Economic and Social Governance in the Making

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Economic and Social Governance in the Making: EU Governance in FluxIain Beggaa European Institute, London School of Economics and Political Science, London, UK

Online publication date: 15 January 2010

To cite this Article Begg, Iain(2010) 'Economic and Social Governance in the Making: EU Governance in Flux', Journal ofEuropean Integration, 32: 1, 1 16

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European IntegrationVol. 32, No. 1, 116,January 2010

ISSN 07036337 Print/ISSN 14772280 Online/10/010001-16 2010 Taylor & Francis

DOI: 10.1080/07036330903510273

INTRODUCTION

Economic and Social Governance inthe Making: EU Governance in Flux

IAIN BEGG

European Institute, London School of Economics and Political Science, London, UKTaylorandFrancisGEUI_A_451460.sgm10.1080/07036330903510273JournalofEuropeanIntegration0703-6337 (print)/1477-2280 (online)Original Article2010Taylor&[email protected]

Introduction

Although there has been relatively little change in the constitutional provi-sions for socio-economic governance since the Treaty on European Unioncame into force in 1993, much has changed in the way that the EuropeanUnion functions in these policy domains. Among the many significant inno-vations are the emergence of the Open Method of Coordination (OMC) as amode of governance, the articulation of broad strategies for pushing forwardEU competitiveness, employment and social inclusion, and concerted effortsto stitch together a coherent EU energy policy that is sensitive to the imper-atives of climate change. Latterly, the manifest failings of regulation of finan-cial services have led to a range of new measures designed to bolster financialstability and to curb macroeconomic volatility, in both of which the EU levelhas assumed a prominent role. In parallel, the Economic and MonetaryUnion (EMU) project has moved from ambition to reality, while the drivetowards a single European market is increasingly focused on the serviceindustries.

There are several reasons for concern about the quality of economicgovernance in the EU. The first is, simply, that the EU economy has been

under-performing for many years (Pisani-Ferry 2006) and, after a brief periodof strength between 2005 and 2007, is again confronted by rising unemploy-ment and slow growth following the severe crisis that struck in 2008. Second,there remain unresolved elements of governance, such as the lack of an overtmeans of achieving a satisfactory macroeconomic policy mix or the increas-ingly unsatisfactory character of the EU budget. Third, many of themechanisms for policy coordination have had, at best, a chequered history,and some have seen their credibility undermined either by non-compliance or

Correspondence Address: Iain Begg, European Institute, London School of Economics and

Political Science, Houghton Street, London WC2A 2AE, UK. E-mail: [email protected]


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2 Iain Begg

by lacklustre results. A fourth concern is that the mix of national andsupranational powers and responsibilities is prone to incoherence and toasymmetries in capacities to act that diminish policy effectiveness, sometimesacutely. A prime example is the contrast between the centralized power of theEuropean Central Bank (ECB) over monetary policy for the Euro Area andthe fragmentation of fiscal policy.

This Special Issue examines the transformations that have occurred in EUeconomic and social governance in recent years, and the forces that continueto shape the framing and conduct of economic and social policies. It bringstogether work undertaken as part of the EU-Consent research network1 thathas sought to shed light on how European governance is evolving. Thenetwork originally took as its two main unifying concepts widening (thehorizontal extension of governance notably encompassing territorialenlargement) and deepening (understood as the vertical intensification ofgovernance in a given policy domain). In contrast to political science, the

implications of widening and deepening have been little studied in economics(Berglf et al. (2008) is an exception), but lend themselves to analysisthrough the lens of the theory of clubs (Casella and Frey 1992). However,while these concepts can be helpful in understanding many institutionaldevelopments in economic and social governance, they struggle to provide afull picture of the determinants of some of the most significant innovationswitnessed in recent years. Instead, they have to be seen as two among anumber of other underlying drivers of change. Globalization, for example,has clearly exerted a strong influence. It is also noteworthy that some of themost innovative policy developments in recent years have been elaborated

largely outside the formal Treaty framework, much of the Lisbon strategybeing a good example.This introductory article has two main objectives. The first is to explain

the motivation for the Special Issue, to introduce and show the connectionsbetween the six thematic articles in the issue, and to draw out some of thekey messages from them. Second, it elaborates on what can be inferred fromthe body of work in the Special Issue for understanding of economic and socialgovernance in the EU. It argues that developments in recent years have eithercast doubt on or altered, sometimes radically, many of the conceptual prin-ciples and practices that had been central to how the EU functions as a vector

of governance. At the same time these developments have exposed shortcom-ings or inconsistencies that point towards orientations for future research.The first article in this Special Issue, by Dyson and Marcussen, looks at the

dichotomy (and possible incompatibilities) between the unitary principlewhich has long been at the heart of EU integration and the increased resortto differentiation, not as an exceptional or temporary expedient, but as anormal approach. The article explores differentiation in macroeconomicgovernance and in the construction of EMU, while also bringing in discussionof public opinion. It proposes a new concept transverse integration tocapture the more diffuse underpinnings of governance, but also as a basis foranalysing the dynamics of policy making. Macroeconomic governance is alsoexplored from a more empirical standpoint in the article by Le Cacheux in


