In 1998, average per-capita GDP and
gross wages and salaries in the CEEC were estimated to be at
15 percent of the EU average, with only Slovenia reaching
levels that were comparable to those of the EU laggards
(Portugal, Spain, and Greece). Measured in purchasing power
parities, the differences in economic development were still
large, with the CEEC average reaching only 32 percent of the
EU average. Variation within the EU-15, measured in
poorest-to-richest ratios, is considerable: leaving
Luxembourg aside, Portuguese per-capita income equals 32
percent of Danish income, and the gross earnings of the
average Portuguese wage earner reach about 25 percent of
those of his Danish colleague. The respective ratios for
Bulgaria are slightly below 4 percent. More generally, the
size of this challenge is illustrated by the observation
that the USA and the EU-15 currently have similar
coefficients of variation of approximately 0.3
in state and national GDP, respectively, while adding the
CEEC-10 to the EU-15 increases the coefficient of variation
by more than 100 percent to 0.75. Extrapolations based
somewhat arbitrarily on a convergence rate of 2 percent per
annum predict that in 2037 the CEEC-10 will achieve an
average GDP per capita of about 65 percent of the EU-15
(Weise et al. 2001: Annex 4).
Hence, enlargement will considerably
increase heterogeneity in the EU, not only in sociocultural
terms but also economically and institutionally. But how
significant are these effects with regard to the viability
of the European Social Model? An answer to this depends on
the expected implications for trade and foreign direct
Enlargement may challenge the European
welfare states in several ways in terms of coverage and
financing, but also with regard to the development of social
structures at the EU level. More specifically, the admission
of countries with substantially lower labor costs may give
the fears of social dumping new impetus. On the one hand, it
is expected that these countries may attract substantial
foreign direct investment, thereby increasing the pressure
exerted on the social security systems of the rich EU
countries by the lower-income member countries and making
the two groups of countries immediate competitors. On the
other hand, the huge differences in living standards are
expected to induce labor migration, thereby increasing the
pressure in particular on the more generous welfare systems.
While the large differences in labor
costs may indeed be regarded as an impetus for relocating
plants to the CEEC, the real effects are expected to be
minor. The current, largely interindustrial, trade structure
will only slowly adapt (with the EU exporting mainly
specialized-supplier, scale-intensive, and knowledge-based
goods and importing mainly labor- and resource-intensive
goods) and depend on the speed of convergence (Schumacher
and Trübswetter 2000: 21). Intra-industrial trade is
expected to increase only in the longer term.
The FDI from the EU to the CEEC,
equaling 0.8 percent of gross fixed investment in the EU in
1998, is “too small to matter” for the EU as a whole, while
the same volume accounts for 25 percent of gross fixed
investment in the CEEC, highlighting the asymmetry of the
trade relationship. Also, analyses of branch structures give
little evidence of ongoing relocation processes, as market
access continues to be the main motive of investment (Boeri
and Brücker 2001: 9-10). From this perspective, the CEEC
countries are better characterized not as being a danger to
European employment but as being the competitors of
far-eastern economies that will profit from their proximity
to the rich EU core countries. By contrast, economic
forecasts tend to suggest that rising trade between the EU
and the CEEC should increase employment opportunities in
both groups of countries (Schumacher and Trübswetter 2000:
21). The only problem zones expected to arise are in
low-wage industries in the eastern border regions of Germany
and, in particular, of Austria, although the forecasts tend
to emphasize the overall increase in employment also in
those regions. On the whole, these studies suggest that we
should not expect extensive relocation processes by firms
seeking to lower labor costs.
However, findings from qualitative
research are inconsistent with these forecasts. In location
decisions of industries with relatively high labor costs,
like the automobile industry, the combination of a low wage
level and a relatively high level of qualification of the
workforce, combined with tax exemptions granted by the
governments, make the CEE countries rather attractive
alternatives to EU locations (Stumpf-Fekete 2001: 435). In
addition, the lower labor standards in these countries make
them candidates for regime shopping (Streeck 1992) by
transnational enterprises, thereby undermining the growth
perspectives of lower-income EU members. As soon as the last
barriers to market entry fall with EU admission, current
reservations against investment in CEE countries may become
obsolete and predictions based on current levels of FDI may
only indicate the minimum level of actual development. In
addition, the low transport costs from the CEEC to the EU
due to market proximity may make it profitable for a larger
set of goods to be relocated to cheaper production sites.
