Resilient Liberalism in Europe's Political Economy

Resilient Liberalism in Europe’s Political Economy

Why have neo-liberal economic ideas been so resilient since the 1980s, despite major intellectual challenges, crippling financial and political crises, and failure to deliver on their promises? Why do they repeatedly return, not only to survive but to thrive? This groundbreaking book proposes five lines of analysis to explain the dynamics of both continuity and change in neo-liberal ideas: the flexibility of neo-liberalism’s core principles; the gaps between neo-liberal rhetoric and reality; the strength of neo-liberal discourse in debates; the power of interests in the strategic use of ideas; and the force of institutions in the embedding of neo-liberal ideas. The book’s highly distinguished group of authors shows how these possible explanations apply across the most important domains: fiscal policy; the role of the state; welfare and labour markets; regulation of competition and financial markets; management of the euro; and corporate governance – in the European Union and across European countries. vivien a. schmidt is Jean Monnet Professor of European Integration and Professor of International Relations and Political Science at Boston University, and Founding Director of Boston University’s Center for the Study of Europe. mark thatcher is Professor in Comparative and International Politics in the Department of Government at the London School of Economics and Political Science. contemporary european politics

Consulting Editor: Andreas Føllesdal, University of Oslo

Contemporary European Politics presents the latest scholarship on the most important subjects in European politics. The world’s leading scholars provide accessible, state-of-the-art surveys of the major issues that face Europe now and in the future. Examining Europe as a whole and taking a broad view of its politics, these volumes will appeal to scholars and to undergraduate and graduate students of politics and European studies.

Other titles in this series: The Worlds of European Constitutionalism edited by Grainne´ de Burca´ and J. H. H. Weiler European Identity edited by Jeffrey T. Checkel and Peter J. Katzenstein Resilient Liberalism in Europe’s Political Economy

Edited by vivien a. schmidt

AND mark thatcher University Printing House, Cambridge CB2 8BS, United Kingdom

Published in the United States of America by Cambridge University Press, New York Cambridge University Press is part of the University of Cambridge. It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning and research at the highest international levels of excellence. www.cambridge.org Information on this title: www.cambridge.org/9781107613973

C Cambridge University Press 2013 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2013 Printing in the United Kingdom by TJ International Ltd, Padstow Cornwall A catalogue record for this publication is available from the British Library Library of Congress Cataloguing in Publication data European political economy : resilient liberalism through boom and bust / [edited by] Vivien A. Schmidt and Mark Thatcher. pages cm. – (Contemporary European politics) Includes bibliographical references and index. ISBN 978-1-107-04153-0 (hardback : alk. paper) 1. Neoliberalism – Europe. 2. Free enterprise – Europe. 3. Europe – Economic policy – 1945– 4. Europe – Economic conditions – 1945– I. Schmidt, Vivien Ann, 1949– II. Thatcher, Mark. HC240.E8474 2013 330.94 – dc23 2013027297 ISBN 978-1-107-04153-0 Hardback ISBN 978-1-107-61397-3 Paperback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. Contents

List of ﬁgures page vii List of tables viii List of contributors ix Preface xv 1 Theorizing ideational continuity: The resilience of neo-liberal ideas in Europe 1 vivien a. schmidt and mark thatcher

Part I Economy, state, and society 2 Neo-liberalism and ﬁscal conservatism 53 andrew gamble

3 Welfare-state transformations: From neo-liberalism to liberal neo-welfarism? 77 maurizio ferrera

4 The state: The beteˆ noire of neo-liberalism or its greatest conquest? 112 vivien a. schmidt and cornelia woll

Part II Neo-liberalism in major policy domains 5 The collapse of the Brussels–Frankfurt consensus and the future of the euro 145 erik jones

6 Supranational neo-liberalization: The EU’s regulatory model of economic markets 171 mark thatcher

v vi Contents

7 Resilient neo-liberalism in European ﬁnancial regulation 201 daniel mugge¨

8 Neo-liberalism and the working-class hero: From organized to ﬂexible labour markets 226 cathie jo martin

9 European corporate governance: Is there an alternative to neo-liberalism? 257 sigurt vitols

Part III Neo-liberalism in comparative perspective 10 The resilience of Anglo-liberalism in the absence of growth: The UK and Irish cases 289 colin hay and nicola j. smith

11 Germany and Sweden in the crisis: Re-coordination or resilient liberalism? 313 gerhard schnyder and gregory jackson

12 State transformation in Italy and France: Technocratic versus political leadership on the road from non-liberalism to neo-liberalism 346 elisabetta gualmini and vivien a. schmidt

13 Reassessing the neo-liberal development model in Central and Eastern Europe 374 mitchell a. orenstein

Part IV Conclusion 14 Conclusion: Explaining the resilience of neo-liberalism and possible pathways out 403 mark thatcher and vivien a. schmidt

Index 432 Figures

3.1. The ideological morphology of liberal neo-welfarism. page 99 9.1. European parliament political grouping relative strength, 1979–2009. 268 9.2. Preference moves of major party groups. 269 9.3. Number of European company law directives passed by decade. 273 9.4. Diversity of employee board-level participation rights in Europe. 275 9.5. EU consultation respondents’ attitudes to quality of non-ﬁnancial disclosure regime in their countries. 277

vii Tables

8.1. Passive and active labour-market spending as a percentage of GDP in selected countries page 244 9.1. Company law directives and year of approval 266 9.2. Members of the high-level expert group on company law 271 11.1. Institutional reforms in Sweden, 1979–2009 326 11.2. Institutional reforms in Germany, 1979–2009 334

viii Contributors

Maurizio Ferrera is Professor of Political Science and President of the Graduate School in Social and Political Studies at the University of Milan. He is a member of the Board of Directors of the Centro di Ricerca e Documentazione Luigi Einaudi in Turin. He has served on many advisory commissions at national and European Union (EU) levels and has published in the ﬁelds of comparative welfare states and European integration in many international journals, including Comparative Political Studies, West European Politics,theJournal of Common Market Studies, and the Journal of European Social Policy. His most recent book in English is The Boundaries of Welfare (2005); in Italian, he recently co-authored Alle Radici del Welfare all’Italiana (2012). Andrew Gamble is Professor of Politics and a Fellow of Queens’ Col- lege at the University of Cambridge. He is a Fellow of the British Academy and the UK Academy of Social Sciences. His main research interests are in political economy, political theory, and political history. His books include Hayek: The Iron Cage of Liberty (1996), Politics and Fate (2000), Between Europe and America: The Future of British Politics (2003), and The Spectre at the Feast: Capitalist Crisis and the Politics of Recession (2009). In 2005, he received the Isaiah Berlin Prize from the Political Studies Association for lifetime contribution to political studies. Elisabetta Gualmini is Professor of Political Science at the University of Bologna. She is also the Director of the National Research Foundation ‘Istituto Cattaneo’. Her main research interests are welfare and labour policies in comparative perspective and comparative public administration. She has written ten books and more than thirty-ﬁve articles in both English and Italian. Among her latest publications are Il partito di Beppe Grillo (2013, co-edited with P. Corbetta) and Tra l’incudine

ix x List of contributors e il Martello: le regioni e i nuovi rischi sociali (2013, co-edited with V. Fargion). Colin Hay is Professor of Political Analysis and Director of the Sheffield Political Economy Research Institute at the University of Sheffield, United Kingdom. In late 2013, he will become Professor of Govern- ment and Comparative Public Policy at Sciences Po, Paris. He is the author or co-author of a number of works, including, most recently, The Legacy of Thatcherism (2014, with Stephen Farrall), The Failure of Anglo-Liberal Capitalism (2013), and The Political Economy of European Welfare Capitalism (with Daniel Wincott, 2012). Gregory Jackson is Professor of Management at the Freie Universitat¨ Berlin. He received his PhD in Sociology from Columbia University and works at the intersection of economic sociology and political economy. His research focuses on the comparative institutional analysis of corporate governance, the social responsibility and irresponsibility of corporations, and the political determinants of the corporation in historical perspective. His work draws on both qualitative and quantitative methods, as well as utilizing qualitative comparative analysis (QCA) to analyse organizational and institutional configurations. He holds an appointment as International Research Fellow at the Oxford University Centre for Corporation Reputation and acts as chief editor for the Socio-Economic Review. Erik Jones is Professor and Director of European Studies at The Johns Hopkins University School of Advanced International Studies and Senior Research Fellow at Nuffield College, Oxford. He is author of The Politics of Economic and Monetary Union (2002) and Economic Adjustment and Political Transformation in Small States (2008), and he is co-author of Weary Policeman: American Power in an Age of Austerity (2012). He is also editor or co-editor of more than twenty volumes, including, most recently, The Oxford Handbook on the European Union (2012). Cathie Jo Martin is Professor of Political Science at Boston Univer- sity, former chair of the Council for European Studies, and co-chair with Jane Mansbridge of the American Political Science Association (APSA) task force on negotiation and political stalemate. She is the author of The Political Construction of Business Interests: Coor- dination, Growth and Equality (Cambridge University Press, with Duane Swank); Stuck in Neutral: Business and the Politics of Human List of contributors xi

Capital Investment Policy (2000); Shifting the Burden: The Struggle over Growth and Corporate Taxation (1991); and articles appearing in the American Political Science Review, World Politics, British Jour- nal of Political Science, Comparative Political Studies, and other major journals. Daniel Mugge¨ is a political economist in the Political Science Depart- ment at the University of Amsterdam. His research focuses on financial regulation and governance. In the EU-funded GR:EEN project on Europe’s role in the world (2011–2015), he leads the work on finance. In 2009, his dissertation was awarded the Jean Blondel prize for best European political science thesis of the year. Daniel spent the first half of 2012 at the Center for European Studies at Harvard University, where he also wrote his chapter for this edited volume. Mitchell A. Orenstein is Professor and Chair of the Department of Political Science at Northeastern University in Boston. Professor Oren- stein is a scholar of international politics focusing on political economy of transition in Central and Eastern Europe, pension privatization worldwide, and the role of policy paradigms in economic reform. His book Privatizing Pensions: The Transnational Campaign for Social Security Reform won the 2009 Charles H. Levine Prize of the Inter- national Political Science Association for the best book in comparative public policy and administration. He is also the author of Out of the Red: Building Capitalism and Democracy in Postcommunist Europe. Vivien A. Schmidt is Jean Monnet Chair of European Integration, Professor of International Relations and Political Science at Boston University, and founding director of BU’s Center for the Study of Europe. She has published widely on European political economy, institutions, and democracy as well as institutional theory, with books including Democratizing France (1990), From State to Market? (1996), Welfare and Work in the Open Economy (co-edited with F. Scharpf, 2000), The Futures of European Capitalism (2002). Policy Change and Discourse (co-edited with C. Radaelli 2005), Democracy in Europe (2006), and Debating Political Identity and Legitimacy in the Euro- pean Union (co-edited with S. Lucarelli and F. Cerutti 2011). In 2008 she received an honorary doctorate from the Free University of Brussels (ULB). She is also past head of the European Union Studies Association (EUSA). xii List of contributors

Gerhard Schnyder is Senior Lecturer at King’s College London. His main research interests are in the comparative analysis of national corporate governance and business systems using a historical institutionalist approach. Recent publications include ‘Like a Phoenix from the Ashes? Reassessing the Transformation of the Swedish Political Economy since the 1970s’, published in Journal of European Public Policy (Vol. 19, No. 8), and ‘Revisiting the Party Paradox of Finance Capitalism: Evidence from Switzerland, Sweden and the Netherlands’ in Comparative Political Studies (Vol. 44, No. 2). Nicola J. Smith is Senior Lecturer in Political Science at the Univer- sity of Birmingham. Her work is broadly concerned with the relationship between globalization discourse and social justice, particularly with respect to the (re-)production of uneven gendered and sexualized power relations. Recent publications include articles in Third World Quarterly, European Political Science Review, Review of International Political Economy, and Sexualities. Dr Smith is currently completing a research monograph on queer sexual economies for Palgrave. Mark Thatcher is Professor of Comparative and International Politics at the London School of Economics. He has also held visiting positions at the European University Institute and Sciences Po, Paris. His research interests are in comparative political economy, public policy, and regulation. His book Internationalisation and Economic Insti- tutions (2007) won the 2008 Charles Levine Prize for best book in comparative policy and administration, awarded by the International Political Science Association. Other books include Beyond Varieties of Capitalism (co-edited with B. Hancke and M. Rhodes, 2007), The Politics of Delegation (co-edited with A. Stone Sweet, 2003), and The Politics of Telecommunications (1999). Sigurt Vitols has been Head of the Project Group ‘Modes of Economic Governance’ at the Wissenschaftszentrum Berlin fur¨ Sozialforschung (WZB) since 2011 and Senior Fellow at the WZB since 2001. In 2010– 2011, he was Visiting Senior Researcher at the European Trade Union Institute (ETUI) and, in 2009, Wertheim Fellow in Residence at the Harvard Labor and Worklife Program. Recent publications include European Company Law and the Sustainable Company (co-edited with ETUI, 2012) and the Sustainable Company: A New Approach to List of contributors xiii

Corporate Governance (co-edited with ETUI, 2011). He received his MA and Ph D from the University of Wisconsin–Madison. Cornelia Woll is a political scientist at Sciences Po, Paris, where she co- directs the Max Planck Sciences Po Center (MaxPo) and the Interdisci- plinary Center for Public Policy Evaluation (LIEPP). Her specialization is in comparative and international political economy, in particular, lobbying and ﬁnancial regulation. She is the author of Firm Interests: How Business–Government Relations Shape Global Trade (2008) and a comparative study of bank bailouts (Cornell University Press, forthcoming). She has edited Economic Patriotism in Open Economies with Ben Clift (2012).

Preface

Although, when viewed from afar, Europe may appear to be a haven of Social Democracy, strongly opposed to economic liberalism, closer analysis reveals that the place of ‘neo-liberal’ economic ideas in policy debates has grown steadily since the 1980s. Such ideas which, most simply stated, centre on extending market competition while limiting the state, have had a profound influence on the institutions, policies, and practices of capitalism across different European countries as well as in the European Union (EU). Neo-liberal ideas have continued to dominate policy debates through Europe’s economic and political booms and busts. This resilience of neo-liberal ideas is surprising. Europe offered a relatively ‘cold climate’ for economic liberalism in the 1970s, with well-entrenched alternative ideas based on Social and Christian Democracy – to say nothing of strong Marxist traditions. Powerful theoretical critiques have been made of neo-liberal ideas while policies inspired by neo-liberalism – such as allowing greater competition in financial markets, reducing regulation, and cutting back state spending and deficits even in economic downturns – have met with failure. The present difficulties of neo-liberalism can be contrasted with the past successes of alternative models, notably social democratic models. However, the greatest surprise came in the 2000s, first with the absence of any major re-evaluation of neo-liberal ideas about governing the markets in the face of the ‘dot-com’ boom and bust and then, even more significantly, with the economic crisis beginning in 2008. After a brief neo-Keynesian moment at the very inception of the crisis, far from abandoning neo-liberal ideas, European policy makers responded with calls for their extension. They accepted or even embraced ideas of reducing public expenditure, delegating greater powers to supranational bodies, increasing liberalization, and imposing ‘market discipline’ through austerity. In the meantime, Europe struggles with high unemployment, low growth, mounting income

xv xvi Preface inequality, and economic stagnation – or worse. Politically, Europe is suffering from increasing electoral volatility, a rising tide of discontent, the re-emergence of extreme programmes and parties, and even the replacement of democratically elected governments by technocratic governments charged with administering the bitter medicine of ‘structural reform’. This book seeks to explain how and why neo-liberal ideas remain resilient. Hence, our concern is with the ideas themselves, as objects of investigation. We seek to elucidate what they are and why and how they have persisted, thereby theorizing about the processes of continuity as much as the dynamics of change. Indeed, what we find extraordinary is that neo-liberalism has not merely survived but also thrived. It has permeated our understanding of the ways in which the political economy could and should work. It has redefined the language and framed the concepts through which we think and talk about state and market. It has altered assumptions about the purposes of state action. Thus, the post–1945 era of ‘embedded liberalism’ and Social Democracy witnessed strong ideas about an active state governing the liberal economy by ‘managing’ markets, regulating business, fostering management–labour coordination, building welfare, and reducing inequalities. In contrast, the touchstones of neo-liberalism since the 1980s have been about limiting the state and ‘freeing up markets’, reducing regulation of business and finance to provide space for the ‘entrepreneurial spirit’, and increasing ‘flexibility’ in labour markets while reducing the ‘burden’ of welfare. Our focus in this book is on the resilience of neo-liberal ideas in policy and political debates rather than the consequences of neo- liberal prescriptions, how neo-liberal ideas may be put into practice, or whether policy outcomes are, in fact, neo-liberal. These other issues would demand consideration of a whole range of variables beyond the purview of this study, although some chapters do study how and why institutions and policies may have sustained and renewed neo-liberal ideas. Finally, there are also many analyses of the political, economic, and policy changes since the 1980s in terms of questions of power, class, interests, and institutions and links among these changes and neo-liberalism. What remains to be explained is why responses came in the form of neo-liberal rather than any other ideas and especially why and how these ideas have endured and, indeed, become dominant over time. Preface xvii

Thus, our central question is as follows: Why have neo-liberal economic ideas been so seemingly resilient in policy debates and political discourse despite powerful intellectual challenges, major economic crises, apparent failure, and political turmoil? By ‘resilience’, we mean the continuity of neo-liberalism over time, its dominance over competitors, and its survival against powerful challenges and rivals. To explain this resilience, we propose five lines of analysis: first, that neo-liberalism’s tremendous ideational diversity and adaptability have enabled it to resist challenges; second, that neo-liberal ideas have remained dominant in policy debates despite or even because of a lack of implementation; third, that neo-liberal ideas have been stronger in policy debates and political discourse than their competitors; fourth, that powerful interests have promoted neo-liberalism for their own purposes; and fifth, that neo-liberal ideas have become so institutionally embedded that they preclude alternatives. These analyses provide a starting point for considering whether neo-liberalism’s resilience is due to its continuous (re)invention, its constant (re)turn to past rhetoric, its (re)framing of ideas and discourse, its (re)conceptualization of interest, or its (re)shaping of institutional arrangements and (re)distribution of power. To probe these lines of analysis, the book examines a full panoply of neo-liberal ideas – from general philosophical principles, ideologies, and paradigms to specific legal norms, regulatory models, policy programmes, and political discourse. It explores how, why, and by whom they came to be generated, disseminated, and maintained both within national political economies in Europe and in the EU across a wide range of domains. The first chapter defines neo-liberalism, traces its intellectual roots, and theorizes about neo-liberal ideas as objects of explanation. It then introduces five lines of analysis that can explain its resilience, illustrated by examples from the contributors’ chapters in the remainder of the book. Contributors use whichever of the five lines of analysis they find appropriate to assess their own particular cases. The chapters in Part I explore transversal issues. With regard to the recurring economic philosophies at the core of neo-liberalism, Andrew Gamble considers the ways in which the metaphor of the ‘household economy’ has been repeatedly applied to the finances of the state to justify ‘sound money’ and balanced budgets. Regarding the welfare state, Maurizio Ferrera explores how neo-liberalism has followed a xviii Preface

‘parabola’, moving from being marginal to a central position in policy debates before absorbing ideas from other social philosophies to produce a new synthesis of ‘liberal neo-welfarism’. On neo-liberalism’s changing approaches to the role of the state, Vivien Schmidt and Cor- nelia Woll discuss how commitments to reduce state intervention in markets later metamorphosed into an increased state role to make markets more competitive, resulting not in a neo-liberal state but rather in ‘liberal neo-statism’. The chapters in Part II examine neo-liberal ideas in several key policy domains. In the macroeconomic governance of the euro, Erik Jones finds that the neo-liberal ‘Brussels–Frankfurt consensus’ of ‘sound money’ – fragile from the very start, given that it was always more rhetoric than reality – has largely broken apart since 2012, although neo- (or ordo-) liberal ideas remain embedded in the institutional rules on financial stability. In the regulation of economic markets, Mark Thatcher analyses the rise of ‘supranational neo-liberalism’ with the development of the EU’s regulatory model focused on competition, which has been resilient due to a powerful and heterogeneous coalition and processes of self-reinforcement over time. In the regulation of financial markets, Daniel Mugge¨ suggests that neo-liberal ideas are virtually the only ideas in play but that neo-liberals are themselves divided between laissez-faire resistance to regulatory rules and pro- market enhancement through strong rules – even through the current economic crisis. In the reform of the labour markets, Cathie Jo Martin shows that although neo-liberal ideas dominate, with the conceptualization of similar ‘active labour-market policies’ across European countries, their application is differs substantially due to different national ideational and institutional configurations, as in the cases of the United Kingdom and Denmark. In corporate governance, Sig- urt Vitols charts a similar predominance of neo-liberal ideas via the ‘shareholder model’, which judges corporate performance according to shareholder value alone but, in this case, despite an alternative model focused on stakeholder value. The chapters in Part III provide more deeply contextualized analyses of neo-liberalism (in its many forms) through paired comparisons of countries. They examine countries usually categorized as part of similar ‘varieties of capitalism’. For the liberal market economies of the United Kingdom and Ireland, Colin Hay and Nicola Smith discuss how the neo-liberal ‘Anglo-growth model’ focused on financialization has Preface xix persisted despite financial crises in both Ireland and the United Kingdom, although they followed somewhat different trajectories due to different conceptions of the role of the state. For the coordinated market economies of Germany and Sweden, Gerhard Schnyder and Gregory Jackson demonstrate that both countries adopted neo-liberal ideas for reform, marrying them with long- standing national principles of labour–management coordination and state action, albeit in different ways. For the state-influenced market economies of Italy and France, Elisabetta Gualmini and Vivien Schmidt detail significant albeit differing resistances to neo-liberalism: Italy’s political elites often embraced the neo-liberal discourse but did little to put it into practice, whereas French elites generally resisted the discourse but attempted nonetheless to implement the ideas. In the final chapter of Part III, for the dependent market economies of Poland and Hungary, Mitchell Orenstein finds that although neo-liberal ideas were adopted everywhere in Cen- tral and Eastern Europe following the end of communism, countries followed significantly different trajectories: Poland accepted – or, indeed, welcomed – neo-liberal ideas, whereas Hungary – after initial acceptance – turned instead to far-right nationalist, statist, and protectionist ideas. Part IV, the Conclusion, examines the actual resilience of neo-liberal ideas using the five lines of analysis with illustrations from the previous chapters. It sets out the processes for neo-liberalism’s ideational resilience for each line of analysis. The first line of analysis suggests that the generality, diversity, and mutability of neo-liberal ideas tend to be ensured through processes of metamorphosis, absorption, and hybridization. The second line shows how the gap between neo-liberal rhetoric and the reality of lack of implementation can, paradoxically, reinforce neo-liberalism by facilitating the regular re-use of neo-liberal ideas, diverting attention from current problems, legitimating further neo-liberal initiatives, and altering the terms of the debate. The third line of analysis argues that neo-liberalism can prove stronger than its competitors due to its seeming coherence or ‘common sense’, its ability to frame the problems of the day, and its communicative power in debates and discussions. The fourth line underlines the ways in which neo-liberal ideas can be promoted by self-interested actors and coalitions of interests whose power is only further enhanced by their dominance. In the fifth and final line of analysis, neo-liberal ideas xx Preface gain in force from being institutionally embedded because this creates incentives for their maintenance and development, further empowers neo-liberal interests, and constrains the institutionalization of alternative ideas. The Conclusion ends by using the five lines of analysis to suggest possible pathways out of neo-liberalism’s ideational dominance. It discusses whether neo-liberalism may break down as a result of internal conflicts and contradictions; unsustainable gaps between rhetoric and reality; the rise of stronger alternatives and of new, powerful interests pressing for new ideas; or, finally, institutional breakdown and the appearance of new institutions. ∗∗∗ This book developed rapidly during 2011–2013, although it was preceded by two years’ worth of discussions with potential co-editors and participants. The book has very much been a group project in other ways as well. The book’s major focus on neo-liberal ideas was Mark’s suggestion and taken up enthusiastically by Vivien since her own work has long emphasized the importance of ideas and discourse in political science. The contributors were also central to the development of key themes in the book, as we together debated how to analyse and explain neo-liberal resilience. Discussants at the two workshops for the book in Boston and in Paris – as well as on panels at scholarly meetings at APSA 2010 and the Council of European Studies conferences in 2011 and 2012 – also played vital roles in assisting those involved to clarify our thoughts and arguments. The first workshop, held at Boston University’s Center for the Study of Europe, benefited from a grant from Boston University’s Human- ities Foundation. The second workshop, held at Sciences Po, Paris, was supported by a grant from the European Science Foundation. We sincerely thank both foundations for their generous support, along with those at both institutions who made the workshops a success. At Boston University, Elizabeth Amrien, Administrator of the Center for the Study of Europe, and graduate assistant Lauren Peyton were tremendously efficient and helpful, as were Renaud Dehousse, Direc- tor of the Center for European Studies, with Linda Amrani and Samia Saadi, at Sciences Po, Paris. We want to thank many people for contributing through their immensely helpful comments on drafts and participation in the workshops and conference panels. In particular, we thank Cornel Ban, Preface xxi

Mark Blyth, Olivier Butzbach, Martin Carstensen, Daniela Caruso, John Ciofﬁ, Pepper Culpepper, Richard Deeg, Ana Maria Evans, Orfeo Fioretos, Jeffry Frieden, Peter Gourevitch, Patrick Le Gales,` Alya Guseva, Peter Hall, Charlotte Halpern, Niamh Hardiman, Miriam Hartlapp, Tim Haughton, Silja Hausermann,¨ Anton Hemeri- jck, Jonathan Hopkin, Chris Howell, Daniel Kinderman, Lise Kjølsrød, Brigid Laffan, Jonah Levy, Susanne Lutz,¨ Daniel Mugge,¨ Bruno Palier, Pascal Petit, Alasdair Roberts, Martin Schroder,¨ Loukas Tsoukalis, Yves Surel, Graham Wilson, Daniel Wincott, and Cornelia Woll. We also thank Cornel Ban, Mark Blyth, Dorethee Bohle, Amandine Cre- spy, and Fritz Scharpf for kindly reading and commenting on parts of the manuscript. Naturally, we remain responsible for the views expressed in the book. Neo-liberal ideas are complex, but we found them fascinating and relevant for understanding current political debates. We treat them academically here, but we are conscious of the fact that they are also signiﬁcant for our understanding of politics and the decisions that policy makers take.

1 Theorizing ideational continuity: The resilience of neo-liberal ideas in Europe vivien a. schmidt and mark thatcher

. . . the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than commonly understood. Practical men, who believe themselves to be quite exempt from any intellectual inﬂuences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. John Maynard Keynes (1936, p. 383)

When Keynes wrote these lines, he certainly had in mind the influence of the ideas of laissez-faire economic liberalism, which he held responsible for the great boom and bust of the 1920s that led to the Great Depression of the 1930s. Today, another form of economic liberalism, neo-liberalism, has supplanted Keynes’s own ideas, which had gained dominance in the postwar era. Our task, in this theoretical essay, is to explain how and why the ideas of neo-liberal economists and political philosophers obtained and retained their power in Euro- pean policy debates and political discourse during the past three or four decades. We define ‘neo-liberalism’, at its essence, as involving a commitment to certain core principles focused on market competition and a limited state. Our purpose is to explain the resilience of these core neo-liberal ideas, meaning their ability to endure, recur, or adapt over time; to predominate against rivals; and to survive despite their own many failures. We offer five lines of analysis as potential explanations for such resilience: first, the generality, flexibility, and mutability of neo- liberal ideas themselves; second, the gap between neo-liberal rhetoric and a reality in which they are not implemented; third, their advantages in policy debates and political discourse compared with alternatives; fourth, the power of interested actors who strategically adopt and

1 2 Theorizing ideational continuity promote neo-liberal ideas; and, fifth, the force of the institutions in which neo-liberal ideas are embedded. Our focus is primarily on neo-liberal ideas – their intellectual origins, history, and current importance. We recognize that a wide range of other elements also falls under the rubric of neo-liberalism, including institutions, practices, and policies.1 However, this book is not about these elements or the impact of neo-liberal ideas on institutions, policies, and practices.2 Rather, it is about neo-liberalism as a set of ideas. Admittedly, neo-liberal ideas are difficult to pin down because neo- liberalism comes in many different forms, with differing assumptions that often appear contradictory. They are also politically contentious, being the subject of polemics in policy debates and political discourse. For this reason, many scholars have chosen to leave aside the study of neo-liberal ideas to focus on policies, politics, interests, and institutions. As a result, however, they give up without even first attempting to explain one of the main forces in Europe’s political economy. As for our own study of ideas, rather than returning in this essay to the long-standing scholarly debates that address whether and to what extent ideas matter, we take it as a given that they do and seek instead to develop theories about how to explain continuity through the concept of resilience. To do this effectively, we outline a framework for analysing neo-liberal ideas as objects of explanation. We consider different views of how to theorize about the role of neo-liberal ideas, from positivist to constructivist; what forms such ideas may take – whether philosophical, programmatic, or policy ideas – and how they may change over time; and who are the neo-liberal agents of continuity or change. This introductory chapter begins by defining ‘neo-liberalism’ (or ‘economic liberalism’, as it is also called) within the larger conceptual tradition of liberalism in order to explain what it is and is not for the purposes of this book. We follow this definition with a brief overview of the intellectual origins of the concept beginning in the 1930s and its subsequent transformations, in particular from the 1980s onwards. We then provide an analysis of the ideational roles, forms, and agents

1 See, for example, Larner 2000, Cerny 2008, Mudge 2008, and Evans and Sewell 2013. 2 For excellent recent studies of neo-liberal policies and their institutional impacts, see Crouch 2011, Streeck 2011, and Grant and Wilson 2012. Theorizing ideational continuity 3 of neo-liberalism. We conclude the chapter with a discussion of how such neo-liberal ideas can be shown to be resilient following the ﬁve lines of analysis.

Conceptualizing neo-liberalism There is no single definition of neo-liberalism beyond the agreement that it contains a commitment to core principles involving market competition and a limited state. Thereafter there exist important debates and differences in defining what neo-liberalism is and in describing its origins and development.3 Sometimes neo-liberalism is portrayed mainly as a political and economic philosophy defining a set of free-market–oriented economic principles and political economic practices promoted in its early years by a loose agglomeration of ‘true believers’.4 At other times, it is cast as an ideology through which the free-market discourse of the ‘converted’ (i.e., elites in academe, business, journalism, and politics) seeks to persuade the public of the virtues of unfettered markets guaranteeing individual freedom along with material prosperity.5 In yet other instances, it is presented as a particular approach to governance, in which neo-liberal principles and practices are deployed to liberalize, privatize, deregulate, and rationalize existing markets.6 However, neo-liberalism has also been portrayed as a political project promoted by social forces to restore capitalist class power via ideas on how to reorganize capital and the social order.7 The variety of treatments of neo-liberalism also links to debates about its historical context because it emerges from a broader liberal philosophical tradition with its own internal divisions on how to balance state and market, individual liberty and collective endeavour, and economy and society.8

3 See Peck and Tickell 2002; Harvey 2005; Mudge 2008; Brenner, Peck, and Theodore 2010; Cerny 2008; Peck 2010; Boas and Gans-Morse 2009; and Evans and Sewell 2013. 4 See, for example, Mirowski and Plehwe 2009 and Gamble 2009. 5 See, for example, Anderson 2000 and Freeden 2005; see also discussion in Ferrera in this volume. 6 For a discussion, see Steger and Roy 2010 and Peck 2010. 7 See Overbeek and Apeldoorn 2012: 4–5; Apeldoorn, Drahokoupil, and Horn 2008; Cafruny and Magnus 2003; and Jessop 2002. See also discussion in Schmidt and Woll in this volume. 8 See, for example, Audier 2012a; Nemo and Petitot 2006; Miroswki and Plehwe 2009; Harvey 2005; and Foucault 2004. 4 Theorizing ideational continuity

This debate resulted in neo-liberalism appearing as a somewhat amorphous body of thought with many different ideological strands, normative interpretations, and policy applications in different Euro- pean polities and in the EU. To provide greater clarity, we briefly outline our own core definition of neo-liberalism and then trace its intellectual history, seeking to take into account its many aspects while pointing to the more specific analyses developed in subsequent chapters of this book.

Towards a definition of neo-liberalism ‘Neo-liberalism’ here refers to a core set of ideas about markets and the state’s role in (or as part of) such markets. Neo-liberals believe that markets should be as ‘free’ as possible, meaning governed by competition and open across borders, while the state should have a limited political economic role in creating and preserving the institutional framework that secures property rights, guarantees competition, and promotes free trade. (We prefer the term ‘market competition’ to ‘free markets’ because the latter is both normatively loaded – who, after all, would be against more freedom? – and misleading because competition depends on the state playing a role.) Just how far market competition extends and just how limited the state should be depends on the strand of neo-liberalism involved. Laissez-faire neo-liberals tend to want a strong but highly limited state; anarcho-capitalists or ‘hyper neo-liberals’ want to dismantle the state as much as possible in order to leave almost everything to the market; and social-market neo-liberals – often called ordo-liberals, following the economic philosophy developed in Germany – embrace a more active state with greater social obligations.9 Our use of the term ‘neo-liberalism’ in this chapter is centred on the strand of economic liberalism as popularized by Margaret Thatcher and Ronald Reagan in the late 1970s and early 1980s, whose discourse promised the reduction of the state and declared their belief in the virtues of competition and ‘the free market’. We ignore the hyper neo-liberals, who rarely had significant political influence. We see ordo-liberalism, largely developed in Germany, as constituting a

9 See Gamble 2009: 70–84 and in this volume; see also Lehmbruch 1999. Theorizing ideational continuity 5 more conservative strand of neo-liberal economic philosophy.10 We include it and, indeed, since the Eurozone phase of the economic crisis, we find that elements of ordo-liberalism have proved highly resilient via the various EU pacts and treaty agreements that reinforce commitments to fiscal austerity.11 The watchwords for the new, or ‘neo’, liberalism beginning in the late 1970s and early 1980s – in Europe as in the rest of the world – have been liberalization, privatization, commodification, regulatory reforms, and delegation to non-majoritarian institutions such as ‘independent’ regulatory agencies and central banks, as well as individual responsibility, competition, and enterprise.12 Colin Hay offers a useful seven-point list of key elements that characterize contemporary neo-liberalism, as follows13: 1. A confidence in the market as an efficient mechanism for the allocation of scarce resources. 2. A belief in the desirability of a global trade regime for free trade and free capital mobility. 3. A belief in the desirability, all things being equal, of a limited and non-interventionist role for the state and of the state as a facilitator and custodian rather than a substitute for market mechanisms. 4. A rejection of Keynesian demand-management techniques in favour of monetarism, neo-monetarism, and supply-side economics.14 5. A commitment to the removal of those welfare benefits that might be seen to act as disincentives to market participation (in short, a subordination of the principles of social justice to those of perceived economic imperatives). 6. A defence of labour-market flexibility and the promotion and nurturing of cost competitiveness.

10 See, for example, Foucault 2004 and Ptak 2009 and the following discussion. 11 See Gamble, Jones, and Schmidt and Woll, all in this volume. 12 See Hermann 2007; Brenner, Peck, and Theodore 2010; Peck 2001; Cerny 2008; Thatcher and Stone Sweet 2002; and Coen and Thatcher 2005. 13 See Hay 2004. 14 Macroeconomic theory has been influenced by these neo-liberal approaches – which were part of the neoclassical economics offensive of the 1970s – as well as by the ‘new Keynesians’, who responded to such approaches in the 1980s. The synthesis has come to be known as the ‘new neo-classical synthesis’ or the ‘new consensus’ that defined macroeconomic orthodoxy until the economic crisis of the late 2000s. Our thanks go to Cornel Ban for this clarification. 6 Theorizing ideational continuity

7. A confidence in the use of private finance in public projects and, more generally, in the allocative efficiency of market and quasi- market mechanisms in the provision of public goods.

In summary, neo-liberalism today entails belief in competitive markets enhanced by global free trade and capital mobility, backed up by a pro-market, limited state that promotes labour-market flexibility and seeks to reduce welfare dependence while marketizing the provision of public goods. As such, neo-liberalism can be seen as representing a theory that combines both cognitive and normative ideas about a specific type of capitalist organization of the economy. At the same time, neo-liberalism is highly varied. It has been adopted, adapted, and applied in differing ways across domains from economic markets to welfare. Equally, national variants have been established across countries that range from traditionally ‘liberal’ economies such as in Britain to statist and corporatist economies, such as in France, Italy, Germany, and the Scandinavian nations, and at both national and EU levels. Definition of the term is made more difficult by the fact that few of those labelled as neo-liberals today actually apply the word to themselves.15 Indeed, the normative value attached to the terms ‘liberal’ and ‘neo-liberal’ vary greatly. Thus, in the United States, ‘liberal’ refers to centre-left politics, often neo-Keynesian, mildly redistributive, and socially tolerant, and is usually applied pejoratively by the Repub- lican right. In contrast, ‘economic liberal’ in Europe often refers to those on the Right who are opposed to state action and seek to institute the neo-liberalism discussed previously. Moreover, calling someone a ‘neo-liberal’ in the United Kingdom or even ‘liberal’ in Continental Europe is most often used as a label for unpopular views. Finally, in the political arena, economic liberalism can be attached to other philosophical ideas about how to steer the economy, administer the state, build community, and promote the welfare of society. These other ideas may encompass conservative principles, as in the case of Mar- garet Thatcher’s evocation of ‘Victorian values’16; or social-democratic principles, as when Scandinavians sought to ‘save the welfare state’ by

15 See Boas and Gans-Morse 2009: 156, and Peck 2010: 13–15. 16 See Martin and Ferrera, both in this volume. Theorizing ideational continuity 7 adding neo-liberal elements; or a ‘third way’ between the two, as in the case of the British Labour Party after the 1990s under Tony Blair.17 It is important to note in this context that neo-liberalism is not only a philosophy of political economy, it is also a philosophy of political democracy and the role of the state. It conceives of the polity as consisting of the individual ﬁrst and the community second, with legitimate state action extremely limited with regard to community-based demands on the individual. Because neo-liberalism places individual freedom ahead of everything else, it perceives state intervention as imposing collective judgements on individuals’ freedom to choose.18 Signiﬁcantly, neo-liberal theorizing often portrays the state as more legitimate when transformed into an arm’s-length arbitrator state as compared with the traditional political or administrative state, which it fears distorts markets by enabling certain interest groups to gain political advantage or administrative support through ‘capture’.

The intellectual origins and development of neo-liberalism Disentangling neo-liberalism analytically from other forms of liberalism requires careful analysis. In his chapter, Maurizio Ferrera notes that in Italian, the language itself provides clariﬁcation that does not exist in English. Liberalesimo refers to the centuries-old Lockean philosophical tradition focused on the constitutional protection of individual freedoms. Liberalismo covers a range of different ‘liberalisms’, including the economic, focused on private property and free markets; the political, concerned with rights and democracy; and the social, encompassing welfare rights and collective responsibilities. Finally, only liberismo concerns what we have named neo-liberalism, which perceives the free market as primary, resulting in its focus on free enterprise, free trade, and efﬁciency. Interwar Vienna of the 1920s witnessed the beginning of such neo- liberalism,19 with major development occurring during the 1930s and

17 See Schmidt 2000; see also Schmidt and Woll in this volume. 18 See, for example, the discussion in Harvey 2005; see also Gamble and Schmidt and Woll, both in this volume. 19 In the 1920s Vienna, Ludwig von Mises held seminars with regular attendees including Friedrich von Hayek and Fritz Machlup, along with foreign scholars such as Lionel Robbins of the United Kingdom and Frank Knight of the United States. Note that some date the Austrian School’s neo-liberalism to the 1880s, with Carl Menger. See Blyth 2013b. 8 Theorizing ideational continuity culminating in 1938 with the Colloque Lippmann, the Paris conference centred on Walter Lippmann that brought together a wide range of intellectual, political, and business leaders sympathetic to his thought.20 At this time, neo-liberalism was conceptualized mainly as a response to the failures of classical liberalism in confronting the challenges of the Great Depression as well as to the perceived dangers from socialist planning. It retained the classical liberal deﬁnitions of individuals as motivated by self-interest and of competition as the principle for market functioning. However, most neo-liberals rejected classical liberalism’s laissez-faire approach to market regulation,21 insisting instead on the need for a strong state able to establish general rules for markets. This was particularly well developed in the work of Friedrich von Hayek (1944), who rejected both laissez-faire and state planning for industry.22 Neo-liberalism also inverted classical liberalism’s basic tenet – that political liberty ensures free markets – and instead argued that economic freedom is essential for political freedom.23 This claim was the basis of Hayek’s (1944) Road to Serfdom, as well as the main theme of Milton Friedman’s (1962) Capitalism and Freedom.By

20 In the 1930s, in addition to the protagonists of the 1920s (see previous footnote), key figures included Edward Canaan and his disciples in the Economics Department at the London School of Economics, Louis Rougier in France, and the Geneva Institut Universitaire des Hautes Etudes Internationales headed by Willam E. Rappard and Paul Mantoux, which provided refuge for a wide range of intellectuals fleeing the Nazis and the war, including von Mises, the German Wilhelm Ropke,¨ and the Italian Luigi Einaudi in 1943. See Plehwe 2009 11–13. Their influence was even felt in Spain in the mid 1940s, when a prominent ordo-liberal (right-wing) economist, Heinrich von Stackelberg, became a visiting professor at the University of Madrid from 1943 until his death in 1946 and, as such, influenced a future generation of economists and policy makers; see Ban 2013. The ‘Colloque Lippmann’ gathered a wide range of neo-liberal luminaries such as Rougier, with attendees including von Mises, Hayek, and Ropke,¨ among others, along with Lippmann himself. See, for example, Denord 2007: 89–122, and Audier 2012. 21 Or, at least, their interpretation of classical liberalism as a laissez-faire approach to the markets. In fact, liberalism had developed in many directions, including ‘social liberalism’ and ‘new liberalism’ in the late nineteenth and early twentieth centuries. See Freeden 1978. 22 See Gamble 1996 and in this volume; and Wapshott 2012. See also Schmidt and Woll in this volume. 23 See Foucault 2004 and Tribe 2009; see also discussion in Schmidt and Woll in this volume. Theorizing ideational continuity 9 putting the economy before the polity, neo-liberals presented the markets as the neutral solution and the state as the politicized problem.24 This also enabled neo-liberalism’s founding theorists to eschew traditional social ethics and instead to view competition as the moral standard, with competitive markets serving to define merit as well as to justify inequalities of situation, whereas notions of collective responsibility beyond a basic minimum could be perceived as interfering with markets.25 The inception of a self-conscious intellectual (or ideological) neo- liberal movement is generally traced back to the postwar period when ideas of state intervention and centralized planning were widespread. An especially important organization was the Mont Pelerin` Soci- ety (founded in 1947), which held regular meetings of intellectuals, academics, business people, and political figures, particularly from Europe.26 The Mont Pelerin` Society brought together, at one time or another, the main figures of neo-liberalism, including not only the expected figures: Austrian thinkers such as Friedrich Hayek, located at the London School of Economics, and one of the initial organiz- ers of the group; US economists such as Milton Friedman, leader of the Chicago School of Economics, and James Buchanan, founder of the Virginia School of public-choice theory; as well as neo-classical economists. There were also German ‘ordo-liberal’ thinkers such as Alexander Rustow¨ and Wilhelm Ropke,¨ along with politicians such as Ludwig Erhard, the future Chancellor of Germany, and Alfred Armack-Muller,¨ architects of Germany’s social-market economy; Ital- ian thinker and future President Luigi Einaudi; and other well-known figures, such as Karl Popper and Arthur Seldon. Other think tanks promoting neo-liberal ideas were also established, in particular in the United Kingdom (e.g., the Institute of Economic Affairs) and the United States (e.g., the neo-conservative Heritage Foundation). The postwar neo-liberals opposed ‘socialism’ and ‘collectivism’ and were committed to developing an agenda that differentiated itself from classical liberalism.27 Beyond this, however, there were wide variations in the philosophy as well as in its applications. The previously mentioned books of the (later) ‘gurus’ of neo-liberalism, Hayek and

24 See discussions in Gamble and Schmidt and Woll, both in this volume. 25 See Amable 2011. See also Gamble and Schmidt and Woll, both in this volume. 26 See Plehwe 2009 and Harvey 2005: 20–22. 27 See Plehwe 2009: 5–6. 10 Theorizing ideational continuity

Friedman, were ideological tracts, not scholarly works.28 Moreover, after 1945, ideas of freer markets and limited states were outliers in the ‘embedded liberalism’, dominated by the rebuilding of war- torn economies through planning, the implementation of Keynesian demand management, and the creation of wider welfare states.29 Only in Germany did ordo-liberalism occupy a mainstream position in economic thinking; but, even there, by the late 1950s, it had been combined with other ideas to form the German model of the ‘social-market economy’.30 For most West European countries, neo-liberal ideas came to the fore only after the 1970s, with the perceived failure of neo-Keynesianism to solve the economic crises brought on by the end of the Bretton Woods system of exchange rates fixed to the dollar and by the two oil shocks of 1974 and 1979. Policy makers and parts of public opinion became concerned about governments’ failures to return their countries to economic prosperity and their inability to overcome ‘entrenched interests’ in order to reform effectively. Although the movement started in the 1970s, a major shift in the place of neo-liberal ideas began in the 1980s and onwards. The development of those ideas is a complex phenomenon with important differences by domain and country, as elaborated in the chapters in this volume. Here, whilst recognizing that there exist important variations, we outline a somewhat stylized overview of development, building on Ferrera’s suggestion of an ideational ‘parabola’ (in his case, welfare policy), which is also apparent in the succession of ideas about state reform presented by Schmidt and Woll. A first phase saw a more radical variety of neo-liberalism defined in both its pro-free market and anti-state positions than the ordo-liberalism in Germany in the 1950s. Its discourse centred on

28 So much so that one critic insisted when Hayek’s book was first published that it was ‘not scholarship. It is seeing hobgoblins under every bed’. Hansen 1945, cited in Peck 2010: xii. 29 John Ruggie (1982) used this term to describe postwar political economies that were liberal in their commitment to markets but ‘embedded’ within the broader values of a social community. 30 The concept of the social-market economy owes much to the theoretical work on ordo-liberalism and the ‘competitive market economy’ of Walter Eucken (1950), begun in the 1930s, in addition to those mentioned previously such as Erhard, Armack-Muller,¨ and Ropke.¨ See Lehmbruch 1999 and Ptak 2009; see also discussions by Gamble and Schmidt and Woll, both in this volume. Theorizing ideational continuity 11 dismantling ‘state intervention’ in markets, particularly with regard to macroeconomic management of the economy, nationalized industries, and industrial planning. Its central assumption was that the state’s main legitimate role was to enforce undistorted competition. It privileged markets over society, epitomized by Margaret Thatcher’s famous statement, ‘There is no such thing as society. There are individual men and women, and there are families’.31 This was linked to attacks on the state that had significant implications for the neo-liberal approach to questions of social justice and equality, as illustrated by another well- known Thatcher line about ‘the right to be unequal’.32 These ideas were strongest in ‘Anglo-Saxon’ countries and taken up by parties of the political right, notably in the United Kingdom and the United States by parts of the Republican Party under President Ronald Reagan. Pro- ponents were mainly inspired by Hayek and Friedman. In the face of the right’s frequent failures to fulfil their neo-liberal electoral promises to ‘roll back the state’ in terms of size and regulation, a second phase of neo-liberal renewal ensued, beginning in the mid to late 1990s, that propounded ideas about the state acting to make markets more open to competition. This, in turn, ensured that instead of producing the limited state idealized by some neo-liberal philosophers, a new synthesis emerged that Schmidt and Woll call ‘liberal neo-statism’. Whereas the ‘liberal’ and ‘neo’ in the term suggest that the state has been transformed in a neo-liberal direction, the ‘statism’ makes clear that the state’s intervention in the markets has increased. Such ideas were largely generated by centre-left parties but then taken up by others as well, and they gained ground in Continental European countries as well as the United Kingdom. In the current phase, faced with critiques and perceived failures linked to the economic crises in the 2000s and the many difficulties in implementing policies that draw on neo-liberal ideas, neo-liberalism has developed in a variety of ways, depending on domain and country. One route has been maintenance of the ‘original version’ of neo- liberalism centred on competitive markets, or the revised ‘second- phase’ version in which the state’s main function is to promote more competitive markets while avoiding or reducing collective provision

31 Interview, Women’s Own Magazine, 23 September 1987, published October 1987. 32 See discussion in Schmidt 2002: ch. 6. 12 Theorizing ideational continuity of other services, especially those involved in spending and redistribution. This second neo-liberal version of the role of the state is seen in what Mark Thatcher terms ‘supranational neo-liberalism’, in which EU regulation – whether of financial or product markets – is strong, extensive, and detailed in the way it acts to ensure competition.33 It also appears in debates on the European Central Bank (ECB) and the euro, which are dominated by ‘austerity’, notably with regard to lowering state deficits and debt – as it does across the EU member states but in particular in Britain and Ireland, in Southern Europe, and in Central and Eastern European countries.34 A second route has seen neo-liberal ideas being combined with rivals to create a synthesis. In the welfare arena, Ferrera makes clear in his chapter that (national) state reforms of the welfare state led to a new synthesis that he characterizes as ‘liberal neo-welfarism’ because neo- liberal ideas are joined with principles of social justice as the basis for welfare provision. Similarly, Gerhard Schnyder and Gregory Jackson find that Sweden and Denmark grafted neo-liberal ideas onto their social democratic systems, freeing up markets without giving up their basic values of equality and universalism. A third route is that neo-liberal labels have been avoided or omitted even as neo-liberal ideas have been accepted. Thus, in France, the term ‘neo-liberalism’ has been widely rejected even as neo-liberal ideas and principles remain strong.35 Given its many different interpretations over domain, time, and place, neo-liberalism is not easily summarized. Nevertheless, it retains a central core of ideas despite their many permutations. In what follows, we discuss how to analyse the nature, scope, and limits of neo-liberal ideas before offering explanations of their resilience.

The resilience of neo-liberal ideas – ideas as objects of explanation Ideas in themselves are worthy of explanation. Indeed, after being strongly focused on interests and institutions, political science is

33 See Thatcher and Mugge,¨ both in this volume. 34 See Jones; Hay and Smith; Gualmini and Schmidt; and Orenstein, all in this volume. 35 See Gualmini and Schmidt in this volume. Theorizing ideational continuity 13 witnessing an increasing interest in ‘ideas’.36 Similarly – although systematic analyses of European political economy have tended to focus on economic logics, institutional-path dependencies, and material interests – significant studies are emerging that incorporate ideas.37 Nevertheless, much of the debate about ‘ideas’ in policy making and in European political economy has centred on whether and how they influence policy initiatives, policy outcomes, and institutional development.38 In this book, our purpose is different – it is to study neo-liberal ideas as part of the policy and political process, especially why they are developed, adopted, spread, and maintained. Thus, we are concerned with both the substantive content of ideas and their role in policy debates and political discourse. Here, we begin by discussing and defining the meaning of ideational resilience. Thereafter, we discuss the different forms and levels of neo-liberal ideas. We then conclude this part with the interactions of the actors who serve as the generators, carriers, and communicators of such ideas, whether as individuals or as ‘discursive’ communities. Lines of explanation for the resilience of neo-liberal ideas are developed later in the chapter.

The resilience of neo-liberal ideas The key theme of this book is that neo-liberal ideas have proven to be remarkably resilient. They have continued and, indeed, flourished despite the major challenges that Europe faced in the 2000s. Even after the crisis of 2007–2008, neo-liberal ideas have come back with a vengeance within a very short period. Problems of low growth, banking crises, excessive ‘financialization’, private-sector debt, pressures on public spending, and tax evasion have been reframed as profligate governments needing to radically cut their deficits and debt, institute ‘structural reforms’ to radically modify the welfare state, and extend the ‘rigour’ of competitive markets. Our central question is how and

36 For recent reviews, see, for example, Beland´ and Cox 2011; Schmidt 2008, 2010; Campbell 2004; and Blyth 1997. 37 See, for example, Blyth 1997, 2002; Berman 1998; Campbell 1998; Hall 1989; McNamara 1998; Hay 2001; Schmidt 2000, 2002, 2009; Abdelal et al. 2010; Cafruny and Ryner 2003; Overbeek and Apeldoorn 2012; Rodrik 2011; Rothstein 2005; Rosamond 2012; and Woll 2008. 38 For classic general texts, see, for example, Heclo 1974; Goldstein and Keohane 1993 and Baumgartner and Jones 1993. 14 Theorizing ideational continuity why neo-liberal ideas have remained so strong. The puzzle, as Alex Callinicos states, is why ‘the illusions have survived the bonfire’ and why the crisis has not ensured – as Joseph Stiglitz had hoped – ‘that the fall of Wall Street is for market fundamentalism what the fall of the Berlin Wall was for communism’.39 The ability of neo-liberal ideas to continue, if not flourish, in the face of internal weaknesses and external challenges is well expressed through the concept of ‘resilience’. The term has been used increasingly across many disciplines as well as in public discourse. Originally, it was used mostly in the natural sciences, where its central meaning concerned the ability of materials to recover their original shape after a shock rather than breaking; thus, rubber is more resilient than mar- ble, which is harder but is damaged by external shocks. The term is now being applied in the social sciences, in domains such as social and ecological ‘systems’, infrastructure networks, communities facing health care and other difficulties, national security, and psychology.40 Policy makers are also increasingly utilizing the term, often to refer to coping with ‘external threats’ such as terrorism and climatic disasters. We use the concept of resilience because it conveys key features about neo-liberalism in recent decades: its adaptation to new circumstances so that it ‘bounces back’, its capacity to respond to challenges, and its ability to change while maintaining key elements so that the result is continuity in the set of ideas as a whole.41 At the same time, we recognize that adopting a concept originating in the natural sciences, in the social sciences, and especially in public policy runs a number of risks, such as treating resilience as a fixed attribute,

39 See Callinicos 2010: x, and Stiglitz 2008. 40 For a good overview and critiques of use of the term in social sciences, see MacKinnon and Driscoll Derickson 2012, Norris et al. 2008, and Walker and Cooper 2011; for social resilience, understood as the ability of members of a group to respond to challenges (e.g., those arising from neo-liberalism), see Hall and Lamont 2013. Within the vast literature in psychology, see, for example, Werner and Smith 1992, 2001; for a review, see Masten, Best, and Garmezy 1990; or, for a more popular version, see Cyrulnik 2003. In network regulation, resilience refers to the spare capacity that allows continuation even if some parts of the system are weakened or stop functioning. 41 In addition, it is noteworthy that Hayek in his later writings uses the concept of resilience as part of arguments about limits of knowledge regarding how systems respond to shocks and critiques of assumptions of returns to equilibrium; see Walker and Cooper 2011. Theorizing ideational continuity 15 importing the hidden assumption of a previous equilibrium, a normative bias towards the preservation of pre-existing states, and treating pressures for change as unwelcome ‘external threats’. Most important, resilience may depoliticize processes whereby social phenomena are maintained. To avoid the pitfalls and hidden assumptions in its many different disciplinary applications, we begin by defining the concept as it is reflected in ordinary language usage, in terms of the synonyms found in the dictionary, including flexibility, elasticity, plasticity, adaptability, and suppleness. We also note that the central definition in social science is a ‘capacity for successful adaptation in the face of disturbance, stress, or adversity’.42 When applied to neo-liberalism, however, we go beyond the identification of these qualities of resilience to place it explicitly in time, as a process that has taken place over several decades, with important variations in time, place, and domain. Equally, we identify key actors involved in creating such resilience to discuss their interests, views, and interactions, as well as the wider institutional framework within which they operate. We also discuss both internal and external pressures on neo-liberalism and give special attention to the processes or mechanisms that promote resilience, as well as the feedback effects that serve neo-liberalism through supportive and reinforcing processes. Finally, we do not view challenges to neo-liberal ideas as a threat to some form of equilibrium. Rather, we perceive such ideas and their resilience as part of political processes involving different aspects of power, such as actor interests and institutions. Our usage of ‘resilience’ refers to ideational resilience in policy debates and political discourse. To be more specific, we use the concept of resilience to refer to neo-liberal ideas continuing to be the ‘preferred’ or assumed ideational approach in public discussions – that is, considered the ‘usual’, ‘standard’, or ‘conventional’ analytic framework, the basic set of values or guiding principles, the main policy programme, or the overarching discourse. Building on analyses of usage in the social sciences,43 we specify three features of ideational resilience: (1) the continuity of neo-liberal ideas over time, including their endurance, recurrence, and adaptability; (2) the dominance of these ideas against alternatives and competitors; and (3) their survival not only in the face

42 See Norris et al. 2008: 129. 43 See Norris et al. 2008 and Walker and Cooper 2011. 16 Theorizing ideational continuity of strong challenges but also despite their own failures. It is particularly important to note that resilience incorporates the idea that neo-liberal ideas face alternatives and are contested and that neo-liberalism involves adaptation and extension to new spheres.

Neo-liberal resilience as continuity Continuity can be seen in the endurance or recurrence of core neo- liberal themes over decades and in their adaptability, as they meet changing conditions and circumstances. Forms of continuity include not just straightforward stability but also recurrence when new versions of old ideas are reintroduced in new times and places. The processes that contribute to the continuity of neo-liberal ideas (running in parallel or inspired by work on institutions) include ‘bricolage’,44 ‘conversion’,45 diffusion, and translation.46 When applied to ideational continuity, bricolage involves new elements being grafted onto older ideas. One major instance is the equation of the state’s finances to those of households and the conviction that the state should avoid long-term budget deficits and hold down public debt, if necessary, by engaging in austerity, even in times of low growth.47 Conversion sees old ideas being used in new ways. It helps to describe, for example, the shift in this recurring theme from the 1920s, when reduction of state spending was framed as protecting money as a ‘store of value’, to when it returned as ‘austerity’ to prevent inflation and arguments about ‘no bailouts’ and sustainable debt in the Eurozone.48 Diffusion involves the spread of neo-liberal ideas, whereas translation means the adaptation of such ideas to new contexts. Both lead to the integration into local philosophies of neo-liberal principles developed elsewhere. One example of diffusion and translation is the movement of neo-liberal ideas from countries that fully embraced neo- liberalism to those that did so only partially. Thus, in Germany and Sweden, even though neo-liberalism conflicted with traditional social- democratic and corporatist ideas, some key neo-liberal principles (e.g., use of markets to allocate resources or competition) were adopted from elsewhere, translated into more nationally relevant terms, and

44 See Swidler 1986; Campbell 2004: 69–74; and Carstensen 2012. 45 See Streeck and Thelen 2005. 46 See Campbell 2004: 77–85. 47 See Gamble in this volume. 48 See Jones in this volume. Theorizing ideational continuity 17 then integrated with these traditional ideas. The results were a recasting or renewal of social-democratic ideas with new neo-liberal elements, making for hybrids of ‘corporatist-managed liberalization’ in which ‘social partners’ are important participants with management in ensuring ﬁrms’ international competitiveness.49

Neo-liberal resilience as dominance The second element of neo-liberal ideational resilience is dominance in debates such that it tends to crowd out other ideas, both in existing domains in which it predominates and in new domains. Such dominance, first and foremost, takes the form of ‘hegemony’, in which certain core beliefs structure debates in the policy and/or the political spheres – whether we use the language of Gramsci or of paradigms to elucidate this.50 One such hegemonic or paradigmatic belief is the beneficial nature of competition – observed in fields as diverse as regulation of commercial markets, banking, and welfare provision – with the concomitant need to reduce ‘barriers’ to competition in all domains while disregarding any damaging effects.51 Another such belief is that the state is inherently less efficient than the private sector and that, although necessary for markets, it is always prone to failure and unjus- tified expansion.52 A second form of dominance is neo-liberalism’s powerful capacity to disseminate its principles widely to new domains or places. Thus, for instance, at the EU level, neo-liberal ideas of the value of competition have grown from a primary focus on economic markets to areas that were traditionally the preserve of state monopolies designed to provide ‘public services’, such as telecommunications, energy, postal services, and railways.53 Similarly, neo-liberal arguments about the dangers of state intervention that were originally focused mainly on state planning and industrial policy have extended into areas such as regulating financial markets.54

49 See Schnyder and Jackson in this volume. 50 On hegemony, see the many works that build on Gramsci, including Laclau and Mouffe 1985; Overbeek and Apeldoorn 2012: 4–5; and Apeldoorn, Drahokoupil, and Horn 2008. 51 See Ferrera, Mugge,¨ and Thatcher, all in this volume. 52 See Schmidt and Woll, Vitols, and Hay and Smith, all in this volume. 53 See Thatcher 2007 and in this volume. 54 See Mugge¨ in this volume. 18 Theorizing ideational continuity

Ideational dominance also involves the exclusion of alternative ideas as illegitimate, whether on normative grounds regarding their inappro- priateness or on cognitive grounds because of their lack of ‘practicability’. For example, in corporate governance, ideas of ‘shareholder value’ that originally sat alongside other principles such as stakeholder value gradually came to dominate thinking at the EU level, as the latter came to be increasingly portrayed as impracticable.55 Exclusion of alternative ideas, even if regularly used in the past, has been even more marked in monetary policy, from monetary financing of state budget deficits to takeover of failing banks or providing deposit guarantees. Such exclusions have been justified by invoking supposed legal constraints or shared ideational frameworks, which Jones (in this volume) labels the Brussels–Frankfurt consensus.

Neo-liberal resilience as survival ‘Resilience’ does not mean that neo-liberal ideas remain uncontested. On the contrary, the term also signiﬁes the capacity to fend off actual or potential ideational competitors, even when they appear equally if not more successful in practice. One such alternative was represented by the postwar period of Christian and Social Democracy, which offered the ‘glorious thirty years’ of industrial development and the ‘golden years’ of the welfare state, in which European economies guided by ideas of cooperation, corporatism, and/or statism operated successfully within an overall international regime of ‘embedded liberalism’.56 In the ‘battle of ideas’, neo-liberalism also faced alternative paradigms and frameworks that traditionally have been powerful in Europe – notably Marxism and Socialism as well as Christian and Social Democracy.57 Neo-liberalism has additionally been confronted with strong resistance in particular countries, whether those marked by statist traditions such as France, which resisted neo-liberal rhetoric,58 or corporatist or ‘coordinated market economies’, which provided a different view of how markets could be structured and operated.59 Although these alternatives also may have been weakened in the

55 See Vitols in this volume. 56 See Ruggie 1982, Shonﬁeld 1965, and Katzenstein 1978. 57 Cf. Helleiner 2003 and Blyth 2002. 58 See Gualmini and Schmidt in this volume; see also Schmidt 2002, 2009, and Fioretos 2011. 59 See Lehmbruch and Schmitter 1982 and Hall and Soskice 2001. Theorizing ideational continuity 19

1980s and 1990s, they have remained.60 In the 2000s, moreover, policy makers, academics, and commentators sometimes drew on these diverse approaches to attack neo-liberalism, in particular using the example of the economic successes of countries farthest away from neo-liberalism – not only the Nordic countries with their continuing social-democratic traditions but also Germany, whose coordinated market economy suffered less from the housing boom and subsequent bust and which recovered much more strongly than, for instance, the more neo-liberal United Kingdom. Yet, despite the challenges, neo-liberalism has not simply survived, it has also renewed its ideas on a continual basis so as to become and remain dominant. That dominance has ensured that it has come to deﬁne the terms of discussion and contestation. Such resilience can be seen as all the more remarkable given the challenges resulting from neo-liberalism’s own apparent failures. European countries that since the 1980s drew on neo-liberal ideas for policy reforms – such as public-spending constraints, privatization, liberalization of markets; and regulatory, labour, and welfare reforms – have (in diverse measure) suffered from economic problems: high unemployment, low or at least uneven growth, increasing inequalities, and rising poverty. They have also experienced major market booms and busts on a regular basis. The most recent crisis alone would have been expected to call neo-liberal ideas into serious question. The experiences since the 1980s make the period of Social and Christian Democrat, corporatist, and socialist idea(l)s of the 1950s and 1960s appear as a lost halcyon period compared with the period since the 1980s. Even the much-maligned 1970s are attractive for many in terms of economic prosperity. Yet, despite a brief moment of apparent retreat in 2008– 2009, neo-liberal ideas have not succumbed or been replaced with alternatives.

Forms and levels of neo-liberal ideas Analysis of neo-liberalism’s ideational resilience can also beneﬁt from a consideration of the variety of forms at different levels of generality in which neo-liberal ideas are cast. They may appear as ideologies or as frames of reference that set an all-encompassing perspective, narratives about why new policies are necessary and appropriate, problem

60 Cf. Hancke,´ Rhodes, and Thatcher 2007. 20 Theorizing ideational continuity definitions that frame issues and create shared meaning, or as strategic weapons in the battle for control. They may also be institutionalized through formal powers, norms, and objectives of organizations, as the informal rules and everyday practices of ordinary people; or they may be embedded in the political and moral vocabulary used in the discussion of market and state problems. The multiple forms of neo-liberalism make the concept difficult to capture fully. This may well be an inherent part of its nature and an explanation for its resilience, which we explore under the five lines of analysis discussed herein. For now, we seek to create a minimum degree of order by drawing on the literature about typologies of ideas. This offers many categorizations, but a key common element is that ideas arise at different levels of generality. We distinguish three: philosophical principles or worldviews, programmatic ideas, and specific policy ideas and proposals. This may be important both for understanding neo-liberalism and for explaining its resilience because different levels of generality can experience diverse potential trajectories of persistence or change. At their most general level, neo-liberal ideas constitute philosophical principles that may be embodied in worldviews, ideologies, normative values, or discourses about how markets and states work and what is therefore appropriate political economic action in the world. These may be seen as a set of philosophical ideas or ‘discourse’ united by a core set of values focused on individualism, free markets, and a strong but limited state; or the worldview of the followers of Friedrich Hayek, as Gamble elaborates in his chapter; or as an ideology that combines philosophy with a political programme, as Ferrera argues in his chapter. These types of philosophical ideas are often at such a deep level that they can become taken-for-granted ideas that are not even questioned. This is how Foucault’s (2004) exploration of the overarching ordo-liberal discourse of the state can prove useful for understanding how such a philosophy could be the unquestioned and almost unquestionable approach to economic policy in Germany from the 1950s onwards.61 At an intermediate level, we find programmatic ideas represented by neo-liberal problem definitions or analytical frameworks that define

61 See Foucault 2004. Theorizing ideational continuity 21 what types of actions states and markets can or should undertake. Such programmatic ideas can be highly influential in limiting policy debates and alternatives because they tend to set the definitions, goals, objectives, and instruments for economic growth, as Hay and Smith outlined for the Anglo-liberal growth model and as Thatcher has done for the ‘regulatory model’ of the EU Commission. Finally, at the most immediate level, we find the policy ideas contained in the neo-liberal policy proposals, aims, and political discourse applied to particular situations. These may be highly specific and limited, concerning individual policies or even policy instruments. They may be grafted onto different types of policy programmes, regardless of their underlying philosophy. One illustration of this is what happened during the Eurozone crisis, in which new policy ideas in response to the crisis often violated the policy programme and even the underlying philosophy of the Brussels–Frankfurt consensus, as Jones notes in his chapter. Many theories suggest that philosophical ideas generally persist over long periods. Programmatic ideas tend not to have as much staying power but are more lasting than policy ideas – which are open to more rapid shifts because they may be compatible with many different wider programmes and philosophies. Thereafter, the speed and nature of ideational change are a matter for debate. One view is that change in paradigms is rare but, when it occurs, it happens comprehensively at moments of crisis with systemic ideational shifts, as in Kuhn’s view of change from one incommensurable paradigm to another.62 Another view is that change in paradigms or programmes is rare but, when it occurs, it happens slowly in a dialectical process of market ‘movement’ and social ‘counter-movement’,63 producing what Blyth called a moment of ‘Great Transformation’.64 A third view is that change is gradual and evolutionary, the result of incremental processes and discursive struggles among elites. Our expectation is that a close fit among rates of change across the three levels of ideas should not be assumed given the multiple forms and levels of neo-liberal ideas. Indeed, our chapters sometimes indicate significant contrasts in the resilience of neo-liberalism across the three levels. Thus, for instance, policy programmes can change even

62 See Kuhn 1970. 63 See Polanyi 1945. 64 See Blyth 2002: 34–44. 22 Theorizing ideational continuity as the underlying philosophy remains the same, as in the progression from the conservatives’ 1980s neo-liberal programme of state roll- back to the Social Democrats’ 1990s neo-liberal programme of state roll-out, as discussed by Schmidt and Woll in their chapter. Equally, whatever their philosophical or programmatic ideas, policy makers have sometimes adopted rather different specific policy ideas, such as those concerning ‘unorthodox’ monetary instruments by the ECB after the 2010 state-debt crisis. Conversely, philosophical ideas can return again and again, albeit pursued through new instruments and in different guises or disguises. One example is the idea of ‘sound finances’, or the metaphor in which state finances are treated as the same as those of private households, as Gamble discusses in his chapter. Thus, changes at one level of neo-liberal ideas can be compatible or even aid resilience at another.

Agents of neo-liberalism Understanding the resilience of neo-liberal ideas also involves iden- tifying the ideational agents – the actors who not only implement these ideas but also construct and reconstruct them. The relationship between agents and ideas is closely linked to wider debates between positivists and constructivists about the role of ideas.65 At the positivist end of the continuum, neo-liberal ideas may be cast primarily as legitimating devices for interests, with analysis focused on how and why actors are able to apply neo-liberal ideas in pursuit of their goals. At the constructivist end of the continuum, neo-liberal ideas have central roles in policy making, including strategic ideas that serve as guiding frameworks, as ‘paradigms’ that set the frame for understanding, or as ‘weapons’ in the battle of ideas. Whereas positivists examine actors’ strategic use of ideas, constructivists perceive ideas as constitutive, shaping agents’ deﬁnitions of their interests. We do not take a stand in the positivist–constructivist debate. One reason is that contributors offer evidence that draws on both views of ideas and the supposed conﬂict between the two extremes is rarely seen empirically. Neo-liberal ideas can serve the (perceived) interests of major actors such as the European Commission, political and

65 For different views see for example Goldstein and Keohane 1993; Jobert 1989; Onuf 1989; Hall 1993; Wendt 1999; Blyth 2002; Schmidt 2002, 2008; Abdelal, Blyth, and Parsons 2010. Theorizing ideational continuity 23 economic leaders, and financial firms and regulators.66 They can shape actors’ problem definitions and views of what are ‘acceptable’ solutions.67 Moreover, they can frame the understandings of political leaders at both national and EU levels, as ideas about the virtues of competition, reduced state spending or the lack of alternative policies become articles of faith unquestioned even in the midst of crisis.68 Regardless of positions taken in the positivist–constructivist debate, our contributors’ analyses of neo-liberalism all serve to identify the agents of resilience, who spread, develop, and sustain neo-liberal ideas through interactive processes of communication.69 Such agents can be considered ‘ideational entrepreneurs’, whether the ‘policy entrepreneurs’ or ‘mediators’ of the comparative policy and political economy literature70 or the ‘norm entrepreneurs’ of international relations.71 Although they are mostly depicted as elites making top- down policy, such entrepreneurs can also be cast as activists in social movements with bottom-up policy effects.72 Among elite ideational entrepreneurs, we can identify three general types – ideological, pragmatic, and opportunistic – classifiable according to how, why, and to what extent they took up and/or stayed with neo-liberal ideas.73 Each played a part in the rise of neo-liberalism. Ideological entrepreneurs can be seen as prime movers for neo-liberal reform, offering a set of overarching philosophical ideas that inform their policy programmes and ideas. These can be political leaders but also intellectuals, such as the economists, philosophers, and histori- ans who developed the ideas for neo-liberalism in the 1930s and

66 See Thatcher, Mugge,¨ Vitols, and Orenstein, in this volume. 67 See Jones and Mugge,¨ this volume. 68 See Thatcher, Gamble, and Schmidt and Woll, in this volume; see also Bermeo and Pontusson 2012. 69 See, for example, Habermas 1996; Sabatier and Jenkins-Smith 1993; Haas 1992; Schmidt 2000, 2002, 2008; and Campbell 2004. 70 See, for example, Fligstein and Mara-Drita 1996; Jobert 1989; and Muller 1995. 71 See, for example, Finnimore and Sikkink 1998. 72 See Keck and Sikkink 1998 and Epstein 2008. See also discussion in Schmidt 2008. 73 Mahoney and Thelen 2009 use a similar set of actor categories but define them in terms of what they have accomplished, as befits historical institutionalist explanation. This categorization differs somewhat because these actors are defined by their beliefs in the ideas they promote and their discourse about them, whether or not they later may compromise those ideas in action. 24 Theorizing ideational continuity then in the 1950s. They have also been technocratic elites, such as unelected officials in central banks or regulatory organizations such as the ECB or the Commission.74 Pragmatic actors, in contrast, tend to be ‘bricoleurs’, cobbling ideas together, without a doctrinaire commitment to an underlying philosophy.75 Thus, with regard to neo- liberalism, examples include leaders of the centre-left in the late 1990s, such as Blair and Schroder,¨ who often sought to merge neo-liberal ideas with social-democratic ideas. Finally, opportunistic ideational entrepreneurs such as Berlusconi or Sarkozy have used neo-liberal ideas (often temporarily) with little commitment but solely to gain political power.76 Neo-liberal ideas have also been developed and spread by agents outside the direct policy sphere. Such agents may be organized in ‘epistemic communities’77 or ‘discourse coalitions’78 of loosely connected, like-minded converts who operate in academe, think tanks, and professional networks, disseminating their ideas without necessarily having a direct or immediate impact on the policy-making process. Certainly, this describes the intellectual leaders of the neo-liberal movement who operated initially through the Mont Pelerin` Society’s ‘thought collective’ of like-minded individuals and who – even if they disagreed on specific questions – shared enough in terms of values and principled beliefs to jointly develop and widely disseminate the results of their neo-liberal thinking.79 However, these individuals may also be part of ‘advocacy coalitions’80 in their own countries, as members of think tanks, as public intellectuals, and as academics they can join with policy makers or themselves become government officials and even leaders, as in the cases of Ludwig Erhard and Luigi Einaudi.81 Economists and other types of experts have been at the forefront of the generation and promulgation of neo-liberal ideas, in particular

74 Cf. Mugge¨ 2011. 75 See Carstensen 2011; cf. also Mugge¨ 2011. For the sociological foundations of the term bricolage, see Swidler 1986; Campbell 2004; and Fourcade and Savelsberg 2006. 76 See Gualmini and Schmidt in this volume. 77 See Haas 1992. 78 See Wittrock, Wagner, and Wollman 1991; and Hajer 1993. 79 See Fleck 1980 and Plehwe 2009: 35; see also Plehwe, Walpen, and Neunhoffer¨ 2006. 80 See Sabatier and Jenkins-Smith 1993. 81 See Blyth 2013. Theorizing ideational continuity 25 through ‘knowledge regimes’ in different national contexts.82 They are important not only in generating neo-liberal ideas and in advising governments – as in the role of neo-liberal economists in recommending the mass privatization programmes in Central and Eastern Europe83 – but also in implementing those ideas as heads of major national institutions (e.g., national central banks and finance ministries) or of supranational ones (e.g., the ECB, the EU Commission, and the Inter- national Monetary Fund [IMF]). Additionally, they are instrumental in training new generations of economists who then put their ideas into practice once they gain positions of power and authority.84 Scholars have also shown that economists embed neo-liberal presuppositions in the very instruments and analytic tools that have increasingly come to be accepted not only by the players in the markets – whose financial models reshape rather than simply reflect the markets – but equally by the administrators of the state.85 Indeed, in economic sociology, Jens Beckert’s (2011) has developed the concept of ‘fictionality’ which suggests instead of being economically ‘rational’, economists and market actors elaborate ‘imagined futures’ about what might happen and then organize their activities based on such ‘mental representations’. Here, through their effects on actors’ expectations, neo-liberal ideas contribute to the constitution of markets.

Explaining resilience: Five lines of analysis So how do we explain this resilience of neo-liberal ideas? We offer five possible lines of analysis, linked to wider theories about political economy and ideas. The first line of explanation is about the core principles and values of neo-liberal ideas, which provide it with a high degree of malleability or plasticity. As a result, when neo-liberal ideas are faced with internal and external difficulties, they can readily adapt and reshape themselves via processes of metamorphosis, absorption, or hybridization. The second concerns gaps between neo-liberal rhetoric and the realities of its policies in practice. Paradoxically, such gaps

82 See, for example, Fourcade-Gourinchas and Babb 2002; and Campbell and Pedersen 2010. 83 See Orenstein in this volume. 84 See, for example, Fourcade 2009; Mandelkern and Shalev 2010; and Ban 2012. 85 See Mackenzie 2006 and Mackenzie et al. 2007. 26 Theorizing ideational continuity can actually be helpful to neo-liberal ideational entrepreneurs, allowing ideologues to continue to promote it as a set of principles and values even (or perhaps especially) if its detailed policy programme has been subject to compromise by the pragmatists or abandoned by opportunists because of problems with the policies. A third line of explanation focuses on discourse. This suggests that in the communication of the ideas, neo-liberal ideas can prove stronger in policy debates than rivals, whether as a result of the seeming coherence of the ideas, how they are framed, or how they are communicated. The first three lines of analysis thus concern the nature of neo- liberalism itself as a set of ideas; the final two concern the wider context within which such ideas are set. The fourth line of explanation is about the power of interests – in the sense of self-interested agents who gain from neo-liberal ideas. The fifth line of analysis concerns the force of institutions, examining how institutional frameworks aid and support neo-liberalism while hindering alternative ideas in ways explicable by reference to different neo-institutionalisms. In this section, we discuss the nature of the explanation offered by each line of analysis and then its possible mechanisms and processes. The concluding chapter examines how these five explanations have played out in practice, with examples from the different empirical chapters. We see the five lines as distinct but complementary lines of inquiry. It is crucial to emphasize that we do not seek to explain whether and why policies are neo-liberal in their impact. Rather, we confine our task to exploring the resilience of neo-liberal political economic ideas as ideas – in their different forms and at their different levels, from general worldviews and values to paradigms, to specific policy proposals as they change or continue over time. In so doing, we also include the conflicts or contradictions in ideational processes both internal and external to neo-liberalism because, as discussed previously, we do not see it a single, coherent set of ideas. Indeed, we find that, apparent weaknesses or imbalances are often turned to neo-liberalism’s advantage.