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Introduction: EU Economic and Social Governance in the Making 3

which he concentrates on what the 2008/9 economic crisis has revealed aboutthe EUs capacity for policy coordination. The article stresses the continuingheterogeneity in macroeconomic conditions and the diverse policy prefer-ences of members of the Euro Area, implying that in the absence of a movetowards the kind of economic government that has long been canvassed by(notably) French economists, such as Boyer (1999), coordination will struggleto provide effective macroeconomic governance (see also Linsenmann et al.2007).

EU public finances have been an unsatisfactory aspect of EU governancefor many years and are the topic of the third paper, by Heinemann, Mohland Osterloh. They discuss the obstacles to reform and suggest that thedebate needs to move on from one predominantly about the content of thebudget to focus more on the incentives facing different actors. The paperputs forward the idea of incentive channelling as a conceptual tool thatcan help to stimulate reform of the budget. Cohesion policy, one of the

largest components of the EU budget, is analysed in the article by Begg. Heobserves that demands on cohesion policy have proliferated over the yearsand that this creates tensions and confusion in policy aims, while alsosuggesting that widening and deepening need to be complemented by aconcept of broadening. While the insistence that cohesion should be aninstrument for promoting the EUs competitiveness, thereby contributing tothe realization of Lisbon Strategy goals, is consistent with the narrativesbehind economic governance, the article notes the risks of placing too manydemands on a single instrument.

The paper by Chang, Hanf and Pelkmans offers a novel analysis of the

single market that attempts to synthesize economic, legal and politicalscience perspectives. The article examines the evolution of the hotlycontested Services Directive, and demonstrates how the interplay betweenthe priorities covered in the different academic disciplines shaped theoutcome. A key finding is that the negotiation and adoption of the ServicesDirective raised tricky issues around the legitimacy of EU governance andthat, partly in response, the EU has been pushed further towards coordina-tion rather than harmonization even in the bastion of hard law that is thesingle market. The sixth article, by Draxler and van Vliet, investigates apolicy domain social policy which is assumed to be firmly in the hands

of member states, yet in which common ground is encapsulated in the artic-ulation of social models with similar features and a willingness to embraceshared policy objectives. However, the article shows that although there maybe some convergence in policy approaches, the enlargement to the countriesof Central and Eastern Europe may have created a distinctive model.

Four unifying threads bind the articles: deepening of understanding of EUeconomic and social governance; contributions to theoretical and conceptualideas behind EU governance; investigation and analysis of recent trends; andthe implications for future governance. Among the policy areas covered inthe Special Issue, recent developments point to phenomena that suggest asimultaneous reinvention of economic and social governance and a blurringof boundaries between different policy modes. The following sections of this


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introduction elaborate on these facets of the debate on socio-economicgovernance. The first section considers shifts in the modalities of governanceand sets out four main approaches; the subsequent section then presents anoverview of the theoretical and conceptual issues woven through the SpecialIssue. The third section summarizes some of the trends in governancerevealed by the different articles, while the fourth speculates on future devel-opments. Conclusions complete the article.

Changing Interpretations of Socio-Economic Governance in the EU

Economic change, much of it attributable to the various phenomenasubsumed under the catch-all label of globalization, has in many way accel-erated wider societal change and created new uncertainties that systems ofgovernance have struggled to deal with. In particular, it is important not tounderestimate the connectedness of the European economies and, therefore,

to recognize that the challenges of integration of governance are aboutaccommodating as much as leading these many social and economic link-ages. European companies, through business decisions to invest, out-source,consolidate and market their products, have shaped the EUs productivestructures, while movements of people have affected many social policies.These trends put the role of the EU level under the spotlight, raising doubtsabout a number of the principles that have guided policy modes and therationale for assigning policy competence to the EU level. This intensificationof linkages is shaped by underlying socio-economic drivers, rather than bypolitical or policy goals.

At the same time, the legitimacy of EU policy making and modes of gover-nance have been called into question, a development highlighted in a reportby Strauss-Kahn (2004, 17), which noted that the economic dimension of theEuropean model is under challenge internally from a failure to adapt toeconomic change. The report attributed this primarily to microeconomicfailings and draws attention to the dilemma at the root of much of the disen-chantment with Europe: new political powers based on the Communitymethod are required today to enable the Union to embody the Europeanmodel. But it is inconceivable today that such powers will be transferred asthe people will not give their consent, on the grounds that the Union lacks

political legitimacy. Since then, the evident failings in macroeconomic gover-nance that were revealed by the 2008/9 economic crisis have added to theconcerns about the legitimacy of the policy framework.