The long-term inequality of living
standards is expected to lead to substantial labor migration
from the CEEC to the EU. Although the total of foreign
residents who have immigrated from the CEEC is estimated to
have been the practically negligible number of 850,000 (0.2
percent of the European population) in 1998, their
distribution is highly unequal with 80 percent residing in
Germany and Austria (Boeri and Brücker 2001: 11).
Unrestricted labor mobility is expected to lead to an inflow
of about 220,000 individuals to Germany and 40,000 to
Austria per year in the first couple of years. Further,
surveys suggest that about 11 percent of all citizens of CEE
countries (or about 11 million people if all ten applicants
are admitted) are likely to leave their country as soon as
free movement of labor is permitted (Sinn 2000: 5). This
amounts to 2.3 percent of the combined population of the EU
and the CEEC. These migrants will mainly offer blue-collar
work in manufacturing and unskilled labor in the service
sector. Although they will compete with the native labor
force in these sectors, the pressure exerted on the
employment opportunities of natives will be mitigated by the
tendency of the migrants to move to the more prosperous
regions. Over time, migrants are expected to adapt their
skill profile also to higher-skilled professions (Boeri and
Brücker 2001: 13).
The migration effects of the upcoming
round of enlargement cannot be compared to previous
admissions of lower-income countries to the EU because of
the considerably larger gap in living standards and the much
closer proximity of centers of very high living standards in
current EU countries and regions of comparatively lower
living standards in the candidate countries. Perhaps a more
realistic comparison might be the experiences at the border
between the USA and Mexico after the NAFTA agreement.
However, this comparison has not yet been explored in depth.
As far as Austria is concerned, the
expectations are less concerned with migration per se than
with a considerable extension of the practice of commuting
between the border regions of the new member states and
economic centers like Vienna, but also within the border
regions. This may exert pressures on incomes and job
competition in these regions, although the net effect is
expected to be positive (Breuss 2001; Huber 2001; Mayerhofer
and Palme 2001b).
and Social Security
I will now discuss the implications of
enlargement for the three dimensions of the ESM in more
detail. Although there are rather clear trends, the actual
size of the effects depends on the accuracy of the forecasts.
If the quantitative forecasts on trade
and FDI are correct, the amount of additional pressure
placed on the social security systems by the admission of
the CEE countries to the EU seems to be minor, in particular
in comparison to the volume of social redistribution. To the
extent that rising trade indeed implies rising employment in
both the EU and the CEEC, the pressure on unemployment
insurance funds may even decline. However, if the caveats
mentioned above are relevant and relocation becomes a major
issue, unemployment may strike the industries affected in EU
countries at least for a transitory period, thereby
increasing the need for a social cushion under the condition
of limited budgets.
While the migration of workers to the
EU is not expected to result in direct challenges to the
social security system per se because eligibility is
dependent on a certain period of paid employment, at least
in the countries currently most affected by migration, the
low-wage orientation of the immigrants is argued to pose a
challenge to the welfare systems. Assuming that the essence
of the welfare state is redistribution from the rich to the
poor, low-wage workers are expected to benefit most from
welfare transfers. While contributing comparatively little
to taxes and social insurance systems, low-income workers
profit from supplementary support, free schooling, full
health care at lower rates, public housing, and tax-financed
infrastructure. Hence, it is argued, the size of net social
transfers to low-income workers will become a prime
determinant when migrants choose their country of
destination, thereby placing pressure on these transfers.
“Systems competition in the presence of free migration will
take the form of lowering the net transfers of resources to
low-income workers, and this means at least a partial
dismantling of the social welfare state” (Sinn 2000: 7).