Neo-liberalism’s ideational generality, diversity, and mutability Neo-liberal ideas are often highly general and amorphous. They appear to contain conflicting or even contradictory concepts that shift over time, policy domains, or context. Thus, neo-liberal positions over the Theorizing ideational continuity 27 state, regulation, welfare, or active labour-market policies have evolved from seeking state ‘retreat’ to advocating new forms of state action to aid or enhance markets. Moreover, many of neo-liberalism’s central ideas, especially at the level of specific policy proposals, have suffered drubbings when subjected to rigorous scrutiny and investigated in detail – from workfare policies to the drive for ‘competitiveness’ in healthcare systems, or from introducing competition in network industries such as rail transportation to ‘light-touch’ regulation in the finance markets.86 Few policy makers accept the appellation because it often has negative connotations, especially in Europe. Indeed, for some, ‘the neo-liberal label has become part of political rhetoric, albeit as an almost meaningless insult’.87 Although such criticisms of neo-liberalism as an analytical concept may be valid, they miss a key point: as a political attribute, generality, diversity, and mutability are some of neo-liberalism’s strongest suits. Neo-liberalism can be viewed as a core set of first principles rather than as a specific and falsifiable set of positive theories or doctrines or proposals. The resilience of neo-liberalism benefits from its core principles over time as well as in their openness to diverse interpretation and application.88 The very generality and plasticity of neo-liberalism, which make the concept seemingly amorphous and difficult to define precisely, are key reasons for its resilience. This explanation suggests that the high level of generality of neo- liberalism’s first principles focused on competitive markets and a limited state, combined with their great malleability, enable it to undergo many different permutations, not only to survive but also to dominate. This includes progressing from hostility against the state to the desire for a strong state, from highly permissive neo-liberal ‘deregulation’ to ‘ordo-liberal’ restrictive re-regulation, from passive reduction of social spending and job protections to active use of welfare to promote market efficiency via ‘active labour-market policy’. Equally, the avoidance of the neo-liberal appellation increases the difficulty for its opponents to identify their object of attack, while permitting the adoption (in many diverse forms and to different extents) of its ideas by a varied range of political actors – from Berlusconi to Blair, from British

86 For academic critiques across several economic domains, see, for example, Crouch 2011 and Harvey 2005. 87 See Hartwich 2009. 88 See Brenner, Peck, and Theodore 2010. 28 Theorizing ideational continuity

Conservatives to Scandinavian Social Democrats, from campaigners against state ‘interference’ to national and European officials and regulators. Far from being a weakness, internal theoretical contradictions and external political conflicts may fuel the growth of neo-liberalism. They produce a highly adaptable set of ideas, able to survive hostile climates and external challenges. We could even say that they offer a large menu of choices of ideas and proposals according to tastes. Neo-liberalism’s generality and breadth may contribute to its resilience through several mechanisms and processes. One mechanism is metamorphosis. Constantly shifting policy ideas not only allow neo-liberalism to grow, develop, and spread but also permit its rela- belling so that past ideas return in new (dis)guises. Metamorphosis permits the proponents of neo-liberal ideas to evade paying the price of past scrutiny, as ideas that were discredited in previous periods recur, returning in new guises. Examples abound, such as the 1920s discourse of ‘sound money’ reappearing in the 1970s as monetarism and in the late 2000s as ‘sustainable debt’. As such, neo-liberalism can be likened to the hydra with many heads of Greek mythology: cut off one head and two pop back up. Absorption is a second mechanism. As tensions and even contradictions multiply among neo-liberalism’s different philosophical principles and theories or among its principles and more specific policy programmes and ideas, so its loose and flexible framework may develop by absorbing other ideas, changing labels, and extending its scope. The reform of the welfare system is a case in point, when different social democratic elements were incorporated in neo-liberal initiatives, particularly beginning in the 1990s. A third mechanism is hybridization. In this case, instead of ‘a fight to the finish’ with apparent ideational competitors, neo-liberal principles are often ‘married’ to them to produce new versions and hybrids of neo-liberalism. This was mostly the case for countries with strong corporatist labour–management relations. All three mechanisms attest to the mutability of neo-liberal ideas as they undergo metamorphoses, absorb other ideas, or combine with yet others. The nature of neo-liberalism as an overall orientation suggests that high generality, lack of internal coherence, and conceptual ‘fuzzi- ness’ may be advantageous for ideational resilience. However, the Theorizing ideational continuity 29 explanation also requires identification of political processes and actors, as well as the context within which they operate. Hence, it invites consideration of other explanatory factors, such as how the generality and breadth of neo-liberalism relates to policies, rival ideas and discourses, interests, and institutions.

Neo-liberal rhetoric versus reality or the benefits of non-implementation Neo-liberalism has faced wide gaps between its rhetoric and the reality of its policies in practice. Already in the 1980s and 1990s, the soaring claims of ‘rolling back the state’ and ‘deregulation’ made by politicians such as Thatcher and Reagan turned out to be hollow in practice. But gaps seemed to increase with the 2007–2008 crisis. Thus, assertions about allocation through ‘efficient markets’ as opposed to the ‘inefficient state’ faced the reality of disastrous private-market decisions and state bailouts of large companies, including large financial institutions who had been the beacons of private markets. Equally, the rhetoric of ‘cutting back the state’ contrasts with increases in state size and market involvement after 2007–2008 due to ‘stimulus’ packages, increased welfare spending, and state aids. Finally, far from being seen as most successful, the most avowed ‘neo-liberal’ countries in Europe – notably the United Kingdom and Ireland – experienced sharp recessions after 2007–2008 and relative failure compared with countries that were more reticent about neo-liberalism, such as Germany and Sweden. Such gaps between the rhetoric and a different reality might have been expected to weaken neo-liberalism; however, their continued reappearance suggests the opposite. Hence, this second line of analysis offers what may seem to be a paradoxical explanation: instead of undermining neo-liberalism, the gap between neo-liberal rhetoric and the implementation of those ideas actually aids resilience. Different mechanisms for this second explanation can be hypoth- esized. First, neo-liberalism may be closer to a religion or ideology than to a practical set of policies. Proponents of neo-liberalism, in other words, may believe fervently in certain basic philosophical ideas on which they base their programmatic ideas, regardless of the practicability. Moreover, because these are normative philosophies and not positive theories that might be falsified by contrary observations, 30 Theorizing ideational continuity proponents are likely to conclude – if implementation fails – that compliance was insufficient rather than that the theory was wrong. The result is pressure for more neo-liberalism, not less, as in the Eurozone crisis, in which the demands from Northern Europeans included tight- ened enforcement and punishment of the ‘sinners’ to the detriment of their economies.89 Alternatively, proponents can be opportunistic leaders, who adopt the policies only to win elections before then abandoning them when they prove too controversial or unpopular. French Prime Minister Chirac in the mid 1980s and Italian Prime Minister Berlusconi in the early 2000s are examples.90 Furthermore, proponents can be pragmatic ideational entrepreneurs, willing to compromise in order to push through at least some elements of their programme, as in the case of Prime Ministers Tony Blair in the United Kingdom and Mario Monti in Italy.91 In any of these four cases, lack of implementation could be used to reinforce the argument that more neo-liberalism is needed, based on a view that its proponents were inadequate (i.e., the ideological entrepreneurs) or betrayed the cause (i.e., the opportunistic and pragmatic entrepreneurs). More generally, lack of implementation allows neo-liberal supporters to claim that their policies have never actually been tested in practice and protects them from blame for specific policy failures. This is significant because many neo-liberal policies – such as cutting public spending, reforming welfare, and reducing regulatory protection – are difficult to implement and extremely unpopular politically. At the same time, lack of implementation can preserve neo-liberalism’s apparent political ‘virginity’. The implementation gap may even directly benefit neo-liberal supporters, notably in political arenas. It can divert attention from the messy difficulties of policy making, pointing to the ‘sunny uplands’ of the future. It can also provide supporters with a simple (or even simplistic) ‘poster child’ with which to contrast alternatives, which can be painted as failed, corrupt, and old-fashioned. Indeed, the rhetoric of neo-liberalism may be precisely designed not for implementation but

89 Our thanks go to Fritz Scharpf for this insight. See also Jones in this volume and Scharpf 2012. 90 See Gualmini and Schmidt in this volume. 91 See discussion in Schmidt and Woll in this volume. Theorizing ideational continuity 31 rather to alter the terms of political debate in ways that advantage its supporters and disadvantage its opponents – notably, carriers of alternative ideas. This line of analysis underlines the political nature of neo-liberalism and the ways in which ‘policy’ may be subordinate to ‘politics’. How- ever, it then points to other questions: Why is neo-liberalism an attractive option for offering impracticable ideas? Why is neo-liberalism not replaced with other ideas that are practicable? Which actors press for neo-liberal ideas and how do they beneﬁt from them? How are neo- liberal myths sustained over time?

The strength of neo-liberal ideas and discourse in policy and politics A third line of explanation lies in the strength of neo-liberal ideas in policy debates and political discourse. For academics, who view neo-liberal ideas as highly ﬂawed and neo-liberal discourse as mere rhetoric, it may seem surprising (if not painful) to think them worthy of serious consideration. However, we are concerned here with how ideas are developed, perceived, communicated, and received in the policy arena and the political sphere – not which are academically strong. Moreover, strength is relative. Despite the problems of neo- liberal ideas, critiques may have been limited and alternatives even weaker, at least in policy debates.92 This explanation lies in the realm of the production and development of ideas, as well as in their dissemination through discourse.93 It thus takes ideas and discourse as the explanatory variable for their own resilience – they are not reduced to the effects of other factors.94 It differs from the ﬁrst explanation in that neo-liberal ideas here remain resilient by winning in the ‘battle of ideas’, in ‘discursive struggles’ against opposing alternatives, and even in the deliberative processes of argument and persuasion. One mechanism by which neo-liberal ideas win over alternatives may arise from the content of the ideas themselves and the completeness of their seeming answers to current problems in both cognitive and

92 Cf. Peck, Theodore, and Brenner 2009: 103. 93 Cf. Blyth 2002, Hay 2001, and Schmidt 2008. 94 Cf. Blyth 2002. 32 Theorizing ideational continuity normative terms. Neo-liberal ideas may offer (or appear to offer) a more coherent account of the usefulness and necessity of their proposed initiatives than rivals such as Social or Christian Democracy, given new constraints, especially international constraints including global competition, large capital markets, and massive cross-border financial and other flows. Similarly, the neo-liberal discourse that promises to rein in spending, with appeals to the ‘virtue’ of sound finances using the metaphor of the household economy, may resonate better with ordinary citizens than the Keynesian counterintuitive proposition to spend more at a time of high deficits and debts. A second mechanism is related to how neo-liberal ideational entrepreneurs use their ideas to ‘frame’ current problems,95 offer- inga‘referentiel´ ’, or frame of analysis, through which to interpret events96 and developing narratives and storylines to weave together policy prescriptions, policy programmes, and philosophical principles into a seemingly coherent account of what happened and why. They may additionally create metaphors, myths, and symbols to bolster their message. Here, self-reinforcement also occurs as subsequent events are interpreted through neo-liberal lenses. Thus, for example, even apparent failures of neo-liberal inspired policies (e.g., recession arising from austerity) become lessons in the importance of avoiding ‘excessive’ state spending. Framing can be linked to a third and often powerful mechanism: political discourse that successfully communicates neo-liberal policy ideas while crowding out or disadvantaging alternatives. Neo-liberal ideational entrepreneurs widely disseminated their ideas. This happened first in the ‘coordinative discourse’ among policy actors, as neo-liberal ideas were generated by think tanks or thought collectives (e.g., the Institute of Economic Affairs in Britain and the Mont Pelerin` Society).97 They were then circulated by elite ‘epistemic communities’, promoted by politically connected ‘advocacy coalitions’, and adopted by powerful ideational entrepreneurs – who translated and communicated them into language accessible to the public. Many neo-liberal ideas are are highly suitable for this ‘communicative discourse’ through which ideas are conveyed to the public: they are easy to understand

95 See Rein and Schon¨ 1994. 96 See Jobert and Muller 1987 and Muller 1995. 97 See, for example, Denham 1996 and Plewhe 2009; on welfare in Britain and Germany, see Pautz 2012. Theorizing ideational continuity 33 and resonate with ‘common sense’ and with deep values and (interpreted) personal experience.98 This makes them easier to communicate than many rivals and also highly attractive to political parties, commentators, and ‘second-hand dealers’ and ‘bricoleurs’ of ideas, who can combine them with other concepts or philosophies, from Social Democracy to statism.99 Neo-liberal ideas also may serve to reconceptualize the interests and priorities of agents. For example, with regard to labour markets, neo- liberal ideas challenged the postwar ideal of organization via corporatist relations between management and unions, with a new frame in which businesses should determine wages in decentralized labour markets, whereas labour unions were presented as damaging ﬁrms and the economy. Multinational businesses, in particular, largely reconceptualized their interests in this way, even in corporatist countries, as they increasingly pressured unions to agree to greater ﬂexibility in wages and working conditions and governments to legislate ‘structural reform’.100

The power of interests as the winners from neo-liberalism Interest-based analyses view ideas as tools wielded by self-interested actors. In contrast to the third line of explanation, the values and priorities of such actors are not changed by ideas – instead, neo-liberalism is utilized by actors to achieve their aims. Hence, a fourth line of explanation is that debates about economic policy have been captured by powerful interests (a claim made by ‘critical political economists’ in particular).101 Those interests have promoted and sustained neo- liberal ideas because they gain from them. They are able to prevent alternatives to neo-liberalism (which exist and may well be stronger in intellectual and policy terms – in contrast to the third explanation) from being accepted in policy debates because of their power, whether economic, institutional, or coercive. This suggests a process whereby self-interested actors promote neo-liberal ideas that, in turn, produce

98 See Schmidt 2002, 2006, and 2010. 99 See Carstensen 2011 or, for national examples, Schnyder and Jackson, Hay and Smith, Orenstein, and Gualmini and Schmidt, all in this volume. 100 See Schnyder and Jackson, and Martin, both in this volume. 101 See, for example, Harvey 2005 on the ‘construction of consent’. See also Overbeek and Apeldoorn 2012. 34 Theorizing ideational continuity policies that enable them to pursue their interests, whether in terms of political power or material gain. The result is a self-reinforcing process between ideas and self-interested actors. An interest-based analysis examines the resources, strategies, and coalitions of actors in developing and promoting neo-liberal ideas. Unlike the third line of explanation, ‘interests’ usually refer to coalitions of actors. Economic actors – firms, their senior managers, and their associations, as well as institutional investors – comprise the most obvious starting point because they are at the heart of neo- liberalism.102 However, political parties and elected politicians may also have important roles. Unelected officials are also significant – not only civil servants but also members of non-majoritarian institutions that have spread and gained powers in Europe since the 1980s, including independent regulatory authorities, the European Commission, courts, and independent central banks.103 Finally, powerful individuals can also contribute, for example, by forming coalitions that press for fiscal ‘rigour’, competition, free trade, and other neo-liberal ideas. This line of explanation suggests that these actors promote neo- liberal ideas for self-interest. Such actors may benefit materially, notably through lower taxes (especially on large firms and rich individuals) or through the new opportunities opened up by ‘deregulation’ and privatization, either through the reduction in constraints on business activity or to provide services no longer guaranteed by the state. In the United States, Hacker and Pierson argue that business interests in particular have gained in organizational power since the 1980s, whereas labour and voters have lost, and that they have used this power to promote the enactment of inequality-enhancing policies as well as to engineer institutional ‘drift’ through resistance to the updating of policy, thereby benefitting themselves and the very rich.104 Politicians also can gain by using neo-liberal ideas to win elections and achieve or retain political power. Neo-liberal discourse can supply political parties with valuable weapons in elections and in political debate. They can provide justifications for policies that benefit their supporters and disadvantage their opponents. Equally, they can provide justification for additional powers to be transferred to non-majoritarian institutions in the name of ‘efficiency’ and ‘competition’.

102 Cf. Crouch 2011 and Harvey 2005. 103 Cf. Coen and Thatcher 2005. 104 See Hacker and Pierson 2010. Theorizing ideational continuity 35

There are several mechanisms that link self-interested actors and support for neo-liberal policy ideas. One mechanism is through such actors’ production of ideas for both policy agendas and political programmes. In contrast with our third line of analysis, which focused on the content, framing, and discursive presentation of ideas, this fourth line of analysis considers the strategic construction and use of neo- liberal ideas by self-interested actors, whether or not they believe in them. Interests can also create coalitions in support of neo-liberal ideas, offering a second mechanism for their influence. Here, the causal- ity suggested in the third explanation is reversed: coalitions promote ideas rather than ideas acting as ‘glue’ for coalitions. This mechanism can be observed through evidence such as funding for think tanks or associations that develop and disseminate neo-liberal ideas. Finally, communicating and persuading people about (or, in the cruder language of advertising, ‘selling’) neo-liberal ideas represent a third mechanism. This highlights the important role not only of politicians in popularizing neo-liberal ideas but also that of the media in propagating them. The media may have links to pro–neo-liberal interests, from political parties to firms and individuals, through ownership or mutually beneficial exchange relationships – as in the cases of Rupert Murdoch and Silvio Berlusconi. Feedback mechanisms are also important in this fourth line of analysis. One feedback process can take the form of policies inspired by neo-liberalism that increase the power of self-interested actors to further promote their self-interest. This has certainly been the case of deregulatory policy ideas promoted by financial-market actors, who only became larger and more systemically powerful as those ideas were implemented (and, in turn, could invest more in lobbying and promoting neo-liberal ideas).105 A second mechanism builds on the first because as actors gain in power, they are likely to broaden their initial coalition. This may be true because others are won over to neo- liberal ideas, as in the case of European competition policy, or because ‘if they can’t beat them, they join them’, as in the case of the centre-left accepting neo-liberal ideas in the UK and elsewhere beginning in the 1990s. A third feedback loop is one in which the content of the ideas

105 See Lindblom 1977 and Block 1977. 36 Theorizing ideational continuity

(as in the third line of analysis) serves to reinforce the power and interests of the actors using those ideas for their own strategic purposes. This may be especially relevant in cases of what Pepper Culpepper calls ‘quiet politics’, in which business interests enjoy more room for inﬂuence because of the high level of technicality of the policy ideas under discussion, as in the case of corporate governance.106 However, whatever the mechanisms of support or of feedback, self- interested actors – along with the ideas they convey – all take place in given contexts. These contexts – meaning the institutional framework within which they are played out – are also signiﬁcant.

The force of institutions as constraints and opportunities An institutionalist analysis emphasizes how institutions shape the endurance, dominance, and survival in the face of challenges of neo- liberal ideas rather than how neo-liberal ideas have influenced institutional formation. Multiple definitions of ‘institutions’ exist; however, here, we mainly use the term to refer to formal organizations and formal and informal rules and regularities.107 Hence, the explanation can point to organizations and formal structures that shape the incentives for actors or that determine the venues for political discourse and debates, legal rules that influence the choices available, and social norms that affect which rules are regarded as practicable or legitimate. One basis for this line of analysis comes from a well-developed literature that claims that ‘institutions’ are crucial for the spread and implantation of ideas. Thus, for instance, Peter Hall108 and Margaret Weir and Theda Skocpol109 argue that the adoption of ideas, whether major new paradigms such as Keynesianism and monetarism or specific policy ideas, depends on whether they are ‘congruent’ with existing institutions – which means the extent to which they are practicable within existing national institutions and, hence, compatible with the institutionally shaped interests of key policy actors.110 This offers a

106 See Culpepper 2011. 107 Here, to avoid confusion, we start by restricting our definition to formalized institutions and rules, as opposed to a more constructivist definition of institutions, in terms of the meanings they hold for the agents who constructed them and are structured by them. 108 See Hall 1984, 1986, and 1989. 109 See Weir and Skocpol 1985. 110 However, see the critique by Blyth (2002: 20–27), who argues that this then cannot explain the spread of transformative ideas. Theorizing ideational continuity 37 powerful explanation for the differential spread and re-interpretation of ideas across countries, helping to explain why neo-liberalism apparently was adopted more quickly and deeply in the United States and the United Kingdom than in, for example, France and Sweden. A separate school of thought, initiated in international relations, argues that the dissemination of ideas also strongly depends on whether they are ‘institutionalized’ through organizational design, aiding in their persistence.111 For neo-liberalism, this explanation would underline the creation and strengthening of organizations that promote neo-liberal ideas.112 These may be ‘non-majoritarian institutions’ such as the European Commission, courts, or independent central banks and regulatory agencies that spread from the 1980s onwards113 but also new or strengthened private bodies such as credit-rating agencies or standard-setting bodies that have acquired an important role in economic markets.114 Certainly, the institutionalization of neo-liberal ideas in the EU’s highly independent non-majoritarian institutions – such as the ECB, with the focus of its charter on price inflation, or the European Commission’s Directorate-General for Competition, charged to focus on competition – attest to the importance of institutional design.115 Historical institutionalism, moreover, suggests that once ideas are institutionalized, they represent powerful forces for continuity. This may occur through the ‘path dependence’ of existing ideas, the constraints on innovation, and on alternatives.116 It may also occur through incremental change that involves keeping existing institutions, notably via layering of new institutions onto old ones; permitting drift of present institutions; or conversion of old institutions.117 The successive pacts for stability in the Eurozone – beginning with the Sta- bility and Growth Pact that consecrated the 1990s Maastricht criteria

111 See Goldstein 1993 and Goldstein and Keohane 1993; see also Blyth 2002. 112 This explanation may come close to the fourth one – namely, interests. However, there are two differences: a historical institutionalist approach examines changes in organizations as the explanation, whereas an interest-based approach based in rational-choice institutionalism takes them as fixed; sociological or historical institutionalist analyses of organizations treat them as following inherited or given behaviour rather than acting as rational self-interested actors. 113 See, for example, Thatcher and Stone Sweet 2002. 114 See Kerwer 2005 and Sinclair 2005, 2010. Cf. Buthe¨ and Mattli 2011. 115 See Thatcher and Jones, both in this volume. 116 See Pierson 2004. 117 See Streeck and Thelen 2005 and Mahoney and Thelen 2009. 38 Theorizing ideational continuity for monetary union and culminating with various pacts during the Eurozone crisis – ensure that neo-liberal ideas about fiscal consolidation, regardless of their failure to solve the crisis, have created path dependence for the rules of EU monetary policy that will be difficult to reverse.118 Moreover, the heavy investment in ideas about competition and efficient markets, along with their institutionalization through legislation, constrains the espousal of ideational alternatives that could be organizationally risky, as indicated by the contortions of the ECB to justify ‘exceptional measures’ to respond to the crisis.119 Sociological institutionalists go even further, viewing institutions as also serving to constrain and empower actors.120 Mechanisms of ideational influence and reproduction result from institutional isomorphism, whether through mimetism, normative processes, or coercion.121 Neo-liberal ideas as such may be seen as a form of ‘fashion’ to be copied or taken as a ‘recipe’ to be applied, adopted, or adapted by other countries in a wide range of domains. Institutional actors such as the IMF, the EU Commission, and the ECB, as well as governments in most European countries, have promoted such mimetism at one time or another. However, they also – often at the same time – have cast neo-liberal ideas as norms for policies as the only ‘right’ or legitimate thing to do, whether to reform welfare by linking it to work or by viewing all debt as unsustainable. They have equally used coercion in imposing neo-liberal ideas as the only ones available – as in the case of EU and IMF conditionality for Central and Eastern European countries.122 However, coercion also can come indirectly from the perceived threats of non-conformity with neo-liberal ideas, whether from the ‘shadow of the law’ hanging over policy debates in domains as varied as fiscal policy, regulation, and welfare or from the ‘markets’. Thus, a fifth explanation for neo-liberal resilience is that, since the 1980s, institutions have come to provide support and opportunities for neo-liberal ideas while conversely constraining and disadvantaging alternatives. However, the many different ways in which such institutional resilience operates is more dependent on the theoretical analysis used than in the other four lines of analysis. Whereas rational- choice institutionalists will point to how organizations or formal rules

118 See Jones in this volume. 119 See Jones in this volume. 120 See Campbell 2004. 121 See DiMaggio and Powell 1991. 122 See Orenstein in this volume. Theorizing ideational continuity 39 establish the incentives that affect actors’ calculations, thereby constraining change and structuring opportunities, historical institutionalists may focus on either the path-dependent constraints of self- reinforcing processes or the incremental processes that add opportunities, even as they constrain the direction of change. In contrast, sociological institutionalists will look for processes such as mimetism, normative legitimation, and coercion to emphasize that the resilience of neo-liberal ideas comes not from superiority in a ‘competition for ideas’ but instead because of wider legitimation and existing power structures. Finally, discursive institutionalists will return to the role of discourse in the embedding of neo-liberal ideas in public debates and discussions within differing institutional contexts. They may either underline how discourse relates to the three other institutionalisms or take a more constructivist approach by emphasizing how institutions are constructions of meaning, as they structure thought and action.123

Conclusion The term ‘neo-liberalism’ often evokes powerful reactions from policy makers and the public in many European countries. Frequently, it is associated with unpopular policies, such as accepting greater inequality, imposing market competition, fiscal austerity, and reducing the welfare state. A (usually smaller) body of opinion disagrees strongly, viewing neo-liberalism as liberating individuals and firms from the deadening hand of the state or monopolists. Academics also react strongly to neo-liberalism. Many see it as a negative or dangerous set of ideas or even an ideology, representing a return to the past and a rejection of scientific progress. They focus on its internal contradictions, its adoption of theories riddled with weaknesses, and its oversimplification of complex problems. Equally, they underline the repercussions of policies inspired or legitimated by neo-liberalism. Others point to the difficulties of applying a term that is often polemical, lacks boundaries, and whose policy prescriptions conflict with one another and are in flux. Our approach here differs from both the normative reactions and the academic critiques of the term. We treat the resilience of neo-liberal ideas as a political phenomenon to be investigated. We look at the nature of such ideas, who holds them, how they are used, and – of

123 See Schmidt 2000, 2002, and 2008. 40 Theorizing ideational continuity course – why they remain resilient. Regardless of our personal views about their content, we see their place and continued dominance in policy debates and political discourse as a matter to be analysed using the tools of political explanation. We do so by investigating the possible reasons for its resilience, including the flexibility of its ideational content, the promises that remain unfulfilled or broken, its predominance in debates, the strategic support from interests, and its embeddedness in institutions. All of these reasons help to explain why neo-liberal ideas continue not only to survive but also to dominate by defining how the key questions in political economy today are conceived, which solutions are proposed, which debates about policy choices are available, and which policy proposals are viewed as legitimate. The resilience of neo-liberal ideas is one of the major themes of our epoch – the importance of the market, the size and role of the state, the nature of the welfare system, the extent of competition, the purposes and basis of regulation, the shaping of labour markets, and the rules that govern corporations. Such ideas are at the core of politics across many different domains and polities. The strength of reaction to the concept of neo-liberalism alone indicates its importance. Indeed, in the light of Keynes’s powerful insight about the ideational sources of economic decision making, we believe that investigating neo-liberal ideas is central to understanding Europe’s political economy.

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2 Neo-liberalism and ﬁscal conservatism andrew gamble

The present period is one of economic turbulence but ideological stability. Despite the scale of the 2008 financial crash, there has not been, so far, much sign of the type of shift in the ideas governing economic policy that followed the economic upheaval of the 1930s and the smaller upheaval of the 1970s. The 1930s saw the emergence of Keynesian- ism and Social Democracy and the 1970s saw the emergence of to monetarism and neo-liberalism. Although challenged by recent events, for the moment neo-liberalism appears to be retaining its ascendancy. How should we understand this resilience? How should we understand neo-liberalism? These are the questions with which this chapter is concerned, and it makes three main claims. First, neo-liberalism is more than simply a contingent reaction to Keynesianism and Social Democ- racy. Part of its resilience as a set of ideas is that it draws on perennial themes of classical liberal political economy, particularly concerning the nature of commercial society and the role of the state in a market economy. Second, neo-liberalism is not a unified doctrine but rather has several distinct strands, which can be contradictory. Third, one of the most striking contradictions is in regard to neo-liberal attitudes to fiscal conservatism. In terms of the typology developed in Chapter 1, I argue that the resilience of neo-liberalism can best be explained by the first three explanations: (1) the ideological malleability of its core principles, (2) the gap between rhetoric and reality, and (3) the ways in which neo-liberal ideas achieve discourse hegemony by being translated into a form of populist economic common sense. These features make neo-liberalism difficult to discredit and help to account for its resilience. An influential way of understanding neo-liberalism draws on Karl Polanyi’s (1945) account of ideological development in the capitalist era. He suggested that the liberal market economy was created through deliberate policy and state action in the nineteenth century, which destroyed traditional forms of economy and society and brought, as a

53 54 Part I: Economy, state, and society reaction, the rise of collectivist and nationalist movements that aimed to reimpose political control over the free market and reestablish community and security for citizens.1 This double movement played out over many decades and reflected the social and political struggles that defined the modern world. Recent analyses inspired by Polanyi suggest that neo-liberalism can be understood as the first phase of a new double movement, with neo-liberalism emerging initially in the 1970s as a reaction to the excesses of the welfare state and Keynesianism, creating in the 1980s – through the application of its ideas – a new era of free- market dominance. In turn, it is suggested, this will be followed by a reaction to curb the excesses of neo-liberalism and reimpose political controls over the market.2 On this reading, the financial crash of 2008 potentially signals the beginning of that reaction. Another influential placing of neo-liberalism in historical context is present in Peter Hall’s (1993) argument that paradigm shifts in economic policy, involving major changes in the basic assumptions as well as the settings and instruments of economic policy, are quite rare.3 The two clear-cut cases of transition from one dominant paradigm to another required a long and painful period of political, economic, and ideological conflict and restructuring, first in the 1930s and then in the 1970s. The paradigm of classical liberalism, with its emphasis on sound money, free trade, and laissez-faire – which was ascendant in Britain, the United States, and many European countries before 1931 – broke down following the 1929 crash and the subsequent Great Depression. Classical liberalism was eventually replaced by a new Key- nesian paradigm that made possible the Keynesian welfare state and different varieties of Social and Christian Democracy in Europe after 1945. This was the era of embedded liberalism. Different domestic policies reflecting national preferences and values to secure domestic legitimacy were combined with a liberal international economic order re-created under US leadership after 1945. The Keynesian paradigm itself was then challenged in the 1970s by monetarism – one of the key doctrines of what then became neo-liberalism – at a time of renewed trouble for the international economy. During the 1980s and 1990s, ‘neo-liberalism’ came to be seen as a new dominant orthodoxy: a powerful discourse or set of discourses deployed at many levels making theoretical and commonsense claims

1 See Polanyi 1945. 2 See Cox 1996. 3 See Hall 1993. Neo-liberalism and ﬁscal conservatism 55 about how the economy worked and increasingly dominating debate on public policy.4 The crash in 2008, as well as the profound nature of the dislocation that has ensued, raised speculation that these events might herald the end of the neo-liberal era and the transition to a new paradigm for public policy. The credibility of neo-liberalism appeared “dented” for a time after the crash, and there was speculation about a return to Keynes and the possibility of political and ideological challenges to the intellectual orthodoxies that had dominated since the 1980s.5 However, ﬁve years after the crash, neo-liberalism appears remarkably resilient and there are few signs of such a shift taking place. No major alternative to neo-liberal economic policy has emerged; familiar neo-liberal ideas still supply the everyday ‘common sense’ that dominates discourses about economic policy in the media and the political class and provide the organizing assumptions that shape the formulation of policy. Many neo-liberals have been content during this crisis to defend the existing order and look for ways to return to ‘business as usual’. More radical ideas have arisen from movements like the Tea Party in the United States, which wants to use the opportunity of the crisis to downsize the state. The failure thus far of neo-liberalism to make way for a new paradigm led Colin Crouch (2011) to argue that we are living through ‘the strange non-death of neo-liberalism’.6 There is certainly no clear evidence as yet of a new Polanyian double movement, the emergence of a challenger to the assumptions of neo-liberalism. Francis Fukuyama suggested in 1989 that we should not expect a new wave because neo- liberalism is the synthesis that has resolved all of the contradictions of capitalist modernity, and it provides a framework that cannot be transcended.7 There are no serious alternatives remaining. If one day there is a new Polanyian double movement, it may be years or even decades away. In the short term, the political response to the current crisis may lead to the further deepening of the present paradigm rather than to its overthrow. On this view, which is popular among hedge-fund managers, the wave of neo-liberalism is far from spent. The crisis of 1929 produced a radical project to create an extended state, one expression of which was the post–1945 social-democratic Keynesian welfare states of Western Europe. This extended state was

4 See Harvey 2005. 5 See Skidelsky 2009. 6 See Crouch 2011. 7 See Fukuyama 1989. 56 Part I: Economy, state, and society challenged ideologically and politically in the 1970s with the emergence of the neo-liberal project to contract and reorder this state. However, the neo-liberal project met with only limited success, which is why some of the most influential accounts of the 2008 crash are neo-liberal accounts, which blame the crash on the persistence of the Keynesian welfare state rather than on neo-liberal policies that deregulated finance. On this view, neo-liberalism is resilient because it remains the radical project with the most traction in this crisis. The radical wing of neo-liberalism perceives this crisis as an opportunity to push farther the project to contract the state, not to retreat. The next swing of the pendulum, therefore, is not automatically away from neo- liberalism. A more radical neo-liberalism is one possible outcome from this crisis. This chapter explores one aspect of this apparent resilience of neo- liberalism by tracing its ideological roots in earlier forms of liberalism. One of the difficulties in considering neo-liberalism is to define exactly what the term covers. It is easy to exaggerate its unity and coherence and group together a diverse set of ideas and policies, which have many internal tensions. Rather than accept a monolithic account of neo-liberalism as an all-embracing and all-conquering single ideological force, its diversity must be acknowledged.8 It is this diversity that explains, in part, its resilience. In this chapter, I accept much of the ‘institutionally embedded’ thesis proposed by the editors but argue that we also need to understand the genesis of neo-liberalism in a much older set of discourses: about the market economy, the household economy, and the tax state. It is partly because neo-liberalism draws on these much-older ideas that it is so difficult to dislodge; it expresses certain perennial truths about the political economy that we all inhabit, and it is this which often gives its ideas the edge. However, it does not exhaust the truths about this political economy, and it is not all-conquering (despite the overblown rhetoric that at times has accompanied it) because, like its rivals, it does not have final or uncontested solutions to the dilemmas of our modern political economy. The chapter begins by outlining different forms of neo-liberalism. It then examines how neo-liberalism has imported key ideas from nineteenth-century liberalism in its treatment of the central relationship in political economy – namely, between ‘the market’ and ‘the state’.

8 See Gamble 2006. Neo-liberalism and ﬁscal conservatism 57

In particular, it shows how the state is treated as a ‘household’ that is equivalent to the other two ‘households’ – namely, private households and ﬁrms. Finally, it looks at how these inherited ideas affect the resilience of neo-liberalism in economic crisis.

Strands of neo-liberalism ‘Neo-liberalism’ is commonly used – although not often by neo-liberals themselves – as a general term that denotes the revival of free-market doctrines in the second half of the twentieth century, particularly since the 1970s. There are a number of strands of neo-liberalism, of which the most important are ordo-liberalism, the Austrian School, economic libertarianism, the Virginia School, the Chicago School, and supply- side economics. Many of these strands were already represented at the Mont Pelerin` Society, convened by Hayek in 1947 and which has been meeting ever since. This revival of economic doctrines cel- ebrating the free market and seeking to limit the role of government was regarded by some of its early critics as a misguided attempt to revive earlier formulations of liberalism that had been superseded and were no longer relevant to the political and economic conditions of the twentieth century. However, in the last three decades of the twentieth century, neo-liberalism furnished a powerful set of doctrines that became influential in many countries, particularly the United States and Britain but also in many others, including Chile and several other Latin American states, Australia and New Zealand, and many countries in Eastern Europe following the opening of the Berlin Wall and the collapse of the Soviet Union. Many international and domestic policies were shaped by these doctrines, in particular regarding finance and trade and the idea of what constituted good economic practice and good governance. In this way, most economies in the international economy were influenced by the new free-market doctrines. Ordo-liberalism was the first form of neo-liberalism. The German ordo-liberals, including Alexander Rustow¨ and Wilhelm Ropke¨ in the 1930s and 1940s, were strong critics of Nazism both economically and politically. They understood neo-liberalism as a political order that combined a free economy with a strong state and that was subject to the rule of law. The economy should be as free and decentralized as possible, but the state had to be strong and legitimate to break 58 Part I: Economy, state, and society interest groups and cartels that formed to prevent markets from working.9 The ordo-liberals were not opposed to the state, but they wanted it to be confined to its proper sphere, which was protecting the key institutions that made possible a decentralized market economy. These ‘neo-liberal’ ideas combined with social-democratic ideas of welfare and industrial partnership to shape the moderate and pragmatic policies of the social-market economy that characterized the West German Bundesrepublik in the 1950s and 1960s.10 The Austrian School and its two most important twentieth-century representatives – Ludwig von Mises and Friedrich Hayek – were impla- cable opponents of all forms of collectivism and socialism, and it warned of the dangers of creeping state intervention.11 Like the ordo- liberals, the Austrian School emphasized the need for strict fiscal rules to keep government limited and to avoid inflation. It developed a distinctive economic theory that treated markets as inherently imperfect because of the fragmented and dispersed character of knowledge but also as the only possible foundation of a free society. The Austrian School accepted that a strong state was necessary to safeguard the market order, but it was suspicious of democracy because it allowed temporary majorities to interfere with the principles of a liberal order. Economic libertarianism is mainly associated with the United States. It includes supporters of the minimal state, such as Robert Nozick, and those who want no state at all – the anarcho-capitalists, such as Murray Rothbard.12 Economic libertarians argue that individual rights are inherent, absolute, and pre-social. They are opposed to the state because it involves coercion of individuals – for example, through taxation. They favour the dismantling of most or all of the programmes associated with the modern state, including in the case of the anarcho- capitalists, the military, and the police. If individuals require protection from risks of any kind, they must pay for it. Economic libertarians are critical of classical liberals such as Hayek for supporting spending to provide an economic baseline below which no citizen should fall. The Virginia School applied economic analysis to the public sector, arguing that agents in the public sector have the same motivation as those in the private sector but lack the discipline imposed by markets and competition. This leads to continuous pressure for expansion

9 See Turner 2008. 10 See Nicholls 1994. 11 See Hayek 1944 and von Mises 1944. 12 See Nozick 1974 and Rothbard 1973. Neo-liberalism and fiscal conservatism 59 of the scale and scope of government, and it places an increasing burden on the private sector. The public sector is held to be inherently inefficient and wealth-consuming rather than wealth-creating. The conundrum of public-choice economics is that any policy to curb the public sector requires altruistic behaviour on the part of policy makers; however, the basic assumptions of public-choice economics deny that policy makers can be expected to act altruistically. To solve this problem, public-choice liberals advocate the adoption of constitutional rules, such as a balanced-budget rule, which prevents governments from running deficits and which make unconstitutional certain policies (e.g., wealth taxes) even if voted for by a popular majority.13 Public-choice economics has been influential in the development of the new public management, which has reshaped the delivery of public services in the last two decades. The Chicago School has been one of the most influential parts of the mainstream of modern economics. It views the economy from the standpoint of money and finance rather than as a system of production or as a political economy. Milton Friedman, one of the pioneers of this approach, developed the monetarist critique of Keynesianism.14 More recent exponents include Robert Lucas, with his theory of rational expectations. The economy is modelled mathematically as though it were a set of financial markets abstracted from any political, social, cultural, or psychological conditions, with assumptions of perfect competition, rational expectations, and no significant externalities. Policy solutions that promote the greatest possible freedom-of-market agents are assumed to be inherently superior. In contrast to the Austrian School, this strand of economic theory assumes that markets are per- fectible, as in the efficient-market hypothesis, which holds that markets are rational, making use of all available information, and accurately pricing risk. Some of these mathematical models informed the investment decisions of banks in the financial boom that ended in 2008. Supply-side economics initially became popular in the 1980s. It argues that growth in a capitalist economy is best promoted by cutting taxes, particularly on upper-income groups, and freeing business activity from regulation. By boosting growth and making high earners more willing to pay taxes, tax cuts boost tax revenues and therefore balance the budget – but at a higher level of output. Spending cuts to balance

13 See Buchanan and Wagner 1977. 14 See Friedman 1977. 60 Part I: Economy, state, and society the budget have a lower priority. These policies were adopted by the Reagan administration and also by the administration of George W. Bush, leading to a rapid increase in US debt because taxes were cut, whereas spending – particularly on defence – greatly increased. The same prescription was at the heart of the Romney–Ryan campaign in 2012, as leading fiscal conservatives in the United States pointed out. Supply-siders have been influential in neo-liberalism, but they have been at odds with ordo-liberals, the Austrian School, and the Virginia School, which tend to be fiscal conservatives and believe that the first priority of government is to balance the books. In the immediate postwar period, neo-liberalism, in its ordo-liberal form, was mainly influential in Germany and other European countries. From the 1970s onwards, however, new strands of free-market thinking began to emerge and neo-liberalism, particularly in Anglo- sphere countries, began to be identified with the clutch of doctrines opposed to welfare states and mixed economies. Supporters of neo- liberalism were determined to uproot social-democratic aspects of the postwar political economy, which tolerated a wide variety of domestic policies. The growing fiscal burden of the state was highlighted, together with the intractable dependency culture fostered by welfare programmes. The political consensus that had endured since the 1940s in many countries about the proper role of government in a market economy came increasingly under intellectual and political attack. A decisive moment was the endorsement of key neo-liberal doctrines by Margaret Thatcher and by Ronald Reagan, who came into office in 1979 and 1980, respectively – particularly monetarism and elements of classical liberalism in Thatcher’s case and supply-side economics in Reagan’s. The understanding that formed between these two political leaders suggested that there was now a coherent neo-liberal doctrine that defined the new economic policies spreading from the United States and the United Kingdom.15

Neo-liberalism and classical liberalism Neo-liberalism can be understood in Polanyian terms as a paradigm shift, contrasting the Keynesian era with the monetarist era that followed: the rebellion against the social-democratic state. However, a different way of thinking about neo-liberalism is to understand it as

15 See Cockett 1994. Neo-liberalism and fiscal conservatism 61 the latest manifestation of much older discourses in political economy, the eighteenth-century idea of commercial society, and the early- twentieth-century idea of the tax state. This perspective emphasizes the continuities in thought among different eras rather than sharp historical breaks. The idea of commercial society, for example, which came to preoccupy so many eighteenth-century political thinkers and which has profoundly shaped the political thinking of the modern world, is considered an essential part of our understanding of what makes this world modern. Istvan Hont memorably evoked its key themes in Jeal- ousy of Trade.16 He argues that many of the ideas that were developed in the eighteenth century still define the nature of the problems that confront contemporary states. Many of the circumstances and contexts may have been altered but the paradigm of commercial society has not been transcended; it is still the intellectual horizon of our world as far as political economy is concerned. Hont argues, for example, that the debate on globalization that dominated the 1990s lacks conceptual novelty because it rehearsed themes and explored dilemmas that had first been aired more than two hundred years before. At the root of this conception of political economy are the peculiar character of the modern market economy and the modern state and the lack of congruence between them. Both have practical and imaginative foundations, but they are different.17 Markets are founded on exchange between independent owners, the stimulation and satisfaction of wants, the calculation of costs and benefits, the division of labour, the ownership of capital, the maximization of profit, and the drive for accumulation. They have expanded to connect the whole world and render it interdependent. There are always many markets but, imaginatively, the market is not complete until it is a world market and equivalence reigns. States, by contrast, are multiple; each state claims a particular jurisdiction and relates to a particular national community. Its practical foundations include securing internal order and external defence, raising taxes, and promoting the prosperity and welfare of its citizens. Its imaginative foundations derive from its unitary form as a fictitious person and its indirect representation – its claim to represent its people as a community of fate. Markets and states become locked together because the benefits of trade are such that no state can forego them. No state can afford to put itself outside the international trading system; however, the

16 See Hont 2005. 17 See Thompson 2008. 62 Part I: Economy, state, and society consequence of remaining within is a ceaseless struggle to compete with other states and to emulate the most successful. This constrains what states can do but, if they are successful, it also opens great opportunities to them and to their citizens. It provides states with the capacities and resources that they need to defend their national territory from attack and to expand it when the opportunity arises. As states became more dependent on one another, they do not necessarily become more peaceable. It also could mean that they became more capable and more willing to wage war. During the nineteenth century, Britain – as the leading industrial and commercial state – broke new ground by moving to complete free trade, making itself dependent on the international economy by abandoning self-sufficiency in food and later many other things as well. Britain maintained its free-trade policy up to and even into the First World War, despite its leading rivals imposing large tariffs on British goods. For most of the nineteenth century, Britain became the country to emulate; as Marx explained to his German readers, English development was not something they could ignore – they would be obliged to follow and compete. Jealousy of trade was at the foundation of modern conceptions of development, encouraging poor and less-developed countries to catch up with rich countries and become developed. As the country that must be emulated, Britain was in a position to set the rules of the international economy and duly did so, from the gold standard and its associated monetary and fiscal rules to rules on accounting, shipping, insurance, finance, and contracts. Britain’s liberal free-trade rules were proclaimed as universal rules, but they also had the advantage of benefitting Britain’s particular interests – a fact that was not lost on critics. Friedrich List accepted the intellectual case for free trade and opposed its adoption when there was such disparity among states in terms of their economic development. In such circumstances, free trade served only the interests of the strongest and most developed states.18 By the middle of the nineteenth century, liberal political economy had been fashioned into a powerful set of arguments and policy prescriptions. Political economy and economic analysis may have since parted company, but writing, argument, and discourse within the paradigm established in the eighteenth century has continued until the

18 See Chang 2002. Neo-liberalism and ﬁscal conservatism 63 present because – much more than economic analysis – it still captures the essential features of the political and economic context in which economic policies are formulated and debated. Neo-liberalism can be understood as the latest manifestation of the liberal political economy favoured in nineteenth-century Britain. At that time, it was distilled into a set of principles that included free trade, sound money, and laissez-faire and which became the organizing assumptions of British ﬁnancial and economic policy and – through Britain’s example – became the organizing assumptions of many other states as well.

Three types of households Since its origins, political economy has always been predominantly liberal political economy, sometimes with national and socialist variants and critiques. It has always been embedded within the institutional matrix of household, market, and state. The distinction with which we are most familiar is that between the market economy and the state, but this ignores the original meaning of economy: that is, the economy of the household. Three important meanings of ‘household’ must be distinguished: the family or individual household, the corporate household, and the public household. These forms of household are distinct from the concept of the market economy, or ‘catallaxy’, as Hayek preferred to call it. Hayek derived the term ‘catallaxy’ from the Greek verb katallattein, meaning to exchange.19 He preferred it to the term ‘economy’, with its roots in Aristotle’s concept of oikono- mia, meaning the management of the household. Such an economy meant an enterprise with a single purpose, directed from the centre by a single will and involving sharing, planning, allocating, and distributing. Hayek did not dispute that there were households in this sense, but he did not accept that this was an adequate way to capture what was essential about the market order. The basic principle was that it did not have a single purpose but rather served many purposes and, therefore, could not have a single directing will in control of it. The point of a catallaxy was precisely that it was coordinated through a set of general rules, which did not prescribe behaviour but instead left economic agents free to engage in whatever activities and contracts they liked. The catallaxy might still be composed of a

19 See Hayek 1976: 108. 64 Part I: Economy, state, and society multitude of households, but it was organized on a quite different principle from them; if this principle were infringed, then the benefits that came from trade were at risk. For Hayek and many other economic liberals, the great problem of the modern political economy that Britain had pioneered was that the secret of its success was not fully understood and that governments would seek to intervene to manage it as though it were a household, with a single purpose; doing so would eliminate the sources of prosperity and enterprise. One reason for this problem was the continuing hold of the classical conception of the household. Managing a household meant planning, allocating, and distributing resources. It implied a central directing will and the direct consideration of fairness and welfare in decision making. The traditional household was also associated with notions of economizing and therefore being economical, two terms still in daily use. To ‘economize’ means to cut costs, to stop doing certain things, or to do the same with less. Managing a household is associated also with balancing expenditure against income and a particular set of virtues: prudence, sobriety, accuracy, thrift, and frugality. Households like these are the foundation on which sound finance and productive enterprise are to be built in the liberal imagination. Hayek would not deny this, but although ideas of fairness and justice may have their place in the family household because it is a potential arena of sharing, altruism, friendship, love, and personal relationships, it also can be despotic and exploitative. The contrast is with the catallaxy, characterized by impersonality, decentralization, observance of general rules, coordination through prices, and connections across vast distances. In this way, a utilitarian sociability is established, which becomes a positive-sum game for all of the participants. The family household remains an important part of contemporary political economy – although not as important as it once was because most economic production in developed economies is no longer sited in families. However, families are still essential in nurturing and supporting family members, through unpaid domestic labour, enabling them to participate in labour markets, and supporting those who cannot. Families are also a key site for consumption, not the least of which is financial services. However, two other types of household have become increasingly significant in contemporary liberal political economy. The first of these is the corporation. In the eighteenth century, corporations were confined to state-created bodies (e.g., the East India Company), which were granted a particular trading monopoly. In Neo-liberalism and fiscal conservatism 65 other cases of corporate enterprise, liability was unlimited, which kept corporations small and fragile. All of the leading political economists of the eighteenth century, including Adam Smith, strongly supported unlimited liability as a way to keep entrepreneurs honest and accountable. During the nineteenth century, as the scale of industrial enterprise increased, this restriction increasingly hampered major investment projects (e.g., the railways). There was strong pressure to allow limited liability; eventually, this legislation was passed in the 1860s.20 It was one of the most significant reforms of property rights in modern capitalism, it was widely copied, and it led directly to the rise of the corporate economy and the dominance of the international economy by the great corporate giants of the modern era. The modern corporation has become a key and much-neglected third party in the relationship between states and markets.21 Companies are not catallaxies, despite a number of interesting attempts by economists to theorize them as such. Rather, they are run as economies, as households, subject to a single purpose and directing will and with their own internal mechanisms of distribution, allocation, and planning. They are strategic actors operating within the market catallaxy and within national states, seeking to shape both to their advantage. If they want to build up their capacity and increase their competitive advantage, states must support their leading companies and enable their expansion, while at the same time seeking to attract foreign companies to set up production facilities and distribution networks within their jurisdiction. Tax, regulatory, and financial regimes all must be adjusted to ensure that a country is ‘open for business.’ In this way, jealousy of trade has also become jealousy of investment.

The tax state The third type of household that is important in understanding contemporary political economy is the public household. This is an old way of thinking about the state but one that also was neglected until Daniel Bell revived the term in an article in The Public Interest, subsequently reprinted in his book, The Cultural Contradictions of Capitalism.22 He distinguished between (1) the economy of the domestic household, in which production and exchange are regulated by a shared conception of the common good and resources are distributed according

20 See Hannah 1976. 21 See Crouch 2011. 22 See Bell 1976. 66 Part I: Economy, state, and society to some conception of need; and (2) the economy of the market, in which production and exchange are regulated by price and ends are not common but rather individual. Wants replace needs as the criteria for determining how resources are allocated, and there is rational and precise calculation of the costs and benefits of different options and the return on investment. These distinctions are also embedded in the idea that needs are satiable and therefore limited, whereas wants are insatiable and unlimited. This is one of the sources of hostility to modern markets and to the idea of catallaxy, captured in Aristotle’s notion of ‘chrematistics’ – that is, acquisition that is unlimited and directed to selfish material gain, contrasted with the sober, prudent management of household finances. Chrematistics came to be associated with finance, usury, the charging of interest, and making money from money, inspiring a horror and distaste that recurs among all of the cultural critics of capitalism on both the left and the right. It reap- pears in contemporary politics in concerns about bankers’ bonuses and the reckless behaviour of the investment banks. Bell viewed the public household as originally arising to perform certain functions for the new commercial society. There were common needs that only a public body could discharge, including defence against external attack, enforcement of law, protection of property rights, and the guarantee of stable currency. Different states added other functions at different stages. In the United States, Bell argued that the public household was enlarged by three key developments in the course of the twentieth century: (1) the adoption of a normative economic policy from the 1930s onwards, which entailed the US federal government’s involvement in the direction of the economy and development of plans for allocation, redistribution, stabilization, and growth; (2) the commitment to substantial investment in science and technology, spurred in part by defence needs and the strategic competition with the Soviet Union but also to enable US corporations to retain their industrial and commercial leadership and to permit new sectors to emerge; and (3) the normative social policy that appeared in the 1960s and is devoted to the redress of social and economic inequalities. This encouraged the development of new welfare programmes, a focus on human capital, and the emergence of an entitlement culture associated with human rights. Bell argued that the modern state was always a public household, differing from the market economy and organized on different principles. Neo-liberalism and fiscal conservatism 67

More recently, it has expanded far beyond the limited functions that were expected in the past. The modern expanded state Bell observed in the 1970s threatened to absorb both the private family household and the corporate households through the increasing scope of its regulation and the increasing enlargement of its capacities, including the capacity to tax. In this way, the state becomes an arena for the satisfaction of private wants, which – because they are insatiable – threatens the basis of commercial society and its separation from the state. Together with the idea of commercial society, it is the concept of the tax state that has been most important in shaping neo-liberalism. One of the earliest analyses of the tax state and its implications was made by Joseph Schumpeter at the end of the First World War. It became a common theme in much neo-liberal, libertarian, and conservative argument from the 1970s until the present, and it underpins arguments for lower taxes and lower spending. As the state expands under pressure from private households – both individual and corporate – to consider their interests and needs, so it increasingly intrudes on commercial society and thereby risks restricting the freedom of the catallaxy by making discretionary interventions rather than relying on general rules. In his article published in 1918, ‘The Crisis of the Tax State’, Schumpeter addressed the problem of fiscal policy in the wake of the financial, industrial, and economic collapse of Austria–Hungary at the end of the First World War.23 He argued that ‘the public finances are one of the best starting points for an investigation of society, especially though not exclusively of its political life’. He quoted the socialist economist, Rudolph Goldscheid, stating that ‘the budget is the skeleton of the state stripped of all misleading ideologies’.24 Schumpeter argued that the tax state had been important in the development of commercial society but had now acquired its own momentum.25 When the state existed as a social institution, staffed by people who identified their interests with the state, and when it had been recognized as essential by citizens for the services it provided, then the state could no longer be understood solely from a fiscal standpoint. Taxes created the modern state but, once formed, the state begins to extend its ‘tentacles’ into ‘the flesh of the private economy.’ It is this intrusion into the private economy that Schumpeter viewed as a particularly modern problem,

23 See Schumpeter 1990. 24 See Schumpeter 1990: 100. 25 See Schumpeter 1990: 125. 68 Part I: Economy, state, and society which must be addressed if the tax state is not to collapse, bringing down with it commercial society and the capitalist entrepreneur. The balance between the two had to be restored; however, in the circumstances of 1918, it appeared to be extremely difficult to do so. For Schumpeter, the problem was the general loss of faith in capitalism and the undermining of its legitimacy, which made its survival doubt- ful. He also clearly perceived that the tax state and commercial society were irrevocably intertwined.26 The problem for the tax state was that the people would come to demand ever-higher public expenditures and that the tax state would lose its connection with the real economy and the self-interest of individual economic agents. The productive base would begin to shrink, exacerbating the problems of balancing the budget. The difficulty of keeping the tax state anchored in economic reality would grow. The tax state and commercial society, Schumpeter’s ‘public economy’ and ‘private economy’, did survive but he anticipated the later concern that would be voiced about the capacity of the public economy to enlarge itself continually at the expense of the private economy, to invade its sphere, and ultimately to destroy it. The implication from Schumpeter’s analysis is that the tax state can survive only if it nur- tures rather than supplants the private economy, from which it draws its strength. This has been a central concern of liberal political economy in the last hundred years: that is, how to allow the state sufficient strength to provide the legal and institutional framework and the wider support that commercial society needs to prosper without allowing an unchecked expansion of state power and public programmes. It became a preoccupation of Ludwig von Mises and his strand of the Austrian School and particularly of Hayek.27 If both the private economy and public economy are seen as ‘economies’, as households, then citizens may be persuaded that the private economy is too anarchic, too wasteful, and too inefficient and that the rational bureaucratic planning of the public economy is inherently superior. The private economy must be understood as a catallaxy that is the foundation of the public economy and not subordinate to it. This results in one of the prime tasks of the state: the safeguarding of the character of the private economy as a catallaxy in the face of bureaucratic and democratic encroachments on it.

26 See Schumpeter 1990: 126. 27 See Hayek 1976. Neo-liberalism and ﬁscal conservatism 69

Fiscal conservatism and economic crisis The growth in the size of the public household in commercial societies in the last hundred years (e.g., in the United Kingdom, from less than 10 to more than 40 per cent of Gross Domestic Product [GDP]) fundamentally altered the politics of the crises that periodically interrupt economic progress. The response to a crisis had always been governed by fiscal conservatism, the liberal principles of sound money, and balanced budgets that were at the heart of British fiscal policy in the nineteenth century and were widely regarded as the reason for the remarkable record of fiscal stability and continuity that the British state had secured. Whereas other states had incurred huge debts necessitating default, British credit was unmatched. Although its national debt had been 250 per cent of GDP because of the costs of financing victory in the Napoleonic Wars and remained above 100 per cent throughout the nineteenth century (much higher than today at approximately 60 per cent), Britain had no trouble financing and gradually reducing its debt through the Sinking Fund. The debt rose again as a result of the costs of the First World War, but the British state responded in the 1920s with severe spending cuts, known as the Geddes Axe, which were proportionately much deeper than anything contemplated today. The return to the gold standard in 1925 at the prewar parity of $4.86 was denounced by Keynes because it required a further massive deflation of British costs and a lowering of British wages to make British goods competitive in international markets. It was the immediate cause of the miners’ strike and then the General Strike. The adjustment necessary to restore the gold standard was loaded onto private households. Following the crash on Wall Street in October 1929, the minority Labour Government in Britain had to grapple with the rising tide of unemployment and financial collapse across Europe. The Chancellor of the Exchequer, Philip Snowden, was a socialist but a Gladstonian liberal when it came to public finance. Socialism, he insisted, had to be paid for and the health of the private economy came before any schemes of redistribution. His policies to balance the budget brought down the minority Labour Government and forced Britain off of the gold standard. A similar denouement occurred in the United States. Following the Great Crash, the US Treasury under Andrew Mellon followed a policy that was the orthodox solution for dealing with a financial crisis. The 70 Part I: Economy, state, and society basic problem was perceived as the misallocation of resources that had occurred during the boom of the 1920s. The fictitious values that it had created needed to be destroyed, and as quickly as possible, through a sharp deflation to ensure a rapid and soundly based recovery. If the government intervened to prevent the market from destroying the inflated values that had been created in the boom, it could do so only by distorting economic activity and risking inflation, paving the way for a further and more damaging collapse in the future. For Mellon, the positive aspect of a recession was that assets returned to their rightful owners. His advice to Herbert Hoover as the slump deepened was to liquidate labour, liquidate stocks, liquidate farms, liquidate real estate, and purge the rottenness out of the system. This liquidationist approach later was held to be responsible by both Keynesians and monetarists for turning the slump into a depression. This led to later governments responding very differently to major financial collapse. The solution to the crisis of the laissez-faire state led to the abandonment or at least relaxation of the rules of fiscal conservatism. The extension of the state took many forms, but one of the most familiar was the Keynesian welfare state. The important contribution of Key- nesianism was not so much the specific rules for the conduct of fiscal policy that it introduced as the political assumption that the state had a responsibility to manage the economy to produce economic growth, full employment, and stable prices – as well as to provide for the social and economic security and well-being of its citizens. These organizing assumptions established a presumption in favour of increasing state powers and state funding to solve social and economic problems. With rapid postwar economic growth, the new balance between state and market appeared to be both manageable and superior to what had occurred previously, and the new model was much celebrated.28 How- ever, by the end of the 1960s, economic growth was beginning to falter and both unemployment and inflation began rising. This situation gave neo-liberalism its chance. The policy message of neo-liberalism appeared to be clear: there should be a return to the principles of fiscal conservatism in order to curb the growth of the state and check inflation. Hayek and Friedman could agree about the goal even if they disagreed about the means. Neo-liberals also insisted that domestic policy should be subordinated to the requirements of the international market. This

28 See Shonfield 1965. Neo-liberalism and fiscal conservatism 71 meant focusing on adjusting and adapting domestic institutions to improve competitiveness and efficiency. A policy package of monetary targets and supply-side reforms – including tax cuts, flexible labour markets, privatization, and light-touch regulation – became the standard neo-liberal prescription for countries wanting to prosper in the international economy and to receive aid and credit. The discourses around these policies became entrenched not only in national governments but also in international agencies and organizations, including the World Bank, the IMF, the Organisation for Economic Co-operation and Development (OECD), and the EU. Austerity packages to eliminate deficits and reduce debts and structural reforms to increase productivity and growth have become standard. They have remained the default policy options after the crash of 2008, although they are tempered by the need to indulge in extraordinary measures to keep banks afloat. The 2008 crash occurred with neo-liberalism in the ascendancy and most governments operating – in some cases reluctantly – within a neo-liberal framework. It provided an opportunity for governments to endorse the principles of fiscal conservatism and rein in the state. Despite much rhetoric to this effect, however, governments have been slow to move in this direction. They have been more concerned about not making the mistakes that were made after 1929. Keynes and Hayek had clashed at that time over the best policy to deal with a crisis in the tax state and in the market economy. Hayek remained convinced by the experience of the response to 1931 that the only way to preserve the catallaxy was to return again to rules that could not be set aside by governments. In the 1970s, the era of stagflation in the world economy – the second great crisis since 1929 – it was often argued that Keynesianism had been discredited and that the rise of monetarism and the doctrines of neo-liberalism represented a repudiation of the enlargement of the public household that had occurred since the 1930s. However, the paradox of neo-liberalism is that although it has restructured the state since the 1980s, nowhere has it significantly reduced it. Many neo-liberal governments have raised rather than lowered public spending. The distribution of benefits may be different, but the tax state is ‘alive and well’ under neo-liberalism and continuing to advance. It was appropriate, therefore, that many of the responses in 2008 should have had a distinctly Keynesian flavour. Many American conservatives were strongly opposed to the bailouts and the fiscal 72 Part I: Economy, state, and society stimulus announced by Hank Paulson and George W. Bush and continued by Barack Obama. Many of them, particularly in the Tea Party, are intent on rehabilitating Andrew Mellon, arguing that his supply-side approach to taxation in the 1920s and his balanced-budget approach to fiscal policy were correct and that the New Deal is responsible for America’s current difficulties and ever-expanding debt by making possible the growth of big government and the culture of entitlement and dependency. Thus far, however, no government has been elected in a Western democracy that is prepared to balance the budget by drastically reducing the size of the state; too many people have too many entitlements that cannot be touched. Although many of the principles of the old sound-money policies have been abandoned, much of the rhetoric of the older conception of the public household remains in the new politics of austerity, which has established itself almost everywhere. One of the most familiar arguments is the analogy repeatedly drawn between the finances of the public household and those of the private household. After 1931, this argument was discredited by Keynesianism. However, Keynesian ideas about these differences from private households have never been easy to communicate to citizens, compared to the simple idea that the state should balance its budget just like the individual household must balance its budget: cutting expenditure to match income, living within its means, and paying down the credit cards. A recent idea that has the same lineage is the notion that the public household should be treated as a cost centre, with its revenues and spending ring-fenced and made to balance. What these images want to deny is that the state is a household very different from the private household because it has the ability to borrow, to tax, and to print money. It is these powers that the old liberal political economy sought to restrain, and it is these powers that Keynesian political economy is accused of unleashing. Treating the state as if it were a private household accounts for some of the deep hostility to Keynesianism, treated by some of its critics as speculative public finance that substituted judgement and discretion for firm rules. Yet, despite this, Keynesian pragmatism and discretion are still alive and well in Britain and the United States. George Osborne, the UK Chancellor after 2010, did not reverse the major stimulus and the bailouts that rescued the British financial system in 2008. Barack Obama went further in adding to the stimulus, although not by enough Neo-liberalism and fiscal conservatism 73 to satisfy Keynesian critics such as Paul Krugman.29 However, neither government offers a serious intellectual defence of its unwillingness to match the rhetoric of fiscal conservatism with policies that might deliver it; in the case of the United Kingdom, the government lux- uriates in the discourse of austerity and moral proprieties of fiscal conservatism.30 The effect is that radical alternatives are disarmed because although governments have many fiscal critics on their right – who rehearse radical economic libertarian arguments of their own – there are many fewer voices providing a positive case for the public household. The resilience of neo-liberalism reflects a widespread appreciation among citizens that something must be done about debts and deficits in the public household, with the understanding that entitlements are not seriously threatened. It is rather different in the Eurozone, where a more Hayekian or ordo-liberal policy is being followed. The fiscal compact was agreed to among members of the Eurozone and is designed to save the monetary union. It imposes tight fiscal rules on permitted deficits that, if implemented, imply a deeply deflationary policy of austerity, thereby forcing all members of the Eurozone to cut spending and reduce costs to stay abreast of the most productive economy: Germany. Although the Euro- zone, like the EU, is a polity, it is not a state and has no demos, which makes the difficulty of securing legitimacy for this austerity policy seem insuperable to most observers. The Eurozone needs a public household of the Keynesian type if it is to be acceptable to all members; however, the only public household that Germany seems prepared to tolerate is firmly ordo-liberal. Despite their desire to emulate Germany and maintain competitiveness, the strains on many of the individual states to live within these rules will be too great. The attempt to create this technocratic economic government will either be given up or a more far-reaching integration will be necessary, which will also transform the nature of the EU, involving a much larger EU budget (currently, it is only 1 per cent of GDP, compared to approximately 20 per cent for the US federal government). If this does not happen, European states will seek to protect their own private economies, including private and corporate households, by deploying the resources and capacities within their separate public households. This is where states remain important: if the crisis is extreme enough, they can choose to reorganize and

29 See Krugman 2012. 30 See Gamble 2012. 74 Part I: Economy, state, and society restructure all of their household economies – private, corporate, and public – to remain competitive within the wider international catallaxy. The politics of crisis reveals once again the essential lineaments of our modern political economy and the perennial dilemmas it poses for states. Fiscal conservatism therefore can be seen as a way of holding the line, of trying to restore the balance between the market economy and the public household that existed before the crisis and of loading the costs onto the private households. Neo-liberalism appears resilient because fiscal conservatism is the default position to which states return at times of crisis. The congruence between markets and states must be restored in ways that allow growth to resume. However, to ensure that this occurs, neo-liberalism can sanction far-reaching intervention by the state to restructure individual, corporate, and public households. For an older liberal political economy and for the Hayekian strand of neo-liberalism, fiscal conservatism is not a tactic but rather an unbreachable set of rules. For many contemporary neo-liberals, however – from Ben Bernanke, Chairman of the US Federal Reserve, to Mervyn King, Governor of the Bank of England – the reverse is true. Both US Secretary of the Treasury Tim Geithner and UK Chancellor George Osborne have been urging the Eurozone to reduce austerity and promote quantitative easing through the issuing of Eurobonds. It is one of the many paradoxes of this crisis that the EU – in this respect, at least – should appear more Hayekian than Anglo-American in its response to the crisis. The resilience of neo-liberalism lies in the fact that it is more than a doctrine of macroeconomic management that can, when circumstances change, be discredited. Neo-liberalism is rooted in an understanding of the twin imperatives of the commercial society and the tax state, which continue to define our political economy. The central tension in neo-liberalism is that although it arose as a critique of the extended social-democratic tax state that had evolved in that era, it has not yet found ways to reduce significantly the size of the tax state.31 One result has been the explosion of credit and debt, which led inexorably to the financial crash. Fiscal stimulus and fiscal austerity have been variously employed to contain the problems created by the crash, but they do not offer lasting solutions. Governments simply hope that growth will return at some stage, as it always has. However, the longer it is delayed,

31 See Pierson 1994. Neo-liberalism and fiscal conservatism 75 the more the resilience of neo-liberalism will be tested by political movements on both the left and the right. This is already happening in Europe but still only in a modest way. It is also possible that neo- liberalism may take a radical turn and generate programmes that seek – through the adoption of, for example, flat taxes and major reductions in state spending – to redraw radically the lines between the market and the state. Despite the rhetoric of the 1980s, this has not been attempted so far in the neo-liberal era. Neo-liberals in practice extol the extended state or, at least, certain parts of it. That is why supply-side doctrines advocating tax cuts without spending cuts are so beguiling. Neo-liberals think of themselves as fiscal conservatives, but many of them in practice are far from that description. This ambivalence makes neo-liberalism very flexible. In terms of the typology in Chapter 1, the gulf between rhetoric and reality is particularly marked in neo- liberalism. Together with its malleability and its success as a discourse of popular economic common sense, this helps to explain its resilience.

References Bell, Daniel. 1976. ‘The Public Household’. In The Cultural Contradictions of Capitalism. London: Heinemann. Buchanan, James, and Richard Wagner. 1977. Democracy in Deﬁcit.New York: Academic Press. Chang, Ha-Joon. 2002. Kicking away the Ladder: Economic Development in Historical Perspective. London: Anthem. Cockett, Richard. 1994. Thinking the Unthinkable: Think-Tanks and the Economic Counter-Revolution, 1931–1983. London: Harper Collins. Crouch, Colin. 2011. The Strange Non-Death of Neo-Liberalism. Cam- bridge, UK: Polity Press. Cox, Robert. 1996. Approaches to World Order. Cambridge: Cambridge University Press. Friedman, Milton. 1977. Inﬂation and Unemployment: The New Dimension of Politics. London: IEA. Fukuyama, Francis. 1989. ‘The End of History’, The National Interest 16 (Summer 1989): 3–18. Gamble, Andrew. 2006. ‘Two Faces of Neo-Liberalism’. In The Neo-Liberal Revolution: Forging the Market State, edited by Richard Robison (20– 35). London: Palgrave-Macmillan. Gamble, Andrew. 2012. ‘The UK: The Triumph of Fiscal Realism?’ In The Consequences of the Global Financial Crisis: The Rhetoric of Reform and Regulation, edited by Wyn Grant and Graham Wilson (34–50). Oxford: Oxford University Press. 76 Part I: Economy, state, and society

Hall, Peter. 1993. ‘Policy Paradigms, Social Learning, and the State: The Case of Policy-Learning in Britain’, Comparative Politics 25 (3): 275– 96. Hannah, Leslie. 1976. The Rise of the Corporate Economy. London: Methuen. Harvey, David. 2005. A Brief History of Neoliberalism. Oxford: Oxford University Press. Hayek, Friedrich von. 1944. The Road to Serfdom. Chicago: University of Chicago Press. Hayek, Friedrich A. 1976. Law, Legislation and Liberty. Vol. 2. London: Routledge. Hont, Istvan. 2005. Jealousy of Trade: International Competition and the Nation-State in Historical Perspective. Cambridge, MA: Harvard Uni- versity Press. Krugman, Paul. 2012. End This Depression Now. New York: W. W. Norton and Company. Mises, Ludwig von. 1944. Omnipotent Government: The Rise of the Total State and Total War. New Haven, CT: Yale University Press. Nicholls, Anthony. 1994. Freedom with Responsibility: The Social Market Economy in Germany, 1918–1963. Oxford: Clarendon Press. Nozick, Robert. 1974. Anarchy, State and Utopia. Oxford: Blackwell. Pierson, Paul. 1994. Dismantling the State? Reagan, Thatcher and the Poli- tics of Retrenchment. Cambridge: Cambridge University Press. Polanyi, Karl. 1945. Origins of Our Time: The Great Transformation. Lon- don: Gollancz. Ridley, Matt. 2011. The Rational Optimist: How Prosperity Evolves. Lon- don: Fourth Estate. Rothbard, Murray. 1973. For a New Liberty. New York: Macmillan. Schumpeter, Joseph. 1990. ‘The Crisis of the Tax State’. In The Economics and Sociology of Capitalism, edited by Richard Swedberg (99–140). Princeton, NJ: Princeton University Press. Shonﬁeld, Andrew. 1965. Modern Capitalism: The Changing Balance of Public and Private Power. London: Oxford University Press. Skidelsky, Robert. 1967. Politicians and the Slump. London: Macmillan. Skidelsky, Robert. 2009. Keynes: The Return of the Master. London: Allen Lane. Thompson, Helen. 2008. Might, Right, Prosperity and Consent: Represen- tative Democracy and the International Economy. Manchester, UK: Manchester University Press. Turner, Rachel. 2008. Neo-Liberal Ideology: History, Concepts and Poli- cies. Edinburgh: Edinburgh University Press. 3 Welfare-state transformations: From neo-liberalism to liberal neo-welfarism? maurizio ferrera

Introduction What has been the influence of the neo-liberal ideology on welfare- state transformations since the 1980s? How resilient is such ideology and what is its influence today – that is, in the early 2010s? In the context of this book’s themes, we would expect to find in this policy area a high degree of influence and resilience. After all, neo-liberalism emerged as an attack on Big Government, with a view to rescuing individual freedom from the torments of taxation, bureaucracy, and regulation (including in the social realm). This chapter recognizes the high relevance (and not only rhetorical) of neo-liberalism for welfare-state developments since the 1980s – but with two decisive qualifications. The first has to do with meanings: gauging neo-liberal resilience requires a prior clarification of what is connoted by the term ‘neo-liberalism’. The second qualification has to do with timing: I argue that the influence of neo-liberalism on the welfare state has followed a broad parabola, which reached its peak in the early 1990s but started to decline thereafter in the wake of ideological changes and discursive reorientations. I start with the meaning attributed to the term ‘neo-liberalism’ and, more precisely, to both the noun (liberal) and the prefix (neo). Unfor- tunately, the English language conflates in the noun three connotations that Italian (and Italy’s political-theory tradition) separates by using different nouns. The Italian language, in fact, distinguishes among liberalesimo, liberalismo, and liberismo. The first term has the widest

I express my gratitude to the volume editors and to all of the co-authors for their valuable comments and suggestions. Previous versions of this text were presented at Boston, Harvard, and Oxford Universities. I am grateful for all of the comments that I received from my audiences. Special thanks go to Bea Cantillon, Michael Freeden, Anton Hemerijck, Bruno Palier, Georg Picot, and Frank Vandenbroucke for their focused remarks and advice for improvement.

77 78 Part I: Economy, state, and society connotation: It refers to the entire, complex, and diverse thought tradition that began with the philosophical contractualism of John Locke and with the doctrines about the constitutional protection of individual freedoms.1 Liberalesimo thus embraces the entire range of offspring that ‘germinated’ from the Lockean core: its outer perimeter ends where authoritarianism and collectivism begin and the ideas of negative freedom, its constitutional protection, and its lexicographic primacy are rejected. The second term – liberalismo – connotes the combination of the general foundations of liberalesimo with speciﬁc emphases on additional components: economic (e.g., private property and free markets), political (e.g., universal suffrage and parliamentary democracy), cultural (e.g., neutrality relative to substantive axiolo- gies), institutional (e.g., strict State–Church separation), and social (e.g., welfare rights and collective responsibilities). There is only one liberalesimo but there are several distinct liberalismi, in the plural.2 The third term, liberismo, is essentially an economic doctrine (and not the only liberal one) that assigns primacy to the free market, free enterprise, and efﬁciency and assigns a minimal economic role to the state, essentially that of upholding undistorted competition. Closely linked with marginalist economics, liberismo’s starting theoretical and ideological point is the ‘sovereign’ rational individual, seen as homo economicus, pursuing self-interested preferences – a pursuit that must remain free, as much as possible, from state interference.3

1 Liberalesimo, unfortunately, is becoming an obsolete word outside Italian academia and, increasingly, also within it, replaced with liberalismo tout court. It was coined and used during the ﬁrst half of the twentieth century in the context of the debate around Benedetto Croce’s idealistic liberalism. The term gave the title to one of the most exhaustive histories of philosophical and political liberalism in Europe: Guido De Ruggiero’s Storia del liberalesimo (1977). 2 See Sartori 1978 and Freeden 2008. 3 The notion of liberismo was coined by the Italian philosopher Benedetto Croce to connote those liberal doctrines that transform the free market from ‘a legitimate economic principle into an ethical theory based on hedonism and utilitarianism’ (Croce 1928: 11). For Croce, freedom was essentially a spiritual category, necessitating civil and political rights, with private property and the free market as only ancillary (and theoretically dispensable) requisites. His polemical target was the liberalism of Luigi Einaudi, who thought instead that private property, free markets, and undistorted competition were necessary conditions of the liberal order alongside civil, political, and social rights (Einaudi 2004). Einaudi was a prominent Italian economist and politician who became the second President of the Italian Republic (1948–1955) and was a member of the Mont Pelerin` society; see also Chapter 1. Welfare-state transformations 79

Using different terms for different meanings has at least three advantages: it enhances ex definitione the clarity of discussion and argument; it avoids misleading analytical overlaps; and it contains the risk of evaluative contagion (especially of negative evaluations: e.g., from liberismo to liberalismo or one type of liberalismo to another). Much of the confusion, controversy, and normative overtones of the neo-liberalism debate in the Anglo-Saxon context is linked, I believe, to the highly ambiguous, internally ‘conflated’ connotation of the noun. In Italian, the neo-liberal turn of the 1970s–1980s is normally called la svolta neo-liberista.4 The debate is thus encouraged, naturaliter,to focus on the essentially economic doctrine which reformulated, radi- calized, and relaunched (hence, the prefix ‘neo’) the classical tenets of liberismo. In this chapter, I connote neo-liberalism in the Italian sense of neo- liberismo and address the issue of resilience essentially in this perspective. It thus is argued that the neo-liberal creed had a strong influence on welfare-state transformation since the 1980s but that, thereafter, a new ideological turn has gradually taken place, leading to a new approach that I propose to call ‘liberal neo-welfarism’ (LNW). This turn has drawn insights from different liberalismi (of a predominantly democratic and social orientation) as well as from the reformist and democratic-socialist traditions, and it has creatively blended these insights into a novel blueprint for welfare-state modernization. LNW has taken root in both the reformist left and centre spaces of the political spectrum, with incipient signs of a process of internal competitive differentiation. My reconstruction thus nuances the resilience thesis of this volume as far as welfare is concerned. Liberalism (i.e., liberalesimo plus, essentially, democratic and social liberalismi) is still an essential component of current ideological views and policy programmes on the state’s role in the social realm. However, neo-liberalism (in the sense of liberismo) has gradually lost its traction and left room for LNW – even though it still largely imbues the overall economic-policy framework at both national and supranational levels. The chapter is organized as follows. First is a brief review of the developmental parabola of the neo-liberal ideology and its influence

4 David Harvey’s book, A Brief History of Neoliberalism, has been translated into Italian as Breve storia del neoliberismo (Harvey 2007). French has the same semantic problem as English. Bruno Jobert’s inﬂuential book on the neo-liberal turn was titled Le tournant neo-lib´ eral´ en Europe (Jobert 1994). 80 Part I: Economy, state, and society on the welfare-state discourse. This is followed by an analytic inter- lude on the concept of ideology and how to study its adaptation and change. The remaining sections are devoted to discussing the rise, impact, nature, and future prospects of LNW. In the conclusion, I relate my argument to the general lines of explanation on ‘resilience’ put forward by the volume’s editors.

