The evolution of the state–market balance in Europe
The history of the evolving relationship between the state and the market in post-war Europe can be divided into two phases. The first was the 30-year period after the end of the Second World War, which the French economist Jean Fourastié famously called ‘Les Trente Glorieuses’. This Keynesian period was dominated by economic planning, which became, as Tony Judt put it, ‘the political religion of post-war Europe’.7 As reconstruction drove growth in Europe, the post-war settlement between capital and labour produced the activist welfare state. But the settlement did not function in quite the same way everywhere. Different models of welfare capitalism evolved in Europe: a ‘liberal’ model (as in the UK), a ‘conservative-corporatist’ model (as in Germany and Italy), and a ‘social democratic’ model (as in Sweden).8
Different models of welfare capitalism evolved in Europe: a ‘liberal’ model (as in the UK), a ‘conservative-corporatist’ model (as in Germany and Italy), and a ‘social democratic’ model (as in Sweden).
A second period began after the oil shock of 1973, in which the balance shifted away from the state towards the market. In what is sometimes called the ‘neoliberal turn’, price stability replaced full employment as the primary goal of economic policy. Governments sought to reduce the power of organized labour, which was then seen as driving the rise in inflation. Keynesian thinking was replaced by monetarist economics, and by policies such as tax cuts and deregulation. As had been the case with welfare capitalism, this new settlement functioned in different ways from one European state to another. The UK went furthest in ‘financialization’ – that is, the growth in the size and importance of the financial sector. Germany, on the other hand, retained much of its social market economy, though it was always extremely hawkish on inflation – a key element of neoliberalism. Other European states followed their own paths, but the general direction of travel was towards a more limited state and an elevated role for market forces.
This evolution in the relationship between state and market overlapped to a large extent with the development of globalization. During the 30 years after the Second World War, barriers to the movement of manufactured goods were removed under the General Agreement on Tariffs and Trade (GATT), although agricultural goods were exempt and barriers to the movement of capital and people remained.9 After the end of the Cold War, this moderate form of globalization gave way to a more expansive model that significantly reduced the sovereignty of states – for example, through the rules of the World Trade Organization, which went further than GATT in liberalizing trade. In this period of what Dani Rodrik has called ‘hyper-globalization’, economic interdependence between states and regions increased as global trade surged and was restructured around international supply chains and ‘just in time’ manufacturing.
European integration developed against the background of this evolution of globalization. It, too, can be divided into two phases: a first that included the Schuman Plan in 1950 and the Treaty of Rome in 1957; and a second that began in the 1980s with the single-market project, and continued with the creation of the economic and monetary union in the 1990s. If we understand globalization as the removal of barriers to the movement of capital, goods and people, Europe clearly went even further in this second phase than the rest of world – at least by these measures. European integration can therefore be thought of as a particularly developed form of ‘hyper-globalization’, albeit limited to a regional context.
In the first wave of European integration beginning in the 1950s, continental European states formed a cartel to produce coal and steel, and then, in 1968, a customs union with a common external tariff. National governments retained extensive autonomy in many areas of policy. In fact, during this period integration seems to have strengthened the nation state rather than undermining it.10 As Alan Milward has argued, integration ‘rescued’ the European nation state after the Second World War.11 After the 1957 Treaty of Rome, European integration stalled at the political level throughout the 1970s – though, importantly, ‘judicial integration’ continued through decisions by the European Court of Justice, with significant consequences for competition law.12
The relaunch of European integration that took place with the single-market project in the 1980s coincided with, and was closely connected to, the neoliberal turn. The British prime minister, Margaret Thatcher, was central to both developments. A further factor was that centre-left parties like the French Socialist Party had themselves embraced deep integration after the abandonment in 1983 of French President François Mitterrand’s experiment with ‘Keynesianism in one country’, amid growing hopes for a corresponding drive for a more ‘social Europe’ at the supranational level. The 1986 Single European Act, the first significant change to the Treaty of Rome, laid the groundwork for the single market, a project that drove deregulation, privatization, subsidy reduction and the removal of barriers to the flow of capital, goods and services. As Chris Bickerton remarked: ‘Closer European integration became a way of burying the post-war compromise.’13
What emerged during the 1980s was a European Community that was structurally skewed towards the removal of market barriers between European countries (a process known as ‘negative integration’) rather than the agreement of common policies to curb market excesses (or ‘positive integration’).14 The EU subsequently became a kind of machine for negative integration even in the absence of political agreement. Meanwhile, positive integration proved extremely difficult to undertake, particularly as the EU enlarged, because it required agreement (usually unanimous) between member states. The regulatory competition unleashed by negative integration put pressure on welfare models, while aspirations for a more ‘social’ Europe were largely frustrated.