The EUs legitimacy is also shaped by the modes of governance that areemployed and their coherence across member states and across policydomains. In contrast to the certainties of the Community method and theunitary integration principle underpinning it, much more diffuse models ofgovernance have become common. These include the fact that key areas ofeconomic policy making apply only to some member states, and the upsurgein softer forms of policy coordination in which there is a functional divisionof labour between tiers of government, rather than a more explicit policyassignment. As the paper by Dyson and Marcussen in this issue shows, forms


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of differentiation through which some member states are in and others outhave become more usual and the negative connotations surrounding it havediminished. Indeed, their concept of transverse integration, posits a newapproach. But, although monetary union lies behind many of the cleavagesbetween groups, membership is not fixed and a member state may well bein for some purposes, but out for others, rendering simple notions of coregroups untenable.

For Majone (2005), the evidence suggests that the traditional Communitymethod approach to European integration is becoming obsolete, being toorigid to permit institutional and policy innovations or to apply to politicallysensitive areas. He argues that the upshot is that member states, even if theyare sympathetic to common aims, increasingly wish to act outside the tradi-tional framework. A possible interpretation is, as Majone has argued, thatcoordination is undertaken because of the weakness of EU institutions andthe reluctance of member states to delegate to the EU level, rather than as a

means of ensuring the best governance. Yet, even within processes rooted inhard law, such as the Stability and Growth Pact (SGP), it is often the softerOMC-type governance procedures that have proved most influential, asHodson and Maher (2004) have observed. Even in the single market oncethe epitome of the hard law approach, notwithstanding the resort to devicessuch as mutual recognition as a means of overcoming the high hurdle ofcomplete harmonization there is evidence of a much more fluid approach.The paper in this issue by Chang, Hanf and Pelkmans notes the profusion ofexemptions from the Services Directive, and also that progress on serviceindustry integration may well proceed though administrative cooperation

and reform.The integration of economic and social governance can proceed in fourways, all of which are in evidence in the policy areas covered in the sixpapers. The first is full assignment of competence which is, in principle,how EMU is conceived of (certainly for its monetary union element). Yet,as the paper by Dyson and Marcussen shows, EMU is subject to what nowappears to be an enduring breach of the unitary approach which hasconventionally been central to integration. A hard-law-based regulatoryapproach to integration is the second mode of governance and is character-istic of the mthode communautaire that underpins the single market, but

here too analysis of the trajectory of the Services Directive by Chang, Hanfand Pelkmans suggests that for diverse reasons (legitimacy, ideologicaldifferences), resort to explicit harmonization has become much trickier,pushing the EU towards cooperative or coordinated solutions.

Public finance at the EU level can be said to constitute a third form of inte-gration. Yet, it is clear from the paper by Heinemann, Mohl and Osterlohthat the EU budget is hemmed-in politically and institutionally in a waywhich prevents many of the normative principles that might determine howpolicy competence for public finances are assigned being asserted. Equally,cohesion policy is a specific element of public finances that has become a coreactivity of the EU level, but which has also been seen as an instrument forachieving more than equality and/or solidarity goals, and the paper by Begg


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highlights the confusion in aims that results from the extension of thedemands on the policy.

The fourth approach is coordination which, as suggested above, is themode of governance that has seen the most development over the lastdecade. Yet it is one that often has to navigate uncomfortably between themember state and Community levels and is subject to a degree of fuzziness.In fiscal policy, various mechanisms are in place, although the coordinationof macroeconomic policies is caught between the regulatory mode viathe SGP and the much looser, non-binding mechanism of the BroadEconomic Policy Guidelines. Le Cacheux argues that this conjunction hasbeen found wanting in the responses to the financial crisis that struck in2008 and the ensuing recession. Social policy, by contrast, remains firmly anational competence, yet has been partly integrated through the OMC, onereason being that the so-called European social model establishes norma-tive goals that, to a degree, constitute a common template for policy. The

paper by Draxler and van Vliet shows, however, that while there has beenconvergence in social protection expenditure in the EU-15, there has notyet been similar convergence by the member states that acceded to the EUin 2004.

Theoretical and Conceptual Innovation

Various theoretical approaches have been used and developed in the sixarticles, and they also approach governance from different disciplinaryperspectives that enrich the discussion as a whole. Europeanization theory

has been prominent in the work on EMU and it can also be argued that thenotion of downloading of policy concepts developed at the EU level ispresent in structural policies through the influence of the Lisbon Strategyand the other mega-processes of policy coordination. Fiscal federalism inits different manifestations bears on the evolution of the EU budget, but islimited by the sui generis nature of the EU fiscal constitution. The theory ofpolicy coordination is also relevant in understanding some of the dilemmasthat are covered in the papers by Le Cacheux and by Draxler and van Vliet.In the internal market area, the theoretical notions of competitive andcontestable markets play some part. But, in all these areas, the idea that a

coherent theoretical framework is waiting to be found may prove to beillusory. Instead, the EU may be better described as a magpie modelwithbits of this and bits of that.