Attacking ‘welfare’: The neo-liberal parabola As highlighted by several authors, the neo-liberal creed has indeed been an extremely salient stream in the discourse accompanying the transformation of the European welfare state during the previous three decades.5 The flow of this stream (and, thus, its visibility and impact), however, has not been constant through time. Rather, it has followed a large parabola, with an ascending phase in the 1980s, a flattening phase around the mid 1990s, and a descending phase thereafter. Especially in the latter phase, the welfare-state discourse witnessed the strengthening (we could say the ‘striking back’ or return) of other ideological traditions, which have gradually gained traction in shaping the reform wave that has been reshaping the profile of European welfare. The neo-liberal parabola is clearly recognizable at both the national and supranational levels.6 Its ideological core consolidated through the 1970s and was centred on the faith in the self-regulating capacity of free markets and their superiority vis-a-vis` any other allocative and distributive mechanism in upholding an individual’s rational pursuit of wealth. The early national debates on the ‘crisis’ were largely inspired by an economistic critique of the Keynesian welfare state,7 which was accused of two main ‘excesses’: first, too much egalitarianism and taxation and, thus, less efficiency and entrepreneurship, less risk-taking and innovation, as well as distorted incentives; and, second, too much bureaucratization and social control (cf. the metaphor of the ‘nanny state’) and, thus, less freedom and choice, less dynamism, increasing predation by special-interest groups, and a culture of passive dependence and weakened personal responsibility on the side of the beneficiaries and the citizenry more generally.8 Combined with moral conservatism (i.e., emphasis on traditional family values, law and order, as well as a disdain for multiculturalism and ‘diversity’), this anti-welfare

5 See Mudge 2008; Harvey 2005; and Roy, Denzau, and Willet 2006. 6 See Gowan 1999. 7 See Steger and Roy 2010. 8 See Taylor 2007. Welfare-state transformations 81 ideology triumphed throughout the 1980s and early 1990s under Rea- gan and Thatcher (who defined themselves as neo-conservatives rather than neo-liberals). In the first phase of their tenure, both leaders put forward various radical proposals aimed at dismantling – or, at least, retrenching – key entitlement programmes (to use Reagan’s jargon) within healthcare and old-age protection. Unemployment and social- assistance benefits (e.g., ‘Aid to Families with Dependent Children’ in the United States and ‘Income Support’ in the United Kingdom) were singled out as being especially wasteful and even ‘immoral’ – allowing some people to live off of other people’s taxes – and were thus the object of harsh discursive attacks and, subsequently, of various material cuts and overall institutional retrenchment. In Continental and Nordic Europe, neo-liberal views and proposals never reached the ‘tsunami’ proportions seen in the United States or the United Kingdom, but various countries within these areas nevertheless witnessed the spread of neo-liberal economistic orientations, as well as the appearance of anti-tax and anti-welfare parties that were able to attract considerable consensus (a typical example was Forza Italia, founded by Silvio Berlusconi between 1993 and 1994).9 At the supranational level, during the 1980s and early 1990s, economic neo-liberalism (and its monetarist core as elaborated by Milton Friedman)10 succeeded in becoming deeply rooted, especially within the OECD and most international economic organizations, the Euro- pean Commission and, later, the ECB. Price stability, fiscal discipline, undistorted competition, free trade, consumer choice, deregulation, liberalization, and privatization acquired lexicographic priority over any other economic and social objective.11 In combination with Treaty rules programmatically biased towards ‘negative integration’, economic neo-liberalism became the driving force of the two biggest European projects and achievements of the 1990s: the Single Mar- ket and the Economic and Monetary Union (EMU).12 As has been rightly noted, in their original formulations, both projects had mixed

9 See Larsen and Goul Andersen 2009 and Lindbom 2008. 10 Although linked to the liberismo of the 1940s and 1950s, Milton Friedman and the so-called Chicago School of Economics developed a new comprehensive economic-policy paradigm squarely challenging the then-hegemonic Keynesian orthodoxy – hence, the appropriateness, in the Italian language, of the term neo-liberismo. 11 See Steger and Roy 2010. 12 See Ferrera 2005, Leibfried 2005, and Scharpf 2009. 82 Part I: Economy, state, and society objectives: partly economic and partly political and not programmatically hostile to the social dimension.13 The fact remains, however, that the welfare discourse (increasingly dominated by trained economists within the most prominent institutional and public arenas, e.g., the financial media) displayed a visible anti-social–state flavour. The welfare state was seen mainly as a liability, a source of rents and distortions hindering market competition as well as of programmatically irrespon- sible spending commitments that threatened the soundness of public finances. ‘Retrenchment’, ‘roll-back’, ‘cost containment’, and ‘cuts’ were common expressions used to prescribe and describe reforms in the social-protection sphere.14 During the ascending phase of the parabola, the neo-liberal discourse had a tangible institutional impact. The most emblematic national case is, of course, the United Kingdom, where several reforms were adopted in the field of unemployment insurance, second-tier pensions, social assistance, and healthcare – all explicitly motivated and justified in neo- liberal terms.15 Through the new provisions of the Single European Act and then the Maastricht Treaty, supranational neo-liberalism was able, in turn, to impose increasing budgetary and (de)regulative constraints on the internal functioning and structure of national social-protection systems, reorienting their agenda towards efficiency, sustainability, and work incentives.16 However, despite its unquestionable significance and attractive force, in its ascending phase, neo-liberalism did not succeed in affecting the institutional foundations of the welfare state (i.e., state-funded and state-centred compulsory social insurance). Even in the United Kingdom, Thatcherism did not bring about the general

13 As Frank Vandenbroucke reminded me (personal communication), one of the driving forces behind both the Single Market and EMU was the Delors Commission. Delors conceived the single market as a necessity to promote economic prosperity but tried to parallel it with initiatives to relaunch an EU-version of corporatism, which largely failed but nevertheless inspired the Social Protocol to the Maastricht Treaty. Delors (and Mitterrand) wanted EMU for political reasons, not because of neo-liberal conviction. Why, then, did they accept the monetarist foundations of EMU? It seems plausible to think that their cognitive apparatus with regard to the requirements of monetary union was weak: They did not think it necessary to question the largely monetarist reading of the problem of monetary policy that intellectually dominated in the Commission services when EMU was prepared (see Vandenbroucke 2012). 14 See Ferrera 2008 and Taylor-Gooby 2001. 15 See Hay 2001 and Gamble 1994. 16 See Falkner 2010. Welfare-state transformations 83 overhaul of British welfare that the ‘Iron Lady’ repeatedly advocated in her speeches.17 On the Continent, the few radical proposals that were formulated by neo-liberal formations – for example, Forza Italia’s plan to privatize the country’s health service in the first Berlus- coni government in 1994 or the demands voiced in the early 1990s by French self-employed associations to break the state monopoles sociaux, including public pensions – were not even officialized.18 In turn, neither the Single Market nor the Maastricht Process prompted a ‘race to the bottom’ in terms of social standards that neo-liberal opponents had predicted in the wake of liberalizations, greater ‘market compatibility requirements’ and financial–monetary austerity.19 In the early 1990s, the ideological climate began to change: the ascending phase gradually halted. At the EU level, after the Sin- gle European Act, the Commission (and Delors, in particular) was able to push through and heighten the visibility of its discourse on ‘the social dimension’ of integration, which led to the adoption of the Social Protocol to the Maastricht Treaty. Later, a full-fledged doctrine on the appropriate role of this dimension was defined (mainly by the Employment and Social Affairs Directorate of the Commission, in collaboration with the European Parliament), under the general rubric of ‘social protection modernization’.20 This doctrine was not presented as an alternative to the neo-liberal perspective but rather as an enriching and coherent expansion: Social policy was to be promoted (while modernized) because it was an important ‘productive factor’. The Employ- ment and Social Chapter of the Amsterdam Treaty (1997), the launch of the European Employment Strategy (1998), and, later, the adoption of the Charter of Fundamental Rights with the Nice Treaty (2000) and the establishment of the Social Inclusion Open Method of Co- ordination (OMC) (2001) comprised a clear result of this discursive reorientation.21 At the national level, the neo-liberal critique of the welfare state started in turn to be opposed by increasingly articulated cognitive and normative counterarguments. Although accepting the challenge (and the desirability) of ‘modernization’, such counterarguments suggested that reforms should not be about only efficiency, cost containment,

17 See Pierson 1994. 18 See Ferrera 1994 and Palier 2002. 19 See Ferrera 2005. 20 See European Commission 2005. 21 See Hemerijck 2012. 84 Part I: Economy, state, and society and market incentives but also efficacy and distributive rationaliza- tions guided by the principles of equity (including gender), inclusion, and cohesion. This new discourse was certainly prompted by the threat of neo-liberal hegemony, but it cannot be seen as a mere temporary response to it. It was, rather, the fruit of a gradual and labourious re-elaboration (already started in the 1980s) of other classical Euro- pean traditions (e.g., Social Democracy, social and democratic liberalism, and – to some extent – Christian solidarism), as well as the new Anglo-American school of egalitarian liberalism, emblematically represented by Rawls. This re-elaboration was also prompted by the need to seriously confront the new challenges posed by European integration, globalization, and the rise of the service economy. In part because of necessity, in part because of (conditional but genuine) conviction, the new discourse came to internalize some of the cognitive and normative elements and institutional constraints of the neo-liberal stream: for example, financial stability, the need to regain competitiveness, organizational efficiency, individual responsibility, and work incentives. During the 2000s, the EU was a major arena and an important actor for the elaboration of the new welfare-state modernization discourse and agenda. Key programmatic notions (e.g., ‘recalibration’, ‘active inclusion’, ‘social investment’, and ‘social quality’) were developed in (and partly by) Brussels, which provided broad inspiration and specific insights for the Lisbon and, later, the EU 2020 agendas. A novel strand of intellectual debate also was launched on how to rebalance economic and social objectives within the EU supranational architecture.22 The anti–neo-liberal ‘strike back’ has come in separate waves, with different political colours and discursive styles in different countries. A first wave was prompted by the return to power of centre-left parties. Blair’s Third Way, Prodi’s Welfare delle Opportunita`, Schroeder’s Neues Modell Deutschand, and later Zapatero’s Nueva Igualdad are emblematic examples of the different symbolic packages that framed the agenda of welfare reform under centre-left majorities in the United Kingdom, Italy, and, later, Spain. However, ideological re-elaboration also took place in countries where centre-left parties had to govern jointly with Christian Democrat or liberal parties, as in the red–black coalition in Germany during the mid 2000s and the purple coalition in the Netherlands in the 1990s.23

22 See Marlier and Natali 2010 and Cantillon, Verschuren, and Ploscar 2012. 23 See Stjerno 2005. Welfare-state transformations 85

Is there a way to capture – beyond national and party-political variations – the general nature of the post–neo-liberal perspective on the welfare state in the EU? When confronted with broad constellations of changing political institutions and normative justiﬁcations drawn by distinct intellectual blueprints – but characterized by some degree of coherence and temporal continuity – political theorists sometimes use the notion of ‘ideological synthesis’.24 Can we possibly speak of post–neo-liberal developments in these terms? Would the expression ‘liberal neo-welfarism’ be an appropriate label for this new ideological synthesis? The following sections in this chapter argue in favour of a positive answer to both questions.

Ideological change: The morphological approach Discursive neo-institutionalism (DI) provides the natural analytical approach to frame the two questions and develop an argumentative strategy. Under the broad rubric of ‘ideas’, DI investigates a wide range of distinct symbolic ‘objects’, conceptualized as ‘frames’, ‘paradigms’, ‘narratives’, ‘public philosophies’, ‘policy programmes’, and so on.25 Vivien Schmidt suggested grouping all of these concepts into three broad categories, according to their level of generality, as follows: (1) philosophical ideas, which offer a deep-seated (i.e., ontological and normative) underpinning for understanding the world and the appropriate actions to be undertaken by individuals and groups; (2) programmatic ideas, which provide problem definitions, analytical frames, contextualized norms, and principles that allow diagnosis of the practical challenges of the real world and that elaborate response strategies; and (3) policy ideas, which are circumscribed to particular situations and tailored to different substantive problems.26 Schmidt locates ideologies within the first, broadest category. Polit- ical theorists, however, are accustomed to drawing a distinction between a ‘philosophy’ (i.e., a specific theory such as Rawls’s Justice as Fairness or a broader school of thought, such as Luck Egalitari- anism) and an ‘ideology’.27 Philosophies rest on reflexive rationality; proceed by logical arguments; maintain a critical awareness of their assumptions and of the essentially contestable nature of their normative constructs; tend to elaborate general, typically abstract, and a

24 See, for example, Mueller 2009. 25 See Beland´ and Cox 2011. 26 See Schmidt 2008. 27 See Freeden 1996 and 2012. 86 Part I: Economy, state, and society historical theories; and employ a technical, often esoteric, language and discursive style. By contrast, ideologies rest on rationality and emotions; mix arguments and non-argued assertions (not always logically coherent and sometimes dissimulatory); are only partly aware of their basic assumptions and tend to ‘de-contest’ their values (i.e., treat them as intuitively ‘right’, non-disputed or non-disputable); and elaborate spatially and historically bounded worldviews, expressed in an accessible language, ready for public use. In respect of Schmidt’s typology, ideologies should be located between philosophical and programmatic ideas: ‘they keep a foot in the realm of political thought and a foot in the realm of political action’.28 Each ideology is characterized by an internal structure or ‘morphology’ – that is, a concatenation of concepts and bridging propositions and reasoning. Following Freeden, we can distinguish among three basic morphological components of an ideology: (1) the core components (i.e., the set of ‘unremovable’ concepts and propositions), those that cannot be eliminated without destroying the ideology itself (e.g., the concept of freedom as an absence of constraints in the case of liberalism); (2) the adjacent components (i.e., concepts and propositions that are logically and culturally implicated by the core and offer substance, determinacy, and richness to the ideology – e.g., equal opportunity or democracy); and (3) the peripheral components, which are more marginally related to the core (e.g., well-being or solidarity) but that are useful for linking the ﬁrst two components to the spatial and historical context of reference.29 Ideologies can be dogmatic or plastic, conﬁdent or tentative, absolute or relative – with liberalism displaying the highest degree of plasticity as well as programmatic ‘openness’ via processes of trial and error. Ideologies are not mutually exclusive but rather can have wide areas of overlap in all three components (i.e., ‘ideological overlapping consensus’, to paraphrase Rawls). They can have different levels of generality (from liberalism versus socialism to neo-liberalism versus social liberalism to single-thinkers’ liberalisms). They can cluster in ideological traditions or even syntheses, which recombine the core and adjacent components of lower-level ideologies into novel forms. Finally, ideologies emerge, evolve, and decline; they strive to adapt, mainly in response to changes in the two realms in which ‘their feet are planted’:

28 See Freeden 1996. 29 See Freeden 1996. Welfare-state transformations 87

(1) the realm of philosophical debates and the practical realm of political action (including the exercise of power), and (2) policy choice in response to social and economic transformation. Although less clearly demarcated than philosophical theories, ideologies typically have (and strive to maintain) a visible boundary, with a view to providing a recognizable Gestalt to actors engaged in conflict and/or cooperation within a given framework of institutions and processes. The morphological approach to the study of ideologies is useful for the analytical framing of my two questions and my argumentative line. The rise of the neo-liberal critique of the welfare state can be seen as a clear example of an ideological turn that (1) re-elaborated in a rather dogmatic and overconfident style the adjacent components of classical liberismo (e.g., the importance of free markets, undistorted competition, and consumer sovereignty); (2) eliminated all of the ‘social’ peripheral components that other liberal traditions had come to include within their perimeter during the twentieth century (e.g., cohesion and collective responsibility versus undeserved disadvantages; opportunities for full individual development), replacing them with a mix of libertarianism and traditionalism; and (3) adopted monetarism as an uncontestably superior counterparadigm vis-a-vis` Keynesianism, thus squarely challenging the ‘social-democratic consensus’ of the Trentes Glorieuses. As discussed in this chapter, during the 1980s, neo-liberalism succeeded in being affirmed as a dominant ideology, reaching its peak at the turn of the decade. In the subsequent period, its traction began to decline and new ideological ‘bricks’ began to be posed in various national and supranational public arenas, drawing the contours of a post–neo-liberal perspective on welfare-state modernization, which – as anticipated in the Introduction to this chapter – I propose to label ‘liberal neo-welfarism’. To what extent can an ideological core be identified in this perspective and can we define it – overall – as liberal (i.e., liberale, not liberista)? Can a relatively coherent mix of adjacent components be identified and does the expression ‘liberal neo-welfarism’ capture the overall essence? Can the new perspective be considered an ideological synthesis of different traditions (e.g., liberal, Social Demo- crat, and in part even Christian Democrat), drawing a perimeter of ‘overlapping ideological consensus’ that might serve as a morphological counterpart to the social-democratic consensus of the 1960s and 1970s? 88 Part I: Economy, state, and society

To answer these reframed questions, I proceed in three steps. First, I identify the main triggers of ideological change from neo-liberalism to post–neo-liberalism. Second, I discuss the actors of change and their impact. Third, I establish whether the new ideological ‘bricks’ can be put together to form a relatively coherent new synthesis.

The rise of post–neo-liberalism As noted previously, ideological change typically proceeds from transformations that occur in the practical realm of society and/or in the philosophical realm. At least four distinct transformations that prompted the rise of post–neo-liberalism in welfare-state discourse can be identified. The first transformation affected the social and economic environment of the welfare state in the wake of both endogenous and exogenous challenges. Beginning in the 1970s, population ageing, the shift to a service- and knowledge-based economy, the change in household patterns, and gender relations created serious upheavals in Europe’s productive, occupational, demographic, and – more generally – social structures.30 Increasing market opening in the EU and beyond altered, in turn, the ‘boundary configuration’ on which the Keynesian and Fordist welfare state had rested, thereby exposing territories, social groups, and economic sectors to a new set of risks and opportunities.31 In the wake of such structural transformations (which became increasingly visible and statistically documented during the 1990s), the neo- liberal critique of the welfare state started to lose credibility. Its diagnosis of the ‘nanny state’ had been elaborated with reference to the ‘old’ Keynesian state and the welfare capitalism of the Trentes Glo- rieuses; most of the new welfare challenges linked to postindustrialism and globalization were falling outside of the scope of the overall analytical and prescriptive frame of neo-liberalism; and some of the most acute new social needs could actually be seen as consequences of the neo-liberal reforms (e.g., the rising levels of child poverty and income polarization).32 A second transformation affected the politics of welfare. Under the impact of postindustrialism, postmaterialism and ‘individualization’, and market opening and globalization, the political markets

30 See Hemerijck 2012. 31 See Ferrera 2005. 32 See OECD 2011. Welfare-state transformations 89 of European welfare democracies were reconfigured away from the social-democratic compromises that had characterized the Golden Age – that is, compromises built and upheld by the expansion of social entitlements to the Fordist ‘middle mass’. The traditional class cleavage started to lose salience in the structuring of political preferences and alliances, raising increasing challenges to the old mass- and class-based parties – and, in particular, to traditional Social Democracy.33 The welfare state as such became an issue of contention, increasingly pitting insiders against outsiders and generating a complex ‘new politics’.34 Except in the United Kingdom, neo-liberalism proved to be an ineffective ideological glue for building and maintaining new social and electoral coalitions: welfare cuts were unpopular, even for the middle classes. In its formative moment, Berlusconi’s Forza Italia enthusiastically espoused the neo-liberal critique against the tax-welfare state. After its failed attempt to reform pensions in order to lower taxes, which led to the fall of its first cabinet after only a few months, Forza Italia hastened to reshape its ideological profile towards more traditional conservative and ‘social market’ moderatism. Being more removed from electoral politics, the EU was politically allowed to stay with neo-liberal orthodoxy for a longer period. However, pressed by a growing number of national governments and eventually becoming aware of its own legitimacy problems, even Brussels thought it better to elaborate the new ‘inclusion and cohesion’ discourse to reassure the increasingly worried public opinion.35 The third transformation occurred in the philosophical and intellectual realms. In the early 1970s, John Rawls’s Theory of Justice (1971) inaugurated a novel era in Anglo-Saxon analytical political philosophy, reviving Kant’s contractual tradition and incisively redefining the relationship between liberty and equality. Since the publication of Rawls’s major volume, philosophical liberalism has been largely engaged in the discussion of the famous ‘Difference Principle’, according to which social inequalities can be justified only if they turn out to promote the greatest advantage of the worst off. Such a principle is presented as the rational choice of individuals located in an ‘Original Position’, debating under a ‘Veil of Ignorance’ on how to design a just and basic

33 See Rhodes (In press). 34 See Pierson 2001, Armingeon and Bonoli 2006, Rueda 2007, and Hausermann¨ 2010. 35 See Ferrera 2006. 90 Part I: Economy, state, and society structure of society. There is no doubt that Rawls’s theory has been, by far, the most influential contribution of the new Anglo-American school of philosophical liberalism. However, other approaches have been developed within the school during the last three decades, which aim to combine the core liberal concept of liberty with a system of distribution that is capable of optimizing the well-being of individuals and groups within society. ‘Starting-gate egalitarianism’ (Ackerman), ‘resource-based egalitarianism’ (Dworkin), and – to a lesser extent – ‘desert-based liberalism’ (Miller) are other important strands of the Anglo-American school, which launched an attack on the individu- alistic and libertarian assumptions and anti-egalitarian stance of neo- liberalism. From different perspectives, neo-liberalism was also a target of attack from the Communitarian (Sandel, Walzer) and Republican (Pettit) strands of the Anglo-American debate on social justice, solidarity, and cohesion.36 As highlighted by ‘reception’ theorists, despite its esoteric language and technical sophistication, Anglo-American liberalism – and especially Rawls – made rapid and deep inroads into most European national political cultures in the 1980s and 1990s.37 The ‘consumption’ of egalitarian (and, to a lesser extent, Communitarian and Republican) liberalism not only by academic philosophers but also by various public intellectuals, the media, and even individual politicians suggests that the neo-liberal parabola had created a demand for alternative ideological positions that were capable of (1) framing in different terms the classical trade-offs between liberty and equality, efficiency and equity; and (2) redefining the notion of ‘social justice’ and, thus, the normative evaluation of welfare-state institutions.38

36 For a general review, cf. Kymlicka 2011. 37 See Laborde 2002. 38 An interesting example of ‘consumption’ for ideological purposes of the insights coming from the new Anglo-American liberal-egalitarian school is offered by this exerpt by Frank Vandenbroucke, taken from a paper presented at a conference on the future of the centre-left in 1998: ‘Today, even more than in the past, social democracy needs a moral programme . . . Some abstract problems discussed in the framework of egalitarian philosophy over the last 20 years are highly relevant in this respect, since they provide the possibility to develop a true social-democratic, responsibility-sensitive conception of equality. The reconciliation of appropriate conceptions of equality with appropriate conceptions of personal responsibiity has been a focal point of many exchanges in the philosophical domain developed by Rawls, Sen, Dworkin, Cohen, Arneson, Roemer, Kolm, Barry ...’Theauthorisan academic philosopher/social scientist who at the time was also actively engaged in Belgian and EU politics within the Socialist Party. He became Welfare-state transformations 91

The fourth development is the ideological ‘revisionism’ that took place within national political cultures, partly (but not exclusively) as a response to the ﬁrst two transformations and in the wake of the new philosophies produced by the Anglo-American school. In the Nordic countries, the national social-democratic traditions based on ‘strong egalitarianism’ coupled with the ‘work-line’ were revisited and became more ‘prioritarian’ (i.e., a Rawlsian emphasis on the worst off; acceptance of ‘just’ market inequality) and productivist (i.e., active inclusion to sustain growth and, thus, solidarity in the long run).39 In the United Kingdom, the Third Way drew mainly from the tradition of social liberalism and Fabian socialism, revisiting it through the lenses of new American egalitarian and Communitarian liberalism (i.e., emphasis on life chances, combining options with social bonds, and individual development, as well as duties and responsibilities) and building on Gidden’s postmodern social theory, emphasizing active participation and the enabling role of the welfare state.40 Under Zapatero, the Span- ish Socialist Workers’ Party (PSOE) took new inspiration not only from the liberal egalitarians but also from neo-Republicans (e.g., Pettit), with their emphasis on the welfare state as a vehicle and guarantor of ‘strong citizenship’ based on the notion of liberty as ‘non-domination’.41 Albeit less incisive and timely than within the left camp, ideological revisionism has indeed taken place within the moderate camp as well. Under the pressure of secularization and individualization, Christian Democrat parties have gradually relaxed their traditional emphasis on ‘familialism’ and come to terms with the gender-equality and ‘new- risks’ agendas, drawing signiﬁcant inspiration from Communitarian thinkers.42 Partly drawing from ordo-liberalismus and classical Chris- tian solidarism, in Germany, the idea of a ‘social-market economy’ was

Minister for Social Affairs and Pensions in 1999 and promoted a number of important debate initiatives at the EU level, especially during the Belgian Presidency of the ﬁrst semester of 2001 (cf. Vandenbroucke 2001 and 2002). 39 See Huo 2009; Kildal and Kuhnle 2005; and Kvist, Fritzell, Hvinden, and Kangas 2012. 40 See Beech 2006. 41 See Martin and Pettit 2010. Under Zapatero, the PSOE elaborated on an original doctrine of ‘citizens, socialism’, combining a strong prioritarian egalitarianism (the consolidation of a robust ‘fourth social protection pillar’ – alongside universal education, healthcare, and pension – targeted towards the worst off) with an equally strong rights-based, non-discrimination agenda in defence of ‘individuality’, minority recognition, and gender parity (see Sevilla 2002). 42 See Seeleib-Kaiser, Van Dyk, and Roggenkamp 2008; see also Stjerno 2005. 92 Part I: Economy, state, and society revived on the occasion of its sixtieth anniversary and has now found a key position in Article 3 of the Lisbon Treaty.43 Secular moderate parties have been the last to move but, in the previous decade, revisionism has been taking place at this end of the political spectrum as well. The goal of welfare retrenchment and tax cuts has been markedly marginalized, for example, in the ideology of the Swedish Moderaterna, which has come to support a ‘modernization’ agenda based on the growth– competitiveness–inclusion triad.44 Mariano Rajoy won the 2011 election in Spain with a growth-centred platform, largely devoid of those neo-liberal proposals in the social sphere that had been endorsed by his predecessor, JoseMar´ ıa´ Aznar. British Conservatism, in turn, has gradually distanced itself from Thatcherism in an effort to incorporate a new ‘social dimension’ through the notion of welfare society or welfare community and, more recently under Cameron, the Big Society (on this, cf. infra).

Actors and impact Ideologies and ideological change can be studied (1) in a pure morphological perspective (i.e., highlighting the internal logic linking core components to adjacent components and peripheries – a logic that to some extent always ﬁlters or constrains the relationship between an ideology and its external environment); (2) in a historical-institutional perspective (i.e., looking at formative moments, ideational path dependencies, temporal sequences, and critical junctures in which relatively independent macro-processes – e.g., a social transformation, an electoral de- alignment, the emergence of a novel philosophical approach – intersect with one another, opening up opportunities for ideological reconﬁg- urations); and (3) in a discursive institutional perspective, focusing on the practices through which ideologies are constructed, acquire political and policy salience, structure interests and preferences, shape institutional outcomes, and so on. In the discursive institutionalist perspective, ideas (in the widest sense, from philosophic to policy) circulate through communicative and coordinative discourses.45 They are carried by individual agents that often directly or indirectly represent social collectivities (e.g.,

43 See Glossner and Gregosz 2009. 44 See Lindbom 2008 and Bergh and Erlingsson 2009. 45 See Schmidt 2008. Welfare-state transformations 93 movements; parties; civic, economic, and cultural associations; and think tanks), which interact in a multiplicity of arenas. Given its dual anchoring (i.e., in the philosophical and the practical realms), an ‘ideological act’ can be thought of as a thought-practice (i.e., action) that (1) attributes a speciﬁc meaning to a political concept (cluster of concepts); (2) de-contests this meaning (deliberately or unconsciously) (i.e., presents it as desirable, good, and right beyond dispute); and (3) makes it politically relevant by linking it to policy challenges and/or consensus building. As a rule, ideological acts leave documentable traces in the form of texts with some material support.46 The performers of ideological acts can be conceptualized as ‘second- hand dealers’ (without a pejorative connotation) of philosophical ideas for political purposes – that is, with a view to problem solving and consensus building. Ideologues thus can range from professional philosophers (or other social scientists with philosophical competence) acting as public intellectuals (e.g., Giddens) to ‘policy middlemen’ (according to Heclo) – that is, scholars and intellectuals who operate at the crossroads between academia and policy making (e.g., Vandenbroucke) to bureaucrats ‘with vision’ (e.g., Delors), to charismatic political leaders who are capable of speaking in the guise of ‘statesmen-philosophers’ (e.g., Blair). These actors can use ordinary discursive arenas (i.e., the media, parliaments, electoral campaigns, and policy-making institutions) as well as dedicated arenas, established around a given collective problem. The rise of post–neo-liberalism in the European welfare discourse has been transmitted by a large number of second-hand dealers. Many exponents of the new Anglo-American school have engaged in explicit ideological campaigning in favour of their welfare-friendly theories, some establishing close and preferential personal relationships with individual political leaders: consider the Giddens–Blair, Etzioni– Clinton, Van Parijs–Vandenbroucke, and Petitt–Zapatero pairs.47 In virtually each national political culture, it is possible to identify one or more welfare ‘gurus’ with post–neo-liberal orientation acting as ideologues of welfare-state change, often in competition with neo-liberal counterparts – but also with hard-line defenders of the status quo, especially within the Old Left. At the national level, new think tanks of post–neo-liberal orientation have proliferated and facilitated the

46 According to Searle 1995. 47 See Martin and Pettit 2010. 94 Part I: Economy, state, and society communicative and discursive dissemination of the new ideas (e.g., the Policy Network in the United Kingdom).48 Many governments have created national commissions with outside experts and intellectuals charged with the task of setting the route for welfare reform, and many have become vehicles of the post–neo-liberal approach in some version (e.g., the Onofri Commission in Italy). A sort of ‘post–neo-liberal ideological community’ around welfare- state ‘recalibration’ (and, more recently, ‘Social Europe’) has gradually formed since the late 1990s, linked not only by academic exchanges (e.g., within the Forum on ‘Recasting the European Welfare State’ that took place in 1998–1999 at the European University Institute [EUI] in Florence) but also by a common engagement in policy advice (i.e., coordinative discourse) and intellectual persuasion relative to the wider public (i.e., communicative discourse).49 Various dedicated think tanks have favoured and accelerated this process. The EU has also had a primary role, as previously mentioned: the Employment and Social Affairs Directorate of the Commission; the European Parliament; and various EU presidencies (i.e., the most active between the 1990s and 2000s include Dutch, Portuguese, Belgian, and British) launched an impressive series of initiatives on virtually all fronts and dimensions of welfare-state change, giving space and visibility to post–neo-liberal public intellectuals. Through the processes based on the OMC (Open Method of Coordination) on inclusion, pensions and health care and, more generally, its social agenda, the EU also created unique arenas and incentives for production and dissemination of the new ideas.50 Gauging the impact of post–neo-liberalism on actual reforms is, of course, a complex and difficult exercise, which is beyond the scope of this chapter. Suffice it to say here that the empirical literature on welfare-state change (1) acknowledges the presence and growing importance of the new discourse in relevant communicative and coordinative arenas; (2) confirms that such discourse has given a recognizable contribution to the adoption of national strategies or specific reforms, especially (but not exclusively) in the United Kingdom under New Labour and in the Nordic countries (although with important dissimilarities); and (3) points out, however, that so far the implementation of the new programmatic ideas (e.g., ‘social investment’ and ‘active inclusion’ – and, thus, the realization of their

48 See Stone and Denham 2004. 49 See Ferrera and Rhodes 2001. 50 See Sabel and Zeitlin 2010 and Vandenbroucke 2012. Welfare-state transformations 95 underlying ideological principles) has been mixed. Scholars’ positions range between moderate pessimism and moderate optimism. According to Hemerijck, with signiﬁcant country variations, ‘without exaggeration we can ...inferfromtheempiricalevidence of long run social policy change that the translation of the social investment paradigm into new welfare provisions has been largely successful’.51 In more general terms, I concur with Hemerijck and Huo (theoretically and substantively) that the emergence of a new ideological and programmatic paradigm should not be expected to produce congruent institutional outcomes in any deterministic or semi-deterministic way; rather, it must be seen as something that generates policy alternatives and creates options. I also concur with both authors that the alternatives and options opened up by post–neo-liberalism may well liberate actors from the constraints of institutional inertia and path dependence as well as the hegemonic chains of the neo-liberal ideology.

Liberal neo-welfarism: Towards a new ideological synthesis? Ideologies are distinctive symbolic artefacts that must be kept separate from philosophies, on the one hand, and programmatic ideas on the other hand. Ideologies differ not only in terms of substance and morphology but also in terms of generality. At the lowest end are single-thinker ideologies; at the highest, ideological syntheses. The latter are broad combinations of components drawn from different traditions or schools of thought: in a morphological language, they pool the (re-adapted) cores of such traditions, as well as a number of common adjacent components and may even create new peripheries. An ideological synthesis leaves room for differentiation at lower levels and may well leave outside its scope other competing ideologies (at its own or lower levels). The ‘social-democratic consensus’ that accompanied the consolidation of the postwar welfare state can be perceived as an emblematic example of a broad synthesis, within which ‘left’ and ‘right’ could still compete on (non-pooled) adjacent and peripheral components. To a large extent (and if viewed at a high level of generality), what I describe as the post–neo-liberal perspective on welfare-state

51 Hemerijck 2012; 380; see also Morel, Palier, and Palme 2011; Huo 2009; and Evers and Guillemard 2012. 96 Part I: Economy, state, and society modernization can be considered as an emerging ideological synthesis, which draws together the core values of the liberal-democratic and social-democratic traditions (i.e., liberty and equality); de-contests each and their relationship in a new way; and re-adapts a number of the adjacent components of each tradition. ‘Post–neo-liberal’ is a label endowed with minimal connotative power (at least, it makes clear what the perspective is not); however, can a more effective and appealing label be proposed? Nomina sunt omina – that is, naming something largely predetermines its fate – and is, thus, a delicate operation, exposed as it is to misunderstandings and misappropriations (as well as to the paradox of performing by this very operation a second-order ‘ideological act’). I tentatively submit here the notion of LNW. A true child of both traditions, the welfare state (and, more generally, the notion of ‘good welfare’) has symbolically come to be perceived as the achievement of Scandinavian Social Democracy: the noun ‘welfarism’ is chosen in acknowledgement of this fact.52 The new perspective innovates from the past in both its approach and the objects and problems approached: hence, the preﬁx ‘neo’. The adjective ‘liberal’ is meant to underline not only the social-liberal tradition (often labelled as ‘welfare liberalism’ in histories of political thought) but also two other normative commitments: (1) the commitment to individuality, rationality, and openness (including economic openness – functioning markets); and (2) the commitment to maintain a reasonable balance between competing values and inevitably contrasting normative pulls.53 The LNW ideology tends to de-contest the notion of liberty in at least three ways. First, while recognizing the lexicographic priority of negative freedom (ala` Rawls), it views it as inextricably linked to positive freedoms and opportunities that allow for self-development and ‘ﬂourishing’ (i.e., the Millian perspective). Second, it builds (also) on negative freedom to strengthen the principle of non-discrimination and, thus, to generate new types of civil rights with strong social implications (e.g., gay marriage, gender quotas, minority rights and

52 The elaboration of a ‘thick’ notion of welfare, extended from the alleviation of poverty to the full elimination of material need and the satisfaction of a wide range of human needs through collective arrangements, is a distinctive achievement of Swedish Social Democracy and its political theory (see Tilton 1990). 53 See Freeden 2008 and Magnette 2009. Welfare-state transformations 97

‘recognition’, and pro-choice options in ethically sensitive areas – cf. the Spanish experience). Third, the LNW ideology emphasizes the link between liberty and fundamental rights (cf. the approval of the Charter of Fundamental Rights at the EU level). Likewise, the notion of equality is de-contested by soft-pedalling outcomes in favour of opportunities, ‘life chances’, and capabilities and ‘functionings’ (ala` Sen). Although not giving up the goals of protection and solidarity, LNW equality assumes moreover (1) a dynamic character (what matters is the life cycle, not ‘here and now’ equality); (2) a multidimensional character (not only income but also other aspects such as minority status and especially gender); and (3) a prioritarian character (Parfit 1991) – while maintaining universality in access to public services and benefits, social policy (and, more generally, the tax-transfer system) should prioritize the worst off. Following the insight of the Anglo-American school, the relationship between liberty and equality is essentially framed in terms of social justice: a concept that is programmatically meant to reconcile the inviolability of basic liberties and democratic procedures with the necessity to accurately and convincingly justify any departure from strict egalitarianism in the distribution of the goods of social cooperation (i.e., the ‘fairness requirement’ of social distributions). The notion of social justice also is used to frame and address two other delicate issues: the recognition and integration of ethnic and cultural minorities and the appropriate balance between national (and supranational) standardization and financial solidarity, on the one hand, with subna- tional, local, and ‘communal’ identities and social bonds on the other hand. Pooled adjacent components of the emerging synthesis include most prominently the three notions of ‘productivist’ or ‘flexible’ solidarity, ‘active inclusion’, and ‘social promotion’. Taken together, these three notions can be largely perceived as bridge concepts with the aim of reconciling tensions typically generated by the liberty–equality dyad: competition versus cooperation, individual versus society, personal versus collective responsibility, desert-based versus need-based, choice versus coercion, and globalism/cosmopolitanism versus localism/communalism. Productivist solidarity (i.e., a key historical adjacent component of Scandinavian Social Democracy) refers to the idea that the collective guarantee and provision of social benefits and services is not only a fundamental instrument of egalitarian redistribution 98 Part I: Economy, state, and society and social protection and cohesion but, indeed, also a productive factor that can enhance economic performance – provided that it is based on reciprocity, readiness to work, and participation in society. The fight against poverty and the promotion of inclusion should be priorities and should be pursued not only by passive transfers but also through quality services and training opportunities. The counterpart of inclusion is activation – that is, the expectation and requisite that recipients engage in activities that promise to re-enable them to become economically self-sufficient. The notion of social promotion emphasizes the importance of preparing individuals to face the manifold risks of their life cycle rather than repairing ex-post the damages of risks. Social investments (e.g., in early education and care, training, work–life balance, long-life learning, and active employment services) are key to empowering individuals in the realization of their life plan (i.e., Millian liberty); in equalizing opportunities and guaranteeing fair outcomes, especially for the most vulnerable (i.e., prioritarian egalitarianism); and, at the same time, upholding economic performance and financial sustainability (i.e., social-democratic productivism). A fourth component (less explicitly debated but much taken for granted) might also be added in the adjacent area of the new synthesis: ‘access to subjective rights’. The emphasis on rights is meant to clarify that the institutional core of the European model of welfare (i.e., social citizenship guaranteeing protection against the main societal risks, underpinned by robust universal civil and political rights) should continue to be a fundamental pillar in the reconfigured and refocused mix of entitlements and duties. A second clarification is that rights should be individualized – that is, disconnected from ascriptive conditions and family status. Figure 3.1 summarizes the key elements and relationships of LNW.54 In the figure, the inner diamond rests on the two core notions of ‘equality’ and ‘liberty’. Their novel de-contestations also serve to reframe

54 In a recent contribution, Silja Hausermann¨ (2012) also suggested a two-dimensional space within which to place various party families, based on their attitude towards expansion versus retrenchment (or adjustment) of the ‘old’ social policies and expansion versus retrenchment (or opposition to) of ‘new’ policies. Figure 3.1 is an internal articulation of the space characterized by support for new social policies and for adjustment and recalibration of the old policies. Welfare-state transformations 99

opportunity social access to investment/ rights promotion

EQUALITY LIBERTY

flexible/ productivist active solidarity inclusion community

Figure 3.1. The ideological morphology of liberal neo-welfarism. other classical concepts associated with welfare-state institutions, such as security or redistribution on the ‘left’ and individual autonomy or meritocracy on the ‘right’.55 At the upper and bottom corners of the figure are two ancillary but still general notions – that is, opportunity and community – often used to bridge the link between the two core components and to substantiate the concept of social justice. The outer square of the figure contains the four main adjacent components of LNW: access to rights, social promotion, productivist/flexible solidarity, and active inclusion. The position of each component loosely reflects its degree of proximity to the core referents and their relationship. There is, of course, much more in the LNW synthesis – for example, the wish for ‘re-embedded markets’ and the attention to social and political legitimacy in allocative and distributive reforms. How- ever, the figure is sufficiently suggestive, I believe, to highlight how the key components are indeed clearly distinct from the neo-liberal ideology, with only limited overlaps – mainly regarding the importance of a healthy economy based on functioning markets and fiscal sustainability.

Liberal neo-welfarism: One or many? As documented by a rich literature, above the shared ‘ﬂoor’ of the Keynesian social-democratic consensus that characterized the Trentes Glorieuses, partisanship on the left–right dimension was signiﬁcant

55 See Flora and Heidenheimer 1981. 100 Part I: Economy, state, and society in shaping spending patterns and institutional profiles of individual countries and composite welfare regimes.56 It may be true that since the 1980s, left–right partisanship has been losing its historical relevance for policy choices; however, we can expect that the emerging ideological synthesis will still allow for internal differentiations, reflecting national traditions and policy legacies, genuine axiological emphases and orientations, as well as political and electoral strategies. LNW has emerged essentially as a reaction to neo-liberalism and neo-conservatism, as a result of revisionist efforts within Europe’s main ideological families (i.e., in primis Social Democracy but also democratic and social liberalism and, to a lesser extent, Christian Democracy) and a certain degree of mutual hybridization. It is worth repeating that in my perspective, LNW connotes something wider and more general than the so-called liberal or Third Way turn in Social Democracy and certainly must not be considered as ‘second-’ or ‘third-’ wave neo-liberalism.57 It is, rather, a genuine ideological innovation, which recombines, rede- fines, and updates concepts drawn by those traditions that had most suffered by the neo-liberal–conservative attacks during the 1980s and early 1990s. The time now seems ripe, however, for a new phase of re- differentiation within the perimeter of LNW. Shared and de-contested symbols are not effective for electoral mobilization relative to either issue-voters or party-identifiers. It is not surprising that LNW parties are developing an interest in elaborating distinct and competitive framings in order to win support. As noted by Morel, Palier, and Palme, the discourse on social investment has already begun to display, for example, two recognizable variants: (1) a Third Way, social-liberal variant; and (2) a Nordic, social-democratic variant.58 In the judgement of these authors, the former – although undoubtedly departing from Thatcherite neo- conservatism – ‘does not represent a clear enough break from neo- liberalism’ (p. 360). This incomplete break may well explain why Labour’s current leader, Ed Miliband, is pushing the party’s discourse in a leftward direction, although not reneging on the fundaments of the Third Way. The social-investment discourse is also currently undergoing significant qualifications within the Continen- tal centre-leftist debate. The best summary of such qualifications is

56 For a review, cf. Schmidt 2010. 57 As suggested, for example, by Steger and Roy 2010. 58 See Morel, Palier, and Palme 2011. Welfare-state transformations 101 provided by Cantillon: ‘the logic of social investment entails a ten- dency to underestimate the workings of labour markets and the strong gravitational pulls of social class, and to consequently over- estimate the potentiality of activation . . . and depreciate the question of redistribution, of social protection and of care for the most vunerable’.59 Insisting on the need to safeguard the traditional acquisitions of the French model, based on the securite´ sociale, Francois Hollande’s manifesto in the 2012 elections can also be interpreted as an attempt at recasting LNW in more distinctively socialist terms. A product of the ‘fusion’ of the reformist wings of the old Partito Comunista Italiano (PCI) and the old Democrazia Cristiana (DC), and incorporating at the same time the remains of traditional progressive liberal and secular formations, the Italian Democratic Party (PD) constitutes, in turn, another distinctive (and highly) hybrid variant of LNW within a single party on the centre-left, markedly skewed towards the equality–community axis shown in Figure 3.1. To distinguish the emerging variants of LNW on the centre-right, the debate has recently coined two other labels. The ﬁrst is ‘Liberal Communitarianism’, which is an approach that stresses the role of the family, local communities, and voluntary associations as key actors for responding to new risks and needs in the civil-society arena, not only through the state arena. This vision embraces many of the elements of LNW but seems to be bending towards a distinctive route, which can be interpreted – depending on viewpoints – as either a social democratization of Christian Democracy or a Christian democratization of Social Democracy.60 In both cases, the ‘liberal’ dimension remains ‘in the shadows’, especially concerning the individualization of rights, gender, sexual orientation, and ‘ethically sensitive’ matters regarding life and death. The second label is ‘Progressive Conservatism’, which is intended to denote all centrist and centre-right political formations (including the German Christian Democratic Union [CDU], the Spanish People’s Party [PP], and the Swedish Moderaterna) that have broken with Thatcherism and have come to espouse mild forms of LNW.61

59 See Cantillon and Vandenbroucke (In press). 60 See Van Kersbergen and Hemerijck 2004 and Seeleib-Kaiser, Van Dyk, and Roggenkamp 2008. 61 See Diamond 2011. 102 Part I: Economy, state, and society

A detailed and systematic illustration of the specific party-ideological substreams that have begun to flow within the LNW boundaries is beyond the scope of this chapter. A few speculative comments are suggested, however, by examining the broad families of parties that are present within the European Parliament. Even a summary reading of the various political groups’ manifestos confirms that LNW fundamentals are accepted by four groups: the Progressive Alliance of Socialists and Democrats (S&D), the European Popular Party (EPP), the Alliance for Liberals and Democrats for Europe (ALDE), and the Greens-Free European Alliance (Greens-EFA). In the latter two groups, however, a few national parties still adhere to neo-liberalism (e.g., the German Free Democratic Party [FDP]) or espouse eco-radical ideologies with little link to LNW. Simplifying the labels that promise to capture the likely ideological differentiation within LNW seem to be (cf. Fig. 3.1, from left to right) as follows: ‘egalitarian-liberal’ LNW (i.e., prime emphasis on equality and opportunity); ‘social liberal’ (i.e., liberty and opportunity); ‘liberal communitarian’ (i.e., equality and community); and ‘progressive conservative’ (i.e., liberty and community). The European Parliament is home to three other political groups, which leads to the issue of ideological competition from without – that is, on the side of parties that do not embrace LNW. A first question relates to the British Conservatives, by far the most important members of the ‘European Conservatives and Reformists’ (ECR) group. According to most observers of the UK situation, Cameron’s Con- servatives are considered as still essentially ‘neo-conservatives’: that is, they actually represent the most resilient bulwark of this camp in contemporary Europe.62 It is recognized that the original ideological foundations of the Big Society project were indeed innovative relative to both traditional conservative thinking and Thatcherism. In the writings about ‘Red Toryism’ that inspired the Big Society project, Philip Blond (considered by some as Gidden’s counterpart in renovating right- wing ideology in Britain) embraced elements of LNW – especially in its Communitarian dimension: the distrust in self-regulating markets and monopoly capitalism; the support for a ‘civic vision’ of community empowerment; and a full-blooded, cohesive ‘new localism’, resting on vibrant economies and strong social bonds.63 Such views clearly resonated in the pre- and immediate postelection campaign of 2010.

62 See Bale 2012. 63 See Blond 2010. Welfare-state transformations 103

However, the Conservative platform was selective from the beginning and its flirtation with Red Toryism has gradually given way to the more traditional ‘morals-plus-the-market’ discourse, increasingly similar to that of US Republicans and even echoing some Tea Party ideas.64 Neo- conservatism may no longer be ‘very well’, but it is certainly still alive: LNW has not yet won its war. Another and more powerful source of ideological competition from without is rising neo-populist parties of the right (grouped under ‘Europe of Freedom and Democracy’ [EFD]) and from the radical left (‘European Unified Left’). To paraphrase Le Pen, right-wing populism is ‘socially left, economically right, but above all nationalist’.65 Its discourse is ambiguous and incoherent: on the one hand, it stresses ‘cohesion’, defends acquired social entitlements, and calls for additional protections (and protectionism); on the other hand, it voices objections to taxation, red tape, and state regulation and speaks in favour of non-public and communal service provision. Its idea of solidarity is exclusive, reserved for members of the national, regional, and local community; against all sorts of ‘strangers’; and against any process of ‘opening’, supranational integration, or globalization. In many EU member states, right-wing populist parties have already achieved high support and are eroding the social basis of mainstream parties of both the centre-left and the centre-right.66 In Italy, France, the Nether- lands, and – increasingly – the Nordic countries, the coalition and/or blackmail potential of such parties forces electoral competition, government formation, and policy making to come to terms with them – and, thus, with their ideology. Left-wing radicalism is also on the rise.67 Its discourse includes nos- talgic appeals to the ‘good old days’ of national Keynesianism-cum- Third World internationalism, strong anti-globalism, a critique of con- sumerism, and often de-growth proposals and radical ecologism. As right-wing populists, the radical left is also against the EU, market opening, and free trade. The social basis of these parties is less stable and homogeneous than the New Right, but they thrive on the growing political distrust and alienation of significant segments of national electorates – especially among younger cohorts experiencing social and occupational precariousness. In Italy (the country with the strongest

64 See Bone 2012. 65 See Le Pen 2011. 66 See Mudde 2007. 67 See March 2011. 104 Part I: Economy, state, and society

Communist Party of the West until the early 1990s), the radical-left formations that splintered away from the Italian Communist Party (PCI) after its conversion into a social democratic party in 1993 dis- turbed in various ways the emergence and consolidation of an LNW agenda within the centre-left. The rising political importance and size of populist and radical formations in most European party systems signal the emergence of new lines of conflict concerning the issue of European integration and the defence and reform of the welfare status quo. The presence of these (new) electoral competitors from without is likely to generate additional (and possibly stronger) incentives for competitive ideological differentiation from within the perimeter of LNW. Francois Hollande’s discursive strategy during the 2012 election campaign (an attempt, as previously mentioned, at outlining a socialist-egalitarian variant or supplement of the new paradigm) can be interpreted as a sign of this dynamic. The rationale for differentiation also can be illustrated a con- trario. Mario Monti’s government in Italy, supported in Parliament by a ‘strange-bedfellows’ coalition, including the Democratic Party (centre-left), the Union of Christian and Centre Democrats (UDC) (centre), and the People of Freedom (PDL) (i.e., Berlusconi’s party, now led by Angelino Alfano), was formed in December 2011 with a platform centred on stability, growth, and equity – we could say a neo- liberal fiscal agenda with all the neo-welfarism that was possible in an emergency situation. Throughout 2012, the political consequence of this centripetal convergence of mainstream parties was an increasing electoral and ideological centrifugation to the benefit of neo-populist and radical formations – a dynamic that casts a shadow on the future prospects of Italy’s politics and its still unbalanced welfare system. The most emblematic example to date of the same syndrome is illustrated by the Greek elections of June 2012. In the face of mounting neo- populist opposition at the extremes, the two mainstream traditional parties – Nea Democratia and the Pasok (which would certainly not be included among the champions of LNW but would still be kept at least minimally within the welfare modernization perimeter) – have found it difficult to form a postelection pro–EU coalition. Despite its discursive predominance within the main political families of the European Parliament, LNW has not (yet?) been capable of generating an effective cross-party alliance. Vandenbroucke recently evoked (and recommended, in his role of policy middleman) a Welfare-state transformations 105 scenario of ‘historical compromise’ among the Social Democrats, the populars, and the liberals, in support of the social investment (cum- social-protection) paradigm.68 Indeed, such a move could have a significant impact in the various supranational arenas and possibly contribute to ‘social’ bending of the ongoing debate over the economic and financial crisis. Although it is ideologically feasible, this scenario does not seem – at the time of this writing – within actual political reach.

Conclusion This chapter argues that neo-liberal ideas (in the Italian connotation of neo-liberismo) have displayed a parabola of influence on welfare-state transformation, which is now in its descending phase. A novel ‘liberal neo-welfarist’ ideological synthesis has gradually been affirmed, creatively combining insights from both liberalism (i.e., liberalismo) and Social Democracy and using them to elaborate a new vision of the nature and role of the welfare state in a globalizing and knowledge- based economy. Regarding the lines of explanation put forward by Schmidt and Thatcher in Chapter 1 of this book, my argument can be reframed as follows: resilience is related to liberalism rather than neo-liberalism. As emphasized in the first chapter of this volume, liberalism has always shown a high ideational plasticity, a capacity to adapt – for example, by dropping certain peripheral aspects of its doctrine and partly merging with other ideological traditions. Thus, LNW maintains not only the core of liberalesimo (i.e., the protection of negative freedom) but also key elements of various liberalismi (e.g., individuality, equal opportunity, non-discrimination, appreciation for functioning markets, and a competitive, open economy). At the same time, LNW is not only liberal because it also crucially includes various key elements of the social-democratic tradition (e.g., solidarity, redistribution, inclusion, and universalism). Even during the heyday of neo-liberalism, this latter tradition remains highly resilient in the Nordic context. It has also had a prominent role in the philosophical elaboration of the egalitarian-liberalism paradigm within Anglo-Saxon academia. What determined the shift from neo-liberalism to LNW? Ideologies are symbolic artefacts that act as a bridge between the philosophical

68 See Vandenbroucke 2012. 106 Part I: Economy, state, and society sphere and the sphere of practical politics. Following this meaning of the concept, I searched for (and found) an explanation in the inspirations that came from discussions within (Anglo-Saxon) political and more general ‘public philosophy’; in the structural transformations that affected European society, economy, and politics since the 1990s; and last, but not least, in the failure of neo-liberalism itself to provide adequate responses to people’s needs and expectations. This latter factor also may explain why the case of welfare stands out as relatively different from other policy cases discussed in this volume. Social protection has been (and still is) a key pillar of Europe’s ‘way of life’. By launching an aggressive attack (i.e., ideological, political, and material) against this pillar (recall the ‘dismantlement’ discourse), neo-liberals have probably committed the sin of ‘hubris’ – that is, excessive ambition and self-pride. After all, at the peak of the parabola (i.e., the early 1990s), according to the Eurobarometer, majorities of more than 90 per cent within the EC12 believed that ‘social security is a major achievement of modern society’ and most voters were in favour of its maintenance and continuation.69 Today, the transformative potential of LNW is still heavily constrained by the austerity-centred stance of ‘Economic Europe’ and by the weakness of the EU’s social dimension. The novel discourse on the welfare state has not affected (and not yet squarely challenged) the prevailing consensus on monetarism and fiscal austerity in the management of the EMU. The intellectual dominance of economic neo- liberalism (in the sense of neo-liberismo) is largely due to its deep entrenchment within the EU architecture since the Treaty of Maas- tricht (thus confirming the fifth hypothesis on resilience laid down by Schmidt and Thatcher in the Introduction). There are tentative signs of new economic thinking appearing in the wake of the crisis, but it is too early to predict whether these seeds can germinate.70 As such, the crisis can offer an opportunity for moving from emergence to the ‘full bloom’ of an alternative economic doctrine, but this cannot be taken for granted either.71 During the Golden Age, Keynesianism allowed (required, even) a high complementarity between economic and social policies. Moreover, there was a relatively lax and virtuous division of labour between market making at the supranational level

69 See Ferrera 1993. 70 See Morel, Palier, and Palme 2011. 71 See Hemerijck 2012. Welfare-state transformations 107 and market correcting at the national level. As is well known, market- making pressures from Brussels have gradually overridden market- correcting autonomy at the national level. The chances for LNW to take solid cultural and institutional roots are severely weakened by the economic ‘straitjacket’ and the EU’s asymmetric architecture in which it is embedded and that pose strong limitations to its delivery potential. It remains to be seen whether a solution to the euro crisis, a new round of institutional reform at the EU level, and the elaboration of different economic-policy paradigms will create adequate margins of manoeuvrability to put the new social ideas into practice, thereby defending the new synthesis from a dangerous spiral of populist and radical centrifugation.

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Neo-liberalism has had one central message for the state: scale back, cut back, cut out, transform.1 This brings to mind Winston Churchill’s reply to an opponent who asked, ‘How much is enough?’ to Churchill’s repeated push to spend increasingly more on defence in the 1930s. Churchill’s rejoinder came in the form of a story about a Brazilian banker with whom he had just had lunch. The banker had received a cable informing him of the death of his mother-in-law and asking for instructions. He cabled back: ‘embalm, cremate, bury at sea; leave nothing to chance’. This take on neo-liberalism – as burying the state – is certainly exaggerated because neo-liberalism comes in many different forms with many different policy applications. Only the recommendations of the most radical strands come close to the Brazilian banker’s response to his mother-in-law’s death. Yet the story as a metaphor for neo- liberal views of the state nonetheless somehow rings true. This is largely because neo-liberals have been more anti-state in their rhetoric than in their actions. The state has been neo-liberalism’s beteˆ noire, as its main focus of attack, because neo-liberals – whatever their differences – have viewed the state as consistently doing too much in the wrong ways with the worst consequences not only for the markets but also for democracy, by endangering individual freedom through its interventions. As a provider of public goods, the state had to be scaled back to leave room for the market, which would assure more efﬁciency. However, the state has also been neo-liberalism’s greatest conquest, as its main locus of action, because it has been primarily through the state that neo-liberals have been able to realize their vision(s). This highlights

1 We thank all contributors to this volume and the workshops for helpful discussion and, in particular, Mark Thatcher, Maurizio Ferrera, Gerhard Schnyder, and Fritz Scharpf for their close reading and insightful comments.

112 The state: The beteˆ noire of neo-liberalism or its greatest conquest? 113 a fundamental contradiction in neo-liberalism – whereas the theory demands a highly limited state, the practice requires a strong state capable of imposing neo-liberal reform. This contradiction has ensured that the more the state has put neo-liberal ideas into practice, by transforming itself as it liberalizes the markets, the more the state has – if anything – grown in size and scope, thereby violating neo-liberal principles. This contradiction, arguably, is the basis of the continuing dissatisfaction of neo-liberals with the state and their constant push for further neo-liberal reform. The result, moreover, is that the neo-liberal conquest of the state has not produced a new state neo-liberalism to go along with market neo- liberalism. Rather, what has happened is that the neo-liberal onslaught against the state has produced a new synthesis that we call ‘liberal neo- statism’. The ‘liberal’ in the term connotes how much neo-liberal ideas have permeated state goals, purposes, and objectives, as well as how these ideas have engendered changes in the state’s own processes and instruments of interaction with markets – all in a neo-liberal direction. However, it also suggests the maintenance of a broader mix of ‘liberalisms’ than that desired by the neo-liberals. The ‘neo-statism’ in the term, by contrast, suggests that although the nature of state action may have changed significantly due to neo-liberal influence, the scope of state action has expanded, not contracted, and is, therefore, largely in direct contradiction with the neo-liberal ideals of a limited state. The road to liberal neo-statism began with a significant retreat of the state. With the exception of Germany, which had developed an ordo-liberal compromise with Social Democracy in the 1950s, states between the early 1980s and the early 1990s engaged in a first period of highly ideological ‘roll-back’ of the state, with the intention of making the markets as free as possible from public interference. This was often accompanied by precipitous re-regulation in response to unanticipated problems with state roll-back, without precise liberal guidelines on how to do it.2 Beginning in the mid to late 1990s, a period of neo-liberal ideological renewal ensued – often the brainchild of social-democratic parties that added a social-democratic overlay to neo-liberalism – which now focused on the ‘roll-out’ of the state by actively using the state to make markets free.3 The EU (i.e.,

2 See Vogel 1996. 3 See Peck (2010) for the use of the terms ‘roll-back’ and ‘roll-out’ of the state. 114 Part I: Economy, state, and society supranatural state) level of activity also picked up at this time, rolling back national state activity even as it rolled out more supranational neo-liberal ideas for action. This only intensified with the economic crisis when, after an initial burst of neo-Keynesian stimulus, the state at both EU and national levels ramped up its activity in response – this time in accordance with ordo-liberal ideas under the influence of Germany. For a topic as vast as the influence of neo-liberalism on the state, all five lines of analysis proposed in the first chapter of this book as explanations of neo-liberal resilience apply. First, in terms of neo- liberalism’s ideational flexibility, a wide range of different and sometimes contradictory neo-liberal ideas about the state has developed from the more general philosophical orientation first articulated by neo-liberalism’s founding theorists, as they were adapted to different contexts and responded to changing circumstances. This is clear from the history of neo-liberalism described previously, beginning with the German ordo-liberal rules-based state as of the 1950s, followed by the Conservatives’ neo-liberal state roll-back starting in the 1980s, succeeded by the Social Democrats’ roll-out as of the mid-1990s, and capped by the EU ordo-liberal state ramp-up, as in the response to the Eurozone crisis. Second, in regard to rhetoric versus reality, neo-liberalism’s impact on the state has certainly involved a major contradiction between neo- liberals’ discourse of ‘less state’ and their actions in practice. This very tension, however, between what neo-liberals say they want – freer markets with less state – and how they obtain it – more state to ensure freer markets – may help explain why neo-liberalism has been so resilient. There is always work to be done for neo-liberals intent on keeping in check the expanding state that neo-liberals themselves are, as often as not, responsible for expanding. In some European member states, such as Italy, Greece, and partly Spain and Portugal, neo-liberal policies were often not about changing the role of the state but rather about constructing more stateness per se. The third line of analysis, concerning the power of ideas and discourse, also helps to account for the resilience of neo-liberalism in some countries and resistance to it in others. Real power has accrued from ideational entrepreneurs’ use of neo-liberal ideas in their discourse – whether ideological, pragmatic, or opportunistic – by convincing policy actors of the validity of their policy initiatives, persuading the The state: The beteˆ noire of neo-liberalism or its greatest conquest? 115 public of their legitimacy, and winning the elections that enabled them to put their neo-liberal ideas into practice. In combination with the work and insistence of professional economists to apply the principles of economic theory to policy decisions, these policy entrepreneurs have sustained a tool box for political intervention. The fourth line of analysis, about the strategic use of neo-liberal ideas by various interests, also holds because such ideas have served to empower a range of economic actors. Rising inequalities – in which the rich have only gotten richer while the working classes have seen little or no real wage growth – can be directly traced to neo-liberal policy ideas focused on limiting state regulation, lowering taxes, and cutting welfare spending. Moreover, whereas the power of institutions – the fifth line of analysis – can be used to explain resistance to neo-liberal ideas and the slowness of some states’ adoption of neo-liberal policies, it can also explain the resilience and staying power of neo-liberalism, once state institutions have been converted. It is important to recognize, however, that the differences in national responses result not only from the presence or absence of receptive formal institutions but also institutionalized ideas about appropriate government action. As John Zysman noted many years ago, whereas in Britain the debates allow for only two choices – state control or the free market – in France, such debates consider three choices: faire (the state does), faire faire (the state incites others to do), and laissez-faire (the state lets private actors do – which does not always mean the free market because the state may allow for private-market–circumventing arrangements).4 Germany and other smaller Continental and Scandinavian countries actually offered a fourth choice in debates about government economic policy making, which Vivien Schmidt (2009) calls, adding to the previously mentioned French terms, faire avec (state does with private actors). This is at the heart of corporatist concertation. The first part of this chapter is a discussion of neo-liberal philosophies of the state. The second part considers entrepreneurial political actors’ neo-liberal ideas that led to the actual transformation of the state, from ordo-liberal compromise of the state in the 1950s to conservative neo-liberal roll-back of the state in the 1990s to social-democratic neo-liberal roll-out of the state from the late 1990s

4 See Zysman 1978: 269. 116 Part I: Economy, state, and society onwards. The third part considers neo-liberalism ‘beyond the state’ in the EU and in other supranational or international organizations as possibly an even greater force for change than neo-liberalism at the national level. The chapter ends with a discussion of the latest seeming resilience of neo-liberalism – that is, in the Eurozone crisis beginning in 2010 – with the ramp-up of the state through neo-liberal austerity.

Matters of theory: Neo-liberal (re)definitions of the state and its action Before considering the neo-liberal re-definitions of the state and its actions, we first define the ‘state’ that neo-liberal theory and practice seeks to limit in size and scope of activity. Our general definition, separate from its portrayal in neo-liberal treatises, is that the state consists of the range of public institutions and actors that, whether alone or in interaction with private actors and institutions, affect collective decision making and implementation in national, transnational, and international political economies. The state is not simply the political and economic setting that structures the institutional patterns of public action for political economic actors. It is also the political institutional setting that shapes the interactions among political and economic actors. However, in addition to constituting the political and political economic institutions, the state is constituted by the public and private actors who act within its institutions, giving meaning to it through their institutional practices while giving substantive content to its resulting policies. Finally, the state serves equally as a political driver for change because its public and private agents can engage as ideational entrepreneurs in constant processes of political coordination, communication, deliberation, and contestation through which they reconstitute the state as they reframe its strategic action and reshape its institutional practices.5

Neo-liberal philosophy in perspective Set into the perspective of the history of philosophy, neo-liberals can be seen to reject premises about the primacy of the state over markets that are central to the Republican tradition going back to Aristotle

5 For a discussion, see Schmidt 2009 and Leca 2012. The state: The beteˆ noire of neo-liberalism or its greatest conquest? 117 and Rousseau. However, they also take a more radical view of the relationship between state and market than the older liberal tradition of Thomas Hobbes and John Stuart Mill.6 In the Republican tradition, the polity comes prior to the individual, with the common good for all the product of virtuous government underpinned by citizen participation and debate in the public space. In this tradition, individual economic activity is necessarily evaluated in relation to conceptions about what is good for the polity as a whole, as agreed to by the citizens and judged by elected political leaders. In the liberal tradition, the order of the relationship between polity and individual is the reverse of the Republican tradition because, here, the individual comes prior to the polity. This naturally reduces the scope for state action, especially given the greater emphasis in liberal thought on the protection of individuals’ rights via their ‘negative’ freedom ‘from’ interference (i.e., to guard against the ‘tyranny of the majority’) than on their ‘positive’ freedom ‘to’ provide for public goods. The polity, however, still comes before the economy, with political liberty a sine qua non for economic freedom. This was the case even for classical liberals, for whom laissez-faire economics nevertheless allowed for almost no role for the state. Such a conceptualization of democracy as prior to the economy made it possible for politically liberal critics of classical liberalism to argue for an expanded role for the state (i.e., freedom ‘to’) as long as the citizens generally favoured it and it did not impinge on individual rights.7 The neo-liberals reversed the traditional liberal relationship between polity and economy by insisting that economic freedom was a prereq- uisite for political freedom. Moreover, most were even more radically individualist than traditional liberals in their assumption that individuals acting in their own narrow, rational self-interest were all that was necessary to produce the best outcomes for the polity. For the neo- liberals, the state needed to be constrained as much as possible to give free reign to individuals’ economic freedom – and political freedom would follow.

6 The following two paragraphs build on Scharpf 2012. 7 Liberal thinkers at the time were quite concerned about authoritarian states. Hirschman (1977) showed that writers like Montesquieu favoured markets and individualism as a means to reign in the whims and passions of autocratic monarchs. We thank Gerhard Schnyder for bringing this to our attention. 118 Part I: Economy, state, and society

Neo-liberals therefore view the state as inherently dangerous: they see the public sphere as always encroaching on the private sphere, damaging not only the freedom of market actors’ transactions in capitalist economies but also the freedom of citizens to choose in liberal democracies – as in the title of Milton Friedman’s (1980) book, Free to Choose. For Friedman in particular, this is why neo-liberals must seek to limit the state as much as possible, even when this might give freer rein to market-distorting activities, such as monopolies.8 For James Buchanan, the risks inherent in state activity are compounded by the fact that public officials are also narrowly self-interested, which can lead them to act against the public interest in search of rent accruing to themselves.9 That said, all neo-liberals also recognize the benefits of a strong state capable of creating the institutions necessary to maintain a free market.10 As Buchanan insisted, ‘social order without a state is not readily imagined [ ...]. Man is, and must remain, a slave to the state. But it is critically and vitally important to recognize that ten per cent slavery is different from fifty per cent slavery’.11 Hayek also supported a strong but limited state by insisting on a rules-based approach to markets.12 Through ‘a carefully thought-out legal framework’, the role for the state was not only to ensure competition but also to guide economic activity where ‘it is impossible to create the conditions necessary to make competition effective’. However, for this, Hayek argued, ‘the state should confine itself to establishing rules applying to general types of situations and should allow the individuals freedom in everything which depends on the circumstances of time and place’.13 Hayek thus distinguished himself from other neo-liberals by proposing a neo-liberal ‘order’.14 Concerning the role of the state in social protection,15 Friedman argued for a ‘negative income tax’ for all those earning below a certain minimum, whereas Hayek maintained that preserving competition was compatible with ‘an extensive system of social services – so long as the

8 This position had evolved over time from an initial support for state intervention to fight private monopolies. See Siems and Schnyder 2014. 9 See Buchanan 1986b. 10 See Schmidt and Thatcher, and Gamble, both in this volume. 11 See Buchanan 1986a. 12 See Hayek 1944/2007: 85–6. 13 See Hayek 1944/2007: 114. 14 See Mirowski and Plehwe 2009. 15 See Schmidt and Thatcher, Martin, and Ferrera, all in this volume. The state: The beteˆ noire of neo-liberalism or its greatest conquest? 119 organization of these services is not designed in such a way as to make competition ineffective over wide fields’ and that a ‘certain security of minimum income’ should be ‘guaranteed to all without endangering general freedom’.16 Individual freedom was thus paramount and depended on the state’s capacity to provide efficient markets. Hayek even insisted that any type of planning was a threat to democracy because it imposed on individuals purposes and values that they were not likely to have chosen, given the difficulties of majority agreement.17 Moreover, once begun, planning would take on all functions because it would be seen as responsible for everything, including inequality, which Hayek (1994/2007: 137) insists is more readily borne ‘if it is determined by impersonal forces than when it is due to design’. Most important, as Hayek contended, planning leads to ‘serfdom’ because, once started, it is a ‘slippery slope’ to all forms of socialist and Nazi totalitarianism.18

Critiquing the neo-liberal philosophy of the state When Keynes first read Hayek’s Road to Serfdom, he wrote to Hayek that he found himself in ‘deeply moved agreement’ with the whole of it, with one caveat: that Hayek gave no guidance on ‘where to draw the line’ on the role of the state in the economy.19 Because it is difficult to find majorities in favour of positive state action of any particular type, it follows that there should not be any such action (although there was nothing to stop voluntary associations from engaging in chari- table activity). Moreover, if inequality is easier to accept if imposed by the impersonal forces of the markets, then the state should not impose much beyond the bare-minimum standards of subsistence that neo-liberals agreed was necessary in a democracy. As for the state’s redistributive functions, despite the fact that the market might generate massive inequalities, it was impossible to establish ‘objective standards’ of distributional justice. As a consequence, Hayek – along with radical libertarian Robert Nozick – insisted that any state attempts at redistribution to correct market outcomes would be arbitrary and, therefore, an interference with negative liberty.20 As for planning, by linking it

16 See Friedman 1962 and Hayek 1944/ 2007: 87, 148. 17 See Hayek 1944/2007: 100–11. 18 See Hayek 1944/2007: 76–82. 19 Keynes 1944, cited in Caldwell 2007: 24; see also Skidelsky 2005: 723. 20 See Nozick 1974 and Scharpf 2012. 120 Part I: Economy, state, and society to socialism and Nazism, Hayek succeeded in questioning not only the validity but also the motives of any state action in the markets. Even more important, as Foucault has pointed out, the ordo-liberals managed to turn the whole logic of the state–market relationship on its head with a discourse that blamed the state for all of the nega- tives of political and economic history.21 In so doing, they challenged long-standing liberal philosophies that saw fundamental defects in the economy by arguing that recent history had demonstrated instead that all of the ‘intrinsic defects’ were in the state, not the economy. There- fore, instead of accepting market liberalism as defined and maintained by the state, market liberalism should become the organizing and regulating principle of the state. For the neo-liberals, in short, the economy became, by definition, the solution and the state the problem. Most remarkable in this is the conscious decision by members of the Chicago School no longer to treat the optimality of markets as an empirical question but rather to postulate the optimality of market solutions in theory and then to justify privatization and deregulation by looking critically at government action.22 State action is no longer justified as intervention for market failures – which is at the origins of traditional liberal thought – because, in principle, the market cannot fail; only government can. With the economy as the ruling principle, politics and political groupings all become the enemies of markets rather than – as in previous Republican philosophy – the rulers of markets. Who, then, was to run the state? To limit the phenomenon of rent-seeking public officials, new public management (NPM) became established as an approach that sought to introduce efficiency into public management by splitting large bureaucracies into small units, introducing competition among public agencies and possibly even bringing in private firms to provide public services. In addition, technocrats and economists were hired to exercise their functions independently.23 However, by introducing the personnel procedures of NPM, which assume that ‘untrustworthy’

21 See Foucault 2004: 119–20. Foucault, however, shared a certain fascination with the neo-liberal conception of a purely selﬁsh rational decision maker, as De Lasgasnerie (2012) argues. 22 In an article on welfare economics, Wagner (2012) refers to Harberger (1971) as seminal for this turn from market failure to state failure. We thank Fritz Scharpf for calling our attention to this insight. 23 See, for example, Boston et al. 1996 and Pollitt and Bouckaert 2011. The state: The beteˆ noire of neo-liberalism or its greatest conquest? 121 public actors need incentives to act against their self-interest, neo- liberalism undermined the very altruism and trust on which public bureaucracies have long depended. Studies show that by assuming that the only rewards were economic, NPM produced the very rationally self-interested actors it was trying to control while undermining many non-economic contributions of public service.24 A more fundamental critique comes from Foucault , who views the underlying assumptions of this neo-liberal approach to governing as involving a type of ‘engineering of souls’.25 It seeks to shape individuals as governable, self-disciplined, enterprising subjects not directly, through state intervention, but rather indirectly, via the creation of structures of incentives. He labelled these rationalities used to steer societies as ‘governmentalities’. If we were to take Karl Polanyi’s (1945) thesis of ‘great transformation’ one step farther, as the neo-liberal Mont Pelerin` Society’s own in-house interpretation of Polanyi did,26 we could suggest that neo- liberalism served as a renewed ‘market’ movement in response to the ‘social’ countermovement. As such, it was undoing what Ruggie (1983) calls the ‘embedded liberalism’ of the postwar period that had served to counter the market ‘movement’ of classical laissez-faire liberalism, by ‘dis-embedding market actors from the institutions of the postwar liberal consensus’.27 The ensuing volatility weighing on the weakest parts of society that Polanyi predicted can now be observed in the context of the ﬁnancial crisis. Polanyi’s analysis leaves little room for optimism that a solution for the angry protest movements can be found peacefully within the framework of the current neo-liberal paradigm.

Agents matter: Putting neo-liberal ideas about state transformation into action With the ideals of the founders in mind, neo-liberal ideational entrepreneurs have sought to harness the power of the state as political driver of change in their efforts to radically restructure the institutional patterns of the state’s political economic action, such as eliminating state industrial policy and reducing the size and orientation of the

24 See Pollitt and Bouckaert 2011. 25 See Foucault 2004. 26 Hartwell 1995: 195, cited in Peck 2010. 27 See, for example, Esping Andersen 1990 and Blyth 2002. 122 Part I: Economy, state, and society welfare state. Moreover, to inﬂuence the ways in which public and private actors act and interact, they have also sought to alter the political institutions of the postwar period, such as the balance of power between management and labour and economic versus political actors more generally. Finally, neo-liberals have endeavoured to take over the state by changing the minds of public and private actors – or, more simply, changing the actors themselves – so as to be more attuned to neo-liberal ideas. However, once neo-liberalism had conquered power, neo-liberals’ theories and actions evolved in response to the resistance they encountered as well as to the failures of their own policies. In many cases, the resulting neo-liberal ideas have been so reshaped that they clash with various aspects of the founders’ original neo-liberal philosophies.

