Since the 1980s the main strategy adopted by the leaders of the European Union has been to pursue market-based economic integration to the increasing exclusion of other, political or social, initiatives. The hope has been that the emergence of a powerful integrated economy would provide a foundation for eventual steps towards greater political unity.

At first this strategy seemed to enjoy considerable success – reforms aimed at consolidating Europe-wide markets and at reinforcing competition did give an important impetus to institutional development, especially with the successful introduction of the euro and the European Central Bank. Meanwhile, the collapse of the Soviet bloc permitted an eastward expansion of the EU, which has helped bring its membership from 12 states at the time of the Maastricht Treaty in 1992 up to 27 today. There are signs, however, that the drive for market-based integration is losing momentum. In particular, the Lisbon strategy, which set ambitious targets for economic growth through market-oriented reforms, is now widely seen as a failure. And the EU’s consistent sacrifice of social objectives to the overriding priority of market-led economic integration has tended to deprive it of popular support and political legitimacy. The rejection of the Reform Treaty in the Irish Referendum, which blocks institutional change in the EU, is the latest evidence of this.

It is argued here that it will be very difficult for the EU to change direction and to start to correct the democratic and social imbalances of its structures and policies. But such a correction is nevertheless indispensable, because if these imbalances are not corrected the whole integration project will become increasingly fragile and increasingly exposed to populist challenges.

The four freedoms

Many commentators have identified the key imbalances in the EU. Sometimes they have referred to ‘negative’ integration (the removal of barriers to market exchange) running ahead of ‘positive’ integration (common policies and institutional construction). The terminology used by Fritz Scharpf is more exact: he speaks of ‘market creation’ running ahead of ‘market correction’, because he recognises that many active, ‘positive’, measures are indeed necessary to integrate markets.[1] The point is that there seems to be little concern, at EU level, to prevent or compensate for the adverse social consequences of market processes.

Essentially the same point is often made in terms of a ‘social deficit’ in the EU. In the sphere of economics and market competition, hard and fast rules are laid down; clear legal entitlements and obligations are established; member state interventions are decisively constrained. In the social sphere, however, there are declarations of principle, and the non-binding ‘guidelines’ which emerge from the ‘open method of coordination’, but few effective initiatives. The imbalance is structural and guaranteed by the EU’s budget, which is so small as to rule out any effective redistributive measures.

To many observers, the frequently mentioned ‘democratic deficit’ is closely related to the same imbalances. The way decisions are made in the EU strengthens executive power as against the power of legislatures. This is because the Commission, the EU’s executive, controls the policy agenda; and the Council of Ministers, the key decision-making body, represents member state governments. The European Parliament, although it has been more ready recently to challenge the Council and the Commission, cannot counterbalance their power. It has legitimacy problems of its own because most voters choose candidates in terms of national, not European, politics and because turnout in European elections is now very low, having fallen continuously from 63 per cent in the first European elections in 1979 to 46 per cent in 2004. In the absence of effective Europe-wide political parties and social movements, business lobbies have even more influence on EU-level decisions than on those taken by member states.

The clearest and most convincing explanation for these imbalances and ‘deficits’ is that put forward by Phillipe Schmitter.[2] The main features of the EU as it actually exists, although they do not inspire any strong allegiance from European citizens, are in fact tremendously advantageous to corporations active in Europe. As the basis for market integration the EU confers four rights, the ‘four freedoms’, on all economic agents: rights to move goods, services, capital and labour anywhere in its territory, without obstacles at the frontiers between member states and without hindrance from member state authorities.

These are justiciable rights, which will be upheld not only by the EU’s Court of Justice but by national courts as well, so that if a corporation is prevented from exercising its economic rights it can usually obtain a remedy from the courts in its home country, even against its own overnment. At the same time, a central responsibility of the Commission, as the EU’s executive, is to safeguard the integrity of the markets based on these four freedoms, and to propose legislation to remove any remaining obstacles to free exchange and any new barriers which may emerge. These policies and legislation on the internal market are completely within the competence of the EU; decisions are by majority voting in Council and Parliament; member states cannot veto these decisions.

