taxation, social welfare expenditures, or regulation. Despite

common economic and fiscal pressures from globalisation, Europeanisation, high and persistent

unemployment, ageing populations, rising health care costs, recession, German unification, the

EMS Crises, and the Maastricht convergence criteria for European and Monetary Union, the

content and distributional implications of reforms differed markedly based upon whether liberal,

Christian democratic, or social democratic policymakers dominated the reform process.

Reforms developed by liberal policymakers generally followed a pattern that included a greater

role for markets and competition; reduced social welfare safety net and regulatory protections; a

less progressive tax system; lower taxes, particularly for businesses; and a more limited role for

the social partners – particularly unions – in the economy and in the management of social

welfare benefits. Reforms dominated by Christian democratic actors provided social benefits and

used taxes in a manner that maintained status (and, thereby, status differentials) and protected

traditional values, particularly family relations. Some of these reform programmes increased the

social welfare safety net, while other policy changes included cuts to social program

expenditures. Likewise, some reforms raised taxes, while others reduced them. Regardless,

Christian democratic policymakers still utilised the state – rather than markets – as the primary

means for pursuing their agenda. Reforms undertaken by social democratic reformers also varied

in terms of whether they increased the social welfare safety net and taxes or trimmed social

programs and taxes, but the distributional implications of their reforms favoured reductions in

status differentials and the retention of social welfare and regulatory protections for vulnerable

populations. When reformers included members from more than one ideological camp (i.e.

Christian democratic and liberal policymakers, Christian democratic and social democratic

policymakers), the resultant legislation tended to be a hybrid of the values and policy preferences

of these different actors.

The analysis of these cases calls into question the utility of studies that have tended to focus upon

aggregate spending or taxation levels which do not adequately capture the effects of partisanship

on changes in the distribution of spending or taxation.

New programmes were created under governments of both the left and the right. In Germany, the

CDU’s Chancellor Helmut Kohl and Labour Minister Norbert Blüm introduced a new long-term

care programme. Liberals in the governing coalition had argued for mandating self-insurance

against chronic illness, using the private insurance market, but Christian Democratic

predominance assured that social contributions were used to organise a comprehensive and

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compulsory universalistic benefit, as had been done with pension, unemployment, disability, and

health insurance. Prior to the reform, chronically, though not critically, ill individuals were

required to exhaust their savings before they qualified for assistance in paying for long-term care.

Under this programme, a vulnerable population, the chronically ill, received new protections, but

it is also noteworthy that the programme preserved the savings – and maintained the status

differentials – of the chronically ill. New programmes under left governments tended to target

low-income groups in a manner that sought to reduce status differentials. While youth training

and employment programmes, such as those adopted by the Jospin and Prodi governments, were

intended to lower unemployment, they also were expected to increase social mobility.184

Cost-cutting efforts occurred under both left and right governments. In France, Balladur and

Juppé’s centre-right governments pursued across-the-board reductions in pension benefit levels,

while Jospin’s ‘plural left’ government preferred income-testing or means-testing of benefits. In

Germany, health care reforms developed via cooperation between the social wing of the

CDU/CSU and the SPD included global budgets for health care, price controls on prescription

medications, changes in remuneration from a per diem basis to uniform payments for treating

specified illnesses, and a rebalancing of compensation for generalists and specialists that

benefited generalists. Health care reforms developed by the business wing of the CDU/CSU and

the FDP favoured increases in co-payments and the removal of ‘marginal benefits’ from the

mandatory list of benefits.