Living by the rules: Ordo-liberal compromise, 1950s and onwards The ﬁrst victory of neo-liberal principles came through ordo-liberalism, which can be thought of as the ‘neo-liberalism with rules’ that dominated state action beginning in the 1950s in Germany. Their economic doctrine developed in ‘discursive coalitions’ in the prewar years committed to a strong state capable of maintaining competitive markets as opposed to intervening in or even as a substitution for the markets.28 Their ideational as well as political success had much to do with the fact that pragmatic ordo-liberal ideational entrepreneurs who had gained power – Chancellor Ludwig Erhard, in particular – managed to engineer a compromise that added a signiﬁcant ‘social’ component to the market economy. The German ‘social-market economy’, which emerged after much discursive struggle during the 1950s, was a compromise accepted by Conservatives and Social Democrats alike, in which the state was to govern the economy according to ordo-liberal principles while also ‘enabling’ corporatist management and labour coordination of wages and work conditions with a reasonably generous, status- and gender- differentiated welfare system.29

28 See Lehmbruch 2001. 29 See Streeck 1997. The state: The beteˆ noire of neo-liberalism or its greatest conquest? 123

It is interesting that as Germany developed – and, in particular, as the welfare state expanded through the 1960s and 1970s – neo- liberals increasingly criticized Germany. Moreover, the conservative ordo-liberal foundations of the system were forgotten, particularly as German corporatism, Rhinish capitalism, or the ‘coordinated market economy’ came to be seen as the main alternative to the British (neo)liberal market economy – and even as ‘non-liberal capitalism’.30 Ordo-liberalism has long had a quiet influence on EU policy. Its most well-known conquest outside of Germany is its macroeconomic policy of sound money, as Erik Jones elaborates in his chapter in this volume. This German influence began as a mimetic effect as other countries copied Germany’s successful example in the mid 1970s, when the Bundesbank’s long-standing anti-Keynesian ‘hard-money’ monetary policy – adopted in the 1950s – hardened more in 1974 in response to the first oil shock, forcing budgetary discipline on governments. This came to be called ‘monetarism’, which Thatcher admired and emulated in the United Kingdom as soon as she came to power, subsequently followed by everyone else.31 Ordo-liberalism had a significant impact in other domains as well, such as in the competition-policy arena. Quack and Djelic convincingly argued that the origins of European anti-trust policy are found in Germany in the early postwar period.32 American occupation authorities, with their liberal ideas on anti-trust policy, opened a ‘window of opportunity’ for the marginal, pro-competition ordo-liberals by putting them in dominant positions that gave them an advantage in the subsequent battle for policy ideas. The resulting institutionalized ideas were translated and embedded in the European Coal and Steel Community and the Founding Treaties of the European Union, thereby influencing the epistemic communities of EU and member-state actors. Ironically, however, whereas ordo-liberal Germany influenced other countries’ neo-liberal turns to monetarism and to competition policy, it resisted those countries’ neo-liberal liberalizations and deregulations much longer. Financial-market liberalization did not begin until the 1990s, and greater flexibility in labour markets and rationalization of the welfare system began only in the early 2000s (see Schnyder and

30 See, for example, Albert 1990, Hall and Soskice 2001, Streeck and Yamamura 2001. See also discussion in Peck 2010: 67. 31 See Scharpf 2000. 32 See Quack and Djelic 2005. 124 Part I: Economy, state, and society

Jackson, this volume). It is only relatively recently that neo-liberal ideas have effectively undermined the ordo-liberal order and, as Wolfgang Streeck argues, the institutions of the postwar social-market economy – dear to Social Democrats and ordo-liberals alike – in favour of a more neo-liberal system.33

Rolling back the state: Radical (conservative) neo-liberalism, 1980s to early 1990s The next phase of the neo-liberal ideational conquest of the state can be seen as more radical than the German ordo-liberal conquest, with neo- liberalism as an uncompromisingly ideological programme. Although different countries took different paths, they all adopted neo-liberal ideas that proposed loosening labour markets, liberalizing ﬁnancial markets, and deregulating business.34 The politics and parties associated with this programme were also mostly on the right, with conservative values attached. Reforms tended to be adopted and implemented more quickly in countries with majoritarian political institutions, given their ability to impose reform – as in the United Kingdom in the early 1980s and France in the mid 1980s – although determined governments with weak civil societies in proportional systems were also able to move rapidly, as in a number of the Central and Eastern European countries in the early 1990s. Neo-liberal reform tended to come more slowly in institutional contexts in which parties that were elected via proportional representation had to negotiate with multiple coalition partners. Within public bureaucracies, NPM spread rapidly after being initially conﬁned to Anglo-Saxon countries. In the United Kingdom, it was in a moment of crisis and disillusionment with the left following the ‘winter of discontent’ that Thatcher came to power. Thatcher was an ideological entrepreneur, intent on breaking the consensual style and ‘paternalism’ of her own party while ending, once and for all, what she saw as the Labour Party’s ‘socialism’ and replacing its Keynesian policies with monetarism, competitive capitalism, and an opening to globalization. Thatcher adopted wholesale Hayek’s view that the free market would not only release the ‘spirit of enterprise’ but also that it would guarantee liberty; that the welfare

33 See Streeck 2010. 34 See Fourcade-Gourinchas and Babb 2002, Schmidt 2002a, and Blyth 2002. The state: The beteˆ noire of neo-liberalism or its greatest conquest? 125 state was an encroachment on individual liberty, whereas government attempts to reduce inequalities created a dependency culture; and that public services should, in the main, be taken into the private sector, with what remained subject to competition.35 Other countries subsequently adopted neo-liberal ideas – some sooner, some later – their elites being influenced by the UK and US neo-liberal experiments as well as by ‘homegrown’ neo-liberal pro- pagandists and converts. Ireland was naturally greatly influenced by the British neo-liberal experiment, although it parted from the United Kingdom in its approach to labour beginning in the mid to late 1980s. This is when it instituted state-led corporatist arrangements (‘faire avec’) in an elaborate coordinative discourse consisting of dialogues among four ‘chambers’ consisting of labour, business, agriculture, and civil society.36 In France, in a postwar era marked by much stronger as well as more successful state interventionism than in the United Kingdom, neo-liberals were a mixed and largely moderate breed. However, from the 1970s, a new generation of more radical neo-liberals came to attack the earlier group, providing intellectual ideas for the neo-liberal opposition to the Socialists in power in the early 1980s and then the opposition’s conquest of power in 1986.37 The Chirac government was radically neo-liberal in its campaign discourse, promising a major shift to privatization, extensive financial-market liberalization, and business and labour deregulation.38 Chirac himself, however, was an opportunistic entrepreneur, as evident from the fact that when he lost the 1988 presidential election, he also lost his neo-liberal enthusiasm.39 Here, too, however, some of his ministers were committed neo-liberal ideologues, including Alain Madelin in the Ministry of Industry, who all but destroyed it. Subsequently, neo-liberal policy entrepreneurs on the right as much as the left shifted their communicative discourse to emphasizing the need to ‘modernize’ the state, even as they continued to institute moderately neo-liberal policy ideas. Other countries also liberalized in the early to mid 1980s, but often more gradually, one area at a time. In the case of the Nether- lands, Prime Minister Ruud Lubbers was the neo-liberal ideological

35 See Tribe 2009 and Schmidt 2000 and 2002a: 260–61. 36 See Hay and Smith in this volume. 37 See Denord 2007 and 2009. 38 See Schmidt 1996. 39 See Gualmini and Schmidt in this volume. 126 Part I: Economy, state, and society entrepreneur who managed in the early 1980s to extract agreements to increase labour market flexibility and to give capital a greater share of profits by threatening that the government ‘is here to govern’ with or without the social partners. He indicated that he would use the state to impose reform if the social partners did not reach agreement. In the early 1990s, moreover, he pushed through major cutbacks in welfare, against strong public resistance, claiming that ‘tough medicine’ was needed for such a ‘sick country’, in which one in seven was out of work on disability. It is important to note that Lubbers’s coalition government then went down to a resounding defeat.40 In Sweden, neo-liberalism came much later but more suddenly. With the bursting of the real-estate bubble and the ensuing crisis, the last European government using neo-Keynesian macroeconomic policy abandoned it. However, budgetary austerity did not mean a commitment to rising inequality, as it did in the United Kingdom. Much to the contrary, the Social Democrats promised to defend the universalistic values of the welfare state even as they reduced benefits – which they pledged to and did restore once the economy recovered.41 In Denmark, where the crisis hit in the 1980s, the government’s pragmatic ideational process of reform was more incremental, with neo-liberal policy ideas ‘layered’ onto the preexisting set of social-democratic arrangements, but without disrupting the social-democratic consensus. The communicative discourse emphasized that they had to ‘cut the welfare state in order to save it’; however, those cuts, as in Sweden, sought to maintain universalism and equality.42 In the countries of Central and Eastern Europe, where radical reforms to move the economy from communist to capitalist were undertaken everywhere beginning in the early 1990s, the degree of radicalness must be defined in terms of timing and rapidity. Note that the conversion process also did not introduce neo-liberal ideas as if onto a blank slate. American economists carrying neo-liberal ideas of market reform were indeed influential, but East European economists had long been using the language of neo-classical economists to talk about planning as well as markets, about efficiency as well as economic freedom, and about socialism as well as capitalism.43

40 See Schmidt 2000 and 2002b. 41 See Hinnsfors and Pierre 1998 and Schnyder 2012. 42 See Schmidt 2000 and 2003. 43 Bockman 2011: viii; see also Orenstein in this volume. The state: The beteˆ noire of neo-liberalism or its greatest conquest? 127

Although the economic process of ‘creative destruction’ was experienced across the CEECs as privatization, deregulation, and liberalization became the watchwords for reform, states again proceeded in different ways at different paces.44 Some countries, such as Poland, engendered a ‘big bang’ in political economic reform by rapidly liberalizing prices and shifting macroeconomic policy, whereas other countries were slower – some so slow, in fact, that they experienced an anti-democratic backlash, as in Bulgaria.45 Here, too, much depended on the ideational entrepreneurs who ran the reform efforts. Thus, the architect of Poland’s radical ‘shock therapy,’ Leszek Balcerowicz, was an ideological entrepreneur of the purest kind. However, although Vaclav Klaus of Czechoslovakia was similarly ideological, he did not engineer the same type of rapid, radical liberalization.46 Across Europe, neo-liberalism took hold between the early 1980s and the early 1990s. Despite widespread resistance to neo-liberal programmes and the patent failure of many its initiatives, neo-liberalism remained largely resilient. This was due, in part, to the fact that its opponents did not seem to have any new ideas; were not electable; or, when elected, seemed to operate in the same way as previous neo-liberal governments. With the demise of the Soviet Union, moreover, the left found itself without an alternative ideological extreme to invoke. More important, however, is that resilience came from neo- liberalism’s own capacity for reinvention, often by attracting new converts to the cause on the left rather than on the right – in particular, with the renewal of neo-liberalism spearheaded by the left beginning in the mid to late 1990s.

Rolling-out the state: Moderate (social-democratic) neo-liberalism, late 1990s to 2000s Although the rhetoric of all such neo-liberal governments maintained that the state was by its very nature inefficient and would be best replaced by the efficiency, rigor, and discipline of the free market, the reality was that their initiatives produced all manner of inefficiencies. In a second step, neo-liberal governments tended to respond through re-regulation, without much neo-liberal philosophical justification or any clear guidance on what to do next. Whereas the radical phase in the

44 See Lane and Myant 2007. 45 See Ekiert 2003. 46 See Frye 2010. 128 Part I: Economy, state, and society

1980s and early 1990s that focused on state ‘roll-back’ fitted well with the ideological legacy of the 1930s, the next stage from the mid to late 1990s onwards, which was focused on state ‘roll-out’, fitted less well. At this time, the state began to move from neo-liberalism’s main target of attack – to get the state out of the markets – to its primary tool of attack – in the markets. From a haphazard process of reactive state reregulation in response to the deleterious effects of freeing up the markets, we find a considered process of active state engagement to create and reinforce liberalised markets. This is when new forms of state interventionism were invented that were certainly still neo-liberal in their underlying philosophy but were much more proactive in their attempts at market-shaping and market-complementing reforms. This is also when the vocabulary of ‘governance’ came to be substituted for ‘government’ to indicate that ‘governing without government’ was not only possible but also desirable. For the public sector, it was when ‘new public management’ was replaced by ‘joined up’ governance along with ‘inter-service coordination’ and ‘e-governance’.47 For labour, it was about flexibility or even ‘flexicurity’ and active labour markets;48 for welfare, it was no longer only about getting people off the rolls but also about getting them into work through youth employment and welfare-to-work programmes.49 Moreover, as subsequent country chapters demonstrate, this involved new social-democratic forms of neo-liberalism. In the United Kingdom, Thatcher’s neo-liberalism set the ideational path that the Labour Party could not and, ultimately, did not ignore in order to regain power as ‘New Labour’ in 1997.50 As ‘New Labour’, the Party was differentiated not only from the ‘old (Marxian) left’ but also from the old ‘(social-democratic) left’ in order to create a ‘Third Way’, which adopted many of the fundamental premises of Thatcherite neo-liberalism while insisting that this incorporated the main goals of Social Democracy. With regard to the public sector, moreover, Blair’s government created what Moran called the ‘steering state’, which was actively involved in developing ‘joined up’ government and encouraging participation through ‘networks’ – even as it became increasingly intrusive in peoples’ lives, particularly on issues of public order and welfare.51

47 See Pollitt and Bouckaert 2011. 48 See Martin in this volume. 49 See Ferrera in this volume. 50 See Faucher and Le Gales` 2010 and Schmidt 2002a. 51 See Moran 2004; see also Gamble 1988. The state: The beteˆ noire of neo-liberalism or its greatest conquest? 129

Whereas Blair in the United Kingdom clearly embraced certain aspects of neo-liberalism, Prime Minister Jospin in France (elected in 1997) avoided any such discourse, even as he rolled out state reforms that further freed up the markets – albeit with an overlay of social- democratic ideas and discourse. Jospin’s communicative discourse was all about providing a middle path: he argued that the reforms proposed by the Socialists were not only economically efficient but also promoted social equity, combated social exclusion, and healed the ‘social fracture’, whereas privatization sought to secure investment as well as guarantee jobs while involving the unions in negotiation.52 Under the Socialists, then, there was no rhetoric of neo-liberalism but rather the reality of significant liberalizing reforms, suggesting that Jospin was very much a pragmatic ideational entrepreneur.53 In Germany, finally, neo-liberal roll-out with a social-democratic flair came later than in France or in the United Kingdom. Chancellor Gerhard Schroder,¨ elected in 1998, did little with regard to reform until the early to mid 2000s. It was only with the recommendations of the Hartz IV Commission that Schroder¨ – clearly acting as an opportunistic entrepreneur – pushed through the most significant reforms of pensions ever. However, he did so without a legitimating discourse that explained why it was appropriate to change a pension system that Germans had come to see as their property rights.54 The absence of a cohesive set of ideas or ‘frame’ helps to explain the tenuous- ness of the reform and its subsequent partial reversal.55 However, Schroder’s¨ persistence in the face of plummeting popularity ratings and public discontent nevertheless allowed time for the coordinative discourse among social partners and the government – led by ministers who served as pragmatic ideational leaders – to produce significant results.56 Social-democratic parties in power beginning in the late 1990s, in short, renewed neo-liberalism with the roll-out of reforms of the state that completed the neo-liberal revolution begun with the more ideological roll-back of the state in the early 1980s. This cannot be fully understood, however, without also considering the role of the EU in promoting such liberalization – in particular, in the second period.

52 See Levy 1999 and Schmidt 2002a. 53 See Gualmini and Schmidt in this volume. 54 See Kinderman 2005 and Schmidt 2002. 55 See Bosenecker 2008. 56 See Stiller 2010. 130 Part I: Economy, state, and society

Liberalization from above: The European Union and beyond Domestic politics matter for the impact of neo-liberal ideas, but the most constant pressures for liberalization have come from above. In Europe, economic integration through the EU has created a systematic bias towards the reduction of obstacles to market integration.57 Internationally, cooperation through the World Trade Organization (WTO) targets trade barriers, and policy recommendations of the OECD, the World Bank, and the IMF have traditionally been marked by a ‘Washington consensus’ – particularly in the 1980s – which was organized around neo-liberal ideas. After the fall of communism, the discursive victory of neo-liberal ideas in international circles was such that many predicted global market integration to lead to the veritable universal transformation of nation-states into market-enabling arbiters rather than public-goods providers. Although international organizations did not entirely depoliticize the state, as proponents of delegation had hoped, they were used as the scapegoat to legitimize domestic-reform initiatives. In many European countries, the EU was frequently used as a reference for the need to impose economic orthodoxy, an external constraint making the traditional social compromise no longer possible.58 In the context of these discursive battles, the result was most often a compromise between pure neo-liberal ideas and other values pursued by the member states. Jabko showed that domestic and supranational policy makers used ‘the market’ as a consciously ambivalent concept that would allow building an alliance among a diverse set of actors, including Federalists and Social Democrats.59 Rosamond similarly suggests that the history of EU economic liberalism has been a delicate balancing act as well as a struggle among German ordo-liberalism, Anglo-American neo- liberalism, and French Colbertism.60 Moreover, in the application of even some of its seemingly more neo-liberal ideas, such as the concepts of ‘ﬂexibility’ and ‘employability’ in the open method of coordination, countries have understood and applied the concepts very differently.61 Thus, the effect of the EU on the pathways of economic development in Europe has to be understood as the ideational construction and

57 See Scharpf 1996. 58 See Dyson and Featherstone 1996 and Hay and Rosamond 2002. 59 See Jabko 2006. 60 See Rosamond 2012. 61 See, for example, Barbier 2008. The state: The beteˆ noire of neo-liberalism or its greatest conquest? 131 strategic application of policy ideas, even if some of those ideas had lasting effects on the constraints and future possibilities of negotiation. Member states also have used the EU to promote their own visions of liberalism and to defend it in the global arena. Most interesting, perhaps, is the story of the liberalization of the financial markets, first at the EU level and then internationally through supranational institutions. Abdelal argued that it was largely French socialists – such as Pascal Lamy, first as advisor to Jacques Delors when he was Finance Minister and then later as EU Commissioner, or Michel Camdessus as head of the IMF – who, as the ideational entrepreneurs behind liberalization, pushed global financial market opening, making for a ‘Paris consensus’.62 His explanation is that the French socialists, as ‘New Left’ ideational entrepreneurs, used neo-liberal ideas pragmatically. Recognizing in the early 1980s that they could not stop capital flows out of the country, they decided that if they could not beat them, they would join them. However, in so doing, they would seek to create ‘managed globalization’ by first convincing the EU and then the IMF to regulate financial capital.63 This upward dynamic illustrates that neo-liberal ideals have always been appropriated in specific ways by ideational entrepreneurs, in the context of detailed negotiations about what is being liberalized and how. Stated differently, extending a certain vision of liberalization in the international realm requires a strong and capable state that is ready to defend national preferences. For the European institutions, the possibility to construct a particular version of economic policy, thereby defending the interest of its citizenry, is a source of legitimacy. Thus, the EU Commission, which is credited mainly with pushing to liberalize markets, also contributes to constructing the European economy as a space for political action of all types.64 At the domestic level, the responses to pressures for market integration have varied depending on political entrepreneurship and on the historical legacies of state traditions. To be sure, as markets become increasingly connected across borders, politicians everywhere experience the paradox of neo-liberal democracy. Their political mandate is to pursue the political and economic interests of their citizenry with respect to an economy that is no longer exclusively within their control.

62 See Abdelal 2007. 63 See Meunier and Jacoby 2010. 64 See Rosamond 2012. 132 Part I: Economy, state, and society

Some have argued that these mismatched boundaries lead to a rolling back of political authority, to ‘sovereignty at bay’.65 Comparing state interventionism in open markets, Clift and Woll suggest that the state repertoire of action has simply shifted.66 Governments still defend their economic interests with the same fervor, but they rely less on traditional industrial policy and protectionism. Instead, they support their industries in international competition, attempt to establish domestic regulation as international standard, and liberalize particularly those sectors where domestic industries have a comparative advantage on world markets. The degree with which neo-liberalism was accepted as the new mantra of international cooperation and domestic reform is far from automatic. Whereas some states adopted them quite strategically – justifying their liberalizing ideas by reference to an external constraint in order to pass controversial reforms – others adhered more thoroughly to the underlying principles. Neo-liberalism’s central belief in the advantages of delegation of economic choices to an independent authority that would be insulated from everyday political pressures took a strong hold in Germany, which designed its monetary policy and subsequently the monetary policy of the ECB accordingly. Mak- ing the ECB the institution defending such core ideas created a policy dynamic at the international level that now shapes how neo-liberal discourse affects the countries turning to the ECB for help during the economic crisis. As Kranke and Lutz¨ show, the lending conditions of the ECB to Eastern European countries are more orthodox than those imposed by the IMF, which had traditionally been accused of being the vanguard of neo-liberal principles, particularly through its policies of structural adjustment in the 1980s and 1990s.67 At the European level, the insistence on markets as major governance mechanisms is accompanied by a discourse on ‘good governance’ and the strength of so-called civil-society actors as an intermediating sphere of social action.68 Seeking to create conditions of subsidiarity, networked governance and civil-society participation implies again a rather active state, even at the European level, to assure a governance regime that can accompany liberal policy principles. To summarize,

65 See Vernon 1971. 66 See Clift and Woll 2012. 67 See Kranke and Lutz¨ 2010. 68 See Armstrong 2002 and Greenwood 2007. The state: The beteˆ noire of neo-liberalism or its greatest conquest? 133 although many pointed to international constraints to explain how neo-liberalism affected the transformation of states, the picture is in reality much more complex.

Ramping up the state in response to the Eurozone crisis Yet, the current Eurozone crisis appears as one of the instances in which neo-liberal ideas are upheld by some with particular fervor against the interests of individual states. But if we acknowledge how much international negotiations are occasions for the definition and revision of particular creeds, it becomes clear that the outcomes result not from any pure application but rather from ideational and discursive struggles. In particular, the Eurozone crisis pitted the ordo-liberalism of Germany against even some seemingly neo-liberal governments such as the United Kingdom – pleading for more state action to promote growth. Here, we need to speak not only about the power of ideas and discourse but also simply about power. Germany, as the economic powerhouse of Europe, and its ‘paymaster,’ has been able to ‘throw its weight around’. The result is a ramping up of the European ‘state’ to roll out more ordo-liberalism. Ordo-liberal theory clearly would find the use of the ECB as a lender of last resort anathema and Eurobonds dangerous unless all other countries adopted similar economic practices. The German discourse, underpinned by the country’s stability culture, insists that the only response to high debts and deficits, not to mention threats of insolvency, is severe austerity policies that serve to reassure the private sector, thereby triggering sustainable growth. This response is in contrast to Keynesian measures for state-spurred growth that would – according to ordo-liberalism – only produce inflation. The German narrative of its experience from the postwar years forward is one of ordo-liberal virtue: in the late 1940s response to inflation; in the Bundesbank’s mid 1970s move to hard money; and in the early 2000s belt-tightening that led to a decade of no real wage growth, accompanied by a painful reform of the pension system. The fact that most of the Eurozone governments were conservative between 2010 and 2012, and that the Northern Europeans backed Germany, meant that these ideas have been enshrined in the criteria set for government budgets in one treaty after another, with the mechanisms of the Stability and 134 Part I: Economy, state, and society

Growth Pact followed by the ‘Six Pack’ and the most recent ‘Fiscal Compact.’ Moreover, decision-making processes have become excessively intergovernmental as the joint decision processes of the ‘Community Method’ – which would include the European Parliament as well as the EU Commission – have been sidelined. Instead, the Franco-German couple – or is it only Germany? – make the major decisions. Thus, what appears to be the resilience of neo-liberalism in European relations is more precisely the conviction carried by one country in particular. Furthermore, it is because of the weight and political capacity of the German state that this vision inﬂuences the debate so fundamentally. The Eurocrisis therefore illustrates that neo-liberal ideas continue and prevail not because states have withdrawn from politics and delegated authority to neutral institutions. On the contrary: powerful states are central to assuring the survival of neo-liberalism in the international realm.

Conclusion However we consider the question, it becomes clear that neo-liberalism does not imply the demise and burial of the state. To be sure, the doctrine maintains that political authority must be insulated from interest- group pressures and that the market is a better provider of public goods than the state. To impose reforms, to create and shape the relevant markets, and to negotiate and revise neo-liberal principles in international cooperation all require strong states, both domestically and externally. Moreover, the adoption of neo-liberal convictions, even in their purest form, has never led to a complete disregard for political objectives and the defence of economic interests: states simply reinvent the intervention they deem necessary and find new ways to protect their interests in ways compatible with their liberal ambitions. The ways in which such choices are made depend on the historical legacies and the institutional and ideational entrepreneurship of the policy makers and elites in each respective country. More generally speaking, we can observe different types of neo- liberal conquests of the state; all are indicative of the degree to which neo-liberalism needs to build on and expand political authority and institutions. In the United Kingdom, the most comprehensive changes The state: The beteˆ noire of neo-liberalism or its greatest conquest? 135 brought about by neo-liberalism are the instruments accepted as admis- sible in policy making: the rise of the NPM and the development of a large controlling bureaucracy that organized the operation of ‘the market’ in numerous policy areas.69 In Germany, the imprint of neo-liberal ideas was much stronger in organizing principles affecting policy discourse and political legitimacy, even if it appeared to be less neo-liberal than Britain at the level of policy processes and instruments. France, in turn, has an ambivalent relationship to neo- liberalism, which never gained much ground as an ideology in public opinion. Politicians in France use neo-liberal constraints in an opportunistic manner and apply its principles whenever it advances their policy agenda. However, they are equally quick to push back or even develop legitimacy claims based on the arguments of their neo-liberal opponents throughout the party spectrum. In Scandinavia, neo-liberal instruments have become ‘part and parcel’ of the countries’ adaptation to economic openness. However, the use of such instruments did not change the nature of policy programmes or of their normative commitments to the same degree as elsewhere. Central and Eastern Europe, finally, has an entirely different relationship with neo-liberal reforms, which were applied with a much greater degree of ideological commitment than elsewhere. Especially in the early years after the fall of communism, neo-liberal ideas appeared as a matter of national identity (e.g., in the Baltic countries) because it helped to clearly distinguish their present from their own historical legacies and Russia.70 Yet, the relationship between neo-liberalism and their communist past was a matter of intensive debate and interpretation in Eastern and Central Europe and, similar to other countries that experienced neo-liberalism as an ideology, it created significant backlashes. All of this discussion suggests that neo-liberal ideas may have renewed the state, leading to a new synthesis of what we call liberal neo-statism. If anything, the state has become more active in managing the market – much more so than anticipated by neo-liberal philosophies and ideologies. This is the basis of its liberal neo-statism, but the state has also become more liberal in its approach. That liberalism, however, is not the narrowly construed liberalism of the ideological conservative neo-liberalism of the 1980s and early 1990s. Rather, it is a liberalism that is more fully ‘liberal’ in the widest sense of the

69 See Faucher and Gales 2010. 70 See Abdelal 2001. 136 Part I: Economy, state, and society word, as social-democratic concerns adopted by the left have infused neo-liberalism even as the new wave of neo-liberalism beginning in the late 1990s served to renew it. In summary, political and economic elites constantly negotiate the meaning and nature of neo-liberal reforms. What is resilient is the nature of the questions, not necessarily the outcome. Yet, in all cases, the state remained central as an arena for discursive struggle: an authority to impose the most prevalent vision and an advocate of domestic preferences in the international realm. As with mothers-in- law, this testiﬁes to the persistent ties and hidden affection between neo-liberalism and the state.

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5 The collapse of the Brussels–Frankfurt consensus and the future of the euro erik jones

European monetary integration rests on a convergence of views across different countries related to the virtues of stable money and sound finances.1 This convergence has operated under many different justifications. It was the logical response to the liberalization of international financial markets2; it was the price for German participation3; and it was the hegemony of neo-liberalism in the battle of ideas.4 No matter how they explained it, most observers agreed on the existence of a Brussels–Frankfurt consensus underpinning Europe’s single currency.5 Then the consensus began to falter. The first cracks appeared during the crisis surrounding the stability and growth pact (SGP) in the early 2000s. The tensions mounted with the widening divergence in inflation rates across Eurozone countries and the increasingly volatile euro– dollar exchange rate during the middle of the decade. The consensus shattered completely as the ECB struggled first to manage the global economic and financial crisis and then was found to be responsible for the stabilization of European sovereign-debt markets. Now, the German economics community is openly discontent with the ECB; the ECB and the European Commission are promoting different agendas; and the member states are clearly divided as to what should be the solution. This chapter explains the collapse of the Brussels–Frankfurt consensus. The argument echoes the main themes of this volume. To the extent that it existed, the ideational consensus underpinning Europe’s single currency was always more rhetoric than reality. The main economic actors couched their policies in the language of sound money and stable finances (or free markets and neutral states); however, they actually

1 See McNamara 1998. 2 See Padoa-Schioppa 1987. 3 See Katzenstein 1997. 4 See Moss 2004. 5 See De Grauwe 2006: 724–25.

145 146 Part II: Neo-liberalism in major policy domains behaved more pragmatically than ideologically, and they showed a remarkable willingness to break their own rules. The point is not that these actors were cynical or hypocritical; rather, it is that they saw no alternative but to hold onto a formal commitment to a common policy framework while at the same time wrestling with the anomalies they encountered in the performance of Europe’s monetary union. The lack of alternatives stemmed from an intellectual problem and an institutional problem. Intellectually, Europe’s policy makers had no other policy framework that they could use to replace the Brussels–Frankfurt consensus. There were dissenting voices and empirical anomalies, but they did not add up to a coherent alternative; the fact that everything appears to be an exception is not a good reason to throw away the rule.6 Institutionally, Europe’s policy makers lacked the political support to alter the treaty obligations or decision- making arrangements that formalized norms about price stability, central-bank independence, fiscal consolidation, and market-structural reform. Hence, it was always easier to show how the policy fit the existing language of commitment than to initiate a comprehensive revision of the framework itself. This chapter has seven sections. The first section sets out the ideas and norms that constitute the Brussels–Frankfurt consensus: stable money, sound finances, and efficient local-factor markets. The second section puts this framework within the broader context of ideas and ideologies examined in this volume. The third section focuses more narrowly on the problem of monetary stability. The fourth section examines the challenge of fiscal consolidation. The fifth section describes efforts to promote efficient local-factor markets. The sixth section brings these three elements together in the context of intra- European interdependence. The seventh section explores the difficulty of introducing alternative institutional arrangements.

The Brussels–Frankfurt consensus Europe’s economic and monetary union was never very popular with economists, and the reason is simple. Europe is not an ‘optimum currency area’, so there is no clear economic rationale for binding Europe’s national currencies together irrevocably. There are economic arguments for and against monetary union. A single currency offers

6 See Lakatos 1970. The collapse of the Brussels–Frankfurt consensus 147 efficiency gains on the one hand and policy constraints on the other. However, there is no compelling economic case either way. The decision to create a common currency was – at its core – political. In turn, that political decision contained a number of strong ideational commitments that together create an interlocking framework of norms and beliefs that guide policy making. The first commitment is to price stability. This commitment derives its justification from the recognition among economists that inflation has significant redistributive consequences, that it tends to accelerate as actors revise their expectations and contractual relationships over time, and that it has no positive net effect on the level of activity in the long run. Beyond that intellectual rationale, the commitment to price stability also reflects the attitudes of the German negotiators involved in working out the initial designs for the single currency and who sought to bring along their own central bankers as reluctant supporters.7 As if that were not enough, soon after the Maastricht Treaty was ratified, German constitutional lawyers argued successfully that European price stability is an essential part of the package accepted by the German parliament. Therefore, any failure to deliver on that commitment would violate the sacred democratic relationship between Germany’s elected representatives and their voters. The political commitment to price stability is bound up with the decision to grant independence to the ECB and its corresponding national central banks. Here again, there is an economic and a political rationale. The economic argument for central-bank independence derives from the fact that the incentives for policy makers involved in monetary-policy decision making are time-inconsistent and therefore should be governed by rules rather than discretion. The political argument reflects concern that there would be many non-German voting members on the governing council, which is the body responsible for making monetary-policy decisions. The only way to ensure that the governing council gives priority to price stability is to insulate it from the political control of the member states over their national central- bank governors. The advantage of the price-stability rule from an economic perspective is that it underscores the neutrality of money by eliminating price inflation as a source of uncertainty. Hence, although the ECB is charged with supporting the broader economic goals of the member

7 See Loedel 1999: 99. 148 Part II: Neo-liberalism in major policy domains states once price stability is assured, successive ECB presidents have argued that assurance of price stability is the best and only real support that monetary policy makers can offer in the service of other economic objectives. Indeed, this line of reasoning is often repeated in the monthly press conferences of the ECB president and the occasional speeches of other board members. The problem is that monetary policy makers are not alone in having an influence on prices. Fiscal policy makers can also cause inflation by running excessive deficits. In extremis, fiscal policy makers might even welcome inflation as a mechanism for reducing the real value of excessive public debts. Worse, the two fiscal influences are reinforcing insofar as deficit spending fuels price increases, whereas mounting indebtedness lowers political resistance to inflation. Hence, a second commitment constituting the Brussels–Frankfurt consensus is that governments should pursue sound finances by avoiding excessive deficits and debts. The key term here is ‘excessive’. As a framing device, ‘excessive’ has obvious heresthetic qualities: no one would advocate fiscal excess. As an economic concept, however, the implications are less straightforward. Different countries can afford to borrow different amounts under different conditions, so there is no objective and universal bench- mark for excessiveness. Hence, the measure of ‘excess’ is political. The story often told about the negotiation of the Maastricht convergence criteria is that the Germans wanted to limit deficits to 2 per cent of GDP, whereas the French were hoping for something closer to 4 per cent. The value they agreed on splits the difference. Even if this story is true, it grossly understates the complexity of the problem. The measure of excessiveness goes beyond the reference values written into the Maastricht Treaty to include the harmonized standards for fiscal accounting (ESA 95), the aggregation of accounts across different levels of government, the time horizons for estimation, and the list of extenuating circumstances.8 As with the price-stability rule, the sound-finances rule entails a specific institutional commitment: that is, not to bail out the fiscal errors of individual member states. This prohibition extends to both central banks (including the ECB) and other member states. It rests on the paired notions of individual responsibility and moral hazard. National governments must know in advance that they will be held

8 See Savage 2008 and Heipertz and Verdun 2010. The collapse of the Brussels–Frankfurt consensus 149 accountable for their own excesses; otherwise, they will face adverse incentives to break the sound-finances commitment in the knowledge that others will absorb the consequences. What is telling about the sound-finances rule is that it applies to the difference between revenues and expenditures and not the broader relationship between states and markets. This is an example in which the distinction between an encompassing policy paradigm and a more partial framework of ideas is important. The Brussels–Frankfurt consensus never extended to fiscal integration and neither did it imply constraints on the scope of national-welfare states. Instead, it focuses much more tightly on the market distortions caused by government borrowing. In this sense, the prescriptions it contains are embedded in different national state–market traditions. The parallels with the compromise of embedded liberalism that described the early postwar international economic system are close.9 The idea of fiscal responsibility was socially embedded in very different national contexts. This is not to say that welfare-state structures were insulated from the Brussels–Frankfurt consensus. Rather, the point is that any influence was indirect rather than explicit. Once member-state governments signed up for irrevocably fixed exchange rates, stable money, and sound finances, they had few remaining instruments for macroeconomic adjustment. Some of the smaller, corporatist countries could rely on price-incomes policies. However, the larger or less corporatist member states could only hope that domestic-market adjustments would be macroeconomically efficient – meaning that prices and wages would be flexible and unemployment would be temporary. The emphasis on the domestic dimension of market adjustments was implicit. Although the European Treaties openly celebrate the free movement of labour, Europe’s heads of state and government did not aspire to create the conditions for mass migrations of unemployed workers to move from one member state to the next in search of employment. Even labour migration within countries was open to question. Hence, the goal was to create efficient local-factor markets so that workers could move from one job to another without necessarily changing their place of residence.10 This emphasis on improving the efficiency of local labour (or ‘factor’) markets is a recurrent theme in European welfare-state- reform debates. The usual rhetorical device is ‘competitiveness’. The

9 See Ruggie 1982. 10 See Jones 1998. 150 Part II: Neo-liberalism in major policy domains heresthetic force of this framing is as strong as with the notion of ‘excessive’, and the economic rationale is similarly incomplete. Local markets are competitive when prices and wages are flexible and unemployment is low, and they are uncompetitive when prices and wages are more rigid and unemployment is high. The problem is that most economic actors aspire to achieve conditions of full employment alongside wage and price rigidities; they want to hold onto their jobs while at the same time protecting the real value of their remuneration from one year (month, day) to the next. Policy makers ‘square the circle’ by focusing on productivity growth as a means of accommodating conflicting demands. The argument is that as long as productivity increases, workers can hold onto their jobs and benefit from stable or rising incomes. The challenge is to encourage productivity growth. Technological innovation is difficult to endogenize, so the argument usually pivots on creating appropriate incentives; the source of productivity growth is more competition.11 At the same time, most economies contain unemployment that cannot be explained as a function of domestic wage and price distortions. Competitiveness addresses only part of this dilemma. Never- theless, the political logic behind the argument for greater market liberalization is supportive of the broader policy consensus. As long as Europe’s governments remain committed to stable prices and sound finances within the context of a single currency, they should do their utmost to ensure that local-market institutions – including welfare- state benefits – do not conflict with the achievement of jobs and growth.12 This framework was not the only possible design for Europe’s economic and monetary union. The architects for monetary integration could have drawn up plans that offered more political influence in mapping out the policy targets, more choice in setting monetary-policy instruments, more dynamic assessments of fiscal capacity, more solidarity when problems got out of control, and more flexibility in managing macroeconomic adjustment. The problem with these alternatives, however, is that each implies some form of discretion; by contrast, the Brussels–Frankfurt consensus rests on a foundation of rules. In this sense, it rests on foundations very similar to the German notion of Ordnungspolitik.

11 See Draghi 2012. 12 See Praet 2012. The collapse of the Brussels–Frankfurt consensus 151

This rules-based framework should be interpreted as an agreement to disagree and not as the imposition of German norms on the rest of Europe. Europe’s politicians could not identify a coherent framework for discretion – that is, where it should be exercised, when, and by whom. Attempts to negotiate a European economic government failed. Hence, they fell back on a rules-based framework that could operate beyond political discretion. This was not the optimal choice, simply the only possibility for agreement. Even countries with a strong state tradition found themselves reluctantly accepting the Brussels–Frankfurt consensus. If they could not have an effective economic government, at least they could help to shape the rules of the game.

Ideas, ideologies, and paradigms The policy commitments included in the Brussels–Frankfurt consensus are ideas that European politicians have transformed into policy rules. They do not add up to a coherent worldview or even a coherent understanding of the relationship between states and markets. In that sense, the Brussels–Frankfurt consensus is more limited in scope than the neo-liberal ideology that is the focus of this volume. It overlaps with neo-liberalism in some respects and it has neo-liberal supporters, but neo-Keynesians and supporters of other more heterodox economic perspectives can reinterpret key elements of the Brussels–Frankfurt consensus in ways that are consistent with their preferences as well. This places the Brussels–Frankfurt consensus somewhere in the ambit of the first two lines of analysis for explaining ideation resilience that are set out in Chapter 1 of this volume – it is at the same time more rhetoric than reality and it is easier to describe in broad theoretical terms than it is to implement in practice. The debate about the appropriate balance between austerity and growth that emerged around the election of François Hollande to the French presidency is a good example. The German position, as advocated by Chancellor Angela Merkel and her Finance Minister Wolfgang Schauble,¨ is that the uncertainty surrounding government finances in Europe is the greatest obstacle to growth. If that uncertainty could be eliminated by engaging in aggressive fiscal consolidation, then businesses would feel more confident about making investments. More- over, the ECB should not step in to facilitate this consolidation because 152 Part II: Neo-liberalism in major policy domains that would only create uncertainty regarding future inflation. Hence, member states must take responsibility for their own actions. They must engage in market-structural reforms as well. Only in this way can they be sure that a change in business confidence will lead to an efficient allocation of capital that will result in sustainable job creation. Hence, the German view includes all of the core elements of the Brussels–Frankfurt consensus: stable money, sound finances, and efficient local-factor markets. The view espoused by Hollande and former Italian Prime Minister Mario Monti rests on a different understanding of the mechanisms that drive growth. They claim that the lack of economic activity is the reason that businesses are reluctant to invest. As long as there is so much excess capacity in the market, there is no reason for businesses to expand. Furthermore, without either activity or investment, it is not surprising that governments are struggling with their finances. Indeed, the situation should only be expected to deteriorate as banks write down their assets and governments must step in to shore up or rescue the banks. Hence, it is the responsibility of governments to ‘prime the pumps’ of the economy to keep matters from worsening. This view does not deny the importance of stable prices; rather, it insists that price stability is not under threat. It does not reject the importance of sound finances either; instead, it argues that only growth can improve government finances. Finally, it embraces efficient local-factor markets. Market-structural reform is the only solution to long-term unemployment. Arguably, the advocates of fiscal consolidation and the advocates of fiscal stimulus both fit within the broad policy commitments that constitute the Brussels–Frankfurt consensus. The problem is that neither side recognizes the other’s fit as legitimate. Hence, the German position is that the only way to accommodate the recommendations of the French and the Italians would be to implement a sweeping institutional reform. The French and Italians disagree. By contrast, the French and Italians complain that the German view is ultimately self- destructive; the single currency cannot survive much longer without growth and investment. The Germans insist that they offer the only solution that is consistent with the existing policy framework. These are stark ideological differences. The Brussels–Frankfurt consensus is not an ideology and it is not even a complete guide to macroeconomic policy making. Indeed, it has The collapse of the Brussels–Frankfurt consensus 153 only some of the elements of a scientific paradigm in the sense described by Thomas Kuhn.13 It works like a paradigm insofar as it sets out a clear notion of progress with shared assumptions about what are (1) the goals for policy making, (2) the standard problems to address, and (3) the generally accepted measures of success. Hence, even if the framework is somewhat less than a paradigm, many of the mechanisms (and pathologies) at work in Kuhnian ‘normal science’ operate within the context of these interlocking ideational commitments. However, the Brussels–Frankfurt consensus has policy lacunae that are relevant to macroeconomic conditions. The relationship between a monetary union and a financial union is a good illustration. The original Maastricht agreement left open the possibility for further financial integration but did not make it compulsory. Hence, the member states remained responsible for prudential oversight, deposit insurance, and other forms of banking regulation. The internal market made it easy for banks to move across borders, but it did not elevate responsibility for the European financial system to the European level. Moreover, this omission was accepted within the Brussels–Frankfurt consensus. The belief was that a combination of stable money, sound finances, and efficient local-factor markets did not entail requirements for a strong rules-based framework to govern European banks. Moreover, this belief persisted until only very recently.14 Now, of course, it is obvious that monetary union and financial union are somehow interconnected. The problem is to devise an acceptable European framework. This problem falls outside the existing Brussels–Frankfurt consensus and is more a bone of contention than an area of agreement among the member states. Again, the shadows of competing ideological commitments are apparent, which is important later in this analysis. For now, it is necessary only to insist that the Brussels–Frankfurt consensus was much less than an ideology; it was also incomplete as a policy framework. What it had to offer was a triptych of policy commitments that Euro- pean politicians transformed into general rules for macroeconomic policy making. The only question is whether those rules would be sufficient to govern Europe’s economy. As it turned out, they were not.

13 See Kuhn 1970. 14 See Hodson 2011: 31–4. 154 Part II: Neo-liberalism in major policy domains

Stable money The problem was that Europe’s new single currency did not play by the rules. Consider the case of monetary stability. The challenges emerged almost immediately and concerned the link between monetary growth and price movements, the divergence of inflation rates across countries, the gap between actual and expected inflation, and the value of the euro relative to other currencies, particularly the dollar. It is worth discussing each of these challenges in turn because each displays a different dimension of the underlying problem: monetary stability is many things, many of which are interconnected in ways that are mutually destabilizing. The gap between monetary growth and price movements is a good place to start the discussion. The basic presumption is that price movements are somehow a function of the volume of money in circulation. Therefore, any change in the supply of money to the economy should have an impact on prices. From the outset, the ECB built this notion into its policy regime as one of the two pillars of its decision-making process. When setting policy, the governing council looked at both the expected rate of inflation over the medium term and the actual growth in the broad money supply (i.e., M3) relative to a reference value – initially set at an annualized growth rate of 4.5 per cent. The problem was that the relationship between M3 growth and price inflation appeared unstable: M3 growth would move far ahead of the reference value with little impact on prices. This created confusion within the market, in which participants were trying to use the relative growth of M3 as a means of predicting monetary-policy changes. Eventually, market participants began to speculate on a change in the reference value. However, changing the reference value makes little sense if the underlying relationship between monetary growth and price inflation is unstable. Hence, the ECB decided first to make the reference value permanent and then to push this aspect of monetary analysis into the background of its decision-making process. When the ECB put less weight on monetary analysis, it necessarily had to put more weight on inflation-targeting. However, inflation- targeting suffered from two other problems. The first is that the relevant measure of inflation for monetary-policy marking refers to the aggregate price movements across the entire Eurozone. Within that aggregate, national price movements were expected to converge The collapse of the Brussels–Frankfurt consensus 155 around a common norm; however, they did not. Instead, price inflation accelerated in some countries and decelerated in others along diverg- ing trajectories. This explains why the ECB revised its price-stability target from open-ended ‘below 2 per cent per annum’ to more narrowly defined ‘below but close to 2 per cent’. Given the wide variation in national-price performance, monetary policy makers hoped that a consistently higher target would ensure that countries did not fall into deflation. Moreover, these divergences in inflation rates proved to be persistent over time. As a result, countries ended up with very different price levels. This is important when the discussion returns to the notion of competitiveness. The second problem with inflation targeting is that actual rates of inflation are not always expected. The ECB can set policy to ensure that expectations about inflation remain stable, but it has little control over energy or commodity price shocks that might distort actual performance. This problem is primarily one of perception: contemporary observers see that actual inflation in the Eurozone exceeds its target more often than not, even as the ECB lauds its ability to hold prices stable. It is not surprising that this creates cognitive dissonance. The response was for the ECB to make its assessment of expectations more transparent, revealing both the sources of its information and the mod- elling assumptions it uses when anticipating future price increases. In turn, this made the ECB’s own actions more predictable and therefore more prone to speculation in the markets. Hence, the ECB had to learn to clearly ‘telegraph’ its intentions to avoid the unnecessary volatility that might arise when market actors make inaccurate guesses about the bank’s next policy moves. The euro as an internationally traded currency was prone to speculation as well, which was clear from the outset. The euro launched in January 1999 at a relatively strong $1.17 exchange rate and then fell like a stone. By September 2000, it was down to around $0.82. Efforts by the then ECB President Wim Duisenberg to engineer a coordinated intervention with the United States Treasury failed to restore confidence; instead, those efforts underscored the ECB’s weakness in influencing the euro’s external value. Subsequent movements in the euro–dollar relationship have repeatedly reinforced this lesson. Worse, they have shown that different European countries are affected asym- metrically by sharp oscillations in the dollar value of the euro. Energy and commodity prices are affected differently as well. In this way, 156 Part II: Neo-liberalism in major policy domains instability in the external value of the euro exacerbates the challenge of stabilizing domestic European prices. This is not a fatal weakness for the single currency, but it is an important constraint. Europe’s monetary policy makers had little choice but to adapt their policy framework to these practicalities. Even having done so, however, it was clear that many factors remained outside of their control. This meant that the ECB had to exercise discretion in setting priorities: over the appropriate balance between inflation-targeting relative to monetary analysis, over the appropriate measure of price stability, over the choice of forecasting models, over the level of transparency when communicating decisions to the market, and over the benign neglect of the exchange rate or – much less frequently – attempts to coordinate intervention in order to influence the external value of the euro. Moreover, this exercise of discretion meant that – like it or not – the ECB had to become ‘political’: it had to master its communications strategy; it had to earn credibility with a number of different con- stituencies; and it had to worry about maintaining popular support. This notion of popular support is not trivial. Despite its political independence, the ECB has long recognized that it is not the only player capable of influencing prices. Other actors – namely, governments, producers, employers, and trade unions – can have a powerful impact as well. Indeed, these other actors are the ones who set prices and wages through their actions. If they do not accept the credibility of the ECB, they will not shape their expectations or actions around its policy preferences. Moreover, if they come into conflict with the ECB, the overall outcome in terms of growth and employment will suffer. This is why the ECB jealously safeguards its reputation. It is also why the ECB goes to such lengths to sell its accomplishments. Having chosen to emphasize its primary mandate, the ECB must show that it can deliver price stability; otherwise, actors will ignore it. In the worst case, they may lobby to have another arrangement set up in its place.15 This provides a slightly skewed illustration of the fifth line of explanation for ideational resilience that is offered by the editors in Chapter 1 of this volume: institutional persistence. The ECB holds onto the Brussels–Frankfurt consensus and specifically its commitment to the virtues of price stability in order to legitimate the ECB’s own political independence.

15 See Jones 2010. The collapse of the Brussels–Frankfurt consensus 157

Sound finances Member-state efforts to enforce fiscal moderation were no less straightforward than the struggle for monetary stability. Three dilemmas are particularly salient: the quality of the measurements, the effectiveness of the enforcement mechanisms, and the consequences of getting things wrong. As with the monetary part of the framework, these are distinct problems but they are also at least potentially reinforcing. Of the three, the measurement issue is the most complex. The bottom line is that there is no meaningful and absolute definition of what constitutes a fiscal deficit.16 The theoretical principle is straightforward: a deficit is the difference between revenues and expenditures. The accounting practice is not. Here again is confirmation of the notion that ideas persist more in rhetoric than in reality and that they are more viable in theory than in practice. The rules for what goes onto the government’s balances and how they are recorded rest on a host of assumptions and judgements that are not easily communicated or transposed from one accounting system to the next. Hence, all measures are relative to the accounting practices that underpin them. Moreover, not all accounting practices convey the same meaning in economic terms. Different rules give priority to different models and causal mechanisms. The cyclically adjusted structural balance is a good example. The idea is to show the net impact that a government has across the business cycle. The practice rests on a number of assumptions about how government accounts would perform under counterfactual economic circumstances. There is a logic to making this adjustment: by changing the accounting rules, what the deficit means also changes. Nevertheless, the implication is that meaning is always relative to the system of accounts. This presumes, of course, that governments follow the rules when assembling their accounts. They do not. Sometimes governments break the rules because they want to highlight particular achievements or avoid particular complaints. Other times, they simply do not have the administrative capacity to ensure accounting compliance. In both respects, the problems that Greece has had are qualitatively worse and yet not categorically different from those experienced elsewhere. Deciding whether a government is actually running an excessive deficit is essentially a political choice. Deciding what to do about that

16 See Blejer and Cheasty 1991. 158 Part II: Neo-liberalism in major policy domains deficit is political as well, which is where the problem of enforcement comes into play. The early history of the euro was littered with unedi- fying illustrations. The February 2001 Irish reprimand by the Council of Economics and Finance Ministers (i.e., the Ecofin Council) represents one dimension of the problem; the November 2003 decision to set aside the procedure for sanctioning excessive deficits in France and Germany represents another. These stories are both well known. Nei- ther should the fact that Portugal and Germany were both allowed to run excessive deficits without comment in February 2002 be forgotten. The long and short of the matter is that European institutions had little power to enforce the rules for smaller states, even when it made sense to do so, and little desire to enforce the rules for larger countries when it arguably made more sense to exercise discretion. Attempts to invoke ever-more solemn commitments will not eliminate the problem. Spain’s decision in February 2012 to defy the Euro- pean Commission’s recommendations and set its own fiscal target demonstrates just how little the ‘fiscal compact’ is likely to matter. Meanwhile, Ireland threatened to undermine the fiscal compact by holding a popular referendum, and the right-wing populist Party of Freedom in the Netherlands brought down the Dutch government in protest over European interference in fiscal-consolidation efforts. The fact that the Irish referendum ultimately passed and a loose coalition of Dutch political parties formed to support austerity measures until new elections does not mean that these episodes were unimportant; neither were they irrational. The domestic political factors behind these manoeuvres are easy to understand; how this all adds up to stable finances is somewhat more difficult to imagine. Such pessimism can be overdrawn. The fact of the matter is that Europe did achieve significant fiscal consolidation during the process of monetary integration. That this consolidation was pursued primarily for domestic reasons rather than out of commitment to the Brussels–Frankfurt consensus does not negate that it happened.17 In this sense, the reality of fiscal consolidation underpinned the broader rhetoric of stable finances. Unfortunately, the Irish case demonstrates that consolidation alone is not enough. By taking on the liabilities of the domestic-banking sector, the Irish government effectively erased two decades’ worth of austerity measures. The Belgian government

17 See Hallerberg 2004. The collapse of the Brussels–Frankfurt consensus 159 suffered a similar setback when it bailed out domestic-banking giants Dexia and Fortis. Furthermore, the Italian government came very close to suffering its own catastrophic reverse. These three cases reveal a fiscal problem within the Eurozone at work on a deeper, structural level. The rapid convergence of nominal interest rates during the run-up to monetary integration in the late 1990s changed the composition of government outlays and contingent liabilities in a way that facilitated consolidation but that also created a new source of exposure. Government finances looked more stable because borrowing declined; yet, they became more fragile in the face of sudden interest-rate shocks. Europe’s policy makers failed to take into account the risks this implied. As nominal-yield differentials increased again, the result was a near disaster.18 The fiscal and the monetary stories overlap at this point. When sovereign-debt markets began to falter, the ECB came under pressure to act as ‘lender of last resort’. Doing so would have solved one set of problems but only at the expense of creating more. The more sovereign-debt assets the ECB purchases, the more liquidity it must inject into the market. The fact that the relationship between monetary growth and price increases is unstable offers cold comfort. At some point, that excess liquidity will translate into activity that could push up prices. The securities market programme (SMP) was an awkward attempt to circumvent this dilemma. The ECB purchased sovereign- debt instruments in secondary markets and then borrowed back the money it spent by doing so. The official justification was that such purchases were necessary to support the mechanisms that transmit monetary-policy decisions to the economy. That was true, but more was involved. The introduction of unlimited long-term refinancing operations pushed out the ECB even farther. In essence, the ECB gave banks the opportunity to borrow unlimited credit at very low fixed rates of interest for periods of up to three years with no penalty for early repayment. Here, the justification was to provide liquidity to the banking system. However, the very low interest rates charged made it likely that the banks would buy government bonds with the money they borrowed. French President Nicolas Sarkozy openly hinted that that was the intent. The ECB would act as lender of last resort for the European

18 See Gonzalez-P´ aramo´ 2012. 160 Part II: Neo-liberalism in major policy domains banking system and the banks would provide essentially the same service for the member states. If so, the policy succeeded beyond expectations; long-term government bonds declined across Europe during the ﬁrst quarter of 2012 as a consequence. Unfortunately, that success came only as a consequence of tying the ﬁnancing of governments ever more tightly to the solvency of domestic banks. When losses became apparent in the banking system, the markets turned on the governments as well, which is what happened in Spain.

Efficient local-factor markets Europe has had difficulty in pursuing stable money and sound finances. Nevertheless, European leaders are quick to tout their achievements on both dimensions and to contrast them favourably with other countries such as the United States. By contrast, Europe’s pursuit of efficient local-factor markets is less easily celebrated. Even before the economic crisis, European unemployment rates fell only sluggishly. Once the crisis struck, that rigidity worked in Europe’s favour and unemployment increased much more slowly as a consequence. Now, however, Europe’s unemployment situation is dramatic – particularly in those countries having the most difficulty in financing their sovereign debts. In Greece, Ireland, Spain, and Portugal, for example, the unemployment rate is well into double figures; among youths across much of Southern Europe, it approaches 50 per cent. This problem will not go away soon. Such evidence to the contrary, the emphasis on market liberalization was arguably the most successful aspect of the Brussels–Frankfurt consensus. This judgement will surprise readers who are aware of manifest failings of Europe’s ‘Lisbon Strategy’ both before and after its revision and who are bound to be sceptical about Europe’s Horizon 2020 initiative to carry the process of market liberalization forward. Clearly, the Lisbon Strategy did not achieve its own headline goal of creating the world’s most competitive and dynamic knowledge-based economy by 2010. Neither did it sufficiently transform Europe’s national labour markets to manage macroeconomic adjustments without significant increases in unemployment. Yet, judging the strategy by those benchmarks would be unrealistic. The fact that virtually every European country has tried consistently to improve its labour-market performance by fine-tuning institutional The collapse of the Brussels–Frankfurt consensus 161 arrangements during the past two decades is a better measure of success. This is a rare instance when the rhetoric of the Brussels–Frankfurt consensus and the reality of underlying policy measures overlapped precisely and with positive effect. Consider the historical contrasts. During the 1970s, most governments used welfare-state institutions to hide macroeconomic problems. During the 1980s and early 1990s, they engaged in welfare-state reform despite the macroeconomic consequences. By the end of the 1990s, however, it became clear that welfare-state reform and macroeconomic performance had to move in tandem. It was not enough to hollow out and harden the state against conflicting societal interests or pluralistic stagnation. Politicians had to find ways to make welfare-state institutions work better to encourage employment while also creating incentives for innovation. This is what the drive to make European local-factor markets more efficient has to offer. The distinction between theory and practice nevertheless remains important in explaining the persistence of the idea. Europe’s success in achieving greater factor-market efficiency is limited in two important respects. The first is related to conflicting national priorities; the second is more akin to a ‘capabilities–expectations gap’. The conflicting priorities have been evident at least as far back as Jacques Delors’ original white paper on ‘jobs, growth, competitiveness’. In that early document, the tension was between employment and environmental protection. During the late 1990s, the tension manifested as a competition among different reform processes – that is, Luxembourg, Cardiff, and Cologne. Under the overarching Lisbon strategy, it metastasized in a host of competing benchmarks and targets. The effect has been to diffuse political energy and thereby reduce the momentum for reform. The consequences of this shortcoming have been significant. When former Dutch Prime Minister Wim Kok published his mid-term report on the Lisbon strategy in November 2004, he made it clear that the stakes concerned the survival of Europe’s social model and not the assertion of European economic predominance. Kok’s rhetoric was dramatic but not in the context of the strategic objectives set out by the March 2000 Lisbon European Council. On the contrary, the Kok report helped to deflate some of the hyperbole that shaped European expectations about the advantages of welfare-state reform. This is where the rhetoric about ‘competitiveness’ becomes important. The basic idea is to facilitate adjustment in the context of 162 Part II: Neo-liberalism in major policy domains stable money and sound finances. There will always be winners and losers from market dynamics, but a ‘competitive’ national economy should perform better overall. This is a fairly subtle argument, and it is made even more subtle by the fact that different countries have different traditions for state–market relations. Competitiveness is not a straightforward trade-off between equity and efficiency; it is a matter of engineering combinations of both.19 Such a subtle argument is impossible to sell to the general public. Hence, Europe’s politicians have made it simpler. Competitiveness is efficiency, period. With greater market efficiency, Europeans will have less reason to fear unemployment. This argument started in the mid 1990s and has continued to gain traction ever since. The dichotomy it provides is simple: competitiveness or unemployment, ‘reform or decline’.20 This dichotomy is not inaccurate, only exaggerated. Although it has proven convincing for many, it has also resulted in mismanaged expectations. When the results of welfare-state reform turn out to be less than expected, the potential for disappointment is high. Disappoint- ment is also acute among those groups that bear the greatest costs of adjustment in response to competition. The result is that popular support for European integration demonstrates a strong negative correlation with labour-market performance. Meanwhile, right-wing populists use welfare chauvinism to appeal to groups most at risk from ‘competitive’ adjustment, and they often combine that message with attacks on European integration. Indeed, this programmatic combination is one of the most significant factors that groups as diverse as the Austrian Freedom Party, the Italian Lega Nord, the French National Front, and the Dutch Party of Freedom have in common. Such criticism should not be taken too seriously. The push for efficient local-factor markets and welfare-state reform did not give rise to right-wing extremism, even if the mismanagement of expectations did give right-wing populists an open goal. Moreover, it is striking that both welfare-state reform and the ‘competitiveness’ that lies behind it have emerged as a new European norm. This is true particularly for those countries hardest hit by the sovereign-debt crisis. Greece has been slow to implement many necessary measures, but it has been faster and more resolute than ever before. The same is true for Spain and Italy. Such efforts will never totally eliminate unemployment in these

19 See Sapir 2006. 20 See Alesina and Giavazzi 2006. The collapse of the Brussels–Frankfurt consensus 163 countries. Neither will Southern European labour markets ever be able to easily manage such massive macroeconomic adjustments. However, current efforts in welfare-state and labour-market reform may succeed in helping to bring unemployment in Southern Europe down to more manageable levels. If so, that should be counted as another measure of success. Europe’s welfare states have already come far, even if many still have a long way to go.

Interdependence The problem with Europe’s new ‘competitiveness’ norm is not that it has failed to make European national labour markets more efficient. They did become more efficient, albeit perhaps only marginally in some cases. Rather, the problem is that the equation of competitiveness and efficiency has created a vacuum around notions of solidarity and interdependence that can have a powerful influence on macroeconomic performance. Here is where we begin to see signs of this volume’s editors’ third line of analysis for explaining ideational persistence – that is, the lack of a compelling alternative. This vacuum around notions of solidarity and interdependence is obvious in the context of intra-European macroeconomic imbalances. The Brussels–Frankfurt consensus offers only one virtuous policy combination: stable money, sound finances, and efficient local-factor markets. This combination is easiest to merge with a surplus of exports over imports; the alternative is more challenging. Countries that import more than they export tend to have higher rates of inflation and to borrow more than they save. Over time, and assuming that they do not have a flexible exchange rate, they will also experience relatively rapid increases in domestic wages relative to their competitors and perhaps also higher levels of unemployment. This appears anything but virtuous viewed through the lens of the Brussels–Frankfurt consensus. The reality, however, is that the two different sets of experiences are opposite sides of the same coin. Moreover, the same dualism operates within as well as across countries. The core–periphery divide in the euro area parallels the north–south divide in Italy, the south–north divide in the United Kingdom, the east–west divide in Germany, and a host of other cases. Hence, it is worth considering why the Brussels–Frankfurt consensus did not give way to a more pliable policy framework. The answer lies in the editors’ fourth line of explanation: that is, the power of interests. 164 Part II: Neo-liberalism in major policy domains

The rapid convergence of long-term nominal interest rates provides the starting point for this analysis. That convergence took place because financial institutions with excess savings in northern or ‘core’ European countries sought higher returns on their investments in southern or ‘peripheral’ countries. These investments took many forms, ranging from sovereign-debt purchases to interbank lending and cross-border deposits. No matter what the situation, the dynamic was the same. The borrowers on the periphery made a market in which the lenders from the core participated. The results were the same as well. Financial institutions on the periphery progressively found themselves holding onto surplus financial resources – because they were priced out of their domestic sovereign-debt markets, because they purchased an interbank loan, or because they accepted a cross-border deposit. These peripheral financial institutions faced very different incentives from their counterparts in the European core. They did not confront saturated domestic markets for lending and therefore did not need to go abroad to ‘hunt for yield’. Instead, they displayed a typical home bias in booking new assets, with the result that credit use increased domestically on the back of financing made available from abroad. The uses of that credit varied among countries but always involved a mix of new assets, some productive and others purely speculative. Over time and with continued expansion of lending, the volume of bad assets accumulated. As long as domestic firms continued to make profits, however, this accumulation of bad assets had little net impact. The expansion of credit in the periphery (from the core) did affect domestic prices. As more money flowed into the economy than could be generated through domestic income, the price for domestic output (including wages) was certain to increase. This explains at least part of the divergence in inflation rates across countries. Current account balances also diverged sharply. Although the peripheral countries maintained their export-market shares until the beginning of the crisis, the inflow of credit from the core necessarily entailed an increase in imports over exports as well. In this way, the current account accommodated the pattern of capital flows. Then the crisis struck and capital flows shifted into reverse, moving from Europe’s periphery back to the core. New credit suddenly ceased to be available for the banks on the periphery and the bad assets they had accumulated were no longer manageable. Worse, banks began The collapse of the Brussels–Frankfurt consensus 165 to shut down the supply of credit to non-financial industry, thereby shutting down the economy as a whole. Government efforts to replace this activity by either propping up the banks or stimulating the economy proved inadequate to the scale of the problem. These efforts also severely weakened government accounts. Ultimately, sovereign-debt markets also fell into crisis as a result. The effects were not limited to the periphery and were felt across the core. However, the market response was different because savers in the periphery estimated that their money would be safer in the financial institutions of the core. This flight to quality reversed the flow of funds across Europe while at the same time further exacerbating the weakness of economic performance on the periphery and propping up performance in the core. This time, however, current account balances could not accommodate capital flows. The trade in goods and services is slow to adapt, which is why financial imbalances in the real-time gross-settlements system for managing payments across countries (i.e., Target2) have become so important. Some type of transaction must fill the gap when capital accounts and current accounts do not balance out. Under a fixed-exchange-rate regime, this transaction would take place through foreign-exchange reserves on the Official Settlements Account. Within the Eurozone, it operates through central-bank credit. Essentially, the German Bun- desbank lends money to peripheral-country financial institutions so that depositors on the periphery can withdraw the money and send it back to Germany. In this example, the private credits to the Ger- man financial system (e.g., Italian capital flight to Germany) are offset by the public debits at the German Bundesbank (e.g., Italian central bank borrowing from Target2). Moreover, the potential exposure of the Bundesbank to this type of transaction within the Eurozone is – theoretically, at least – limitless. The problem came to a head when Bundesbank President Jens Weidmann wrote to ECB President Mario Draghi on 29 February 2012 to express his concern about the Bundesbank’s exposure to Tar- get2 imbalances. In his letter, Weidmann suggested that the loss provisions in the existing Eurozone system are inadequate. If a country were to pull out of the monetary union and repudiate its Target2 obligations, the Bundesbank would have to absorb the lion’s share of the associated losses. Weidmann suggested it would be better if the system earmarked collateral to national exposure in a matched way. 166 Part II: Neo-liberalism in major policy domains

This suggestion represents an existential challenge to the monetary union because it implies that Target2 imbalances should be treated as official settlements under a fixed-exchange-rate regime and because it suggests that national commitments to the euro are not irrevocable. If those implications are true, then the euro is not a monetary union at all. If those implications are embraced by the market, then the resulting increase in the flight to quality from the periphery to core Europe could tear down the system. Draghi acted quickly to minimize the significance of Weidmann’s letter and to reassert the inviolability of the euro. He and his colleagues on the ECB executive board took great pains to reassert the continuing validity of the existing policy framework as well. Never- theless, the scale and structure of interdependence across countries within the Eurozone does not fit easily within the Brussels–Frankfurt consensus. Try as they might, Europe’s political leadership cannot accurately define the sovereign-debt crisis in terms that derive from the nexus of stable money, sound finances, and competitive local-factor markets. Instead, they fall back on preconceptions of virtue and vice that happen to coincide with the distribution of power across countries. Germany most closely approximates the virtues of stable money, sound finances, and efficient local-factor markets, and the German government is essential to any solution to Europe’s sovereign-debt crisis. Greece most closely approximates the opposite of German virtue on all three dimensions, and Greek politicians find themselves, as a consequence, on the receiving end of instructions from other countries and international organizations. The point here is not to criticize German perceptions of the crisis as self-serving or without factual basis. Rather, it is to explain why much of the German central-banking community and economics profession has found it easy to promote a stark version of the Brussels–Frankfurt consensus; they can set the agenda for the policy debate because they are in such a powerful position. Unfor- tunately, this does not make the Brussels–Frankfurt consensus any more useful now as a guide to macroeconomic policy making than it was in the past. It may even be worse insofar as it can capture some of the elements of some of the cases; however, the descriptions it offers generate little insight on the causal mechanisms at work and the prescriptions that derive from the analysis are implausible if not counterproductive. The ECB has little left to offer in terms of monetary stimulus; more austerity will not stimulate The collapse of the Brussels–Frankfurt consensus 167 activity on Europe’s periphery; and further welfare-state reform will require years to have a significant impact on unemployment. In this sense, Europe’s sovereign-debt crisis is not a vindication of the Brussels–Frankfurt consensus. To the contrary, it presents a huge anomaly within the existing policy framework; it is a problem for which the usual rules do not apply. As the scale of the crisis became apparent and the costs of the German position became excessive, Euro- pean policy makers began to adapt their approach to the crises in a piecemeal, experimental manner. This was neither a reassertion nor a repudiation of the Brussels–Frankfurt consensus; rather, it was a reflec- tion of the fact that Europeans had few new ideas and little institutional opportunity to put something new in its place.

Alternative arrangements The elements of a new arrangement are starting to emerge, and they all respond to the problem of interdependence with an increasing emphasis on solidarity. This emphasis goes well beyond the minimal contours of the Brussels–Frankfurt consensus. It demands a much higher level of cooperation across countries and a much greater trust as well. Neither of those factors appears sufficiently abundant; as a result, there is little prospect that these alternatives will find widespread acceptance. The most obvious alternative is to push forward with a more comprehensive discretionary framework, which encompasses the debate concerning fiscal federalism and economic government. The idea would be to either empower the ECB to act as lender of last resort for member-state governments or endow another European institution with sufficient resources to play that role. So far, that argument has only attracted theoretical support – often using the United States as an example. That illustration is somewhat incongruous given the inability of the US Congress to exercise its fiscal authority. This suggests that the whole debate about fiscal federalism is more cynical than real. If anything, a re-nationalization of fiscal and monetary policy seems more likely. A more modest prospect would build new institutions to manage interdependence – such as an emergency bailout mechanism, a common-deposit-insurance provision, and jointly issued sovereign Eurobonds. In other words, the idea is to expand the Brussels– Frankfurt consensus to include financial union as well as monetary union, thus eliminating an important gap in the policy framework. 168 Part II: Neo-liberalism in major policy domains

These proposals are gaining traction. The European Council has agreed to bring the permanent European Stability Mechanism forward, even if it remains unwilling to provide that facility with sufficient resources to do the job. Common-deposit insurance is not yet on the table but the arguments are widely mooted. As for the Eurobond proposal, the EC has issued a green paper to argue that such instruments should be considered ‘stability bonds’. There is considerable merit to the argument: not only would such a common instrument lower incentives for peripheral savers to seek a financial safe haven in the European core; they would also sever the tight coupling between national banking systems and their home-government finances. These proposals are also driving a wedge into the Brussels–Frankfurt consensus, with much of Europe on one side and much of Germany on the other. French President François Hollande, Italian Prime Min- ister Mario Monti, and Luxembourg Finance Minister Jean-Claude Juncker have emerged as the greatest supporters of the Eurobond proposal, whereas German Chancellor Angela Merkel and Finance Min- ister Wolfgang Schauble¨ appear to be the staunchest opponents. That said, Germany is hardly alone in this argument; Finland, the Nether- lands, and Slovakia are also openly reluctant. The challenge is to reassure political actors in these countries that these new institutions can be made compatible with preexisting values – stable money, sound finances, and efficient local-factor markets. So far, that argument is proving difficult to sell. Hollande, Monti, and Juncker tend to argue that Europe will get there eventually, but only Hollande seems willing to push harder now. Meanwhile, the existing institutions for European decision making provide numerous veto points that slow the efforts to define these alternative institutions. If the Brussels–Frankfurt consensus appears resilient as a policy framework in this context, it is because of this institutional inertia. Long after the Brussels–Frankfurt policy framework ceases to inspire consensus, the institutions it brought forward will remain in place. Politicians will continue to pay lip service to the virtues of stable money, sound finances, and efficient local-factor markets because they recognize that the cost of pulling a national economy out of the Euro- zone would be unacceptable. Realization of that fact already seems widespread if not exactly welcome. In that sense, ‘muddling through’ may have paid off as a strategy for managing the crisis. Then again, the end of the current crisis may only set the stage for an even bigger crisis to follow. As long as Europeans continue to adhere The collapse of the Brussels–Frankfurt consensus 169 to a policy framework that ignores the implications of interdependence and the structural transformations that having a single currency entails, they risk a repetition of the current turmoil. If anything, the next crisis will be even bigger. The macroeconomic policy framework set out in the Brussels–Frankfurt consensus has proven resilient, but it is a hollow demonstration – more rhetorical than real.21

References Alesina, Alberto, and Francesco Giavazzi. 2006. The Future of Europe: Reform or Decline. Cambridge, MA: MIT Press. Blejer, Mario I., and Adrienne Cheasty. 1991. ‘The Measurement of Fiscal Deﬁcits: Analytical and Methodological Issues’, Journal of Economic Literature 29 (4): 1644–78. De Grauwe, Paul. 2006. ‘What Have We Learned About Monetary Integra- tion Since the Maastricht Treaty?’, Journal of Common Market Studies 44 (4): 711–30. Draghi, Mario. 2012. ‘Competitiveness of the Euro Area and Within the Euro Area’. Speech given in Paris on 13 March. Gonzalez-P´ aramo,´ Jose´ Manuel. 2012. ‘What Has Europe Learnt from the Crisis?’ Speech given in Frankfurt am Maine on 15 March. Hallerberg, Mark. 2004. Domestic Budgets in a United Europe: Fiscal Gov- ernance from the End of Bretton Woods to EMU. Ithaca, NY: Cornell University Press. Heipertz, Martin, and Amy Verdun. 2010. Ruling Europe: The Politics of the Stability and Growth Pact. Cambridge: Cambridge University Press. Hodson, Dermot. 2011. Governing the Euro Area in Good Times and Bad. Oxford: Oxford University Press. Jones, Erik. 1998. ‘Economic and Monetary Union: Playing for Money’. In Centralization or Fragmentation? Europe before the Challenges of Deepening, Diversity, and Democracy, edited by Andrew Moravcsik (59–93). Washington, DC: Brookings Press for the Council on Foreign Relations. Jones, Erik. 2009. ‘Output Legitimacy and the Global Financial Crisis: Per- ceptions Matter’, Journal of Common Market Studies 47 (5): 1085–105. Jones, Erik. 2010. Available at www.jhubc.it/facultypages/ejones/JCMS 48 1.pdf. Katzenstein, Peter. 1997. ‘The Smaller European States, Germany, and Europe’. In Tamed Power: Germany in Europe, edited by Peter Katzen- stein (251–304). Ithaca, NY: Cornell University Press.

21 See Praet 2012. 170 Part II: Neo-liberalism in major policy domains

Kuhn, Thomas S. 1970. The Structure of Scientific Revolutions. Chicago: University of Chicago Press. Lakatos, Imre. 1970. ‘Falsification and the Methodology of Scientific Research Programmes’. In Criticism and the Growth of Knowledge, edited by Imre Lakatos and Alan Musgrave (116–32). Cambridge: Cam- bridge University Press. Loedel, Peter. 1999. Deutsche Mark Politics: Germany in the European Monetary System. Boulder, CO: Lynne Rienner Publishers. McNamara, Kathleen R. 1998. The Currency of Ideas: Monetary Politics in the European Union. Ithaca, NY: Cornell University Press. Moss, Bernard H. (ed.). 2004. The Triumph of Monetarism in the European Union: A Neo-Liberal Project? London: Palgrave. Padoa-Schioppa, Tommaso. 1987. Efficiency, Stability and Equity: A Strat- egy for the Evolution of the Economic System of the European Com- munity. Brussels: European Commission, II/49/87. Praet, Peter. 2012. ‘Sound Money, Sound Finances, a Competitive Economy: Principles of a European Stability Culture’. Speech given in Berlin on 27 February. Ruggie, John Gerard. 1982. ‘International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order’, Inter- national Organization 36 (2): 379–415. Sapir, Andre.´ 2006. ‘Globalization and the Reform of European Social Mod- els’, Journal of Common Market Studies 44 (2): 369–90. Savage, James D. 2008. Making the EMU: The Politics of Budgetary Surveil- lance and the Enforcement of Maastricht. Oxford: Oxford University Press. 6 Supranational neo-liberalization: The EU’s regulatory model of economic markets mark thatcher

Analysis of EU regulation of markets leads into ‘the seventh circle’ (of hell, purgatory, or paradise, depending on individual taste) of Euro- pean neo-liberalism. The EU’s core function is regulation and it is the leading exponent of neo-liberal regulation in Europe. Since the 1980s, it has developed a dominant set of ideas centred on competition to achieve a ‘single European market’ that is sufficiently integrated and coherent to be called a ‘model’. Although the neo-liberal content of the regulatory model is often taken for granted in public and academic debates about the EU, this chapter argues that it was not legally or ideationally inevitable. Indeed, between the 1960s and 1980s, attractive alternatives were available and neo-liberalism appeared to be an unlikely candidate for ideational dominance. However, a powerful coalition of the European Commis- sion, European Court of Justice (ECJ), national governments, and large firms has formed to support the EU’s neo-liberal regulatory model. The coalition is heterogeneous, and it has widened and deepened over time as key actors have altered their position. Thus, the development of a powerful coalition that favours neo- liberal ideas requires analysis rather than simply being presumed on the basis of the EU’s legal and institutional framework. Equally, changes over time must be accounted for. In response, the analysis shows how and why the key features of neo-liberalism – its breadth and ambiguities, the combination of competition and a strong state, and its apparent political neutrality through reliance on rules and ‘markets’ – make it attractive at the EU level. The chapter examines the ways in which these features allow members of the supporting coalition to draw benefits

I would like thank the participants of the workshops in Boston and Paris for comments on earlier drafts and especially the discussants, Orfeo Fioretis, Peter Hall, and Charlotte Halpern.

171 172 Part II: Neo-liberalism in major policy domains from the model. Equally, it analyses self-reinforcing processes that, over time, have strengthened neo-liberalism. Thus, it highlights the processes of ‘neo-liberalization’ that led key policy actors to embrace or accept neo-liberal ideas as the means of pursuing their interests rather than alternatives centred on mercantilism, industrial policy, and public service, which were traditionally strong in Europe. Empirically, the chapter focuses on both ‘general-competition’ regulation and more sector-specific regulation; for the latter, it provides examples from strategic industries that have seen a dramatic expansion of EU activity, such as telecommunications, energy, transport, and finance. The chapter begins by tracing the development and resilience of the EU’s neo-liberal regulatory model for economic markets. It then analyses the major actors in the coalition that supported the model, showing why neo-liberal ideas were particularly suitable for EU regulation as well as the benefits that the model offered each coalition member. EU merger policy, which offers a major empirical example of EU regulation, is then studied to illustrate the general arguments. This analysis therefore draws on both the fourth line of explanation set out in Chapter 1 of this volume, in which neo-liberal ideas are pressed by self-interested actors who gain from them, and the first line of analysis, which points to the nature of neo-liberal ideas. The wider argument is that key features of neo-liberal ideas make them attractive to a wide range of actors who can therefore form a heterogeneous coalition behind them, which is then strengthened by self-reinforcing processes.

