MPIfG Working Paper
01/4, July 2001
What Have We Learned?
Problem-Solving Capacity of the Multilevel European Polity
by Fritz W. Scharpf
Prof. Fritz W.
Scharpf is Director at the Max Planck Institute for the Study of Societies,
This Working Paper is an attempt, occasioned by the
evaluation of the Max Planck Institute for the Study of Societies, to provide a
conceptual framework within which institute research on multi-level European
problem solving could be discussed in the context of a more comprehensive
overview of the literature. The framework combines an institutional dimension
(distinguishing between supranational, joint-decision and intergovernmental
modes of EU policy making) and a policy dimension (distinguishing between
market-creating, market-enabling, market-correcting and redistributive
policies). As institutional modes differ in their capacity for conflict
resolution, and as policy types differ in the likelihood of severe policy
conflict, greater or lesser problem-solving capacity can be explained by the
location of a particular policy area on both of these dimensions.
Aus Anlass der Evaluierung des Max-Planck-Instituts
für Gesellschaftsforschung entwickelt dieses Working Paper einen Bezugsrahmen,
in dem die Ergebnisse der am Institut betriebenen Forschung zur europäischen
Mehrebenenpolitik im Kontext der internationalen Literatur eingeordnet und
diskutiert werden können. Der Bezugsrahmen verbindet eine institutionelle
Dimension (in der zwischen supranationalen, verflochtenen und
intergouvernementalen Interaktionsformen unterschieden wird) mit einer
Policy-Dimension (in der zwischen marktschaffenden, marktfördernden,
markt-korrigierenden und redistributiven Policy-Typen unterschieden wird). Da
Interaktionsformen sich in ihrer Konfliktregelungskapazität, und da
Policy-Typen sich in ihrer Konfliktwahrscheinlichkeit unterscheiden, kann die
größere oder geringere Problemlösungsfähigkeit in einem bestimmten
Politikfeld durch dessen Lage in beiden Dimensionen erklärt werden.
1Introduction: A European Problem-Solving Gap?
The question of whether the Europeanization of public policy was generating a
problem-solving gap was early on our research agenda. Starting from the analysis
of the "joint decision trap" (Scharpf 1988), we concluded that
policy-making at the European level was impeded by conflicts of interest between
member states. Similarly, neocorporatist national regimes could not be
transferred to the European level, where they would at best be replaced by
pluralist patterns of interest intermediation (Streeck/Schmitter 1991). At the
same time, the completion of the Single Market program, and eventually European
Monetary Union, would allow capital owners and firms to evade national taxes,
regulations, and corporatist regimes - with the result that regulatory and tax
competition would undermine the postwar achievements of European welfare states,
while the "neovoluntarism" of European-level policy could not provide
a substitute for the "beneficial constraints" that had characterized
national regimes of regulated capitalism (Scharpf 1989, 1996; Streeck 1995).
It is fair to say, however, that this perspective -
expecting substantial losses in national problem-solving capacity that could not
be compensated for by policies adopted at the European level - did generate much
debate (see, e.g., Grande/Jachtenfuchs 2000), but has remained fundamentally
controversial. One reason may be theoretical or ideological disagreement over
the self-sufficiency of free markets and the need for political intervention (Genschel
1998), but there are also empirically based objections. On the one hand, a
growing number of case studies have shown that (some)[2)
European regulations are
quite effective in providing protection above the level of the "lowest
common denominator" (Pollack 1997; Eichener 1997, 2000; Joerges/Neyer 1997;
Héritier et al. 1996; Héritier 1999). On the other hand, there is a body of
qualitative and quantitative research trying to show that the integration of
product and capital markets need not generate forms of regulatory and tax
competition that necessarily involve national social protection policies in a
"race to the bottom" (Vogel 1995; Garrett 1998; Swank 1998; Soskice
Our initial response was to introduce a number of conceptual distinctions -
negative vs. positive integration, product vs. process regulations, and
market-making vs. market-correcting policies - which would allow us to identify
policy areas where national-level problem-solving capabilities would be either
fully adequate or severely constrained by economic and institutional integration
and/or where European-level problem-solving capabilities would be either fully
adequate or severely constrained by conflicts of interest between member states
(Scharpf 1997b, 1999a). It became clear, however, that these dichotomous
classifications of policy types could only be one element among others in more
complex explanations trying to account for the full range of contingencies
encountered in empirical research on a wide variety of policies responding to
different types of problems and shaped by an even greater variety of causal
factors and situational conditions.
Yet from a research perspective, this recognition is difficult to deal with: The
full range of potentially relevant contingencies is not captured in quantitative
studies, which, even if theoretically valid and reliable data are available, can
only deal with a few variables at a time; it is not covered by qualitative
studies either, as these have to concentrate on a limited number of cases. In
both types of research, the problems, policies, and explanatory factors that can
be explored are limited by the scope of the project and by the observations that
are possible within it. Yet if we are interested in the overall problem-solving
capacity of the multilevel European polity, we need to go beyond the variety of
constellations that can be examined in any single project - which should be
possible in secondary analyses of existing studies covering a wider range of
policy problems, policy types, and policy-making institutions (Falkner 2000;
Genschel 2000; Jachtenfuchs 2000).
By itself, however, the overview of a wider variety of case constellations would
only create more confusion unless the more comprehensive information can be
organized in a relatively simple conceptual framework. Yet if its simplicity is
a precondition for effective communication and orientation, the usefulness of
the framework for explaining past observations and for guiding future research
depends on categorical "distinctions which make a difference" (as
common-law lawyers would say) - meaning that (to use metaphors from other trades)
they "go with the grain" and "cut at the joints" of the
underlying causal structure of reality. The construction of such a framework is
of course anything but straightforward, depending as it does on an interaction
between deductive theorizing and inductive reasoning that is informed by the
cases to be covered.
Most research at the MPIfG combines problem and policy analyses with (actor-centered)
institutional analysis (Mayntz/Scharpf 1995b; Scharpf 1997a: Chap. 1). The same
two-dimensional conceptualization is appropriate for structuring discussion of
the problem-solving capacity of the multilevel European polity. The basic
assumption informing the conceptual framework presented here is that
policy-making institutions differ in their capacity for effective action in the
face of policy conflict and that the probability of policy conflict differs
between policy areas. The intersection of the two dimensions should thus define
greater or lesser problem-solving capacity.
Table 1: Problem-Solving Capacity
In the following sections, I will first present and discuss the categories
structuring these two dimensions with reference to EU policy-making; I will then
proceed to show how the more detailed conceptual framework can be used to
organize the complexity of available empirical information about EU policies and
their effectiveness and to explain a great deal of the puzzles and apparent
contradictions that have been generated by the existing literature as well as by
the research projects undertaken at our own institute.
2The Institutional Dimension of Problem-Solving Capacity
The capacity to generate political solutions to societal problems is constituted,
shaped, and constrained by the institutionalized modes of interaction through
which collectively binding policies can be adopted and implemented. At the same
time, however, capacity is a relative concept: The same institutions that
facilitate effective policy responses to one type of problem may impede other
types of policy choices (Scharpf 2000). The reason is that policies differ in
the intensity of conflict that they tend to generate between policy actors (the
subject of the next section) and that policy-making institutions differ in their
capacity to resolve  policy conflict.
2.1Institutional Modes: Legitimacy Constraints and Veto Positions
Institutions serve a dual function in policy processes. On the one hand, they
organize collective decisions by establishing arenas, allocating and limiting
competencies and resources, and regulating access and modes of interaction. On
the other hand, they also provide the legitimating arguments which support the
effectiveness of public policies by asserting a moral duty to comply with them
even if the policy in question is against one's interest or preferences. From a
problem-solving perspective, what matters is therefore both the capacity for
collective action and the capacity to convey legitimacy to that action in the
face of divergent preferences among the groups affected. The former is most
directly affected by institutional rules defining the modes of interaction
within the constellations of actors that are authorized to participate in the
adoption and implementation of policy choices. At a given level of policy
conflict, the capacity to act is greatest if a single (corporate or collective)
actor is able to adopt and enforce effective policy choices unilaterally, and it
is reduced to the extent that effective action may be impeded by the requirement
of negotiated agreement among the occupants of multiple veto positions.
Regardless of the agreement or disagreement between policy actors, however, the
capacity of policy institutions to convey legitimacy needs to be defined in
relation to the target population that is supposed to comply with, or suffer the
consequences of, the policies thus chosen. The need for such legitimation is
lowest for policies that satisfy existing constituency preferences, and it rises
with the intensity of the preferences that are being violated. At the same time,
institutions also vary in their capacity to legitimate the violation of intense
preferences. Under modern conditions and at the national level, this capacity is
greatest for the institutions of majoritarian democracy. At the European level,
however, majority votes would not be able to legitimate highly controversial and
politically salient policy choices even if the role of the European Parliament
were to be further strengthened. The reasons for this have been developed in the
"no demos" and "no public discourses" debates (Scharpf 1999:
Chap. 1). However, contrary to what is often assumed in discussions of the
"European democratic deficit" (Greven/Pauly 2000), we are not
compelled to either assert that the preconditions of majoritarian democracy
exist in the EU or to deny the legitimacy of all European policies. It merely
means that EU policies have to rely on the more limited legitimating powers of
other types of governing institutions that are available in the multilevel
In this context, I find it useful to distinguish between three institutionalized
modes of EU policy-making: The supranational/hierarchical mode, in which policy
choices can be unilaterally imposed by supranational actors (i.e., the European
Court of Justice, ECJ; the Commission; and the European Central Bank, ECB); the
joint-decision mode, in which supranational actors play a significant role, but
cannot act without the acquiescence of at least a qualified majority in the
Council of Ministers; and the intergovernmental mode, in which policy choices
depend solely on the unanimous agreement of member state governments. In
addition, I will briefly discuss the new methods of open coordination and will
also mention the mode of mutual adjustment which characterizes national policy
processes significantly affected by EU policies or by the pressures of
regulatory and tax competition among EU member states (Scharpf 2001a).
The intergovernmental mode characterizes negotiations over amendments to the
Treaties, which, so far, have been the prerogative of Intergovernmental
Conferences and the summit meetings of heads of state and government in the
European Council. Moreover, given the strong role of the Commission, the Court,
the European Parliament, and comitology in the joint-decision mode, member
governments have also been shifting important policy initiatives that do not
require treaty amendments to the intergovernmental mode. On the basis of the
Maastricht Treaty, this applies to policies in the "second pillar"
(Common Foreign and Security Policy) and the "third pillar" (Police
and Judicial Cooperation). However, even within the first pillar defined by the
European Community Treaty (TEC), the strictly intergovernmental European Council
has increased the significance of policy initiatives promoted by the rotating
Presidency rather than by the Commission in recent years, and certain policy
areas (such as taxation) have in practice been reserved for intergovernmental
In the past, the intergovernmental mode has provided the foundational legitimacy
of all EU policies and institutions. It is indirectly derived from the fact that
treaties and treaty revisions were and are negotiated by democratically
legitimated national governments and ratified by the democratically legitimated
parliaments of all member states. In the history of the EU, this indirect
legitimation was generally considered sufficient and was not called into
question until debate began about the need for a "European Constitution."
At the same time, however, there is no question that, at the national level, the
expansion of "government by treaties" has weakened the role of
parliaments, political parties, interest groups, and the public,[7)
policy choices are formulated in intergovernmental negotiations and are, at
best, presented for ratification as a take-it-or-leave-it proposition. As this
reduces the autonomy of national governing institutions and processes, it also
affects the indirect legitimacy of European policy choices derived from them.
If nevertheless the legitimacy of policy choices adopted in the
intergovernmental mode is relatively strong, its capacity for conflict
resolution is tightly constrained by the fact that each government has a veto.
Even though there may be strong pressures on all governments to negotiate with
"cooperative" interaction orientations in order to reach agreement in
the face of divergent preferences, uncompensated concessions are difficult to
defend against opposition back home if European issues have political salience
in national politics. Under such conditions, negotiations may either break down
or deteriorate into "bloody-minded" bargaining where outcomes can only
be reached through cumbersome package deals or side payments.
The main function of the treaties, however, is not the formulation of
substantive European policy, but the establishment of European institutions and
procedures through which "secondary" EU policies are to be adopted.
