Governing the European Union, by Michele Boselli

5. To what extent does the evidence support the view that the European Union is creating a single economy for its member states?

Nowadays it would seem pretty easy to say that the European Union is creating a single economy for its member states: it is a view supported to a great extent by the Evidence of the Euro, the single currency recently introduced among 12 of the 15 countries (the exceptions being Denmark, Sweden and the UK). A currency is only an (important) element of the economy, which is made up of complex relations of many other elements, such as social framework, macroeconomic institutions, political intervention, corporate governance…, and the question should be addressed with a historical view to the developments that through the last five decades led to this great conquest towards integration.

The most evident data is the growth of intra-EU trade from 35.2% in 1958 to 62.6 in 1993, just 35 years. This is resulting from the gradual but continuous integration among the European national economies, an objective pursued above all by the successful establishment of a common market founded on the four freedoms of the Treaty of Rome (freedom of trade, investment, labour movement and service provision), and also pursuing common, albeit controversial policies in important issues such as agriculture and VAT harmonisation. This is the exten to to which we can seriously talk of an European economy, on the verge of the monetary union, but many differences persist and we now aim to see where.

In order to address this question we cannot examine every single economy of the 15 member states and the other 15 or more of the continent. We must necessarily simplify by examining three countries that best represent the three main economic systems in Europe: the United Kingdom, with an Anglo-American, market-oriented system; Germany, with a regulatory-oriented system similar to other important European countries such as Sweden; and France, with a slightly different “Mediterranean” version of the regulatory-oriented system, closer to that of the fourth big European economy, Italy.

By taking such approach we imply a more basic distinction between Anglo-American and continental economies which reflects two different systems: the market-oriented order is characterised by more competition and it is self-regulated by the invisible guiding hand of the market itself; banks play a minor role, and the stock exchange a major one, in companies’ ownership, which is a separate thing from management; most important from the social point of view, the influence of employees is very limited in the decision-making process, which is rather the outcome of how the market “awards” the merits of a (highly incentivated) management or punishes it by means of deregulated, hostile take-overs from winning companies. To summarize this in ome single word related to a very important, recurrent concept in our studies, Grahame Thompson simply writes “non-governance” in Governing the European economy.

On the other hand, in the regulatory order there is a state bureaucracy supervising the economy, a nuch more significant participation of banks at the expenses of relatively smaller stock exchanges, and extensive control by families traditionally owning the companies (in particukar small and medium-sized enterprises that make up the economic tissue of many European regions). There is, in sum, an active intervention in the governance of the economy, which comprises a stronger influence by workers, organised in large trade unions, and also by an articulated system of cross-participation: for example in chapter 3 of the same Governing the European economy, Michael Moran shows that the Deutsche Bank owns 7% of the insurance group Allianz which in turn owns 5% of Deutsche Bank, and the same happens between Allianz and Dresdner Bank (owning respectively 21.7% and 10% of each other), so that we can paradoxically extrapolate that through Allianz both Deutsche and Dresdner banks own part of each other (respectively 0.5% and 1.5%), and consequently even that even through this web of participation car maker Daimler becomes a remote "cousin" of its fiercest domestic competitor, BMW, and vice versa.

Hoping that this gross, inevitably summary in its conciseness, representation of the two systems is clear (we will not tackle the subtler subdivision within the regulatory order, i.e. the Germanic and Mediterranean varieties), we now learn from Graham Watson (Governing the European economy, chapter 4) that "the German macroeconomic policy framework was more influential on the design of the EU macroeconomic policy and institutions than those of the UK and France". This means that the governance of the economy has had a heavy de jure, "positive" intervention besides the "negative" de facto intervention: polarities that characterise the regulatory and the market order respectively.

Critics of this vision (or indeed of the regulatory system itself) point out that in the 1970s and 1980s there has been a move from the regulatory order towards a market order among the EU economies. this will become an increasing necessity as greater problems will loom in the next round of enlargements towards Central and Eastern European countries: for example, a regulatory policy par excellence such as the Common Agricultural Policy like we know it today will be unsustainable in an Union comprising Poland. They highlight that the crisis of the European social model of the 1950s and 1960s led to a reform in the need of greater flexibility in the labour market and welfare provision. The balance point in this debate would probably be, as Dawson concludes, that "the experience of economic and monetary union so far suggests that the EU macroeconomic polici is based on a pragmatic blending of Keynesian and neo-liberal elements", where Keynesian refers to the economist's theories, particularly on unemployment.

Thw Union, in fact, has so far produced little in terms of a common social policy, which is an essential element of integration. Back to the Euro, for example, the Maastricht convergence criteria for the single currency are merely monetary, including inflation, interest rates and government finances but exluding unemployment. This brings us again to simplify the social aspects by taking the same three big countries to represent the major tendencies. Social policy is the field where Germany and France broadly agree on stricter worker protection laws, a greater consultation with trade unions, and a consumer protection to ensure transparency about the origin of products. The UK is fiercely protective on social security questions and won the right to keep its veto on the matter.

On taxation policies, Europe already has a degree of tax harmonisation - for example VAT rates are set with a certain minimum in order to make the single market more effective. The three big member states have different views on whether there should be further harmonisation, but now maintains that taxation policies should remain at national or regional government level. France supports the view of the European Commission that a new, direct tax should be levied by Brussels to provide a direct link between citizens and the EU, and wants a unified tax policy, including common rules for business taxes, but the UK is strongly opposed to a common tax policy and refuses to give up its veto on tax decisions.

In conclusion, the debate on the European economies' degree of integration has again taken us to the usual themes of our studies: tradition and transformation (the evolution of the economies); conflict and consensus (the social issues); inclusion and exclusion (of employees in the decision-making process, or even whole countries in the Union). There is a theme that revealed itself to be more important in the case in study, in the sense that both supporters of the regulatory and the market approach would probably agree on it as a picture of the situation, rather than take sides on the positive/negative polarities (centralisation/decentralisation, de jure / de facto, ...) that we have examines, and it is that of unity and diversity.

The EU member states' economies were very different in the post Second World War period, when "a real tendency for a single European social model (or family of models), involving similar industrial relations systems and social protection systems" emerged (John Grahl, Governing the European economy, chapter 5) and these economies have since then converged toward a common position in many areas. They still differ in their approaches to the welfare state, employment law and trade union organisation, divided into two broad types: the Anglo-American version and the continental European version. These differences are important in limiting integration because there is an issue - Grahl concludes - about the long-term prospects for successful economic integration among economies with disparate unemployment rates. That will be the next, very difficult challenge towards a European single economy, while the common market and the monetary union remain, nonetheless, historical achievements.