The theoretical contribution of the Special Issue also connects to theconceptual framework for the wider network described above. Specifically,the EU-Consent project included the articulation of four scenarios (Faber2006; Umbach and Hofmann 2009) to capture possible trends in integra-tion in different domains, and to expand on the notions of widening anddeepening. These scenarios draw on long-established concepts developedby some of the founding fathers of integration theory, such as Haas andSchmitter, while also opening the door to new conceptual tools. Whilethey were developed largely from a political science perspective, they can


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be used to assess the recent and prospective trajectories of governance.They are:

Spillover in the traditional neo-functionalist sense of incremental increasesin the competencies assigned to the EU level or on which it exercises a

strong influence, typically leading to deepening; Spill-back or disintegration as parts of the acquis are whittled away,leading to a repudiation of what had previously been seen as valid EUactivity. Such a process arises because existing EU process and policyassignments come under great strain, notably because of widening, asgreater heterogeneity takes its toll, resulting in increased use of vetoes andrendering Community institutions less effective. The upshot is thatmember states opt for alternative arrangements;

Status quo (or status quo-plus) where the EU seems to have reached astable equilibrium in which only marginal adaptations occur;

Reinvention in which, after a period of considerable widening, a fresh lookat EU integration leads to a transformed approach to governance, ratherthan one which is a remodelled version.

The different domains covered in this issue exhibit elements of differentscenarios, but it is hard to identify a single narrative that encompasses allthe developments. This is unsurprising given that the performances of EUinstitutions have varied greatly. At one extreme, the success of the EuropeanCentral Bank stands out and the decisions taken in June 2009 to assign itnew responsibilities for macro-prudential supervisions could be interpretedas classic spillover. Yet, even within the EMU policy arena, the Commis-

sions role in fiscal coordination has been increasingly questioned, renderinginstruments such as the SGP much less visible, let alone effective. Insteadmember states appear to have reclaimed the initiative on fiscal policy,implying spill-back.

Cohesion policy provides an intriguing test case of possible trajectories. Asis shown in the paper by Begg, the policy is strongly entrenched and hasshown a capacity to evolve that has enabled it to adapt to enlargement of theEU. But by also becoming more attuned to competitive imperatives and beingreceptive to the need for a spending instrument that feeds into the LisbonStrategy, cohesion has shown a nimbleness in reinventing itself. A possible

spill-back is, however, now on the agenda through the demands from somemember states for renationalization. It is far from clear whether the motivesare simply budgetary (facilitating a reduction in the EU budget) or morecomplex ones to do with what are suitable EU-level public goods.

Despite these cases, an assessment of which of the scenarios best describescurrent directions is that EU economic and social governance overall haselements of status quo alongside reinvention, but it also raises questionsabout whether there is something distinctive going on in these policy areasthat will be captured only adequately by bringing in further conceptual tools.

The Special Issue also proposes a number of conceptual innovations thatcan extend the widening/deepening dichotomy. One of the significant chal-lenges in economic and social governance in the EU (identified, for example,


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by Fritz Scharpf 2006) is the presence of a problem-solving gap, character-ized by policies that are subject to heterogeneous preferences and/or highnational political salience, yet for which national solutions are precluded orinhibited by constraints of European integration. This analysis helps toexplain the rejection of increased formal integration of social policies andmay be equally true of tax harmonization, common industrial relationsframeworks and policy mix ideas that integrate monetary, fiscal and wagepolicies. But, if preferences in these areas are more closely shared by somecountries than others, then differentiation could be one way of going beyondthe limited integration afforded by the OMC. The notion of transverse inte-gration put forward by Dyson and Marcussen starts from the observationthat various facets of governance do not fit neatly into more formal struc-tures. Instead, they suggest that increased resort to differentiation should betheorized as normal rather than atypical.

The willingness of policy actors, especially around the Lisbon Strategy, to

merge different policy modes in an arguably new phenomenon that can bedescribed as hybridity can also be seen as a significant innovation in EUeconomic governance. It involves a fusion between the now traditionalcommunity method and new modes in which various forms of policy learn-ing are to the fore. The Services Directive, for example, was one of the majorinitiatives in the Community Lisbon programme for 20052008 and itsimplementation continues to be a central plank of the Lisbon Strategy, yet isone being advanced in part by soft coordination (Chang et al., this issue).

Trends in Socio-Economic Governance Since the 1990s

Transformation of governance in the socio-economic sphere has proceededboth by big bangs and small evolutionary steps: what is often more interestingthan this distinction is how they interact. Constitutionally, the Maastricht andAmsterdam Treaties largely established the framework for EU economic andsocial governance that is in force today, with the Nice Treaty adding a littleon social policy. Yet there have been striking innovations in governance inthe latter half of the 1990s, especially in the various forms of policy coordi-nation that have been adopted. What is especially noteworthy about all ofthese is that they have at most only limited foundations in hard law.