Even under favorable circumstances, policy-making by intergovernmental agreement
is a slow and awkward process, and policies so adopted are very hard to change
in response to new circumstances or preferences. Hence treaties are best
employed to determine a limited range of relatively simple, presumably stable
and politically salient "primary" policy choices. Given the original
political commitment to create a "European Economic Community" and the
obvious importance of removing tariffs and quantitative restrictions to trade
and free movement, it is also no surprise that the substantive provisions of
primary European law are mostly about negative integration. In order to become
effective, however, even these needed to be interpreted and applied to changing
circumstances by institutions created or authorized by the treaties. This is
even more true in areas in which the treaties merely establish European
legislative competencies without specifying the substance of policies to be
pursued. If the legitimacy and effectiveness of European policies is considered
problematic, the main concern is therefore about the policy-making functions of
European institutions that were created by the treaties, particularly where
these institutions are able to act in disregard of the preferences of national
governments and parliaments.
In the supranational/hierarchical mode, European institutions are able to impose
binding policy choices without the agreement of national governments. This is
true of monetary decisions by the ECB, policies defined by the ECJ in its
interpretation of treaty provisions and secondary European law, and decisions by
the Commission when it unilaterally adopts directives, when it issues
regulations specifying the content of Council directives, and when it initiates
treaty infringement procedures against individual member states. In this mode,
the European capacity for conflict resolution is not constrained by the veto
positions of national governments. It is therefore possible to adopt policy
choices that violate the interests and preferences of national governments and
their constituents even on politically salient issues. By the same token,
however, the legitimate reach of supranational capacity is limited by relatively
narrow normative constraints.
For the ECB, the substantive legitimacy of its "sound money" course of
monetary policy has a clear intergovernmental base in its explicit mandate to
maintain price stability (Art. 105 TEC), which was adopted in the Maastricht
Treaty after extensive negotiations and much public debate (Verdun 2000).
Similarly, when the Commission and the ECJ enforce explicit treaty commitments,
they seem to be on safe grounds in light of Arts. 211 (ex 155) and 220 (ex 164)
TEC. At the same time, however, the reach of these powers was dramatically
extended and deepened by the judge-made doctrines of "supremacy" and
"direct effect" (de Witte 1999). Nevertheless, policies defined by the
ECJ continue to benefit from the cooperation of national judiciaries and hence
from nationally rooted legitimacy beliefs and respect for the "rule of law"
shared by national publics and policy elites as well (Burley/Mattli 1993). The
caveat is, however, that these conventional legitimacy beliefs would not support
the exercise of explicit law-making functions. Admittedly, there is no clear
dividing line between interpretation and legislation, and most national high
courts probably operate on the other side of this hypothetical line much of the
time. Nevertheless, the fact that judicial law-making has to masquerade as
interpretation makes a difference, especially since the possibility of having
judicial misinterpretations of the "legislative intent" corrected by
democratically legitimated political actors is much more remote at the European
level than it is in the nation state.
It follows that the legitimacy of supranational policy choices by the Commission
and the ECJ is strongest in areas where the original intent of the treaty-making
governments is clearest - which are, by and large, the policies of market-making
negative integration. It is true that the Court, protected by its self-created
doctrines of supremacy and direct effect, has extended the reach of negative
integration beyond the historical intentions of member governments, but in doing
so it was still going forward in the direction that was originally agreed upon.
That same basis of legitimacy would not have been available if Commission and
Court were to have used their supranational powers to achieve purposes about
which member governments were deeply divided.
The joint-decision mode is the main institutional avenue of European legislation.
It is characterized by a strong role of the Commission, whose initiatives are a
formal precondition of European legislation (Peters 1996). These initiatives
respond to a wide variety of inputs - from the Council, individual member
governments, the European Parliament, subnational governments, European
associations, national associations, large firms, and expert groups convened by
the Commission - which are documented in the extensive literature on European
interest intermediation and policy networks (Kohler-Koch/Eising 1999; Benz
2000). Nevertheless, the Commission (or more specifically its specialized
Directorates General) is generally able to follow its own preferences in
selectively translating inputs into legislative initiatives. At the same time,
the role of the European Parliament in the legislative process has been
considerably strengthened by the expansion of its co-decision powers to the
point where its specialized committees are consulted well in advance of formal
decisions by both the Commission and the Council (Shackleton 2000). Moreover,
the veto positions of individual member governments have been greatly reduced as
the decision rule in an increasing number of policy areas has been changed from
unanimity to qualified majority. Nevertheless, at the end of the legislative
process, European policies still depend on the support of a large majority of
the weighted votes of member governments in the Council. In many areas, however,
that is not yet the end of the policy-making process, as the Commission clearly
dominates the comitology processes through which general Council directives are
translated into specific directives and regulations with direct legal effect (Joerges/Vos
1999). Since the EU has no administrative infrastructure of its own, these need
to be implemented by national and subnational governments. Yet again, the
Commission is charged with monitoring national compliance and may, at its
discretion, initiate infringement proceedings against member governments which
it believes to be in violation of Treaty provisions or of Council and Commission
directives, regulations, and decisions.
In the joint-decision mode, in short, national governments have considerable
power to block European legislation, but the direction of legislative
initiatives and the specification and enforcement of detailed rules are largely
under the control of supranational actors. As a consequence, the institutional
capacity for effective action in the face of policy conflict tends to be
considerably greater than would be true of strictly intergovernmental
negotiations. By the same token, however, the "intergovernmental"
legitimacy arguments that originally supported European legislation in the
joint-decision mode have lost much of their weight. What seems to have taken
their place are arguments asserting the legitimacy of "network governance"
(Kohler-Koch/Eising 1999), which presumably have their normative roots in the
Roman maxim volenti non fit iniuria - meaning that policies that are supported
by a broad consensus, after serious deliberation and consultation of all
affected interests, need no further legitimation (Benz 2000). However, if that
argument is accepted, it also follows that EU legislation in the joint-decision
mode will be unable to legitimate hard policy choices on controversial and
politically salient issues.
Network governance creates a large number of de facto veto positions. The system
is kept going by the existence of strong pressure on all parties to reach
agreement - in COREPER, in the Council, and in "deliberative"
comitology proceedings (Lewis 2000; Benz 2000). By itself, however, that
consensus merely allows decisions to be reached, but it does not necessarily
legitimate them. Exasperation over the extremely bureaucratic perfectionism of
European regulations is ubiquitous, and national responses to the BSE scare have
shown that deliberation and consensus behind the closed doors of European-level
committees cannot create legitimacy for policies that have strongly negative
political salience in national constituencies. However, such cases are probably
exceptions rather than the rule. Where strongly negative responses can be
anticipated, or where the policy preferences of national governments or of major
interest groups strongly diverge, the more likely outcome is either deadlock or
a compromise at the lowest common level. In other words, EU policy processes in
the joint-decision mode tend to anticipate legitimacy deficits and to avoid them
by resorting to "non-decision" - which also implies that in such cases
existing EU policy will be very hard to change. Moreover, if a policy area is
generally characterized by strongly divergent preferences, it is likely that
governments will have maintained the intergovernmental mode by insisting on
unanimous decisions in the Council.
Starting with the introduction of an Employment Title in the Amsterdam Treaty
and its implementation in the "Luxembourg Process," the EU has begun
to institutionalize a mode of policy coordination among member states which is
intended to avoid the self-blocking tendencies that limit the effectiveness of
European policy processes in the joint-decision and intergovernmental modes in
the presence of divergent national preferences. Under the label of "open
coordination," the new mode was extended at the Lisbon Summit to a variety
of policy areas concerning social protection and economic promotion. Even though
"Luxembourg" and "Lisbon" differ in the degree and the
detail of institutionalization, the basic approaches are similar. Both processes
involve the Commission, national governments, a permanent committee of
high-level national civil servants, the Council of Ministers, and the European
Council in defining common policy objectives and in assessing national efforts
to reach these objectives.
It is clear, however, that harmonization is not to be part of the process and
that any European-level action will take the form of guidelines, benchmarking
reports, and recommendations. Given that all effective policies have to be
adopted and implemented at the national level, legitimacy is not a problem. The
more interesting question is whether these very demanding procedures are
effective in solving problems in the sense that national policy responses will
be improved (or at least influenced) as a result of open coordination. The hope
is that benchmarking and peer review will stimulate processes of policy learning
and innovation in areas where European governments face common problems but
could not agree on common policy responses (Ferrera et al. 2000).
In the absence of effective open coordination, "mutual adjustment" (Scharpf
1997a: Chap. 5, 2001) is the default mode in which member states must try to
cope with those problems for which European solutions are not available. Here,
each country is on its own, but to the extent that governments find themselves
affected by policies adopted in other member states and are themselves
influenced by the incentives of regulatory and tax competition, their policy
choices are in effect Europeanized, and it makes theoretical sense to
conceptualize (some) national policy choices as moves in a Europe-wide (or even
larger) non-cooperative game (Dehejia/Genschel 1999).
3The Policy Dimension of Problem-Solving Capacity
Our assumption is that policies differ in the types and the intensity of
conflict which they tend to generate and that the probability of conflict is a
characteristic of the constellations of interest that are typically represented
by policy actors  in a given policy area. Given the fact that our focus is on
European economic integration, the primary interests involved are either
pursuing the benefits of larger and more efficient markets or seeking protection
against negative consequences of market competition. Before I proceed to discuss
these interest constellations in greater detail, however, it seems useful to
present a brief overview of the historical evolution of EU policy areas.
3.1Market-Making and Social Protection Policies
At the national level, the governments of capitalist democracies have to respond
simultaneously to both market-making and social protection interests, and while
the relative emphasis on policies serving either type of interest varies between
countries and over time, there is no question that both concerns have equal
constitutional standing and should be pursued in the same institutionalized
modes of policy-making. This was not originally the case in the processes of
European integration, and it still is not the case now.
After the demise of plans for a European Defence Union in 1954, the ultimate
goal may have remained political union, but the driving force behind European
integration was a widely shared interest in realizing the economic advantages
that were associated with the creation of larger European markets.
beneficiaries were supposed to be consumers, but the main political support came
from industrial and (after the establishment of the Common Agricultural Policy,
CAP) agricultural producers, who expected to benefit from unimpeded access to
the markets of all member states. This quest for economies of scale has not only
driven the geographic enlargement from the Economic Community of the Six to the
preset Union of the Fifteen and beyond; it also explains the progress from a
free trade area to a customs union and to a common market eliminating national
non-tariff barriers to trade in goods and services and to capital mobility.
Whether the theoretically predicted and politically anticipated economic
benefits of larger and more perfectly competitive European markets have in fact
been achieved is surprisingly unclear (Ziltener 2001). What matters here is that
the process of market integration has continued even in the absence of
demonstrably positive economic effects. One reason, surely, is that economic
integration was repeatedly treated as a strategy (or as a substitute) for
advancing the much more difficult goal of political integration. Moreover, with
the worldwide ascendancy of neoliberal ideas in economic policy and with rising
concerns over "Eurosclerosis" in the 1980s, market-making goals became
progressively radicalized, moving far beyond the mere integration of the
national markets that had existed in the "mixed economies" of member
states. European competition policy was extended to eliminate public procurement
practices and state aids that could distort free competition, and "liberalization"
was extended to service branches and public utilities which - as nationalized
industries or highly regulated monopolies or cartels - had been exempted from
market competition in all member states (MacGowan 2000). By the same logic,
finally, it was thought that the transaction costs imposed by the existence of
multiple currencies and variable exchange rates ought to be eliminated by the
creation of monetary union and a common currency (Verdun 2000; Moravcsik 1998:
Chap. 6; Dyson/Featherstone 1999).
For a large part of this history, social protection interests - concerned with
the welfare state, employment protection, work safety, industrial relations, and
environmental protection - played a very limited role in European integration.
Admittedly, the original treaties did include rules on gender equality and
against the discrimination of migrant workers which required existing rules to
be modified in some countries. Furthermore, European policies on coal and steel
and on agriculture were also designed to stabilize employment and incomes in
these very tightly integrated economic sectors. In general, however, France was
the only one of the original Six to propose the establishment of explicit social
policy and welfare state competencies at the European level.