While taxation as a percentage of GDP generally fell when liberals dominated the policy reform

process, there was no generalisable pattern for increases or decreases in taxation as a percentage

of GDP for Christian democratic and social democratic governments, but studies that focus

primarily on aggregate levels of taxation do not adequately capture the distributive effects of

these changes. In France, Socialist Lionel Jospin’s changes to the tax code did not change

aggregate tax revenue, but they did significantly alter distribution of taxes. Low-income workers

benefited from a nearly 2% increase in income, while higher-income individuals, particularly

those receiving income from property or financial investments, saw their tax burden rise. 184 In response to the precipitous rise in unemployment, the Kohl government expanded existing programmes for the unemployed. While some of these programmes were focused upon improving job skills, others were little more than make-work schemes that did little to improve the employability of programme participants. (One infamous programme used the unemployed to help harvest the annual asparagus crop. While make-work schemes are advocated by those claiming that unemployment benefits without work obligations pose a moral hazard problem, harvesting asparagus did little to improve the job skills and employability of a population left unemployed by a region-wide collapse of the economy that was the result of the post-unification shuttering of factories for environmental and uncompetitiveness reasons, shifts in tastes in favour of Western rather than Eastern goods, loss of state subsidies, and botched privatization efforts.) By contrast, Kohl’s successor, Gerhard Schröder of the SPD, dramatically increased active employment policies and introduced a greater focus on teaching high-tech and entrepreneurial skills.

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Furthermore, an analysis of economic and welfare reform that looked only at aggregate tax levels

would also miss the potential employment effects of this shift in taxes. Jospin’s reductions in

health insurance contributions decreased the non-wage cost of labour, was believed to have

improved work incentives and stimulated employment, especially in the low-wage sector where

the non-wage cost of labour had been especially burdensome.

While Christian democratic and social democratic governments showed roughly similar patterns

in regard to their decisions whether they would increase or decrease expenditures and taxes, there

is a distinct pattern regarding how they generally distributed these costs and benefits. Christian

democratic policies maintained or increased status differentials, while social democratic policies

decreased status differentials. While some governments included policies that were more

consistent with their opposition’s preferences, these policies were usually concessions or

side-payments that were used to make a much broader programme more acceptable to potential

reform opponents. Though none of these shifts of benefits or taxes would be revealed in a

consideration of aggregate benefit or tax levels, failing to dig beyond the surface misses the

profound divergence in the distributional implications of reform.

Looking at policy changes in nominal terms insufficiently captures the effects of partisanship on

the distributive repercussions of qualitatively different reforms.

Proponents of the argument that there has been a reduction in differences among parties point to

developments, such as the creation of supplementary pension systems or the privatisation of

state-owned enterprises by leftist governments, as evidence for their claims. While it is certainly

true that the left has come to accept some policies that were previously anathema, this does not

accurately represent the continued variation among parties. A more careful examination of the

reforms reveals important details that result in quite different effects.

Under the centre-right governments of the liberal Berlusconi and Juppé and the centre-left

governments of Ciampi and Jospin, efforts were made to introduce supplementary pension

systems. The details of these efforts, however, revealed clear differences between liberals’

supplementary pension policies and social democratic supplementary pension policies.

Juppé’s supplementary pension policy allowed firms and workers the option of creating

tax-advantaged, second pillar (firm-level) supplementary pensions. As written, this reform

constituted a voluntary semi-privatisation of the pension system because the tax-advantaging was

done in a manner that diverted resources away from the existing, universalistic, pay-as-you-go

public pension system. This new programme also required firms to bear the costs of devising and

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managing these new firm-level pension funds, a decision that made the scheme unaffordable for

smaller firms. Finally, this second pillar supplementary pension system excluded any role for the

social partners, a change that would ultimately undermine the power of the social partners – and

their ability to advocate on behalf of their members – if the supplementary pension system gained

importance over time. After Juppé’s defeated in 1997, Jospin’s centre-left government repealed

the law that created Juppé’s supplementary pension programme, but then introduced a revised

version of it. The revised programme maintained the funding of the public pension system,

assuring that the introduction of supplementary pensions would not divert resources and endanger

the existing, pay-as-you-go public pension system’s ability to meet its commitments to retirees

and older workers. The revised law also addressed the social partners’ other concerns. Smaller

firms were allowed to pool together and share the set-up and management costs of the

supplementary pension funds, which made these firm-level pension plans affordable for small

firms. Jospin’s version of the programme also gave the social partners a role in the

supplementary pension system that generally resembled the role they played in the existing

universalistic public pension system.