Of course it is normally corporations rather than individuals which exercise these freedoms; essentially they guarantee that corporations are free to do business throughout the territory of the Union. One way to understand the ‘four freedoms’ is to refer to Marx’s account of the capitalist process. This begins with money in the form of capital, which is then exchanged for the goods or commodities that constitute the means of production, and for labour power; the production process then follows, in which labour services are performed, giving rise to the outputs which constitute the commodity product; finally, the sale of these outputs restores the original money capital, now augmented by profit. The four freedoms mean that no barriers to any phase of this process can be erected by any member state or at any national frontier.

After nearly sixty years of increasing economic interdependence, the commercial, industrial and financial interests linked to market integration are immense. These interests are by no means all opposed to those of ordinary citizens; on the contrary, they usually serve the interests of citizens as consumers and employees. But it is crucial to note that the four freedoms are in practice exercised by corporations, and generally by the larger corporations, which are most likely to be active in more than one member state. This means that corporate Europe is deeply committed to the EU and to its continuation in its present form.

Social Europe

The positive assertion of economic rights is indispensable to the Europe of the corporations. But the absence of positive social rights and of integrated regulations and interventions, together with the absence of a unified tax structure, is almost as crucial. Most of these issues remain firmly within the competence of the member states: each of them is free to determine its own social policies, to finance them with its own taxes, and to regulate business activity in order to protect consumers, workers and the environment (although economic interventions at national level tend to be either inhibited or prohibited by the competition rules of the EU).

This state of affairs establishes regime competition among the member states and makes possible regime shopping by the corporations. And it should be noted here that the EU is, at least for corporations, an open economic space: US, Japanese and indeed virtually all corporations in the world are free to establish themselves in any member state and then to conduct business on the same basis as European corporations. Thus the regime competition associated with the EU is global in character – member state governments strive to attract investment and employment onto their own territories by cutting corporate taxation, deregulating business activities and making labour markets and employment law as ‘flexible’ as possible. This process does not always become a ‘race to the bottom’ – there is usually significant resistance within the member states – but it limits redistributive policies and impairs the social control of business activity.

It was not always thus. In the early years of the European project some powerful employers, particularly in Germany, sought to tighten regulatory standards and improve working conditions in other member states. They were concerned to avoid ‘social dumping’, competition from other member states based on lower employment standards or looser regulation. Today, the larger German corporations take a different view – they are much more likely to use their increasing presence in other countries to press for lower standards in Germany rather than the other way round. A dramatic example last year was a demand by Siemens for a longer work week from its German employees, without any increase in weekly wages, under the threat of a move to Hungary. Today the trade unions still sometimes contest social dumping but the theme is no longer of interest to employers.

The suggestion here, that the absence of any real social Europe is essential to the way the EU functions, contradicts the rhetoric of EU leaders, which makes much of the ‘European Social Model’ and continues to insist that there are profound differences between European and US varieties of capitalism.

There has indeed been a ‘social dimension’ to European integration from the very start in the 1950s. But the social content of integration has been considerably attenuated over the years since the Maastricht Treaty. The refusal of the largest and richest member states to expand the EU budget is one reason for this: although the accession of new member states formerly in the Soviet bloc has greatly widened the disparities in income within the EU, there are no significant resources available for redistribution. In the early 1950s the European Social Fund had the realistic aim of compensating those who lost out from the integration of coal and steel industries: in the event, mostly Belgian miners, who received reasonable pensions and severance payments. Today the Fund is little more than symbolic.

The notion of a ‘European Social Model’ is an abstraction from the specific social models of individual (Western European) countries. There are indeed some family resemblances among these models, but they are also very different, and the EU has little influence over them, since most aspects of social policy remain very firmly in the hands of the member states. This situation is in part a response to the success of the EU in the economic sphere; the member states have given up most of their responsibility for economic policy – the competition rules and the four freedoms prevent most interventions to strengthen their economies; and, for those that use the euro, monetary policy is centralised in the ECB and there are tight limits on taxation and public spending. This makes member states guard their control over social policies very jealously. In an economic emergency these are the only instruments available to them.