According to this logic, low-income migrants are thought to
prefer countries with comparatively generous systems of
redistribution, while those who are called upon to finance
the transfer payments will leave those countries, thereby
threatening the funding of the transfer system. Since
preventing migration will harm the potential welfare gains
induced by an improved factor allocation, this perspective
argues that excessive migration incentives must be removed.
The harmonization of social systems would remove the
incentive but eastern standards would be unacceptable to the
EU and western standards unaffordable to the CEEC. If
selection criteria for migrants are also ruled out by the
free movement principle, the application of the home country
principle is regarded as the only means by which “access to
the benefits of the western social systems can be limited”
(Sinn 2000: 11).
Apart from the lack of both normative
and political tenability of this rationale, its real-world
relevance may be limited or offset by other factors
affecting the choice of destination. Among these are the
proximity to the home country, labor market opportunities,
or the existence of ethnic colonies. Hence, the practical
relevance of this challenge is less definite than the
economic logic suggests. In addition, it remains
questionable whether the average migrant’s behavior is
well-captured by the assumed benefit-maximizing function.
However, the issue does have a political dimension that may
be much more important. Even the potential of net benefits
for immigrants may increase resistance to the
redistributionist element in welfare state arrangements
already visible in the social stigmatization of the
unemployed and people depending on welfare transfers. Such
sentiments may be expressed in increasing popularity not
only of parties rallying against welfare redistribution but
also of xenophobic movements and parties fighting against
immigration as such. But again, existing evidence does not
necessarily support such a prediction. Although the
northeastern districts of Austria are expected to be most
strongly affected by the admission of the CEE countries (and
this process is already visible), the popularity of the FPÖ
in that region is clearly below its nationwide average.
Experience has also shown that a number of guest workers in
Germany and Austria move back to their home countries once
they retire. So it is not at all clear that the net balance
between contributions and benefits should turn out to be
negative for current EU members.
All in all, the effects of enlargement
on the financing of European welfare states seem to be
limited by the relatively small size of the expected shifts
given the current size of the western European welfare
states. But even small shifts may have a large impact if
they can be instrumentalized in a political controversy. In
particular, the coverage of welfare systems may be
negatively affected, and the redistributionist element of
the welfare state may be reduced to the detriment of those
most economically disadvantaged. One might expect that such
effects will be larger if conservative and xenophobic
parties jointly push for welfare state retrenchment. Current
developments in the Austrian welfare state underline the
potential impact of such a redesign (Tálos 2001), although
the upcoming EU enlargement does not seem to be receiving a
great deal of consideration. Therefore it is important to
acknowledge the politically disrupting potential of this
challenge, particularly in those countries that are
currently the preferred destination of migrants, even though
the real significance of migration is open to doubt and its
current impact limited.
What impact might enlargement have on
the development of EU-level social policy? One might argue
that enlargement will increase the differences in social law
and policy to such extent that it will become impossible to
agree either on a common framework or on common standards at
a level acceptable to the countries endowed with a
well-developed welfare state.
However, there is less disparity
between the traditions and legacies than one might think.
Like the EU countries, CEE countries are characterized by
more or less encompassing state intervention in the areas of
welfare, but also in many policy areas connected to social
policy. During communist rule, most CEE countries developed
social security systems that cushioned practically all risks
from the cradle to the grave for the large majority of their
citizens. These systems were functional within the framework
of a planned economy, but soon reached their limits during
the transformation to the principles of market economies.