The Ciampi government introduced a legal and fiscal framework for voluntary supplementary

pensions. Under this reform, the social partners at the branch or company level gained the option

of establishing supplementary pension funds to complement the existing pension system. Via

preferential tax treatment, the government subsidised these supplementary pensions, but it did so

in a manner that undermined neither the funding for the existing pension system nor the

government’s pension obligations. The Berlusconi reform, by contrast, would have created a

mandatory shift to a multi-layered, semi-private pension system that diverted funds away from

the existing, pay-as-you-go public pension system and threatened its ability to meet commitments

to retirees and older workers.

Without looking at the details of such reforms, the potential changes to the long-term viability of

the first pillar pension system, the changes in unions’ current or future role in the social welfare

system, the impact on different classes of firms, and the effects of different partisan orientations

are lost.

Privatisations of state-owned enterprises took place under every government considered above, a

policy that was a break with past tendencies for liberal governments to prefer privatisation, while

Christian democratic and social democratic governments generally placed greater value upon the

existence of state-owned enterprises as a means to foster development and employment, to

overcome barriers to economies of scale, or to garner national prestige. While data on

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privatisations in all three countries was not collected systematically for this dissertation, evidence

from France did suggest striking differences regarding how privatisation was carried out. Juppé

undertook privatisations in order to disengage the state from the economy and to raise revenue,

and his privatisation efforts tended to result in the selling of state-owned enterprises to competing

firms, which resulted in a large proportion of these jobs being eliminated. By contrast, Jospin

actually privatised more state-owned enterprises and raised more revenues from privatisation than

Juppé did, but Jospin’s privatisation efforts tended to focus on firms wishing to sectorally or

regionally diversify. This generally safeguarded jobs and secured new investment for the

newly-privatised enterprises.

The difference in the economic impacts of these two privatisation efforts illustrates the

importance of examining the details of policies rather than simply describing them in nominal

terms as ‘privatisation.’ While these two examples of privatisation provide anecdotal support for

the claim that leftist (or social democratic) governments are more concerned about the

distributive implications of their privatisation efforts, a broader selection of cases of privatisation

would be needed to rigorously test the hypothesis. Regardless, large-n studies that rely upon

superficial descriptors, whether nominal (e.g. presence of privatisation) or quantitative (e.g.

number of privatisations, revenues from privatisation), would likely overlook important rich

qualitative differences that have profound repercussions for the distribution of costs and benefits.

Reform approach may intensify or attenuate the partisanship of a reform and the consequent

distribution of costs and benefits

While the partisan orientation of the key policymakers was vital to understanding their

preferences regarding the reform, the reform approach played a strong role in determining the

extent to which these policy preferences were expressed or attenuated. Reformers who pursued a

confrontational approach were able to develop a reform package that much more closely

resembled these policymakers’ ideal point, while reformers who pursued a consensual approach

had to include side-payments and concessions that muted the extent to which the reformers’

policy preferences were expressed. The consensual reforms pursued by France’s Balladur and

Italy’s Dini won the acquiescence of most of the social partners because their negotiations had

produced reforms that addressed the biggest concerns of the social partners; in Dini’s case, a

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fairly market-liberal (or centre-right) prime minister even achieved passage of his reforms by

winning the support of parties from the centre and the left.185

DETERMINANTS OF RESPONSE

Political parties, social partners, and the public’s reception of the reform was a response to the

combination of the impetus to engage in reform, the approach to developing a new policy, and the

distributional of the costs and benefits of the proposed programme.

While severe economic crises gave governments more leeway to engage in painful political

reforms, particularly when they were able to convince the public that their reforms were genuine,

economically responsible efforts that included an equitable distribution of the burden of

adjustment in order to achieve vital national projects of reform. Governments faced greater

resistance, however, when reforms were seen as opportunistic responses to crisis for the benefit of

the government’s constituents.