In some cases, shifts occur because a policy cycle has reached an end. Inthe area of the budget, for example, obvious periodic shifts result from thenegotiation of multi-annual financial frameworks (MFF) every seven yearsand these, in turn, shape the cycles of cohesion policy. But the discoursearound the 2008/9 review of the budget at least re-opened debate on the corepurposes of the budget, with (as the paper by Heinemann et al., this issue,discusses) a questioning of the rationales for EU public goods vis--visdistributive transfers. Consequently, in the budget the EU may well be grav-itating towards a constitutional moment similar to the one that occurred in1988 when it was last comprehensively reformed, although the lack (so far)of political momentum behind the review could see it drift into being littlemore than the early skirmishes of the next MFF negotiations.


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The many innovations in economic and social governance of the lastdecade can at least partly be linked to enlargement. Thus, Best (2008) arguesthat the emergence of the OMC, while not a direct consequence of enlarge-ment, was probably facilitated by the Nordic enlargement and the prepara-tion of the 2004 enlargement. However, these coordination methods wereprobably in the ascendancy anyway, so that what enlargement did was toassist rather than trigger their use. Best concludes that there is no simplecausal relationship from enlargement to new modes of governance. But somesystematic influences can be posited. For example, Scharpf (2006) stressesthe sheer arithmetic problem of enlargement: as more members accede, thetransactions costs of reaching decisions rise and the scope for compensatorypayments that facilitate agreement diminishes as the slender EU budget hasto be spread more thinly.

Nevertheless, in the areas covered in this Special Issue, enlargement ismanifestly a core factor behind many changes. For example:

In an enlarged EU, there are more heterogeneous spending preferencesregarding what categories of public spending should be supported by theEU budget.

The arrival of more participants in stage 3 of EMU has altered the decisionmaking (by obliging the ECB to rethink the voting arrangements on theGoverning Council) and led to new coalitions and different approaches.

Cohesion policy has seen continuity in the model applied, but alongsidevery pronounced shifts in its incidence through its application increasinglyto member states that acceded in 2004 and 2007.

In social policy areas, the distinctive approaches brought by newermembers have contributed to the definition of flexicurity as a paradigmfor social protection systems.

The papers in the Special Issue find extension of the scope of policyapproaches in a variety of areas. Perhaps the biggest change in governance ofthe first decade of the twenty-first century has been the progressive integra-tion of economic governance under the banner of the Lisbon Strategy, aprocess that has seen the emergence of a new accommodation between hardand soft law. In parallel, after initial experiments in selected policy areas, theOMC has been adopted in additional domains. This is neither deepening nor

widening in the sense of enlargement, but an extension of scope that is hori-zontal, but a qualitatively different concept: that might be called broaden-ing. The somewhat contested instrumentalization of cohesion policy insupporting the Lisbon Strategy and, latterly, in playing a small part inproviding a fiscal stimulus is an illustration.

So far, OMC has been conceived of as being for all member states, butwith a limited role for the EU level, and the imperative of achieving consen-sus has been prone to result in a lowest common denominator of integratedpolicy aims. Le Cacheux, and Draxler and van Vliet discuss coordinationprocesses from different standpoints, yet show that there is a commonagenda which is how to reconcile diversity with a desire for integration ofpolicy. To a degree, the verdict of both papers is that weak coordination and


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the hesitant political commitment behind it are symptomatic of a diminishingwill to integrate, a conclusion also implicit in the analysis of the ServicesDirective in the paper by Chang et al. More generally, growing resistance tothe use of the traditional forms of European integration has led to a searchfor alternative ways of achieving common aims that lessen the transfer ofpower to the Community level. One of the most prominent policy areas inthis regard is economic reform, principally under the banner of the LisbonStrategy.

One of the most persistent fears about the integration of markets,whether in the EU or as summed-up in the term globalization, is that it willlead to ever greater sacrifices of social policy on the altar of competitiveness.Yet, as the paper by Draxler and van Vliet in this issue shows, the muchtrailed race-to-the-bottom simply does not appear in the empirical dataand, in EU-15, the trend has, if anything has been for a convergence on highlevels of social spending. However, so far, the member states of Central and