The limited place of neo-liberal ideas in the early decades of the EU Neo-liberalism is not inherently hostile to supranational regulation, provided it is conﬁned to certain domains. Hayek already identiﬁed the need for an international authority that ‘guarantees both that certain rules are invariably enforced and that the authority which has the power to enforce these cannot use it for any other purpose’, arguing that ‘an international authority which effectively limits the powers of the state over the individual will be one of the best safeguards of peace’.1 In the early years of the EU (then the European Community),2

1 See Hayek 1944: 236. 2 This chapter refers to the EU although much regulation has been made legally under the European Community pillar of the EU. Supranational neo-liberalization 173 neo-liberal ideas were certainly present. Thus, key principles enshrined in the 1957 Treaty of Rome included free movement of goods and services, labour and capital, and removal of trade barriers. Nevertheless, until the mid 1980s, neo-liberal ideas enjoyed only a limited place in the EU. They were strongest in general-competition policy, for which ordo-liberal principles of regulation to control possible excessive market power of firms were important. Even here, however, their role was severely circumscribed; in particular, they were applied to neither state-owned enterprises nor key sectors such as network industries that were regarded as closer to welfare services than competitive markets (i.e., markets in which competition is permitted).3 Moreover, they faced powerful alternative theories of how markets should be organized. To provide a major example, state-led models of industrial policy enjoyed considerable support from the 1960s until the 1980s. These models envisaged close cooperation between public and private firms for long-term investment and the creation of large industrial ‘national’ or European champion firms, capable of reaping economies of scale and competing with international rivals, especially from the United States.4 In France, this was known as the ‘grand projet’ model and it appeared to deliver successful outcomes in many key industries, including nuclear power, railways, and telecommunications.5 In the 1970s and early 1980s, intergovernmental cooperation provided a European grand projet model of governing economic markets. The Airbus consortium is an excellent example, in which a European ideational framework (i.e., ‘ref´ erentiel´ ’) of collaboration among national firms in a common venture provided a strong alternative to neo-liberal competition.6 Even at the EU level, industrial policies to aid European champions through mergers, research support, and EU standards to create larger markets were discussed. One example was mobile telephony, in which Europe-wide standards were developed through interoperator and intergovernmental cooperation and then enforced through EU regulation.7 These models offered alternatives to neo-liberalism and especially its priority for highly liberalized markets. They were favoured by major actors – notably many governments, large national firms, and significant parts of the EC.

3 See Scott 1995; Pelkmans 2001a. 4 Cf. Hayward 1995 and Servan-Schreiber 1967. 5 Cf. Cohen 1992 and S. Schmidt 1996, 2002. 6 Cf. Muller 1989. 7 See Pelkmans 2001b. 174 Part II: Neo-liberalism in major policy domains

Moreover, the EU legal framework was able to accommodate different models of regulating markets. As surprising as it may seem today, however, when ECJ decisions and EU legislation are used to justify the focus on competition, EU Treaties are, in fact, broadly worded. Competition is not one of the EU’s objectives under the 1957 Treaty of Rome; instead, according to the Preamble, ‘“fair competition” is a means to achieve a common market in pursuit of the essential objective of . . . constant improvements of the living and working conditions of their people’.8 Moreover, there are Treaty provisions that permit the pursuit of aims other than competition. Thus, for instance, although member states may not introduce prohibiting measures with effects equivalent to customs duties,9 this is counterbalanced by their ability to take measures that restrict imports from other member states on several broad grounds (e.g., public morality, policy, security, health, and cultural heritage).10 Equally, there is a strong doctrine of ‘services of general interest’ recognized by the European Commission (and the ECJ).11 It involves pursuing non-economic aims and objectives such as ‘universal service’ (usually deﬁned as ensuring essential services at reasonable cost to all citizens) or other minimum rights, and it is linked with well-established national legal, economic, and political doctrines of ‘public service’. Even Treaty provisions relating directly to competition in economic markets seemed open to non-neo-liberal interpretations. There appeared to be wide scope for using public-sector organizations to avoid competitive markets. The important Article 10612 states that competition rules apply to ‘undertakings entrusted with the operation of services of general economic interest . . . in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them’. Even general-competition law includes aims other than competition. A perhaps surprising example is state aid, which can be permitted for a series of purposes that are not only social but also economic – for example, for development or ‘to remedy a serious disturbance in the economy of a Member State’

8 Preamble, Treaty of Rome, retained under the Treaty of Lisbon, which renamed the EC Treaty the ‘Treaty on the Functioning of the EU’ (TFEU). For a discussion, see Buendia Sierra 2012. 9 Article 28 (ex Article 30); the Treaty of Lisbon numbering is used, but former numbers are also cited when much of the academic literature refers to them. 10 Article 36. 11 See, for instance, Heritier´ 2002 and Sauter 2008. 12 This is better known as Article 90. Supranational neo-liberalization 175 or to ‘facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest’.13

The development and resilience of the EU’s neo-liberal regulatory model for economic markets Thus, until the 1980s, the place of neo-liberal ideas at the EU level was circumscribed, if not marginal, and counterbalanced by other ideas. However, thereafter, the importance of neo-liberal ideas grew. Their rise was progressive and varied across policy domains. Neo-liberal ideas were expressed and institutionalized over several decades through reports, ofﬁcial documents, legislation, ECJ decisions, and interpretations of the Treaties.14 They were often broad and principles were adapted and reshaped over time. Equally, implementation was frequently uneven and limited in practice. However, the argument here is about their expansion as a set of ideas or norms for EU debates. More- over, and importantly for the analysis, these ideas became attached to a different set of aims – namely, European integration. Initial steps were taken in the 1970s and early 1980s in major court cases that extended legal principles from tariff to non-tariff barriers. As a result, national policies and decisions that impeded cross-border trade were caught by EU law15 Equally, the ECJ began to apply competition law more widely, including to previously untouched domains such as publicly owned telecommunications operators.16 At the policy level, the Cecchini report on the ‘costs of non-Europe’ and the 1985 Single European Act both set out the goal of creating a ‘single European market’.17 From the idea of abolishing tariff barriers for cross-national trade, the EU’s model moved to creating competition across Europe with as few tariff and non-tariff restrictions as possible. During the 1980s and into the early 1990s, the aim of extending competition achieved increasing prominence. It was increasingly

13 Article 107(2) and (3). For policy analyses of state aid, see Zahariadis 2010 and Smith 1998. 14 For a legal history, see, notably, Hancher and Larouche 2011 for regulation and Maher 2011 for competition law. 15 Notably, the Cassis de Dijon case of 1979 and the Dassonville decision of 1974. For a discussion, see Stone Sweet 2004. 16 See, for instance, the 1985 British Telecommunications (BT) case, [1985] ECR 873. 17 See Smith 2005, Jabko 2006, and Armstrong and Bulmer 1998. 176 Part II: Neo-liberalism in major policy domains linked to being a (or, rather, the) means of achieving European integration. Moreover, the single European market was interpreted as the removal of all barriers to trade, not only cross-border trade but increasingly domestic exchange as well. Equally, the scope of its application was widened to include parts of previously excluded sectors, such as telecommunications, energy, air transport, and financial services. General-competition policy also took a more decisive turn towards ideas of allowing ‘market forces’ to operate, notably under the Irish Commissioner Peter Sutherland (1985–1989) and especially the British Commissioner Sir Leon Brittan (1989–1993). Nevertheless, during this phase, rival conceptions of EU regulation remained. One view was that the EU should seek the rapid extension of competition across markets and remove constraints on firms. This was often advanced by a more ‘liberal’ coalition of certain member states (led by Britain but often including Germany and other ‘North- ern’ member states) and parts of the European Commission (especially Directorate General [DG] Competition, then called DGIV). The coalition was generally supported by rulings of the ECJ, which became a key player in supporting additional EU powers to extend competition.18 In contrast, a rival view was that the extension of competition should be slow and limited to services purchased by large firms that had the ability to change suppliers and that faced international competitive pressures to lower their costs. Moreover, liberalization was to be counterbalanced by re-regulation to shape markets through setting standards and rules to ensure that competition did not damage collective benefits (e.g., universal service). This conception also favoured EU promotion of large ‘European champion firms’ that would receive active EU support (i.e., financial and regulatory) to take advantage of the new large European market, thereby representing a form of EU industrial policy or even grand projet. This approach received support from more statist or ‘Southern’ member states, usually led by France, many of their ‘national-champion’ firms, and parts of the European Commission (often sectoral-industry DGs, DG for industry, and DG for regional policy). The differences between the two conceptions should not be overemphasized – both accepted the extension of competition through

18 For instance, by applying Article 106 (ex Article 90) (3) to oblige member states to end legal monopolies. See, for instance, European Court of Justice 1991 and 1992. Supranational neo-liberalization 177

EU regulation to achieve the single European market – but they offered rather distinct views of the role of regulation and the nature of markets. However, since the mid to late 1990s, neo-liberal regulatory ideas have developed and become truly resilient. They have become increasingly accepted by many key policy actors: the European Commission and, within it, many DGs, from competition to sectoral DGs; the ECJ; national governments that differ not only in terms of model of capitalism but also politically between left and right; and firms, especially transnational ones. Acceptance has spread to ‘statist’ countries and their ‘national-champion’ firms. Even the French government usually assented to the principle of extending competitive markets, including in those sectors previously part of the grand projet strategy, such as energy and telecommunications. Moreover, the EU’s neo-liberal ideas have increasingly formed a set of principles that have become sufficiently related and comprehensive to merit the appellation of constituting a normative ‘model’ for the regulation of economic markets. The model is neo-liberal in the sense of being centred on the pursuit of competition. It aims to ensure a single European market, which is understood to mean preventing ‘distortions to competition’. Although the model is broad and its specific ideas vary by policy domain, four key components can be identified in schematic form. The first component is that EU regulation should ‘liberalize’ markets by ending legal restrictions on entry. Thus, for instance, almost all state monopolies are regarded as counter to the single market and, therefore, illegal under EU law, including those traditionally perceived as public services (e.g., public utilities).19 State restrictions include policies, rules, and standards that prevent or distort competition by restricting imports from other member states, regardless of intention.20 Re-regulation for competition is a second element of the model, and it can take many forms. One form is general-competition law, such as prohibitions on state aid, abuse of a dominant position, and control over mergers that create substantial market power. Although some of the legal provisions may have been present in previous decades, what has changed is the renewed emphasis on their importance and

19 Cf. Thatcher 2007 and Smith 2005. 20 Expressed in Article 28 (ex Article 30) and then numerous legal cases, of which Cassis de Dijon are the best known. 178 Part II: Neo-liberalism in major policy domains application to ‘national-champion’ firms and previously protected sectors.21 Another example is the principle of mutual recognition, which means that member states must accept products and services meeting the standards in another member state.22 Thismaybecom- bined in many markets, including financial markets, with the principle of ‘home-country control’, whereby a firm can be licensed and regulated in one member state that thereby permits it to operate throughout the EU. A third form of regulation consists of sector-specific principles in industries such as telecommunications, energy, and transport to ensure that even in these domains – which are characterized by monopoly or oligopoly networks – competition can occur.23 A third element is that insofar as member states pursue aims other than ensuring competitive markets, their policies are subject to constraints, notably to make them compatible with competitive markets. It is important to note that the regulatory model does not prevent all provision of ‘services of general (economic) interest’. These are defined by the Commission and in EU law as ‘economic activities that public authorities identify as being of particular importance to citizens and that would not be supplied (or would be supplied under different conditions) if there were no public intervention’.24 Rather, it treats them as exceptions that require justifications and whose effects on competition must be prevented or minimized to avoid any possible distortions to the single market. Thus, for instance, if states seek to achieve aims in network industries such as universal service, the allocation of funding must not discriminate among firms and must be allocated in a transparent and competitive manner.25 A fourth element is that the model does not prescribe a single institutional mode for implementation. Instead, it provides for the use of a range of legal forms and regulatory institutions. Usually, this means that implementation of EU legislation is the responsibility of member states. However, it also allows for other forms of EU regulation,

21 Cf. Smith 2005. 22 Cf. Schmidt 2007. 23 These may take the form of provisions about conditions for access by competitors to infrastructure networks, unfair pricing or terms and conditions, or provision of information. 24 Available at http://ec.europa.eu/competition/state aid/overview/public services en.html, accessed 8 February 2013. For a discussion, see Hancher and Larouche 2011. 25 Cf. Sauter 2008 and Hancher and Larouche 2011. Supranational neo-liberalization 179 such as ‘soft-law’ instruments and deliberation through ‘experimentalist governance’, from forums to advisory committees and codes of practice.26 To address cross-national disparities in implementation, EU-level bodies can be established to ‘coordinate’ national regulators (e.g., the recently created European agencies in fields such as finance and network industries) and, in a few fields, certain decisions at taken by EU bodies, including the European Commission (notably parts of competition policy). Hence, there is considerable institutional flexibility in pursuit of the principle of a single European market. The neo-liberal regulatory model exhibits all three elements of resilience: continuity and adaptation, dominance, and survival.27 Thus, the principle of competition has been extended across many sectors. Equally, re-regulation has been increasingly focused on promoting competition (as opposed to counterbalancing competition). The principle of competition has also gained a predominant place in much of the EU’s debates and discourse about its regulation of markets, in both general-competition policy and individual economic sectors.28 It overshadows other policy objectives, whereas industrial policy has increasingly become marginalized or excluded as illegitimate (notably on grounds of constituting state aid and an impediment to ‘fair competition’). The focus on competition has survived in the face of critiques and problems that arose before and after the economic crisis of 2007– 2008. Despite the ending of legal monopolies, tariffs have failed to fall or have even risen in markets such as energy. Key industries including telecommunications, banking, and energy remain dominated by incumbent suppliers but also face difficulties in ensuring sufficient long-term investment. State aid to national firms remains, as seen most clearly in banking after 2008 but also in other industries.29 Indeed, implementation has often proved difficult and the principles of the neo-liberal model have often not been followed in terms of national

26 Cf. Lodge 2007 and Sabel and Zeitlin 2010. 27 See Schmidt and Thatcher, in this volume. 28 Cf. Jabko 2006; Buch-Hansen and Wigger 2010, 2011; Gerber 2001; Wilks 2010; and Smith 2005. 29 See European Commission annual reports on the energy and telecommunications markets – despite these having been subject to ever-increasingly detailed EU regulation. 180 Part II: Neo-liberalism in major policy domains legislative transposition, let alone practice.30 However, the claims here relate to the model as a normative framework for debates about EU regulation. Equally, the resilience of the EU’s regulatory model does not mean that disagreements about EU policies have ended; however, they have changed in scope and nature. Increasingly, the extension of competition across economic markets has been accepted. Instead, debates have arisen about the scope of ‘economic markets’ and, notably, whether they extend to welfare services such as health, social insurance, and pension provision. This issue has become part of discussions about the extent and regulation of ‘services of general (economic) interest’. Thus, from being one instrument among several, competition has become the central norm, with other modes of governance being exceptions that require speciﬁc justiﬁcation. Countermovements to the predominant position of the principle of competition have been rare. The most prominent recent example concerns the ‘Bolkestein directive’ on liberalization of services, which illustrates the extent to which competition is the norm and how unusual the conditions under which it is challenged.31 The directive received limited attention and, indeed, was set to pass with almost no opposition until it became linked to controversy (especially in France) about ‘overseas workers’ and a new constitution, as well as questions in the European Parliament. Thus, it seems that only when the EU ‘policy stream’ meets the ‘politics stream’ do proposals attract controversy, but the norm is ‘quiet politics’ in which apparently technical principles become established.32 Yet again, however, this illustrates the exceptional nature of resistance, which requires a high degree of political mobilization rather than the habitual ‘humdrum’ policy making of most EU regulation. Even after the 2007–2008 crisis, there have been only limited challenges to the neo-liberal regulatory model built up in the previous two decades. Debates have begun about the limits to competition in markets and the value of state assistance in developing infrastructure,33

30 See, for example, Smith 2005 on state aid and Nicolaıdis¨ and Schmidt 2007 on services liberalization. 31 See Grossman and Woll 2011, Nicolaıdis¨ and Schmidt 2007, and Crespy 2010. 32 Cf. Kingdon 1984 and Culpepper 2011. 33 See, for instance, European Commission 2012, which examines state aid being permitted for broadband networks. Supranational neo-liberalization 181 and state bailouts of banks have been permitted. Equally, the Lisbon Treaty has included several articles that point to greater emphasis on social and economic objectives.34 Yet, no serious alternative models – in the sense of coherent frameworks – have been proposed. Competi- tion continues to be the dominant norm that is progressively extended; a recent example in 2013 was when the European Commission adopted plans to liberalize the domestic railway services and insist that operation of the track and services be separated.35 This has occurred despite the multiple difﬁculties that such changes have created in the United Kingdom. Far from reversing direction, the EU has given considerable attention to institutionalizing competitive markets by strengthening EU regulatory agencies charged with ensuring greater implementation of EU law.36 It has even given responsibility for implementation of regulation directly to EU bodies – for instance, supervision of large banks being placed with the ECB. Despite the crisis, EU regulation remains dominated by the objective of competition, with debates on how to achieve it (especially the degree of integration and institutional arrangements) rather than whether to seek other policy objectives, let alone alternative forms of market organization.

Analysing the development of the EU’s neo-liberal regulatory model Given the gradual development of the EU’s regulatory model, the focus of this chapter is on why, over time, neo-liberal ideas have obtained the support of a broad and heterogeneous coalition. This leads to a number of questions in understanding the resilience of such ideas. Why could such a broad coalition hold together? Why was neo-liberalism adopted at the EU level rather than attractive alternatives that have been available? Why did neo-liberalism strengthen over time?

34 For instance, additional wording on services of general interest, as well as the Social Protocol or Article 9 TFEU on objectives of high levels of employment, education and public health, and adequate social protection; however, little was changed for competition policy. See Buendia Sierra 2012. 35 On 30 January 2013, the European Commission adopted proposals for a fourth railway legislative package. See http://europa.eu/rapid/press-release IP-13–65 en.htm#PR metaPressRelease bottom, accessed 20 February 2013; Liberation´ 30.1.2013. 36 See Thatcher 2011. 182 Part II: Neo-liberalism in major policy domains

The growth of EU economic regulation has been subject to extensive study. Many analyses have focused on the issue of European integration37 or processes of EU policy making.38 These are useful in pointing to the intermingling of two distinct processes: European integration and neo-liberalization. Moreover, they specify key actors and processes through which integration occurs. Of particular interest is neo-functionalism’s identification of key coalitions – notably, the European Commission, the ECJ, and large firms – and the feedback or ‘spill-over’ processes that bind their coalitions together as cross-border trade grows. However, studies are mostly focused on explaining the expansion of EU powers rather than the content and resilience of neo- liberal regulatory ideas at the EU level. The most direct analysis is that of the regulatory state.39 This provides a descriptive argument of a change in the nature of regulation away from (re)distribution and towards rule-making. It sets out explanatory factors lying in broad developments, notably the decline of Keynesianism. Nevertheless, it says too little about the neo-liberal content of EU regulation and about alternatives; it is not clear why a move towards rule-making should be neo-liberal. Thus, to respond to the questions, the present analysis begins by examining the features of neo-liberalism that were particularly attractive to key supporters in the policy process of the neo-liberal regulatory model. Thereafter, it looks at the ways in which key actors in EU decision making were able to benefit from those ideas as well as self-reinforcing processes that increased the attraction and power of neo-liberalism, drawing on other frameworks to explain EU regulation and integration. The EU’s regulatory model is broad and marked by significant ambiguities. The first, linked to a general ambiguity in neo-liberalism, concerns the role of the state and the nature of a ‘free market’. The model envisages that regulation should promote competition by allowing firms freedom from state restrictions and by regulating firms to allow others to compete ‘fairly’. The central concept of ‘the market’ is highly plastic and open to interpretation and reconfiguration40; indeed, it may be appropriate to refer to ‘neo-liberalisms’. At one end of the

37 See, for example, Sandholtz and Stone Sweet 1998 and S. Schmidt 1996. 38 See Bulmer et al. 2007 and Armstrong and Bulmer 1998. 39 See Majone 1994, 1996; McGowan and Wallace 1996; and Moran 2002. 40 Cf. Jabko 2006. Supranational neo-liberalization 183 spectrum is ‘Chicago school’ free-market liberalism, which assumes that the decisions of firms are efficient unless there is overwhelming evidence to the contrary and which seeks minimum regulation. At the other end of the spectrum is ordo-liberalism, which is marked by suspicion of the market power of large firms and emphasis on rules that are strictly enforced. The second, parallel ambiguity concerns European integration and the relationship between EU decision making and member states. The EU model constrains national authorities from ‘distorting’ the single European market, while also relying on them to implement most of its regulation, including ‘market-making’ and ‘market-protecting’ rules. This is particularly true of legislation in the form of directives that member states must transpose and implement. The model seeks to create a ‘single European market’ while entrusting implementation to member states that have incentives and capacities to protect domestic producers. The third ambiguity concerns the roles of law and politics. The growth of EU regulation is overtly political because it involves trans- ferring decision making to the EU level. Yet, the model also promises an apparently politically neutral and technical mode of governance, operating through the impersonal processes of ‘the market’ and legal rules (as opposed to traditional industrial policy, in which political choices were made about supporting selected firms). At the same time, it permits significant utilization of ‘soft law’ and informal negotiations because it allows a variety of institutional mechanisms for implementation. These ambiguities may seem to be weaknesses, and they certainly illustrate that neo-liberalism is open to criticism. However, they also aid the formation of a heterogeneous coalition of the European Com- mission (and especially certain DGs within it), national governments, and large firms, all of which have differing interests and aims. The attractiveness of the breadth and ambiguity, mixture of liberalization and re-regulation, and technical appearance of neo-liberalism is evident in analysing the major actors in the coalition. Each has obtained benefits from neo-liberal ideas of regulation. Equally, certain self-reinforcing processes can be found that have further strengthened the position of neo-liberal ideas. As a result of its power as an agenda-setter and its role in monitoring and enforcement, the European Commission is a key player in the 184 Part II: Neo-liberalism in major policy domains development of the EU’s regulatory model.41 The Commission is usually viewed as seeking to both extend its powers and deepen European integration. However, it suffers from major constraints: it is internally divided, both at the level of Commissioners (who are nominated by national governments) and organizationally among different DGs; it faces powerful member states that have diverse policy preferences; it is unelected and lacks wider popular legitimacy; and, contrary to popular myth, it remains a remarkably small organization, relative to both national governments and the tasks of regulating complex markets. Several features of neo-liberalism aid the European Commission in circumventing these constraints and pursuing its objectives. Neo- liberalism’s breadth and ambiguities allow the Commission great flexibility in seeking to satisfy diverse internal and external preferences. Thus, for instance, regulation to open up markets to competition can satisfy countries (e.g., the United Kingdom) that are seeking ‘freer markets’ in the sense of fewer constraints on firms. Regulation to end monopolies and re-regulation for competition to prevent the market power and privileges of incumbent firms meet the views of more ‘ordo-liberal’ actors (often led by Germany). The combination of liberalization and re-regulation also aids the Commission in reconciling the preferences of economic liberals with more ‘statist’ views (often put forward by countries such as France and Italy). Such re-regulation can be presented as shaping markets and especially as protecting wider policy objectives (under the heading of services of general interest). Finally, the apparently legal and ‘technical’ nature of neo-liberal regulation avoids explicit redistribution, which could pose difficult legitimacy issues for an unelected body such as the European Commission, as well as problems of resource constraints.42 Instead, the model allows the Commission to focus on apparently non-distributional issues such as entry to markets, non-discrimination among suppliers, and barriers to competition. The model gives rise to incremental but powerful self-reinforcing processes that make it especially attractive to the European Commis- sion. Although early Commission initiatives to establish regulation in new domains were frequently limited in scope, the Commission can set out far-reaching purposes and ambitions. Thus, for instance,

41 See Schmidt 2000, Pollack 2003, and Jabko 2006. 42 See the literature on the regulatory state, notably Majone 1996 and 2005. Supranational neo-liberalization 185 liberalization in network industries including telecommunications, energy, postal services, and transport began by discussing liberalization of only a few specific services.43 However, even early documents made reference to wider aims. Thereafter, the ‘success’ of initial liberalization provided strong justification for further extensions of EU regulation and, with it, the Commission’s powers and role. Within the Commission, the focus on competition as the main means of ensuring the single European market strengthens DG Competi- tion, the most likely DG to favour neo-liberal ideas. It also provides strong incentives for other DGs to adopt pro-competitive positions so that they, too, can exercise competition powers. Hence, for instance, although liberalization in telecommunications in the late 1980s and early 1990s was led by DG Competition, by the mid to late 1990s, the sectorial DG Information Society also fully supported the extension of competition.44 Indeed, in many sectors (e.g., telecommunications, energy, and airlines), a process of ‘policy transfer’ means that ideas of liberalization have spread across sectors.45 Finally, achieving competition often justifies re-regulation to allow entry and prevent existing firms and governments from discriminating against the newly permitted competitors. Fritz Scharpf (1996) has analysed the institutional bias in the EU towards ‘negative integration’ or removal of barriers.46 However, the neo-liberal regulatory model then provides a powerful justification for ‘re-regulatory’ measures viewed as the essential counterpart to liberalization (i.e., ‘freer markets, more rules’)47 that helps to overcome such a bias. Hence, the Commission can also undertake re-regulatory measures addressing matters such as access to networks, cross-subsidization, and government support for domestic incumbent suppliers. These are (re)regulatory but neo-liberal in the sense of being market-creating, seeking to allow and protect competition. The ECJ has been a significant ally for the Commission. It has often upheld the regulatory model in terms of both substantive legislative provisions and more constitutional questions about the rights of the European Commission to issue legislation.48 ECJ rulings such

43 See Thatcher 2007. 44 See, for instance, Goodman 2006: chaps. 7 and 8. 45 Cf. Bulmer et al. 2007. 46 See Scharpf 1996. 47 See Vogel 1996. 48 The strongest examples concern the right of the European Commission to issue its own directives under Article 106 (ex Article 86(3) and before ex Article 186 Part II: Neo-liberalism in major policy domains as the Cassis de Dijon judgement in 1979, which prohibited non- tariff barriers to trade, provided the impetus for Commission action in a neo-liberal direction in at least three ways: (1) substantively, they have strengthened the neo-liberal model centred on competition; (2) politically, they have encouraged and aided the European Commission in extending its regulatory model; and (3) institutionally, they have affected the European Commission’s powers. The ECJ also has gained power and an enlarged role from the neo- liberal regulatory model. The development of legal regulation has aided the growth of ‘Euro-legalism’, in which policy is increasingly made by adversarial legal cases.49 These combine substantive issues about competition with constitutional questions about the allocation of powers within the EU.50 Hence, the ECJ can issue rulings that extend Euro- pean integration. The breadth and ambiguities of the regulatory model allow the ECJ considerable discretion in its rulings. Thus, it has been able to support the extension of competition into the core networks of telecommunications and energy from the 1980s onward and place limits on competition in other sectors such as social insurance and support for services of general economic interest.51 Hence, the ECJ enjoys a central role in deﬁning, developing, and applying the regulatory model. Member states might seem to be unlikely allies for the Commission. Yet, the EU regulatory model has often gained the support of, or at least acceptance of, most national governments. The preferences of governments about the degree of neo-liberalism and its form vary. However, the EU neo-liberal model is well equipped to accommodate such diversity as a result of its ambiguities, ﬂexibility, and variety of elements. It can offer the opening of markets to more neo-liberal countries (e.g., Britain), whereas more ‘statist’ countries (e.g., France) can look to re-regulation that organizes markets. The accommodative capacity of the EU’s model is enhanced by the separation of rule-making at the EU level from implementation of those rules by member states, which allows national governments considerable discretion. In addition, the model permits frequent reliance on ‘soft law’ and several modes of

90(3)) without approval from the European Council or European Parliament to prevent member states from maintaining ‘special and exclusive rights’ for public undertakings. See, for instance, European Court of Justice 1991 and 1992. 49 See Keleman 2011. 50 See Stone Sweet 2004. 51 For a discussion of ECJ case law in health and social security, see Gallo 2011. Supranational neo-liberalization 187 governance rather than one dominant mode, thereby enhancing its flexibility. Thus, different varieties of capitalism can find their place and adapt to the EU’s framework, while continuing to follow distinct paths of institutional development.52 National governments can also find the EU’s regulatory model valuable in dealing with domestic obstacles to change. They can engage in ‘two-level games’, in which EU regulation serves as a legitimating device for reforms that they desire or believe are necessary but are unpopular or difficult at home.53 The model has been used in many countries not only for reforms required by EU legislation but also to justify much wider changes. Thus, for example, although privatization is not part of the EU model and cannot be required by EU law, EU liberalization and competition have been important rationales used in political debates to justify privatization.54 The fourth set of participants examined here are large firms, which are political actors who lobby strongly in Brussels and participate in developing the EU’s regulatory model.55 The EU offers the promise of European-wide markets, with the possibility for ‘national champions’ to become ‘European champions’. Equally, the ambiguity of the EU’s neo-liberal regulatory model allows large firms to seek greater freedom from national restrictions and also ‘venue shop’, especially between the national and EU levels, where organizations such as the European Commission are particularly porous and open to lobbying.56 EU regulation can be highly attractive to many large firms, which may find it easier to influence EU than national decision making for certain types of issues and, in any case, can pursue their strategies at different levels. Finally, the re-regulatory elements in the EU model may offer advantages to large firms, especially in terms of operating as effective barriers to new entrants, which must face complex regulatory demands. Finally, it is important to understand the actors that are often institutionally disadvantaged in the development of the EU’s regulatory model. Most important are the employees and trade unions as well as domestic and small consumers. These groups usually lack the institutional links and lobbying capacities of large firms in Brussels, and they are weaker in relative terms compared with the national level. More- over, the Commission and ECJ are unelected bodies, which reduces

52 Cf. Fioretos 2011, S. Schmidt 2002, and Hall 2007. 53 Cf. Putnam 1988. 54 Cf. Clifton, Comın,´ and Dıaz-Fuentes´ 2006; Thatcher 2007. 55 See Coen 2010. 56 See Coen and Richardson 2009. 188 Part II: Neo-liberalism in major policy domains the direct influence and impact of electoral and popular pressure. The neo-liberal nature of the EU regulatory model further limits the mobilizing capacities of both groups – it is based on dry legal texts that are often complex (especially re-regulatory texts) and that provide few direct, politically salient consequences for consumers (e.g., redistribution and price changes). Instead, it is presented in a depoliticized manner as arising from the legal framework of the EU and involving achievement of a politically neutral aim, notably competition, which will offer benefits to consumers. Moreover, because implementation of EU regulation is generally left to member states, it is difficult for trade unions, employees, and consumers to mobilize against the EU.

An important example of neo-liberal ideas and regulation: EU merger control General-competition policy occupies a central place in European regulation because of its importance for markets and firms and because of its applicability across economic domains. The EU also has extensive legal powers, and it is a rare example of the EU directly holding powers rather than relying on member states for implementation.57 Indeed, one scholar describes competition policy as a central element in the ‘economic constitution’.58 Within the policy, merger control is key for markets, affecting large firms, employment, and market competition. Merger control is also a key element in neo-liberal discussions about markets. It links to questions about whether and how to regulate firms and the role of the state in both providing firms with freedom to pursue their interests and protecting competition.59 However, even within neo-liberal analyses that place ‘protecting competition’ as the foremost aim of merger control, there are several distinct approaches.60 Some are highly concerned with excessive market power of firms, which is deemed to generally harm consumer welfare; hence, mergers that result in high market shares are usually seen as harmful. The

57 Cf. Cini and McGowan 2009, McGowan and Wilks 1995, and Wilks 2010. 58 Wilks 2010: 753. 59 For debates in law and economics, see, for instance, Gerber 2001; Van den Bergh and Camesasca 2006: chap. 3; and Monti 2007. 60 For discussions and overviews, see, for instance, Gerber 2001 and Van den Bergh and Camesasca 2006. Supranational neo-liberalization 189

‘Harvard school’ of the 1950s and 1960s and German ordo-liberalism provide examples.61 In contrast, other approaches (sometimes labelled ‘Chicago’ or ‘Austrian’ schools) are more concerned about harmful state ‘interference’. They regard mergers as frequently beneficial by lowering costs and increasing efficiency, even if they result in high market shares.62 Hence, the nature of a neo-liberal merger policy is ambiguous and open to debate. Traditionally, in Europe, merger control was neither neo-liberal nor decided by the EU. Instead, it was in the hands of national authorities, usually governments, who frequently used their powers to pursue ‘mercantilist’ industrial policies. These included protecting domestic firms from overseas takeovers and promoting domestic mergers (often decided through highly political processes) to create ‘national champions’. Policy makers believed that such firms would be more efficient due to economies of scale and also would compete internationally. However, from the 1960s onwards, there were discussions about giving the European Community powers to regulate cross-border mergers that met obstacles of needing to obtain approval from several national regulators. Yet, agreement was difficult because the key actors had differing aims and preferences.63 The Commission had ‘integration’ objectives, including reducing the powers of national policy makers and aiding cross-border mergers as part of creating a single Euro- pean market. By the 1980s, large firms, especially transnational firms, also supported EU regulation to create a ‘one-stop’ shop for cross- border mergers instead of facing multiple national authorities. How- ever, member states were divided about the substantive nature of merger control: some argued that it should be based on preserving ‘market competition’ (notably Germany and Britain), whereas others sought to encourage the development of European champion firms as part of industrial or regional policy (e.g., France, Italy, Spain, and Portugal). After many years of discussion, the EC Merger Regulation (ECMR)64 was finally passed in 1989. Although EU competition policy

61 For a history, see Peritz 1996 and Gerber 2001. 62 For example, see Bork 1978. 63 For different analyses, see Bulmer 1994, Doleys 2009, Budinski and Andt 2005, Cini and McGowan 2009: 128–40, and Kassim and Wright 2009. 64 Council Regulation (EEC) No. 4064/89 of 21 December 1989 on the control of concentrations between undertakings: OJ L 395, 30.12.1989, p. 1. Corrected 190 Part II: Neo-liberalism in major policy domains is usually perceived as highly ‘neo-liberal’, in fact, the ECMR represented a compromise among the different actors. It is broadly worded and contains objectives other than promoting competition, reflecting the diverse views and interests in its passage. It represented a move towards greater European integration. Thus, it gave sole authority to the Commission to approve, prohibit, or impose conditions for large mergers (i.e., ‘concentrations’).65 The Commission examines mergers to determine whether they are ‘compatible with the common market’.66 The most formal and imperative criteria in the 1989 ECMR stated that Commission decisions are to be based on whether a merger creates a ‘dominant position’ in the ‘relevant market’.67 This test was changed in 2004 to a ‘significant impediment of effective competition’, although dominance was retained as the core criterion for accepting or prohibiting a merger.68 The EU merger regime established in 1989 provided considerable scope for interpretation. The ECMR did not define the key concept used to judge a merger – namely, a ‘dominant position’. Moreover, the criteria ‘to be taken into account’ by the Commission are broad and extend beyond ‘the need to maintain and develop effective competition’ to other factors relating to both the market power of firms and industrial policy and welfare objectives. Hence, it includes objectives about market competition but also the interests of consumers and ‘technical and economic progress’.69

version in OJ L 257, 21.9.1990, p. 13; amended 2004: Council Regulation (EC) No. 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation): OJ L 24/1 of 29.1.2004. 65 Through the use of thresholds in terms of turnover. Those thresholds were altered in 1997: aggregate worldwide turnover of more than 5 billion ECU was lowered to 2.5B ECU, and aggregate EC turnover of at least two of the undertakings of more than 250 million ECU was altered to combined aggregate turnover in each of at least three member states of 100M ECU, with the turnover of least two of the undertakings being more than 25M ECU, and aggregate EC-wide turnover of at least two of the undertakings being 100M ECU (Regulation 1310/97). 66 Article 2(1) of the ECMR. 67 It should allow a merger that ‘does not create or strengthen a dominant position as a result of which effective competition would be signiﬁcantly impeded in the common market or in a substantial part of it’ and, vice versa, prevent one that runs counter to these conditions (Article 2(2) and (3)). 68 See Article 2(3) (MCR 2004); for an analysis, see Levy 2010. 69 For example, ‘the market position of the undertakings concerned and their economic and ﬁnancial power, the alternatives available to suppliers and users, Supranational neo-liberalization 191

Although the wording of the 1989 ECMR left ample room for diverse ideas, a neo-liberal discourse has developed for merger control. The central focus is on greater competition, which is viewed as the sole policy objective because it, in turn, offers other beneﬁts, such as maximizing consumer welfare.70 Thus, successive competition Com- missioners including Sir Leon Brittan, Mario Monti, and Nellie Kroes (usually presented as ‘neo-liberals’)71 have repeatedly emphasized their belief in competition and rejection of national ‘protectionism’.72 A detailed and complex model for merger regulation was developed after 1989, composed of the ECMR, legal cases, European Commission documents, and many commentaries.73 The model is neo-liberal in the sense of being centred on competition, which is understood to be almost the sole criterion for decisions. The European Commission, together with the ECJ, developed detailed norms for analysing effects on competition, notably about crucial matters such as relevant markets and what constitutes acceptable market shares.74 Those norms are often favourable to mergers. Thus, for instance, relatively high market shares are often acceptable (e.g., even more than 30 per cent), and Sir Leon Brittan argued that ‘as a rule markets are dynamic and self- correcting’ and only mergers resulting in ‘unacceptable’ market power should be prohibited.75 Overall, the central norm has been to accept many mergers, especially cross-border mergers, on the grounds that they do not damage competition. Indeed, between the start of the regulation in 1990 and the end 2009, the European Commission approved more than 94 per

their access to suppliers or markets, any legal or other barriers to entry, supply and demand trends for the relevant goods and services, the interests of the intermediate and ultimate consumers, and the development of technical and economic progress provided that it is to consumers’ advantage and does not form an obstacle to competition’. Article 2(1) (a) and then (b). 70 See Buch-Hansen and Wigger 2010, 2011; cf. Wilks 2010; Cini and McGowan 2009. 71 See Buch-Hansen and Wigger 2011. 72 See, for example, Brittan 1992: 19–26; and Kroes 2006. 73 For legal analyses, see Whish and Bailey 2012, Cook and Kerse 2009, and Monti 2007. 74 Notably, the Commission Guidelines on horizontal and vertical mergers: European Commission 2004, 2008. For detailed legal analyses, see, for instance, Whish and Bailey 2012, Schwalbe and Zimmer 2009, and Cook and Kerse 2009. 75 Brittan 1992: 20–21. 192 Part II: Neo-liberalism in major policy domains cent of the 4,274 cases notified to it; there were only 20 prohibitions, which represent less than 1 per cent of the total.76 In key sectors such as energy, telecommunications, and finance, the European Commission has allowed or even encouraged mergers, especially cross-border mergers. Therefore, between 1990 and 2009, not one of the 187 mergers of banks was prohibited or even subjected to a detailed ‘second-phase’ investigation under the ECMR. Despite the financial crisis of 2007, the regulatory model for mergers has continued and includes sectors such as banking, in which mergers resulted in the creation of complex cross-border groups that lacked one strong regulator, were overex- posed across multiple national markets, and had to seek bailouts from several governments.77 Thus, for instance, the fifty-three mergers in banking in 2008 and 2009 were all approved. Although European Commission prohibitions attract great attention, they remain a small minority of cases. The EU’s merger model has obtained the support of a wide and heterogeneous coalition: diverse member states, the Commission the ECJ, and large firms. However, it emerged over time rather than being established by the legislation and it was shaped by the interests of key actors. As a result of the flexibility of neo-liberalism, the model was able to satisfy the diverse interests of different actors and its neo-liberal content could be linked with the process of European integration. The model has empowered the Commission to pursue integration in the name of creating the single European market. The Commission – and especially DG Competition – obtained increased legal powers under the ECMR and a monopoly of decision over the largest mergers, which the member states therefore no longer regulated. Thus, legal integration was advanced. By aiding cross-border mergers, the model also promoted economic integration, another of the Commission’s objectives. Within the Commission, DG Competition safeguarded its position as a result of additional powers. Moreover, the model provides considerable discretion because the Commission exercises judgement: it discusses mergers informally with firms before formal notification; it

76 European Commission, available at http://ec.europa.eu/competition/mergers/ statistics.pdf, accessed June 2010; and http://ec.europa.eu/competition/ mergers/cases, accessed September 2011. 77 Prominent examples include RBS, which bought the Dutch ABMN at high cost, and the Dexia group. Supranational neo-liberalization 193 enjoys significant discretion about whether to pursue detailed second- phase investigations and remedies; and even a vitally important matter such as market definition is said to be ‘more of an art than a science’.78 The model also permits the ECJ to play a central role. Because it is broad and allows for considerable interpretation, ECJ rulings can strongly influence decision making. Moreover, Commission merger decisions are subject to judicial review. Thus, for instance, ECJ decisions have been important in questions from market definition to procedures.79 Not only affected parties but also third parties can turn to the Court, allowing many opportunities to review cases. Although the merger model is focused on competition, its permissive stance allows approval of mergers that create international champion firms, whether privately owned or state-owned. Indeed, it is notable that even when a self-avowed economic liberal such as Sir Leon Brittan declared his approach of prohibiting mergers only on competition grounds (i.e., preventing excessive market power) did not conflict with EU industrial policy.80 Neelie Kroes emphasized the opportunities for cross-border mergers for European companies by stating, ‘I’m all for champions – European champions who can go out and win on global markets’.81 This combination of applying competition principles while permitting mergers enables the EU, through the neo-liberal regulatory model, to satisfy the diverse preferences held by different member states when passing the ECMR. On the one hand, it gives overriding importance to competition criteria. This satisfies countries such as the United King- dom and Germany, which seek to make ‘depoliticized’ mergers through decisions based on competition and to prevent other member states or the Commission from deciding mergers on ‘industrial-policy’ or ‘political’ grounds. On the other hand, these norms favour mergers, even for firms with high market shares, such as ‘national-champion’ incumbent suppliers. This meets the preferences of other member states, such as France, for the development of larger ‘Euro-champion firms’. Over time, such ‘statist’ countries have largely ceased their attempts to have

78 Cook and Kerse 2009: 217. 79 For a good overview of ECJ cases, see Whish and Bailey 2012: 891–97. Important cases in the 2000s included the Airtours, Tetra-Laval, and Schneider cases (i.e., Cases T-342/99, T-5/02, and T-310/01, respectively, and then subsequent cases about damages). 80 See Brittan 1992: 20–21. 81 See Kroes 2006. 194 Part II: Neo-liberalism in major policy domains industrial-policy grounds decide mergers. Thus, the De Havilland case of 1991, in which France attempted to drive through a merger on grounds of creating a national or European champion despite opposition by DG Competition that blocked the merger,82 has not been repeated; mergers are now debated in terms of their effects on competition. However, a permissive view of the dangers to competition also permits most mergers to be approved. Hence, the regulatory model manages to balance and, indeed, satisfy these different preferences. Finally, large firms often benefit from the merger model. For cross- border mergers, they must deal with only one body – the Commission – rather than several national bodies. Moreover, decisions are made on apparently ‘technical’ criteria regarding effects on competition by the non-elected Commission, far removed from the more politicized and public world of national politics. Firms can engage in informal discussions with the Commission before attempting mergers, which aids predictable outcomes. The pro-merger norms aid the approval of mergers proposed by firms, including large ‘national champions’ who can seek to Europeanize and thereby become larger multinationals. Moreover, since 1989, large cross-border mergers have become more common, creating larger firms that in turn offer greater support for the EU’s merger model. Thus, the EU’s merger model has been able to satisfy a wide and diverse coalition of supporters. A major reason is its flexibility and breadth – especially the combination of legalized control based on competition criteria but a permissive approach to market shares and therefore mergers by large firms. Moreover, in time, the model has enjoyed a progressively strengthened position and obtained wide acceptance.

Conclusion The EU has developed a regulatory model that is centred on the extension and promotion of competition in the name of creating a single European market. Its rise was not legally inevitable, given that the treaties are broadly worded. Indeed, it appeared unlikely before the 1980s: strong traditions of mercantilism, public service, and protection of domestic ﬁrms existed within member states. There were alternative models at the European level of intergovernmental cooperation and

82 Cf. Cini and McGowan 2009: 140–59; Buch-Hansen and Wigger 2011: 98–100, 114–17. Supranational neo-liberalization 195

EU industrial policy involving collaboration among firms and public support for large companies. Nevertheless, the neo-liberal model has become ideationally resilient. It has extended across many markets, including those previously excluded from EU competition regulation. It has achieved ideational dominance, becoming increasingly the main legal and normative framework for EU regulation of economic markets. It has continued despite difficulties and alternatives. Of course, the EU regulatory model has not been implemented fully or in the same manner across all member states, but that is part of its inherent nature: arising from its breadth and frequent reliance on member states for implementation. A diverse coalition has supported and gained from the model – namely, the Commission (supported by the ECJ), national governments, and large firms. Moreover, self-reinforcing processes have strengthened the model over time as the coalition has widened and deepened. Some of the reasons for the attractiveness of the EU’s regulatory model to key actors are specific to the EU, including the institutional framework of the EU, its highly legalized nature, and the effects of regulation occurring at both the EU and national levels. However, other explanatory factors are linked to the nature of neo- liberal ideas. In particular, their ambiguity and diversity, inclusion of both liberalization and re-regulation, and their apparent neutrality through use of technical modes of governance, especially law, all aid diverse actors in drawing benefits and making it difficult for opponents to mobilize and propose alternatives. Thus, the model’s resilience arises from the combination of self-interested actors, the nature of neo-liberal ideas, and self-reinforcing processes that have operated over time. The crises and problems of EU regulation in the 2000s (so far, at least) have not ended the dominance of the neo-liberal regulatory model.

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Introduction It is difficult to find an account of the ‘neo-liberal’ decades since 1980 that does not reserve a special place for unshackled financial markets.1 This is true not only for the United States but also for the European economies that are the focus of this volume and chapter. Critics commonly portray globalized and deregulated finance as the lynchpin of the neo-liberal economic order.2 International capital mobility has shifted the balance of power in favour of capital at the expense of labour, so the argument goes. Furthermore, credit institutions let loose have eased the pain of growing income inequality by showering unsustainable credit on households across the OECD world.3 These policies have been inspired or, at least, justified by neo-liberal ideas about financial markets and their regulation: that markets can ensure an efficient distribution of capital and financial services and that governments should either promote such efficiency through market-enhancing regulation and the enforcement of competition or take a hands-off approach altogether. In the panoply of ideas about state–market relations, ideas about finance occupy a special place. Textbooks in the field emphasize individual rationality and efficiency and portray wholesale finance as quintessential markets: liquidity is high, information asymmetries and transaction costs are low, and equal assets have equal prices around the world.4 Because of their virtual character, contemporary financial markets have lent themselves to the practical application of abstract economic ideas more than other societal domains. That makes neo- liberal ideas powerful in contemporary finance but also vulnerable: in the event of a crisis, we can expect these ideas to attract much of the

1 See Dumenil´ and Levy´ 2004 and Harvey 2005. 2 See, for example, Glyn 2006. 3 See Crouch 2009 and Young 2009. 4 For example, see the popular Mishkin 2012.

201 202 Part II: Neo-liberalism in major policy domains blame rather than exogenous material factors, such as adverse weather conditions in case of a famine or demographic change causing strains in pension systems. It is not surprising, then, that to many observers, the financial crisis that has been ongoing since 2007 has wrought intellectual defeat on neo-liberal ideas in finance with their emphasis on market efficiency.5 Crisis analyses by prominent economists and leading newspaper pun- dits – for example, Paul Krugman of the New York Times and Martin Wolf of the Financial Times – have spent more time debunking market myths than defending them.6 Neo-liberal orthodoxy no longer dominates public discourse about financial markets and how they function. Turn to financial regulation, however, and the picture is different. Here, debates continue to emphasize ideas that are directly borrowed from neo-liberal conceptions of financial markets. In key regulatory domains, the thrust of reforms has been to increase market efficiency: derivatives are to be standardized to allow better pricing and increase liquidity, and credit-rating agencies (CRAs) must be more transparent about their methods, such that users of ratings can exercise more effective market discipline. Where bank bonus rules have been adapted, the aim has been to align bankers’ incentives more closely to those of their shareholders and creditors. At the same time, regulatory reforms have steered clear of fundamentally disrupted, putatively dysfunctional markets. For example, there has been no ban on the types of credit derivatives that were frequently described as ‘toxic’. European authorities have stopped short of prescribing particular rating methods for CRAs. To be sure, pre-crisis regulation has also been subjected to fundamental criticisms, and the agenda has been expanded, for example, by ideas about macroprudential regulation, discussed herein. Never- theless, contemporary reform debates largely follow neo-liberal tracks in that they see government policy as a tool to make markets work better, not as a substitute for them. Despite their intellectual defeat in academia, neo-liberal ideas still dominate real-world policy in finance. It is this resilience that this chapter seeks to explain. Of the five hypotheses that Schmidt and Thatcher set out in the first chapter of this volume, two are particularly relevant. First, neo- liberal ideas have been buttressed by their institutional entrenchment

5 See de Grauwe 2009 and Kotlikoff 2010. 6 Popular examples include Johnson and Kwak 2010, Akerlof and Shiller 2009, Rajan 2010, Stiglitz 2010, Roubini and Mihm 2010, and Reinhart and Rogoff 2009. Resilient neo-liberalism in European ﬁnancial regulation 203

(i.e., hypothesis five) and the way European policy making has been reformed in the past two decades. With regulatory competences clus- tered at the supranational level, financial regulation has effectively been disembedded from its previous positive coordination7 with other policies; public micromanagement of financial markets to attain specific ends is no longer a plausible alternative to hands-off market facilitation. The putatively neutral neo-liberal policy goals (e.g., market efficiency) form a lowest common denominator of otherwise divergent policy preferences of EU member states. In this vein, the EU has installed – both nationally and supranationally – a new breed of financial supervisors and regulators as ‘market guardians’. More than financial firms, these public actors have emerged as the true defenders of neo-liberal regulatory ideas. Second, their mission has been facilitated by a surprising resilience of neo-liberal ideas and the weakness of their contenders (i.e., hypothesis three). ‘Pro-market’ thought in financial regulation is ‘a broad church’, reaching from laissez-faire and doctrinaire non-intervention to a market-enhancing liberalism, under which public agencies seek to fine-tune markets to raise efficiency. For this reason, actual policy failures can rarely be pinned on neo-liberalism as a whole. Laissez- faire adherents can claim that excessive government distortions had spawned market failure; market enhancers retort that their project of rooting out these failures through regulation had remained unfinished. Both positions can be framed as ‘pro-market’ ideas. The vagueness of neo-liberalism – apparently a sign of weakness – is ultimately a source of strength. Whatever arguments are hurled at pro-market thinking, there always is a strain that emerges unscathed. Despite widespread criticism of neo-liberal ideas, no coherent contending paradigm has emerged. Critics have exposed the intellectual weaknesses of market-enhancing financial regulation. They have failed, however, to table an alternative that could take neo-liberalism’s place. The financial crisis has shattered hopes that – left to their own devices – financial markets could achieve stability and efficiency of capital allocation. It does not follow, however, that governments can be trusted to do a better job through intrusive intervention. History is replete with examples of governments mismanag- ing financial markets or hijacking them for their short-term benefit.8

7 See Jayasuriya 2001. 8 See Kindleberger 1978 and Reinhart and Rogoff 2009. 204 Part II: Neo-liberalism in major policy domains

The fact that markets are the problem does not mean that governments are the solution. Indeed, the specific challenges to neo-liberal ideas in finance that have gained prominence imply that financial markets may be inherently unstable, such that their control through public policy is necessarily elusive. Instead of offering regulatory alternatives, radical critics have excelled at exposing why those might not exist. The beliefs in the possibility of efficient financial markets and effective public regulation are two sides of the same coin: both presuppose the existence of rational market activity that – if market structures are appropri- ately furnished – can let markets function as desired. Critics who deny (the possibility of) rational action in financial markets also leave little hope that – barring straightforward financial repression – public policy could mend financial markets’ defects. Taken together, neo-liberal ideas in financial regulation survive because they still have answers to new regulatory challenges and because an alternative set of ideas that could take neo-liberalism’s place has failed to materialize. The following section outlines how neo-liberalism is understood when applied to financial regulation. The two main sections of this chapter then describe the primary pillars of the argument: (1) the institutional embeddedness of such ideas in European policy-making institutions, and (2) the continued dominance of neo-liberal regulatory ideas over potential contending paradigms.

The two faces of neo-liberal financial regulation In line with other contributions to this book, this chapter takes Hay’s definition of neo-liberalism as the starting point.9 As understood here, the hallmark of neo-liberal thought is that markets – not governments – should allocate capital. When we translate this neo-liberal idea into policy, however, matters become more complicated. The third of the seven criteria of neo-liberal thought listed in the first chapter of this volume views neo-liberalism as marked by:

...[a] belief in the desirability, all things being equal, of a limited and non- interventionist role for the state and of the state as a facilitator and custodian rather than a substitute for market mechanisms. (emphasis added)

9 See Hay 2004. Resilient neo-liberalism in European ﬁnancial regulation 205

The two emphasized roles for states are in tension: What, if anything, should governments do about markets that fail to operate efficiently? Non-intervention implies leaving market participants alone; facilitation and custody of market mechanisms implies intervention. Both strategies can be and have been advocated in the name of a ‘pro- market’ worldview, one that favours capital allocation by markets, not governments.10 We can label the two versions of neo-liberalism the laissez-faire and its market-enhancing variants. To understand the regulatory debates, and thereby make sense of the resilience of neo-liberal ideas in European financial regulation, it is useful to contrast both positions. Neo-liberals agree that the goal of government policy is capital allocation by well-functioning markets, but they disagree about whether that is achieved by leaving market participants alone (i.e., deregulation) or by forcing them to act such that market failures are minimized (i.e., market-enhancing re-regulation). Three arguments continually surface in favour of laissez-faire.The first argument is moral in essence and holds that governments have no business infringing the liberty of individuals more than absolutely necessary. For example, if citizens are eager to invest their savings in risky and non-transparent enterprises, what gives a government the right to stop them? Second, laissez-faire liberals distrust governments as impartial arbiters in economic affairs. They suspect that when governments do intervene, they do so not to serve the public interest in efficient markets but rather to benefit either their particular constituency or, even worse, the officeholders and regulators themselves. Third, even if governments had only the public interest in mind, laissez-faire liberals doubt that they could easily improve market functioning by second- guessing the collective sentiment of myriad market participants. If the key to efficiency is the discovery of equilibrium prices, by which means could governments achieve what markets cannot?11 In contrast to the moral basis of laissez-faire neo-liberalism, its market-enhancing variant has more ‘scientific’ roots: it asks for an

10 Mirroring these schools of thought, scholars of financial governance have debated whether liberalization should be understood as deregulation or as re-regulation. See Vogel 1996, Cerny 1997: 173–81, and Gamble 2009. 11 This fundamental critique of government intervention as necessarily market-distorting has strong echoes of Hayek’s economic thought, even though he was more concerned with fiscal and monetary policy than with financial regulation. 206 Part II: Neo-liberalism in major policy domains identification of market failures through meticulous analysis (commonly, quantitative research by economists) and proposes policy remedies. Market imperfections such as information asymmetries abound in financial markets, so the scope for potential regulatory fixes to market malfunctioning is nearly endless. Market enhancement lends itself to the application of expertise to regulation rather than the ‘nods and winks’ that have long dominated regulation (e.g., in the City of Lon- don). Market enhancement views markets as imperfect, measurable, and amenable to improvement. Policy goals, in their focus on such improvement, are largely one-dimensional. Arbitration between competing policy goals is not needed; hence, politicians can stay out of regulation.

The institutionalization of neo-liberal ideas in European finance The puzzle that animates this chapter, simply stated, is that, whereas most economists have given up on the idea that markets could allocate capital ‘efficiently’, much regulatory policy continues to take inspiration from it. In this respect, the recent financial crisis has been by far the most important challenge to neo-liberal regulatory ideas. However, before the following section makes the case that such ideas have indeed proven resilient in recent years, it is important to reach further back in time and trace the roots of their institutional entrenchment in Europe. Two dynamics stand out: (1) by ‘uploading’ financial regulation to the European level, it has been disembedded from the previous positive coordination with other facets of national economic policy; and (2) the creation of regulatory agencies to ‘administer’ financial markets has created a set of vocal and influential actors with a mandate largely in line with neo-liberal precepts. Because these features of the institutional setup for EU financial regulation have actually been reinforced rather than reversed since the crisis (following the advice of the High- Level Group on Financial Supervision in the EU), they have limited the space for alternative conceptions about financial regulation to become dominant.12 To be sure, the spread of pro-market financial regulation in Europe in the 1980s and early 1990s did not stem from a single set of

12 See High-Level Group on Financial Supervision in the EU, 2009. Resilient neo-liberalism in European financial regulation 207 ideas that was widely supported and consistently implemented.13 Neo- liberal policies came in many guises, and their champions had divergent motives. In the late 1980s, France, for example, was very selective in its implementation of neo-liberal ideas when it ‘modernized’ Paris’s financial markets. Germany dragged its feet even more, implementing regulation against insider trading only to earn Frankfurt international acceptance, not because of putative virtues of truly competitive markets. Also, the EU-level reforms were largely shaped by domestic financial-sector interests, institutional constraints, and international competition. The European Single Market Programme, which in the mid 1980s jump-started the development of coherent EU financial- market policy, was justified in strongly normative terms: completion of the single market would allow industry consolidation and thereby boost competitiveness of European firms facing Japanese and Ameri- can competition.14 In contrast to the framing of the single-market programme, the detailed negotiations that followed for financial markets were everything but driven by neo-liberal ideas. Concerns about the ‘competitiveness’ of national financial industries prevailed.15 Appeals to concepts such as free markets, open competition, and level playing fields were highly selective. In the early days of EU financial-market integration, neo-liberal ideas were not a real driving force, let alone sufficiently deeply entrenched to explain their eventual resilience in the face of crisis. However, the largely interest-driven overhaul of financial regulation in Europe had two important institutional effects that did cement neo-liberal ideas. The supranational integration of financial regulation disembedded it from the top-down governance of national economies at large. Previously, political agencies had to balance competing regulatory objectives in policy design because financial markets had been governed with an eye to the linkages among finance and other facets of national economies.16 The dawn of ‘negative coordination’ in the second half of the 1990s drastically changed the perspective. From a facet of an integrated national economy, finance became a business sector to be regulated competently. The polyarchic character of the European institutions has been compatible with ‘hands-off’, market-enhancing regulation, but not with policy designed to attain specific outcomes.17

13 See Lutz¨ 2002, Mugge¨ 2010, and Thatcher 2007. 14 See Cecchini 1988. 15 See Underhill 1997. 16 See Deeg 1999, Loriaux et al. 1997, and Zysman 1983. 17 Cf. Holman 2004, Scharpf 2009, and Mugge¨ 2013. 208 Part II: Neo-liberalism in major policy domains

Financial regulation was not only partially shifted to Brussels but also was increasingly delegated to regulators whose task it was to administer markets not with an eye to national economic idiosyn- crasies but instead in line with abstract and seemingly non-partisan neo-liberal precepts, such as market efficiency and consumer protection. Indeed, the detachment of regulators, for example, from finance ministries or central banks intentionally isolated regulation from the context in which it had previously been embedded.18 Particularistic interests continued to lobby national and EU regulators. However, the legitimacy of policy that would attempt to steer financial markets rather than simply improve their inherent drift was increasingly viewed as illegitimate. Governments created a brand of market guardians – the regulators – that emerged as the most dogmatic defenders of the market-enhancing faith. The dislocation of regulatory debates away from national capitals towards transgovernmental networks populated with colleagues sharing a similar regulatory mandate has only reinforced the entrenchment of neo-liberal ideas.19 The wider socioeconomic effects of financial regulation, with an eye to which finance – in principle – might be managed, is ‘simply not the business’ of the regulators who find their peers less in national ministries and more in forums such as the Financial Stability Board and the Basel Committee on Banking Supervision. In the case of finance, the bias towards negative integration that had been built into the EU also implied a bias against government steering of financial markets and therefore in favour of neo-liberalism. To make public micromanagement of financial markets a plausible alternative to a neo-liberal approach, regulatory institutions would have had to be overhauled significantly, including a renationalization of regulatory powers. With no such drastic institutional overhaul on the horizon, a fundamental reshuffle of how governments and financial markets relate through financial regulation has remained unlikely and therefore of little importance in public debate.20

18 See Majone 1994, 1996; and Thatcher 2005. 19 See Tsingou 2009 and Cerny 2010. 20 Note that this applies to financial regulation. The more abstract argument – that financial markets should once again be at the service of societies rather than vice versa – was and is prominent (Financial Services Authority 2009). Rarely, if ever, is it spelled out what that would mean in practice (Lothian 2012). Resilient neo-liberalism in European financial regulation 209

Before the crisis, neo-liberal discourse to legitimize stakeholders’ divergent regulatory preferences took strength from the fact that most relevant positions could be framed in neo-liberal terms. Hence, stakeholders could pursue their particularistic interests without having to question the common (i.e., neo-liberal) parameters of public debate. Consider the clashes between the European Commission and City banks. Espousing laissez-faire views, London firms have championed negative integration and the abolition of ‘cumbersome’ regulation. To them, pan-European mutual recognition of home-country rules was and is the way forward. The Commission, in contrast, has supported rule harmonization.21 Whereas it is often portrayed as a bulwark of neo-liberal policy, City firms frequently lambast ‘Brussels’ for its imposition of ‘unnecessary red tape’. Both arguments make sense: the financial-markets department of the Commission is neo-liberal in orientation in that it has largely sought to aid rather than impede market functioning. At the same time, its approach is often opposed to that of the most competitive firms in the industry, which clearly prefer fewer restrictions over rules that buttress competition. Neo-liberalism is a broad church, indeed. This breadth has also allowed commercial opponents in regulatory battles to appeal to a neo-liberal policy agenda simultaneously. For example, one key EU debate prior to the crisis concerned whether large banks could act as bourses and match stock orders in-house, without routing them through a stock exchange – a process called ‘systemic internalization’.22 The banks, eager to erode stock exchanges’ profits, argued that banks acting as bourses would boost competition and, hence, market efficiency because systemic internalization would break the damaging monopoly that traditional stock exchanges typically held. The stock exchanges countered that the real damage to market efficiency would be done when trading of individual stocks was fragmented across trading venues and the market efficiency resulting from concentrated liquidity would be lost. The positions were directly opposed, but both sailed under the ‘market-enhancing’ flag. In this way, conflicting politics could be squared with a unifying normative agenda that, over the years, became the regulatory common sense.

21 See Jabko 2006. This strategy stands in contrast to an earlier EC emphasis on mutual recognition (Egan 2001). For capital markets, this approach had been tried in the early 1990s and failed to achieve the desired market integration. 22 See Mugge¨ 2010. 210 Part II: Neo-liberalism in major policy domains

One of the central neo-liberal assumptions in pre-crisis regulation was that regulators could effectively rely on the self-interest of market professionals to make well-informed decisions, which cumulatively would enhance market efficiency and, by moving prices towards equilibrium, also financial stability.23 For example, investment banks could be trusted to calculate the risks before entering into complex derivatives deals. Indeed, so strong was the belief in market participants’ rationality that derivatives transactions were assumed, by default, to be win-win deals with benefits for both parties, even if mischief and fraud with derivatives had already been thoroughly documented.24 Derivatives had to be good – otherwise, why would professionals buy or sell them? Regulators displayed similar faith in the rationality and proper judgement in other regulatory fields. CRAs had come under fire in Europe because of their failure to anticipate trouble at the Italian company Parmalat, just as they had previously done at Enron. Therefore, in 2004, European politicians charged the Committee of European Secu- rities Regulators (CESR) to assess the need for regulation of CRAs. However, before CESR could even report back, it agreed in the Inter- national Organization of Securities Commissions (the international stock-market regulators club) that only a voluntary code of conduct would be necessary because CRAs’ dependence on a solid reputation could be relied on to inspire maximum diligence. With similar arguments, the regulation of hedge funds was pushed aside. Professional investors had no interest in losing money; hence the idea that they could be trusted to acquire all of the information necessary for their own rational judgement and, by implication, for efficient market functioning overall. The aim of regulation had largely become to align it with market operations, not to act as a barrier to them. This sentiment was clear, for example, when in the spring of 2007, the British Financial Ser- vices Authority announced that it would move further in the direction of principles-based regulation and de-emphasize detailed rules where possible:

Firms will have increased flexibility in how they deliver the outcomes we [the FSA] require. Many will find a closer fit between meeting their business objectives and meeting regulatory requirements (Financial Services Authority 2007; emphasis added).

23 For the examples that follow, see Mugge¨ 2011. 24 See Partnoy 2002. Resilient neo-liberalism in European ﬁnancial regulation 211

Similar to the use of bank-internal risk-models for regulatory purposes in Basel II, regulation in general could ‘piggy-back’ on banks’ business rationales. Neo-liberal thinking – not only favouring markets but also trusting market professionals to act ‘rationally’ – had thus become a common frame in regulatory debates in Brussels. The supranationalization of financial regulation and its negative coordination with other policy fields meant that political fine-tuning had decreased markedly and market efficiency reigned largely unchallenged as a policy goal. The flexibility of the pro-market worldview and the complexity of financial markets meant that most political positions could be framed in neo- liberal terms in one way or another – until the financial crisis hit in 2007. Now, neo-liberal ideas were met with a challenge unlike any they had encountered before.

The post-crisis resilience of neo-liberalism The financial crisis has been interpreted in many ways, but one recurrent theme is an alleged bankruptcy of pre-crisis neo-liberal ideas.25 The efficiency of financial markets left to their own devices had occupied a central place in pre-crisis financial economics. Much of the theoretical work in this vein had preceded the onset of neo-liberal politics in the late 1970s.26 This abstract scholarship showed that ‘the market can’t be beaten’ if investors followed appropriate investment strategies and relevant information was widely available (i.e., the efficient-market hypothesis). So-called agency theory celebrated the creation of shareholder value as mirroring efficient capital allocation.27 Furthermore, if well-functioning markets could not be improved on in their allocation of capital among competing investments, then the only real remaining task for governments was to provide a stable and predictable outlook for the value of money itself and to control inflation through monetary policy. Drawing on psychology, behavioural finance questioned the rationality of economic actors as construed in this work, and it showed how markets could fail to attain ‘fair’ prices because of, for example, ‘herd behaviour’.28 However, although these ideas dampened the expectation of market-generated efficiency, they remained an addition to rather than a substitute for financial-economics orthodoxy – not

25 See Lo 2012. 26 See MacKenzie 2006. 27 See Jensen and Meckling 1976. 28 See Shleifer 1999. 212 Part II: Neo-liberalism in major policy domains least because its insights could be expected to apply much less to professional investors who used quantitative tools to guide their decisions than to retail investors.29 Scholarship rooted in the efficient-market hypothesis was powerful because it aimed not so much at providing an encompassing guide to economic reality as a template for optimizing market design in search for economic efficiency and, hence, societal welfare. However, the depiction of unfettered financial markets as agents of allocative efficiency has suffered enormously since the onset of the subprime crisis in 2007. The efficient-market hypothesis had too many ‘ifs’ built in to be a useful guide to real-world finance: it would hold if investors were rational, if transaction costs were negligible, if relevant information was widely available at little or no cost, if there was effective competition, and so on. Different strands of economic-crisis analysis showed not only that these conditions had not been met before the crisis but also that there was no reason to think that they would hold eventually. Orthodox theories about financial markets’ efficiency thus lost their grip in public debates. Indeed, the criticism often attacked the fundaments of neo-liberal ideas, and the work of Hyman Minsky (especially 2008 [1986]) experienced an unexpected renaissance.30 Critics lambasted a ‘false sense of trust in the market’ and contrasted ‘Wild West’ finance, with no rules, to public sovereignty over financial markets. With market sceptics winning new converts by the day, the time seemed ripe for a new approach to financial regulation to replace the neo-liberal approach. Even if neo-liberal ideas about financial regulation do not constitute a (policy) paradigm in the narrow sense, Kuhn’s work on paradigm shifts is still instructive. He identified two necessary conditions for shifting from one paradigm to another: (1) the old paradigm must have reached its limits in attempts to explain real-world observations;31 and (2) an alternative paradigm must be available that can do a better job. In financial regulation, neither condition has been fulfilled. Despite its defects, a neo-liberal view of financial regulation has still been able to provide plausible answers to the regulatory challenges that the crisis exposed. For all of its merits, the fundamental criticism of

29 See Fox 2009. 30 See de Grauwe 2009, Kotlikoff 2010, and Soros 2008. See also Minsky 2008 (1986); and, e.g., Mirowski 2010. 31 Cf. Hall 1993 and Kuhn 1973 (1962). Resilient neo-liberalism in European ﬁnancial regulation 213 neo-liberal thought that has (re)surfaced after the crisis has not proposed wholesale regulatory alternatives but rather suggested that the hope of taming ﬁnancial instability through government intervention might be in vain.

The crisis: Neo-liberal faults, neo-liberal remedies? Once the crisis had set it, the regulatory debate witnessed different schools of thought locking horns. Market enhancement clashed with laissez-faire, and critics favouring market constraint argued against both strands of neo-liberalism, often without distinguishing clearly. Ironically, the division in the neo-liberal camp – which from the outside appeared to be a City–Brussels alliance but felt more adversarial from the inside – was a source of strength. Fundamental attacks on pre-crisis financial governance could always be deflected. Accused of espousing a vision that had failed, advocates of both laissez-faire and market enhancement could retort that their vision was perfectly in order but that it had not been implemented fully. Libertarians viewed – and view – the crisis as the result of government distortions of the economy; many regulators simply felt that they had not yet completed the regulatory edifice by the time the crisis hit.32 It was not the ideas that were to blame but rather their execution. Many plausible remedies to pre-crisis regulatory failings could be framed in market-enhancing terms.33 For example, sizable bonuses constituted ‘skewed’ incentive structures for traders and executives.34 The implication was that excessive risk-taking was not the fault of inherent market instability or trader irrationality. Poorly designed bonuses meant that short-term profits would boost traders’ incomes, irrespective of the long-term performance of investments. In taking high risks, traders behaved perfectly rationally, optimizing portfo- lios in line with their own payoffs, even if those did not match the interests of their employers. Hence, skewed incentive structures in the financial sector did not prove the obsolescence of agency theory but rather showed how an updated version of it could be a powerful tool to explain regulatory failures. Markets could function well and

32 See Allison 2012. 33 See Arner 2011. 34 See Murphy and Jensen 2011; co-authored by the Jensen whose work had inspired bonuses as a management tool in the first place. 214 Part II: Neo-liberalism in major policy domains rationality could be relied on if only bonuses were fine-tuned to match the time horizons and payoffs of banks. Debates about derivatives, another common culprit in crisis accounts, followed a similar trajectory. Here, a lack of information was quickly identified as the main problem.35 If market participants had better information about the exposures and profiles of other market participants, then derivatives markets could be much more stable. Information asymmetries and transaction costs could be remedied by improved disclosure requirements and central counterparties, which centralized risk and monitoring. Also here, the main regulatory debates on both sides of the Atlantic followed in the tracks of neo-liberal ideas. Where such ideas were seen as reaching their limits, they could coex- ist happily with more drastic market intervention. Regulators increasingly identified the enormous size of ‘systemically important’ banks and the complexity of their dealings with one another as sources of vulnerability.36 Recognizing the limits of real-time supervision of financial markets, regulators had to resort to cruder measures in their attempts to tame those sources of risk. For example, particularly large or connected banks would face tougher capital requirements than smaller banks, which pose a lesser risk to financial stability. EU hedge-fund rules as designed by the European Commission were more a clamp-down on the industry than a finessing of market mechanisms, even if they were diluted in the end.37 Furthermore, new proposals for auditing firms demanded that clients would frequently switch from one auditor to another, lest relations became too cozy. The measures derived from these regulatory approaches – for example, crude but sizable capital buffers for large banks – conflict with the doctrinaire version of market enhancement; rather, they amount to ‘throwing sand into the wheels’ of free markets. However, they have not invalidated the overall neo-liberal bend of regulation. Tough rules for banks have been deemed necessary because of the practical limits of market-enhancing regulation: present-day supervisory instruments or bank-internal risk-management systems are simply not capable of providing satisfactory (i.e., systemic) risk assessments. It is practical problems that may necessitate crude government intervention in

35 See, e.g., Cecchetti et al. 2009. 36 See Financial Stability Board 2010. 37 See Buckley and Howarth 2011. Resilient neo-liberalism in European financial regulation 215 markets, not the faultiness of the underlying regulatory paradigm. The resulting maxim is: enhance markets when it is possible, rein them in when it is not. Regulators throughout Europe have become more pragmatic in their endorsement of market enhancement, but they have not forsaken it because it provides several attractive tools to address past market failures. At the system level, the most prominent innovation has been ‘macroprudential regulation’ as a focal point of discussion.38 The concept is a direct answer to the pre-crisis emphasis on microprudential regulation, which assumed that system stability could be ensured by safeguarding the stability of individual financial institutions. Because the crisis demonstrated how contagion effects and financial chain reactions among banks could lead to financial collapse, microprudential regulation as the sole instrument for safeguarding financial stability fell out of favour. A conscious concern with financial risks emerging at the systemic level was added to the regulatory agenda. To what degree does macroprudential regulation chime with or challenge neo-liberal ideas? The concept is used in two distinct ways that emphasize either systemic risks that lurk between (rather than within) financial institutions or deleterious boom–bust cycles over time.39 While the discussion returns to the second usage when we consider alternative regulatory approaches, the first is fully consistent with neo- liberal thought. It underlines that financial actors face practical limits in assessing their mutual exposures and that moral hazard in the form of expected government bailouts creates a bias in favour of excessive risk taking.40 Thus considered, the need for macroprudential regulation can be derived directly from an orthodox approach to financial markets and it complements, rather than challenges, a neo-liberal take on financial governance.

The futile search for a regulatory alternative Even if neo-liberal thought had not exhausted its potential to suggest regulatory answers to the crisis, the attack on its intellectual fundaments was so ﬁerce that its credibility and legitimacy were seriously damaged. Had the crisis not demonstrated neo-liberalism’s fundamental fallacies? Rather than aiding market functioning, CRAs and the

38 See Borio 2010. 39 See Lothian 2012. 40 See Tressel and Verdier 2012. 216 Part II: Neo-liberalism in major policy domains

‘sophisticated’ risk models of banks had exacerbated pro-cyclicality.41 Moreover, just as individually rational retrenchment in a recession leads to perverse aggregate outcomes, individually rational investment decisions led to destructive booms and busts in markets. Cer- tainly, it was time for an alternative way of thinking about and regulating financial markets, one that eliminated obsolete neo-liberal premises instead of only tinkering with them. Even if neo-liberalism could still offer plausible policy suggestions, there had to be a better alternative. Critics of neo-liberal finance have mostly taken inspiration from heterodox economic thinking that suggests that markets do not ‘discover’ but rather construct asset values. The absence of an anchor in the ‘fundamentals’ renders them unstable such that after long upswings, financial markets enter periods of crisis.42 For Minsky, however, the problem runs deeper than deficient financial regulation. An economic upswing generates optimism among investors; increased investment feeds economic growth and, thus, further optimism and readiness to accumulate debt. This feedback loop continues until it reaches a breaking point and painful debt-deleveraging sets in. Smoothing out these credit cycles over time is the second goal of macroprudential regulation (i.e., in addition to addressing syn- chronous system complexity, as discussed previously). The desirability of public tools to this end is now widely accepted in regulatory circles and, given that it departs fundamentally from dominant pre-crisis ideas, the rise of macroprudential regulation counts as a clear and prominent departure from neo-liberal ideas.43 At the same time, it does not invalidate the relevance of microprudential approaches; indeed, it still relies on individual financial institutions being ‘as rational as possible’. In all of its crudeness, macroprudential regulation enters the picture only when complexity becomes too high for individual market participants to manage. Thus, alternatives to market-enhancing regulation are, in fact, not real alternatives at the paradigmatic level but rather modifications to established policy. If, however, Minsky’s argument that financial stability inevitably breeds instability is accepted, then policy is necessarily self-defeating. We should expect macroprudential regulation to complicate the picture further because it adds yet another layer of

41 See Hellwig 2008. 42 See Minsky 2008 (1986). 43 See Borio 2010. Resilient neo-liberalism in European financial regulation 217 market actors (i.e., central banks and regulators), whose assessments of economic circumstances market actors will try to second-guess. There are good reasons to doubt the assumptions underlying market- enhancing regulation and, both before and after the financial crisis, there has been no shortage of commentary describing them. However, if efficiency is not to guide financial regulation, then what is – other than outright credit allocation by governments? Beyond attempts to smoothing out credit cycles, ‘market constraint’ does not come with policy instructions. In contrast, ‘market enhancement’ generates specific prescriptions. Barriers to competition can easily be identified and, given political will, removed. The same is true for information asymmetries and a lack of transparency. In this perspective, mandatory disclosure of information, its dissemination through the Internet, or the processing and interpretation of information by centralized agents (e.g., supervisors or CRAs) all ameliorate the detrimental effects of information asymmetries. ‘Market enhancement’ as a policy approach comes with a ‘user’s manual’ for regulators, suggesting straightforward formulas to improve market functioning. Accounting provides a good illustration of both the strength and the weakness of criticism to orthodoxy.44 Fair value accounting (FVA) has been ascendant in recent decades, and its rise is commonly attributed to an increasing marketization of corporations and corporate control as well as the rise of a transaction logic instead of a stewardship logic in economic affairs.45 In line with the fundamental market criticisms outlined herein, FVA sceptics deny that markets could somehow reveal the ‘true’ value of an asset or liability. Irrespective of its merits, such an argument misconstrues what the ‘fair’ in FVA stands for: FVA proponents argue that market values are fair not because they are ‘correct’ but rather because in a functioning market, they are formed on the basis of myriad individual value assessments. The point is not that FVA provides accurate valuations but rather that market valuations are better, and more useful, than any

44 The two basic approaches to accounting practice are fair value accounting (FVA) and historical cost accounting (HCA). FVA requires that balance sheets of entities list their assets and liabilities at (estimated) current market prices; HCA lists assets and liabilities at the prices paid or received for them at the time of acquisition or sale. 45 See Barlev and Haddad 2003; Perry and Nolke¨ 2006. 218 Part II: Neo-liberalism in major policy domains other estimates (e.g., by the firm owning an asset or by governments). Although criticism of FVA abounds, its opponents have not offered a coherent and principled alternative. Accounting based on market values is clearly imperfect but, for the time being, it may be the best that accountants can do. This pattern is repeated elsewhere in financial regulation. Rating agencies have been widely criticized for failing to properly assess investments that are ultimately shaky (e.g., repackaged subprime mortgages) and to anticipate the financial crisis more broadly. Some observers have found fault with their business model, in which the companies whose products have been rated paid the CRAs. This criticism still chimes with neo-liberal precepts, however, and just as with bankers’ bonuses, an ‘optimization’ of incentive structures has been the obvious answer. The more fundamental criticism blames the inherent inadequacy of financial models that use historical data for predicting future market developments. Instead of assessing market swings, according to the accusation, rating agencies amplify them: benign past conditions are translated into ‘rosy’ predictions, which trigger additional investment and activity – until this self- reinforcing cycle reaches its limits and reverses dramatically. The argument is sound. It also makes clear, however, that it is not a specific type of rating methodology that is to blame for market swings but rather the fundamental impossibility to assess future economic developments without shaping them. Despite the justified criticism of the CRAs, a proper alternative to their ratings methodology remains elusive. Governments have (rightly) shied away from suggesting that they would have a better alternative to the established rating methodologies. More broadly speaking, although financial crises, scams, and melt- downs occur frequently enough to suggest that a financial system dominated by profit-oriented private entities is prone to instability, history also shows that governments are normally too self-interested, too short-termist in outlook, or too incompetent to keep financial markets out of a crisis for very long.46 The recent Eurocrisis has driven home this point. The first phase of the financial crisis – which was then labelled the ‘subprime crisis’ – generated much soul-searching,

46 See Kindleberger 1978; Reinhart and Rogoff 2009. Resilient neo-liberalism in European financial regulation 219 in both academic and policy-making circles, about where financial- market governance had gone wrong; for many, the time was right for governments to reclaim control.47 Once the Eurocrisis set in, the lesson to be learned changed completely: now, the narrative was not about economists having failed governments with their myopic advice but rather about EU member states having failed to heed straightforward warnings from economists against the dangers of a currency union.48 Political imperatives had trumped orthodox economic advice, and it cost Europe dearly. Governments had not listened too much to economists but rather too little. The idea that good government intentions were sufficient to generate a propitious financial climate took a serious drubbing. Considering these points together, it is clear that the ideational map on which ‘neo-liberalism’ is commonly pinned is a poor guide to financial regulation. Discussions about neo-liberalism commonly construe it as the antithesis either to complete government control (i.e., socialism of some type) or a much more ‘social’ market democracy associated with coordinated market economies or the trentes glorieuses. Either way, neo-liberalism is one of two, or perhaps three, alternative ‘models’ and typically not the preferred one. This map fails to capture the evolution of ideas about financial regulation. Recent decades have clearly witnessed the emergence of a relatively well-codified regulatory orthodoxy, which I label ‘market enhancement’. However, it would be wrong to conclude that before its rise, financial regulation had been dominated by an equally coherent but somehow more social alternative – which might now provide the model to which to return after the failures of market-enhancing regulation. The evolution of pre-crisis regulatory ideas in recent decades is better understood as moving from a pragmatic approach to a more dogmatic, ideas-guided approach than as a shift from one regulatory paradigm to another.49 Since the crisis, we have returned to a more humble approach to regulation.50 Viewed that way, the second reason for the resilience of neo-liberal ideas in financial regulation is that there is no wholesale alternative approach. There are valid criticisms that lower our expectations of what regulation can achieve and there

47 See Alexander et al. 2007, Blackburn 2008, Financial Services Authority 2009, and Hellwig 2008. 48 See, e.g., Feldstein 1997. 49 See Mugge¨ 2011. 50 See Borio 2010. 220 Part II: Neo-liberalism in major policy domains are pragmatic policy tweaks and additions to the tool box, but there is no coherent alternative that can serve as the anchor for regulatory debates. Neo-liberal thinking remains the default approach with or against which actual policy is developed.