Initially, the asymmetry between market-creating and social protection
competencies did not matter much, since the integration of product markets was a
slow process as long as national non-tariff barriers could only be overcome
through harmonization directives that depended on unanimous agreement in the
Council of Ministers, while even greater obstacles impeded the integration of
service, capital, and transport markets. However, these conditions changed in
the 1980s. Resistance to the integration of product markets had been broken by
the Court in the Cassis revolution, and the liberalization of services and
public utilities was facilitated by a shift to neoliberal policies in key member
states which, in combination with competitive pressures and the strategic
employment of legal action by the Commission and the Court, ensured the
realization of the Single Market program.
With this, the neoliberal program for European integration was completed in
principle, even though the process of its further perfection is still ongoing.
However, unions and left-of-center political parties, who had by and large been
content with the exclusion of social protection policies from the European
agenda, were now faced with a serious challenge. National markets could no
longer be closed to goods and services produced under different national
production regimes, and at the same time the exit costs of mobile capital and
firms were greatly reduced. Thus, if high levels of regulation and taxation were
maintained, national producers, complaining of reverse discrimination and
suffering competitive disadvantages, would threaten to exit. Yet if regulations
concerning production processes were relaxed and taxes on mobile factors of
production reduced, interest groups and voters who had come to rely on existing
systems of social protection would rise in protest against the dismantling of
the welfare state and against social injustice.
As a result, demands for "European solutions" are now being made in
many non-economic policy areas - just as had been predicted by neofunctional
theorists (Wessels 1997). Moreover, confronted with these demands, left-of
center parties and unions have generally come to support the Europeanization of
public policy in the hope of recreating the social protection capabilities that
are eroding at the national level under the legal constraints of negative
integration and the economic pressures of regulatory and tax competition. That
was also the promise of the "Social Dimension" which Jacques Delors
had associated with the drive to complete the Internal Market and Economic and
Monetary Union (Ross 1995). As we shall see, however, this promise is not being
fulfilled. In order to discuss the reasons, it will be useful to refer to a more
detailed version of the conceptual frame introduced above.
3.2The Conceptual Frame Elaborated
In Table 2, I present an elaborated conceptualization which, on the vertical
axis, lists the institutional modes discussed above. They are arranged in an
order that suggests that the capacity to adopt effective policy choices in the
face of policy conflict decreases from top to bottom, being highest in the
supranational/hierarchical mode and lowest in the intergovernmental and
In the horizontal dimension, I have listed four generic EU policy areas that are
directly or indirectly related to economic integration in an order that reflects
the probability of policy conflict (to be discussed below). The first area
includes market-creating policies, which merely remove national obstacles to the
free movement of goods, services, capital, and labor ("negative integration").
The second describes market-enabling policies, which, in order to remove
remaining non-tariff barriers to trade, have to harmonize national product
standards and turnover taxes. The third category of process regulations
describes efforts to harmonize production-related national regulations and
factor taxes that do not constitute barriers to trade, but where national
solutions are directly affected by international regulatory and tax competition.
Welfare state policies which are not production-related, finally, have no effect
on trade and only indirect effects on competitiveness, but they are affected by
revenue constraints caused by the integration of capital markets (Scharpf 2000:
In order to complete the overview of "first-pillar" policies, Table 2 also includes two policy areas that will not be discussed in detail below,
namely economic promotion and protection and fiscal equalization.
Table 2: Institutional modes of EU policy-making, policy-related preferences,
and policy areas
In the inside cells of Table 2, I have listed examples of specific European
policies that were either adopted or seriously promoted. Empty cells suggest
either a lack of European competencies or the absence of serious policy
initiatives. It is useful to point out here, however, that there is not
necessarily a one-to-one relationship between institutional modes and specific
policies. Policy choices adopted in the supranational mode by the Court may
become the object of treaty negotiations or of Council directives, and the
Commission may waver between imposing a directive on its own or initiating a
Council directive (Schmidt 1998a: 211-217, 1998b). Conversely, the
Europeanization of monetary policy could only be achieved in the
intergovernmental mode through the adoption and ratification of the Maastricht
Treaty, but now that the amendment is in force, monetary policy choices are
imposed by the ECB in the supranational/hierarchical mode (Dyson 2000).
Similarly, once a general Council directive is adopted, policy shifts toward the
"supranational" end of the continuum as it becomes subject to the
authoritative interpretation of the Court or is made more specific through
regulations and decisions adopted by the Commission after consulting comitology
committees that cannot be effectively controlled by national governments or by
the Council (Joerges/Vos 1999).
In a more fundamental sense, it could be said that, once adopted, all European
policies are shifted into the supranational mode by the combined effect of the
supremacy doctrine and the "joint-decision trap" (Scharpf 1988): Given
the high consensus requirements of Council directives and even more so of Treaty
revisions, it is inevitable that many existing policies will stay in place and
will remain supranationally binding, even though they could not be adopted by
current majorities in the Council of Ministers. If the issues involved have high
political salience, such as the BSE and foot and mouth disease (FMD) crises,
this fundamental asymmetry could also become a problem for democratic legitimacy.
As mobilized national publics become aware of how tightly policy choices are
constrained by European regulations (adopted, perhaps even unanimously, under
conditions when they had either broad support or low political salience), it
will be difficult to explain why these constraints cannot now be relaxed in
response to severe problems and massive political demands because of minority
opposition in the Council of Ministers (or in one of the hundreds of comitology
The horizontal location of policy areas, from left to right in Table 2, is meant
to suggest differences in the probability of policy conflict. The assumption is
that these differences are determined by policy-related constellations of
preferences among policy actors. The salient types of preferences involved are
represented by arrows in the top row of the table. Here I distinguish between
preferences for the creation of larger and more competitive markets, preferences
for protection against the effects of market competition, and preferences for
and against fiscal redistribution among member states. However, before I discuss
these, it is necessary to point out what this conceptualization does not include.
3.3.1Policy Preferences and System Preferences
Given the fact that (for all member states most of the time) economic
integration was the driving force, but not the ultimate goal of European
integration, all explanations and predictions predicated on an analysis of the
preference constellations involved in particular policy processes are plagued by
a two-level problem. On the first level, it is plausible to focus on the balance
of economic and countervailing social protection interests of a member state
that are immediately at stake in a particular EU policy choice, and it may also
make sense to rely on stylized and quasi-objective representations of the
interests (defined in rational, egoistic terms) of the governments involved (Moravcsik
1998). At this level, agreement can only be expected for outcomes that leave
each party better off than they would have been in the event of non-agreement.
In addition, some governments and Commission directorates were (sometimes)
influenced by policy-related normative or ideological orientations, mainly of
the neoliberal or ordoliberal variety.
On the second level, however, both for governments and for the supranational
actors in the Commission, the Court, and the European Parliament, the success or
failure of European integration as such is not only at stake in
Intergovernmental Conferences and European Summits, but is also a background
condition in processes of "everyday" European policy-making. For
supranational actors, that may be a constant concern (associated with their
institutional self-interest), whereas for member governments it may be more
realistic to think of a latent "system interest" in preventing the
erosion of present achievements and in facilitating the further deepening of
European integration which, if activated, may facilitate agreements that could
not be explained by analyses of the proximate policy interests at stake. But
when would such latent interests be activated? For national civil servants with
longer terms of duty in COREPER, in the Council Secretariat, and in comitology
committees, the threshold may in fact be quite low. Socialized into a European
frame of reference, and under the influence of in-group pressures, they may
indeed develop action orientations which value the success of negotiations for
its own sake even if it might require substantial concessions in terms of
predefined national interests - or even in terms that would be politically
acceptable "at home" if proposed agreements were seriously reviewed (Hayes-Renshaw/Wallace
1997; Joerges/Neyer 1997; Lewis 1998, 2000).
In practice, therefore, European policy-making by "stealth" and by
"subterfuge" may have considerable potential (Héritier 1999) which is
constrained only by the limits of "permissive consensus" - and by the
absence of attention and possible mobilization of domestic interest groups, the
media, and parliamentary parties. However, even if national publics are
mobilized on issues with high political salience, ministers, and even more so
heads of government, may shy away from defending national positions to the point
where this might signal a readiness to secede from the Union or where it might
push another government to the brink of secession (DeGaulle's France in the
1960s or Thatcher's Britain in the 1980s). Since European integration is
considered a highly valuable, but still fragile achievement, its protection and
promotion is a concern - primarily, but not only, of the government that has the
rotating Presidency - that may indeed override the calculus of national
self-interest. Unfortunately, however, for theory-based predictions, the
intensity of these concerns tends to vary strongly from one policy area to
another, from one country to another, and from one period to another. In the
following overview, I will only look at the constellations of explicitly
policy-related preferences, but we should bear in mind that, at least on issues
that have low political salience in member states, the "negotiation space"
within which agreement can be reached may exceed the limits defined by theories
of interest-based bargaining.
3.3.2Preferences For the Creation of Larger Competitive Markets
The Europeanization of public policy was primarily driven by the shared
interests of member governments in gaining free access to the larger European
market for their producers and in obtaining for their consumers the benefits
associated with economies of scale in terms of production and more intense
market competition. These interests supported market-creating policies that
removed national barriers to trade and free movement and that ensured the proper
functioning of competitive markets, and they also had to support those
market-enabling policies that were necessary to harmonize national regulations
and taxes which would otherwise have constituted non-tariff barriers to trade.
Even if all countries expected to benefit from access to larger markets, however,
national producers would also suffer from becoming exposed to international
competition in their formerly protected domestic markets. This suggests that the
resulting interest constellations have the characteristics of a Prisoner's
Dilemma. Under that assumption, the creation of free markets would still be in
the common interest of all member states, but conflicts could be expected at the
implementation stage when countries would be tempted to maintain protectionist
practices while free-riding on the opening of other markets. This, at any rate,
is the accepted justification of the strong hierarchical role of the Commission
and the Court in enforcing negative integration and in controlling national
measures that may distort competition through state aids and public procurement.
By the same token, the proper functioning of European markets must be ensured by
a European competition law that is also largely formulated and enforced by the
Commission and the Court.
3.3.3Preferences For Protection Against Market Competition
If the interest constellations associated with European economic integration had
in fact resembled a symmetrical Prisoner's Dilemma, the adoption of the free
market regime itself ought to have been a conflict-free process, and governments
would also have had reason to agree ex ante on institutional provisions
protecting themselves against temptations to free-ride. The fact is, however,
that policy conflicts have been endemic throughout the history of European
economic integration. The reason for this is that free trade initiatives and the
realization of free trade regimes have also activated social protection
interests in the member states which, however, were much more cross-nationally
divergent in their policy goals than the free trade initiatives to which they
Even if free trade is thought to be in the common interest, national economies
or particular industries in these economies differ greatly in their
vulnerability to competition. Thus even the original commitment to create a
Common Market could only be achieved through the resolution of severe (primarily
Franco-German) conflicts of interest. For France, the opening of its industrial
markets to German competition was only acceptable if agricultural markets were
also integrated- which would then create massive problems for less efficient
German farmers. Tough intergovernmental bargaining led to complex package deals
in which industrial markets were only gradually liberalized, while the
integration of agricultural markets was to occur within the tightly regulated,
subsidized, and protectionist regime of CAP. The integration of service and
capital markets, though also envisaged in the EEC Treaty, was not actively
pursued before the late 1980s. By that time, the salient conflict was again
asymmetric, between early liberalizing countries pushing for rapid
liberalization and protectionist countries defending their highly regulated or
monopolist service public functions against foreign competition (Lyon-Caen/Champeil-Despats
Once market integration and liberalization are accepted in principle, the
existence of nationally differing product standards, service regulations, and
turnover taxes must appear as a barrier to free trade if the country of
destination is allowed to apply its own rules to imported goods and services.
From a strictly neoliberal perspective, the proper responses would be "mutual
recognition" and the "country-of-origin" principle. From the
perspective of social protection interests, however, these national rules serve
important purposes of consumer and environmental protection, and turnover taxes
have become important sources of revenue - all of which would be undermined if
goods and services offering less protection or taxed at lower levels could be
freely imported. Recognizing the validity of these apprehensions, the Treaty
allows national service regulations and product standards to be maintained if
they serve valid protection purposes (Art. 30, ex 36 TEC), and it maintains the
country-of-destination principle for turnover taxes. To the extent that this
remains true even after the Cassis decision, the advocates of free trade find
themselves compelled to support the harmonization of product standards, service
regulations, and turnover tax systems.
Attempts at harmonization, however, must then cope with the fact that national
regulations may differ significantly from one another. Hence, even if they
generally support harmonization, producers and consumers in each country would
also prefer to have European standards conforming to their own existing rules.