Eastern Europe (CEE) have not converged much. Draxler and van Vliet askwhether the OMC may have had an influence and what impact economicintegration has had, recognizing that the two do not necessarily pull in thesame direction. Their empirical finding is that, up to 2006, there was notmuch convergence towards EU-15 by the new members that acceded to theEU in 2004, but that there was convergence among these new members.Two possible reasons for slow convergence can be put forward. First, theremay be a need for sequencing, in which the primary aim is economic perfor-mance while social advances are seen as only viable subsequently. If so, thenthe CEE trajectory may just be delayed. But it is also plausible that they

have hit on an alternative model.Macroeconomic policy coordination during the recession has highlightedsome of the uncomfortable compromises that continue to dog economicgovernance. Le Cacheux demonstrates one of the most intractable paradoxesat the heart of EU integration, which is that a process EMU whichassumes that economies have already converged in nominal terms (realconvergence is a different story) or will face strong pressures to do so, havenot. Indeed one of the acknowledged problems of the Euro Area is that itsvery heterogeneity has contributed to the exacerbation of macroeconomicimbalances. Le Cacheux notes, further, that the timing of entry into recession

was not identical, with lags of one or more quarters, a disjunction that helpsto explain divergent fiscal policy responses.In his view the continuing heterogeneity in the Euro Area has also been an

influence, with explanations for it including differences in the incentivesfacing large and small states especially the fact that whereas a small statecan fee-ride, larger ones cannot. Here the analysis of Dyson and Marcussenbecomes relevant, because it stresses the enduring nature of uncomfortablecompromises. The choice between rules and discretion also becomes critical.Rules such as the SGP have proved to be too crude and, already amendedin 2005, look ill-suited to the probably more volatile macroeconomicconditions that can be expected in the aftermath of the crisis. Yet limitsto discretion also have to apply and the problem is that political leaders


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are suspicious of more intensive coordination, let alone gouvernmentconomique or the much more ambitious concept of a European Republicwith extensive centralised economic powers suggested by Collignon (2003).For future Euro Area economic governance (and if the Euro Area adopts newapproaches, other EU countries are likely to follow similar rules), newapproaches to rules deserve to be explored.

Implications for Governance

The charge that the EU was nowhere to be seen in dealing with the financialand economic crisis in 2008 is, though unfair in a number of respects, adamaging one. Unless the EU is seen to be relevant in economic and socialpolicy, its legitimacy will be questioned and its repute will be undermined.What might have been expected. First, an assumption about the set-up ofEMU well explained by Artis and Buti (2000) was that monetary policy

was suited to deal with common shocks affecting all countries, while fiscalpolicy was available to deal with a shock that had an asymmetrical effect onany individual member state. However, as the paper in this issue by LeCacheux recalls, in a more severe downturn, monetary policy can come upagainst the zero bound at which no further cuts in interest rates are feasible,yet be insufficient to stabilize the economy. When that point is reached, otherpolicy responses are needed, but it can be politically difficult for governmentsto argue for policies that support the common EU interest in taking moreradical steps in fiscal or structural policies.

A single policy stance for all EU members is not easy to achieve, espe-

cially where there are manifest differences (as there were in 2008/9) in theincidence and intensity of problems, a need for urgency and differences onhow best to proceed. Combining two of the key innovations of the lastdecade in economic governance, under what circumstances could it makesense to have differentiated integration subject to the Open Method ofCoordination? So far, OMC has been conceived of as being for all memberstates, but with a limited role for the EU level, and the imperative ofachieving consensus has been prone to result in a lowest common denomi-nator of integrated policy aims. Moreover, as Metz (2006) points out, theOMC does not commit member states and the outcomes have been disap-

pointing in many of the policy areas in which it has been applied. The keyadvantage of OMC is its flexibility and capacity to adapt to the differingcircumstances of the member states. Other models for OMC can, therefore,be countenanced and it may well be that an OMC-limited sub-group couldbe more ambitious. Indeed, Metz has put forward the idea of differentiatedOMC as one of six proposals for reforming in his words, taming open coordination and refers to the possibility of OMC islands composedof sub-groups of member states. He argues, notably, that the mechanismsthat are supposed to underpin OMC, such as peer pressure, would workbetter with smaller groups. This, indeed, is an evolving practice in theapproach to employment policy, as well as in social protection and socialinclusion.


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Heinemann et al. argue that the difficulties in reforming the EU budgetstem in large part from the relative neglect of the decision-making processand of the incentives that face decision makers. They characterize most of thedebate around the 2008/9 review of the budget as having been about content,emphasizing in particular the arguments for European added value. Theirpreferred approach of incentive channelling is designed to neutralize the issueofjuste retour the idea that there must be a fair net balance for everymember state by separating the decisions on net positions from those on thecontent of the budget. This approach has obvious attractions in so far as itwould mean an end to the distortion of individual policies to achieve a givennet position, resulting in the increasingly opaque array of corrections on boththe revenue and the expenditure side. Instead there would be negotiation ofone of several means of adjusting net positions and a logically separatedebate on how to spend the money.

