Is there a future for European Varieties of Capitalism after the Crisis?

The Eurozone crisis has resulted in a shift toward greater market liberalisation and flexibility rather than social protection and security. This seriously calls into question the model of ‘social Europe’ and the future direction of Europeanisation. In the study of comparative capitalism there has been a long debate on whether financial de-regulation and market integration at European and global level has resulted in a convergence of national political-economies into a neo-liberal model.

If so, there is a limited future for the social democratic economies of Northern European, the coordinated market economies of Alpine Europe and no hope for the liberal market economies of the Anglo-Irish region of Europe. Most research over the past 10 years, however, has shown that there has not been a convergence but continued divergence. The continued resilience of national modes of political-economic governance is the result of domestic politics, coalitions, interests and institutions. Neoliberalism as an idea has influenced the trajectory of change across Europe but it is mediated differently according to national welfare, labour market and industrial relations regimes.

The research indicating the resilience of national differences fails to appreciate the extent of liberalisation that has occurred across Europe. This change is gradual, incremental and often hard to capture in large quantitative studies. Wolfgang Streeck in his study on ‘Transforming German Capitalism’ has found that it is no longer possible to describe Germany as a ‘coordinated market economy’. There has been a distinct shift toward greater liberalisation in collective bargaining, company level governance, labour markets and welfare state provision. This gradual change has transformed the German political economy beyond recognition and directly related to shifting power relations in the domestic economy. The weakening power resources of trade unions, the decline in support for left-wing parties, the individualization of social relations and the increase in consumerism have had the aggregate effect of de-coupling the lifeworld from the system of capitalism it attempts to govern. This fits with my own intuition that what we have witnessed over the past 15 years across European varieties of capitalism is ‘divergence within convergence’. There has been a gradual shift to neoliberalism in both domestic public policies and at a transnational European level. But, what way does the causal chain run? Is it change from above or change from within? Whether it is domestic or European, the change is based on power and politics.

Undoubtedly differences exist across European countries on a whole variety of indicators such as income inequality, wage compression, collective bargaining, labour market policies, employment rights, welfare provision etc. These differences are important and should not be overlooked but neither should the gradual institutionalisation and colonisation of a specific type of free-market capitalism over domestic policies. A paradigm shift toward neoliberalism has occurred and manifests itself in a variety of different ways. German neoliberalism is not the same as Irish neoliberalism. But, the commonalities between the two are just as important as the differences. The commonality is an aggressive form of disorganised capitalism that is supported by a specific configuration of political interests amongst elite networks of powerful actors.

Karl Polanyi is his famous text ‘great transformations’ describes the history of capitalism as a series of movements and counter-movements to embed and dis-embed capitalism. Prior to the great depression, capitalists managed to de-regulate the free-market leading to social dislocation and war. In response, there was a counter movement to re-regulate the market via the welfare state and made possible by an organised labour movement in the political and economic domain. On the basis of this study one might be tempted to argue that we should witness the emergence of a new counter-movement to confront the vagaries of financial de-regulation. This, however, is not the case. The European response to the debt crisis (which has its origins in chaotic and reckless private market behaviour) has been to encourage more liberalisation and capital flows. It is business as usual. The focus is not on social protection but austerity. The response to unemployment has been to liberalise labour markets through the de-regulation of wage setting institutions. The focus is on making the national economy more competitive by weakening labour.

The source of the Irish (and American) economic crisis is financial deregulation yet the European response has been to encourage structural reforms through liberalising domestic markets (including labour). The effect of Irish policy choices has been a deflationary spiral and growing unemployment. Yet, all policy prescriptions have focused on cutting public spending, wages, social protection and de-regulating institutions of the labour market to encourage employment (even though Ireland after the UK has, arguably, the most liberal labour market in Europe). The focus has been to blame trade unions, social partnership, public sector insiders not the political decisions of Charlie McCreevy as finance minister or the close connections between property developers, media tycoons and banks.

Or, take the example of Spain. Between 1994-2007, over 8 million jobs were created. As occurred in Ireland most of these jobs were created in construction. Their small mortgage-oriented banks (cajas), managed by political appointees, borrowed billions on the Euro inter-money market, and created a growth model based on real estate. Since 2008, this job creation machine has turned into job destruction, such that youth unemployment currently stands at 48 percent. In 2010, a labour market reform law was implemented. This aims to reduce the duality of labour market contracts and enhance internal flexibility. In 2012 similar reforms have been passed. The overall result has been to make it easier for employers to fire workers (as opposed to hiring). This is in line with the European Council (ECOFIN) and ECB’s growth strategy.

Financial market integration, central to the Economic and Monetary Union (EMU) project in Europe (EMU), significantly narrows the policy choices facing centre-right and centre-left governments. Social democracy, across Europe is now faced with  a serious identity and legitimation crisis. The future direction of European varieties of capitalism, and the capacity of member-states to carve out autonomous growth strategies, that defend the interests of citizens cover markets, probably requires less not more Europe.

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