By itself, of course, this form of "regulatory competition" amounts to
a "battle of the sexes" constellation which generally should not be a
major obstacle to agreement (Héritier et al. 1996). Nevertheless, harmonization
may still be blocked in cases where differing national rules have a significant
impact on the price of products or where a change of product standards would
affect a large installed base.
By contrast, the harmonization of process regulations, which do not affect the
quality of products and hence cannot be used to justify the exclusion of imports,
cannot rely on the free trade interests of producers and consumers. Its support
has to come exclusively from social protection interests that are at risk of
being undermined at the national level by the pressures of regulatory and tax
competition. However, these are primarily the concerns of producers and workers
in highly regulated and highly taxed countries, and they are directly opposed by
the interests of producers in less productive countries who could not afford
these demanding regulations. Welfare state policies are affected by the same
conflicts of interest if they have a direct effect on the costs of production -
with the implication that demands for harmonization would mainly come from
member states that rely heavily on payroll taxes for the financing of benefits.
Moreover, even if social transfers and social services are primarily financed
from income and consumption taxes, harmonization will be greatly impeded by
politically salient differences in institutional structures of European welfare
3.3.4Preferences For and Against Fiscal Redistribution
As the financial weight of European policies increases, conflicts of interest
among member states over the incidence of fiscal contributions and program
benefits have also gained in importance. They affect the creation and
implementation of European programs of economic promotion - including CAP,
industrial policy, and R&D policy - which are meant to protect jobs and
incomes in backward regions and declining sectors and to promote industrial
competitiveness in global markets. They are also particularly virulent in
negotiations over the medium-term budget, structural and cohesion funds, and CAP
reform and of course in the negotiations over Eastern enlargement. Analytically,
these are zero-sum conflicts in which compromise solutions greatly depend on the
applicable decision rules - which explains why net contributor countries
continue to defend the unanimity rule. Even then, however, a considerable degree
of fiscal redistribution was achieved through package deals that obtained the
agreement of economically less advanced member states to the liberalizing
initiatives of the Single European Act and the Maastricht Treaty.
* * *
After this explication of the two-dimensional conceptual framework, I will
now turn to a discussion of specific insights gained from empirical research,
paying particular but not exclusive attention to research at the MPIfG. Since
the focus is on problem-solving capacity, I will use the policy dimension as the
primary organizing principle of the following sections, except for the final one,
in which I will discuss what we have learned about the adjustment of welfare
states at the national level.
The market-creating policies of the EU have their origin in intergovernmental
agreements. This was true of the Treaty of Rome committing the original Six to
the creation of a Common Market and to the removal of tariffs and quantitative
restrictions to trade; it was true of the Single Market program of 1986; and it
was also true of the creation of European Monetary Union (Moravcsik 1998). It
should be noted, however, that in the original Treaty further progress toward
the integration of agricultural, transport, service, and capital markets was
also to be left either to intergovernmental negotiations or to the
joint-decision mode (which, under the unanimity rule, was not very different).
Nevertheless, it is in the field of market-creating policies that the
supranational/hierarchical mode has achieved its greatest substantive importance.
4.1Negative Integration and Mutual Recognition
Even though intergovernmental commitment had laid the political and legal
foundations for market integration, it was by no means clear how far governments
would be willing to go in this direction. In fact, after the abolition of
tariffs and the difficult compromises on CAP, the political support for economic
integration appeared to have faltered in the economic crises of the 1970s. The
renewed and ever more ambitious initiatives of the 1980s were therefore
critically dependent on the constitutional revolution of the Cassis doctrine
that was announced by the Court in 1979. Its importance can hardly be
exaggerated. Before that decision, governments simply invoked Art. 30 (ex 36)
TEC to exclude imports that did not conform to national health, safety, or other
product regulations. Thus the effective expansion of goods and service markets
depended on the (unanimous) adoption of harmonization directives by the Council
- which had become an extremely slow and cumbersome process.
Cassis removed that impasse by imposing a rule of "mutual recognition"
in all cases where national product regulations did not meet Court-defined and
very strict criteria of "proportionality." By the same token, the
Commission was now empowered to initiate Treaty infringement procedures to
remove non-tariff barriers to trade even in the absence of prior harmonization.
In other words, the proper scope of market integration was no longer under the
control of national governments relying on their veto powers in the Council of
Ministers. From then on, "negative integration" through mutual
recognition imposed by supranational legal action was a background condition in
intergovernmental and joint-decision negotiations about the integration of
European markets. This explains why even governments that, at the time, were not
under the influence of neoliberal and free-trade beliefs agreed to the Single
Market program of 1985 and to the move from unanimity to qualified majority for
harmonization decisions in the Single European Act of 1996.
4.2Competition Law, State Aids, and Liberalization
Similarly, there is a clear intergovernmental foundation for the active roles of
the Commission and the Court in defining and enforcing a body of European
competition law and of European rules controlling state aids (MacGowan 2000).
These were understood as a necessary implication of the political commitment to
create competitive European markets - which otherwise could have been frustrated
by economic concentration and the protectionist practices of national
governments. It is also true, however, that the Court, and even more so the
Commission in its neoliberal zeal, interpreted the Treaty mandates very broadly
and with little sympathy for the numerous exemptions governments had written
into Art. 87 (ex 92) TEC.
The impact of supranational activism was particularly important for the
liberalization of service public or Daseinsvorsorge sectors - telecommunications,
financial services, energy, air, rail and road transport, and financial services.
In all member states, these had been staatsnahe Sektoren (sectors close to the
state; Mayntz/Scharpf 1995a) which in one form or another - as public monopolies
or highly regulated private monopolies or cartels - were exempted from (the full
force of) market competition. Except for the field of transport - where Arts.
70-80 (ex 74-84) TEC had envisaged a "Common Transport Policy" that
never came about, but which presumably was meant to be as dirigiste as CAP - it
was not obvious that the Treaty was supposed to change this state of affairs,
and in fact for the first three decades nothing much happened. Moreover, the
textual justifications for liberalizing initiatives that could be found in the
Treaty were all worded to suggest that they should only prevent discrimination
against foreign suppliers and providers. Thus the basic free trade commitment
requires the "abolition, as between Member States, of obstacles to the free
movement of goods, persons, services and capital" in Article 3 [c] TEC.
Similarly, Art. 12 (ex 6) rules out "discrimination on grounds of
nationality," and all Treaty provisions establishing a European competition
law - Arts. 81-89 (ex 85-94) TEC - are explicitly aimed at restrictive practices
or at competition-distorting regulations or state aids which "affect trade
between Member States." It is remarkable, therefore, that the major impact
of liberalization policies was on the internal transformation of national
economies, rather than on transnational trade.
Economists and lawyers with a strong preference for liberalization could of
course argue that a national sector that was exempted from market competition
was eo ipso closed to foreign suppliers and providers, even if these were
treated no worse than potential national competitors. In some branches (air
transport or road haulage, for instance), service providers in early
liberalizing countries and their governments were indeed pushing for protected
markets in other member states to be opened. Moreover, as the promise of lower
prices and more efficient services spread from the United States and Britain,
liberalization also came to be supported by big industrial consumers and their
associations in laggard countries. National service providers, however, were
generally opposed, and their political influence in "sectors close to the
state" was generally sufficient to defend the status quo against reform
efforts in most member states. In spite of the lure of new technical
opportunities and competitive pressures, therefore, the majority of national
governments were initially unenthusiastic or even hostile to European
initiatives for service and infrastructure liberalization.
It therefore seems puzzling that the liberalization and deregulation of a wide
range of heavily protected sectors was ultimately achieved through directives
that were adopted in the joint-decision mode by qualified majorities in the
Council. A partial explanation may be the ideological ascendancy of market
liberalism in the 1980s, under the influence of which some governments may
indeed have welcomed the opportunity to evade domestic political constraints
through reforms imposed by the European level (Moravcsik 1998). But that alone
would not have been sufficient under the applicable voting rules. As Susanne
Schmidt has shown in her dissertation project, the initial push again came from
the Court, which, in response to a complaint made by the European Parliament,
had declared the Council's inaction in the transport field to be in violation of
the Treaty. Encouraged by this decision, the Commission then used its competence
to issue general directives without Council agreement (Art. 86 III (ex 90 III)
TEC) for the first time in order to liberalize the market for terminal equipment
in telecommunications. When this bold move was upheld by the Court, it defined a
new fallback option which increased the bargaining power of the Commission, even
though it generally preferred to promote liberalization through Council
directives. In addition, the Commission developed a most effective "dual-track"
strategy to undermine the resistance of protectionist governments and to build
political support for a liberalizing Council agenda (Schmidt 1998a, 1998b).
Through selective legal action against national monopolies, it forced individual
member states to open their own markets - and persuaded their governments to
support Council directives that would liberalize the markets of all member
states. Nevertheless, as the eventual compromises in the energy or insurance
sectors show, countries with a strong political commitment to their existing
public service structures were at least able to proceed quite slowly toward full
By and large, however, if market creation is defined as the problem, the
problem-solving capacity of European policies adopted in the supranational/hierarchical
and in the joint-decision modes must be rated exceptionally highly. Once the
foundations had been laid by intergovernmental agreement on Treaty provisions
which, however cautiously, established a commitment to market integration,
supranational action by the Court and the Commission was able to build on this
foundation, and on the supremacy of European law, in order to establish and
expand free market regimes that effectively neutralized the protectionist
preferences of member governments. It is a credit to the strategic skills of the
Commission that this free market program, even where it went far beyond the
initial preferences of most member governments, was generally realized with the
acquiescence of these governments in the Council of Ministers.
4.3Monetary Policy and Fiscal Coordination
The centralization of monetary policy and its assignment to an independent
European Central Bank was, of course, again the outcome of tough
intergovernmental bargaining. The same is true of the ECB's mandate to treat
price stability as its "primary objective" (Art. 105 I TEC). However,
since macroeconomic performance is determined by the interactive effects of
monetary and fiscal policy (and by wage increases), and since the size of the EU
budget is insignificant in comparison to the aggregate budgets of EMU member
states, it was also thought necessary to achieve central control over national
fiscal policy. In part, this requirement was made more specific in the Stability
Pact which, at German insistence, was added as a condition of Monetary Union. It
represents only a partial solution, however, since it merely defines upper
limits for public-sector deficits; and even in this regard it falls short of the
demands of its promoters since, according to Art. 104 XI (ex 104c) TEC, the
application of sanctions is not automatic or left to supranational/hierarchical
enforcement procedures, but depends on political decisions in the Council.
Beyond that, fiscal coordination is left to procedures resembling the mode of
"open coordination," in so far as recommendations proposed by the
Commission and adopted by the Council are not binding on member governments.
Moreover, it is now being realized that the centralization of fiscal policies
would not be conducive to effective macroeconomic coordination at the level of
national economies. As Henrik Enderlein's dissertation project will show, the
eurozone is not, at present, an "optimal currency area" since growth
rates, inflation rates, and the phases of the business cycle continue to differ
significantly among its member economies. As a result, member governments can no
longer count on a monetary policy that fits the conditions of the national
economy. For high-growth and high-inflation countries, this implies that real
interest rates will be too low, adding fuel to inflation; and for low-growth and
low-inflation countries, ECB interest rates will be too high, pushing the
economy into recession and adding to already high rates of unemployment
(Enderlein 2001). Under these conditions, the coordination of European fiscal
policies - meaning that national budgets should expand or contract at the same
time in response to the average state of eurozone economies - could only make
matters worse. If monetary instruments are chosen without regard to the current
condition of the national economy, national governments depend all the more on
the autonomous use of their fiscal instruments and, if available, of their
influence on national wage increases.
The intergovernmental commitment to market integration had initially removed
national competencies to impose tariffs and quantitative restrictions on trade,
but left intact the power of member states to regulate and to tax internal
economic activities. If these powers were exercised in a way that discriminated
against imported goods, foreign providers of services, or migrant workers, the
original law of the Treaty gave the Court and the Commission ample
supranational/hierarchical authority to intervene.