What future for neo-liberal EU financial regulation? What does this analysis imply for the future of EU financial regulation and the influence that pro-market ideas may have over it? In recent decades, financial regulation has been disembedded from nationally idiosyncratic socioeconomic contexts, and the supranationalization of policy has embedded it in the Brussels approach to financial-market governance. A more fundamental shift in regulatory ideas therefore could be expected only if negative integration as the guiding model for Europe and negative coordination of economic policies were displaced either by deeper integration or a significant dissolution of common EU governance arrangements. The current institutional setup in Europe favours the ideational status quo. At the same time, the Eurocrisis that continues to fester at the time of writing may still prove the EU as a half-built house that is unsustainable. In that way, either of the likely outcomes of the current crisis – substantially more integration or substantially less – may open new regulatory possibilities and therefore the scope for the development of new ideas. As this chapter argues, the real alternative to neo-liberal ideas as a guide for regulatory policy is not a heterodox rule book, based on post-crisis criticisms of financial governance. Regulation of finance at arm’s-length necessarily requires abstract policy goals, such as efficiency. In contrast, as soon as financial markets are employed to achieve specific aims – for example, in social or industrial policy – it may be more appropriate to speak of government guidance of the financial sector rather than its regulation. In that sense, the future of neo-liberalism depends on the outcome of the Eurocrisis: if the EU ‘weathers the storm’ roughly in its current shape, it will remain resilient. However, if European public authorities fundamentally redefine their relationship with the European economy, we can also expect them to open a new chapter in financial regulation and its intellectual underpinnings. Resilient neo-liberalism in European financial regulation 221

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Introduction Liberalism in Jane Austin’s day was the great path for escape from the strictures of the British class system and for reward for individual effort and merit. Jane Austin’s Persuasion is the ultimate ode to neo- liberalism: the wealthy heroine and the poor but ambitious hero are forced by her family to abort a youthful engagement. Yet, his later bourgeois success as a sea captain and consequent wealth permit love to triumph at last. Liberalism in this context is a revolutionary concept that empowers bourgeois strivers to challenge aristocratic prerogatives and to achieve by individual merit those goals denied to them by class constraints. More recently, liberalism as a political philosophy – dubbed ‘neo-liberalism’ – has had very different implications for social class: policies inspired by neo-liberal goals are frequently viewed as mechanisms to release individuals from the constrictions imposed by government rather than by class structure. These recent neo-liberal reforms often advantage actors in the marketplace who – by virtue of their class position or inherent capabilities – hold superior resources in exchange transactions. Whereas liberalism was once celebrated as a vehicle for levelling class inequities, policies of a neo-liberal hue (at least in some countries) have now become a driver of inequality. This chapter reflects on the flexibility and ambiguity embedded in the neo-liberal ideal, and it comments on two questions and related lines of explanation raised in the first chapter of this volume. First, I ponder the utility of neo-liberalism as an independent variable and query whether the flexible, multifaceted nature of liberal political ideology contributes to its resilience or whether this inherent flexibility constrains its capacity for causal impact. Second, I reflect on neo- liberalism as a dependent variable by probing the factors that shape the diverse manifestations of this set of ideas across time and national settings.

226 Neo-liberalism and the working-class hero 227

The attractions and mysteries of neo-liberal ideas are explored in the context of active labour-market policy (ALMP), a reform that emerged as the new ruling paradigm of industrial relations in the 1990s, recast the focus of unemployment protection from security to ‘employability’, and epitomized the transition from organized to flexible labour markets. ALMP shifted the policy goal from one of improving and protecting the well-being of a class of workers to one of realizing individual potential. Working-class hero (i.e., struggling to improve the lot of the class) was replaced by self-actualized employee, given the opportunity to achieve a labour-market dream. The once-political became the now-personal. First, we must grasp why the active labour-market concept (as an independent variable) claimed such seemingly immense causal salience across diverse welfare regimes and parties and why it persisted in its appeal even after the global financial crisis. Particularly surprising was the post-crisis endurance of ALMPs in the Scandinavian countries that are, arguably, least susceptible to neo-liberal ideas. The chapter suggests that the shifting realization of liberal ideals across time and place reflects the essential malleability of the liberal political philosophy: from Jane Austin’s time onwards, liberal ideals have had diverse political utilities (see Gamble’s chapter in this volume). We cannot understand the widespread attraction of ALMP without recalling the Janus-faced nature of liberalism and the philosophy’s (often unfulfilled) promise to release individuals from the stranglehold of social class. For example, the ALMP reforms appealed simultaneously to many interests in their central ambition of making labour markets more flexible: some manifestations of the policies bene- fitted the ‘haves’, whereas others had greater utility for the ‘have-nots’. The concept garnered ideological inspiration from both leftist interests in social investment and rightist desires to reduce passive income supports. The implementation of these complex, ambiguous policies varied across diverse institutional settings. The programmes could either facilitate a higher level of access to employment for labour-market outsiders or erode the power and material support of the working class, and these multidimensional, ideological appeals helped to popularize ALMP across a multitude of countries. Since the crisis, a very different set of economic conditions has contributed to the enduring utility of the neo-liberal reforms as ALMPs have become a strategic tool in national economic patriotism. ALMP 228 Part II: Neo-liberalism in major policy domains allows for policy makers simultaneously to combat unemployment, provide macroeconomic stimulus, and retrain human capital. Conse- quently, these investments have a more targeted economic impact than automatic stabilizers. ALMPs can advance goals of economic patriotism by promising to augment national productive activity while also combating unemployment. Second, we must understand the variability of neo-liberal policies as a dependent variable and grasp why a set of fundamentally similar policy prescriptions was implemented in such a divergent way (with varying success rates) across countries. I suggest that the interpretation and implementation of a neo-liberal concept are heavily mediated by its institutional environment, which shapes the articulation of preferences among the social partners and other participants in the policy debates. Institutions governing industrial relations and inter- firm relations are – together with political parties – the core processes for collective political engagement by which citizens and major social groups come together to solve new policy problems. These institutions have an important role in channelling information, aggregating preferences, facilitating interchange with governmental policy makers, and – ultimately – translating new ideas into concrete policy proposals. The characteristic profiles of these institutions for collective political representation endure across policy areas and time, and they have a delimit- ing impact on both punctuated equilibria and incremental institutional- change processes.1 Ideas also contribute to the institutional context of reforms and to cross-national differences in the involvement of public programmes by business and labour. The success of adjustment programmes is greater in countries with a better fit between reforms and existing policy legacies of the welfare state.2 Ideas mould reforms because deep logics or patterns of discourse within welfare regimes persist even when the essential policy forms of the regime are being altered.3 The arena of the active-labour-market case vividly illustrates the institutional influences on the specific interpretation and operational- ization of liberal ideas because country-specific industrial-relations institutions are particularly relevant to the formulation and implementation of ALMPs and to the policies’ impacts on social class. The

1 See Martin and Swank 2012. 2 See Scharpf and Schmidt 2000. 3 See Cox 1997, Schmidt 2005, and Blyth 2001. Neo-liberalism and the working-class hero 229 structure of industrial relations influences the relative dominance of left and right ideas within the liberal concept; shapes the possibilities for implementation and levels of support by the social partners; and somewhat determines whether the liberal plans will be used to bolster human-capital investment or to reduce social and labour protections under pressure from falling productivity associated with postindustrial economic change. The importance of the institutional context is also apparent in the fortunes of ALMP after the global financial crisis. ALMPs, somewhat paradoxically, exhibited greater staying power after the financial crisis in social-democratic countries – with strongly coordinated labour-market institutions and a more left-inspired interpretation of the reforms – than in liberal countries with weak organizations and a more rightist interpretation of the reforms. This is because countries with strongly coordinated industrial-relations systems were able to redefine ALMP to suit the needs of the new economic conditions.

The persistent power of liberalism? An initial concern is to reflect on whether neo-liberalism indeed per- sists in policy creation or whether the illusion of this ideological hegemony masks an essential enervation of political influence. In the latter instance, Schmidt and Thatcher’s second line of explanation in the first chapter of this volume suggests that neo-liberal ideas are resilient only in their rhetoric: we may take refuge in tired but familiar political aphorisms, but new policy directions are quietly undermining our comfortable truisms. This chapter suggests a compromise between supporting and rejecting the null hypothesis of neo-liberal resilience: namely, the staying power of the concept through shifting fortunes is embedded in its capacity for reinvention. The multifaceted nature of liberalism, its rather diverse inspirations, and its multi-century commitments to both negative and positive liberties and to diverse notions of equality all contribute to both the ambiguity and the enduring salience of the liberal ideal. Pertinent to our purposes, the recent manifestations of neo-liberalism echo this familiar capacity for flexible interpretation and timely reinterpretation of the dominant themes of the political philosophy. 230 Part II: Neo-liberalism in major policy domains

For example, liberalism is associated with equal rights, yet equality is ‘a many-splendored thing’: this may guarantee uniform political treatment regardless of individuals’ socioeconomic station or redistribution to equalize the socioeconomic base. Initial revolutionary treatises on liberalism endorsed equal political rights. Individuals (existing in the state of nature) entered into a social contract to create governing institutions, and the legitimacy of these institutions demanded that all enjoy equal political rights. Laws should be universally applicable – developed as if their creators were behind a veil of ignorance about the impact of these laws on their own specific circumstance.4 Philosophers of liberalism extended liberal ideals to the economic sphere by promising to eliminate restrictive class constraints on economic achievement and to reward individual effort and merit. This economic liberalism was rooted in the opposition to state-granted economic privileges for selective classes or groups, and this distrust of politically based selective benefits has been a feature of liberalism dating back to Adam Smith. James Madison and the Founding Fathers sought to use the Constitution to unleash the market from the abuses of state-granted economic privileges.5 Moreover, liberalism is associated with individual freedom. Yet, two freedoms comprise a more accurate description of the liberal tenet, and the liberal notion of ‘freedom to’ has an uneasy relationship with liberalism as ‘freedom from’. ‘Freedom to’ entails the right of individuals – living in the state of nature – to enter into the political arrangements previously discussed that guarantee equal rights and achieve collective goods. ‘Freedom from’ allows individuals to resist political institutional arrangements that they view as illegitimate or as threatening to their personal liberty. These conceptions of the positive and negative liberties may well come into conflict.6

4 See Locke 1689 and Rawls 1970. 5 See Smith 2009 and Hardin 2002. 6 See Berlin 1969. It is worth noting that Social Democracy – the predominant alternative to liberalism and itself a response to more doctrinaire forms of socialism – embodies a similar elasticity in its myriad forms: the Swedish Social Democratic Workers’ Party (SAP), for example, is noteworthy for its consummate pragmatism. Yet, Social Democracy as political philosophy can be contrasted with liberalism in bas relief in its endorsement of fundamental social rights (thereby moving beyond the political rights of liberalism); its deep historical connections to the working class (whereas liberalism was initially a movement of the bourgeoisie but claimed to transcend class biases in its equal treatment of all citizens); its commitment to the essential legitimacy of Neo-liberalism and the working-class hero 231

Over the years, liberalism has steered an uneasy course among these conflicting ideals. Initially, liberalism offered freedom from the rules of behaviour set by accidents of birth but also embodied an individual’s freedom to make a significant contribution to the broader collective good by realizing his or her fullest economic potential. This was closely linked conceptually to the freedom to enter into a social contract – to forge political structures for achieving collective goods and governing social interactions. Both markets and governments were institutions to spur individual excellence and to enable people to achieve together what they could never hope to gain alone. Although liberalism originally was a major part of the bourgeois revolution, the liberation from the shackles of class could pertain to any social segment. The use of the term ‘liberal’ came to be viewed in the United States as a synonym for ‘progressive’ politics in the postwar era. Eliminating illegitimate prerogatives granted to special groups or classes had the added effect of permitting energetic have-nots to achieve greater labour-market successes and enabling individual economic self- actualization. Therefore, liberal social policies were those that entailed governmental support for the betterment of the lower classes. In this regard, labour-market policies that nurtured individual talents could enable workers to make a non-incremental shift in employment status.7 In the past three decades, a new variant of liberal thought has developed in the form of ‘neo-liberalism’. Neo-liberalism encompasses a smaller subset of the ideas embedded in liberalism and elevates free- market exchange above state controls. It affirms the superior efficiency of markets for allocating resources, seeks to greatly curb state interference in markets, and restricts state intervention to the essential provision of goods that may not be distributed through markets. Efforts to nurture markets and dampen states include rejecting Keynesian stabilization policies, augmenting supply over demand, scaling back market-distorting social benefits and labour-market regulations, promoting labour-market flexibility, and introducing the outsourcing of state functions to private-sector intermediaries.8 Neo-liberalism has given preference to negative over positive freedoms and, somewhat paradoxically, expressions of freedom from often

redistribution; and the importance attributed to the state in managing coordination with somewhat less reverence for market competition in sustaining the mixed economy. 7 See Galston 1982. 8 See Hay and Rosamund 2008. 232 Part II: Neo-liberalism in major policy domains entail rejecting the institutional structures that were once considered a manifestation of individuals’ freedom to achieve collective social goods. Moreover, the successful rejection of these structures has been associated with growing inequality and the hegemony of haves over have-nots. Neo-liberalism and its negative freedom have been used to attack the very political structures to which an earlier version of liberalism initially gave rise: proponents of ‘neo-liberalism’ argue that governmental programmes for promoting equality impinge on individual protections for private property. Although liberalism was initially created to facilitate class mobility, it has increasingly been associated with rising inequality. Moreover, an initial advantage of liberalism was that it accommodated shifting exogenous conditions by elevat- ing individual agency: liberalism enabled individuals to realize their employment potential by responding to labour-market demands. Yet, over time, proponents of neo-liberalism expected workers to make these adjustments and blamed the victims when individuals failed to ﬁnd their rightful place in the labour market. Thus, King suggests that liberal ideals have been hijacked for illiberal causes: to eliminate social protections for the lower classes and to shift the responsibility for and burden of poverty from larger systemic causes (e.g., deindustrialization) onto individuals.9 Liberal democracies have pursued illiberal social policies or withdrawn social protections when the populations enjoying those protections have limited standing in the public sphere. Neo-liberalism has also provided a vehicle by which governmental social spending may be contained in response to an economic climate of scarce resources associated with deindustrialization.

The impact of neo-liberal ideas on employment policy An example of the ambiguity and power of neo-liberal ideas is found in the arena of employment policies. During the ‘golden age’ of an ever-expanding economic ‘pie’, labour relations in many European countries (but less so in Anglo countries) were highly coordinated, either at the national level in the Scandinavian case or the industrial- sector level in many Continental European countries. Neo-liberal ideas gained credence, however, when falling productivity growth rates and

9 See King 1999. Neo-liberalism and the working-class hero 233 deindustrialization in the 1980s ushered in a new era of zero-sum conflicts and rattled the class compromise. Neo-liberal reforms sought to deregulate labour markets, to decentralize collective bargaining, and to scale back contractual relations between employers and workers. This first wave of neo-liberal reforms – expressed most vividly, perhaps, in the punishing policies of Margaret Thatcher – became an object of contention: whereas the policies successfully reduced the costs of labour by rolling back union power, they did little to expand worker skills in preparation for the postindustrial economy. A restatement of the liberal ideal was needed to balance the waning economic prosperity with the waxing knowledge society. A second wave of neo-liberal reforms, embodied in the concept of ALMP, appealed to the compelling requisites of the age and further transformed the policy area of social protections against unemployment. Gaining popularity in the 1990s, active-labour-market reforms promised to address the stark institutional changes in labour markets with deindustrialization: they included shifting skills requirements, decoupling high- and low-skilled workers (who worked closely together in manufacturing production but who largely toiled in different sectors in services), and reducing the growing gap between labour- market insiders and outsiders (who were increasingly excluded from employment). The ALMP concept drew philosophically from both the right and the left and, in this way, was not inspired only by neo-liberalism.10 Nonetheless, it offers a fine example of the multifaceted nature of liberalism and constitutes a good arena in which to study liberalism because it became the central policy intervention for fighting unemployment. ALMP was targeted to a number of sometimes conflicting goals: its central mandate was to (1) reintegrate beneficiaries of public assistance or insurance back into the core economy; and (2) prevent individuals from relying excessively and over the longer term on public assistance, unemployment, or disability insurance. To this end, programmes shifted emphasis from income maintenance to employment promotion and from full employment to individual employability. Within this central mandate, national plans borrowed conceptually from different welfare-state regimes to achieve a broad group of goals: to enhance incentives to work, to aid in job seeking, to keep the

10 See Pontussen 1997 and Rhodes 1997. 234 Part II: Neo-liberalism in major policy domains unemployed occupied, and to develop the human capital of the long- term unemployed. Policies included both ‘sticks’ in the form of rules about the duration of benefits and ‘carrots’ in the form of access to training or subsidized jobs.11 There was tension among the diverse aims of the active-labour- market agenda. Putting people to work, for example, could be accomplished by several methods, such as simply increasing the number of short-term, low-skilled jobs. However, the policies, at least in some settings, also sought to improve the productivity of the labour market by expanding skills and better utilizing the assets of the unemployed. Deregulating labour markets served an ambition to reduce government involvement in job markets, but this action did not necessarily increase employment or expand skills.12 Moreover, in some countries (e.g., the United States), policies to make social-assistance recipients enter the workforce were associated with the removal of an entitlement to protections against unemployment and poverty. Thus, ALMP held the potential of dramatically changing people’s perceptions of a social right that had been in place in most countries throughout the twentieth century. Permutations of ALMP combined these diverse goals in a varie- gated manner across countries. In the Danish social-democratic welfare regime, most training historically was provided by the state; yet, the active approach significantly increased firm-based training. In corporatist-statist welfare regimes, the government left training to private firms but began to micromanage supply and demand through ‘one-stop’ job centres. In the British liberal-market regime, training choices were largely left to private-sector markets, and labour-market strategies focused on reducing social benefits, yet ALMP sought to shift greater responsibility for ensuring adequate training to the state.13 Thus, whereas some observers interpreted the active strategy as reducing social insurance and assistance benefits, others emphasized the strategy’s deviation from the liberal belief in letting markets manage employment, and they hailed the approach as a mechanism for recognizing a right to work among the economically and socially excluded.14

11 See Layard et al. 1991 and Bonoli 2012. 12 See Bonoli 2012. 13 See Layard et al. 1991, OECD 1994, and Rhodes 2001. 14 See Cox 1997 and Madsen 2002, respectively. Neo-liberalism and the working-class hero 235

ALMP also marked a new direction in employment policy by relying on employers and other voluntary actors far more than traditional interventions because private-sector training with a wage subsidy was considered to have a higher likelihood of permanent employment than public-sector training or public-sector subsidized jobs.15 Even countries in which government historically provided virtually all social beneﬁts involved employers in implementation. For example, initiatives with a strong role for private employers marked a profound ideological divergence from the governmental, compulsory, and nationally uniform solutions to social problems in Denmark.16 A ‘competitive-corporatism’ model involved employers, unions, and the state entering into social pacts to link social provision to international competitiveness.17 The ALMPs threatened to alter power among the social classes, albeit with somewhat contradictory impacts for labour. Some feared that the compulsory work requirements included in this package of neo-liberal reforms would reduce the power of organized labour and recommodify workers by forcing them back into employment. Others hoped that the plans would chip away at the abuses of organized labour markets: in some countries, employment protections and negotiated wages protected core labour insiders but created labour-market rigidities that dampened employment and harmed marginal workers. Proponents hoped that the policies would improve both productivity and social cohesion and help countries to reach higher levels of employment. In these countries with strong dualism between insiders and outsiders (e.g., Germany), the policies held the promise to reintegrate those on the margins of the labour market. The liberal ALMP reforms emerged from a distinctive set of labour- market institutions during the era of deregulation but were found to be embedded in a new institutional environment with the fall of ﬁnance capitalism. Therefore, understanding the ongoing allure of the active-labour-market reforms requires an understanding of their place in the new institutional world. Countries had competing needs and ambitions, anchored by severely elevated rates of unemployment, sharp budgetary constraints, a discrediting of deregulated markets, and

15 See Madsen 2002. 16 See Danish National Institute of Social Research 1997: 10. 17 See Rhodes 1997. 236 Part II: Neo-liberalism in major policy domains euro-inspired constraints on monetary policy. In this context, countries pursued economic patriotism motivated by competition for scarce international-market share. In the immediate wake of the crisis, unemployment increased dramatically across the world, and neo-liberalism as a political philosophy experienced a setback as countries responded with economic-stimulus policies and expanded social protections to mitigate the treacherous impacts of the disaster. Government intervention and Keynesian stimulus policy suddenly gained greater acceptance with the wide-ranging view that market deregulation was to blame and that recovery required fiscal stimulus. In a moment reminiscent of Nixon’s famous declara- tion ‘We are all Keynesians now’, Sarkozy remarked, ‘Have I become a socialist? . . . Perhaps’.18 Virtually all countries engaged in Keyne- sian demand-side stimulus and expansionary fiscal policies. A Euro- pean Union Commission proposed a 200 billion euro-recovery programme for 2009–2010 (i.e., 1.5 per cent of the GDP) and the United States passed a $787 billion fiscal stimulus in spending and tax cuts thereafter.19 The International Labour Office (ILO) calculated that automatic stabilizers would create 5.2 million jobs in 2009 within the G20 countries.20 However, despite this ideological resurgence of Keynesian macroeconomic intervention, countries pursued rather different strategies for economic recovery and neo-liberal ideas continued to be important. Pursuant to our interests, ALMPs (together with other market- enhancing interventions) continued to be important instruments in the tool kit of national responses to the crisis as a way to expand employment without placing undue burdens on public coffers.21 Recovery strategies were partially predicated on the budgetary capacities of countries to sustain high levels of social investment and, rather paradoxically, the Scandinavian countries with the largest public sectors had the lowest post-crisis budgetary problems. High support for the tax state meant that these countries largely enjoyed budget surpluses before the crisis, and the budgetary implications of their stimulus packages were less severe than in countries with pre-crisis fiscal deficits. Thus, contrary to our image of a bloated state crowding out private investment, after the crisis, the most energetic economies had a large

18 See The Economist 2008. 19 See Cameron 2012. 20 See International Labour Office 2009: 48. 21 See World Bank 2009. Neo-liberalism and the working-class hero 237 public sector. In this vein, Cameron notes the contemporary regional divide in growth rates between (1) those in Northern European countries with large tax bases that can run budget surpluses in times of prosperity; and (2) those in Southern European countries that must rely on deficit spending even in good times and that, consequently, are unprepared for an expansive stimulus programme when needed during an economic downturn.22 Countries also varied widely in their reliance on automatic stabilizers versus discretionary spending (including active-labour-market spending) and on spending increases versus tax reductions.23 For example, France had a rhetoric of aggressive intervention, yet ultimately relied primarily on automatic stabilizers through tax transfers; Germany endorsed a rhetoric of self-restraint but implemented a short-term jobs programme (i.e., Kurzarbeit) that employed 1.5 million (primarily manufacturing) workers (i.e., 3.5 per cent of the labour force) at its peak.24 Countries relying solely on automatic stabilizers to rejuve- nate the economy did significantly worse than those that also utilized ALMPs because the latter activist group was significantly more successful in controlling rising unemployment and hastening post-crisis recovery than the former.25 In the new economic climate, ALMPs continued to be attractive to the left as a tool for promoting social investment in marginal workers. At the Tripartite Social Summit on employment and growth, the Euro- pean Trade Union Confederation (ETUC) demanded a commitment to ALMPs that would generate high-quality jobs and social justice rather than policies to scale back job security and wages.26 Some of the more neo-liberal aspects of the ALMP concept were also scaled back. For example, Sweden initially experimented with decentralization and private-service delivery in ALMP (inspired by the neo-liberal NPM philosophy); however, the failures of this undertaking motivated the Swedish bourgeois government to re-centralize labour-market board control. Thus, whereas devolution to private-service providers was once considered a way to improve the efficacy and efficiency of the welfare state, centralized government control came back into fashion after the crisis.27

22 See Cameron 2012. 23 See Cameron 2012. 24 See Schelkle 2012 and International Monetary Fund 2010. 25 See Cameron 2012. 26 See Tripartite Social Summit 2012. 27 See Niklausson 2011. 238 Part II: Neo-liberalism in major policy domains

ALMP programmes were also motivated by incentives after the crisis to engage in economic patriotism or campaigns to build up economic activity within the territorial boundaries of the nation-state. ALMP programmes allowed countries to encourage economic growth within their territories by fostering skills development and other infrastruc- tural development and by augmenting employment and demand in a targeted manner.28 Resources for nurturing employment and human- capital development through these policies could be pinpointed to advantage favoured markets, industrial sectors, and working-class segments, thereby achieving more selective intervention than was possible with broad-based Keynesian interventions. The new climate of austerity motivated a scrambling for scarce market share, and measures for economic patriotism would augment domestic economies and expand the competitive positions of firms. Finally, in a time of fiscal austerity, the ALMPs offered a way to reconcile conflicting political interests in what appears to be a win- win alternative, particularly in less wealthy countries or those on the periphery of Europe. For example, Spanish employers’ associations, unions, and government officials were deeply divided over governmental plans for deficit reduction in 2010 (resulting in general strikes and, ultimately, the occupying movement) and over labour-market reforms that proposed greater flexibility and deregulation. However, in early 2011, the Spanish state and social partners broke the ‘logjam’ with a new formula of ALMPs and targeted industrial policies, in tripartite agreements collectively referred to as the Social and Economic Agreement for Growth, Employment and Guaranteed Pensions.29 In a similar manner, Bulgarian social partners settled on ALMPs and ‘flexicurity’ as a mechanism for expanding employment, reducing the skills gap with the rich democracies, and curbing social conflict.30 Thus, the multifaceted nature and ambiguity of the neo-liberal active-labour-market reforms allowed this concept to quickly conquer a variety of political dominions, to conform to shifting economic conditions, to satisfy the needs of changing class coalitions, and to reflect the concerns of diverse political eras. However, the reforms also took different shapes across countries, and it is to the issue of cross-national variation in the liberal paradigm that we now turn.

28 See Clift and Woll 2011. 29 See Sanz de Miguel 2011. 30 See Tomev 2009. Neo-liberalism and the working-class hero 239

The institutional bases of neo-liberal policies The second purpose of this chapter is to reflect on the variation of neo-liberal ideas across national contexts and, in approaching neo- liberalism as a dependent variable, to grasp why a set of fundamentally similar conceptual prescriptions are transformed into rather diverse policy reforms across countries. This question also speaks to the first chapter’s lines of explanation, in pondering how an idea may be resilient – even while being manifested in different forms – across national terrains. I suggest that the specific form of an idea taken in a national setting is deeply shaped by the institutional structures in which the idea is embedded, thereby giving support to hypothesis five in Chapter 1. The plasticity of liberalism – with its diverse goals and social impacts – allows reforms inspired by this political philosophy to be moulded into quite different forms by the institutional context. For example, a central tenet of liberal thought is that anonymous markets rather than discriminatory governments allocate productive resources. Yet, markets function because a dense network of governmental rules governs the rules of individual exchange: the invisible hand – guided by the institutional underpinnings of markets – draws very different lines in diverse institutional settings. The image of anonymous private choices resulting in the public good vastly underestimates the importance of these non-liberal institutional structures. The dense networks of institutions found in coordinated market economies create possibilities for supportive labour–management relations, extensive vocational training, and high levels of social protection. In turn, these tend to encourage both labour and management to develop close economic cooperation, to increase long-term investment in skills, and to develop higher rates of productivity.31 Thus, liberal institutions such as seemingly autonomous markets are embedded in an institutional nexus of state rules and institutions.32 Although a number of governmental and political economic structures have bearing, institutions for collective political engagement are arguably most important to the specific realization of neo-liberal ideas because systems of partisan interaction and labour-market coordination are the crucial arenas in which citizens and groups negotiate their

31 See Hall and Soskice 2001. 32 See Ruggie 1983. 240 Part II: Neo-liberalism in major policy domains general policy concerns. As discussed previously, liberalism sets a priority on both positive and negative liberties. ‘Freedom from’ entails preserving the uniform treatment of individuals, protecting them from violations of their liberty: neo-liberalism’s emphasis on an individual’s right to maximize self-interest is also associated with this negative liberty. These types of freedoms do not necessarily entail collective action but may be pursued through individual autonomous effort. In contrast, ‘freedom to’ entails the empowerment of a group of individuals to achieve collectively beneﬁcial goals, which presupposes group action. Therefore, institutional structures for political discourse clearly have bearing on capacities of individuals and groups to achieve these common goals.33 Institutional structures for collective political engagement should mediate the impact of liberal policies on social class, distributive outcomes, and the expression of the revolutionary potential embedded in the liberal ideal. Party-system characteristics are crucial to the political expression of neo-liberal ideas because they shape the preferences of participants in political debates and their capacities for negotiated collective outcomes. Participants in proportional-representation (PR) party systems behave differently from those in majoritarian systems. Politicians in PR party systems represent well-organized economic interests, do not ‘poach’ voters from other parties, and participate in coalition governments; therefore, they have a less acute need to focus solely on short- term electoral interests and are better positioned to work towards longer-term goals. In short, PR systems have stronger institutional capacities than majoritarian systems to express and to implement policies oriented towards the ‘freedom to’ goals of liberalism. In like manner, characteristics of industrial-relations systems inﬂu- ence the articulation and implementation of neo-liberal ideas because they shape the preferences of both business and labour. High levels of organization (especially macro-corporatist forms) make employers and workers more likely to support public social policies because highly organized groups have political-economic, collective-action, and cognitive effects on members.34 The macro-corporatist forms of association have political-economic effects because centralized collective bargaining between highly organized employer and labour associations produces wage compression and the motivation for employers

33 See Berlin 1969. 34 See Martin and Swank 2004, 2012. Neo-liberalism and the working-class hero 241 to eliminate low-skilled jobs and to support social protections that drive skills development.35 Participation in macro-corporatist groups helps to overcome the limits to collective action by binding firms to negotiated decisions and convincing members to trust that they will not be punished for commitment to longer-term goals.36 Highly organized business associations have a cognitive impact on their members in educating employers about the benefits of social policies and bringing managers into contact with policy experts from government and organized labour.37 Sustained interaction among these associations and employers and the state in national collective-bargaining and tripartite policy-making forums as well as iterative corporatist patterns of interaction foster a long-term perspective.38 These institutional differences also affect the state’s capacity to build coalitions for social solidarity. Scholars often attribute rather immutable interests to companies, with preferences determined by economic structural characteristics. Thus, firms ‘exposed’ to international competition are expected to have different interests than those ‘protected’ through their production for domestic markets; capital- intensive companies relying on workers with highly specific skills should hold different preferences than those labour-intensive firms utilizing labour with lower general skills. Yet, although these differences certainly exist, companies with a given set of industrial-sector characteristics have been shown to hold diverse preferences at both the national and the firm levels. This means that states may potentially incorporate employers into rather diverse political coalitions.39 As Duane Swank and I demonstrated, higher levels of coordination ease government-policy entrepreneurs’ efforts to fold employers into solidaristic political coalitions to address the needs of low- skilled workers. These associations convince managers to participate in forums joining diverse sectors in discussions about the potential labour-market contributions of low-skilled workers.40 Politicians in macro-corporatist countries can entice employers into political coalitions to adopt policies that minimize negative impacts on marginal

35 See Wallerstein 1999. 36 See Streeck 1992, Katzenstein 1985, and Hemerijck and Visser 1997. 37 See Katzenstein 1985 and Rothstein 2000. 38 See Streeck 1992 and Crouch 1993. 39 See Martin and Thelen 2007 and Martin and Swank 2012. 40 See Martin and Swank 2012. 242 Part II: Neo-liberalism in major policy domains groups – even labour-market actors in the Danish export sector have participated in efforts to train and employ marginal workers – and this sustains higher levels of equality, employment, and economic growth. Countries with sectorial coordination (e.g., Germany) have less success in rallying business to the aid of marginal workers and in maintaining relative equality. For example, employers and workers in the German export sector agreed to dualist political strategies that largely shunted aging and low-skilled workers into the unemployment system. Thus, in our quantitative analyses, it has been shown that employers’ organizations have (net of other forces) signiﬁcant positive effects on redistribution and signiﬁcant negative effects on wage inequality, long-term unemployment, and labour-market dualism.41

Embedded ALMPs The impact of the institutional context on the expression of neo-liberal ideas is evidenced in the case of ALMP, as industrial-relations systems had a major impact on the interpretation and realization of the active- labour-market concept within countries and on the political coalitions available to the state to make the plans a success. National plans were motivated by a rather congruent set of ideas and, on paper, were remarkably similar. Yet, the realization, implementation, and impacts

41 As I have argued elsewhere, processes for collective political engagement also have an essential role in helping ideas to facilitate both abrupt and gradual institutional change. Scholars of institutional change utilizing punctuated equilibria models suggest that actors’ choices of new ideas and the resolution of political conflicts at critical junctures create enduring path dependencies and lay down a track for future policy incarnations (Capoccia and Ziblatt 2010). Scholars of incremental institutionalism emphasize small shifts in response to endogenous decay: new coalitions of actors arise to seize control of institutions with new priorities, ideas, and purposes; and institutions adjust through an erosion of their initial functions, conversion to new purposes, and layering of new goals on the prior goals (Streeck and Thelen 2005). Yet, the variations in the collective processes of political engagement shape both the manner in which policy legacies are reinterpreted at critical junctures and delimit the range of political coalitions that contribute to incremental institutional change. Certainly, agencies at critical junctures establish new paths and new political coalitions capture existing institutions for their own political purposes; yet, political structures of engagement constrain strategic action. However, countries have characteristic ways of solving social and economic problems, and these reflect the ways that social actors come together with government actors to negotiate new policies. These rules of political engagement also exert a strong influence on institutional adaptation (Martin and Swank 2012). Neo-liberalism and the working-class hero 243 of active-labour-market reforms varied enormously across countries in the proportion of total unemployment expenditures devoted to active measures, in the reduction of passive benefits, and in the active participation in the plans by the social partners.42 To some extent, the programmatic details of country-specific ALMP programmes resonated with the deep logics and legacies of welfare- state regimes. In keeping with the values of a social-democratic welfare regime, the Danish policies sought to be empowering rather than punitive and were connected to a broader campaign to enhance the skills of low-skilled workers and to expand the labour pool. The policies were liberal in drawing from NPM ideas, introducing strong compunc- tions to participate, reducing passive unemployment supports, and encouraging private effort. This brought scholars to question whether Denmark continued to have a universal welfare state and could be characterized as a coordinated market economy.43 Yet, they also maintained high levels of training (enabled by the expansive tax state) and comprised an important element in the ‘flexicurity’ strategy that combined low labour-market regulation to encourage energetic economic activity with social protections to skills renewal. Madsen viewed the Danish market policies as congruous with the values of a highly productive and highly protective society.44 This combination sustained high levels of equality, security, skilled employment, investment in new technology, and social solidarity. Unskilled jobs declined over the course of the 1990s, whereas skills qualifications expanded due to aggressive training interventions.45 Whereas most countries cut passive benefits over time, the Scandinavian countries invested substantial resources in the active measures according to a ‘social-investment’ philosophy; the liberal, Continental European, and Southern European countries were all more likely to use the programmes to reduce passive expenditures and to recommodify workers.46 In liberal Britain, Tony Blair’s New Deal plans to curb long-term and youth unemployment closely resembled Danish ALMP by setting limits on the recipient of passive benefits, introducing compulsory participation, and seeking firm-based opportunities. Yet, the plans differed in the language of markets to sell the programmes and the ‘demand- led’ strategies to tailor the programmes to private market needs. The

42 See Martin 2004. 43 See Campbell and Pedersen 2007. 44 See Madsen 2002. 45 See Goul Andersen 2007: 73–75. 46 See La Porte and Jacobsson 2012. 244 Part II: Neo-liberalism in major policy domains

Table 8.1 Passive and Active Labour-Market Spending as a Percentage of GDP in Selected Countries

Passive Passive Active Active Active Countries 1985 2007 1985 2000 2007

Denmark 4.8% GDP 1.9% 0.8% 1.9% 1.3% Netherlands 1.6 1.1 1.3 1.5 1.1 Germany 0.5 1.4 0.5 1.2 0.7 Austria 0.4 0.9 0.3 0.5 0.7 United Kingdom 1.2 0.2 0.7 0.2 0.3 United States 0.7 0.3 0.3 0.2 0.1

Source: Nikolai 2012: 98–101.

British welfare-state regime has historically conceptualized a weaker ideological connection between unemployment protections and skills development, and Blair developed a more residual programme aimed at eradicating unemployment without doing much to enhance skills.47 In Germany, the Hartz reforms also reduced the duration of unemployment-insurance benefits; yet, in the early years of reform, these ALMPs did little to counteract the dualism featured in Christian Democrat welfare states. Efforts to recruit employers to train marginal workers were limited, perhaps due to the earlier disappointing show of business interest in the Alliance for Jobs initiative. Despite the Hartz reforms, budgets for public training programmes were cut significantly in 2002, and it was only with Hartz IV – when the government finally moved on without the social partners – that Germany developed a more proactive programme for its marginal workers. However, significant dualism persisted and many of the ALMP funds were used to create short-term jobs.48 Table 8.1 captures the differences in the directions and levels of active-labour-market interventions in selected countries. Thus, although Denmark and the Netherlands scaled back active-labour- market spending after the ‘glory days’ at the millennium, they reduced passive spending significantly and retained higher rates of active spending than other countries. Germany and Austria increased both passive

47 See King and Wickham-Jones 1998: 445–51. 48 See Martin and Swank 2012. Neo-liberalism and the working-class hero 245 and active labour-market spending; the United States and the United Kingdom reduced both active and passive labour-market spending. Employer participation in the plans was also stronger in Scandinavia, as shown in my study of 107 randomly selected firms in Denmark and Britain. The higher participation rates by Danish employers worked against the logic of social-democratic welfare regimes because, historically, there was virtually no implementation of social-assistance programmes by private employers, and efforts to expand employment were largely concentrated in the public sector. British firms, in comparison, played an important role in social provision for some time because state social benefits were supplemented with private- employment–based benefits. Yet, Danish employers participated more in the programmes, primarily because they were attracted to the social- investment aspects of ALMPs. Thus, 68 per cent of Danish firms participated in some degree, whereas only 40 per cent of British firms signed up for the New Deal programmes, and the social-democratic aspects of the policies were the clear draw for employers.49 Diverse capacities of the industrial-relations systems had a sharp impact on the programmatic manifestations of the active-labour- market concepts because different institutions gave varying support to the somewhat conflicting goals of ALMPs (e.g., greater investments in human capital versus greater constraints on social assistance). In particular, active social policies that uplift the economic potential and contribution of the unemployed (or low-skilled) must be shown to offer tangible benefits for employers as well as for the unemployed. Therefore, and somewhat surprisingly, the policies were most successful in social-democratic countries because the institutions of collective political engagement allowed participants to work together to achieve their common interests in social programmes to enhance skills. For example, Denmark created a set of ALMPs and social policies that both improved skills and attracted widespread support from a cross section of society: employers and unions sought an expanded skilled-labour pool and their corporatist associations wanted to preserve their privileged status as decision makers in matters of public policy. Municipal employers were made responsible for the social problems and were motivated to find solutions to improve the employability of their most fragile populations. Consequently, the succession of

49 See Martin 2004 and Martin and Swank 2012. 246 Part II: Neo-liberalism in major policy domains reforms implemented by successive (and ideologically diverse) administrations since 1982 was marked less by change than by continuity. When the bourgeois coalition led by Anders Fogh Rasmussen (i.e., a member of the neo-liberal-right party, Venstre, in conjunction with the Conservative Party and smaller partisan allies) threatened to cut back active-labour-market spending, it met with resistance from both business and labour.50 The participation of Danish employers in the active-labour-market campaign reveals both the social-democratic cast to ALMP and the importance of institutions in mediating conceptions of liberalism. The Danish plans were tailored to real economic needs, and the devices to end long-term unemployment were linked to the ‘up-skilling’ of the general population. For example, job-rotation schemes allow firms to hire with state subsidies the long-term unemployed while their own employees receive skills training.51 The plans also created protected jobs for disabled people with ‘reduced working capacities’ in an effort to bring everyone into an ‘encompassing labour market’; these positions allowed firms to fill unproductive jobs with disabled workers (who received part of their wage from the state). This kept workers off the welfare rolls but restrained company labour costs. Within my firm study, Danish companies with blue-collar workers at all skills levels were significantly more likely to participate to fill real skills needs (unlike British firms discussed herein, which participated in order to obtain cheap labour). Of the Danish firms, 31 per cent cited labour shortages as a reason for participating, compared with 22 per cent of the British firms; whereas British firms participated in the programme for political reasons, Danish firms viewed the programmes as meeting real economic needs. One firm reported using job rotation to reduce ‘the barriers between production workers and the skilled mechanics who fix the machines’ so that production could move more seamlessly on the shop floor.52 The macro-corporatist institutions mediated employers’ perceptions of ALMP and expanded their participation. The Danish Federation of Employers (Dansk Arbejdgiversforening [DA]) and its major member, Danish Industry, sponsored consciousness-raising activities and offered a vehicle for the state to build awareness of the programmes

50 See Martin and Swank 2012. 51 See Arbejdsmarkedstyrelsen 2000. 52 See Martin 2004. Neo-liberalism and the working-class hero 247 among employers. Many Danish firms identified the corporatist associations as their primary source of information, and membership in the corporatist association was a significant determinant of company participation in the programmes. The associations allowed the social partners to have enormous input in the development of the ALMPs through tripartite processes that allowed business and labour to tailor the programmes to real employment needs. At the municipal level, the DA chose company participants to sit on local Social Coordination Committees, which were crucial to local firms’ involvement. The state also threatened to appeal directly to firms if the associations did not engage in the campaign to end long-term unemployment. Both the employers’ associations and labour unions participated to retain their jurisdictional control over labour relations. As one business respon- dent told me, ‘DA and LO were like Siamese twins’ in their need to retain their credibility as willing participants in the political dialogue.53 The DA also joined LO in resisting a proposal by the Danish government (then controlled by bourgeois parties) to liberalize part-time work. Both unions and employers’ associations perceived the legislative initiative as an attack on the social partners’ jurisdictional authority to negotiate collective agreements and as a probable limit on social rights guaranteed to part-time employees.54 In comparison, the British New Labour plan’s mechanisms for skills development were considerably more limited than those of their Dan- ish counterparts, and the residual programme to reduce unemployment did little to enhance skills. Therefore, although British political leaders considered employers essential for supporting and implementing their social project, efforts to bring British firms into the business of implementing the welfare state met with less success than the parallel campaign in Denmark. Although employers signed up in high numbers (especially for the New Deal for Youth Unemployed People), they stopped short of actually creating jobs for this constituency.55 The constraints of the pluralist system of business organization contributed greatly to the lack of corporate action. Employers had a limited organizational base to bring them into the policy-making process, and they lacked tripartite institutions that would help them to tailor the programmes to real economic need. In my firm study, the British

53 See Martin and Swank 2012. 54 See LO Aktuelt 2002a and 2002b. 55 See Department for Education and Employment 2000. 248 Part II: Neo-liberalism in major policy domains companies (unlike the Danish companies) engaged with the programmes to secure cheap labour and to appease the Blair government rather than to derive real skills. Thus, whereas 31 per cent of British companies credited their participation to strong pressure from government and a desire to appease the new administration, only 9 per cent of the Danish firms reported such incentives. The Confederation of British Industry (CBI) failed to be a source of information or connection to the state. The CBI did little to introduce firms to the benefits of innovation in low-skilled workers or to advertise the Blair programmes. Whereas membership in the Danish corporatist associations was highly determinant of participation in the ALMP programmes, membership in the British employer associations failed to encourage participation: 32 per cent of Danes identified an employers’ association as their major source of information, as opposed to 14 per cent of the British firms – and British companies were more likely to learn through the press (i.e., 34 per cent). The CBI took a somewhat ‘schizophrenic’ approach towards the New Labour government, with Sir Clive Thompson being less enthusiastic than his predecessor, Adair Turner.56 Because the peak employers’ organization lacked the collective capacity to make an imprint on the policy and to encourage its members to participate in the outcomes, Blair appealed to individual firms and developed market-based inducements to entice employers to join in his campaign to expand the skills of the British people. With much fanfare, Blair breakfasted with 3,500 business leaders across Britain; however, efforts to mobilize individual firms did not add up to an institutional commitment to the programmes. Institutions for industrial relations had a similar impact on the attitudes of organized labour towards ALMPs. For example, in highly coordinated Denmark, the peak LO fully supported the evolution of ALMP, in large part because it was an active participant in the development of the programmes. LO has the responsibility to represent workers in tripartite committees and to set the framework for collective- bargaining rounds; therefore, even though Danish craft unions are somewhat fragmented, the encompassing mechanisms by which these groups engage in policy making tend to reduce the potential economic cleavages among segments of labour.57 LO was just as involved as the DA in the evolution of ALMPs; for example, both sat on a Labour

56 Confederation of British Industry 2001. 57 See Scheuer 2007. Neo-liberalism and the working-class hero 249

Market Commission (i.e., the Zeuthen Udvalg), which had the task of bringing a more active approach to the delivery of unemployment insurance, and the bulk of its recommendations were incorporated into the Social Democrats’ first labour-market reform in 1994.58 A parallel Social Commission issued a series of recommendations for changing the public-benefits structure, and perhaps 80 per cent of its recommendations subsequently became regulations.59 In the wake of the global economic crisis, institutional settings have continued to mediate the interpretations and impacts of the neo-liberal ALMPs, and the policies have continued to have somewhat diverse implications for social classes. Countries learned lessons from the crisis but different regime types have taken away diverse messages. Liberal- ism remains embedded and, once again, the capacity of the reforms to address new labour-market requisites and their implications for class relations depended on the institutional context. Northern Europe has exhibited stronger continuing commitment to ALMPs since the crisis than the liberal countries, and the crisis has even strengthened the social-democratic component of the programmes in some countries. The ETUI found that in Denmark, compared to Germany and the United Kingdom, long-term unemployment was lower and spending on ALMP was much higher. Whereas 51 per cent of job seekers participated in activation measures in 2010 in Denmark, only 28.5 per cent participated in Germany and only 1.5 per cent did so in the United Kingdom.60 In the years leading up to the crisis, the Danish and Swedish bourgeois governments ‘flirted’ with the privatization, decentralization, and scaling back of ALMP programmes; however, since the crisis, the Swedish government has centralized the programmes again and reduced the role for private-sector intermediaries. In Denmark, ‘flexicurity’ as a labour-market concept included expectations that workers would be laid off during downturns and reemployed during booms. Therefore, there has been limited use of ALMP simply to keep individuals in employment but relatively more investment in retraining workers for the new economy. Although there was some job sharing for current workers, training continued to be an option for the unemployed. However, although employment declined, there has been less

58 See Mailand 2000. 59 See Martin and Swank 2012. 60 European Trade Union Institute 2012. 250 Part II: Neo-liberalism in major policy domains

‘pain’ than might have been predicted because the Danish model of ‘flexicurity’ was intended to work precisely as macroeconomic events have predicted. In a flexible labour market with few labour-market regulations, firms can hire and fire at will: this flexibility tends to elevate employment during periods of rapid economic growth but depresses employment more rapidly during recessions. Steen Bocian, Chief Economist of Den Danske Bank, noted that, whereas employment in Denmark fell more rapidly than the EU average in 2009, production levels fell in other countries at a similar rate, but labour- market rigidities prevented layoffs.61 In Germany before the crisis, governments sought to delegate ALMPs for the long-term unemployed to the social partners; however, with Hartz IV, proponents recognized that the social partners were not up to the job. Since the crisis, this more Scandinavian approach to ALMP has continued to bolster German workers through the difficult economic times. At the same time, many beneficiaries of the German work programmes have been those already in the workplace because short-term jobs have been used to keep labour in current positions. In the Liberal countries such as the United Kingdom, active labour- market spending has been reduced along with many other types of social expenditure. The Labour Party recently demanded a more targeted approach to the crisis that combines economic patriotism, a targeted industrial policy, and expanded spending on education and training. Moreover, Ed Miliband recognized the historical institutional limitations on British manufacturing to secure what it wanted from the government:62

In my view, a thriving and diverse manufacturing sector is central to the challenges revealed by that crisis . . . Economic patriotism is what governments reach for when they don’t believe firms can compete. And we will never return to those days. But too often opposition to protectionism became an excuse for believing that the best way to help British business was to stand aside entirely. Opposition to protectionism was right. But opposition to industrial activism was wrong. From our government to our culture, we need pride and patriotism if our British firms are to succeed. Patriotism is about an active government using all the means at its disposal to give competitive British firms every chance to succeed . . . Above all, it is about having a

61 See Elmer and Hansen 2010. 62 See Miliband 2012. Neo-liberalism and the working-class hero 251 shared, long-term vision between public and private sectors, involving every department.

Conclusion This chapter suggests that the essential endurance of neo-liberalism is embedded in its capacity for reinvention. The multifaceted nature of liberalism accounts for both its ambiguity and its enduring salience, and this has enabled the perpetuation of neo-liberal ideas through the most earth-shattering moment of economic upheaval since the Great Depression. In the case of ALMP, the concept took hold in the 1990s because of both its political utility and its revolutionary promise. In diverse iterations, it threatened to make labour markets more flexible and insecure for low-skilled workers and to release those workers from the trap of underemployment. Since the global financial crisis, ALMP has sustained its appeal as a mechanism for economic patriotism and for targeted economic stimulus. Policies inspired by liberal ideals can have diverse impacts on social class, and the institutional environment alters the balance of power among the social partners. Thus, ALMPs held the potential to both correct some inequalities among organized labour and to erode the power of the working class. Older forums for industrial relations – although enhancing the power of the working class – could foster sharp subclass divisions. Particularly in the Continental countries, these structures favoured the interests of core manufacturing workers in the export sectors over those employees with marginal skills. Therefore, ALMPs – with an emphasis on increasing the employability of the individual even while reducing worker protections – could either erode worker security with the reduction of passive welfare-state benefits or improve the skills of marginal workers and adjust the power balance between the higher-skilled and lower-skilled members of the working class. The diverse consummation of neo-liberal ideas and their varied class impacts across countries reflect the institutional context. The Nordic countries – with macro-corporatist structures for labour-market negotiations – were better able to realize the revolutionary promise of this neo-liberal idea: policy makers and their social partners focused collective attention on the skill needs of marginal workers, articulated as a guiding principle the individual’s right to work, and used ALMPs to 252 Part II: Neo-liberalism in major policy domains reintegrate those at the edge of the economy. In comparison, the liberal countries – lacking strong institutional capacities within employers’ associations and unions – adopted a much more punitive interpretation of ALMP: without an institutional platform on which to build a dialogue about long-term skill needs, policy makers were unable to generate much support for the broader ambitions of transforming the skills of the truly disadvantaged, and they used the policies to roll back social expenditures.

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Introduction One of the most significant developments in economic theory in recent decades is the emergence of a neo-liberal approach to governing the firm, which has become commonly known as the ‘shareholder’ or the ‘shareholder-value’ model. This approach, which is based on the con- ceptionalization of the firm as a set of contracts between ‘principals’ and ‘agents’, has achieved a dominant position in academic thinking and policy making in the field of corporate governance at the EU level. Most advocates of this approach do not explicitly identify themselves as neo-liberals; nevertheless, the tenets of this approach clearly fit the definition of neo-liberalism offered in the first chapter of this book. The shareholder model is based on a strong faith in the efficiency of markets because it claims that a properly functioning stock market can best measure the value of firms and efficiently allocate capital to the most profitable investment projects. Furthermore, the stock market is a key element in creating a ‘market for corporate control’, which allows ownership and management of underperforming firms to be transferred – if necessary, against the will of incumbent managers and employees – to actors that will restructure the firm to increase efficiency. The shareholder model of governance, it is argued, has positive welfare effects for stakeholders in the firm (including employees) and, therefore, for society as a whole. In contrast with laissez-faire approaches to corporate governance, the shareholder model accepts the need for a strong state role in setting and enforcing rules to enable the stock market to function properly.

The author would like to acknowledge his indebtedness to Laura Horn and Jan Cremers for their analyses of the shift in EU policy making on company law and corporate governance, and to Johannes Heuschmid for his analysis of worker participation in Europe. Special thanks to Daniel Kinderman for extensive comments and presenting this paper on my behalf at a workshop in Paris.

257 258 Part II: Neo-liberalism in major policy domains

In particular, so-called minority shareholders (i.e., those shareholders holding relatively small proportions of stock in a company) must be protected from a host of actors that might exploit information or power advantages to extract value from the firm in their own interests. The shareholder model also contrasts with the broad class of ‘stakeholder’ theories, which value worker participation, state-led industrial policy, and (more recently) environmental protection. Whereas advocates of the shareholder model prefer to grant shareholders a decision-making monopoly in company governance, stakeholder theories generally support the sharing of power with other actors, such as employees, non-governmental organizations (NGOs), and the community (as represented by the state). This chapter focuses on the emergence and persistence of a neo- liberal approach to governing the firm at the European level. This approach achieved a dominant position in the EU relatively recently. The 1970s, 1980s, and 1990s can be characterized, for the most part, as a ‘standoff’ among different national conceptions of the firm, particularly between the United Kingdom and Continental Europe. Most substantial proposals for company law at the European level were blocked during this period. However, the shareholder model gained the advantage in the new millennium. A key event was the European Commission’s appointment in 2001 of an expert group with a decidedly neo-liberal philosophy to come up with recommendations for legislative action in the company-law and corporate-governance areas. Most of this group’s recommendations were endorsed by the Com- mission in the 2003 Action Plan on Company Law and Corporate Governance. In the years leading up to the financial crisis, a surprising number of directives proposed in the Action Plan were passed, most of them with a clear neo-liberal thrust. Following the onset of the financial crisis in 2008, criticism of the EU’s approach has increased, not only from the stakeholder camp – which includes trade unions and NGOs and their academic allies. Nevertheless, the resilience of this paradigm can be seen in the neo-liberal orientation of recent proposals made by European institutions, particularly a new Action Plan published by the Commission in December 2012, which prioritizes a further strengthening of the rights of minority shareholders. The persistence of the neo-liberal approach can be explained by a combination of some of the theses advanced in the first chapter of this book. On the one hand, at an ideational level, the shareholder model remains stronger than its alternatives because the ‘principal–agent’ European corporate governance 259 concept is still dominant within economics and law faculties, which provide almost all of the experts on corporate governance (following the third line of analysis in Chapter 1). Advocates of this approach are currently making a forceful argument that the financial crisis was due to the incomplete implementation of the shareholder model rather than to its weaknesses (following the second line of analysis). In the policy- making world, the shareholder model has the advantage of being a relatively simple paradigm that allows for clear policy recommendations; stakeholder theories, on the other hand, remain too heterogeneous and, for the most part, lack detailed and comprehensive policy recommendations (arguably a combination of the first and third lines of analysis). However, ideational strength alone cannot explain the rise and persistence of the neo-liberal approach to corporate governance at the EU level. The shareholder model was developed in academic circles in the 1970s and 1980s and, in fact, had achieved a dominant position at least a decade earlier in the United Kingdom and the United States than at the EU level. Part of the explanation is the development of a powerful coalition of business and national interests supporting the shareholder model (following the fourth line of analysis). A growing number of investors and businesses have embraced this model, and also neo-liberal ideas have become politically stronger in many EU member states. Although the confidence of the public at large in capitalism has decreased since the crisis, this coalition has not yet been seriously challenged by political forces in favour of a stakeholder approach. This chapter first discusses alternative models of corporate governance – in particular, it contrasts the shareholder-value model with the broad class of stakeholder models. The chapter then discusses the factors that explain the success of the shareholder model on the European level. Finally, the potential for an alternative stakeholder approach is examined, as well as the barriers to this approach, which explain the persistence of the neo-liberal approach.

A neo-liberal approach to corporate governance A widely used definition of corporate governance ‘is the system for directing and controlling the firm’. It involves the definition and allocation of strategic decision-making rights in the firm. It is not surprising, given the concern with power relations and the changing social and economic context over time, that radically different conceptions 260 Part II: Neo-liberalism in major policy domains of corporate governance and its regulation have developed; there have been frequent periods of contestation for dominance in policy. The term ‘corporate governance’ is relatively new, with its first documented use in 1960.1 Embryonic elements of this approach can be discerned as far back as the 1930s, in Berle and Means’s (1932) identification of the problem of the ‘separation of ownership and control’ in the modern corporation and Coase’s (1937) foundations for a contractual view of the firm.2 However, the decisive period for laying the intellectual foundations of a neo-liberal conceptualization of corporate governance was in the 1970s and 1980s, when the fundamental building blocks of this approach were developed and seminal articles were published. In essence, the shareholder model of corporate governance has the following five major elements:

(1) Shareholders are seen as deserving of a monopoly in decision- making rights in the firm. It is argued that this is justified because all other interested parties (e.g., employees and suppliers) are able to protect their interests through contracts. Shareholders, in contrast, face ‘residual risk’; that is, they are entitled to profits only when all other interests are paid off and, in the worst case, they risk a total loss of their investment. (2) So-called minority shareholders (i.e., those shareholders controlling only a small proportion of voting rights) are deserving of special protection because they may be vulnerable to exploitation by large ‘inside’ shareholders who may have access to inside information, multiple voting rights, and so on. For stock markets to function properly, it is argued that minority shareholders must be guaranteed a series of rights including full information about the financial situation of the company, voting rights proportional to the capital they have invested, and the right to call and put items on the agenda of shareholder meetings. (3) The top management of the firm must be paid in a way that its incentives are aligned with those of shareholders. This is because most shareholders do not have the capacity and resources to closely monitor the behaviour of top management. In particular, there is a danger of ‘moral hazard’ – that is, the possibility that top management will use available funds to improve its own welfare

1 See Eells 1960. 2 See Berle and Means 1932 and Coase 1937. European corporate governance 261

(i.e., through private benefits such as corporate jets or ‘empire building’ through acquisitions) rather than to maximize profits. A solution is to award top managers stock or stock options in the company so that they have a direct financial incentive to increase share prices. (4) The composition and functioning of company boards must be structured in a way that it does not simply ‘rubber-stamp’ the decisions of top management. ‘Independent’ directors must have a majority on company boards and on key committees such as auditing and remuneration. They also must have full rights of information and access to impartial external expertise. (5) There must be an ‘open market for corporate control’; that is, it should be possible for investors to buy and sell companies like any other asset. This is particularly important in the case of companies that are underperforming due to bad management and/or shareholders that are not concerned with maximizing shareholder value. Active investors who are willing to buy up the company and install better management should be able to do so – if necessary, through ‘hostile takeovers’ that are against the will of incumbent management, employees, and so on. Management should not be allowed to implement a set of defensive actions designed to thwart hostile bids (e.g., ‘poison pills’).

This shareholder model of the firm contrasts strongly with previous conceptualizations of the firm. Originally, corporations had to be authorized specifically by a charter granted by monarchs or governments, and their permissible activities were clearly stated in the charter. Perhaps the most famous early corporation was the British East India Company, which was granted a fifteen-year monopoly on trade with the East Indies and Africa by the British monarch in 1600. Corporations were regarded with suspicion and closely observed. To the chagrin of many owners, the state retained the right to intervene in the affairs of the company, sometimes quite deeply. One of the key demands of early supporters of the corporation was to free business activity from dependence on the arbitrary behaviour of the state. Over time, however, a more liberal attitude towards the business corporation emerged, and countries began passing legislation allowing the registration of corporations without the specific authorization of the state. In Britain, the key event was the passage of the Joint Stock 262 Part II: Neo-liberalism in major policy domains

Companies Act in 1844; in the United States, this took place shortly thereafter, starting in New Jersey, because company law is regulated at the state level. The passage of such legislation typically ushered in a laissez-faire era for corporations in those countries because there was typically a lack of regulation in other areas, such as financial reporting, competition policy, financial markets, and labour law. The behaviour of firms during this laissez-faire period became increasingly problematic, as many corporations abused their market power in a variety of ways. Corporations also frequently exploited investors – for example, in the use of funds for personal purposes by managers and in not reporting the true financial state of the company. The weak capitalization of many corporations led to mass bankruptcies during economic downturns, which were exacerbated by the fragility of early financial systems. A major discrediting of the laissez-faire model occurred during the Great Depression of the 1930s, which led to increasing regulation of corporations in the public interest. However, national responses varied quite differently, driven not only by the need to recover from the Depression but also by mobilization for World War II and, in many countries, postwar reconstruction. Universally, major steps were taken away from the laissez-faire approach, justified by the need for greater regulation of corporations ‘in the public interest’ and, in many countries, steps towards a greater state role in economic planning, at least in key sectors. The postwar-stakeholder model is a stylized characterization of the type of corporate-governance system that was introduced after World War II, primarily in but not limited to the Continental European countries. Ownership was dominated by long-term ‘patient’ investors with controlling interests in the firm (i.e., with majority voting rights), such as founders/families, the state, banks, and other companies. The market for corporate control could be characterized as closed because various formal and informal mechanisms (e.g., multiple voting rights for dominant shareholders) made it difficult or impossible for outside investors to gain control of the firm. At least in large firms, workers had a medium to strong degree of voice in running the firm through mechanisms such as works councils, collective bargaining, and board- level employee representation. Top managers tended to be paid a fixed salary, perhaps with a small bonus for good performance. Trans- parency to outsiders tended to be low and, for the most part, limited to past financial performance. European corporate governance 263

Interests supporting the shareholder model This approach had a major practical impact on policy making beginning in the 1980s in the United States and the United Kingdom and in the 1990s elsewhere. The approach made particularly strong advances in the wake of major crises and spectacular cases of governance failures because the paradigm offered simple explanations for these failures and clear recommendations on how to avoid them in the future. However, in addition to offering a parsimonious intellectual paradigm, the shareholder model of the firm also advanced due to the strong support it received from powerful interest groups, including the increasingly significant group of institutional investors, which constituted the bulk of the so-called minority investors identified by the approach, investment banks, and other actors involved in the trading and restructuring activity involved in shareholder value; and, finally, a growing number of top managers in non-financial companies who profited from the rising levels of remuneration (including stock-based compensation). Probably the most decisive change in European corporate governance came not as an explicit policy decision related to corporate governance but rather as the unintended consequence of shifts in financial savings and regulation, as well as the growth of multinational companies. This was the massive shift in the ownership structure of companies, away from closely held long-term owners (i.e., founders/families, the state, banks, and non-financial companies) towards fragmented ownership structures composed of ‘minority shareholders’. Minority shareholders, for the most part, are financial investors (i.e., investment funds, pension funds, and insurance companies) pursuing a portfolio strategy – that is, a strategy in which risk is dispersed over small shares in hundreds or even thousands of companies. As a consequence of this dispersal, these investors typically do not hold more than 5 per cent of the shares of specific companies. Many of these investors also follow short-term strategies, buying and selling shares based on their perception of whether the shares will outperform or underperform the stock market as a whole in the near future. The average holding time of shares by this type of investor has dropped to less than a year. Many people have written about this shift.3 The main driving forces for this shift are the following, with the relative weight of each factor varying among countries or even among companies:

3 See Lutz¨ 2002; Deeg 2005; Jackson 2005; and Hopner¨ 2011. 264 Part II: Neo-liberalism in major policy domains r The ‘privatization’ of retirement savings, away from pay-as-you-go first-pillar (i.e., state) schemes to second and third-pillar ‘capital- ized’ schemes.4 This has led to a massive accumulation of wealth at pension funds and other types of financial firms used as retirement vehicles. r Privatization policies by the state, whereby the state has sold off major shareholdings accumulated in the immediate postwar period through nationalization policies or in public utilities built up by the state. The United Kingdom led the way here, but the extent of privatization has been much greater in other countries (e.g., France). r Changes in financial regulation and a shift in the strategies of banks, which has led to a reduction in the shareholdings of banks in large firms (Germany is a particularly prominent example of this). r The ‘succession problem’ in many family-owned firms, in which the second or third generation has different interests than the founder. One example is the Thyssen Steel Company, in which the third generation was more interested in cattle farming in South America than in making steel in Essen. r The rapid growth (and therefore the need to increase capital through attracting outside investors) and/or the merger of many multinationals, which meant the ‘watering down’ of the relative size of shareholdings by ‘insider’ owners. This was caused in part by a shift from national to international strategies by companies and the need to achieve critical mass in international markets as opposed to a single national market. These ‘minority shareholders’ have a different approach to investment in companies than ‘insider’ investors. In particular, they have an interest in the following: r A high degree of transparency in the financial performance of companies, allowing both an accurate judgement on the current financial state of the company as well as its probable performance in the near future. This includes reporting on a quarterly (rather than an annual) basis as well as ‘segmental reporting’ (i.e., breaking down financial reporting by division in diversified firms and by region in geographically diverse firms). r An increase in effective voting power so that minority shareholders can ‘outvote’ insider owners. Continental European

4 For a discussion, see Ebbinghaus 2011. European corporate governance 265

corporate-governance systems typically allowed or did not explic- ity forbid a number of mechanisms that insider owners would use to control a greater proportion of votes in the company than their actual capital investment (e.g., multiple votes for ‘A’ class shares, pyramids, and cross-shareholdings). The motto of minority shareholders in this respect is ‘one share, one vote’; that is, voting rights should be proportional to shareholders’ actual investments in the ﬁrm. r The creation of ‘open markets for corporate control’, which allows activist shareholders to acquire control in underperforming companies and to oust underperforming managers. r ‘Liquid and fair markets’ – that is, the ability to buy and sell shares in companies quickly with as little impact as possible on market price. This requires a whole set of changes in the way that ﬁnancial markets are organized and share price is set, prohibition of insider trading, and other measures. r A reorientation of the way top managers are paid so that they have a strong incentive to take actions that are in the interests of shareholders. The most direct way to do this is to pay top managers with shares and stock options, to make bonuses conditional on increasing share price, and other ways. These changes do not occur automatically with the shift to a minority shareholding structure because existing practices and regulations need to be changed or new regulations need to be created in previously unregulated areas.

The emergence of the shareholder model at the European level The early 2000s ushered in major changes in the EU’s approach to corporate governance. The ﬁrst was a major shift in the understanding of the purpose of EU regulation in this area.5 The previous emphasis was on the encouragement of developing the internal market by using directives for harmonization, which allowed for a degree of standardization of business structure without encouraging regulatory competition among member states. The new approach drew on a more market-based view of the ﬁrm and the proper role of regulation. Share- holders and their quest for greater ‘shareholder value’ were viewed as

5 See Horn 2011 and Cremers and Wolters 2011. 266 Part II: Neo-liberalism in major policy domains

Table 9.1. Company-Law Directives and Year of Approval

Year Directives approved passed Brief description

First Council Directive 1968 Registration/power of 68/151/EEC organs/nullity Second Council Directive 1977 Formation/capital 77/91/EEC Third Council Directive 1978 Mergers of public limited liability 78/855/EEC cost Fourth Council Directive 1978 Accounting 78/660/EEC Sixth Council Directive 1982 Division of companies 82/891/EEC Seventh Council Directive 1983 Accounting 83/349/EEC Eighth Council Directive 1984 Auditing 84/253/EEC Eleventh Council Directive 1989 Disclosure of branch operations 89/666/EEC Twelfth Council 1989 Single-person private limiteds Company-Law Directive 89/667/EEC Directive 2001/86/EC 2001 SE directive Directive 2003/58/EC 2003 Registration/disclosure Directive 2004/25/EC 2004 Rules for takeover bids Directive 2005/56/EC 2005 Rules on cross-border mergers Directive 2006/68/EC 2006 Formation/capital public limiteds (amends second directive) Directive 2007/36/EC 2007 Shareholder rights Directive 2007/63/EC 2007 Independent expert report Directive 2009/101/EC 2009 Registration/power of organs/nullity (replaces first directive) Directive 2009/102/EC 2009 Codification of twelfth directive (single-person private limiteds) Directive 2009/109/EC 2009 Reporting/documentation in divisions and mergers Directive 2010/76/EU 2010 Capital requirements/remuneration in financial institutions Directive 2011/35/EU 2011 Mergers of public limited liability cost (amends third directive)

Source: Author’s research. European corporate governance 267 a key force for driving restructuring activities, including cross-border restructuring, to achieve greater efficiency and competitiveness of the European economy. A key goal was to open up the ‘market for corporate control’ in the sense of making it easier to buy and sell shares and the decision-making rights attached to them, thereby allowing activist investors to drive beneficial changes in company policy and structure, if necessary, against the opposition of incumbent management. The second change was a partial removal of the blockade on proposals touching on decision making in the company, particularly the role of worker participation. This was achieved through a combination of neo-liberal substance in directives combined with the formal protection of worker-participation rights through flexible negotiation and the allowance of a certain number of national options or opt-outs on some directive provisions. The third change, symbolized in the transition from ‘company law’ to ‘company law and corporate governance’, was an expansion of activity to new areas more directly affecting not only decision-making structures but also substantive policies in the firm. These changes in approach were driven by three main factors. The first factor was a change in political tone with the election of a new European Parliament (EP) and the appointment of a new set of Euro- pean Commissioners in 1999. In the elections that year, parties in the social-democratic bloc won less than 30 per cent of the seats in the EP (Figure 9.1). Furthermore, in contrast with previous commissions – in which the key position of Director of the Internal Market Directorate was frequently held by Christian Democrats or the independent but moderate Monti – the outspoken liberal Frits Bolkestein (the Netherlands) took this office. At the same time, parties in both the Christian Democrat and Social Democrat blocs continued a drift to the right that started in the mid-1970s (Figure 9.2). This was associated with a strengthening of business influence in the political system in Europe. A second factor was the growing popularity of the ‘shareholder- value’ model of the company, which had been guiding changes in company law and related areas primarily, but not only in the Anglo- Saxon countries. In the United Kingdom, for example, the so-called Cadbury Committee was established in 1991 in the wake of a number of spectacular failures of governance (including a group of companies owned by Robert Maxwell, Bank of Credit and Commerce Interna- tional, and Polly Peck). 1979

1984

1989

1994

1999

2004

2009 % 0 10 20 30 40 50 60 70 80 90 100

Election results by political group, 1979 to 2009. Left to right:

Far Left CDI or TGI CD / EPP National Conservatives

Socialist Group Non-Inscrits Forza Europa Far Right

Regionalists (inc. Greens) Liberal Democrats Conservatives

Greens Radical Alliance (Liberals) Eurosceptics

Figure 9.1. European Parliament political grouping relative strength, 1979–2009. Source: http://en.wikipedia.org/wiki/European Parliament, accessed on 16 March 2012. European corporate governance 269

Mean CMP left-right index

20 Right

Liberals 10 Christian Democrats 0

–10 Left

–20

–30

1960 1970 1980 1990 2000

Figure 9.2. Preference moves of major party groups. Source: Manow et al. 2004: 17.

A key element is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship.6 Of particular significance in this definition is the con- centration on the shareholder–director relationship. The ‘law-and- economics’ school has developed a large literature focusing on this as the primary problem in the governance of the firm, and it suggested a number of measures to address this problem.7 This approach was hostile to worker participation, even calling the movement for economic democracy an ‘attack on freedom’. This approach also found supporters in many Continental European countries and influenced reforms in a more market-based, Anglo-American direction.8 Athird factor was a new round of corporate failures, precipitated in part by the collapse of the dot-com bubble and its excesses of share price and debt financing. Although the most spectacular collapses took

6 See Cadbury Report 1992: 14. 7 See Jensen and Meckling 1976 and 1983. 8 See Vitols 2005. 270 Part II: Neo-liberalism in major policy domains place in US companies, a number of important European companies were also affected, including the French multimedia company Vivendi in 2002 and the Italian dairy and food company Parmalat in 2003.

Towards a shareholder-driven model of the firm Symbolic of the change at the European level was the increasing use of academic experts in policy making and discourse, most of whom were inspired by the law and economics principle–agent view of the firm. At the encouragement of the EC, the European Corporate Gov- ernance Institute (ECGI) was founded in 2002, which currently has 202 academic members and 42 institutional members (including companies, banks, and associations). The ECGI often provides expert and organizational support for the European Commission, including the organization of conferences on European Corporate Governance and advice on both policy and the state of research. In September 2001, Commissioner Bolkestein appointed the High Level Group of Company Law Experts to fulfill two tasks: (1) to review the highly controversial issue of takeovers because the EP had recently rejected a takeover directive proposed by the Commission; and (2) more generally, to examine the need and make proposals for further steps regarding regulation in the area of company law. The composition of the High Level Group was decidedly close to the business community (Table 9.2). For example, its chairperson was a legal advisor to Unilever and its members included the legal affairs director of the French employers’ federation, the former president of the Italian stock exchange, and a consultant to the British Department of Trade and Industry. Although a few of the members were respected academics – particularly the Director of the Max Plank Institute for Comparative and International Private Law – their academic leanings were decidedly pro-market and inspired by the ‘law-and-economics’ approach. In response to its first task – that is, making recommendations on the controversial topic of a European takeover directive – the High Level Group took a positive view on the desirability of takeovers, including hostile takeovers, as follows:

In the light of available economic evidence, the Group holds the view that the availability of a mechanism for takeover bids is basically beneﬁcial. Takeovers are a means to create wealth by exploiting synergies and to European corporate governance 271

Table 9.2. Members of the High Level Expert Group on Company Law

Name Afﬁliation

Chairman Jaap Winter Professor at the Erasmus University of Rotterdam and legal advisor to Unilever, the Netherlands Jose´ Maria Garrido Professor at the University of Castilla La Mancha, Garcia Spain Klaus J. Hopt Geschaftsf¨ uhrender¨ Direktor Max-Planck-Institut, Germany Jonathan Rickford Consultant for the Department of Trade and Industry, United Kingdom Guido Rossi Former President of the Italian stock exchange supervisory body CONSOB, Italy Jan Christensen Professor at the University of Copenhagen, Denmark (previously a practicing attorney) Joelle¨ Simon Legal Affairs Director, Employers’ Federation (MEDEF), France

Source: Single Market News No. 29 (June 2002), DG Internal Market, Brussels. discipline the management of listed companies with dispersed ownership, which in the long term is in the best interests of all stakeholders, and society at large.9 The High Level Group also criticized the highly uneven situation within Europe, where it was much easier to execute a takeover in countries such as the United Kingdom but virtually impossible in other countries. According to the group, this would justify a directive requiring countries to create a clear framework for takeovers and to dis- courage the use of takeover defences by incumbent management. For example:

In the event of a takeover bid, the ultimate decision must be with the shareholders . . . It is sometimes argued that allowing the board to frustrate a takeover bid can be justiﬁed as a means to help take into consideration the interests of shareholders and other stakeholders in the company, notably the employees. The Group rejects these views.10 Regarding its second task – that is, making recommendations on the general framework of European company law – the High Level Group also took a liberal view. It recommended that the Commission expand

9 See High Level Group 2002a: 2. 10 See High Level Group 2002a: 2. 272 Part II: Neo-liberalism in major policy domains its activities to a wider variety of corporate-governance matters in the interests of strengthening shareholder rights, as follows:

In a proper system of corporate governance, shareholders should have effective means to actively exercise inﬂuence over the company . . . Shareholders focus on wealth creation and are therefore, in the Group’s view, very suited to act as ‘watchdog’ not only on their own behalf, but also, in normal circumstances, on behalf of other stakeholders.11

On the basis of this approach, the High Level Group made a series of specific recommendations, including the encouragement of a greater degree of competition among different national company-law regimes in Europe, as well as creating an alternative for smaller companies to incorporate at the European level (specifically through the European Private Company). The further use of experts was institutionalized through the establishment of two advisory groups that meet on a semi-annual basis. The first group, the European Corporate Governance Forum, was first set up at the end of 2004 and its mandate was renewed in 2008. It included one trade-union–nominated representative, but the remainder were representatives of business or academics inspired by the law-and- economics approach. Parallelling this group was the Advisory Group on Corporate Governance and Company Law. Although there was a certain diversity of opinion among these experts, there nevertheless was a certain homogeneity in the view of the appropriate shape and proper functioning of company law. This was a major influence in political discourse and on policy making in the EU.