One core problem is a shortage of funds, aggravated by
austerity measures and a growing shadow economy as well as
by widespread tax evasion that reduces social security
contributions and tax receipts. Other core problems are
unclear responsibilities in the administration, and an
overcapacity of facilities and personnel that limit
efficiency and quality, particularly in health care
(European Parliament 1998: 39-44). Thus, the welfare states
of the CEE countries face the consequences of underfunding
and the ensuing development of welfare provision via
Although all CEEC governments are
working to adjust their welfare systems to the exigencies of
the market system, it remains to be seen how successful
these varying reform efforts will be (Deacon 2000; European
Parliament 1998; Heller and Keller 2001). Despite the
efforts of the CEE countries to attract FDI by low capital
taxation, none of them seem to be headed toward a deliberate
strategy of social dumping. This is manifest in the reliance
on payroll taxes to an extent similar to the EU countries (Deacon
Admission to the EU, which implies
entry into the EMU, will certainly not relieve the CEEC
governments from austerity policies, even if they do meet
the Maastricht convergence criteria. The budgetary
restraints will remain while these countries adjust to the
acquis of the EU, including EU social standards. This is a
major challenge for these countries and has led to a
considerable reorientation of policies (Tóth and
Langewiesche 2000). But given the existing EU standards, the
ambivalent scenario for improving welfare provision in the
CEEC suggested by the tension between ongoing budgetary
restraints and the need to attain EU standards will affect
the current state of EU social policy less than future
developments. Given, too, that the transfer of social policy
to the European level is most advanced in particular areas
of labor law (Falkner 1998), adjustment needs are most
pressing in these areas that do not directly affect
However, one should not be overly
pessimistic. The development of social policy in the 1980s
and 1990s has shown a remarkable extension of activity at
the EU level despite the fact that one important member
country, the UK, resisted many attempts at integrating
social policy (Pierson and Leibfried 1995: 452). As a result,
the EU has started to develop mechanisms to deal with the
variety of interests and standards, among which “open
coordination” has become a major and promising component
(Falkner 2002). Open coordination consists of a system of
coordination and monitoring that involves the submission of
reports to the European Commission and their discussion in
the Council, which creates peer pressure on the social
laggards. The EU issues guidance principles that are
intended to induce reform processes in the member countries.
Although little can be said about the success and future
potential of this approach, it is most likely to be the one
best suited to dealing with the variety of standards already
existing in the EU. The admission of the CEE countries adds
further variation to an already high degree of variation.
Since the prospects for progress via regulation or financial
incentives are dim, an optimistic perspective would be to
claim that this increased variation might well help advance
the further development of open coordination because few
other alternatives, if any, are available. A more
pessimistic view, however, might interpret the same
observation as an indication that tension will increase
within the still fragile polity of the EU.
Although not considered part of the
ESM and therefore not included in this review, the EU
financial support distributed via the CAP and the Cohesion
Fund can be regarded as elements of a broad concept of EU
social policy since these payments either support the living
standard of the agrarian population or help improve economic
development in peripheral regions (see, e.g., Rieger 1996).
Since enlargement will certainly increase the number of
eligible regions, the EU has the options of either
increasing the budgets, changing the eligibility rules to
the advantage of the new member countries, or redesigning
the whole system of redistribution within the EU. Since
increasing the budgets is limited by the unwillingness of
the net payers and changing the eligibility rules will be
vetoed by the net recipients, challenges for adjustment in
these policy areas certainly add a further dimension to the
complexity of social policy in the enlarged EU (see, e.g.,
Weise et al. 2001).
and Wage Coordination
To what extent does enlargement have
an impact on wage coordination in European countries?
Challenges come from market integration and from migration.
The admission of CEE countries to the EU integrates a high
wage region and a low wage region into a single market. The
removal of restrictions to imports from the CEEC increases
the plausibility that firms may relocate to the CEEC if
social standards including wages are set at a level that
equalizes the overall utility assessment. While important
aspects of this assessment are market access, political
risks, and unit labor costs, labor market and production
regimes become relevant aspects as soon as these factors are
accounted for (Stumpf-Fekete 2001). In particular, CEE
countries may attempt to attract investment by containing
union power and by offering additional incentives like tax
The challenge to industrial relations
posed by enlargement-induced relocation is not directly
related to the amount of actual relocation. It is the larger
plausibility of the relocation option due to the integration
of the CEEC that shifts the current wage bargaining
equilibrium to the advantage of employers. Evidence from
large German corporations suggests that internal competition
from plants of the same firm located in other countries has
massively increased the occurrence of pacts for employment
and competitiveness in Germany (Rehder 2001). These pacts
often tend to undermine collective agreements and are
regarded as indicative of an ongoing redesign of the German
collective bargaining system toward a more market-oriented
Nevertheless, it remains unclear to
what extent enlargement adds to the existing pressure on the
bargaining system. One might speculate that the option of
relocation to the CEEC gives additional impetus to the
competition between plants. This may not only undermine the
high labor standards in the core EU countries, but also slow
down the improvement of labor standards in more peripheral
countries where trade unions face even more credible
relocation threats, because the lower labor costs and more
permissive labor standards in these countries originally
contributed to the decision to locate there in the first
place (Stumpf-Fekete 2001: 435).