There is now a large body of case law ensuring that migrant workers are
protected by the same rights as domestic workers under labor law and social
security. As a consequence, there is also a large number of Council directives
dealing with the coordination problems among national social security systems
that have arisen as a result of these judicial interventions (Leibfried/Pierson
2000). From a theoretical perspective, these policies are interesting since it
is hard to explain them as a response to the economic interests that otherwise
support the opening of product, service, and capital markets. Instead, countries
of origin may have cared for the welfare of their citizens working abroad, and
unions in the host country would have an interest in preventing competition at
substandard wages and employment conditions. Yet neither would have been able to
determine the outcome of ECJ judgments. It seems more plausible, therefore, to
see the expansion of European law protecting migrant workers as an instance of
the logic-driven, rather than interest-driven, evolution of legal rules: If the
Treaty guarantees "an internal market characterized by ... the free
movement of persons" (Art. 3, c TEC) and prohibits "any discrimination
on grounds of nationality" (Art. 12 TEC), then it would logically follow
that the employment of foreign workers must be governed by the same rules that
apply to domestic workers. The same may be true in other areas of
anti-discrimination case law.
However, national policies need not be discriminatory to have the effect of
non-tariff barriers to trade (Armstrong/Bulmer 1998). If product standards and
service regulations differ from one country to another, producers and providers
cannot sell identical products in all member states, and hence the expected
economies of scale of the larger European market cannot be realized. Even under
the Cassis rule, however, mutual recognition could not be imposed by the Court
if such regulations were appropriate means for protecting consumer, health,
safety, or environmental interests. In other words, the removal of these
non-tariff barriers could not always be achieved through supranational action,
but often depended on harmonization directives adopted in the joint-decision
From the perspective of free trade interests, then, the harmonization of product
standards generally appears to be desirable. In practice, however, harmonization
efforts had to cope with the fact that national regulations may differ
significantly from one another. In discussing these difficulties, it is useful
to distinguish between "coordinative" and "regulatory"
standards (Werle 1993; Scharpf 1994). The former serve the immediate interests
of producers and consumers by ensuring the technical compatibility of hardware
and software products. In their absence, firms would not be able to sell
identical products in all European member states. Hence harmonization can
generally rely on the shared interests of the industries represented in European
standardization committees (e.g., CEN, CENELEC). While producers and consumers
in each country would presumably prefer to have European standards conforming to
their own existing rules, the resulting Battle-of-Sexes constellations will
generally have low levels of conflict.
By contrast, product standards of the regulatory variety and most service
regulations are supposed to serve the interests of consumers and workers, or
they may serve to protect the environment or other politically specified values,
rather than the immediate interest of producers. Nevertheless, producers would
prefer common product standards to nationally differing regulations. For
consumers, workers, and other protected interests, however, differences may be
more salient since national rules are likely to reflect differing national
sensitivities to certain types of risks and differing abilities to pay for the
higher-priced products required by more demanding rules. As a consequence,
harmonization through intergovernmental negotiations under the unanimity rule
was cumbersome and often ended in deadlock.
The breakthrough came in the 1980s with the shift to qualified majority voting
in the Council and with new harmonization procedures that used Council
directives only for formulating very basic requirements, leaving the further
specification of product norms to Commission directives, regulations, and
decisions that are developed in hundreds of highly specialized advisory,
regulatory, and management committees composed of experts delegated by national
governments or nominated by interest associations and the affected industries (Joerges/Vos
1999). The harmonization of product norms in comitology procedures has been
found to approximate "deliberative" problem-solving, rather than
interest-based strategic bargaining (Joerges/Neyer 1997) and, given the veto
positions of high-regulation countries under Arts. 30 (ex 36) and 95 (ex 100a)
TEC, it is also plausible that many of the European standards do in fact provide
high levels of protection (Eichener 1997, 2000). Moreover, the professional
orientations of participants in comitology procedures seem to bias the output
not only toward the much-lamented perfectionism and excessive detail of European
product regulations, but also toward a progressive expansion of the domains that
are being regulated.
Nevertheless, even in the field of product standards, free trade interests will
not always prevail. Impediments to harmonization may arise from the costs of
changing a large "installed base" (which has so far prevented the
European standardization of electrical and telephone plugs and sockets). Of
similar importance may be culturally ingrained preferences for certain types of
products with high political salience (e.g., homeopathic medicine) and the
institutional interest of national regulatory agencies, both of which may
combine to defend divergent national regulatory regimes. These difficulties are
well illustrated and analyzed in Jürgen Feick's project studying the arduous
history of attempts to harmonize the licensing of pharmaceuticals despite the
strong support of major industrial producers. Here, paradoxically, the move
toward a mutual recognition of national licenses, based on the harmonization of
national testing procedures, proved so difficult that the large producers of
innovative pharmaceuticals were able to mobilize political support for the
creation of a centralized European licensing facility, which now exists
alongside diverse national licensing systems (Feick 2000).
In general, we find that the harmonization of product standards (which
constitute barriers to trade) is less difficult than the harmonization of
regulations of production processes. In service branches, however, this
distinction is less clear and has less explanatory power than is true for
material goods. In the case of uno actu services, which are consumed as they are
performed, the process is the product. Hence if the underlying justification of
the distinction in the case of goods is the fact that consumers and users are
affected by the qualities of the product, but not by the conditions under which
it is produced, then regulations of service provision should be considered to be
Since most services are locally provided and locally consumed rather than
imported, free trade issues and hence the need for harmonization used to play
only a minor role. However, as formerly protected service branches have become
liberalized, international trade in transport, communications, financial, and
business services is gaining in importance, and nationally differing regulations
of service provision and consumption may indeed become economically significant
barriers to trade. If the protective purpose of national regulations is
considered valid (e.g., in markets characterized by significant information
asymmetries between providers and consumers), mutual recognition may not be an
acceptable outcome, while the diversity of national regulations may still create
serious obstacles to harmonization. In the insurance sector, Susanne Schmidt's
current project shows that the problem was ultimately resolved by the adoption
of a divided regime: In the markets for mass insurance, where consumer
protection concerns are highly salient, business depends to a large extent on
local information, and transnational trade was not an economically attractive
option for service providers. As a result, national rules governing insurance
contracts were allowed to stand. In the markets for insuring large industrial
risks, by contrast, consumer protection seems less important since buyers and
providers meet on a more equal footing. Again, therefore, harmonization could be
avoided - but this time under rules requiring the mutual recognition of national
Yet another explanatory constellation is illustrated in Susanne Lütz' project
on recent transformations of banking and capital market regulations in Europe.
Again, national regulations differed, but the parties whose interests were
protected by them - holders of savings accounts, creditors, and investors -
could not benefit from their defense. As capital transfer controls were
abolished in the 1980s, the integration of financial markets achieved a global,
rather than a merely European dimension, and mobile capital would flow to the
most attractive locations. Here, however, attractiveness was not defined by the
absence of regulations. Creditors had reason to care about the solvency of
banks, and investors were interested in safeguards against deception and insider
trading. Moreover, U.S. regulations governing the access of European firms to
the large American capital market and the investment practices of large American
pension funds created massive incentives for European countries to approximate
the - relatively demanding - regulatory regimes of the United States. As a
consequence, regulatory competition did not result in the "race to the
bottom" that is usually expected (Lütz 2000).
Even though the institutional arrangements for regulating financial markets and
for controlling insider trading and other practices in stock exchanges differed
greatly among EU member states, European companies and national regulators
shared an interest in attracting large institutional investors, including
American pension funds operating under strict U.S. regulations of permissible
forms of investment abroad. National reforms of stock market regulation
therefore began to converge on the pattern of state regulation that had been
established by the U.S. Securities and Exchange Commission, and European
harmonization merely ratified the result. In short, international competition
for the business of potent and demanding "consumers" did in fact
strengthen the regulatory capacities of the state. Similarly, in the field of
banking regulations, the "upward harmonization" (Luhmann 2001) of
capital adequacy regulations was driven by the interest of the industry and of
national regulatory agencies. For the former, the quality of national
regulations of credit risks is a "certification" factor that
influences a bank's rating in interbank borrowing, whereas national regulators
have an interest in coordination at high levels of security in order to avoid
the international repercussions of bank failures. In both fields, the interest
constellations among national industries and national governments therefore
favored coordination and would have ensured a high degree of convergence even in
the absence of European harmonization.Thus, taken as a whole, the
problem-solving capacity of the multilevel policy process is now probably higher
than it was when national regulatory systems were still operating autonomously.
5.4Harmonization of Turnover Taxes
Tax policy at the European level is not (yet) about European taxes; it is about
the harmonization of national taxes. Attempts at harmonization may be driven by
either free trade or social protection interests. On the one hand, diverse
systems of taxation and diverse tax rates are considered an obstacle to the
integration of product, service, and capital markets; on the other hand, tax
competition in the integrated European market is seen to constrain public
revenue and welfare state finances. Hence European tax harmonization may, in
principle, serve both market-making and market-correcting purposes. In fact,
however, the partly successful European harmonization of turnover taxes served
market-making purposes, whereas the mostly unsuccessful attempts at capital tax
harmonization were driven by social protection interests.
Turnover taxes would constitute serious barriers to trade if exports were taxed
by both the country of origin and the country of destination or if the methods
of taxation differed between countries. As Philipp Genschel showed in his
project on European tax harmonization (Genschel 2001), the second problem was
eliminated at an early stage when member state governments agreed on a
standardized systems of value-added taxation in the late 1960s. At the same
time, double taxation was avoided since exports were exempted from VAT in the
country of origin and taxed at the domestic rate in the country of destination.
While the "country-of-destination" principle eliminated tax
competition among member states, cross-border trade is still burdened by the
bureaucratic procedures required by the move from one VAT regime to another. In
the interest of more perfect market integration, the Commission has time and
again proposed a move to the "country-of-origin" principle - which
would entail either massive tax competition or the full harmonization of VAT
rates. So far, however, member governments have been unwilling to sacrifice
their autonomy in setting VAT rates in order to achieve comparatively minor
gains in market perfection.
From the social protection perspective, the present state of VAT does not
constitute a problem. Since national taxes are refunded on exports and imposed
on imports, differing national tax rates created tax competition only as a
consequence of private cross-border shopping when customs controls were removed.
In the absence of harmonized tax rates, however, a shift to the
country-of-origin principle would create heavy downward pressures on countries
such as Denmark which rely on high VAT rates to finance the welfare state - and
for the same reason these same countries also have to resist attempts at further
harmonization. From their perspective, even the present degree of harmonization
may have gone too far in constraining national policy options that would either
increase VAT rates on energy and other exhaustible resources or that would
reduce rates on certain types of services.
6Regulations of Production Processes
The category of process regulations was originally introduced to characterize
production-related environmental regulations in contrast to regulations of
product standards (Rehbinder/Stewart 1984), but has been extended to cover all
regulations and taxes that increase the cost of production without affecting the
attractiveness of the product itself in the eyes of the consumer. These include
not only environmental and work safety rules, but also rules limiting working
time or ensuring paid maternal leave and minimum wage, employment protection,
and industrial-relations legislation or factor taxes - all of which may have a
significant impact on the costs of production but will not generally affect the
qualities of the goods and services that are produced. Since the free trade
regime of the EU (which is stricter than the WTO in this regard) does not allow
the exclusion of products which are in themselves harmless on grounds of
"social dumping" or "environmental dumping," free trade
interests and consumers have no reason to mobilize support for the harmonization
of process regulations. Initiatives therefore have to rely exclusively on the
support of those interests that expect to suffer from free trade and the
pressures of regulatory and tax competition. However, these interests are likely
to be divided.
Where process regulations have a significant impact on production costs,
producers in countries with very expensive regulations have an interest in
achieving "a level playing field" through European harmonization at
their own level. However, this interest is directly opposed to the interest of
producers in less productive countries with low levels of regulation, who would
lose their competitive advantage through harmonization. At the same time,
workers and environmental interests in high-regulation countries would strongly
oppose common European rules that would require existing national standards to
At the European level, most (but not all) of these policies would need to be
negotiated in the joint-decision mode, and some would require unanimous
agreement in the Council of Ministers. Hence our theoretical expectation was
that the outcome of negotiations would, at best, be common European minimal
standards that are still acceptable to countries with low levels of protection,
but that will not eliminate the pressures of regulatory competition, if they
exist, on countries with high levels of protection.
These expectations do not apply to the European law on gender equality - which
is the one area where process regulations could be advanced and extended in the
supranational/hierarchical mode by the Commission and the Court. Unlike the
protection of migrant workers against discrimination, these rules are not even
logically related to a market-enabling function; they have a clear social
protection origin. They owe their place in the primary law of the Treaty (Art.