According to Heinemann et al., an incentive channelling approach would

make member states more receptive to genuine EU-level public goods,because they would not be fighting for policies that favoured their netposition. While this may be somewhat disingenuous, bearing in mind that(see the paper in this issue by Begg) no policy can ever be wholly space-blind,the principle is an appealing one that could have a wider resonance in socio-economic governance and not just in relation to the EU budget. Resistanceto many ostensibly desirable policy innovations mediated by the EU oftenreflects the perception (and sometimes the reality) that a member statescompetitiveness will be undermined or that it will have to shoulder an unfairshare of the burden. The debate on reform of cohesion spending (the paper

by Begg see also Barca 2009), similarly, has highlighted the tensionbetween distributive aims and a greater focus on the funding of EU-levelpublic goods that support the EUs strategic goals (competitiveness, counter-ing climate change, Europe in the world).

Better incentives could also help in mitigating the reservations aboutmacroeconomic coordination in the common interest, discussed in the paperin this issue by Le Cacheux. In the response to the economic crisis, and theresort to ad hoc measures by individual member states that made good sensedomestically, some had immediate negative repercussions for others. Thus,Irelands unilateral announcement of blanket guarantees for bank deposi-

tors triggered an outflow of funds from banks in other member states thatput their financial systems under pressure. The rapid depreciation of thepound against the euro could be seen as a competitive devaluation aimed atswitching demand from the Euro Area to the UK and so on, while hesitationabout moving first on fiscal stimulus packages could have accentuated therecessionary psychology.

Coordination provides a remedy in all these cases and can be portrayedas a form of incentive channelling. For instance, a simple approach to fiscalstimulus would have been to establish an EU-wide target for both theaggregate stimulus and the timing of both the increase in deficits and thesubsequent unwinding as member states re-consolidate their publicfinances. The common interest is in the total package because of the need


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to sustain aggregate demand, but member states have to be alert to thefiscal spillover effects of uneven changes in demand and may thereforehesitate to take sufficient action. In the recession of the early 1980s, notori-ously, much of the fiscal stimulus in France crossed the Rhine, leavingFrench public finances in disarray, while Germany benefited. Althoughthere are divergent views among economists about the magnitude of suchfiscal spillovers, the key point is that in a well coordinated system, theywould be taken into account in the timing of major policy shifts.

The internal market remains, for many, the core achievement of EU inte-gration and there is a strong consensus to preserve it against protectionisttendencies. Yet the inexorable increase in the share of the economyaccounted for by services calls into question the conception of an EU marketthat is dominated by exchanges of goods, rules that are designed above all toregulate (or liberalize) such physical movements and market access as theprincipal concern. As the paper by Chang, Hanf and Pelkmans demonstrates,

there are qualitatively different imperatives in liberalizing service industries,such as the right of establishment. But their paper also shows that there canbe shifts in approach that facilitate new solutions.

Two other areas of contest that may be amenable to more imaginativesolutions are the difficult negotiations on euro enlargement and the mannerin which financial stability is reformed. Euro Area enlargement is expectedto follow the same route as for the existing members, notably through thestrict application of the convergence criteria. However, an argument can bemade that circumstances have changed in a number of respects. First, themere fact that the euro exists renders some of the provisions less satisfac-

tory. Strictly, two of the convergence tests (affecting consumer prices andlong-term interest rates) rely on a benchmark of the average of the threebest performing member states not of the Euro Area, but of the EU as awhole. The economically logical test would be to compare the candidatewith the Euro Area as a whole: convergence of consumer price inflation, asan illustration, would then be bench-marked against the Euro Area rate, notwhatever three countries happened to have the lowest rates. However, theletter of the Treaty provisions excludes this more pragmatic solution.

Candidates also have to demonstrate exchange rate stability by spending aminimum of two years in the exchange rate mechanism, a stage which would

oblige those which currently run effective monetary policy strategies basedon inflation targeting to switch to exchange rate targeting. Such a step wouldprobably be destabilizing. Yet the dilemma is that the Treaty provisions arehard law and there seems to be no willingness to find a more sensible way ofachieving change.

Treaty terms also come into play in considering the way forward for finan-cial regulation in the EU, a policy domain that was exposed by the 2008financial crisis as having significant shortcomings. As things stand, there isno EU-wide supervisor of financial intermediaries, with the result thatprudential supervision of financial intermediaries with sizeable cross-borderactivity is neither integrated nor left fully to member states. In particular,the various forms of coordination introduced through the creation of


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14 Iain Begg

pan-European committees of financial regulators, largely as a result of themeasures proposed by a group chaired by Lamfalussy during the late 1990s,are considered by many to be insufficiently powerful to deal with the chal-lenges (for an overview, see Lannoo 2008). Although a way forward has nowbeen agreed, based largely on the proposals of the de Larosire (2009)committee, it is one that stops short of creating a genuine EU-level compe-tence for supervision of financial intermediaries that are systemically impor-tant in two or more member states.