What might be called the ‘neoliberalization’ of the EU continued and intensified in the 1990s after the end of the Cold War. With the creation of the European single currency, the EU went further in ‘constitutionalizing’ elements of neoliberal economic policy. The European Central Bank (ECB) was given a narrow mandate focusing almost exclusively on price stability. Meanwhile, the eurozone’s fiscal rules, which have been gradually expanded and tightened since their first iteration in the Maastricht Treaty that created the single currency, set limits on government debt and deficits, although an EU-wide framework of minimum rights for workers was also established. In parallel, freedom of movement increased as the EU enlarged, creating a more integrated European labour market and generating dynamism and efficiency, but also raising concerns about immigration – in particular, but not only, in the UK.
The 2008–09 global financial crash and subsequent eurozone crisis highlighted many of the challenges of market fundamentalism. The crisis was considered by many as an opportunity to recalibrate the state–market balance and address what they saw as market overreach. However, the political and policy dynamics of the time prevented a serious paradigm shift. Instead, after an initial fiscal stimulus, the collective EU and national responses to the crisis frequently entailed aggressive fiscal consolidation with massive social and political consequences. In particular, after the start of the euro crisis in 2010, the EU enforced austerity and structural reform on crisis-hit countries.
If a genuine shift away from market mechanisms and ‘sound money’ is to now take place in the context of the coronavirus pandemic, what will that mean for the relationship between the nation state and the EU? If priorities or preferences shift among governments and publics, as may now be occurring, the EU will both shape the degree to which it is possible to enact these preferences and itself be shaped by the outcome. The current form of the EU, centred on negative integration, the single market and the single currency, came into being during the neoliberal period. If the relationship between the state and the market now changes, what kind of supranational architecture and structures will Europe need? Can the EU as currently constructed adapt to a change in economic paradigm?
The EU’s future will also be conditioned by the existing and unresolved political tensions that predate the pandemic. Despite frequent predictions of its demise, the EU has proven politically resilient through more than a decade of crises, including the eurozone debt crisis, the migration crisis and Brexit. At the same time, it has not decisively resolved a number of fundamental internal challenges to its functioning. Many of these are rooted in the mixed or partial nature of European integration, the characteristics of which include: a monetary union (of 19 states) without a fiscal union; a borderless interior (linking 25 states) protected by largely nationally managed frontiers; central institutions (representing 27 states) of contested democratic legitimacy; and as yet unsettled relationships with key neighbours including Britain (a former member state of 66 million people), Turkey (a candidate country of 82 million), and a number of candidates and aspirant members from the Western Balkans to Ukraine. The capacity of the EU to shape itself and evolve in response to the pandemic will be influenced by this wider context.
7 See Judt, T. (2011), Postwar. A History of Europe Since 1945, New York: Penguin Press, p. 67.
8 Esping-Andersen, G. (1990), The Three Worlds of Welfare Capitalism, Princeton, New Jersey: Princeton University Press.
9 See Rodrik, D. (2010), The Globalization Paradox: Democracy and the Future of the World Economy, New York: Norton.
10 Bickerton, C. (2016), The European Union. A Citizen’s Guide, Harmondsworth: Penguin, p. 53.
11 See Milward, A. (2000), The European Rescue of the Nation State, London: Routledge.
12 See Scharpf, F. (1999), Governing in Europe. Effective and Democratic?, Oxford: Oxford University Press.
13 Bickerton (2016), The European Union, p. 68.
14 Scharpf, F. (1998), ‘Negative and Positive Integration in the Political Economy of European Welfare States’, in Rhodes, M. and Mény Y. (eds), The Future of European Welfare: A New Social Contract?, Houndmills: Macmillan, pp. 155–77, here p. 155.