141 (ex 119) TEC) to French concerns over competitive disadvantages that might
follow from its legislation on equal pay for men and women. Other governments
acquiesced - perhaps because each country was only expected to apply its own
standards for men to women as well. Moreover, the injunction of the original
Art. 119 was only addressed to member states, and it probably was not foreseen
that the Court and the Commission would take the matter in their supranational
hands (Falkner 1994). Once they were in charge of defining the requirements of
gender equality, however, the outcome was in part paradoxical: The Court's legal
syllogisms had a strong deregulatory touch, allowing employers to avoid national
regulations intended to protect women against unfavorable working conditions,
and men to challenge positive discrimination laws intended to improve the career
opportunities of women (Tesoka 1999). This is not meant to deny that in some
countries the case law on gender equality did in fact improve the status of
women in the labor market. Moreover, in response to protests and the spirit of
the times, Council directives and even intergovernmental Treaty revisions (e.g.,
Art. 141 IV TEC) have corrected some of the excessively formalistic definitions
of equality in the case law.
6.2Process Regulations with Fuzzy Edges
In general, however, the harmonization of process regulations has to be achieved
in the joint-decision mode rather than in the supranational/hierarchical mode.
Here, our theory-based expectations would apply - and by and large, we found
them confirmed by the empirical record. We had to recognize however, that there
are instances where the distinction between product and process regulations does
not provide a theoretically valid dividing line. Work safety regulations, for
instance, may indeed affect the costs of industrial production processes. Under
modern conditions, however, safety is largely incorporated in the hardware and
software of machine tools and office equipment - which are themselves traded
products whose manufacturers would be unable to realize the economies of scale
of the larger European market if they had to comply with different safety rules
in each country. In other words, in these cases process regulations are in
effect product regulations, the adoption of which depends on the factors
discussed above. Once that is understood, it seems less surprising that some of
the harmonization directives on work safety and ergonomic qualities of work
places are indeed providing high levels of protection (Eichener 2000).
In other cases, the distinction loses its explanatory value because, in the eyes
of the consumer, the process of production does indeed affect the quality of the
product. That was shown to be true in Susanne Lütz' project for capital market
regulations protecting the interest of investors; in the aftermath of the BSE
scare, this has also become true of the rules defining the permissible feeding
and medication practices for cattle and other livestock, and it may become true
for other foodstuffs. Under such circumstances, regulatory competition may
indeed generate a race to the top if consumers are informed and care about the
qualities in question. By the same token, harmonized regulations at high levels
of protection may also find the support of producers in low-regulation
countries, who would otherwise be vulnerable to consumer boycotts.
6.3Environmental and Employment Regulations
It should be understood, however, that these qualifications do not detract from
the basic theoretical proposition: European regulations of production processes
which would significantly raise the costs of production without affecting the
quality of the product in the eyes of the consumer are likely to differ in their
impacts on the competitiveness of national economies operating at different
levels of average productivity. Hence the harmonization demands of countries
with high levels of protection are met by the opposition of member states with
less productive economies. As a consequence, European process regulations (which
are not, at the same time, product regulations) tend to have the character of
minimum standards that do not place excessive demands on producers' ability to
pay in economies with less than average productivity. This has been shown to be
true for EU environmental policy (Golub 1996a, 1996b). Moreover, the current
projects by Gerda Falkner and her collaborators on the implementation of EU
directives concerning the "social" conditions of employment in all
fifteen member states, shows that all of the seven directives that were adopted
in the 1990s take the form of minimum standards. Again, there are caveats,
however. Given the diversity of national policy legacies, some aspects of
European minimum standards are likely to require adjustments even in countries
that are generally seen to be in the avant-garde of social protection (Bercusson
1999; Falkner 2000). Moreover, the Falkner projects also show that the assumed
equation of high-regulation and high-productivity countries does not always
apply: Certain social employment regulations that are on the books in some
Southern countries are more stringent than those in the Northern welfare states,
with the result that more demanding Europe-wide minimum standards will not
necessarily be blocked by the resistance of Southern governments.
Even though legislation on industrial relations also constitutes a regulation of
production processes, the economic pressures for harmonization are mitigated by
the historical co-evolution of systems of industrial relations, production
regimes, and product market strategies. Hence national configurations may differ
greatly in the extent, form, and effectiveness of worker representation in
collective bargaining and management decisions, but as long as production
regimes and product strategies are part of the same matrix, economies with
highly institutionalized systems of industrial relations may be as competitive
as economies with deregulated labor markets and decentralized wage negotiations
(Soskice 1999; Hall/Soskice 2001). Nevertheless, even in "corporatist"
systems, the distributive conflict between capital and labor will at best be
moderated by the "antagonistic cooperation" between management and
organized labor. It is therefore no surprise that international competition
should induce employers' associations to ask for the reduction of specific cost
elements even at the risk of unbundling the "beneficial constraints"
(Streeck 1997a) of a complex constellation.
By the same token, unions in highly regulated systems have tried to protect
their positions through European harmonization. These efforts have failed almost
completely - almost, because the European Works Councils directive does provide
a minimum of information rights for workers in multinational European companies
(Streeck 1997b). The reason, however, is not merely the resistance of employers'
associations and governments in less regulated economies, but also the fact that
there is no agreement among European unions on a common model of industrial
relations that could be protected by European harmonization initiatives
(Ebbinghaus/Visser 2000). In other words, institutional diversity would have
constrained agreement on common European rules even if class conflict and
competitive concerns had not stood in the way.
6.5Harmonization of Factor Taxes
As with turnover taxes, the harmonization of factor taxes on capital and labor
might occur under decision rules corresponding to the joint-decision mode. In
fact, however, finance ministers in ECOFIN continue to dominate tax decisions,
and national governments continue to defend their vetoes by insisting on
unanimous decisions. As a consequence, interactions continue to approximate the
intergovernmental mode, and the focus of interaction seems to be more in the
nature of "bloody minded" bargaining than of cooperative, let alone
In his project, Philipp Genschel showed that free trade interests are primarily
concerned about double taxation and the additional bureaucratic burdens that
nationally divergent tax systems might impose on the cross-border movements of
goods, services, and capital. In the field of capital taxation, however, the
main issue of double taxation was already eliminated through bilateral tax
treaties and national legislation before European tax policy became an issue.
While differing national tax systems continue to impose bureaucratic burdens on
multinational firms and cross-border investments, the pressure they exerted was
not strong enough to overcome the resistance to harmonized rules that arises
from differences between existing national tax systems. By comparison, advocates
of free trade cared even less about the harmonization of social security
contributions since these, like other process regulations, were no impediment to
free trade or capital movements.
Thus, if the harmonization of factor taxes is presently a serious European
concern, it is generally driven by social protection interests in high-tax
countries, whereas free trade interests are now more attracted by the downward
pressures on tax rates that could be expected from international tax
competition. However, the nature of competitive pressures differs between
different types of capital taxes. The taxation of income from interest is
primarily vulnerable to tax evasion if assets are transferred to countries with
low or zero source taxes and if income is not reported to the country of
residence. Here, it is often assumed that tax competition resembles a
symmetrical Prisoner's Dilemma and that harmonization ought to serve the
revenue-maximizing interest of all countries. In fact, however, small countries
will gain more revenue by attracting foreign assets than they lose through low
tax rates on domestic capital incomes (Dehejia/Genschel 1999). Moreover, revenue
from taxes on capital interest may not be the major concern of countries
defending their comparative advantages in the market for financial services. In
any case, the mobility of financial assets is not limited to EU member states,
and EU-wide harmonization would therefore not provide a perfect solution to the
problems of tax competition. As a result, harmonization has been an extremely
conflictual and slow process, and even the compromise that was finally reached
in 2000 is marred not only by very long transition periods, but also by its
dependence on the cooperation of tax havens outside of the EU (Genschel 2001).
In the case of taxes on company profits, downward pressures are the consequence
of a complex combination of competitive incentives (Ganghof 2000). On the one
hand, low source taxes on local operations may influence the choice of
investment and production locations. On the other hand, low taxes on company
profits may induce multinational corporations to relocate their legal domiciles
and headquarters functions. Even if there is no discrimination in favor of
foreign companies, this is a form of competition that may be won by small
countries, whereas large countries would lose large amounts of revenue if they
tried to match the lowest rates of profit taxation. These conflicts of interest
have so far prevented the harmonization of profit taxes, and even the efforts to
define a "code of conduct" governing tax benefits that discriminate in
favor of non-resident companies have not yet succeeded. It remains to be seen
whether announcements by the Commission that discriminatory tax benefits will
now be examined under the rules governing state aids will be able to stop the
most blatant practices.
Finally, social security contributions have a direct impact on the costs of
production and hence on international competitiveness in European product
markets. It may therefore appear remarkable that attempts at their harmonization
have never been on the European agenda. Nevertheless, on the basis of what was
said before, the explanation is straightforward: In terms of the free trade
interests that shaped the European agenda for the first three decades, there was
no reason to consider the harmonization of a form of taxation that did not
interfere with the free movement of goods, services, and capital. To the extent
that it might constitute an impediment to the free movement of persons, it could
be assumed that any problems were dealt with by the legal rules ensuring
non-discrimination of migrant workers and the portability of accrued
entitlements and benefits. By contrast, social protection interests, which might
have had reasons for avoiding the pressures of tax competition, saw no chance
for effective harmonization, given the immense differences in the degree to
which member states did and still do rely on social security contributions to
finance their welfare expenditures (Scharpf 2000).
7Welfare State Policies
Since the "social" regulations of employment conditions were among the
process regulations discussed in the previous section, the present concern is
with European policies affecting the core functions of national welfare states.
These include the provision and financing of means-tested social assistance, of
earnings-related social insurance covering income losses in cases of
unemployment, sickness and disability, and in old age, of health care, and of
social services for families with small children, for the handicapped, the sick,
and the aged. All these policy areas are affected by tax competition and, at
least to some extent, by regulatory competition as well, and considerable
pressure for harmonization might therefore be expected to come from social
protection interests. With the exception of means-tested social assistance,
however, which is tax financed everywhere, the financing, the form of provision,
and the availability of these functions varies considerably among member states.
At the same time, under Art. 137 III (ex 188) TEC, European harmonization
continues to depend on unanimous agreement in the Council.
As a consequence, the Europeanization of public policy has affected the core
functions of the welfare state only in marginal ways - and almost exclusively as
a consequence of market-making European law. Thus EU rules against the
discrimination of migrant workers have ensured their access to
contribution-financed social insurance systems and the portability of accrued
benefits. Moreover, there are elaborate coordination rules under Art. 42 TEC (ex
51) to ensure that workers with employment histories in more than one member
state pay contributions and receive benefits according to the law of a single
designated state. However, since these coordination rules were first formulated
for the original Six, all of which had Bismarckian social security systems, the
fact that there are no similar coordination rules for the taxes paid by migrant
workers is generating increasing difficulties as countries with tax-financed
social security systems have joined the Community and as even the original Six
are changing the financing structures of their systems (Pieters 2001). To the
extent that EU rules also ensure access to tax-financed benefits for the
families of migrant workers, or for workers who are no longer employed, they
have been considered a problem for countries with a tax-financed basic pension
and with tax-financed national health systems. Moreover, EU rules ensuring free
trade in goods and services have been interpreted to allow cross-border
purchases of medical services, pharmaceuticals, and medical appliances at the
expense of national health insurance systems, and there seems to be a serious
concern that EU competition law might allow private insurers to enter the
"markets" of national social insurance systems - at least in areas
where these are seen to provide defined-contribution benefits for individual
risks (Leibfried/Pierson 2000). Beyond that, however, the EU has treated the
core welfare state functions as being off limits for positive European
This was in part due to neoliberal opposition against any extension or
reinforcement of welfare state policies. The more important reason is that the
policy legacies and institutional structures of existing social protection
systems in European welfare states are extremely diverse. These differences are
extensively documented in the comparative project directed by Fritz W. Scharpf
and Vivien A. Schmidt (2000a, 2000b): "Scandinavian,"
"Anglo-Saxon," and "Continental" welfare states have defined
differing dividing lines between the welfare functions that individuals and
families are expected to provide on their own and those functions which are
assumed by the state. As a consequence, European countries differ greatly in
their levels of welfare spending and taxation, and they also differ greatly in
the levels and structures of employment in sheltered-sector services. The same
is true of differences in European systems of industrial relations
(Ebbinghaus/Visser 2000). In other words, there is no common "European
social model." On theoretical grounds, we expect these differences between
European welfare states to largely resist harmonization, and the empirical
record seems to support this expectation.