An obstacle to doing so is that the Treaty offers only limited guidance.That supervision was envisaged as a competence to be retained by memberstates is supported by Art. 58 TEC, which asserts the right of member statesto retain powers over financial supervision. Yet there is also an enablingclause in the Treaty (Art. 105(6), TEC) which states that The Council may,acting unanimously on a proposal from the Commission and after consultingthe ECB and after receiving the assent of the European Parliament, confer

upon the ECB specific tasks concerning policies relating to the prudentialsupervision of credit institutions and other financial institutions with theexception of insurance undertakings.

Two aspects of this provision are noteworthy in considering the possibleevolution of economic governance. The first is that although only the ECB ismentioned, other bodies are not precluded, so that a separate EuropeanAgency could, conceivably be established. Certainly, belying the customaryreticence of central bankers, the ECB has been unusually forward in statingits willingness to act (see, for example, Bini Smaghi 2009). However, it isevident from the outcome of the June 2009 European Council that the fact

that the ECB only formally represents 16 (at the time of writing) memberstates was an insuperable obstacle to a deepening along these lines. Even ifthe whole question has to be revisited within a few years, it suggests that onemessage to draw from the Dyson and Marcussen paper in this issue is thatdifferentiation is likely to have an enduring impact on decision making.

A second issue arising from Art. 105(6) is the ramifications of the apparentexclusion of the ECB from supervising insurance undertakings. Since theearly 1990s, when this clause was introduced, a growing number of countrieshave opted for integrated supervision of financial intermediaries, partlyreflecting the trend towards consolidation under one roof of a range of

financial services. Indeed a majority of EU Member States now have singlesupervisors some as separate agencies, some within the national centralbank. A possible implication is that if it was deemed desirable to deepen EUintegration by having a pan-European supervisor, these responsibilitieswould either have to be split between the ECB and a new agency forinsurance undertakings, or kept away entirely from the ECB.

Conclusions

The (often deliberate) ambiguity about what the EU is as a political, socialand economic entity has a significant bearing on what reforms in economicgovernance might be envisaged. In some respects, the EU can be regarded as


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a single socio-economic space in which it is appropriate for there to be acommon approach to governance. That the EU level should be responsiblefor trade policy, for example, is barely contested, while the EU role inadvancing the single market also receives broad support, even if it is subjectto periodic sniping. In other areas, it is equally clear that neither theeconomic setting nor the political context warrant common policies or insti-tutions of governance. It is in the middle-ground that questions arise abouthow much integration of policy should occur and whether such integrationshould be for all participants or a sub-set of member states. The choices tendto be dominated by political considerations with two principal sorts ofoutcomes: either a single agreed policy which will most often consist of theminimum degree of integration needed to achieve common goals; or a moreextensive pooling of policy among a subset of members. In both cases, polit-ical factors tend to dominate analytical considerations that might provide adifferent answer based on positive assessments.

But there are also different dimensions of EU governance that are notgiven due recognition. Policy coordination subject to the open methodplaces a significant premium on effective diffusion of ideas and methods.This contrasts with the Stability and Growth Pact, which has preventive encouraging good policies and dissuasive penalizing badpolicies arms, intended to exert a disciplininginfluence on fiscal policy.By contrast, supply-side coordination aims to push member states toembrace reform and to be more innovative in policy making; that is tofoster policy learning through tools such as benchmarking, peer reviewand exchange of experience. In this regard, the diverse experience across

Europe in trajectories of structural change is positive, as it shows thatgood strategic policy choices can make a difference, but also that there isscope for one country to learn from another and thus to develop newsolutions. This notion of positive coordination is one to be developedfurther in understanding and reforming EU governance.

Enlargement of the EU has resulted in many well-established policies beingadapted to the circumstances of the new members while retaining many oftheir previous characteristics, cohesion being a good example. Successiveenlargements have seen various innovations in policy and, especially inresponse to the 2004/7 wave of enlargement, substantial re-distribution of

the financial resources. Yet the findings of Draxler and van Vliet could signala break in the trend towards convergence in social policies, raising the possi-bility of more fragmented policy models.

In the responses to the current financial and economic crises, a furtherinteresting trend can be discerned. This can be summed-up in the expressionneeds must, as political leaders cobble together collective solutions becausepolitical pressures to act are so overwhelming. One can speculate that thedeepening and broadening of scope that have gone on in these circumstancesmay nevertheless be enduring. The Eurogroup, for example, may acquire aweightier role and not revert to being a club confined to finance ministers.Crisis is also driving the search for new ways of dealing with financial insta-bility. At the same time, recognition of overarching challenges, such as


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16 Iain Begg

climate change, are manifestly prompting an extension of integration thatappears to start with broadening, but may then lead to deepening. Thedebates on widening and deepening, enriched by the concepts of broadeningand hybridity, will continue.

Notes

1. For further details, see the website of the project at www.eu-consent.net.

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Economic and Social Governance in the Making

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