With Italy’s particularly severe economic and political situation, particularly profound reforms

were implemented in the areas of pensions, collective bargaining, health care, and public

employment. The Amato, Ciampi, Dini, and Prodi governments all succeeded in establishing

credibility with the social partners and the public because their reforms were focused upon

utilising a collaborative process to achieve a solidaristic sharing of the burden of a reform that

was intended to end an economic crisis and to safeguard the long-term viability of the Italian

social welfare system. By contrast, the Berlusconi’s pension reform and business tax cuts were

seen as an opportunistic attempt to transfer funds from retirees and public employees for the

benefit of Berlusconi’s business constituency. Governments that acted in an inconsistent way or

which broke their commitments to potential opponents, as happened in Germany with the

introduction of the Sparpaket shortly after Kohl’s promise to support the Bündnis für Arbeit

negotiations, lost credibility and angered the opposition parties, social partners, and public that

felt that their role in the process and their interests had been betrayed.

185 Italy’s Lamberto Dini came from a market-liberal economics background, but the weakness of his technocratic, majorityless government led him to adopt a consensual approach and to seek support from centrist and leftist parties rather than to try to pursue a confrontational reform closer to his own more liberal preferences. Dini succeeded in making noteworthy changes to the Italian pension system. His reform cut expenditures and increased revenues in the long term by changing from defined benefits to defined contributions, raising retirement age, and increasing the number of years used as the basis for calculating retirement income. This reform was moderated, however, by the very long phase-in period, which sheltered existing retirees and older workers, and by exemptions for blue collar workers and recipients of Cassa Integrazione Guadagni funds. These delays and exemptions were an essential concession to unions and parties of the left, and without these concessions the distribution of costs and benefits would have been much different. Furthermore, without these concessions, the reform would probably not only have failed to win a majority in Parliament, unions would likely have mobilised and the reform would have encountered massive strikes and protests.

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More consensual approaches generally reduced opposition to the government’s reform effort,

while conflictual approaches were more frequently met with a hostile reception.

The approach to a reform influenced the response to that reform in several different ways. First, a

consensual approach eased passage of reform by removing or mitigating the more problematic

aspects of the programme during the negotiations with the parliamentary opposition or the social

partners, while the more confrontational and more sharply partisan reform produced clearer

patterns of winners and losers.

Second, when negotiations produced reforms that substantially addressed the parliamentary

opposition or social partners’ concerns, some of these potential opponents of reform felt a degree

of ‘ownership’ of the reform and were willing to support (or at least not oppose) it. By gaining

support from some parties outside the government’s coalition or from some of the social partners,

the government weakened the ability of reform opponents to present a unified front against the

reform. This was seen repeatedly in the Balladur health care and pension reforms, the Amato and

Ciampi collective bargaining reforms, and the Amato, Dini, and Prodi pension reforms, and the

GSG health care reform. When a confrontational approach was utilised and the opposition and

the social partners, particularly the trade unions, were essentially excluded from a reform process

that produced painful adjustments, there was little incentive for them not to publicly criticise the

reform. It was at these times that potential opposition was most able to unify against the reform

and credibly claim that the government’s reform was a purely partisan project. A united front

against the reform provided a clear message that made mobilisation of the public easier. The

massive protests that arose in response to Berlusconi’s pension reform, Kohl’s Sparpaket, and

Juppé’s pension reform were all the product of confrontational approaches that united opponents

and allowed them to use their unified front to mobilise strikes and protests that immobilised each

of these countries.

