Competition States on Europe's Periphery: Race to the Bottom and to the Top Višnja Vukov Thesis submitted for assessment with a view to obtaining the degree of Doctor of Political and Social Sciences of the European University Institute Florence, September 2013 European University Institute Department of Political and Social Sciences Competition States on Europe's Periphery: Race to the Bottom and to the Top Višnja Vukov Thesis submitted for assessment with a view to obtaining the degree of Doctor of Political and Social Sciences of the European University Institute Examining Board Prof. Martin Kohli, European University Institute (Supervisor) Prof. Laszlo Bruszt, European University Institute (Co-supervisor) Prof. Dorothee Bohle, Central European University Prof. Martin Myant, University of the West of Scotland © Višnja Vukov, 2013 No part of this thesis may be copied, reproduced or transmitted without prior permission of the author Abstract The thesis deals with the transformations of capitalist states in Europe in the context of increased economic transnationalisation and explores the different strategies that states develop to increase their competitiveness and attract capital, thereby improving the profile of insertion of their economies in the global and regional markets. Starting from the premise that the increased economic integration apparent in market liberalizations, the intensification of trade, the transnationalisation of production and the emergence of transnational financial markets exert pressures on states to reorient their economic and social policies towards the goal of increasing competitiveness and transforming themselves into so-called Competition States, the thesis examines the extent to which this state reorientation has been apparent in Europe and whether it has led to the emergence of unique or varied types of Competition States. The main argument is that, first, pressures for state restructuring vary among European states, with the Eurozone members being much less exposed to the pressures of the international financial markets and thereby much less likely to transform into Competition States and, second, those states that are exposed to such pressures respond in different ways and devise different strategies for increasing competitiveness. Based on the comparative case-studies of the Czech Republic and Slovakia as representatives of the two different types of Competition States, the thesis argues that the choice of these strategies is primarily shaped by the features of the domestic political system – more precisely, the strength or weakness of socio-economic issue divides as the main axis of competition in the political party system – rather than being determined by the position of states in the global or regional division of labour, or by their initial social and economic institutions. I II Acknowledgements This thesis would have never seen the light of the day without generous help of many friends and colleagues. I would like to express my deep gratitude to my supervisor at the EUI, Martin Kohli, for his strong support and great supervision throughout the five years of writing the thesis. I am also most grateful to my co-supervisor, Laszlo Bruszt, for his thoughtful guidance and his continuous encouragement, believing that I am ‘going in the right direction’, even when I felt completely lost and with no direction at all. I owe special thanks to the members of the examining board, Dorothee Bohle and Martin Myant, for their most valuable comments and inspiring criticism. Many scholars and colleagues commented on the earlier versions of specific chapters or parts of the thesis, and I am particularly indebted to Sven Steinmo, Wolfgang Streeck, , Claire Wallace, Ruth Zimmerling, Furio Stamati, Stefano Palestini and Vera Scepanovic for their useful suggestions or pointed questions that pushed my research further in one or the other direction. I also consider myself most lucky for having met Doro Bohle and Bela Greskovits during their visiting year at the EUI – our conversations and exchanges ever since, as well as the ability to closely follow their work, have always provided ample food for thought and served as a continuous source of inspiration. Needless to say, all the errors in the text remain mine. The research presented here would not have been possible without the precious input from my interviewees and I am deeply indebted to all of them for their time and their patience with my questions. Big thanks also go to Mysha for her generous help with translation, but even more so for being such a great friend and making me feel truly at home during my fieldwork in Prague. Looking back, sometimes it feels that the most difficult thing of all was to make that decision and apply for the PhD programme in the first place. My special thanks go to Mirna for pushing me to make the very first step and apply for my first graduate year abroad; to Iza for keeping my academic side alive during the months in which my life seemed as far away from academia as it could possibly get; and above all to my former boss and a wonderful friend Sanja for making sure that despite all the work that had to be done, I still get the time and energy to write up that application for Florence and go follow my dreams. III As always, family is the one that gets to carry the heaviest burden and often ends up as a collateral victim in the emotional ups and downs of PhD writing. I am immensely grateful to my parents and my sister for always being there for me, cheering to my successes and endlessly cheering me up in times of crisis. Without their unreserved love and support, I would never get where I am today. Last, but certainly not least, I express my deepest gratitude to my friends and colleagues at the EUI – to those that were with me in the final and perhaps the most difficult moments of writing up the thesis amidst work obligations in the fifth year, as well as to those with whom I shared the most wonderful four years of student life in Florence. I don’t need to name you here, I am sure you will recognize yourself. It was your friendship and the incredible ties among us that made it possible for me to endure long hours of writing and survive the stress that comes with it. Many of you are now far away from Florence, yet your support reaching me from distant corners of the world still gave me the strength to get to the stage of writing these acknowledgements. I am most thankful for having you in my life and I feel truly privileged for having shared this journey with you. IV Table of Contents Abstract ......................................................................................................................................................... I Table of Contents ...................................................................................................................................... V INTRODUCTION .................................................................................................................................... 1 TRANSNATIONAL CAPITALISM AND THE RISE OF THE COMPETITION STATE .... 9 Introduction ............................................................................................................................................ 9 Globalization and state debate ........................................................................................................... 10 The politics of competitiveness .......................................................................................................... 17 Competition State and European integration .................................................................................. 24 MAPPING THE TRANSFORMATIONS OF THE EUROPEAN STATES ............................. 31 Operationalization of Competition States ........................................................................................ 31 Welfare vs. Competition State – assessing the changes in Western Europe ............................... 37 Europeanization East .......................................................................................................................... 52 Discussion ............................................................................................................................................. 68 Conclusion ............................................................................................................................................. 76 PARTY POLITICS AND COMPETITIVENESS STRATEGIES – EXPLAINING THE DIVERSITY OF COMPETITION STATES..................................................................................... 79 Introduction .......................................................................................................................................... 79 Case selection ........................................................................................................................................ 79 Political economy of East European divergence ............................................................................. 82 Party systems and the politics of state transformation ................................................................... 87 PRELUDE - DUAL TRANSFORMATION IN CZECHOSLOVAKIA ..................................... 95 Introduction .......................................................................................................................................... 95 Economic reforms during Czechoslovakia .....................................................................................