Migration from the CEEC to the EU will
increase the supply for blue-collar work and unskilled
employment in the service sector. Hence these workers will
lose bargaining power to the extent that labor supply
increases. This may threaten to pull wages down and worsen
labor conditions in such professions. Unlike the current
situation, the supply of relatively well-educated migrants
will increase the pressure also at higher skill levels. But
since the employment of migrants in the host countries is
subject to the same set of rules as the employment of native
employees, there is little additional reason to believe that
migration might undermine labor standards to a greater
degree (Sinn 2000: 9).
In addition, if population forecasts
for the EU countries are correct, the EU might in the medium
term witness a shortage of labor. Yet the effects of
migration might be at least partially offset by the decrease
in the native labor supply (see Feld 2000).
With regard to the variety of wage
coordination systems within the EU, the admission of CEE
countries implies an increase in the number of rather weak
coordination systems (see Schienstock, Thompson, and Traxler
1997; Kohl, Lecher, and Platzer 2000). Although the trade
unions in all CEE countries have made attempts at both
increasing worker organization and integrating different
factions, they have been only partially successful. Also,
employers associations are highly differentiated. Even
though these institutional characteristics limit the ability
of peak associations to engage in tripartite negotiations,
such efforts are paramount in the CEEC and seem to be
capable at least to a certain extent of helping to solve
conflictual issues in the course of the transformation
process. At the macro level, differences between wage
coordination modes in the EU countries, in particular those
of the more peripheral ones, and the CEEC are minor (Kohl,
Lecher, and Platzer 2000: 413) and do not substantively add
to the existing problems of EU wage coordination.
and Income Equality
Contingent on the trends described in
the previous two sections, we have to expect a considerable
increase in income inequality in Europe. In terms of
vertical income distribution, the increase in the supply of
cheap labor within the EU willing to take on jobs at the
lower end of the skill pyramid -achieved either by triggering
FDI to CEE countries or by increasing the number of job
applicants in the current EU countries- will pressure wages
to drop, especially at the lower end of the scale. In terms
of sectoral wage differentiation, it is to be expected that
workers in those sectors particularly exposed to competition
from the CEE countries will experience more pressure to
decrease their income than those in sectors profiting from
the increase in exports to these countries. Enlargement may
not be regarded as the prime cause of both developments. But
it certainly makes the challenge more severe.
I have presented an overview of the
literature relating to the challenges to the European Social
Model posed by EMU and the admission of the CEE countries
and discussed the possible implications of these
contributions to the deepening and the widening of the EU
for the ESM. Since it is widely expected that the
implications should be far-reaching, the findings are
First, instead of the expected push
toward the abolition of welfare standards, the EMU has to
date accelerated and intensified the search for a
recalibration of the welfare systems, which tended to be
subject to pressure anyway due to the aging of the
population and the increased speed of economic restructuring.
Second, enlargement has been expected
to increase the variation in social standards in the EU. But
the only breaking news in this respect is that the size of
the already rather large spectrum of variation will increase.
EU policy makers have demonstrated remarkable inventiveness
in circumventing previous attempts at halting integration of
Third, instead of the expected final
strike of EMU on collective bargaining and labor market
regulation, the astonished public has witnessed the
reinvention of social pacts as a means to achieve the EMU.