In recent years the EU has sought to influence, without controlling, these member state social policies through the ‘open method of coordination’ – a series of discussions among policy communities resulting in non-binding recommendations to governments. This does not seem to have had much effect on policy practice, but it is interesting that one theme pushed by the Commission in such debates is the ‘modernisation of the European Social Model’. This is code for the partial privatisation of pension systems, which has for some time been a priority of the Commission, as of the OECD and other international bodies.

In fact the national character of Europe’s social models calls into question the Commission’s claim that the social situation in the EU is preferable to that in the US. It is certainly true that there is much less inequality in the EU than in the US, if we make the comparison with the US one country at a time. But if we take the EU as a whole the reverse is the case: the US is much more egalitarian than the EU: although there are sharp regional disparities in the US, there is nothing that begins to compare with the gap between, say, Lithuania and the Netherlands, or between Slovakia and Denmark. The US has limited but effective mechanisms for regional redistribution in the working of the Federal income tax and the social security system; there is nothing comparable in the EU. While most Europeans take their own country as their frame of reference, it is logical to make comparisons between the US and individual countries; but if one ceased to do so and started to take a Europe-wide view, then the EU would be seen to be marked by extreme inequalities. Thus the claims made for ‘Social Europe’ depend on the non-existence of a European society.[3]

‘Flexicurity’ and the retreat from labour market regulation

The account of the EU given here so far is of a simple dichotomy: the economy and the rules of the market are controlled by the Union; social policy by the member states. The sphere of employment regulation and labour market policies is an intermediate zone – member states defi ne their own positions, but subject to some general standards promulgated through EU directives, and to non-binding recommendations. This probably corresponds to the market logic of the integration project: if member states had a completely free hand they might use labour market policies to interfere with the working of competition; on the other hand, a centralised labour market policy at EU level would be very unwelcome to the big employers, who much prefer regime competition.

In any case, an important body of EU labour law has gradually emerged, and, although stronger measures might be desirable, it has worked to strengthen employee rights and to sustain working conditions in member states where national employment law is weak. The main fields concerned are health and safety, gender equality and the rights of workers on ‘atypical contracts’ – such as agency workers, part-time workers or those on fixed-term contracts.

However, the Commission seems recently to have changed its position on labour market regulation.[4] Several recent initiatives indicate that, under pressure from the employers, it is now seeking to dilute existing employment regulations and to intensify cross-border competition in labour markets. Examples of this shift include proposals to weaken the working time directive and the posted workers directive (which accords workers temporarily sent by their employer to another member state at least some of the employment rights which have been established in that state); and there has also been an attempt – so far blocked by the European Parliament – to deregulate employment conditions in enterprises providing services in other member states (this was one aspect of the Bolkestein draft directive which was strongly resisted by trade unions).

This general change in position is confirmed by recent policy documents from the Commission, on the ‘modernisation’ of labour law and on ‘flexicurity’. This last term denotes in principle a supposed reconciliation of ‘flexible’ labour markets and economic security for employees, but its main practical implication seems to be a drive to weaken standard labour contracts, in place of previous attempts to strengthen the protection of employees with non-standard, ‘atypical’ contracts.

Thus in employment regulation – one of the few spheres where a genuine European level social policy might be said to exist – the current trend is to reduce standards and to intensify competition among workers.

The Lisbon agenda

The priority given to economic objectives by EU leaders, however, is very far from achieving the dynamic economic results which they promised. Although the Lisbon Agenda – which was meant to guide the EU through the first decade of the new century – took as its slogan ‘the knowledge-based economy’, it was essentially a business oriented programme, heavily influenced by the dot.com boom in the US, which was at its height at the time. A generally deregulatory approach could, it was believed, permit Europe to match or surpass American performance in business start-ups and productivity. The absurd objective was to make the EU ‘the easiest and cheapest place to do business in the world’.

The Lisbon Agenda did make a nod towards the ‘European Social Model’, but social policy was clearly subordinated to market-led integration; the contributions of social policy would be to promote skills and increase employment. A central thrust of the strategy was to build integrated financial markets in Europe, which would resemble their US models as closely as possible. Financial integration was not in itself an irrational goal, but the uncritical enthusiasm with which it was pursued threatened to replicate the worst features of the US financial system without significantly accelerating European economic development. (The recent preoccupation of the branch of the Commission responsible for the internal market has been to argue for an integrated EU mortgage market – again along US lines; this policy at least seems unlikely to survive the current fi nancial turmoil, which is rooted in US mortgages.)