Since both the beneficiaries and the providers of welfare state services and
transfers have based their life plans on the continuation of existing systems,
their replacement by different common European solutions would face massive
political obstacles at the national level. British voters, who have had to make
their own private arrangements for most life risks, could never accept
Scandinavian levels of taxation; Swedish women, who have come to rely on the
availability of high-quality public services, would never accept a return to
Continental patterns of family work and gender relations; and German patients
and doctors would be united in protest against the establishment of a
British-type National Health Service. Similar differences prevent the
harmonization of national systems of industrial relations and of employment
As a consequence of these anticipated electoral responses, and of the veto
positions that organized labor tends to enjoy in left-of-center governments,
European directives in the field of the welfare state and industrial relations
need to avoid direct challenges to the policy legacies and institutional
structures of the different types of national welfare states; indeed, in order
to maintain their own continuing control, member states insisted on the
unanimity rule even at the Nice Summit, when they were most clearly confronted
with the need to avoid immobilism in anticipation of Eastern enlargement. In
short, in the field of welfare state policies, the problem-solving capacity of
European policy processes in the joint-decision or intergovernmental modes is
extremely low. Instead, there is now a "Lisbon process," which is
designed to achieve progress in the open-coordination mode. However, it is too
early to judge its effectiveness.
8Adjustment at the National Level
Any assessment of the problem-solving capacity of the multilevel European polity
must, of course, also take account of changes at the national level, where the
policy space is legally constrained by the rules of negative integration on the
one hand and economically constrained by the pressures of regulatory and tax
competition on the other. As a consequence, many domestic policy choices are no
longer determined by nationally available policy resources and national policy
preferences alone; they have assumed some of the characteristics of foreign
policy - just as international relations between EU member states have assumed
characteristics of European domestic politics. It is thus meaningful to speak of
the "mutual adjustment" among EU member states as a mode of
Successful adjustment would serve both competitive and protective purposes:
Since negative integration increases the intensity of international competition,
countries must seek to maintain and increase the competitiveness of their
economies; and since negative integration combined with the pressures of
regulatory and tax competition challenges existing social protection policies,
countries seeking to maintain protection levels must find solutions that are
legally and economically viable in the open economy.
8.1Competitive Adjustment: Deregulation and Tax Reform
Competitive adjustments may, in turn, primarily increase productivity or reduce
costs. These distinctions are analytically useful even though the empirical
dividing lines are sometimes less clear, as actual policies will often be
designed to serve multiple purposes. This is true of regional and sectoral
industrial policies which may at the same time reduce costs through subsidies
and attempt to increase the productivity of employment in declining regions and
branches, whereas R&D and innovation policies are more clearly at the
competitive and productivity-increasing end of the spectrum. Comparative studies
of European regions and the policies affecting their competitiveness have been
carried out in an internationally cooperative project designed and carried out
by Colin Crouch and Helmut Voelzkow. They show that policies adopted at the
regional level make a difference. More generally, they support the proposition
that - at least in the large member states of the EU - nationally uniform
industrial policies are becoming less effective, whereas the capacity of
subnational governments to respond autonomously to the specialized needs of
regionally concentrated industries has gained in importance. In international
comparison, this also suggests that the comparative advantages of "small
states in world markets" (Katzenstein 1985) will continue to increase,
unless larger states learn to make full use of decentralizing options (Scharpf
2001b). It also appears to us that nationally distinct systems of innovation
(Casper 1997; Soskice 1999) are presently being transformed in unexpected ways
as governments and large firms respond to new global challenges. In this regard,
however, we have no answers as yet and are still in the process of designing a
research project that will explore recent changes.
In the comparative literature on political economy, the more generally expected
outcomes of competitive adjustment are cost-cutting strategies involving
deregulation and tax reductions. If goods and services produced under foreign
regulatory and tax regimes are allowed to compete on domestic markets, and if
constraints on the mobility of factors of production are removed, regime
competition is expected to exert downward pressure on burdensome regulations and
high rates of taxation on factors of production or factor incomes (Sinn 1993).
It should be clear, however, that tax cuts and deregulation will not follow
directly from economic competition, but instead will be mediated by domestic
political institutions and processes providing varying incentives and
opportunities for governments, opposition parties, and intermediary
organizations to promote or oppose them.
Thus Susanne Schmidt's current post-doctoral project will show that there is
indeed reason to be skeptical of hypotheses that try to explain observed
deregulation as a direct effect of international regime competition. Comparing
German and French responses to the European liberalization of the road haulage
and insurance markets, it appears that the effective deregulation of previously
cartelized and highly regulated sectors went much further in Germany than was
legally required by EU directives and that it also went further than it did in
France. Moreover, the more radical German response does not seem to be a
consequence of economic pressures: Liberalization did not in fact generate much
competition from foreign providers; hence deregulation was not needed to prevent
the reverse discrimination of German providers. Instead, it seems that in the
multiple-veto political system of the Federal Republic, European liberalization
directives unfroze a stalemate between domestic political forces challenging and
defending high-regulation regimes that had outlived their economic rationale. In
France, by contrast, a less constrained political system had been able to
continuously adjust and modernize existing regulations and continued to do so
after the adoption of European directives. In other words, radical deregulation
in Germany owes more to the pressures of pent-up reforms in the
"semi-sovereign" German state (Katzenstein 1987) than to the legal
constraints of mutual recognition and the pressures of regulatory competition.
Given the importance of intervening political variables, there is now a body of
literature which, on the basis of multivariate statistical analyses of
cross-national time-series data on exposure to trade, capital controls, levels
of taxation, and public expenditures or deficits, claims that regime competition
has no causal influence at all on national policy choices (e.g., Garrett 1998;
Swank 1998). In our view, such sweeping conclusions are not justified. In the
tax field, the challenge of this literature is taken up by the dissertation
project of Steffen Ganghof, which, through a combination of quantitative
analyses and comparative case studies, will show precisely how international
competition is creating specific constraints and tradeoffs for countries with
different policy legacies and how the responses of individual countries are
shaped by differences in their policy-making institutions and their political
preferences (Ganghof 2000).
The empirical sequence began with politically motivated cuts of the nominal
rates of personal and corporate income taxes in the United States and in the UK,
the impact of which on public revenue was limited by simultaneous "base
broadening." Under the pressure of tax competition, Scandinavian countries
then moved toward "dual income tax" solutions, where taxes on
corporate profits, or on all income from capital, are reduced to the low
Anglo-Saxon rates, while progressive and very high rates of taxation are
maintained on income from labor. The social asymmetry of this solution became a
political problem in Sweden, where it contributed to the defeat of the Social
Democrats in 1990, and in Denmark, where the explicitness of this dualism had to
be softened by subsequent reforms. Nevertheless, the dual-tax strategy has
allowed Scandinavian countries to maintain very high levels of revenue without
endangering their competitive position in international capital and investment
Finally, in Continental countries, high nominal rates were riddled with
exemptions for a wide variety of purposes and groups. Nevertheless, nominal
rates also came under pressure. In most countries, however, political resistance
and economic concerns about investment disincentives were strong enough to
prevent an Anglo-Saxon strategy of radical base broadening - with the
consequence that revenue losses could not be compensated for. At the same time,
a move toward the Scandinavian dual income tax was not only highly unpopular but
would, at least in Germany, violate constitutional norms of equal taxation. In
the past, Continental countries generally responded by raising VAT rates and
social security contributions (Manow/Seils 2000a, 2000b). As the damaging
effects of payroll taxes on employment came to be realized, however, this trend
was halted and even reversed in some countries - beginning in the mid-1980s in
the Netherlands and later taking place in France, Belgium, and Germany as well.
The pressure is now on cutting social expenditure and perhaps on an expansion of
green taxes. As the dissertation project of Eric Seils is showing, the change of
policy has only had a significant effect on labor costs in the Netherlands so
far. In the meantime, however, Belgium and France are following the Dutch
example in targeting tax cuts or subsidies to reduce the tax wedge specifically
for low-wage employment.
In the tax field, then, our projects show that domestic resistance to
competitive adjustment may be strong enough to prevent the most economically
efficient policy responses to the pressures of international regime competition.
As a consequence, we also find few examples where changes in national policies
have the manifest characteristics of a "race to the bottom." However,
as Steffen Ganghof's project will show in detail, this does not justify sanguine
interpretations: International tax competition has created severe financial
strains for advanced welfare states, and the resulting pressures to adjust have
created difficult dilemmas and "trilemmas" for national policy-makers.
It is true that countries still have choices, and that politics still makes a
difference. But it is not true that countries could avoid paying a high price if
they fail to come up with economically effective responses.
8.2Protective Adjustment: Employment and the Welfare State
Protective adjustment in the fields of employment and the welfare state was the
subject of an internationally cooperative project directed by Fritz W. Scharpf
and Vivien A. Schmidt (Scharpf/Schmidt 2000a, 2000b). Covering the policy
responses to changes in the international economic environment of twelve
advanced welfare states (including three that are not members of the EU)
period from the early 1970s to the late 1990s in the employment and
social-policy sectors, the project did not specifically focus on the EU. It is
nevertheless worth noting that European policies, while very much part of the
problems that nine of the twelve countries had to cope with, did not appear to
be part of the solution in any of these countries.
The project shows that the integration of product and capital markets created
major challenges for all national employment and welfare systems. As a
consequence of more intense international competition in product markets,
employment in the exposed sectors of the economy declined everywhere, increasing
welfare state expenditure and reducing revenue from work-based contributions,
while international tax competition created additional strain on welfare state
revenue. At the same time, capital mobility constrained national options for
Keynesian demand management, and for EU countries aspiring to join European
Monetary Union, the Maastricht criteria and the subsequent Stability Pact also
had the effect of reducing the options of deficit financing.
However, the project also shows that countries differ greatly in their
vulnerability to common external challenges. Remarkably, these differences did
not matter so much in the internationally exposed sectors of the economy, where
all countries tried to reduce costs and increase productivity without being able
to stabilize, let alone increase, employment rates.[26)
Where there were overall
employment increases, they were due to jobs created in the sheltered sectors,
where services are locally provided and locally consumed. The big difference
here is between countries that were able to expand (private or public) services
in the sheltered sector sufficiently to maintain high levels of total employment
and those that had to accept high and persistent rates of unemployment. This is
directly related to differences in the policy legacies of specific types of
Scandinavian countries have very high rates of employment in the public sector,
because their welfare states provide universal and high-quality social services
for families with children, the sick, the handicapped, and the elderly.
Anglo-Saxon countries, by contrast, have very lean public sectors but achieve
high levels of private-sector employment in the sheltered sector as a
consequence of deregulated labor markets, low levels of taxation, and high
income inequality. Finally, Continental welfare states have on average as little
public-sector employment as the Anglo-Saxon countries and as little employment
in private services as the Scandinavian countries. Hence their total employment
rates are low and unemployment is high and persistent.
The problem of the Scandinavian welfare states is the very high tax burden - on
average about 20 percent of GDP above the level of the Anglo-Saxon countries.
These are not a problem for private investments or for export-oriented
production, since capital taxes have been reduced to very low levels. However,
taxes on income from labor (and in Denmark VAT too) are very high. The problem
is thus not primarily economic but political in character: Scandinavian welfare
states are secure as long as middle-class voters find the benefits which they
receive sufficiently valuable to accept high taxes as a fair price to pay.
In Anglo-Saxon countries, the main problem is the existence of a poverty trap
for the "working poor" with low occupational qualifications and -
since social assistance benefits for families with children are comparatively
generous - the existence of an unemployment trap for "workless
families". The solutions adopted by "Third-Way" governments in
the UK and earlier in Australia tend to combine "in-work benefits"
with improvements in education and training systems and with fairly rigorous
"activation" measures. Again, the main problem is political:
Middle-class voters, who receive few benefits (apart from free health care) from
the welfare state, need to be persuaded that it is appropriate to pay (somewhat)
higher taxes in order to improve the situation of the least well-off. Since such
arguments cannot be based on appeals to self-interest, the tone of policy
discourses is more moralistic, and there is a greater emphasis on the reciprocal
obligations of beneficiaries than there is in other countries.