Third, exclusion from negotiations (or inclusion in only a token effort) alienated and radicalised

actors who believed that they had a rightful role in the reform process. Inclusion in a genuine

negotiations process, even if the negotiations failed to produce a reform broadly supported by the

parliamentary opposition or social partners, helped governments avoid the alienation and

radicalisation which would likely have occurred in the absence of negotiations. The importance

of a genuine inclusion in the reform process is illustrated by recalling the differences in the

dynamics between the Balladur and Juppé pension reforms, between the Berlusconi pension

reform and the Amato, Dini, and Prodi pension reforms, and the change in German unions’ stance

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vis-à-vis the government in the time between initiation of the Alliance for Jobs talks and the Kohl

government’s decision to implement its Sparpaket programme of benefit cuts.

Fourth, the very process of negotiations provided the government with an opportunity to make an

early start at convincing the public and key veto players that the reform was a necessary and – at

least in the long-run – beneficial project. At the very least, it allowed the government a chance to

see which talking points are most effective in dealing with its various audiences – its own

coalition members, opposition parties in parliamentary, the social partners, and the public. This

effect was particularly strong throughout the successful reform attempts in Italy, though lower

levels of enthusiasm about EMU made it a less useful strategy in Germany and France.

Finally, a consensual approach was more frequently seen by the public as a sign of good faith

with the government openly embracing a national project of necessary reform. By contrast, in

cases where the government pursued a confrontational approach and only had coalition members

supporting the reform, the public was quicker and likelier to interpret the reform as a purely

partisan project.

DETERMINANTS OF OUTCOMES

The severity and nature of the economic impetus confronting the country, the government’s

approach to reform, and the distributional implications of the proposed legislation provide

motivation for political parties, social partners, and the public to support or oppose a reform.

When the impetus is severe and the approach to and distributional consequences of the reform are

perceived as reasonable, the reform is likely to gain relatively broad acceptance. When the

impetus is not perceived as warranting the costs of the reform or when the approach or content of

the reform have provoked opposition to the reform, the outcome of this proposed policy change is

called into question. The means and ability of reform opponents to effectively prevent the

adoption and implementation of the proposed programme is dependent upon their role and power

concentration in the political system.

Political parties as determiners of outcomes

The ability of the parliamentary opposition to block reform through formal channels varied,

depending upon the strength of institutional veto points and whether the parliamentary opposition

controlled those veto points. In the cases considered in this dissertation, relatively few reforms

were actually vetoed. More frequently governments went to great lengths to circumvent vetoes

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either by avoiding reforms that would not survive the veto process or by paying off potential veto

players.186 Governments can succeed with a divide-and-rule strategy when dealing with some

veto points, while the opposition will need to maintain cohesion if it hopes to veto the reform.

Even when it was unable to block reform via veto points, the parliamentary opposition could at

times impose costs. The electoral losses of the Berlusconi, Juppé, and Kohl governments after

their pursuit of highly unpopular reforms were a result of the opposition’s success in politicising

the issue and mobilising their supporters against the reform. The greater the degree of harm to

their constituents, the greater was the opposition parties’ motivation to politicise the issue and to

mobilise their supporters against the reform. The more unified the opposition parties, the greater

was their ability to exert influence by developing a coherent and consistent critique of the

government and its reform, by shaping public opinion, by encouraging strikes and protests, and

by threatening – and sometimes delivering – electoral retribution. The threat of electoral

retribution was sufficient to cause the withdrawal of portions or the entirety of some reforms, as

occurred with Juppé’s pension reform and portions of the Juppé Plan and the Sparpaket. In other

cases, the threat of electoral retribution was enough to cause government parties to withdraw

from the government, as happened when the Lega Nord abandoned Berlusconi’s government,

causing the collapse of that government.

Conversely, when the political opposition were fragmented into a large number of parties and

wings, divided ideologically on the reform, or divided regarding the effects of the reform, it was

more difficult for these opposition parties to mobilise their members and the public. Though not

addressed in this dissertation, it is instructive to recall the Thatcher government in Britain in the

1980s, which was remarkably successful in surviving resistance to its policies, largely because of

the disarray of its political opposition.