Company law and corporate governance Whereas, prior to the 2000s, European Commission proposals were clearly defined as company-law initiatives that dealt mainly with structural issues in the firm, the term ‘corporate governance’ was also taken on board by the Commission, such that its activity field and responsible administrative units were renamed ‘company law and corporate governance’ (emphasis added). These two terms are not identical but rather overlapping in two respects. First, corporate governance uses not only ‘hard-law’ but also ‘soft-law’ instruments, such as recommendations

11 See High Level Group 2002b: 47. European corporate governance 273

12 11

6 5

4 3 No. of Directives

2 1 1 0 0 1960s 1970s 1980s 1990s 2000s 2010s Decade

Figure 9.3. Number of European company-law directives passed, by decade. Source: Author’s research. and codes. Second, due to its focus on strategic decision making, corporate governance overlaps more with labour law – in particular, with securities law – than with company law. However, company law also addresses structural aspects of the firm that do not fall under common definitions of corporate governance. In addition to public support from the High Level Group for expanding its activities to corporate governance, the Commission also experienced pressure from national governments. In September 2002, the Competitiveness Council requested the EC to organize an in-depth discussion on its forthcoming report and to develop – in coordination with member states – an Action Plan for Company Law, Including Corporate Governance. The Competitiveness Council is composed of ministers from EU member states that are concerned with competition policy, industrial policy, and research. An example of a definition fitting this narrow view is the following, used by the Commission in 2003 in its ‘action plan’ on company-law corporate governance:

Corporate Governance is usually understood as the system by which companies are directed and controlled.12 Corporate governance essentially focuses

12 This draws largely on the deﬁnition provided by the UK’s Cadbury Commission on corporate governance in 1992: Corporate governance is ‘the 274 Part II: Neo-liberalism in major policy domains on the problems that result from the separation of ownership and control, and addresses in particular the principal–agent relationship between shareholders and directors13 (emphasis added).

This has turned out to be a very signiﬁcant document because it outlined the new approach of the European Commission and its priorities for action on new directives and other initiatives in the years ahead.

A new approach to ‘national varieties’ and worker involvement Another change in policy was the use of greater flexibility in designing proposed directives relative to the old harmonization approach. One example of this flexibility was a new approach to the issue of worker representation on company boards. Whereas the old approach (e.g., in the proposed fifth company-law directive) was to propose a fixed alternative or ‘menu’ of alternatives for worker-participation structures, the new approach would allow employers and worker representatives to negotiate a customized solution specific to the firm.14 This approach was successfully used to reduce opposition to the European Company Directive, the European Cooperative Society Directive, and the Cross- Border Mergers Directive. Although this approach had the advantage of avoiding differences within the trade union over the proper form of worker involvement, it also had a number of disadvantages regarding employee representation. One disadvantage was the specific thresholds used to define a right to negotiation for workers, generally based on number of employees and the share of employment in different countries. In a number of cases, these thresholds were not met by the companies being restructured (particularly under the Cross-Border Mergers Directive) and therefore resulted in a lower level of worker-involvement rights.

system by which companies are directed and controlled’ (Cadbury Committee 1992). 13 European Commission 2003. 14 This solution was borrowed from the European Works Council Directive, which was passed in 1994. This Directive deﬁned rights for workers in companies meeting certain size and internationalization requirements to negotiate with employers to form a European Works Council, composed of representatives from different countries and embodied with speciﬁc information and consultation rights. European corporate governance 275

Employees on the Board in Europe

Widespread participation rights IS comprising state-owned as well as FI private companies (12 countries) Limited participation rights NO SE mainly state-owned or privatized EE companies (6 countries) LV IE DK No (or very limited) participation LT UK rights (12 countries) NL PL BE DE LU CZ SK FR AT HU SI RO

PT ES IT LI BG GR

MT CY

Figure 9.4. Diversity of employee board-level participation rights in Europe.

A second problem, particularly in the case of European-company legal forms, was the ‘freezing’ of worker-involvement rights when the restructuring was completed. There is evidence that a number of German companies below the threshold for worker participation have reincorporated as European companies without worker-participation rights, and they have subsequently grown above the threshold that would have applied had they remained as German companies. Thus, although ‘protection of worker rights’ is formally provided for in the directives, in practice, this protection is very uneven, with companies exploiting loopholes in the legislation to avoid worker participation. A second example of ﬂexibility is the offering of options to countries in the transposition of EU directives into national legislation. Under the old approach, company-law directives were designed under a harmonization philosophy, thereby intending to deﬁne certain common standards and procedures across member states.15 The new approach,

15 Directives, by definition, offer more flexibility than Regulations, the other main EU legal instrument. Regulations are self-executing; that is, they have direct legal force. Directives, in contrast, do not exercise direct legal force but rather instruct member states to transpose the Directives – that is, implement 276 Part II: Neo-liberalism in major policy domains however, built explicit ‘choices’ or options into the Directives, which member states could exercise when they transposed the directive into national legislation. In the case of the European Company legislation, eight options were provided in the Directive and thirty-two options in the accompanying Regulation to Member States for implementation. Similarly, the Takeover Directive defined a set of options for member states when transposing the directive into national legislation.16 These options allow member states some flexibility in choosing the degree to which company boards can implement takeover defences, as well as in specific rules regarding the takeover procedure. This flexibility helped to meet member states’ concerns that a ‘one- size-fits-all’ approach was being imposed on them, while at the same time allowing the spirit of the directives to be implemented.

An alternative approach to corporate governance: The stakeholder firm The ‘shareholder-value’ model of the firm and the new approach towards corporate governance in the EU has not been without criticism, and, since 2008, this criticism has increased. Key elements of this model are widely seen to have contributed to the financial crisis. In particular, the high levels of management remuneration and their orientation towards short-term performance of the company and/or share price (e.g., through the use of stock options) have received widespread negative publicity. However, other elements and assumptions of the model have also been criticized, not only in the public debate but also in the academic world. For example, an increasing number of academic studies show that mergers and acquisitions in most cases do not result in improved company performance and frequently lead to significant job losses. This challenges a key assumption underlying recent EU policy – namely, that encouraging company restructuring will be beneficial to the European economy. One aspect of contestation of this model takes place at the level of the conceptualization of the firm and its role in society and the

the substance of the Directives through national legislation (or, in some countries and legislative areas, through alternative mechanisms such as agreements among the social partners). Nevertheless, under the old approach, the intent was that the substance of Directives be applied uniformly across member states. 16 See Johnston 2009 and Sjafjell˚ 2009. European corporate governance 277

Total Academics/Individuals Public Authorities/Standard Setters Accountants and Auditors NGOs/Other Users Companies/Preparers

0% 20% 40% 60% 80% 100%

poor/ very poor at least sufficient

Figure 9.5. EU consultation respondents’ attitudes to quality of non-financial disclosure regime in their countries. Source: European Commission 2011: 6. economy. Whereas the shareholder-value/principal–agent model discussed previously defines the key problem of corporate governance as making management work in the interests of shareholders, an alternative approach proposes a much broader definition of the term. This approach has, for the most part, used the terms ‘stakeholder’ and ‘stakeholder model’ to provide a contrast to the ‘shareholder firm’ and ‘shareholder value’. Perhaps not coincidentally, these terms apparently originated in the Anglo-Saxon countries; the major proponents in the United States were Freeman and Blair and, in the United Kingdom, Hutton and the Parkinson/Gamble/Kelly group.17 The Freeman analysis focused on the contribution of a broad range of stakeholders to the firm and the normative need for the firm to consider the interests of these stakeholders.18 This approach, in fact, has been adopted not only by some businesses but also by government agencies; for example, the World Bank formalized guidelines on the identification and consultation of stakeholders affected by specific policies. Blair focused in particular on the role of employees in value creation in the firm and the need for them to be assured that their investments

17 See Freeman 1984; Blair 1995; Hutton 1995; and Parkinson/Gamble/Kelly 2000. 18 See Freeman 1984. 278 Part II: Neo-liberalism in major policy domains in firm-specific human capital will not be exploited by the firm or lost due to dismissal.19 On this basis, the need for mechanisms granting employees power in the firm to protect these firm-specific investments is justified. This approach has had some success in influencing definitions of the meaning of corporate governance at various levels. A broader definition of corporate governance would require a more pluralist view of the governance of the firm, including employees as key stakeholders. Thus, in stark contrast to the definition included in the EC’s action plan on corporate governance, the OECD explicitly included stakeholders in its definition in Principles on Corporate Governance in 1999, as follows:

Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined20 (emphasis added).

The adoption of this broader definition was reportedly due to the intervention of the trade unions through their representation at the OECD level through the Trade Union Advisory Committee (TUAC) and the intervention of specific social-democratic governments. Similarly, the German Corporate Governance Code explicitly men- tions stakeholders, specifically in its definition of the responsibilities of the management board (i.e., the board in the two-tier structure composed of the top full-time managers), as follows:

The Management Board is responsible for independently managing the enterprise in the interest of the enterprise, thus taking into account the interests of the shareholders, its employees and other stakeholders, with the objective of sustainable creation of value.21

The newest Commissioner for the Internal Market, Michel Barnier, who took ofﬁce in 2011 after the election of a new EP in 2010, announced a number of times that he would like to take a different approach than his predecessor, the neo-liberal McCreevy from Ire- land. Barnier is a moderate conservative in the French tradition – that

19 See Blair 1995. 20 See OECD 1999. 21 See German Corporate Governance Code, as amended on May 26, 2010, p. 6. European corporate governance 279 is, with a touch of paternalism and not as antagonistic to state intervention and worker participation. A number of broad-ranging public consultations on company law and corporate governance suggested that a new approach might be taken in this area. However, the new action plan announced by Barnier in December 2012 fell short of these expectations because the plan can be described as incremental adjustment to the shareholder-value approach rather than a radically new stakeholder approach.22 However, the major question faced by critics of neo-liberalism is: What type of approach and what type of specific measures would be needed to support an alternative to neo-liberalism in corporate governance at the EU level? To date, perhaps the most far-reaching effort has been made by trade-union experts and academics closely affiliated with the trade- union movement. Specifically, the GOODCORP network of experts recently published a collection of essays entitled The Sustainable Com- pany: An Alternative Approach to Corporate Governance.23 This book coincided with the European Commission consultation on a Euro- pean corporate-governance framework. This new approach draws on both traditional postwar pluralist models of the firm and newer concerns with sustainability. Key themes in the book include the need for workers’ ‘voice’ in corporate governance and for a binding legislative framework to promote sustainability. Individual chapters address the issues of worker involvement, employee shareholding, sustainability-oriented remuneration, international framework agreements, NGO–trade-union relationships, reforming financial regulation and carbon taxes, and emissions-trading schemes. The book has been positively received by both the European Commission and European trade unions.24 Given the importance of worker participation within the firm for a new approach, the ETUC has also started working on a global approach to this question in EU regulation. Until recently, the question has been addressed in a fragmented way, in the context of specific

22 See European Commission 2012, Vitols and Heuschmid 2012, and Vitols 2012. 23 See Vitols and Kluge 2011. 24 See, for example, the ETUC resolution, ‘The Future of European Company Law: Towards Sustainable Governance’, adopted by the Executive Committee on 6–7 March 2012. 280 Part II: Neo-liberalism in major policy domains directives. Thus, worker representation in company boards has been addressed separately in the directives for a European company (i.e., Societas Europaea), the European Cooperative Society, and the Cross- Border Merger Directive, as well as proposals for directives for the European Private Company and the Cross-Border Transfer of Reg- istered Seat. Information and consultation rights are addressed separately in more than twenty directives on issues such as health and safety, mass layoffs, and transfer of undertakings. The ETUC has emphasized the need for a European minimum standard on information, consultation, and participation.25 A working group is being organized to develop concrete proposals and demands for the implementation of such a standard, possibly through a directive covering all European company legal forms and cross-border situations. Although a similar effort has not yet been made by other actors (e.g., NGOs), an interesting effort entitled the ‘Sustainable Companies Project’ is being carried out by academics (mainly from the field of law) concerned primarily with the environmental (but also social) impact of shareholder value and the current approach to company law in Europe and elsewhere.26 A series of public events is being organized and publications on the subject are planned in the context of this project. In addition to the question of which specific alternative should be pursued, a second question is: How can the necessary political support for an alternative be generated? The recent consultations on corporate governance (specifically on financial institutions and on a general framework) and on disclosure of non-financial information by companies demonstrates a deep division between most of the business community and many of the other respondents (Figure 9.5). For the most part, businesses are satisfied with the current framework and are opposed to mandatory measures and a binding framework in this area. Many of the other respondents are dissatisfied with the current framework; however, there is a lack of consensus on concrete measures and on the specific measures necessary to move ahead. To overcome

25 ETUC resolution, ‘Strengthening Worker Involvement: Minimum Standards for Information, Consultation and Participation in Europe’, adopted by the Executive Committee on 28 April 2011. 26 See Sjafjell˚ 2012. For a description of the project, its activities, and its publications, see www.jus.uio.no/ifp/english/research/projects/ sustainable-companies. European corporate governance 281 the opposition of business to create a binding framework supporting a stakeholder approach to corporate governance, the formation of a broad coalition around a consensus on this model and speciﬁc measures are necessary.

Conclusion The emergence of a neo-liberal EU model of corporate governance in the past decade is a complex phenomenon. Probably the most crucial single driving factor is the shift in the pattern of share ownership, away from long-term insider owners towards dispersed ownership by minority shareholders. These types of owners have very different interests than insider owners, and they have an extensive agenda for regulatory changes that they pursue actively through lobbying and coalition-building. In particular, coalitions with other powerful actors (i.e., investment banks and large law firms) and with the ‘law-and- economics’ school of academics have been important in providing both resources and the ideas supporting a ‘sea change’ in the EU’s approach to corporate governance. The Commission’s emphasis on increasing the role of the market in corporate governance, the explicit expansion of activity from company law to other areas of corporate governance (including the use of soft-law instruments), and the shift from harmonization to encouraging competition among national regulatory regimes are the main elements of a neo-liberal approach to corporate governance. The success of this approach is evident in a burst of legislative activity in the 2000s (i.e., eleven company-law directives were passed and a variety of other measures, such as recommendations, were taken). This success is attributable to not only material factors (particularly the interests of many financial and other companies in the new model) but also ideational factors; the shareholder-value model of the firm witnessed great acceptance in the fields most relevant to corporate-governance policy making (i.e., economics and law). Nevertheless, this neo-liberal approach has not been implemented to the same extent at the EU level that it has in some countries, particularly the Anglo-Saxon countries. Although trade unions and social- democratic parties have become much weaker, at the same time, they have not totally lost influence in the EU. Furthermore, not all conservative parties have had undivided enthusiasm for the neo-liberal model. 282 Part II: Neo-liberalism in major policy domains

Therefore, although relatively weak, protection of worker interests has been taken into account in the new directives, and options have been built in to directives to allow member states to protect some features of their national political economies. Although dissatisfaction with the neo-liberal paradigm has grown among the population at large since the financial crisis, the business community is, for the most part, supportive of the current EU corporate governance regime. The potential for a coalition around an alternative ‘stakeholder’ model of corporate governance exists. However, the work on formulating specific demands and a unifying conceptual approach has only just begun, as has the political work on creating this coalition. Given the complexity and multiple fields of institutions and practices that corporate governance encompasses, a shift away from neo-liberalism cannot be achieved through a ‘single-bullet’ change in regulation. As the most prominent example, changing the behaviour of short-term minority shareholders towards long-term responsible investment cannot be achieved simply by passing a directive. Thus, the persistence of a neo-liberal approach to corporate governance can be explained by multiple factors: the continuing attraction of the shareholder model of the firm, the persistent power of interests supporting the neo-liberal model, and a lack of consensus and political coalition around an alternative conceptualization.

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Jensen, Michael C., and William H. Meckling. 1976. ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,’ Journal of Financial Economics, 3 (4): 305–60. Jensen, Michael C., and William H. Meckling. 1983. ‘Corporate Gover- nance and Economic Democracy: An Attack on Freedom’. In Cor- porate Governance: A Deﬁnite Exploration of the Issues, edited by C. J. Huizenga Harvard Business School NOM Unit Working Paper No. 1983. Available at http://ssrn.com/abstract=321521 or http://dx.doi.org/10.2139/ssrn.321521. Johnston, A. 2009. EC Regulation of Corporate Governance. Cambridge: Cambridge University Press. Lutz,¨ Susanne. 2002. Der Staat und die Globalisierung von Finanzmarkten.¨ Regulative Politik in Deutschland, Großbritannien und den USA. Frankfurt am Main: Campus. Manow, Philip, Armin Schafer,¨ and Hendrik Zorn. 2004. ‘European Social Policy and Europe’s Party-Political Center of Gravity, 1957– 2003’. MPIfG Discussion Paper 04/6. Cologne, Germany. Organisation for Economic Co-opeartion and Development. 1999. Princi- ples of Corporate Governance. Paris: OECD. Parkinson, John E., Andrew Gamble, and Gavin Kelly (eds.). 2000. The Political Economy of the Company. Oxford: Hart Publishing. Sick, Sebastian, and Lasse Putz.¨ 2011. ‘Der deutschen Unternehmensmitbes- timmung entzogen: Die Zahl der Unternehmen mit auslandischer¨ Rechsform wachst¨ ’, WSI Mitteilungen 1/2011: 34–40. Sjafjell,˚ Beate. 2009. Towards a Sustainable European Company Law: A Normative Analysis of the Objectives of EU Law, with the Takeover Directive as a Test Case. Leiden, the Netherlands: Kluwer Law Inter- national. Sjafjell,˚ Beate. 2012. ‘Regulating Companies as if the World Matters: Reﬂec- tions from the Ongoing Sustainable Companies Project’. In European Company Law and the Sustainable Company: A Stakeholder Approach, edited by Sigurt Vitols and Johannes Heuschmid (263–86). Brussels: European Trade Union Institute. Vitols, Sigurt. 2005. ‘Negotiated Shareholder Value: The German Version of an Anglo- American Practice’, Competition and Change 8 (4): 1–18. Vitols, Sigurt. 2012. ‘A Stakeholder Approach to EU Corporate Gover- nance: Waiting for Godot?’ Social Europe Journal. Available at www. social-europe.eu/2012/12/a-stakeholder-approach-to-eu-corporate- governance-waiting-for-godot. Vitols, Sigurt, and Johannes Heuschmid (eds.). 2012. European Company Law and the Sustainable Company: A Stakeholder Approach. Brussels: European Trade Union Institute. European corporate governance 285

Vitols, Sigurt, and Norbert Kluge (eds.). 2011. The Sustainable Company: An Alternative Approach to Corporate Governance. Brussels: European Trade Union Institute. Warntjen, Andreas, Simon Hix, and Christophe Crombez. 2008. ‘The Party Political Make-Up of EU Institutions’, Journal of European Public Pol- icy, 15 (8): 1243–53. part iii Neo-liberalism in comparative perspective

10 The resilience of Anglo-liberalism in the absence of growth: The UK and Irish cases colin hay and nicola j. smith

Introduction This chapter examines the origins, sustenance, and puncturing of the growth dynamic enjoyed by the United Kingdom and Ireland since the early 1990s. Often classified as ‘liberal market economies’, these two economies are particularly well matched for purposes of comparative analysis.1 They share not only a common legacy but also key structural similarities, such as their high levels of trade openness, their dependence on foreign direct investment, their membership in the EU (both since 1973), their flexible labour-market regimes (at least by European standards), their shared ‘liberal’ welfare tradition, and – of course – their common language.2 Yet, there are also notable differences between the two countries – not only in terms of their economic size and relative influence on the international stage but also their rather different and distinctive political traditions. For example, from 1987 onwards, Irish macroeconomic policy has been guided by ‘social- partnership’ agreements between the government and key social and economic interests, which have stood in stark contrast to the British system of free-collective bargaining.3 Given these differences and the path-dependent nature of political discourse, there might be strong reasons for anticipating divergent ideational and institutional responses even to common pressures and imperatives. Yet, as discussed in this chapter, there are striking similarities between the two countries in the development of political discourse and public policy in response to the crisis in recent years. More specifically, the chapter identifies what might be termed an ‘Anglo-liberal growth model’ in both the United Kingdom and Ireland. We use this term primarily as a heuristic device: that is, we do not mean

1 See, for example, Hall and Soskice 2001. 2 See Daly and Yeates 2003. 3 See Hay and Smith 2005.

289 290 Part III: Neo-liberalism in comparative perspective a unified, deliberate, or even conscious vision held by policy makers but rather the somewhat more intangible and complex product of a series of unanticipated consequences of policy choices. Yet, the effects of the ‘model’ are no less real for this, for what it ultimately constituted was a consumer boom fuelled by growing private indebtedness dependent on the nurturing and sustenance of a low-inflation–low- interest-rate equilibrium – and this, we argue, was fatally flawed. The chapter seeks to gauge the ideational and institutional preconditions of Anglo-liberal growth and the character, paradigmatic significance, and effectiveness of the interventions made in the attempt to shore up the UK and Irish economies in crisis. We suggest that it is difficult to see, in the UK case, how sustained economic growth can be restored in the absence of a completely new growth model and, in the Irish case, without the cleansing of the long-standing export-oriented growth model of the Anglo-liberal trappings it has acquired in recent years. In so doing, we ask: If the Anglo-liberal growth model is indeed broken, then why is it that we continue to see the resilience of neo- liberal ideas in both the United Kingdom and Ireland? Our answer lies in the third line of explanation set out in the first chapter of this volume: that is, in the power of ideas and discourse. Particular discursive configurations cannot be expected to neatly ‘match’ the material reality that they purport to represent precisely because policy makers do not have direct access to material reality; rather, ‘reality’ is constituted through ideas and discourse. As we discuss herein, it is through discourses of neo-liberal globalization that British and Irish policy makers alike have come to view both the broader political– economic context and the specific decision-making alternatives available to them. Globalization, in short, has come to be articulated and understood as setting clear limits on what is possible in economic, social, and political terms (e.g., the need to reduce ‘excessive’ wages and welfare expenditure). In the wake of the financial crisis, it is not surprising – although it is certainly dismaying – that potential solutions have been articulated in terms of these preexisting logics (despite mounting criticism and contestation). Indeed, as we argue, the crisis has been understood not as a problem with growth but rather with debt and, as such, as a problem that only ‘more’ liberalism can solve. As such, the crisis to date has proved not paradigm-threatening but rather paradigm-reinforcing. The resilience of Anglo-liberalism in the absence of growth 291

The Anglo-liberal growth model: The very idea of it . . . It is and has undoubtedly proved all too tempting to attribute more agency than is genuinely warranted to the development of the ‘new financial’, ‘privatized Keynesian’, or – more simply – ‘Anglo-liberal’ growth model that has characterized the United Kingdom and – albeit to a lesser extent – the Irish and other Anglophone economies since the early 1990s. In the process, there also is a danger of assuming too clear and conscious a conception among policy makers of the ‘growth model’ that, in effect, they were constructing. We argue that such a growth model can be detected in each case (albeit in a rather purer form in the United Kingdom) and that ideas are crucial to explaining the origins and consequences of Anglo-liberal growth. However, we do not see policy makers as animated by a vision of the growth model that they were building. Indeed, in both the United Kingdom and Ireland, Anglo-liberal growth was certainly stumbled upon serendipi- tously; in Ireland, it is an altogether more recent creation.4 As is now widely acknowledged, in both cases it was largely consumer-led and private-debt-financed – although, once established, it was undeniably supported by high levels of public expenditure. Yet, it was the easy access to credit – much of it secured against a rising property market – that was its most basic precondition. This served to broaden access to and improve affordability within the housing market, driving a developing house price (and, in Ireland, a construction) bubble. Once inflated, this was sustained and increasingly nurtured by interest rates that remained historically low throughout the boom. In essence, it appeared as if a virtuous cycle in which the preconditions of growth were mutually reinforcing had been established – that is, the ‘Anglo-liberal growth model’. Sustained low interest rates and a highly competitive market for credit provided both the incentive and the opportunity for first-time buyers to enter a rising market and for established homeowners to extend themselves financially, by either moving up the housing ladder or releasing the equity in their property to fuel consumption. There was little incentive to save; instead, consumers were increasingly encouraged to think of their asset purchases as investments that they might cash in to fuel their consumption in retirement, as the state withdrew from pension provision, or in times

4 See Crouch 2009 and Hay 2009. 292 Part III: Neo-liberalism in comparative perspective of economic difficulty or unemployment. Crucially, this had a direct and immediate impact on consumption – what has been termed the rise and demise of ‘privatized’ or ‘house-price Keynesianism’.5 The Keyne- sian analogy cannot be taken too far but it does highlight the key link among (private) debt, aggregate demand, and consumption. Whereas traditional Keynesianism viewed public spending as the key to raising and generalizing demand, so privatized Keynesianism demands a similar role to be performed by private debt, typically secured against rising property prices. As long as a low-inflation–low-interest-rate equilibrium persisted, a virtuous and seemingly self-sustained growth dynamic was established. The difficulty, however, is that whereas classical Keynesianism is predicated on the existence of the business cycle, privatized Keynesianism simply assumes that there is no business cycle. This means, in turn, that (as an implicit paradigm) it neither counte- nances the need for nor is capable of providing any macroeconomic stabilizers. Arguably, this is precisely what happened in the heartlands of Anglo-liberal growth: the United States in 2006 and the United Kingdom and Ireland in 2007. However, before discussing the details of that process, it is important to reflect on the implications – particularly for ideational approaches to institutional analysis – of the proceeding observations and, in particular, the status of the concept of ‘model’ in our argument. As previously suggested, there is a certain danger in the use of the term ‘growth model’ that a rather more conscious conception in the minds of policy makers – in effect, a vision – is implied than was, in fact, ever the case. This is not our argument. Indeed, although we think that the term has considerable value in institutionalist political economy, we think that value is largely heuristic. In effect, we are suggesting that had, for example, UK policy makers held in their minds a conscious conception of the sources of growth functioning within the political economy, it may well have taken this form. We do not imply that from the outset they held such a view; neither – perhaps more significantly – do we imply that Anglo-liberal growth (for as long as it lasted) was the product of (and may therefore be explained in terms of) the positing by political elites and their advisers and the subsequent

5 See Crouch 2009; Hay, Riihelainen,¨ Smith, and Watson 2009; and Watson 2010. The resilience of Anglo-liberalism in the absence of growth 293 attempt to instantiate and institutionalize a concerted programme, plan, or vision – that is, a conscious model. Coming from ostensibly constructivist institutionalists (such as our- selves), this might be seen as something of a theoretical concession – for does it not imply a more limited explanatory role for ideas than is typically associated with such a position? We suggest not. It does, however, suggest a rather more complex process of causation – although one in which ideas still feature prominently – than is often assumed to be posited by ideational analysts and constructivist institutionalists. Typically, constructivists point to (and are seen to point to) the importance of paradigm shifts and other moments of ideational innovation as path-shaping phases of institutional change – with a conscious and often highly politicized and contested change in ideas that heralds, in effect, a more incremental process of institutional change. However, this is by no means the only way in which ideas influence institutional evolution and economic performance. No less constructivist, we would contend, is to see the emergence of Anglo-liberal growth (and, indeed, its retrospective recognition by policy makers as a model) as the product of a series of unanticipated consequences of policy choices made consciously but principally for other reasons. The constructivist part is to emphasize the ideas that actors held at the time they made such choices and to perceive such ideas as causally significant for the choices they made. In other words, our explanation for the emergence of Anglo-liberal growth as a model (in our terms) in the United Kingdom and as an element of a model in Ireland is a constructivist one – but one that does not entail policy makers in Ireland or the United Kingdom setting out to build an Anglo-liberal growth model. Stated in such terms, it becomes clear that the origins of Anglo- liberal growth in the United Kingdom and Ireland are profoundly neo- liberal in character. For the ideas informing the key policy choices that led – inadvertently and unintentionally yet inexorably – to a growth dynamic sustained by escalating consumer credit were all deeply market-conforming. Consider, for instance, the United King- dom. As discussed previously, the key decisions were those relating to the austere and fiscally conservative spending plans of the incom- ing New Labour administration in 1997, its orthodox neo-monetarist decision to cede operational independence to the Bank of England to 294 Part III: Neo-liberalism in comparative perspective set interest rates (as well as the remit it gave to the Bank’s Monetary Policy Committee), and – prior even to that – the decision to liberalize UK financial markets in the 1980s. In ideational terms, what all of these decisions share is a profound confidence in the superiority – all things being equal – of private, market, or quasi-market mechanisms over collective, public, or state action or intervention. In other words, they are all neo-liberal. In this respect, the Anglo-liberal growth model is irredeemably neo-liberal – although it is by no means the only growth model that a neo-liberal disposition might countenance. However, there is a further complexity here – in effect, a form of ideational feedback. The Anglo-liberal growth model may not ever have been consciously designed – there is no evidence in either case that it was; indeed, there is ample evidence that it was not. However, this did not prevent it from becoming, in time, part of the self-understanding of political elites of the economy that they were responsible for governing. The UK case is again very interesting. From about 2000 and particularly in the 2001 budget, there is clear evidence that UK policy makers – notably in the Treasury – were consciously aware of the role played by private debt secured against rising property (and other asset- class) prices in the growth dynamic of the economy. The conscious, planned, and strategic turn to a programme of ‘asset-based welfare’ and the rationale offered for it demonstrate a clear understanding of the Anglo-liberal growth model (if not, alas, its fragility) in terms similar to those we present in this chapter. Similarly, that the Bank of Eng- land from 2006 onwards chose, in effect, to ignore its anti-inflationary mandate in its anxiety to sustain house-price inflation (at the expense of consumer-price inflation) is a clear indication of its awareness – at least at this stage – of the centrality of the housing market to growth in the UK economy.6 As this suggests, although the Anglo-liberal growth model was never consciously planned, since 2000 or 2001 (at least in the United Kingdom), it has been consciously sustained – in the face of its own inherent fragility.

Resilient liberalism in the United Kingdom and Ireland This, of course, begs the question: How is it that liberal ideas have remained so resilient in the wake of the crisis? An important issue

6 See Hay 2009. The resilience of Anglo-liberalism in the absence of growth 295 here is what can be understood by the term ‘crisis’. Does ‘crisis’ refer only to a material fact – an economic and exogenous ‘reality’ – that policy makers respond to politically, or can ‘crisis’ be understood as a discursive construction through which certain political projects are forged? Stated another way, is it that we should treat discourse (‘liberal ideas’) and material reality (‘the crisis’) as separable variables (such that we may use one to explain the other?’), or can we instead see discourse as constitutive of material reality? In other words, are liberal ideas separable from the crisis (i.e., to explain or be explained by it), or are liberal ideas internal to the crisis itself, a part of the way in which the crisis becomes articulated and understood – indeed, a language through which ‘crisis’ becomes recognized as such? We argue that liberal ideas are resilient ‘despite’ the crisis because it is precisely through liberal ideas that the crisis has been constructed politically. This is why the ‘crisis’ has proved to be not paradigm-challenging but rather paradigm-reinforcing, for it has been constituted politically in both Ireland and the United Kingdom as a crisis of debt rather than as a crisis of growth. The response to a crisis of debt is, of course, austerity and deﬁcit reduction. From an ideational perspective, this should not be surprising – paradigm shifts are rare and, in order for one to arise, there must be a credible alternative paradigm on offer. There is, in effect, a problem of ideational under-supply here; the old (neo-liberal) paradigm must be more seriously discredited before any genuine alternative (even the reversion to an earlier Keynesianism) is considered credible. The historical parallels suggest that when such paradigm shifts arise, they often take at least a decade to occur. To explore this discursive continuity further, it is useful to consider the historical context of the current Anglo-liberal paradigm in both countries.

Constructing Anglo-liberalism In the United Kingdom, the ascendancy of neo-liberalism in the late 1970s and 1980s was predicated on the success of the New Right in mobilizing widespread perceptions of a crisis of overload and ungovernability.7 This paved the way for a neo-liberal offensive

7 See Hay 2004. 296 Part III: Neo-liberalism in comparative perspective informed, to varying degrees, by monetarism and supply-side economics. With the mid to late 1970s constructed as a period of persistent and increasingly acknowledged state and economic failure, the success of Thatcherism lay in its ability to construct the moment of the 1970s as a moment of crisis. This was achieved by selectively ‘narrating’ the symptoms of state and economic failure into a coherent and simple discourse of crisis. The crisis of the 1970s as constructed, and lived, in Thatcherism’s terms was a crisis of ungovernability and overload, a crisis of an overextended state. Yet, the Thatcherite state project was not so much a response to the actual contradictions and failures of the British variant of the Keynesian welfare state as a response to the opportunistic and simplistic construction placed on such failures by the New Right. Consecutive Thatcherite governments consistently failed to address the enduring structural weakness of the British economy while stripping the state of the strategic capacity for economic intervention.8 Yet, despite such contradictions in the Thatcherite project, the 1980s and early 1990s also witnessed a profound ideological transformation in the British Labour Party, which came to accept – and, under Tony Blair’s leadership, actively to promote – the terms of a post–Thatcher yet nonetheless Thatcherite settlement.9 This was also forged through a narrative of crisis – the crisis of the ‘Old Left’ – in order to establish the need for the modernization of the party to legitimate the content of the ensuing process. As we argue in detail elsewhere, central to this new paradigm was globalization as a (discursive) logic of external economic compulsion.10 New Labour’s political economy, in opposition and then in government, was consistently situated with respect to globalization – as a pragmatic response to the constraints it imposes. Globalization, then, became a (rare) unifying theme of New Labour’s discourse. The non-negotiable character of this external imperative was effectively summoned to establish the need for modernization. In ofﬁce, it was deployed to similar effect with respect to a range of British institutions and to establish the necessity of a wholesale rejuvenation of the ‘European social model’. Indeed, a key theme of this discourse was the notion that globalization exposes all institutions, from the local to the EU level, to an exacting competitive audit. Consequently, globalization was invariably presented as the context with respect to which

8 See Hay 2004. 9 See Hay 1999. 10 See Hay and Smith 2005. The resilience of Anglo-liberalism in the absence of growth 297 the success of a succession of modernization initiatives, at various levels, should be adjudicated. Thus, neo-liberal economics were, in effect, normalized and necessitated by New Labour, for an ongoing agenda of neo-liberal reform was articulated as a condition of sustained economic growth and competitiveness in an economically interdependent world. The Irish case is subtly different because stark liberalism has never characterized Irish policy discourse, even during the 1980s.11 Indeed, the abandonment of indicative economic planning notwithstanding,12 Irish public policy remained explicitly informed by Keynesian ideas into the late 1970s and early 1980s. Both in government and in opposition, Fianna Fail´ had explicitly rejected the monetarist agenda adopted by the Fine Gael coalition (and, indeed, the British government) at this time. As Charles Haughey argued to the Dail´ in 1981: ‘Mone- tarism takes no account of the social degradation, of the waste of human talent and potential, of the hardship and misery that unemployment involves. On the contrary . . . monetarism uses unemployment as a weapon of economic management’.13 This commitment to Keynesian ideas – which had characterized Irish public policy since the late 1950s – was not to last, however. Rather, the 1980s represented a period of ideational shift. The political climate witnessed something of a transformation in 1981–1982, as worries about unemployment gave way to alarm about the rate of public borrowing.14 Yet, there was little in the way of a consensus between the two main parties, Fianna Fail´ and Fine Gael, about how to tackle this concern.15 Although both emphasized budgetary targets, little progress was made in reducing the current budget deficit.16 Yet, some new thinking had been occurring behind the scenes. The role of the National Economic and Social Council (NESC) is identified as particularly significant.17 In its 1986 report, ‘A Strategy for Development’, the NESC identified the

11 See Smith 2005. 12 Irish policy makers had experimented with economic planning since the adoption of the Programme for Economic Expansion in 1958, which aimed to ‘re-define the objectives of economic policy in the light of present-day and probable future conditions’ (Government of Ireland 1958: 7–8). 13 See Haughey 1981. 14 See O’Conner 2002: 164. 15 See Mac Sharry and White 2000. 16 See Kennedy, Giblin, and McHugh 1988. 17 See, for instance, Mac Sharry and White 2000, O’Donnell 1999, Sweeney 1999, and Taylor 2005. 298 Part III: Neo-liberalism in comparative perspective national debt as the central policy issue but also pointed to the need to create a broad-based consensus in order to address it.18 This report provided both the momentum and the theoretical foundations for a return to macroeconomic bargaining.19 After the collapse of the Fine Gael/Labour coalition in 1987, Fianna Fail´ secured a minority government under Charles Haughey, who articulated the need for consensus in terms of a narrative of crisis. As he told the Dail´ in 1986: ‘The present crisis is . . . comprehensive and total. It is felt everywhere. It permeates every sector of our national life’.20 The embedding of this discursive project into a political programme – that is, the negotiation of social partnership leading to the Programme for National Recovery – marked both the beginning of the end of crisis in Ireland and the start of a new era of Irish politics.21 It is within this context that ideas about competitiveness (and, with them, a set of submerged neo-liberal premises about the efficiency of deregulated labour markets and the attractiveness of tax havens) increasingly came to the fore in Ireland.22 In ‘A Strategy for Devel- opment’, the NESC identified the fundamental problem with Ireland’s economy to be the low level of national output.23 Only by achieving economic growth, it was argued, could Ireland address its high unemployment levels. Crucially, the NESC emphasized the need to enhance Ireland’s international competitiveness in order to achieve economic growth. As the report stated: ‘It is the internationally traded sectors, embracing enterprises which compete on overseas markets and those which compete with imports on the home market, which comprise the locomotive of growth’.24 This emphasis on competitiveness was embraced in all subsequent social-partnership agreements. In a vein similar to New Labour, this did not entail a normative commitment to neo-liberal ideology – indeed, Irish policy makers would frequently and explicitly reject this – and yet neo-liberal economics became, in effect, normalized and necessitated in Irish public-policy discourse. Although a need for social justice was explicitly and consistently articulated, this was ultimately presented as contingent on and subordinate to competitiveness. Competitiveness was the more urgent priority and, indeed, the means to the end of social justice–a‘precondition for the pursuit of

18 See NESC 1986. 19 See O’Donnell and Thomas 2002. 20 See Haughey 1986a: 1162. 21 See Taylor 2005. 22 On neo-liberal premises in competitiveness discourse, see Hay 2012. 23 See NESC 1986. 24 See NESC 1986: 147. The resilience of Anglo-liberalism in the absence of growth 299 all other economic and social goals’.25 As we argue elsewhere, this ele- vation of competitiveness as the principal objective of economic policy, to which all else must be rendered accountable, was intimately associated with the appeal to the external economic imperatives unleashed by globalization.26 During the height of the ‘Celtic Tiger’ in the 1990s – and, indeed, once economic growth began to lessen – globalization was consistently articulated as an intransigent force that must be harnessed to fulﬁll Ireland’s full potential. For instance, as Bertie Ahern argued at an international conference in 2007: ‘The proﬁle we now enjoy in this globalisation era is a dynamic, prosperous and high-participation economy . . . Competition for foreign direct investment is relentless and global ...whilewehave come a long way and are proud of what we have achieved, we have no plans for resting on our laurels any time soon’.27

The re-nationalization of Keynesianism: A paradigm shift? And then it all went wrong. In the United Kingdom, as the crisis began to unfold – and with Gordon Brown now at the helm – there appeared to be signs of a putative paradigm shift. Indeed, it is striking how it became credible, for a while, to pose the question of whether the public rescue of the banking sector heralded the return to an era of Keyne- sian economics.28 Although this proved short-lived, the brief return to the language of Keynesianism is nonetheless interesting.29 What it represented was, in effect, a form of inter-paradigm borrowing. In certain respects, it was reminiscent of UK economic policy making in the mid to late 1970s. As the Labour Government of Jim Callaghan sought to deploy monetarist techniques in an attempt to shore up the prevailing Keynesian growth model in the mid 1970s, so that of Gor- don Brown sought to make use of a quasi-Keynesian (as distinct from more classically Keynesian) repertoire of techniques in the attempt to shore up the existing growth model. However, this is the key point – both episodes of inter-paradigm borrowing were characterized by the attempt to stabilize the existing model and its attendant paradigm. As such, they ultimately both remained internal to the paradigm; neither,

25 See Government of Ireland 1997. 26 See Hay and Smith 2005. 27 See Ahern 2007. 28 See, for instance, King 2009 and 2010. 29 Although, for instance, see Marsh 2009. 300 Part III: Neo-liberalism in comparative perspective as is now clear, heralded an imminent paradigm shift. This was, in effect, ‘foul-weather Keynesianism’ – that is, a dipping into the Keyne- sian repertoire of techniques in recession, only for such techniques to be abandoned if, as, and when growth returned to the UK economy. Indeed, the tragic irony is that in their perhaps understandable desire to signal to the markets a clear intention to restore balance to the public accounts, such techniques were abandoned in favour of public austerity and deficit reduction long before any recovery was firmly established. In Ireland, too, the initial response of the Fianna Fail–led´ government was to deploy Keynesian techniques, with budgetary targets for 2008 including spending increases of more than €1.7 billion (with nearly €960 million for welfare supports), and the 2009 budget similarly entailing a special welfare package of €515 million, which contributed to a general government deficit of just over €12 billion.30 However, as in the United Kingdom, this experiment in ‘foul-weather Keynesianism’ was not to last. In April 2009 – with the Republic’s budget deficit now ‘the worst in Europe’31 – the government dramatically unveiled an emergency budget in order to raise €1.8 billion from increased taxation and to save €1.5 billion from spending cuts.32 Subsequent budgets continued on this path, including a four-year plan of tax hikes and spending cuts announced in December 2010.33 Crucially, these measures saw Fianna Fail´ preside over the collapse of social partnership. In September 2008, in the wake of the crisis, the social partners signed a Transitional Agreement as a means to ‘provide certainty and stability during a period of great change and difficulty’.34 However, this soon broke down, with an albeit aborted strike called by the Irish Congress of Trade Unions (ICTU) for March 2009 on grounds that employers and the government were not adher- ing to the National Wage Agreement. By December 2009, the General Secretary, David Begg, had declared social partnership to be ‘dead and buried’35 and, although the government subsequently agreed to freeze pay cuts, Budget 2011 was condemned by the ICTU as ‘utterly lacking in any sense of the common good’ and as ‘an assault on the weakest’.36

30 See Cowen 2007 and Lenihan 2008, respectively. 31 See BBC ‘News At One’, 7 April 2009. 32 See Times Online, 30 September 2008. 33 See Lenihan 2010. 34 See Cowen 2008. 35 See Irish Times, 7 December 2009. 36 See Irish Congress of Trade Unions 2010. The resilience of Anglo-liberalism in the absence of growth 301

Such developments took place against a backdrop of mounting criticism of and opposition to the government on a variety of fronts, including massive public outcry over the welfare and wage cuts and serious breakdowns in party discipline.37 Although it is no surprise that the cuts proved enormously unpopular, the government undoubtedly compounded matters by failing to offer a convincing narrative of the crisis and a clear attribution of responsibility. For, despite Fianna Fail’s´ claims to have taken ‘bold, decisive and innovative steps to manage our way through the crisis’, it sought to consolidate, rather than challenge, the existing model and the paradigm underpinning it.38 The Celtic Tiger had been constructed in terms of Ireland’s ability to compete under conditions of neo-liberal globalization, and the response to the crisis was in and through this lens. As Taioseach Brian Cowen argued in May 2010: ‘The lesson we need to take from [the recession] is that we are in a competitive global marketplace and soft option solutions are not going to provide the basis for sustainable growth and the improvement of living standards’.39 As such, the crisis and the response to it were couched in terms of the preexisting growth model – the very growth model over which Fianna Fail´ had presided. As the ICTU rather aptly stated in its document, ‘Shifting the Burden: Why the Govern- ment Wants to Load the Cost of the Collapse onto the Less Well Off and Why Their Plan Will Just Make Things Worse’: ‘Like disciplines of a dead faith, they cling grimly to the wreckage instead of starting over with a new vision’.40

Re-inﬂating the bubble This brings the discussion to the political implications of the bubble burst and ensuing recession. In the United Kingdom, the Labour Party government had a rather ‘better’ recession than might have been anticipated, but – having failed to restore stable growth by the time of the election – this did not prevent it from being replaced in ofﬁce by those who claimed to be able to do better. This, too, became the fate of the Irish government in February 2011, when Fianna Fail´ suffered the worst defeat of any incumbent in the history of the Irish state.41 As

37 See, for instance, Irish Times, 27 March 2010. 38 See Fianna Fail´ 2010. 39 See Cowen 2010. 40 See Irish Congress of Trade Unions 2009. 41 See Reuters, 26 February 2011. 302 Part III: Neo-liberalism in comparative perspective discussed herein, it is no easy task for either government to deal with the economic situation bequeathed to it – but, arguably, it is not made any easier by the ideas that animate economic thinking today in either the Conservative Party or Fine Gael. Cameron’s Conservatives and their Liberal Democrat coalition partners are neither carriers of an alternative economic policy-making paradigm nor do they offer an alternative growth model. They do not differ from their Labour Party counterparts in either respect; nevertheless, there are significant differences in emphasis between the parties on economic policy. First, although they have not explicitly denied that they would have engaged in the same public underwriting of the banking sector, the Conservatives have been consistently ‘queasier’ about the Keynesian connotations of such deficit financing: the active role for the state as financial guarantor of last resort that was implied and the consequent ‘ratcheting up’ of public debt. Their natural inclina- tion, it would seem, remains to invoke a ‘moral-hazard’ objection to the bailing out of private institutions. The Conservatives refer to the recession as a crisis, but they do so in a particular way. For them, it is a debt crisis – ‘Labour’s debt crisis’ – and that, of course, implies that the solution to the crisis is to restore balance to public finances.42 This does not place them significantly at odds with the previous government; however, it is certainly a rather different emphasis. Yet, it is by no means the only or perhaps the most significant difference between the parties. It is surprising, perhaps, that the Conservatives have been far more sanguine about the degree to which the United Kingdom’s growth model is broken. The economic chapter from their 2010 manifesto opened with a stark question: ‘Where is the growth to come from?’ That was precisely the right question but, three years on, the answer remains elusive. For Labour, it seems, any return to growth rested on resuscitating the old growth model, whereas for the Conservatives, it was very clear that this would not suffice. As their manifesto went on to state:

[W]e cannot go on with the old [growth] model . . . built on debt. An irre- sponsible public spending boom, an overblown banking sector and unsustainable consumer borrowing on the back of a housing bubble were the features of an age of irresponsibility that left Britain so exposed to this

42 See Cameron 2010 and Conservative Party 2010. The resilience of Anglo-liberalism in the absence of growth 303 economic crisis. They cannot be the source of sustainable growth for the future.43

At some level, this was almost certainly correct, but there was – and remains more than three years on – no clear sense of what is to be done. It is clear that the United Kingdom must make the transition to a new growth model based on saving rather than borrowing, investment rather than consumption, a balance-of-trade surplus rather than the existing deficit, and a reduced role for financial services. Yet, how this is to be achieved remains unspecified. There is, in effect, an open disavowal of Anglo-liberal capitalism in favour of something more closely resembling Modell Deutschland.44 Restated in such terms, the stark disparity between the extent of the transformation implied and the policy instruments required to achieve it (i.e., almost exclusively tax incentives) is cruelly exposed. The problem, in the end, is simple: the Conservatives and their coalition partners disavowed, then as now, the type of intervention (and, indeed, public investment) necessary to secure any such transformation. The same might be said for Ireland. Both in opposition and in government with the Labour Party, Fine Gael has sought to use the crisis as a means to distance itself as much as possible from Fianna Fail´ – an obvious step to take, perhaps, but it is something that Fine Gael has struggled to achieve throughout the history of the Irish party system.45 Certainly, Fine Gael has lost few opportunities to criticize Fianna Fail’s´ approach to the crisis: as Enda Kenny stated it in his ‘Nomination of Government’ speech: ‘[W]e will make sure that “what was done” will most certainly not be done again’.46 What Fine Gael has, on the whole, failed to do, however, is to question either Fianna Fail’s´ approach to growth or, indeed, the foundations of the Celtic Tiger itself. Of course, this is perhaps unremarkable, given that Fine Gael was in power during the early years of the economic boom (i.e., 1994 to 1997). However, despite its claims to be the bearers of genuine change, Fine Gael continues to offer precious little in the way of an alternative economic paradigm. To the contrary: the solution for recovery, it seems, is more of the same: that is, further adaptation to the forces of neo-liberal

43 See Conservative Party 2010: 3. 44 A model whose own imminent demise, of course, was famously pronounced more than a decade ago (see, especially, Streeck 1997). 45 See Smith 2005. 46 See Kenny 2011c. 304 Part III: Neo-liberalism in comparative perspective globalization aligned to deﬁcit reduction. Most tellingly – and despite enormous pressure from the EU to do otherwise – Fine Gael remains ‘unequivocably committed’ to the 12.5 per cent rate of corporation tax.47 An irony here is that – as a number of commentators have noted – Ireland’s low rate of corporation tax is not, in fact, the critical concern for foreign investors; rather, it is education.48 It need hardly be noted that the government’s continued commitment to the former is at the direct expense of the latter.

Conclusion In conclusion, it is important to return to the issue with which we began – the viability, sustainability, and long-term stability of the liberal market economies. Although the term is – as we endeavour to demonstrate – something of a misnomer (in that the crisis we have experienced, although it has ultimately proved globally contagious, had more endogenously Anglo-liberal origins), the ‘global financial crisis’ invites and requires a thorough reappraisal of the institutional durability of the liberal market economic order. The analysis developed herein suggests that contrary to the pervasive varieties of capitalism perspective, comparative advantages are not institutionally given.49 Rather, they are better seen as the product of the dynamic and politically contingent interaction between the specific institutional configurations that characterize a political economic regime (e.g., a variety of capitalism), on the one hand, and the growth model or models with which it is aligned, on the other hand. Such interactions, as the preceding analysis demonstrates, are rather more fluid, dynamic, and potentially volatile than was previously assumed. Moreover, it is credible, we suggest, to think that the same basic institutional architecture (such as would be seen conven- tionally to define a variety of capitalism) might be aligned with a great variety of different and potentially incompatible growth models. Growth models, in other words, may vary among cases of a common variety of capitalism – with the stability of the case in question relating less to the variety to which it belongs (and the institutional complementarities that underpin it) than to the

47 See Kenny 2011a. 48 See Kirby 2010a and Smith 2005. 49 See Hall and Soskice 2001. The resilience of Anglo-liberalism in the absence of growth 305 interaction between its institutional configuration and the growth model to which it is aligned. If this is true, then there yet may well be hope for Europe’s liberal market economies – for the exhaustion of the Anglo-liberal growth model on which they have both drawn need not necessarily entail the demise of their liberal-market economic order. That said, our consideration of the Irish and UK cases generates rather different expectations for these liberal market economies in the years ahead. Despite superficial impressions to the contrary and the seemingly prevailing economic orthodoxy, the prospects for the United Kingdom, we suggest, are decidedly bleaker than they are for Ireland. The United Kingdom developed perhaps a purer form of the Anglo-liberal growth model than any other liberal market economy (the United States included). Consequently, the extent of the transition required to place it on a new growth trajectory is all the more considerable. The United Kingdom has, in effect, lost all of its growth model as, in their different ways, all the principal parties now accept. However, it has not found an alternative, and the transition to an alternative – if, as, and when one can be identified – is unlikely to prove to be a rapid or painless process. Although there is, then, something of a cross-party consensus on the need for a manufacturing-led rebalancing of the economy, the impediments to this are considerable: a long-standing balance of trade deficit, persistently low levels of investment in human and physical capital, and the punitive commercial lending spreads that have opened up as banks sought to recapitalize (crowding out the investment in additional capacity that might sustain such a rebalancing). In each of these respects, the prospects for the Irish case are more optimistic. Crucially, the Anglo-liberal component of Irish growth was never as high as in the United Kingdom – with an ultimately unsustainable housing, consumer, and construction bubble at least inflated on the back of a more robust, deep-seated, and sustainable manufacturing-led export-growth strategy. Moreover, Ireland enjoys a sizeable balance-of-trade surplus, high levels of inward foreign direct investment, and persistently high levels of investment in human and physical capital. This makes the task of restoring a stable growth dynamic to the Irish economy in the years ahead somewhat less oner- ous. Nevertheless, the basic challenges are, in effect, very similar: (1) to re-secure a steady supply of credit from the banking sector, and 306 Part III: Neo-liberalism in comparative perspective

(2) to steer such credit lines away from the housing market and the consumer economy towards those export-oriented sectors of the economy targeted to form the basis of a pared-down growth model. This involves cleansing the existing hybrid growth dynamic of its Anglo- liberal elements rather than devising and managing the transition to an entirely new growth model. What makes this a more difﬁcult task is that it entails a more regulatory, developmental, and coordinating role for the Irish state. This, of course, will be no easy task – particularly in light of the constraints posed by membership of the Eurozone. However, this suggests a seemingly perverse conclusion. For Ireland, at least, the solution to the demise of Anglo-liberal growth may well be to supplant Anglo-liberalism in favour of a more coordinated approach to export-led economic growth. In other words, now may very well be a good time for Ireland to reposition itself as a coordinated market economy. That would indeed entail a paradigm shift.

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Introduction Within the literature on comparative capitalisms, Germany and Swe- den are often perceived as paradigmatic cases of ‘coordinated market economies’, in which economic success has rested on non-market forms of organization.1 At the same time, coordination in the two countries is achieved in different ways through the Bismarkian or Nordic welfare-state traditions and the differential importance of sector versus national-level industrial relations. Likewise, both countries have undergone substantial liberalization in recent decades, reﬂecting attempts to open markets and transform the role of the state away from intervention and towards a neutral regulator of markets. Neo-liberal ideas and discourse have had a role in these transformations in both countries despite the fact that both could be considered as least-likely cases for liberalization due to strong non-liberal institutions. In Sweden, neo-liberal ideas have obtained a surprising level of dominance in public debates;2 similarly, German policy makers have promoted the virtues of more liberal capital markets and emphasis on shareholder value.3 However, the recent ﬁnancial crisis could be expected to shatter the relative strength of neo-liberal ideas and discourses, prompting a return to non-liberal forms of economic policy. This chapter argues that such a return to ‘non-liberalism’ has not taken place so far. Rather, neo-liberal ideas and discourse demonstrate a surprising resilience in the face of ‘real-world’ problems that could be understood to seriously challenge neo-liberal theories about the

1 See Hall and Soskice 2001. 2 See Blyth 2002 and Ryner 2004. 3 See Jackson 2003.

313 314 Part III: Neo-liberalism in comparative perspective role of the state in the economy and the superiority of markets as a social-ordering principle. In this chapter, we demonstrate that liberalization has worked by simultaneously adopting market-creating reforms as well as embedding them within wider political compromises within which key groups seek to preserve or adapt market-taming institutions. In this way, the specific patterns of liberalization in both Sweden and Germany reflect the similarities and differences in their nationally specific forms of corporatism. The resilience of liberalism can be explained, perhaps ironically, by the political consensus around the selective nature of liberalization itself. More precisely, we show that three factors help to explain the continuity of neo-liberalism after the crisis. First, the two countries recently experienced relatively successful macroeconomic performance, increasing the legitimacy of the neo-liberal reform path. Second, despite the salience of neo-liberal ideas and policies, recent reforms cannot be seen as purely neo-liberal policies. Rather, Ger- man and Swedish reforms typically mix neo-liberal measures with measures following the traditional institutional ‘logic’ in each country – that is, they are characterized by corporatist arrangements and/or state intervention. Third, most policies were formulated and/or implemented using corporatist policy-making channels. Neo-liberal policies were often negotiated among the social partners and reflected compromises among them; in many cases, they were supported by both right- and left-wing parties. This further increased the legitimacy of neo-liberal ideas but also made it more difficult for the main political forces in both countries to distance themselves from these policies during the crisis. The longer-term influence of neo-liberalism on institutional change can explain why such ideas have become deeply embedded in both countries and therefore are difficult to change. We begin by examining the immediate reactions to the crisis in the two countries in order to assess whether post-crisis policy measures can be interpreted as a return to more traditional non-liberal ideas or whether we observe – to the contrary – a continuing reliance on neo-liberally inspired discourse, ideas, and policies. Then, before concluding, we turn to the Swedish and German cases, respectively, and analyse the ideational foundations of support and opposition to liberalization by different actors. Germany and Sweden in the crisis 315

The resilience of neo-liberal ideas in Germany and Sweden The global financial crisis originated in 2007, beginning in the United States and spreading to Europe. Many observers see this biggest crisis since the 1930s as the culmination of a new type of financialized capitalism emerging in recent decades.4 The liberalization of financial markets and resulting global financial crisis reflect a wider movement of intellectual, bureaucratic, and political discourses towards neo-liberalism in recent decades.5 It therefore has been argued that the crisis may sound the ‘death knell’ for neo-liberal ideas, whereby free markets are self-correcting forces for efficient outcomes. In fact, neo-liberalism has experienced a surprising ‘non-death’ because governments are so strongly entwined within the neo-liberal project and support the vested interests of the financial sector within it.6 This section examines the reactions to the crisis in Germany and Sweden in order to assess whether there was, indeed, a break with neo-liberally inspired policies. The global economic slowdown was quickly felt in Germany and Sweden. Sweden reported negative GDP growth of −0.61 per cent for 2008, whereas Germany grew slightly (+0.99 per cent). In 2009, the two countries’ economies shrunk by −5.33 and −4.79 per cent in Sweden and Germany, respectively – both worse than the OECD average of −3.41 per cent. Although only Germany had to bail out several banks, both countries adopted stimulus packages to alleviate the impact of the global downturn. These packages were large by OECD standards (i.e., 2.8 per cent of GDP in Sweden and 3 per cent of GDP in Germany, compared with a 2.5 per cent OECD average). The composition of the packages reveals interesting differences in the two countries’ economic-policy priorities. In Sweden, a larger proportion of the stimulus package involved investment in the information and communications technology (ICT) sector through spending on science, research and development (R&D), and innovation (i.e., 0.29 per cent of GDP compared to 0.1 per cent in Germany). Sweden’s stimulus package also contained measures to make venture capital available to small- and medium-sized enterprises (SMEs) and to alleviate cash- flow problems through tax breaks. No similar measures were adopted in Germany.7 Germany’s stimulus package was directed more towards

4 See Krippner 2011. 5 See Turner 2009 and Mudge 2008. 6 See Crouch 2011. 7 See OECD 2009. 316 Part III: Neo-liberalism in comparative perspective infrastructure investment and education: 0.5 per cent of GDP in infrastructure, which compares to 0.27 per cent in Sweden, and 0.6 per cent of GDP in education, which compares to 0.016 per cent in Sweden. In addition to economic stimulus, different policy measures were adopted in other areas. Sweden pursued income-tax reductions and increased central-government grants to local governments. Also, the Swedish government reversed some of the extensive changes made to the unemployment insurance (UI) system in 2007. Indeed, the 2007 reform had increased UI contributions by a factor of three for some employees, leading to large numbers exiting the UI system (i.e., as many as 500,000 between 2007 and 2008).8 Moreover, following a clearly neo-liberally inspired ‘work-first’ principle, the centre- right government’s reform had strongly limited the eligibility criteria, reduced the coverage rate to 70 per cent of the last salary after two hundred days, and shortened the coverage period to a maximum of three hundred days. In reaction to the crisis, some of these reforms were attenuated in 2009 to alleviate pressure on the unemployed. For example, certain rules were abandoned, including the length of time a person had to work before being eligible for unemployment benefits.9 German policies, by contrast, focused more strongly on maintaining employment. Germany’s unemployment rate increased by only 0.7 per cent (i.e., from 7.1 per cent in 2008 to 7.8 per cent in 2009), compared to an OECD average of 3 per cent, and it fell to 5.5 per cent in 2012.10 Although the strength and rapid recovery of German exports can help to explain this result, the positive development of the labour market must also be explained by measures adopted to favour the retention of labour by companies, such as subsidies for working on a short-term contract. The number of employees in short-term arrangements was approximately 100,000 in 2008 but increased to 1,144,000 in 2009, before gradually shrinking to approximately 502,000 in 2010 and 147,000 in 2011.11 Company surveys from 2009 reveal that 42 per cent of firms adjusted employment through hiring freezes, 31 per cent reduced working time, and 24 per cent used short-term work. Along with other measures, only 13 per cent of firms reduced their

8 See Anxo 2011: 462. 9 See Anxo 2011. 10 See Eurostat, available at http://epp.eurostat.ec.europa.eu/statistics explained/ index.php/Impact of the economic crisis on unemployment, accessed on 23 September 2012. 11 Available at http://de.statista.com/statistik/daten/studie/2603/umfrage/ entwicklung-des-bestands-an-kurzarbeitern, accessed on 23 September 2012. Germany and Sweden in the crisis 317 core employment levels.12 Unlike the extensive use of early-retirement schemes during German unification, adjustment during the crisis took place largely by adjustment of working hours and use of labour on atypical employment contracts.13 Sweden aimed its policies less towards maintaining employment levels through public support or subsidies, and weekly working times remained relatively stable.14 The Swedish government supported different supply-side active labour-market policies (ALMP) (e.g., match- ing measures and work experience opportunities) but did not seek to directly support greater job stability. The social partners were left to negotiate employment adjustment at the firm level. The social partners extensively used Job Security Councils to supplement the role of the public employment agencies and to help redundant workers quickly find new work.15 The two countries’ policy responses reflect longer-term institutional legacies. German employers were able to cooperate with works councils to retain their highly skilled labour force and maintain productive capacities with short-term public support, while also taking advantage of the last decade of liberalization of atypical employment to adjust their buffer of part-time and temporary employees. Sweden focused on negotiated external numerical flexibility combined with corporatist negotiations and ALMPs aimed at helping people quickly find new jobs.16 The use of Job Security Councils, for instance, indicates that elements of the traditional corporatist Swedish model, based on bipartite negotiations rather than state intervention, are still very much alive. Indeed, Sweden’s postwar model until the 1970s relied on rather liquid labour markets in which industrial restructuring was actively favoured by both employers and employees and facilitated by the state through measures that provided workers who lost their job with generous support.17 During the 1970s, relatively strong job- protection reforms were introduced under the first Palme government, which made layoffs more difficult. The neo-liberal orientation of policies in recent years has led to a return to rather more liquid labour

12 Available at http://de.statista.com/statistik/daten/studie/72808/umfrage/ massnahmen-von-unternehmen-in-der-wirtschaftskrise, accessed on 23 September 2012. 13 See also www.oecd.org/germany/44855721.pdf. 14 See Anxo 2011. 15 See Anxo 2011: 453. 16 See Anxo 2011. 17 See, for example, Pontusson 1992. 318 Part III: Neo-liberalism in comparative perspective markets, although the legislation of the 1970s has not (yet) been formally amended.18 Also, tellingly, contrary to previous phases of low growth, the Swedish government did not react to the strong increase in unemployment by creating public-sector jobs. On the contrary, Swedish public-sector employment further decreased during the crisis and reveals the emergence of a more liberal approach and departure from the past social-democratic model of using public-sector job creation for achieving the goal of full employment.19 Similarly, Germany broke with its past Christian Democrat model of labour- market adjustment based on externalization, whereby publicly funded early-retirement schemes were heavily used to protect core employees. Although the state continues to have an important role in adjustment policies through short-term work, post-crisis policies reflect a more liberal focus on pursuing higher levels of employment and flexibility for firms on the basis of extensive deregulation of atypical employment, wage restraint, and growing wage inequality. Whereas post-crisis commentators praised the pragmatic interventions of the government, the dominant discourse recast the crisis as a re-normalization of market forces, portrayed government intervention as antithetical to freedom, and even increasingly refocused blame on rising public debt.20 Simi- larly, critics of the neo-liberal strands of the German economics profession became more vocal but have yet to widely influence change within the economic discourse.21 Despite deep slumps in 2009, both countries emerged from the crisis as relative ‘winners’. They recovered more quickly than many other countries – and did so without a major reform of economic policy, let alone a Polanyian-like turn towards re-regulation. In 2010, Ger- many and Sweden had growth rates of 3.63 and 5.54 per cent, respectively, whereas the United Kingdom grew by only 1.25 per cent and the United States by 2.85 per cent. During the decade before 2009, Germany’s growth was sluggish at, on average, 1.10 per cent annually but increased every year between 2003 and 2009. Sweden grew, on average, by 2.28 per cent per annum between 2000 and 2009 and hence grew faster than the United Kingdom (i.e., 1.65 per cent), the

18 See Nycander 2010. 19 See Anxo 2011: 451; cf. Heclo and Madsen 1987 and Iversen and Wren 1998. 20 See Hartz 2012. 21 See debates in the Handelsblatt, available at www.handelsblatt.com/themen/ VWL. Germany and Sweden in the crisis 319

United States (i.e., 1.91 per cent), and the average OECD country (i.e., 1.79 per cent).22 Although there is not necessarily a causal link between the relatively good performance during the 2000s or quick recovery and neo-liberal policies,23 the temporal coincidence of the two may at least lead to a positive perception of such policies. In summary, reactions to the crisis in both countries reveal a complex mixture of neo-liberal measures (e.g., tax cuts to stimulate domestic consumption) and more interventionist measures (e.g., making access to UI easier and subsidizing short-term work). The following two sections analyse the longer-term trajectory of institutional change in Sweden and Germany and discuss how the mixing of neo-liberal and non-liberal policy elements has been a hallmark of reforms in both countries.

Sweden

The politics of (neo-)liberalism in Sweden: Business power and social-democratic volte-face Sweden is undoubtedly the paradigmatic case of social-democratic capitalism, with a strong political continuity since the 1930s and extensive ‘social engineering’ to counterbalance the private economy and market mechanisms through a developed welfare state and strong role for trade unions. This model is often associated with the ideas of Gosta¨ Rehn and Rudolf Meidner in the late 1940s and 1950s, but it goes back to earlier attempts to reconcile a reformist branch of Social Democ- racy with quasi-Keynesian (but, in reality, Wicksellian) economic ideas, notably associated with Gunnar Myrdal and Bertil Ohlin.24 Despite the strong institutionalization of non-liberal ideas of economic and social policy, liberalism has witnessed a strong resurgence since the late 1970s. Two groups of actors were crucial:

22 See OECD 2012. 23 Indeed, Germany and Sweden’s quick recovery can at least be partly attributed to good fortune relative to the product mix of the export sector, continued growth in main export markets (i.e., China, Brazil, and India), and favourable macroeconomic conditions (e.g., low interest rates and a weakening exchange rate in Germany due to the devaluation of the euro). However, the Swedish recovery, to a greater extent, was related to increasing domestic consumption following income-tax cuts rather than exports as in Germany’s case, which hints at a positive impact of the crisis measures adopted (see Anxo 2011). 24 Cf. Ryner 2004 and Hellden´ 1990. 320 Part III: Neo-liberalism in comparative perspective

(1) the Swedish Employers Association (Svenska Arbetsgivare Foreningen¨ [SAF], now SvensktNaringsliv¨ [SNS]); and (2) the ‘reformist wing’ of the Social Democratic Party, notably around the 1980s Finance Minister, Kjell-Olof Feldt, and Ingmar Carlsson, who became Prime Minister after Olof Palme’s assassination in 1986. The SAF began an extensive publicity campaign to promote neo-liberal ideas among the Swedish population. This campaign mainly used the SAF think tanks, SNS and Timbro, and aimed at influencing public opinion through the quality media and the academic discipline of economics.25 Academic economists in Sweden also experienced a ‘neo-classical turn’ after the late 1970s. The influential economist Assar Lindbeck changed his stance from a Keynesian approach to monetarism and rational-expectations theory by the early 1980s. The new generation of young economists followed Lindbeck and pushed this transformation even further towards fully neo-classical economics.26 The two developments dovetailed because the SNS also had an important role in giving the new generation of economists an effective platform for their ideas. In particular, SNS Chief Economist Hans Tson Soderstr¨ om¨ was a major influence in promoting a new monetarist understanding of monetary policy, known in Sweden as ‘Normpolitik’.27 By the 1990s, neo-liberal ideas arguably attained a status of absolute dominance.28 Similarly, the main newspapers in Sweden were clearly influenced by the neo-liberal ‘ideas offensive’ and increasingly framed articles in a pro-market manner.29 The ‘neo-liberal offensive’ by the Swedish employers’ organization had far-reaching implications for corporatist institutions. Indeed, increasingly using publicity campaigns rather than negotiations with the state and trade unions made consensual corporatist relations more difficult, and this weakened tri-partite institutions considerably. This undermining of corporatism on the employers’ side must be viewed in the context of a certain radicalization of the trade-union movement during the 1970s. Indeed, from the late 1960s onwards, an increasing dissatisfaction with the existing system began to be felt among the members of the main blue-collar trade-union federation (i.e., Landsor- ganisationen i Sverige [LO]).30 This led to a series of wildcat strikes during the late 1960s, which ultimately led to a certain shift to the

25 See Blyth 2002 and Ryner 2004. 26 See Blyth 2002: 216. 27 See Blyth 2002. 28 See Ryner 2004. 29 See Boreus 1997. 30 Cf. Pontusson 1992 and Swenson 1989. Germany and Sweden in the crisis 321 left – first in the LO but then also in the governing social-democratic party Sveriges socialdemokratiska arbetareparti (SAP). As a result, the Labour government adopted a series of laws and proposed laws during the early 1970s that brought into question the historical balance between employers and employees in Sweden, which relied on a non-interventionist stance of the state in affairs pertaining to employment and working conditions. Thus, laws were adopted that increased employee participation in firm-level decision making and job protection was increased substantially.31 More important, a proposal was elaborated to establish ‘wage earner funds’, which constituted a form of profit sharing with employees and would have led, in the long run, to socialization of Swedish companies. These legislative measures adopted in the mid 1970s by the Palme government sparked the employer side into action.32 In 1977, one year after adoption by the parliament of the new job-protection and co- determination laws, the SAF declared the death of the 1938 Saltsjobad¨ agreements – that is, the foundational corporatist agreements that had led to an extended period of industrial peace in Sweden.33 The SAF also underwent an internal restructuring, which mainly witnessed a replacement of people close to the Handelsbank – which is one of the two major owners in the Swedish ownership spheres – with people closer to the Wallenberg family, the second major owner group.34 The Wallenberg approach was much less conciliatory and led to strong opposition to the more interventionist social-democratic policies and more antagonistic relationships with trade unions.35 Speaking in 1991, one trade unionist from the metalworkers union commented on this transformation in the following terms:

People [in the SAF] who supported the ‘Swedish Model’ have been replaced by spokesmen for the market . . . The SAF is emphasizing political opinion formation rather than taking responsibility for wage formation . . . Neo- liberals, who have the US and the UK as their ideal . . . don’t give a damn about wage differential and inequality is increasing at a catastrophic rate.36

However, the employers’ offensive would not have created any real results in terms of policy outcomes in a context of social-democratic hegemony without some support from the governing party. Here, the

31 Cf. Schnyder 2012a. 32 Cf. Blyth 2002. 33 See Blyth 2002: 213. 34 Cf. Hogfeldt¨ 2005. 35 See Ryner 2004. 36 Quoted in Blyth 2002: 213, footnote 43. 322 Part III: Neo-liberalism in comparative perspective role of the reformist wing of the SAP is crucial. Since the late 1960s, a new type of thinking has evolved within the SAP. Although the ideas remained, at first, close to the precepts of the Rehn–Meidner Model (RMM), the social-democratic politicians – in particular, the younger generation within the ministry of finance – began to justify their arguments in a more utilitarian way than previously.37 During the 1980s, this emerging utilitarianism went together with a change in the content of ideas as well and led to leading Social Democrats embracing neo- liberal ideas (notably Deputy Prime Minister and then Prime Minister Ingvar Carlsson, Finance Minister Feldt, and Undersecretary of State in the MoF Klas Eklund). It therefore would seem that Sweden has experienced a remarkable and sweeping ‘neo-liberalization’, which did not even stop at the social- democratic party. However, despite this remarkable evolution, actual policy changes are more ambiguous than this ideological dominance of neo-liberal ideas would suggest. We argue that this can be explained by the existence of certain countervailing powers within the Swedish polity. Indeed, at least two important collective actors resisted, to some extent, the spread of neo-liberal ideas and rhetoric. First, parts of the trade-union movement remained opposed to much of the neo-liberal agenda despite increasing acceptance during the 1990s. Indeed, since the adoption by the SAP of the neo-liberally inspired so-called Third Way policies in the 1980s, tensions between the SAP and the trade unions (notably, the LO) have increased.38 The SAP started to adopt quasi-monetarist policies and promoted the liberalization of financial markets as well as tax reforms in favour of business. The SAP’s pro-business turn led to an increasing divide with trade unions. Sec- ond, the Swedish electorate posed another barrier to full-fledged ‘neo- liberalization’. Popular support for the tax-financed universal welfare state has remained high and has forced both SAP and centre-right governments to maintain rhetorical support for the welfare state.39 It is remarkable that the SAP-led Persson government lost the elections in 2006 to a centre-right alliance, mainly due to its bad record in terms of unemployment and because the bourgeois Alliance for Sweden managed to define itself as the defenders of the welfare state.40 Indeed, neo-liberal policies do not seem to have been rewarded by the Swedish

37 See Ryner 2004. 38 See, for example, Belfrage and Ryner 2009. 39 See Blyth 2002: 246; cf. Steinmo 2010. 40 See Agius 2007. Germany and Sweden in the crisis 323 electorate, at least until the most recent election in 2010. Thus, the Carlsson government lost the elections in 1991 with an historically low percentage (i.e., below 40) after what arguably had been the most clearly neo-liberal era in Swedish history.41 Certainly, the context of an acute financial and monetary crisis between 1990 and 1994 – which, incidentally, was mainly caused by the quick liberalization of financial markets since 1985 – may explain the Carlsson government’s down- fall. However, even the decidedly neo-liberal policies of the centre-right Carl Bildt government that came to power in 1991 led to an electoral defeat in 1994. Again, the Bildt government’s neo-liberal programme was not translated into policies in any pure form. Indeed, the social- democratic opposition at the time put pressure on the government by defining itself as defenders of the welfare state in opposition. This led to tensions between centrist and more right-wing elements in the bourgeois coalition, which had the effect of diluting the more radical neo-liberal reform proposals.42 Therefore, Swedish governments that followed relatively radical neo-liberal policies were rarely rewarded by the Swedish electorate. On returning to power in 1994, the SAP continued many of the neo- liberally inspired liberalization policies of its predecessors but focused rhetorically on reassuring the population that the welfare state would remain untouched.43 According to this interpretation, Sweden during the second half of the 1990s is an interesting case in which neo- liberalism was stronger in actual policies than in public discourse. In this respect, Sweden does not fit the second line of explanation or neo-liberal resilience in Chapter 1 of this volume, whereby a radical neo-liberal discourse is combined with more pragmatic policies. In Sweden, due to the still relatively strong public support for certain features of the traditional system, neo-liberal public discourse was rather more muted, but policies remained clearly neo- liberal in nature. A somewhat different interpretation, however, is that neo-liberal reforms – albeit important – were more limited in certain sectors of the Swedish model than in others. Regard- less, this situation appears to have changed in recent years. Steinmo quotes survey data showing that solidaristic welfare provision through tax-funded universal welfare services has lost support among the

41 See Ryner 2004. 42 See Belfrage and Ryner 2009: 270. 43 See Blyth 2002: 236. 324 Part III: Neo-liberalism in comparative perspective

Swedish population for the ﬁrst time.44 This suggests that the neo-liberal publicity campaign that began in the 1970s and was carried by the SAF/Svenskt Naringsliv has started to reach the population, not only the elite. If so, the Swedish model may become less stable, thereby opening the door for more radical reforms and electoral strategies focusing on neo-liberal programmes. Indeed, the era of the centre-right coalition Alliance for Sweden governments led by leader of the centre-right ‘Moderate Party’ Fredrick Reinfeldt seems to indicate, in different respects, a new level of neo-liberalization in Sweden. Reinfeldt ﬁrst came to power in 2006 and was re-elected in 2010. Both discourse and actual policies have become more blatantly neo-liberal during this period than was the case, for instance, during the late 1990s.45 The privatization of state-owned companies – even in times of depressed share prices – is a case in point; other examples include far-reaching privatization programmes in the health system. To be sure, these are not necessarily new, but the discourse around them seems increasingly open to focusing on the neo-liberal credos of ‘choice’ and ‘competition’ than previously. Even during and after the crisis, neo-liberal ideas seem remarkably resilient, as discussed herein. It is also interesting that in Sweden, there is a relatively recent prece- dent regarding the resilience of neo-liberal ideas after a major crisis. Thus, the crisis of 1991–1994, which was the result of the rapid liberalization (notably, of credit markets) during the second half of the 1980s, did not lead to any questioning of such neo-liberal ideas. On the contrary, the power shift from the Social Democrats to the centre- right Bildt government had reinforced the strength of neo-liberal ideas and rhetoric.46 Hamilton and Rolander attributed this resilience in the 1990s to the strong dominance of neo-liberal ideas within the community of academic economists.47 Indeed, they argued that in Sweden by the early 1990s, there was no alternative to neo-liberal ideas. Yet, the following subsection shows that the resilience also must be viewed not only in a context of hegemony of neo-liberalism. Alternatives – albeit increasingly marginalized – continued to exist (e.g., among trade- union economists). However, one of the strengths of neo-liberal ideas is precisely how they blended with other ideas and were implemented

44 See Steinmo 2010. 45 Cf. Schnyder 2012a. 46 Cf. Hamilton and Rolander 1993. 47 See Hamilton and Rolander 1993. Germany and Sweden in the crisis 325 in subtle ways, which makes them strongly engrained – albeit not in any pure form – in the institutional setup of the country.48

Neo-liberalism and policy reform The complexity of the process through which neo-liberalism progresses is shown in Table 11.1, which schematically summarizes institutional change in different domains of the Swedish economy. The changes in different domains of the ‘Swedish model’ vary in both extent and even the general direction. For instance, in industrial relations and even more so in industrial policy, state intervention has remained stable or even increased in recent years. In other domains, however, the shift towards a more market-based system has been extensive, notably regarding welfare provision and the financial system. Table 11.1 also illustrates that the timing of the reforms varied markedly among areas. Thus, the most important legal changes in industrial relations took place during the 1970s before the era of neo-liberalism. These changes, however, had spillover effects on industrial relations more broadly and led to important changes in the following years – notably, the abandoning of the centralized peak-level wage bargaining. In terms of ‘neo-liberalization’ or deregulation, the earliest significant changes took place in the financial sphere, where deregulation began in the early 1980s and was practically complete by the late 1980s.49 In other areas, reforms were more tentative, less extensive, and happened later. Welfare reforms certainly introduced important qualitative changes but were not unambiguously neo-liberal with regard to most aspects of the welfare system, and retrenchment remained limited.50 Finally, certain domains exhibit a remarkable absence of neo-liberal reforms. In particular, changes in corporate governance have certainly been extensive in terms of firm ownership, in which foreign ownership has increased to an important extent.51 However, at the level of formal legal change, the Swedish insider-oriented company law has not radically changed, much less indeed than in other countries.52 In the domain of industrial policy, Sweden was traditionally characterized by an absence of any explicit state intervention.53 The state

48 Cf., for example, Belfrage and Ryner 2009. 49 Cf. Reiter 2003. 50 See Bergh and Erlingsson 2009. 51 See Henrekson and Jakobsson 2012. 52 See Schnyder 2012b. 53 See Pontusson 1992. Table 11.1. Institutional Reforms in Sweden, 1979–2009

Direction of Change and Examples of Sphere Typology Major Reforms Timing

Financial systems Bank-based (indirect owners) but Shift towards market finance 1983–1989 state-dominated (tight regulation, • Deregulation of credit market: removal public sector as most important of restrictions on bank lending lender) → Banks and markets • Liberalization of capital movements • Facilitation of equity issuing by non-financial companies Corporate governance Insider-dominated → Some elements Moderate legal change; increasing 1993–2005 of shareholder orientation ‘diversity’ of models in practice • Adaptation of company law and related laws to EU directives • Limited increase in minority shareholder protection (MSP) Industrial policy Market-based → Increasing state Active policy to support ICT start-up 1990s involvement to support ICT sector companies • Tax bias against SMEs removed • Increased public R&D spending • Policies aimed at supporting SMEs Industrial relations Bipartite corporatism → Increasing • 1970s increasing interventionist state 1974–1976 state intervention (1970s) and and employment protection and segmentation (1990s) but signs of co-determination laws some re-coordination (1997) • Demise of peak-level bargaining → 1990s Firm-level or sector-level collective agreements • 1997 ‘Industrial Agreement’ introducing pattern-bargaining system Education and skill State-dominated, social partners More market-based education and higher 1990s creation absent from vocational training skills → Some increase in company • Reintroduction of apprenticeships involvement • Private initiatives by companies: more firm-specific and higher skills Welfare state State-dominated → Limited • Marked increase in private welfare 1990s and 2000s retrenchment but extensive provision privatizations and abolishing of • Some retrenchment (unemployment state monopoly benefits, sick pay) • Major pension reform → Partial privatization • Workfare measures

Source: Adapted from Schnyder 2012a. 328 Part III: Neo-liberalism in comparative perspective did inﬂuence economic structure indirectly through the corporate-tax system and through credit controls that favoured large physical capital- intensive companies over small and less capital-intensive companies. Yet, unlike other European countries, the Swedish state did not choose winners and construct ‘national champions’. In this respect, industrial policy has become rather more interventionist since the 1990s, with a more active role of the state in promoting certain types of industries – notably the knowledge-intensive ICT and biochemical industries. Overall, then, the transformation of the Swedish model in recent years deﬁes simplistic descriptions of ‘neo-liberalization’. The processes of change have been complex, incomplete, and – to some extent – even contradictory.54 The ‘messy’ nature of the process and outcome of neo-liberalization is, in part – as previously mentioned – due to the fact that neo-liberal ideas were not promoted by a single, coherent, collective actor. Rather, different actors (e.g., SAF, Timbro, SNS, and the reformist wing of the SAP) promoted partly different ideas using different means (e.g., publicity campaigns, newspaper articles, and scholarly articles and reports). All of these actors and media mediated, to some extent, the content of the ideas that were disseminated. Moreover, despite an increasing dominance of neo-liberal ideas, they were not uncontested (e.g., by parts of the union movement). In combination with persisting corporatist institutions – albeit in some cases in considerably weakened form – the variety of actors and preferences involved led to different compromises that then led to policies that mix neo-liberal, market-based elements with more traditional policies of non-market coordination. This is illustrated, for instance, by the far-reaching pension reform. It was elaborated on during the 1990s in a context of crisis, and detailed legislation was adopted under the SAP government in 1998. This legislation constituted a cross-party compromise, which contained major concessions to the centre-right parties (notably, the increasing privatization of pension savings in the long run) without, however, directly undermining the Social Democrats’ fundamental interests in maintaining a high level of equality and universality.55 Another example is the reform of UI in 2007, which – despite its radical nature – did not directly attack the principle of trade-union–managed UI funds (i.e., the Ghent system),

54 Cf. Belfrage and Ryner 2009. 55 See Anderson 2001 and 2004. Germany and Sweden in the crisis 329 one of the trade unions’ main power sources. This process of media- tion and compromising contributed to the legitimacy and acceptance of such ideas and, hence, their resilience.