These pacts have contributed to the search for a new power
equilibrium in the labor market. In addition, these pacts
have helped the trade unions steady their position in
countries hitherto characterized by organizational
fragmentation and hefty disputes.
Fourth, enlargement will further shift
the balance of power on the labor market toward the
employers, which might imply some deterioration of
employment conditions in the EU, most notably in incomes at
lower skill levels. It may also add to the pressure on
collective bargaining regimes.
As far as the present overview
suggests, both the EMU and enlargement alone do not seem to
challenge the ESM to a degree that might endanger its basic
layout. Their joint effect, however, may be more significant.
The EMU limits deficit spending strategies for the EU
countries and imposes additional austerity demands on fiscal
policy of the CEE countries wishing to enter the EU.
Enlargement is likely to increase competition in particular
in the lower and middle strata of the incomes scale, thereby
increasing the demand for welfare provision. Since the
reform of welfare states is likely to confront both popular
resistance and opposition by vested interests, these two
pressures may add up to a partial dismantling of the welfare
state to the detriment of the poor. Given the pressures on
the collective bargaining systems to open wage scales at the
lower end -due both to the increased power of employers as a
result of enlargement and to a government strategy to fight
unemployment- the number of low-income workers may
considerably increase. Hence, the most likely result of the
combined impact of the EMU and enlargement is an increase in
inequality in the countries hitherto attempting to maximize
With regard to the CEE countries, the
implications of the EMU for fiscal policy may aggravate the
the problems already present in these countries to raise
social standards to the EU level because of the restrictions
imposed by the global financial markets. In addition, these
problems may undermine attempts to counter corruption and
the growing shadow economy, major problems hindering the
integration of the CEEC economies into the EU (despite
similar problems in at least some of the EU countries).
To what extent these implications will
materialize cannot be finally assessed at this point. The
EMU and enlargement certainly add even more pressure on the
ESM than already exists as the result of formershortsighted
policy reforms, economic restructuring and cyclical
downturns, mismanagement, and population trends. The
likelihood of thorough reform is increased by these projects.
This means that, despite the considerable efforts necessary
for adjustment, there are currently no clear and unambiguous
signs that the fears of those expecting a serious
deterioration of the welfare state and the collective
bargaining system will come true. However, the danger is
present and an inventive approach will be needed to combat
The extent to which the concept of the
EU gradually expanded from a means of peacekeeping to a
project of market liberalization and then to a particular
concept of a social model is impressive. All the more
impressive is that this process is better characterized as
“muddling through” than as the result of a clear-cut
strategy. Although the challenges of the enlargement process
should not be underestimated, the ability of the EU to
adjust without sacrificing its acquis should not be
underestimated either. Who would have thought only a couple
of years ago that social policy could ever be regarded as a
concern of EU policy making? The challenge is one of
political will and inventiveness, not an economic
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1 The coefficient of variation of GSP
per capita in the USA is estimated from data from the US
Census Bureau and the US Bureau of Economic Analysis and
refers to 1995.
2 Nevertheless, some regions (notably in
Germany and Austria) and labor-intensive industrial sectors
(e.g., textiles) are already affected and may have
considerably more need to adjust than the EU average. In
particular, low-wage trades in the service sector in border
regions will be exposed to considerable challenges
(Mayerhofer and Palme 2001a: 682-686).
3 While the FPÖ attained 26.9% of all
votes for the national assembly in 1999, the northern
districts of Lower Austria (bordering the Czech Republic)
reported between 19% and 21% and the eastern districts of
that province (bordering the Slovak Republic) reported
between 23% and 25%. In the province of Burgenland (bordering
Hungary), the FPÖ reached an average of 21%. By contrast, in
Carinthia, which borders Slovenia, the FPÖ attained 38.6%,
followed by Vorarlberg with 30.2%. The deviant case of
Carinthia could be explained by the combination of
long-lasting, though mostly latent ethnic conflict and the
charismatic, populist leadership of former FPÖ party leader
and current head of the provincial government Jörg Haider
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