Political parties as determiners of outcomes

The social partners generally lacked any direct ability to block a reform, although some of them

had compétence over policy areas that were under the purview of the government in other

countries. German employers decided to not implement Sparpaket’s cuts in sick pay by signing

collective bargaining agreements that guaranteed full sick pay benefits. Though the specific

details differed, both the French and German health care social partners avoided developing and

186 In Germany, governments have sometimes sought to prevent veto in the Bundesrat by making side-payments to a Land that was controlled by the opposition party, but which had particular regional interests that made it amenable to breaking with the party leadership at the federal level and voting in favour of the government’s reform.

266

monitoring prescribing and medication guidelines. In these cases, the social partners were able to

side-step or fail to enforce their governments’ reforms, thereby assuring that the reform – or at

least that aspect of the reform – was never fully implemented.

More generally, the strength of the social partners lay primarily in their ability to influence

policymakers during the drafting of the legislation or to impose costs afterward by politicising the

issue, mobilising their members, and encouraging strikes in a manner that influenced members of

the governing coalition to have second thoughts about the reform. Finally, the social partners,

particularly the trade unions were able in some cases to shift public opinion and to make the issue

so salient that they were not only able to threaten, but they were also able to deliver retribution at

the next election. Union opposition played a substantial role in Juppé’s 1997 and Kohl’s 1998

electoral defeats.

Political parties as determiners of outcomes

Except in countries with referendum and initiative processes, the public has no direct or indirect

ability to veto legislation. As a political actor, it also tends to be rather weak, due to its

tendencies to lack information and to not self-organise and self-mobilise. But in cases where the

reform process has been highly polarising and in cases where political parties or social partners,

particularly unions, provide the informational and organisational capacity, the public can be

mobilised in a manner that may cause a government or its coalition members to re-evaluate their

reform course. And in the case of unpopular reforms that are passed in spite of broad public

opposition, the public in democracies does have the ability to turn out to the polls and to vote for

the opposition in the hopes that their policies will be preferable to the existing government’s

policies.

Government strength can be a liability.

The potential for opposition to block reform or impose costs on the government should give

reformers pause. Reformers’ agendas can have consequences. Governments enjoying a high

concentration of power in their hands and distant elections were more confident about their ability

to pursue confrontational reforms, and they were more likely to seek to impose their preferred

reform. Governments with lower levels of power concentration were generally less confident,

and they tended to pursue reforms that were more consensual in their approach and further from

their ideal points. Yet, it was generally not the strongest governments that were most successful

in achieving reform. Government strength became a liability when policymakers’ perceptions of

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their strength led to a level of confidence (or overconfidence) so great that they chose to pursue

reforms in such an aggressive and partisan manner that they provoked the mobilisation of a

unified opposition which they ultimately could not withstand.

In the end, the governments that were most confident of their ability to impose reform or which

were driven by the leadership of their key reformers to pursue confrontation were the very ones

that most dramatically failed. The Berlusconi pension reform, the Juppé pension reform, and the

Kohl Sparpaket all precipitated massive strikes that led to the retraction of part or all of the

reform. In Italy, the failure of the reform also precipitated the collapse of the government. In

France, the reform’s failure contributed to the decision to call early elections, but more

importantly it contributed to the fall in popularity of the government and its defeat at the polls.

The Kohl government endured until the next federal election, and it did implement further

reforms, but the unpopularity of the Sparpaket and the Pension Reform Act of 1999 contributed

to the government’s loss to the SPD in the 1998 elections. In France and Germany, the

successors to the Juppé and Kohl governments repealed part or all of the reforms that had helped

propel their new governments to power.

In the cases considered in this dissertation, the governments that successfully implemented

reform were the ones which were more cautious about their ability to impose reform. They chose

to negotiate with potential opponents of their reform. Though never achieving the entirety of

their aims, they did succeed in moving forward their reform agenda, and over time these smaller

steps have produced some profound changes to these countries’ economic, fiscal, and social

welfare policies, particularly in the areas of pensions, health care, taxation, privatisation, and

collective bargaining.