In Continental countries, finally, the problem is exclusion: Women, older
workers, and low-skilled workers find fewer employment opportunities than they
do in either the Scandinavian or the Anglo-Saxon countries. On the one hand,
social services are underdeveloped and create relatively few employment
opportunities in the public sector. On the other hand, the Continental welfare
state is relatively expensive since it has to support a large share of the
population depending on unemployment, disability, early retirement, or social
assistance transfers. As a consequence, demand for private-sector services is
constrained not only by highly regulated labor markets but also by relatively
high tax burdens and by the fact that work-based social security contributions
are still the main source of welfare state finance.
Compared to Scandinavian and Anglo-Saxon countries, Continental welfare states
therefore have the worst of both worlds, and it is not clear how they can escape
from this position in either the Scandinavian or the Anglo-Saxon direction. Tax
increases to allow considerable expansion of publicly financed social services
are as unpopular as labor market deregulation to allow the expansion of
private-sector services, and even a shift in the revenue mix of the welfare
state from social security contributions to income taxes or green taxes may run
into severe political opposition. As a result, we consider the study of reform
options and reform strategies in Continental welfare states to be among the most
interesting and potentially policy-relevant research areas in our program. Thus
Eric Seils' dissertation project is comparing the relative success of the
Netherlands and the failure of Germany in containing and ultimately reversing
the rise of the tax wedge affecting low-wage employment. Similarly, Martin
Schludi's dissertation will compare the role which unions in several countries
have played in opposing or facilitating pension reforms that would contain the
rise of wage-based contributions (Schludi 2001).
One conclusion from this overview is that the Europeanization of public policy
was mainly successful in furthering free trade interests through market-creating
and market-enabling policies. Institutionally, these processes were driven by
the competencies of negative integration and competition policy exercised by the
Commission and the Court in the supranational mode on the one hand and by the
inherent perfectionism of comitology procedures harmonizing product and certain
process regulations in the joint-decision mode on the other. Social protection
interests have been able to shape market-enabling policies in areas where
European harmonization was required to overcome non-tariff barriers to trade or
in areas where neither economic conflicts of interest nor major and politically
salient differences between national policy legacies stood in the way of
harmonized process regulations. Beyond that, however, the creation of
"Social Europe" is blocked by conflicts arising from the diversity of
welfare state aspirations and solutions at the national level. Since these
conflicts cannot be resolved within the given institutional framework of the EU,
social protection interests continue to depend on the problem-solving capacities
of member states. These are constrained by the legal gridlock of negative
integration and competition rules on the one hand and by the economic pressures
of regulatory and tax competition on the other. Nevertheless, the constraints
created by economic integration are not so tight as to rule out national policy
choices realizing widely differing patterns of work and welfare.
We can say this much with some assurance on the basis of our current empirical
research and our knowledge of the relevant literature. In a more speculative
mode, we add the following observations:
It seems that European integration has more or less reached its economic goals
with legal requirements of negative integration, liberalization, and competition
rules, the stringency of which exceeds those of long-established federal nation
states such as the United States or Switzerland. At the same time, it is
becoming clear that economic integration has exhausted its potential as the
driving force behind European political integration. Instead, the tightness of
economic regulations is becoming politically counterproductive and will become
more so after Eastern enlargement. One symptom is the increasing tendency of EU
heads of government to strengthen the Presidency at the expense of the
Commission in the preparation of policy initiatives and in the negotiation of
policy compromises to be reached at Summit meetings rather than in regular
procedures involving the Commission, the Parliament, and the Council. Another
one is the turn that the finalité debate started by Joschka Fischer has taken
since the Nice Summit: While proposals for reforms strengthening the democratic
legitimacy of European institutions have provoked massive opposition among
member governments, the emphasis is now on the constitutional limitation of
European policy choices - through a catalogue of individual rights and, more
significantly, the search for legal instruments that would be more effective
than "subsidiarity" in constraining the exercise of EU competencies.
At the same time, in response to the BSE scare and FMD, member governments not
only reasserted national controls but are also in the process of designing
national versions of agricultural reforms of which it is as yet uncertain how
they could be integrated into a future version of CAP - which, in any case, will
have to renationalize some of the present CAP functions in order to contain the
budget escalation of Eastern enlargement. Moreover, it is becoming clear that
the Europeanization of monetary policy will not, and cannot, be followed by the
Europeanization of fiscal policy among eurozone governments. Instead, the
present divergence of growth rates, employment, and inflation among member
economies shows that the "one size fits all" interest rates set by the
ECB need to be complemented by nationally diverging fiscal and wage policies.
Under such conditions, it should be expected that the legal constraints of
negative integration, competition policy, and the Stability Pact will have to be
somewhat relaxed and that the acquis that has to be accepted by newly acceding
countries will eventually be defined more selectively and with longer transition
periods than is presently envisaged. At the same time, in its recent decisions,
including the latest one upholding a German law requiring power networks to
purchase electricity from renewable sources at preferential prices, the Court
has shown some willingness to moderate the unconditional supremacy of
competition rules over strongly held national policy preferences.
In any case, it seems unlikely that any major new initiatives for economic
integration - comparable to the Single Market and Monetary Union - will provide
major new impulses for political integration. It would also be surprising if the
essentially normative arguments promoted by the German government in the
post-Nice "constitutional" debate were to induce institutional changes
which - in the face of dramatically increasing diversity after Eastern
enlargement - would improve both the legitimacy and the problem-solving capacity
of EU policy processes. In a longer historical perspective, we might instead
speculate about the possibility that now, after the EEC strategy of 1956 has run
its course, the European Defence Community (EDC) strategy of 1954 might be given
another chance. In that case, impulses for more effective political integration
might arise from crises and conflicts forcing member states into more effective
and better legitimated cooperation in the areas of Foreign and Security Policy.
These fields, however, are beyond the scope of our past and present research
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This paper was written in
preparation of the institute's evaluation by the Scientific
Advisory Council of the Max Planck Institute for the Study
of Societies, May 31 to June 1, 2001.
2 Since case studies tend to focus on
processes that did in fact result in an EU policy, rather
than on initiatives that failed or that were not even
introduced in anticipation of failure, they may be perfectly
true individually and yet produce a selection bias in the
aggregate. The resulting distortion is similar to the
"non-decision problem" discussed in American
"community-power" research more than three decades
ago (Bachrach/Barratz 1962, 1963, 1970).
It should be noted, however, that
MPIfG research, and hence my framework, does not cover the
full range of EU policies. It is essentially limited to
regulatory policies that are either intended to bring about
economic integration or that are designed to protect
national societies against the negative consequences of
economic integration. This excludes policies in the
"second" and "third pillar," and it also
excludes a range of promotional and redistributive policies
within the first pillar (e.g., CAP, industrial policy,
R&D policy, or the structural and cohesion funds) that
do not fit this specification. If the conceptual scheme
presented here is sound, it ought to be possible to extend
and adapt it to other policy areas, but I am not trying to
do that in the present paper.
Conflict may be resolved through
procedures that allow some actors to override the opposition
of others, or through procedures that facilitate
The refusal to change existing
policies in the face of new problems or changed constituency
preferences should be treated in analogy to the adoption of
a new policy.
From the perspective of national
parliaments, however, there is a critical difference between
these two forms of "intergovernmental"
policy-making: At least in principle, treaties can be
rejected by a national legislature, whereas it is legally
bound to transpose European directives into national law,
even if these directives have to be adopted by unanimous
agreement in the Council.
This appears to be a more appropriate
description than the claim by Moravcsik (1994) that the
Europeanization of policy choices "strengthens the
state" (i.e., the national executive), which ignores
the fact that national governments are also losing the
capacity to realize their most preferred policy choices.
The same problem plays a large role
for parliaments at both levels in German federalism
I will not discuss the procedural
legitimation of US-style independent regulatory agencies
here, but note that this form of delegated legislation is
circumscribed by stringent rules of publicity and adversary
procedure and that its outcomes are easily reversed by the
democratically legitimated Congress. Neither of these
conditions would apply to autonomous rule-making by the
It needs to be understood that
constellations involve the actors authorized to participate
in European policy choices - government ministries,
Commission directorates, etc. - but the interests they
represent are likely to be a combination of the
socioeconomic interests of their constituents, of their
role-specific understanding of the public interest, and of
their institutional self-interest.
This is not meant to deny the crucial
role that European integration has played in creating
conditions in which, for the first time in history, war
between European countries has become unthinkable. As
economic boundaries were being removed, moving political
boundaries between member states has ceased to be a salient
In the present text, I often use
"interests" and "preferences"
interchangeably. In earlier work, Renate Mayntz and I
(1995b) defined "preferences" as the more
inclusive category that contains interests (in the sense of
material and institutional self-interest) as well as
normative (or ideological) orientations and identity
In German ministerial bureaucracy, the
Ausschuss der ständigen Vertreter (COREPER) was nicknamed
the Ausschuss der ständigen Verräter (traitors).
Relations theorists might describe these second-level
interests as "geopolitical" (Moravcsik 1998,
27-35). Alternative conceptualizations could be derived from
models of iterated games and generalized reciprocity
(Keohane 1984, 110-132). Constructivist notions of
preference modification and learning may facilitate useful
descriptions of the shift from one definition of interests
to the other (and back?). By contrast, the systems theoretic
emphasis on the extreme complexity and fluidity of
"interdependent, reflexive, destabilized and
competing" institutional orientations (Sand 1998) is
likely to overwhelm all attempts at conceptual ordering, let
alone systematic explanation.
Case 120/78, 1979.
In electricity, the French monopolist
EdF was among the original supporters of liberalization, but
remained of course opposed to any opening of the French
market (Schmidt 1998: 192, 235-236). Similarly, since it has
been privatized, Deutsche Post is pushing the German
government to support the liberalization of all postal
markets in Europe.
A rational-choice explanation could be
stated in a simple model: Let us assume that national
delegates are simultaneously accountable to two national
constituencies, i.e., export industries interested in common
standards and social protection groups interested in
maintaining their national requirements. Under these
assumptions, it will be easier to cumulate national
requirements than to persuade a delegate that an
idiosyncratic national requirement ought to be dropped.
For example, a very general Council
directive on product safety was (plausibly) specified in
safety regulations for children's toys and then extended to
safety regulations for the design of children's playgrounds
reflecting cumulative national requirements - allegedly with
the consequence that half of the playgrounds in France had
to be closed (communication by Laurent Thévenot, EHSS,
If service providers choose to make
use of the freedom of establishment, Art 43 II (ex 52) TEC
allows each member state to apply "the conditions laid
down for its own nationals." What does create
difficulties is then the mutual recognition of diplomas and
certificates of qualifications - which, under Art. 47 (ex
57) TEC, depends on the adoption of Council directives,
rather than on the Cassis rule.
In theoretical terms, we have here a
combination of the "certification effect," where
regulations serve as a signal to consumers (Scharpf 1999,
92-95), and of the "California effect" described
by David Vogel (1995), which depended on California being
allowed by U.S. law to exclude automobiles that did not
conform to its high emission standards.
As an experiment, the EU does
presently allow lower VAT rates on some local services.
By the same logic, regulations that
have no significant impact on production costs and
international competitiveness (such as the Drinking-Water or
the Flora-Fauna-Habitat directives) might well be harmonized
at higher levels of protection.
The one exception is social assistance
which, with some exceptions in Southern member states, is
ubiquitously available for people without other means of
support and is financed from general revenues in all
countries. Here, agreement on common European minimum
standards (preferably set at levels that are proportionate
to average incomes in different countries) ought to be
feasible in theory (Atkinson 1998). It remains to be seen
whether the Lisbon process focusing on "social
exclusion" will be able to achieve a similar outcome
through the mode of open coordination.
Australia, Austria, Belgium, Denmark,
France, Germany, Italy, the Netherlands, New Zealand,
Sweden, Switzerland, and the United Kingdom.
A partial exception is Italy, where
pension reforms in the 1990s were facilitated by the need to
meet the Maastricht criteria to join European Monetary Union
(Ferrera and Gualmini 2000). Our conclusion might have been
different if the project had also included Ireland,
Portugal, and Spain, where employment and reform efforts
seems to have benefited greatly from membership in the EU.
Countries do differ in the extent to
which service functions were externalized from industry to
service branches, but if employment in industry and in
production-related services is considered in the aggregate,
the statement made in the text remains true (Scharpf 2000).
Copyright © 2001 Fritz W. Scharpf
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