Very soon it became clear that there was no chance of achieving the ambitious targets of the Lisbon agenda for output and employment growth.[5] On the one hand the conservative macroeconomic stance of the European Central Bank, and of several member state governments, especially that of Germany, did not permit the kind of expansion which was envisaged. On the other, the collapse of the dot.com bubble made it clear that the immediate potential of the new technologies to accelerate economic development had been greatly exaggerated on both sides of the Atlantic.

Thus the priority given to corporate interests in the EU by no means ensures rapid development even in the private sector: the public investments and interventions needed to reduce uncertainties, lower external costs and ensure sustainability are neglected in its key strategy. And in their absence, its largest economies have been close to stagnation for over ten years.

Treaties, constitutional and otherwise

The failure of the EU to secure the relatively minor changes to its rules and functioning which were included in the draft Constitutional Treaty illustrate its continuing loss of legitimacy. The two electorates who rejected the treaty in referendums were those of France and the Netherlands, countries which participated in European construction from the start, and where there was in general considerable support for it. Objections to the Treaty were of two types, although they often overlapped.

Firstly, there were political concerns about the lack of democracy in EU structures, both as regards the balance between EU powers and those at member state level, and regarding the preponderance of the executive in EU decision making. (There are sharp differences, however, among those with such objections: for some, often but by no means only on the right, the necessary response is to decentralise power to the member states; others believe that a larger measure of centralised power would be acceptable on the condition that it be exercised in a more democratic way.)

The second main objection – by those most concerned with the subordination of social needs to economic objectives, usually on the left – was that the Treaty gave constitutional status to the present economic rules of the EU – that is, to the four freedoms, as well as to the extremely narrow and restrictive macroeconomic regime centred on the European Central Bank. Repeatedly the Treaty called for ‘free and undistorted competition’ – limiting the scope for interventionist economic policies at both EU and national level. It gave only the most minimal and grudging recognition of the need to exempt public services from the rule of market forces, and required, wherever possible, open competition to provide such services, as well as stating that EU interests must not be seriously affected by public service provision. It eliminated long-standing safeguard clauses that have allowed member states to control capital flows in emergency situations.

When ratifi cation of the Constitutional Treaty was blocked by the Dutch and French referendums, the EU faced technical diffi culties, in that it had included certain changes to its procedures that were necessary to deal with the big increase in the number of member states. Some minimal, essentially uncontroversial, revisions to the existing Treaties would always have been necessary to deal with this issue, and with the need to organise common actions on emerging issues such as global warming.

But the ‘Reform Treaty’ that is proposed as a replacement (sometimes known as the Lisbon Treaty) goes far beyond such revisions. Its takes a different form from the Constitutional Treaty, in that it amends rather than replaces previous EU Treaties.[6] But the content of the two Treaties is – in the view of those who drafted them – virtually identical. The hope was that, by presenting things in this way and by giving up the expression ‘constitution’ (as well as by dropping reference to a few symbols such as the twelve-star flag and the Ode to Joy), the Treaty could be presented as a relatively minor change, hardly needing to be endorsed by referendum. In many member states (including the UK) this seems to have been the outcome, but this tactic failed when the Irish referendum rejected the Treaty.

This situation reflects the political problems of the EU in two ways: firstly in the dogmatic refusal to alter the substantive policies of the Union in the face of both policy failure and popular discontent; secondly in the attempt to evade that discontent by procedural methods which narrow and restrict public debate.

Strength and fragility of the EU

An early head of the European Commission, Walter Hallstein, remarked that the European Union (or at that stage, Economic Community) was a creature of law. He spoke truer than he knew, for in the 1950s European law was only certain to prevail when all six of the then member states were agreed that it should do so. Thus the law would be enforced against corporations or individuals, but when states had serious differences these were nearly always resolved by political negotiations rather than by litigation.