REMAINING QUESTIONS

This study reaches conclusions based upon consideration of France, Italy, and Germany during a

relatively limited time period. This study finds certain patterns that suggest that different power

concentrations, election cycles, leadership styles, and partisan orientations will determine the

approach to and content of reforms. Consideration of reforms by other countries would need to

be undertaken to see if these observations are generalisable.

Missing Case: The Confrontational Leftist Government

This examination of welfare reform considers cases of confrontational conservative reform,

consensual conservative reform, and consensual leftist reform (including the cases of consensual

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reform by technocratic governments, dependent upon Left party support). The absence of a case

of confrontational leftist reform begs the questions: what would a confrontational leftist reform

look like? Are leftist governments ‘inherently’ less likely to pursue a confrontational approach?

Or, as critics have charged, have leftist parties, such as Britain’s “New” Labour, Germany’s

Social Democrats, French Socialists, and the US’ Democrats, ‘sold out their base’ to the extent

that they no longer even desire to pursue a confrontational and highly partisan leftist agenda?

Missing Case: A Successful Confrontational Reform

While Juppé arguably carried out a successful confrontational reform with his health care reform,

it still utilised some of the strategies found in more broadly consensual reforms, including staging

of reforms and targeting of members of his own constituency (i.e. specialists). Still, it would be

interesting to examine a clear case of confrontational reform ‘untainted’ by such strategies to

mitigate resistance. Thatcher’s Britain pursued such a course in the late 1970s and the early

1980s, and it survived, due to Labour’s profound weakness at the time and due to the

unimportance of the reforms’ ‘victims’ to the Conservative Party’s electoral chances.

Examination of that and other cases of successful confrontational reform could provide

interesting insights.

Missing Case: Policy Reforms with Distribution of Costs and Benefits Contrary to Predictions

Based upon Partisanship

All of the cases considered in this dissertation broadly conformed to predictions regarding the

distribution of costs and benefits, based on the partisan orientation of reformers. A superficial

look at the SPD-Green Schröder government finds that personal and business income tax rates

were reduced while consumption taxes, particularly on energy, were sharply increased.187 An

examination of that and other cases of successful confrontational reform could provide interesting

insights into when and how governments with highly confrontational reforms might overcome the

resistance their policies would be expected to provoke.

A LAST THOUGHT – AUSTERITY IS THE NEW BLACK

In France, Italy, and Germany, as well as throughout virtually all other advanced industrial

democracies, the recession and the credit crisis that started in 2008 have contributed to a massive

187 This apparent inconsistency between expectations and actual reforms can be rationalised to an extent. German business income taxes were among the highest in the developed world, and the hike in environmental taxes was used as a substitute for a scheduled increase in social contributions. Given the participation of the Greens in government, the use of environmental taxes, despite their regressive impact, does make sense.

269

rise in indebtedness, unemployment, and uncertainty. Western European states’ heavier reliance

on automatic stabilisers ensured that a counter-cyclical Keynesian response started relatively

early, while the United States responded more slowly. After two years of recession and a

dramatic rise in national debt levels, an increasing number of Western European governments

have turned to austerity packages. The United States continues upon a mutedly Keynesian

course, although pressures have intensified for the US to also adopt austerity measures to bring

the growth of its national debt under control.

Despite economic and political incentives to constrain the rise in deficits and debt, governments

are simultaneously confronted by countervailing political pressures to maintain or expand their

social welfare safety nets in order to meet the needs of their vulnerable populations, including the

unemployed and underemployed, the sick and disabled, pensioners, and the poor. The successful

balancing of these conflicting pressures is essential if policymakers are to assure the future

prosperity of their economies, the well-being of their citizenries, and the political survival of their

governments. In light of the prevalence and intensity of these economic, social, and political

challenges, an understanding of the decision process and the consequences of reform is more

timely than ever.

270

271

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