This situation changed only slowly up to the 1980s. But then member states became increasingly sceptical about economic interventions at national level, and increasingly willing to accept market outcomes. This meant that they were ready to accept a much more legalistic version of European construction, in which the competition rules of the EU nearly always prevailed, even when this required changes in member state policies. This strengthening of EU law, which relates above all to the four freedoms, is, as pointed out above, very much in the interests of the large corporations, since it means that they can buy, sell, produce and invest wherever in the EU they choose to do so; and that if any member state government tries to prevent them they will have an effective remedy not just in the EU Court of Justice, but usually in the national courts, including those of the member state concerned.[7]

This situation is the basis of the strong support given to the EU by corporate Europe; and the wealth and influence of the corporations in turn strengthen the EU. The same interests, however, tend to discourage any strong initiatives beyond competition and market integration, since centralised policies on taxation, employment conditions or social provision would be very unwelcome to the corporations. It is not suggested here that there is a complete opposition between the interests of the corporations and those of the citizens; but the interests of citizens, both collective and individual, are often much wider than those of the big enterprises. Yet the way the EU is presently organised, and the way it functions, work against these wider interests and prevent their effective expression.

This dominance of corporate interests and of the competition rules which underpin them, is, however, extremely fragile. There are now twenty-seven member states, and only consistent good behaviour by every branch of government in each of them preserves the smooth working of the EU. If one member state court refused to enforce EU law, if one member state parliament refused to write an EU directive into national law, or if one government defied the EU rules in a determined way, the Union would be faced with a political crisis. Obviously some such challenges could be overcome by putting pressure on the country concerned, but this would be more difficult if the issue mobilised public opinion against the EU, if the country concerned was a large one, or if more than one country was involved. And the working of EU rules, both as regards open markets and competition and as regards interest rates and often tight constraints on public spending, is often so harsh as to make this kind of revolt always possible, and in the long run probably unavoidable.

Indeed there are already cases where EU law has reached its limits and solutions have had to be sought in political compromise. Germany, for example, repeatedly violated the expenditure limits of the Stability Pact. In legal principle the Commission could have imposed a fine on the German government; in political practice this was and is inconceivable. Again, Sweden refuses to adopt the euro although, unlike Denmark, it does not have a legal opt-out permitting it to do so. But it is impossible to enforce Sweden’s Treaty obligations in this case because it is clear that the Swedes would throw out any government that proposed to take them into the monetary union. Here again the model of integration by law reaches a political limit.

It would be desirable if opposition to the present direction of European construction and the assertion of different priorities, were to take a rational and unified form – if social movements, progressive governments and European electors successfully contested the actual integration model and imposed a wider and more balanced one. In practice, however, effective challenges to the EU seem likely to take the more negative form of national revolts, with a populist character, involving right-wing as well as left-wing political forces. These revolts might be in many respects highly dysfunctional, but they would still be a consequence of the persistent imbalances in European construction, and of the persistent refusal of EU leaderships to make a necessary change in course.

It still seems possible, however, that a change in course can come about in a more constructive way than through a series of revolts in particular member states; that leaderships will respond to the drastic loss of legitimacy signalled by falling turnouts in European elections and repeated defeats in national referendums. But in any case the present path of the EU – reinforcing inequalities, rendering employment ever more precarious and undermining the provision of public goods and social services – is eroding the political basis for European integration, and seems only to lead to a dead end.

Notes

1. Governing in Europe. Effective and Democratic?, Oxford University Press 1999.

2. Philippe C. Schmitter, How to Democratize the European Union and Why Bother Lanham 2000.

3. See for example the Commission’s own annual report, The Social Situation in the European Union.

4. Commission of the European Communities, Green Paper: Modernising Labour Law to Meet the Challenges of the 21st Century, COM (2006) 708 final.

5. In spite of this virtually complete failure, the Commission, in its usual Brezhnevite way, reaffi rms the essence of the strategy. See Working Together for growth and Jobs – next steps in implementing the revised Lisbon strategy, SEC 2005.

6. For this reason it is somewhat harder to study, since the Reform Treaty merely lists amendments, and one has to compare the existing and amended articles to see what is meant. The consolidated text of the
EU Treaties as amended can be found at http://collections.europarchive.org/tna/20080205132101/www.fco.gov.uk/Fi….

7. For the role of law in European integration, see the writings of J.J. Weiler, especially The Constitution of Europe – do the New Clothes have an Emperor? Cambridge University Press 1998.