Germany56 The postwar German model has always been underpinned by a compromise between liberal and non-liberal elements, often captured by the notion of a social-market economy. The early postwar understanding of liberalism was quite different from contemporary neo- liberalism in emphasizing strong anti-monopoly policies, some pater- nalistic role of the welfare state, and even promotion of ideas such as unlimited liability for debt.57 The highly consensual nature of German political institutions, including its federal structure, has prevented adversarial swings across the political spectrum and brought parties closer to blended versions of liberal and various non-liberal elements.58 In this way, German economic policy has evolved along a broad trajectory of liberalization but in which neo-liberal reforms often go ‘hand in hand’ with a re-embedding of these compromises in ways that also seek to stabilize or defend a core of non-liberal institutions.

The political basis of neo-liberalism Returning to the conservative CDU/Christlich Soziale Union (CSU) coalition with the economically liberal FDP of the 1980s, Helmut Kohl presided as German Chancellor from 1982 until 1998. During this period, the influence of neo-liberal ideas generally increased and terms of debate shifted towards a rather different view of state activity. However, despite the long term in office of the centre-right, a notable feature was the absence of aggressive liberalization relative to Thatcher’s Britain or Reagan’s United States. For example, the government pursued policies supporting labour-market flexibility (e.g., temporary workers) but made no move to dismantle employee co- determination. Likewise, the government supported financial-market liberalization but did not dismantle the special position of regional

56 This section draws on the analysis of Jackson and Sorge 2012. 57 See Oliver 1960. 58 See Prasad 2006. 330 Part III: Neo-liberalism in comparative perspective and cooperative banks, which have strong relationships with SMEs. The CDU has a socially conservative ideological commitment and historically supported the welfare state.59 The CDU initiated all of the major pieces of postwar social legislation, including coal and steel co- determination. Policies of the CDU/FDP coalition in the 1990s were a mixture of liberalism with strong doses of fiscal transfer from West to East and social policies to maintain employment and social standards in East Germany – leading public budget expenditure to all-time peak levels relative to GDP. After German unification in 1990, the political focus was on trans- ferring existing institutions to the East. However, this extension led to many complex changes in the practice of institutions on the ground. No major reforms were undertaken to the main features of the German model as it existed in the West. However, by the mid 1990s, the costs of unification were becoming apparent and created a variety of new pressures on the existing German model. Many of these problems were related to the high costs of the welfare state, including the rising levels of unemployment. The massive transfer of money into the East had been financed mainly on the basis of contributions levied on labour costs, so that employment became disadvantaged through rising labour costs and created acute pressures during the cyclical downturn after 2001. Although acceptance of the social-market economy remained high – at approximately 50 per cent of the German population – East Germans became less supportive over time as unification led to persistent unemployment.60 During the period of the SPD and Green coalition government (i.e., 1998–2005), liberalization was more far-reaching. The Sozialdemokratische Partei Deutschlands (SPD) took active measures to dismantle ‘Germany Inc.’ – that is, the dense network of relationships among large banks and industrial companies either by crosshold- ings of shares or non-bank shares held by banks. The ‘power-of-banks’ and ‘failure-over-control-and-oversight’ debates have a long history; they resurfaced amid public outcry concerning scandals at Metallge- sellschaft, Klockner-Humboldt-Deutz,¨ and Schneider Real Estate in the mid 1990s. These debates turned disaffection with control and oversight failures – ascribed to uncritical and cozy personal networks – into an interest in Anglo-American corporate governance through

59 See Lehmbruch 2001. 60 See Sauerland 2012. Germany and Sweden in the crisis 331 stock markets, dispersed ownership, influence of network outsiders, and concern with unambiguous profitability. The rise of the Neuer Markt on the heels of the information and communications technology stock-market bubble was an important factor contributing to the left coalition’s support for the stock market. This ‘party paradox’ witnessed the left-party SPD seeking to tame big business by encouraging the dissolution of intercorporate linkages, as well as aligning with players in financial markets, who stood to gain from more market competition and garner an image of being a modern and economics- focused party.61 However, because banks had already undergone a strategic reorientation towards international financial markets, the political process may have expedited institutional change rather than causing it. Ironically, an SPD chancellor placed his faith in the capacity of shareholder-value capitalism to generate increasing public revenue, precisely at the moment before the first major bubble – in dot-com enterprises – burst in 2002. Meanwhile, the SPD–Green coalition aggressively cut welfare-state support in 2002 as a way of tackling unemployment and preventing a financial collapse of the public sector. The manner of these reforms and parallel tax cuts for corporations and high-income earners led to massive voter disaffection and abstention on the left, as well as a fall from grace of the SPD, which has not yet been reversed. To some extent, this evolution was particular to Germany, involving unification problems and specific challenges of the national/Lander¨ competencies mix. The more general international conundrum relates to placing hopes on government revenue and employment from sources exposed to the volatility of financial markets – such as dot-com industries, shareholder-value policies, and international financial markets. As in some Southern European countries, major instigators of neo-liberal reforms were social-democratic governments. The subsequent ‘grand’ coalition of CDU and SPD (i.e., 2006– 2009) was characterized by more modest reforms. The advent of the 2008 financial crisis led to renewed interest in regulation and new rules regarding executive pay, which – if anything – suggest a swing back towards a more stakeholder-oriented model. The subsequent CDU and FDP coalition (i.e., from 2009) consolidated a path of relative stability in the core features of the German model, albeit along a path of public

61 See Cioffi and Hopner¨ 2006. 332 Part III: Neo-liberalism in comparative perspective austerity. No major liberalization of labour markets has occurred, despite an initiative by the Liberals (i.e., FDP) to throw out parity representation in large companies, as something that was ‘internationally not state of the art’. Liberalization has therefore not been a party-political agenda limited to either the centre-left or centre-right. Both have pursued a broad agenda of liberalization with different accents and boundaries between the ‘social’ and the ‘market’ of Germany’s social-market economy. Germany has lacked radical forms of neo-liberal policies on the right coalition, whereas the ‘new left’ has promoted market liberalization not unlike New Labour in the United Kingdom. After enjoying broad public support during the 1990s, support for the idea of the social- market economy declined to a low of approximately 30 per cent of the population during the early 2000s and increased to only 40 per cent after the onset of the crisis in 2008.62 Why has government not been more radical in pursuing liberalization during this period? At least two factors are important. The first factor revolves around business interests and how these are shaped historically by a given set of institutions. Business interests supported only moderate reforms. Large industrial firms experienced a period of strong economic growth based on the success of Germany’s export sector during the 1980s. The German export economy has traditional strengths in high-quality investment goods such as machinery – including input to newly industrializing countries such as China and Brazil. Export manufacturers have long struggled with high unit labour costs, which had been a contentious issue throughout the 1980s and 1990s, as increasing non-wage labour costs threatened the international competitiveness of the German export industry. Business sought to reduce costs through liberalization of the labour market and social protection but also benefited from the protection of core workers and the ability to externalize some adjustment costs on the state.63 The slow exhaustion of state-supported adjustment led to a re-politicization of social welfare in the mid-1990s. The strong sectoral basis of German business associations meant insufficient support for encompassing redistribution – represented by the failed ‘Alliance for Jobs’ effort of the Schroder¨ government – and the fragmentation of political power also impeded more sweeping liberalization. Rather, the

62 See Sauerland 2012. 63 See Martin and Swank 2012 and Trampusch 2009. Germany and Sweden in the crisis 333 success of reducing production costs would probably not have been possible without existing corporatist institutions. Trade-union membership and union power have certainly declined, with an increase of wage and conditions bargaining at the company rather than the industry level. Moreover, more German employers abandoned association membership in order not to be tied to agreements and have maintained competitiveness by cutting labour costs. Nevertheless, the wage restraints accepted by unions in collective agreements and cooperative relations with company works councils were important in the strategy of increasing the export sector’s competitiveness through cost reduction. Second, the consensus-driven nature of German electoral politics and decentralization of power under the system of Federalism gravi- tate against radical reforms driven by top-down policies. The majority in one chamber of parliament has often been the opposite of the majority in the other chamber as a result of interim elections in the different states. This has created many ‘veto points’ in German politics, which constrain the retrenchment of existing social protection because de facto only a quasi-all-party coalition can rule. This casts light on the importance of ‘institutional layering’ within Germany, where new rules are created to facilitate changes in practice without directly seeking to abolish past practices. The political institutions of Federalism and consensus-driven coalition governments have been important in slowing reform, whereas the EU-level directives have accelerated liberalization. Similarly, large ﬁrms and banks have different preferences regarding liberalization, leading to a ‘push–pull’ of varied policy preferences.

Neo-liberalism and policy reform The interdependent relationship between liberalization and stabilization of non-liberal or coordinated institutions is evident across many domains or realms of public policy (see the overview in Table 11.2). As in the Swedish case, the most far-reaching liberalization was in the domain of financial markets, starting with the series of four Financial Market Promotion Acts in 1990, 1994, 1998, and 2002. These Acts eliminated various taxes on financial-market transactions, established new investment vehicles, and created a single new financial-services regulator. The 1998 reforms promoted the stock markets through Table 11.2. Institutional Reforms in Germany, 1979–2009

Institutional Direction of Change and Examples of Timing of Major Domain Typology Major Reforms Reforms

Financial systems Bank-oriented → Banks Shift towards market finance 1990s and markets • Deregulation of equity markets • Implementation of EU directives on transparency Corporate Stakeholder-oriented → Some Shift towards outsider, shareholder-oriented model 1998–2002 governance elements of shareholder • Liberalizing stock options value • Voting-rights reform • Change in takeover rules Industrial relations Corporatism → Increasing Some flexibilization of labour market for small firms 2001, 2003 segmentation and lower-skill employees but some new social protection • Minimum wage in construction industry (1996) • Works Constitution Act • ‘Job centres’ introduced (2003) Education and skill Associational governance of Some greater role of the state 1990, 2000 creation apprenticeship • Greater public role in apprenticeship system • Policies for low-skill workers Welfare state Conservative → Limited • Hartz Reforms (shortening length of Early 2000s introduction of market unemployment benefits) elements, some • More employment activation policies retrenchment • Limited expansion of private pensions

Source: Adapted from Jackson and Sorge 2012. Germany and Sweden in the crisis 335 new listing requirements and by allowing companies to adopt international accounting standards. Finally, the 2002 reforms allowed the tax-free sale of long-term equity stakes held by banks and corporations. Whereas these reforms shifted Germany away from its bank- based financial system and towards more market-oriented finance, the large savings-bank and cooperative-banking sector maintained a more traditional banking-relationship model, albeit in an evolving form. It is important that the weak demand for private pensions has left capital markets relatively underdeveloped relative to the highly financialized economies, such as the United States or the United Kingdom. Reforms have operated by institutional layering, whereby new practices are facilitated through incentives and rules are placed alongside preexisting practices. Corporate-governance reforms increased the orientation of corporations towards shareholder value. The 1998 reform (i.e., KonTrag) limited the influence of large shareholders and banks, increased auditor independence, and removed restrictions on share buybacks and stock options. This reform mixed different political motivations – the desire by the CDU to increase transparency of capital markets, the aim of the SPD to limit the power of big banks in Germany, and new US–inspired debates about corporate governance.64 Other liberal reforms streamlined the process of shareholder lawsuits (i.e., 2005), mandated disclosure of executive pay (i.e., 2005), and streamlined the process for exercising proxy votes (i.e., 2009). Taken together, legal reform has increased the salience of shareholder interests, while often remaining ‘below the radar’ of public debate.65 However, Germany did not fully liberalize the market for corporate control.66 A central issue opposed by German industry was the requirement for board ‘neutrality’ during hostile bids, which allowed an option for defensive actions given prior shareholder approval.67 Although the scope for defensive actions has become relatively constrained, the number of hostile takeover bids has remained low.68 Little stakeholder-focused legislation has been passed, other than recent regulation of executive compensation (i.e., 2009), which demonstrates more caution towards

64 See Ziegler 2000. 65 See Klages 2012 and Culpepper 2010. 66 See Callaghan and Hopner¨ 2005. 67 See Culpepper 2010. 68 See Hopner¨ and Jackson 2006. 336 Part III: Neo-liberalism in comparative perspective stock options and reasonable levels of total remuneration. Nonethe- less, unions have succeeded in stopping reforms that would directly endanger the role of co-determination.69 As a result of German unification and long-term declines in trade- union membership, as well as the growth of service-sector economies, German employment and industrial-relations institutions have undergone slow erosion in recent decades. Comparing East and West in 2009, collective-bargaining coverage is lower (i.e., 34 versus 52 per cent) and works councils represent fewer employees (i.e., 38 versus 44 per cent), so that only 18 per cent of the East German workforce is covered by these two key institutions.70 In this context, labour- law reform liberalized new patterns of atypical employment. Restric- tions on the use of agency work were loosened in 1997 and abol- ished in 2003. The duration of fixed-term employment contracts was also extended to twenty-four months in 1996. The effect of liberalization has been a growing dualism in the German labour market.71 However, despite liberalization, several reforms have sought – at least partially – to counterbalance existing erosion of German industrial relations. First, works councils were modernized in 2001 in ways that rendered their structure less bureaucratic and more adaptable to the diverse needs of small and medium-sized complex network forms of organization, and different categories of outsourced or temporary employees. Second, the state sought to support social protection by passing a minimum wage for the construction industry as a way to prevent ‘social dumping’ given the vast increase of migrant labour in the industry. Similarly, institutions offering training and skills have remained largely stable and sought to protect and upgrade the dual system of training in various ways, such as moving away from specialized and towards broader occupational profiles.72 The state also intervened to support social partners in ensuring or increasing the supply of occupational training through new funding schemes in 2004 and 2008. In terms of the welfare state, economic pressures facing UI, social benefits, and the pension system have grown. Concerning pensions, the Riester reforms in 2000 reduced state benefits from 70 to 67 per cent of salary and created new incentives for private pension savings.

69 See Faust 2012 and Jackson 2005. 70 See Hans-Boeckler Foundation 2012. 71 See Palier and Thelen 2010 and Hall and Ludwig 2010. 72 See Busemeyer 2009a and 2009b. Germany and Sweden in the crisis 337

These reforms have had little influence on the development of private pension funds, the assets of which remain low at 5 to 7 per cent of GDP. Consequently, pension reform had few spillover effects on the German financial system or corporate governance. Still, the costs of German unification became increasingly apparent throughout the 1990s and created growing pressures on non-wage labour costs in ways that disadvantaged employment, particularly in lower-wage, service-sector jobs. In 2003, the German state adopted a controversial retrenchment of welfare payments and unemployment benefits, known as the ‘Hartz Reforms,’ which marked a new era of ‘managed austerity’.73 The Hartz I and II (2003) reforms and Hartz III (2004) reform de-regulated the market for atypical employment by liberalizing temporary work via new ‘Staff Services Agencies’ (PSA), creating so-called mini-jobs characterized by lower taxes and insurance payments for casual employees, introducing the ‘Ich-AG’ (Me, Inc.) to support self- employment, and restructuring public job centres. The more dramatic and contested Hartz IV (2005) reform merged benefits for the long- term unemployed (‘Arbeitslosenhilfe’) and the social-welfare scheme (‘Sozialhilfe’) and also shortened the duration of unemployment benefits from thirty-six to eighteen months. The payment for social welfare was set at a low level of €359 per month (‘Regelsatz’) plus the cost of ‘adequate’ housing. This retrenchment of benefits was also consolidated by activation policies (i.e., ‘workfare’) that supported the expansion of approximately 300,000 so-called 1-euro jobs for long- term unemployed people. Today, two thirds of unemployed people receive these low-level residual benefits. Spending on labour-market policy fell from approximately 4 per cent of GDP during the unification era to just 2 per cent in 2009. Welfare-state reforms reduced both taxes and expenditures from approximately 48 to 43 per cent of GDP between 1999 and 2009. Meanwhile, Germany experienced a substantial reduction in unemployment due to the expansion of poorly paid service work or temporary forms of employment through active labour market policies and retrenchment of benefits – which resulted in labour-market dualism.74 These reforms were successful in lowering spending and relieving the existing welfare state of mounting-cost pressures – including lowering contributions from 6.5 to only 3.3 per

73 See Vail 2010. 74 See Palier and Thelen 2010. 338 Part III: Neo-liberalism in comparative perspective cent in 2008.75 As such, the reforms have probably helped to preserve the system for core workers but nonetheless led to major voter discontent with the Social Democratic Party and in trade unions, together with the eventual rise of the Left Party.76

Liberalization and re-coordination: A dialectical relationship? Neo-liberal economic thinking has had an important role in the economic policies of Germany and Sweden, both before and after the global ﬁnancial crisis. We view the post-crisis phase of economic policy in terms of its continuity, with a slower and longer-term trajectory of institutional change, whereby both countries have undergone substantial liberalization. In both cases, liberalization has involved political compromises and attempts to re-embed new market-liberalizing rules within existing institutions. A deeper examination reveals that neo-liberal reforms and re- coordination are dialectically intertwined, leading to a paradoxical form of politics. The contradictory nature of market and non-market forms of economic organization (i.e., thesis and antithesis) has coex- isted through political compromises, whereby the introduction of new market mechanisms is linked to the continued protection of other non-market mechanisms. The integration or synthesis of these elements is always temporary because the further extension of markets eventually creates new pressures on non-market institutions. For example, German welfare-state reforms led to substantial retrenchment but also stabilized the social-insurance institutions for core workers and employers against the threat of unsustainable rising costs. The liberalizing effects on the labour market, in turn, place further downward competitive pressure on wages and working conditions among core workers. The parallel but distinct paths of liberalization in Germany and Sweden demonstrate how this dialectic relationship led to viable policies. Indeed, neo-liberal reform policies were successful precisely where they were implemented in traditional corporatist ways. Rather than inhibiting liberalization, corporatist politics gave different social partners the opportunity to inﬂuence the nature that neo-liberal reforms

75 See Palier and Thelen 2010. 76 See Hassel and Schiller 2010. Germany and Sweden in the crisis 339 would take.77 Two effects result from this situation. First, the legitimacy of neo-liberal policies was increased by giving different actors a chance to influence the content of the reforms and to prevent the most radical neo-liberal ideas from being implemented. German political institutions create many veto points for different stakeholders and make compromises necessary, which also explains their relative slowness (i.e., Reformstau) and incremental nature, as well as their content (i.e., mixing market-creating measures with non-market coordination). In Sweden, although the political structures are more majoritarian, the strength of trade unions and the persistence of certain corporatist structures still create incentives to engage in negotiated policy making. Although ‘compromises’ in both countries are increasingly skewed towards employer interests, the fact remains that such compromises constituted a form of coordination similar to traditional corporatist arrangements. In that sense, both models still rely on institutions of extra-market coordination. Moreover, reforms were successful in attaining cross-class compromises that combined liberalization with strategies of economic adjustment with a clear core of high-skilled employment. The inclusive nature of policy making also implied that many actors ‘got their hands dirty’ and therefore share responsibility for the neo- liberal reform course. Thus, leftist parties are unable to mount virulent attacks on neo-liberal reforms; this task is restricted to relatively minor political movements, such as the German Links Partei or the Swedish extreme right, Sverige Demokraterna, and the Pirate Party movement, which originated in Sweden in 2006. The emergence of new and radical political parties may reflect dissatisfaction with the hegemonic consensus of established centre-right and centre-left parties around various forms of neo-liberal ideas. However, the electorate has recently shown relatively strong support for the particular path of incremental and socially tamed forms of neo-liberal reforms, as reflected in the election victories of Merkel’s governing CDU in 2009 and Rein- feldt’s coalition in 2010. This political continuity is partly explained by important weaknesses of the centre-left – among other reasons, due to their own ideological reorientation towards quasi-neo-liberal Third Way policies during the 1980s and 1990s – and, hence, the

77 For the persistence of processes of ‘social concertation’ despite formally weakened corporatist institutions, see Afonso 2013. 340 Part III: Neo-liberalism in comparative perspective absence of a political alternative in the middle of the party spectrum. The continuity is partly due to the fact that the negative effects of the reform policies hit not the median voter strongest but rather begin to be felt mainly at the lower end of the socioeconomic pyramid, notably low-skilled and immigrant workers who often do not or cannot vote. Taken together, the cooperative and negotiated ways of formulating and implementing neo-liberal policies help to explain why we do not observe any radical break following the crisis of 2008–2009. Indeed, neo-liberal elements have been integrated in the existing system and legitimized through corporatist processes. This legitimacy was further increased by their relative success but also by a strategy of policy makers to show considerable degrees of pragmatism in ‘tweaking’ the neo-liberal model to fit specific circumstances. One striking example is the Swedish government’s move to reverse some of the strongly neo- liberal UI reform during the crisis in 2009, making the system once again somewhat more generous. Both cases indeed support the line of explanation in the first chapter of this volume, according to which neo-liberalism is resilient due to its high malleability and plasticity. The German and Swedish cases show that the process of ‘metamorphosis’ of neo-liberal ideas that makes them so malleable was partly the result of these ideas being channeled through traditional corporatist institutions and renegotiated by traditional corporatist actors. These renegotiations have led to ‘tweaking’ with the neo-liberal doxa and made the ideas more fit for the specific national contexts. Para- doxically, then, institutions that could have constituted a stronghold against neo-liberalization may have indeed contributed to reinforcing such ideas, making them more viable in the long run. Regarding outcomes, it can be expected that these reforms will have effects in the future, which may undermine the coordinated nature of the two business systems in the long run but are not as yet fully visible. Thus, the emergence of a low-wage sector may constitute an imminent threat to the high-quality, high-price strategies that these two countries traditionally followed. The possibility of paying low wages may decrease employer organizations’ willingness to support investment in human capital and skills, which may undermine the competitiveness of the two countries in the long run. Therefore, the rather incremental and ‘creeping’ nature of neo-liberal reforms should not lead us to conclude that the transformations are inconsequential. Rather, the reforms may Germany and Sweden in the crisis 341 seem limited at first glance but they still have the potential to develop unintended and unanticipated effects farther down the road.

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Ziegler, Nicholas J. 2000. ‘Corporate Governance and the Politics of Prop- erty Rights in Germany’, Politics and Society 28 (2): 195–221. Zysman, John. 1983. Governments, Markets and Growth: Financial Systems and the Politics of Industrial Change. Ithaca, NY: Cornell University Press. 12 State transformation in Italy and France: Technocratic versus political leadership on the road from non-liberalism to neo-liberalism elisabetta gualmini and vivien a. schmidt

Although Italy and France have seemingly little in common – given differences in economic profile, state capacity, leadership effectiveness, vulnerability to the economic crisis, and more – they both nevertheless can be categorized as part of a third variety of capitalism: state- influenced market economies (SMEs). In such political economies, the state intervenes more, for better or for worse, and differently than in liberal market economies like the United Kingdom and Ireland1 or in coordinated market economies like Germany and Sweden.2 However, what distinguishes these SMEs from other varieties of capitalism is not just their institutional configuration. Equally important are the underlying ideational legacies that underpin the institutions, shaping the ways in which actors have defined and remade markets and how they have engaged in ‘acting out change’ against a background of national traditions of economic thought, of state intervention, and of decades of lived economic practice.3 Postwar SMEs are distinguished from the other postwar varieties of capitalism by their very different stewardship of the economy through ‘non-liberal’ (defined as violating neo-liberal tenets) institutions of planning, industrial policy, and/or public enterprise. These in turn constituted historical legacies that left their traces even as the state liberalized from the 1980s onwards. In Italy, the country’s ‘state-assisted’ capitalism, or ‘public neo-capitalism’,4 continued to ‘muddle through’ after the postwar years, leading at best ‘by indirection’ except at times when and/or in areas where technocratic

1 See Hay and Smith in this volume. 2 See Schnyder and Jackson in this volume. 3 See Clift 2012 and O’Sullivan 2007. 4 See Barca 2010.

346 State transformation in Italy and France 347 elites took over.5 In France, political elites transformed the country’s postwar non-liberal ‘state-led’ capitalism, or dirigisme, through the dirigiste retreat from dirigisme6 that resulted in the ‘post-dirigisme’ of the 1980s onwards.7 These countries’ state-centred traditions of economic thought also ensured that even when liberalizing markets, state leaders have been less focused on instituting the level playing field prized by the British and the Germans; have been more at ease with dominant market positions for their firms; and have been more open to state intervention to promote such market dominance, including the presence of elitist oligarchic networks spanning the public and private sectors.8 Thus, although in both Italy and France – as in other European countries – homegrown neo-liberal thinkers developed their ideas in the interwar period, were marginalized in the postwar years, and came into their own starting in the 1980s,9 the impact of such ideas was heavily mediated by their differing state-influenced national ideational traditions. Even though neo-liberalism has been resilient in both countries, it was (for the most part) taken up by governing elites in Italy and France less as a matter of ideological conviction than of pragmatic necessity in response to international economic pressures and European political constraints. As a result, it has been a moderate and largely pragmatic neo-liberalism that has found little lasting ideological commitment or ideational coherence and much resistance – in great contrast not only with Britain, whether in terms of Thatcher’s strongly conservative neo-liberal ideology or Blair’s Third-Way neo-liberalism, but also with Germany’s continuing conservative ordo-liberal ideology. Italy’s trajectory since the postwar years has gone back and forth between ‘normal’ periods of non-liberal political leadership – in which what ‘opportunistic’ political leaders said had little to do with what they did – and crisis periods of neo-liberal technocratic leadership, in which ‘pragmatic’ leaders’ neo-liberal words matched the actions. Whereas the normal periods made for neo-liberal rhetoric without the reality, as in the second line of analysis in this volume’s first chapter, the crisis periods fit the third line of analysis because this is when the

5 See Schmidt 2002, ch. 1; and Schmidt and Gualmini 2013. 6 See Schmidt 1996. 7 See Levy 1999 and Clift 2012. 8 See Clift 2012. 9 See Denord 2007 and Regonini and Giuliani 1994. 348 Part III: Neo-liberalism in comparative perspective discourse had persuasive power. France’s trajectory since the postwar period, by contrast, began with non-liberal technocratic leadership in the postwar years and then moved to neo-liberal political leadership since the 1980s, in which ‘pragmatic’ political leaders’ non-liberal discourse sought to mask the influence of neo-liberal ideas, effectively providing the reality without the rhetoric – or the second line of analysis reversed. That neo-liberal reality suggests that Chapter 1’s first line of analysis is most relevant here, to the extent that neo-liberalism has been adaptable in its interpretation, thereby allowing for policies that contain many non-liberal elements. Notably, the EU has been an additional force behind both countries’ liberalizing transformations, at the same time that the EU no doubt has held in check some of both countries’ most egregious forms of ‘economic patriotism’.10 Italy’s neo-liberal reform capability, in particular, came from the outside, a result of the power of the EU both as a normative ideational construct (i.e., ‘the EU makes us do it’) and an institutional constraint and opportunity. This helps to explain why pragmatic technocratic elites in Italy have periodically been able to muster not only the force of institutions (i.e., the fifth line of analysis) but also the power of ideas and discourse (i.e., the third line of analysis) to push through neo-liberal reform. However, whereas Italy perceived itself as ‘rescued by Europe’11 and, therefore, when pushed, it followed the EU’s prescriptions, France sought to lead Europe and, in so doing, to make the EU a shield against (neo-liberal) globalization.12 Increasingly, however, rather than a shield, French leaders and the public perceived the EU as a conduit for (neo-liberal) globalization and therefore to be resisted. This chapter examines the ideational trajectories of Italy and France in turn, starting with a brief consideration of the sources of neo- liberalism in the postwar years, followed by a more extensive examination of the rise of neo-liberalism from the 1980s to the mid 2000s, and concluding with the two countries’ responses to the economic crisis beginning in 2008. The discussion employs a discursive institutionalist approach to consider not only the ideas through which Italian and French policy makers conceived of the market and of neo-liberal reforms to remake the market but also how they coordinated the

10 See Clift and Woll 2012. 11 See Ferrera and Gualmini 2004. 12 See Schmidt 2002. State transformation in Italy and France 349 construction of neo-liberal policies and then communicated about them to national publics, seeking to legitimize them in ways that resonated within their respective institutional contexts.13

Italy between non-liberal political and neo-liberal technocratic leadership The state has always played a central role in Italy’s state-assisted capitalism, even as it moved from non-liberal to neo-liberal leadership. It went from protagonist and leader of economic recovery in the postwar period to coordinator and regulator of the adjustment process undertaken in the name of Europe. As Barca explains, Italy’s ‘public neo- capitalism’ is something ‘neither statist nor hyper-liberal’ but rather the result of an ‘extraordinary compromise’ that ‘assigned to autonomous public bodies a pivotal role in economic development as an alternative to the formulation of fair rules of the game in the market’.14 Signifi- cantly, there is no ‘post’ public neo-capitalism to match France’s post- dirigisme because Italy never had dirigismo in the first place, plagued as it was by the hyper-politicization of its highly fragmented, compound polity. This meant that inertia was the order of the day, sometimes offset by incremental policy change. This was perpetuated by opportunistic and self-interested political elites whose governing practices tended to pervert if not preclude any reforming policy ideas as they turned the economy into a spoils system in which party patronage and clientelism predominated (known as partitocrazia). As a result, the everyday direction of the economy was left to the technical ministries rather than the government in order to allow for a modicum of pragmatic and depoliticized leadership and oversight. Only at critical junctures in the mid 1990s and again beginning in 2011, was the government in the hands of goal-oriented, pragmatic technocratic elites who sought to institute neo-liberal programs and policy ideas – despite the fact that even in these cases, politics was often difficult to keep out, with perverse effects. Although neo-liberal and pro-market ideas have always been historically present in Italy, they have mostly remained outside party politics, with their influence and implementation delegated either to the Bank of Italy or the EU. In domestic-party politics, neo-liberal ideas tended

13 See Schmidt 2002, 2006, and 2009. 14 See Barca 2010: 102. 350 Part III: Neo-liberalism in comparative perspective to be more rhetoric than reality, inﬂuencing the public discourse but lacking the strength to infuse the contents and goals of public policy. Italy has always had a disjunction between the domestic ‘real’ policy trajectory and implementation (mainly non-liberal) and the (highly neo-liberal) ‘hegemonic’ paradigm of international institutions.15

Political elites’ postwar construction of state-assisted capitalism and the marginalization of neo-liberal ideas During the ‘economic miracle’ of the 1950s and 1960s that transformed Italy from a backward and mainly agricultural society into one of the top industrialized countries of the Western world, there were lively intellectual debates about what types of ideas should guide the state and the market. Liberal ideas were present in these political debates, but they had little impact on the politics. They remained limited to a restricted circle of intellectuals and, above all, were never represented by political parties (i.e., the liberal party always had a minor role in the postwar period). Intellectually, however, liberal philosophers were nonetheless influential, in particular because they had an important role in the philosophical fight against Mus- solini’s authoritarian fascism. Prominent among these philosophers was Benedetto Croce, who originated the distinction between liberalismo and liberismo: the latter was limited to economic liberalism; the former was part of the larger philosophical/ethical tradition of liberalism.16 For Croce, liberal ideas were to be understood as philosophical meta-principles related to the global functioning of polity and society and to the living conditions of citizens. Civil rights embedded in a legal state were his main priority, viewed as first-order values in contrast to economic and utilitarian goals that could divert citizens from more important and idealistic aims. Croce, therefore, conceived of liberalism only as an abstract and general framework; he viewed it as completely separate from economic liberalism and ‘mercatismo’ (i.e., marketism), which became the banner of the Bank of Italy and international organizations. More pragmatic was the approach formulated by Luigi Einaudi, who contested fascism during the Mussolini era on liberal grounds, fled

15 See Gentile 2011. 16 See Croce 1931; see also Modugno 2006 and the discussion in Ferrera in this volume. State transformation in Italy and France 351 during the war to Geneva’s Institut Universitaire des Hautes Etudes Internationales (which also welcomed other prominent neo-liberals), and was a founding member of the Mont Pelerin` Society – the thought collective committed to promoting liberal doctrines and the open society.17 He was a major proponent of neo-liberalism not only intellectually but also through his political positions as Governor of the Bank of Italy in 1945, Vice President of the Council and Minister of Finance in 1947, and President of the Republic from 1948 to 1955. Einaudi was strongly convinced that there could not be full liberalism without economic liberalism. He had total confidence in the market as the most efficient instrument of resource allocation and distribution, and he believed liberal ideas were to be implemented through pragmatic and specific public policies. That said, for Einaudi, economic liberalism (or liberismo) was not to be unlimited; the role of the state was to set limits and design general rules within which the market could display its effects. However, liberal ideas – whether as a subspecies of Croce’s general philosophies or in the more pragmatic version of Einaudi – were to have little influence over the contents of public policy during the postwar period of exponential growth, a time when Keynesian ideas were predominant. Notwithstanding the fact that Einaudi was in a major position of institutional (if not active) power as President of the Repub- lic, he could do little to restrain the rapid expansion of the welfare state or, as a consequence, the proliferation of public bodies in charge of delivering the increasing number of public services. Runaway state spending, however, became a problem beginning only in the 1960s, as the more leftist orientation of the leading Christian Democrat party led to the start of the rise of the deficit spending that was to grow out of control by the 1980s. The debate is still open as to whether this was a particularly Italian version of the Keynesian prescriptions or a mere underestimation of long-term economic repercussions.18 What is clear, however, is that while the government remained non-liberal in its policies, as it ratcheted up the public deficits and debts that still plague the country today, the Bank of Italy switched to a more neo- liberal or, better, ordo-liberal approach in 1979. After Carlo Azeglio Ciampi was appointed to head the Bank of Italy, he promoted rigorous monetarist policy in order to cut back inflation and reach currency

17 See Schmidt and Thatcher in this volume. 18 See Verzichelli 1999. 352 Part III: Neo-liberalism in comparative perspective stability. However, this policy – rather than solving the problem – at first arguably only made matters worse because the Bank of Italy exercised neo-liberal restraint, whereas the government continued the non-liberal spoils system. The year 1979 was also when Italy entered the European Mone- tary System (EMS) and the first stage of the process of ‘restoring the economy to health’ driven from the outside, by external European constraints. The national debate was lively, with the leader of the Confindustria, the Minister for Foreign Trade, and the Minister for Agriculture strongly opposing entry into the EMS – and even the Bank of Italy was at first quite reluctant. However, in the end, the German– French alliance prevailed.19 Two years later, in 1981, a neo-liberal ‘divorce’ between the Treasury and the Bank of Italy was passed, in which the latter ceased to be the buyer of last resort of unsold government bonds and direct controls on credit and administrative obligations were dismantled in favour of a more market-oriented regulation. In the meantime, the Italian Parliament passed a more rational reform of the budgetary process in 1988, centred on responsible planning and accountability. Although in the 1980s some neo-liberal policy ideas were indeed adopted, it is important to note that the underlying program and philosophy – along with the legitimating discourse – were mostly focused on using the state to reform the rules for business and labour. Moreover, there continued to be great resistance to neo-liberal policy ideas focused on privatization or reduction in state interventionism, which went against the trend in most other European countries by this time, including France. It was not until the 1990s that the state came to be viewed as the problem, not the solution.20

Technocratic elites’ neo-liberal reconstruction of Italy’s political economy: Liberalism from above Only in 1992, as a result of an extraordinary mix of domestic and international factors, did Italy begin serious neo-liberal reform of the postwar system. This occurred during the inception of the ‘Second Republic,’ so called because it came with the collapse and subsequent renewal of the Italian party system. The previously prevailing

19 See Dyson and Featherstone 1999 and Ferrera and Gualmini 2004. 20 See Regonini and Giuliani 1994. State transformation in Italy and France 353 opportunistic political elites were brought down by technocratic elites in the judiciary whose ‘virtuous circles’ of magistrates, beginning in the 1980s, first pursued the Mafia and then politicians and businessmen as the Cold War drew to a close, which contributed to the demise of the old political class. At this time, the state gained greater capacity and a new set of political parties and politicians as a result of electoral reforms that produced more of a two-party system. The resulting elections brought to power ‘technical’ governments of pragmatic technocratic elites that in this initial period were able to push through major neo-liberal reforms without any party vetoes or demands and with the support of trade unions and business associations for tripartite concerted action. In the vacuum created by the collapse of the old political class and in the absence of administrative elites or even of businesses with a sense of community, networks of academics actively involved in neo-liberal projects for political and economic reform already in the 1980s stepped into the breach in the early 1990s to exercise policy leadership21 – whether acting as advisors to the two main electoral coalitions, helping to devise the electoral and constitutional reforms, or taking on major roles in the Bank of Italy and the Treasury. Moreover, Ciampi, the former head of the Bank of Italy, followed the same trajectory of Einaudi, coming onto the political stage first as Prime Minister and later as President of the Republic. Differently from other countries, in Italy in periods in which politics is ‘suspended’, the delegation of political power shifts to academics. Unlike France, where the National School of Administration (ENA) works as the main instrument of elite selection, in Italy there are no post-graduate or specific training institutions for top civil servants’ recruitment. This is why university professors are considered the main depositories of knowledge and expertise and even candidates for political position – in particular those trained in economics, due to the complexity and highly technical nature of the policy issues or reforms to be handled. Notably, although these academics were generally connected to one or another political party, they retained their independence and were called to serve as individual ‘personalities’ because of their intellectual qualities and practical abili- ties rather than as members of any given school of thought or ‘epistemic community’. That said, they were, indeed, part of larger academic

21 See Radaelli 2002. 354 Part III: Neo-liberalism in comparative perspective networks that throughout the 1980s had been exchanging ideas on what to do, and they were aware of the neo-liberal experiments being conducted elsewhere.22 These academic networks helped craft a highly successful macroeconomic discourse about the necessity and appropriateness of sound monetary policy that successfully pushed state and societal actors alike to accept the austerity budgets, the one-off EU tax, and the labour and pension reforms necessary to enable the country to accede to the EMU. The reforms were all legitimated with a discourse that evoked the neo- liberal paradigm of restraint, financial adjustment, deregulation, and flexibility in ‘hard times’, although other values were also brought in, such as NPM, which emphasizes the importance of efficiency and effectiveness of state action.23 European integration, more generally, as Ferrera and Gualmini argued, served as a set of ideas as well as policy imperatives to ensure the ‘rescue of the nation-state’ by helping to overcome state inca- pacity and parliamentary inefficiency with reforms that, without the EU, could not have passed.24 This was the case not only with the technocratic governments of the early 1990s of pragmatic ideational entrepreneurs – Amato, Ciampi, and Dini, all former professors – who brought major neo-liberal policy reform ideas. It was equally true for the centre-left government of Romano Prodi in the mid 1990s, who was a former academic who had also held positions in the public sector prior to entering politics. In its communicative discourse to the public, the Prodi government evoked the EU as the vincolo esterno – that is, the external constraint or, better, ‘opportunity’ – to push reform while appealing to national solidarity and pride. National pride was evoked in particular in the case of Spain, were it to join while Italy could not. This eventuality served to enhance the government’s efforts to convince the unions to agree to pension reforms and the public to accept the new special tax ‘for Europe’.25 On pension reforms in particular, success came through a mix of coordinative discourse with the unions that went all the way down to the rank and file,26 and a communicative discourse to the general public focused on intergenerational justice with regard to welfare reform.27

22 See Regonini and Giuliani 1994. 23 See Schmidt and Woll in this volume. 24 See Ferrera and Gualmini 2004. 25 See Radaelli 2002, Ferrera and Gualmini 2004, and Schmidt 2006. 26 See Locke and Baccaro 1999. 27 See Ferrera and Gualmini 2004 and Schmidt 2000. State transformation in Italy and France 355

The centre-left’s success in instituting neo-liberal reform ideas with a discourse focused on remaining in the EU as well as on intergenerational justice was preceded by the failure in 1994 of the short-lived right-wing coalition government of multibillionaire businessman Silvio Berlusconi, who had had a more ideologically neo-liberal discourse and policy proposals. The announced aim of his movement, Forza Italia, was to introduce a ‘liberal revolution’ in the state, combining elements of Willy Brandt’s social-market economy with a pro-market vision for the economy and the reorganization of public service. It is interesting that the ‘number two’ of the party was Professor Antonio Martino, an Italian ‘Chicago boy’, PhD student of Milton Friedman, and Pres- ident of the Mont Pelerin` Society (from 1998 to 2000). As Minister for Foreign Affairs in 1993 (and later as Minister of Defense in the second and third Berlusconi governments), Martino tried to push the political agenda to more liberista policy positions in fields including welfare, professions, and public bureaucracy. However, he often came into conflict with Giulio Tremonti, the Minister of the Economy, who was a milder conservative liberal. In any event, the predicted ‘liberal revolution’ was a ‘dead letter’ because Berlusconi had to agree and negotiate with countless veto players acting in the political arena, and he was contested by the unions that were strongly opposed to any liberista turnabout. In Berlusconi’s words, Forza Italia was ‘a liberal party but not an elitist one, it was liberal-democratic and popular, it was a Catholic party but not a confessional one, a lay party but not an intolerant one, a national party but not a centralizing one’. A strong market orientation could not fit with this ‘hybrid’ and ‘catchall’ party profile. Berlusconi was an opportunistic ideational entrepreneur who not only largely gave up on his neo-liberal reform ideas in 1994 but also when he came back to power from 2001 to 2006 and then again after 2008. Despite a strongly neo-liberal campaign rhetoric that promised time and again major neo-liberal reform and a strong coalition government that had little difficulty passing legislation, Berlusconi seemed to be mostly committed to passing laws to solve his own personal judicial problems. In contrast, the left’s problems came more from the weakness of its government coalitions – both in the late 1990s and between 2006 and 2008 – which resulted from internal divisions on ideas about reform and resistance to the centre-left’s own moderate neo-liberal reform ideas coming from the extreme left, in particular. 356 Part III: Neo-liberalism in comparative perspective

From political to technocratic leadership in the economic crisis Italy’s response to the economic crisis while Berlusconi was Prime Min- ister from 2008 to 2011 was weak. Some may attribute this to the path dependency of an inefficient state with stalemated political structures; however, it also can be explained in terms of the personality of the leader (i.e., Berlusconi), the opportunistic politics of a political elite with few innovative ideas, and a public that would have welcomed reform of any kind but no longer believed it would ever happen. Forza Italia had not only lost the combative spirit of its beginnings, it also had fully adapted to the more rooted features of the partitocrazia Italian style (i.e., immobilismo, which includes self-referential policy making and opportunistic types of policies). The lack of commitment to neo-liberal reform ideas in the Berlusconi years was easily apparent from the government’s communicative discourse to the public, as Berlusconi himself shifted between claiming ‘it’s a dramatic crisis’28 to blustering that ‘we will get out earlier from the crisis’29 because ‘by putting together the public and private debt, we are the richest country in Europe, slightly above Germany ...’30 Between 2008 and 2010, although some neo-liberal policy ideas were implemented (e.g., reducing taxes, cutting public expenditures, and introducing more competition into the public sector), many non-liberal initiatives were also carried out. Most notably – echoing Italy’s past non-liberal public neo-capitalism and a sign of its ‘economic patriotism’ – was the state rescue of a bankrupt Alitalia. This was in addition to attempts to save what the government deemed its strategic industries, including scut- tling takeovers mainly by French firms of Italian energy firms, banks, and the dairy firm involved in the early 2000s Enron-like scandal, Parmalat. It was only at the end of May 2010 – after the first bailout of Greece, the agreement to loan-guarantee mechanisms, and the pledge of all member states to engage in fiscal consolidation – that Berlusconi switched his public discourse to emphasizing the ‘harmony of ideas and values’ on the need for fiscal reform with the EU, when EU Commission President Barroso visited Italy. Berlusconi left the turn to neo-liberal austerity, however, to his Minister of the Economy, Giulio Tremonti,

28 Il Corriere, 23 November 2008. 29 La Stampa, 23 February 2009. 30 Il Corriere, May 2010. State transformation in Italy and France 357 who, in a public speech in Freiburg, stated that ‘austerity has become the new ideology of Europe’. The reform process was ‘authoritarian’, with the government passing legislation by way of votes of confidence – thereby shutting off debates and amendments – and centralizing power in the hands of the Minister of the Economy. This was in marked contrast to the mid 1990s, when there was a strong coordinative discourse between a technical government and the social partners and the country was unified behind the reforms, united by the idea of joining the EMU. This time, the lack of parliamentary involvement, combined with the authoritarian style of legislating, impoverished Italian democracy and led to increasing public disaffection accompanied by cycles of public protest and strikes. The only positive sign was that business – having lost faith in Berlusconi because, under his leadership and in the words of the head of Confindustria, Emma Marcegaglia, ‘Italy has lost ten years of growth’31 – began trying to engage in a coordinative discourse with the unions to negotiate labour reforms. It did this both collectively through bipartite national discussions and at the firm level – most notably in the case of Fiat’s groundbreaking firm-level agreement to limit strikes and curtail absenteeism and work breaks in exchange for massive investment in its Italian plants. By mid to late 2011, Berlusconi was increasingly in trouble as a result of public and private scandals, growing tensions and conflicts internal to his coalition, and public disillusionment. This was clearly evident in the massive losses for Berlusconi and his coalition members in municipal elections in May 2010 and in four referendums in June 2010. However, with a frail Democratic Party in the opposition, internally fragmented, with no new ideas or discourse, and unable to project a clear political identity around which to organize, as well as divided unions, it took the markets turning attention to Italy and pushing the price of interest on government bonds to an unsustainable level to force Berlusconi out of office. Mario Monti was appointed by the President of the Republic, Gior- gio Napolitano, to head a new technical government of ‘national commitment’ and to carry out a progam of ‘blood and tears’ in order to restore confidence in and health to the country’s economy. Monti generated high expectations as ‘the man who can save Europe’ and

31 Meeting of Confindustria, 26 May 2011. 358 Part III: Neo-liberalism in comparative perspective national citizens accorded ‘Super Mario’ growing levels of trust.32 Having served with distinction as European Commissioner for Trade, Monti was another member of the exclusive club of Italian liberal economists (who mostly taught at the prestigious private University Bocconi in Milan) with a deep knowledge of European political institutions. His government of technocratic elites was composed, again, mainly of academics and no politicians but it had the backing of major parties in parliament on the right and the left. Its mandate was nothing less than to reform all aspects of Italian government and administration while putting the country back on the road to economic recovery – a tall order, given the spread in the bond markets and the lack of growth of the economy. There also were debates about the possible democratic deficit of the executive in this ‘blocked’ or ‘suspended’ democracy,33 although the government was generally considered legitimate, much as technical governments were in the 1990s. The reforms passed by the government had ideationally rich titles and ambitious targets. They began with the ‘Save-Italy’ decree that the government explained was ‘shock therapy’ for a ‘terminally ill’ patient and that ‘sacrifice’ was necessary – as Labour Minister Elsa Fornero declared while shedding tears – through a massive reduction in the budget deficit via tax increases, pension reforms, and decreases in the size and cost of administrative bodies.34 This was followed by the ‘Grow-Italy’ decree that sought to liberalize closed professions and fight tax evasion as well as reorganize labour markets. The main issue raised in parliament on the last of these initiatives, after the brief sequence of coordinative negotiations with the social partners, focused on the extent to which the reforms would balance laissez- faire neo-liberal ideas about labour-market deregulation (e.g., through easy hiring and firing) with more social-democratic concerns about recalibrating rights (e.g., revising temporary contracts to provide for greater social protection). Compared to ‘Berlusconi-ism’, which involved a mix of liberalism (albeit, as noted, more rhetoric than reality) and domestic protectionism, Monti’s policy paradigm appeared, on the one hand, to be more market-led liberalism because it sought to deregulate markets35 and,

32 Quoted on cover of Time Magazine, February 20, 2012. 33 See Fusaro 2012; Ceccarini, Diamanti, and Lazar 2012; and Schmidt 2011. 34 See Jones 2012. 35 See Moschella 2012. State transformation in Italy and France 359 on the other hand, paradoxically, more state-led liberalism, in the sense that it engaged in a higher degree of ‘stateness’36 with greater autonomy, efﬁciency, and legitimacy than the Berlusconi state. ‘Monti-ism’ also contained the recognition not only that Italy cannot exist without Europe – because, as Monti emphasized, ‘you can do without me, but not without Europe’37 – but equally that Europe also cannot operate without Italy’s support. Monti’s leadership on the European stage effectively brought Italy back as a credible European and international player. He was largely responsible for the beginning of the shift to a discourse about growth that Chancellor Merkel could not ignore. The problem for Monti – and Italy – was that, in the end, he lost the public’s trust with policies that it perceived as increasingly harsh in terms of austerity and not very effective as the country continued to decelerate economically. This was clearly evident in the results of the February 2013 elections, in which Monti’s supporters received barely 10 per cent of the vote, whereas the followers of Beppe Grillo – a populist who had no programme other than to oppose all Italian politicians – won more than 25 per cent, which effectively made it impossible for the centre-left under Pier Luigi Bersani to form a government. After three weeks of attempting to form a government, Bersani’s statement that ‘only someone who was “insane” would want to run Italy under these circumstances’ seemed prophetic.

France from non-liberal technocratic to neo-liberal political leadership In France, the state has always had an even more central role than in Italy – and a more positive one. Rather than the immobilismo imposed by opportunistic political elites in the postwar years, dirigisme was the brainchild of ideologically state-centred technocratic elites who largely determined the non-liberal interventionist ideas for the state from the postwar period through the 1970s. Beginning in the 1980s, however, the transition to post-dirigisme meant that state-trained, neo-liberal political elites replaced the state-trained, non-liberal administrative elites and, in the process, produced the move from the administrative state to what Yves Thiberghien called the ‘entrepreneurial state’.38 The

36 See Cassese 2011. 37 New York Times, 5 December 2011. 38 See Thiberghien 2007. 360 Part III: Neo-liberalism in comparative perspective concept of post-dirigisme emphasizes the state as actor in and enactor of markets while pointing to the state’s neo-liberal movement away from postwar dirigisme.39 Although these neo-liberal political elites were convinced that it was necessary to dismantle the dirigiste capabilities of the state, they nevertheless continued to ﬁnd more indirect intervention appropriate whenever they believed the interests of the national economy and/or the polity to be at stake. Furthermore, even the way in which they adopted and adapted neo-liberal ideas – that is, choosing to engineer state retreat from active intervention in the economy – was intended to ensure that the state remained central to political economic activity, if only to compensate for the weaknesses of business organization and labour coordination.40 As for the EU, these modernizing French political elites also sought to export their national liberalizing ideas to particular policy sectors as well as to create, together with Germany, the Single Market and the EMU.41 Neo-liberal and pro-market ideas have been as historically present in France as in Italy and, during the postwar years, were also marginalized. Unlike in Italy, however, neo-liberal policy ideas were actively espoused by the right in the 1980s but then dropped, such that subsequently on both the right and the left, they were implemented in reality even as the rhetoric sought to disguise the underlying programme and philosophy. In the meantime, the EU that had ﬁrst served French political elites as a place to export moderately neo-liberal ideas for liberalization increasingly became an institutional constraint on French non-liberal ideas about state intervention in the markets.

Technocratic elites’ postwar construction of non-liberal state-led capitalism and the fall, then rise, of neo-liberal ideas In the early postwar years, during the Fourth Republic, France’s model might easily have been called ‘public neo-capitalism,’ as in Italy, given the strong role of elite civil servants in the management of the economy. The difference is that French dirigisme embodied a reasonably clear set of non-liberal ideas, characterized by Keynesian macroeconomic policies and interventionist industrial policy. This was carried out by a state-trained technocratic elite, often with origins on the ideological

39 See Levy 1999 and Howell 2009. 40 See Howell 2009. 41 See Schmidt and Woll in this volume; see also Jones in this volume. State transformation in Italy and France 361 right or even the far right, which had the power and position to put these ideas into action around or even against the fractious political elites.42 It was at the inception of the Fifth Republic, however, that they consolidated their control, which is also when the ideal-typical model of state capitalism as such came into being.43 This type of control, however, did not entail the same type of corruption and rent seeking as in Italy because France’s public enterprises were led by state-trained elite public servants who were granted a high degree of autonomy from the state and were imbued with an ideology of the state and their special role within it to promote the public interest – not party interests, as in Italy.44 Although neo-liberalism as an ideology remained largely marginal during this period, there nevertheless were a number of neo-liberal thinkers actively opposed to France’s dirigiste approach to governing. Some of the neo-liberals of the prewar years retained influence and access, specifically those who had been active in the resistance and part of the technocratic elite. Jacques Rueff, in particular, who had been part of the 1930s technocratic neo-liberal networks (and a member of the influential group of graduates of Polytechnique, X-Crise), had an impact, especially when he was brought in under De Gaulle to advise on economic policy.45 Others, however, such as Louis Rougier, who had organized the Colloque Lippman in 1938 and sought to redynamize the movement during the war from the United States, had little impact, particularly because he propounded nationalist ideas, opposed the Free French, and sought reconciliation with the Vichy government.46 The Mont Pelerin` Society, moreover, was at pains to recruit top-level French intellectuals and officials, unlike the interwar period when it had few such officials, with a few notable exceptions (e.g., Rueff). It was, in fact, only as the French dirigiste approach was beginning to demonstrate its limits in the 1970s, as the economy began to slow, the state-owned ‘national champions’ became ‘lame ducks’, and unemployment began to increase, that neo-liberalism in France, as elsewhere, came into its own.47 From the mid 1970s through the mid 1980s, France witnessed a major burgeoning of neo-liberal thought through growing epistemic

42 See Nord 2010. 43 See Hayward 1973, 1986; and Schmidt 1996. 44 See Burdeau 1970 and Hayward 1986. 45 See Chivvis 2010 and Denord 2007: 262–64. 46 See Denord 2007: 160–62. 47 See Schmidt 1996. 362 Part III: Neo-liberalism in comparative perspective communities of neo-liberal intellectuals, academics, policy makers, and publicists. The ‘new economists’ who adopted US–style neo-liberal (or at least neo-classical) economics and condemned dirigiste economics – along with the ‘new philosophers’ who promoted the core principles of neo-liberalism and criticized the dirigiste state – were increasingly influential because they portrayed the French interventionist ‘planning’ state as the problem and the market as the solution. Policy makers on the right along with public intellectuals made the case for neo-liberal policy ideas such as minimum income, budgetary restraint, privatization of public housing, and providing for the very poor rather than fighting inequality.48 Even in the central administration among civil servants in charge of planning and forecasting, the previous pluralist openness to experts with differing ideologies, methodologies, and backgrounds gave way to a more homogenized group, largely dominated by economists more attuned to neo-liberal thinking and increasingly in agreement with the monetarists in the Treasury. Moreover, because outside of the ministries there were no credible think tanks tied to business or trade unions, or even independent university centres with alternative expertise, neo-liberal policy ideas about what could or should be done became predominant.49 Neo-liberal thought became increasingly the focus of public debate as well, specifically once the Socialists were elected in 1981. Count- less books were published by neo-liberal theorists, some of whom sought to trace the French roots of liberalism back to the work of the AbbeSiey´ es,` Jean-Baptiste Say, Alexis de Tocqueville, and Ben- jamin Constant; others who attempted to create a modern version of liberalism by combining the work of French and Anglo-American philosophers as diverse as Montesquieu, Rousseau, and Hayek; and yet others who instead explicated and applied to France the Anglo- American version of economic liberalism as elaborated by members of the Chicago School of Economics and, again, Hayek or as practised by President Reagan in the United States.50 Neo-liberalism also had a major take-up in right-wing politics, in particular once the Socialists were elected in 1981, when the right divided into a hard nationalist core with the National Front – that then gave up any pretence to supporting neo-liberal ideas – and the

48 See Jobert and Theret´ 1994: 43–46. 49 See Jobert and Theret´ 1994: 26–34. 50 See Schmidt 1996: 133–34. State transformation in Italy and France 363 centre-right, newly converted to neo-liberalism and calling itself ‘republican’ in contrast to the Socialists.51 The centre-right was itself divided into ‘ultras’ and moderates. The ultras, who propounded complete state disengagement from the economy and an end to most aspects of the welfare state, were mainly academics, with one politician, Alain Madelin. The ‘moderates’, by contrast, encouraged a reform of the polity through limited state disengagement from the economy – including denationalization because the state is, by deﬁnition, a bad manager – and a gradual retreat from the welfare state in order to encourage individual responsibility and la liberte´ d’entreprendre (i.e., freedom of enterprise).52

Political elites’ neo-liberal reconstruction of France’s political economy When Mitterrand was elected President and the Socialists took over the government in the midst of ‘la crise’ in 1981, instead of a neo-liberal turn to monetarism – following the ideas of most other advanced industrialized countries – the newly elected, ideologically left-wing Socialist government brought back non-liberal ideas based on neo-Keynesian reﬂation in monetary policy, renewed state dirigisme in industrial policy through large-scale nationalization and extensive industrial recapitalization and restructuring, and generously expanded welfare-state entitlements. With these policy ideas, Socialist political elites claimed in their Marxian campaign rhetoric to be breaking with the ‘wall of money’ and capitalist exploitation. Once elected, however, the Social- ists largely dropped the Marxian discourse previously used to the nationalizations for a more nationalist discourse – that is, to save French ﬁrms from foreign takeover – and within nine months of their election, they began speaking of CEOs not as exploiters but rather as ‘creators of riches’. As one Socialist stated: ‘We went from the idea of a break with capitalism to the very different idea of a break with the failures of capitalism’.53 The newly appointed CEOs – overwhelm- ingly from the state-trained technocratic elite – insisted that this was the only way forward: there was no such thing as ‘socialist’ management of public enterprise, only ‘good or bad management’.54

51 See Jobert and Theret´ 1994: 58–61. 52 See Schmidt 1996: 133–37. 53 See Zinsou 1985: 61, cited in Schmidt 2002: 274. 54 For interviews with author, see Schmidt 1996: 311. 364 Part III: Neo-liberalism in comparative perspective

The critical juncture of 1983 confronted the government with double-digit inflation, runaway spending, declining business competitiveness, and the choice between staying in the European Monetary System or pulling out of it and the Single Market. President Mitterrand chose the ‘great U-turn’ to neo-liberal monetary policy, through monetarism and budgetary austerity. For the government – as one highly placed Socialist at the time put it – it was a question of either denying the economic realities, maintaining their Socialist doctrine, and losing politically or accepting reality and plunging into ideological crisis but having a chance to keep power.55 Mitterrand was clearly no ideological entrepreneur (he was perceived throughout his career as an opportunist when it came to allegiances and a pragmatist when it came to policy). However, with regard to the governments under his presidency, in the first phase, he allowed the more ideologically Socialist members free reign and, in the second phase, the more pragmatically neo-liberal. The problem for the Socialists from then until 1986, when they lost power, and again from 1988 to 1993 is that although they had cognitive arguments to justify their neo-liberal policy turn – that ‘modernization’ (not neo-liberalism) was a matter of necessity to ‘meet the challenges of globalization’ and that, within this, European integration would act as a shield against globalization – there was little normative legitimization beyond appeals to French national pride in the ‘economic combat’ for national survival and revival.56 Although the Socialists did speak of social justice – Mitterrand especially – the discourse had changed from one focused on promoting equality to one of social solidarity, which represented the tacit acceptance of the inequalities of income and social-insurance provisions necessitated by a more neo-liberal approach to economic management.57 It was, in fact, not until the Jospin government of 1997 that the Socialists developed a discourse that seemed to resonate normatively – at least in the first three years – by claiming to balance equity and efficiency in privatization, labour, and social policy as well as by promising to push for the regulation of ‘destructive’ globalization.58 (Note that they privatized more public enterprises than all the previous governments combined.)

55 Henri Weber, interview with author; see Schmidt 1996: 111. 56 See Schmidt 2002: ch. 6. 57 See Jobert and Theret´ 1994: 72–8; see also Schmidt 2002: 276. 58 See Schmidt 1996 and 2002: 282–87. State transformation in Italy and France 365

However, whereas the Socialists backed into implementing neo- liberal policy ideas without necessarily believing in them or articulating any discourse of legitimation, the right had not only the rhetoric but also the reality of implementation – for a short period. The Chirac government elected in 1986 had a strong campaign discourse that embraced a moderate version of neo-liberalism, promising ‘to restore liberties’ with a major shift to privatization, extensive financial-market liberalization, and business deregulation.59 Chirac, however, was an opportunistic entrepreneur, as is evident from the fact that when he lost the 1988 presidential election – he was successfully portrayed as too radical by Mitterrand during the campaign – he also lost his neo- liberal enthusiasm. That said, certain of Chirac’s ministers were committed neo-liberal ideologues, including Alain Madelin in the Ministry of Industry, who all but destroyed it. More generally, however, the country’s state-centred traditions of economic thought prevailed even during this period. Thus, despite the proclaimed end to dirigisme, or perhaps because of it, the privatization process was a highly dirigiste and not very neo-liberal affair: The government hand-picked a noyau dur, or hard core, of industrial and financial investors – determined as it was to provide privatized firms with stable leadership and protection against hostile takeovers and foreign acquirers.60 Subsequently, moreover, whether under governments of the left or the right, although the ‘post-dirigiste’ state was engaged in implementing neo-liberal ideas focused on privatization and deregulation, it did not entirely give up on seeking to influence business indirectly where it saw fit. The state continued to seek strategic areas in which it could reinforce business competitiveness including by using privatization strategically, bailing out failing industries, and providing state aid to others in need – albeit under the increasingly watchful eye of the EU Commission. France’s ‘economic patriotism’ was equally pronounced, such as designating yogurt a strategic sector to ward off a hostile takeover of Danone61 or interfering with the attempted takeovers of banks. However, with regard to the banking sector, the French state took a highly laissez-faire neo-liberal approach to its regulation. As such, the sector has been controlled not by the markets but rather by the bankers through their oligarchic

59 See Schmidt 1996: 136–39. 60 See Schmidt 1996, 2002. 61 See Clift and Woll 2012. 366 Part III: Neo-liberalism in comparative perspective relationships, which the state assumed to be in the best interest not only of the firms but also of France.62 Notably, then, as Mark Vail writes: ‘[w]hile thus clearly liberal, the metamorphosis of the French economy was far from neo-liberal in inspiration’.63 For labour, in contrast, state intervention took the form of back- and-forth efforts to liberalize the labour markets when right-wing governments were in power – as in the case of the abortive attempt in 2006 to increase flexibility with a two-year probationary contract for youth employment – or to ‘moralize’ the labour markets when the left was in office, as with the initiative on the 35-hour work week in the late 1990s.64 However, both efforts point to the paradox of a state that having been the main architect in dismantling centralized labour-market regulation, nevertheless was committed to remaining a central actor in the reconstruction of the industrial-relations system.65 From the 1980s onwards, moreover, the welfare state continued to expand as the ‘social-anesthesia state’ sought to maintain the social peace66 as well as to meet the obligations of ‘solidarite´ sociale’ and to combat social ‘exclusion’. Reforms occurred periodically beginning in the 1990s, but they were characterized not by any new ‘paradigm’ but rather by incremental shifts and ‘layering’ of new policies on top of the old, with no clear idea about where the changes would lead.67 The reforms passed generally where there was an effective coordinative discourse with the social partners, with measures that balanced positive and negative benefits.68 This is in contrast to the failed 1995 attempt by Prime Minister Alain Juppe´ to reform public pensions and to eliminate the ‘special regime’ of the railroad workers. This was met by massive strikes with public support, largely because Juppe´ engaged in almost no legitimizing discourse, whether via communication to the public or coordination with the social partners. President Sarkozy’s success twelve years later in eliminating the special regimes of the railroad workers was largely due to the fact that he had a persuasive communicative discourse to the public that reframed the issue in terms of the French Republican tradition. He argued that equality of treatment demanded that railroad workers retire like everyone else

62 See Jabko 2013. 63 See Vail 2010: 64. 64 See Schmidt 2002, 2009. 65 See Howell 2009. 66 See Levy 2008. 67 See Palier 2005. 68 See Palier 2006 and Hausermann¨ 2010. State transformation in Italy and France 367 after forty years of employment (rather than at age ﬁfty for railroad conductors).69

From non-liberal to neo-liberal political leadership in the economic crisis It is notable that President Sarkozy had won the 2007 election on a platform as close to market liberalism – or the ‘Anglo-Saxon model’ of capitalism – as imaginable for a French presidential candidate (albeit also with elements of ‘voluntarism’) – largely as a break with the immobilism of his predecessor, Chirac. However, once the crisis hit, he reversed his position, seemingly becoming the champion of renewed non-liberal dirigisme through his call for greater state intervention at the national level and regulation at the global level. His activism on the European and world stages to respond to the crisis was impressive – including calling European leaders together for coordinated action on the banking crisis – and to inject non-liberal Keynesian stimulus when the real economic engine started sputtering. In France, however, Sarkozy ultimately accomplished much less than he promised, and what he did do was more in keeping with the ‘post- dirigisme’ that had been the rule at least since the late 1980s.70 In industrial policy, for example, Sarkozy’s government continued to be committed to promoting French business by arranging mergers where it deemed necessary; bailing out banks and ﬁrms without, however, otherwise exercising control over them;71 and doing everything it could to facilitate the creation of French national champions, in particular with regard to dominance in the ﬁnancial-services industry.72 ‘Eco- nomic patriotism’ was also enhanced, as Sarkozy continued to claim to ‘protect the French in globalization’ by railing against the unfair advantages of the low-wage economies of Central and Eastern Europe, threatening to prevent the sale in France of Peugeots made there, and urging Renault to repatriate its operations – with sharp rebukes from Brussels in response. However, none of this compared to the dirigisme of the past because it lacked the coherent planning and clear vision, the money, and the power, given geopolitical constraints.73 Whatever

69 See Schmidt 2009. 70 See Levy 2011, Clift 2012, and Jabko 2013. 71 See Jabko 2013 and Clift 2012. 72 See Hardie and Howarth 2009. 73 See Levy 2011. 368 Part III: Neo-liberalism in comparative perspective his populist pronouncements against the bankers, Sarkozy understood the constraints of globalization of the financial markets and he was unwilling to take action without global or at least European legislation to ensure that French business would not be disadvantaged by legislation coming only in France. However, whatever the non-liberal discourse, by mid 2010, neo- liberalism was back with a vengeance, in particular as a way to address the pledge to budgetary austerity in the negotiations of the Greek bailout. Having led the non-liberal charge to respond to the 2008 crisis with Keynesian stimulus, Sarkozy largely gave in to Chancel- lor Merkel’s ‘ordo-liberal’ ideas linked to ‘fiscal consolidation’ and a ‘Stability Culture’.74 In exchange for finally attaining France’s long- cherished institutional idea of ‘gouvernance economique´ ,’ in which member states would jointly govern macroeconomic policy in the Euro- zone, Sarkozy accepted that such governance would follow Germany’s ordo-liberal economic philosophies and policy programme. A bonus was that these ideas were also more in line with those of his electoral constituency. From 2010 to 2012, Sarkozy not only accepted agreement after agreement focused on ensuring member-state compliance with austerity (e.g., the ‘six-pack’ and the ‘fiscal compact’), he also increasingly shifted his discourse from concerns with growth and solidarity to one that parroted Merkel’s discourse of stability.75 It was only in late March or early April of 2012 that Sarkozy started calling for growth in response to his presidential-campaign opponent François Hollande’s call for growth and a renegotiation of the ‘fiscal compact.’ In his election campaign, Hollande proved to be mostly a pragmatic political entrepreneur who understood not only the importance of Germany at the level of EU coordinative negotiations, and therefore pledged to meet the goals of fiscal consolidation, but also of the French public, which had soured on neo-liberal policies particularly because they had not produced growth and prosperity. Significantly, although Hollande promised in his campaign to promote growth using non- liberal policy ideas, once elected President, he charted a course much closer to the neo-liberal, or rather ordo-liberal, orthodoxy with a discourse that insisted that in order to ensure French credibility with the markets and the Germans, he would have to proceed to rapid deficit

74 See Schmidt and Thatcher, Schmidt and Woll, and Jones, all in this volume. 75 See Crespy and Schmidt 2012. State transformation in Italy and France 369 reduction and belt-tightening, as agreed in the ﬁscal compact. Iron- ically, this course of action has not only made him unpopular with the French public, but also the contraction in the economy as a result of these very policies is likely to make France less rather than more credible with both the markets and with Germany.

Conclusion: Resilient liberalism through an active state It is clear from what happened in Italy and France during the crisis that state leadership continues to matter, and it matters arguably even more in state-inﬂuenced market economies – whether taking the form of ‘public neo-capitalism’ or post-dirigisme – than in other types of market economies because the state is ever present to make matters better – or worse. This particular intertwining between a highly active state – more typical of non-liberal ideas – and highly resilient neo- liberal ideas, however, has taken a different course in Italy and France. In Italy, neo-liberal ideas have been present from Croce and Einaudi to the present day, but they have remained in the background, outside of domestic party politics or political institutions and with self-interested, ideologically divided, opportunistic political elites pre- dominating much of the time. Neo-liberal ideas appeared on the political stage only when pushed from the outside, mostly by the EU, and imposed on the inside by pragmatic technocratic elites who have taken over political economic leadership at critical junctures, both in the mid 1990s and from late 2011 to early 2013. By contrast, in France, neo-liberal ideas gained increasing predominance beginning in the 1970s – albeit a generally moderate neo-liberalism that ‘dared not speak its name’ – as pragmatic political elites on the left as much as on the right beginning in the mid 1980s implemented neo-liberal policy ideas that they explained most often using a non-liberal discourse. In short, whereas Italy had the neo-liberal rhetoric but not the reality – with the exception of critical moments during which pragmatic technocrats deployed neo-liberal ideas, discourse, and actions – France had the reality but not the rhetoric as pragmatic politicians deployed neo-liberal ideas in action that they sought to disguise through their discourse. However different Italy and France may have been in the particulari- ties of their neo-liberal ideas and discourse, both countries nevertheless have pursued a moderate type of neo-liberalism in recent years while 370 Part III: Neo-liberalism in comparative perspective maintaining a highly activist state. Both Italian and French elites, political as well as technocratic, remain ‘voluntarist’ and committed to the idea (if not always the practice) of a highly efﬁcient and powerful state, even if not as interventionist as in the non-liberal period. This ‘statist liberalism’ paradoxically violates – in its aspirations as much as in its actions – not only the classical neo-liberal ideals of laissez-faire but also the ordo-liberal ideas of rules-based state action. This further demonstrates that there are many ‘liberalisms’, some more neo-liberal than others, but all – for the moment at least – highly resilient.

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From the point of view of many participants and observers, the break- through of 1989 was nothing else but the historical victory of liberalism over socialism. (Szacki 1995 [1994]:3–4)

The standard stabilization principles apply here: ﬁscal deﬁcits must be eliminated, money creation controlled. (Blanchard et al. 1993: xii)

Developments outside Slovakia have been exceptionally turbulent since 2008, which makes the need to provide certainty for our citizens ever more pressing. The Government . . . will guarantee sound and sustainable economic growth . . . which is not based predominantly on cheap labour, uncertainty in industrial relations, impaired health and safety at work, agency work, speculation and fraud. (Government of the Slovak Republic 2012)

Introduction Central and Eastern European countries were global leaders in the adoption of neo-liberal ideas and policies during the 1990s and 2000s. After being ruled for decades by communist political regimes that rejected free-market economics, Central and Eastern European countries were among the least liberal societies in the world in 1989. The following two decades witnessed a dramatic catch-up with and popularization of Western liberal norms. Estonia, for instance, which was part of the Soviet Union for almost ﬁfty years, transformed into one of the most liberal economies in the world and a Eurozone member in the twenty years between 1991 and 2011. Its economic liberalism

374 Neo-liberal development model in Central and Eastern Europe 375 now exceeds that of most Western European countries. Other countries moved at their own pace, in their own way, and with greater or lesser trouble, but nearly all Central and Eastern European countries adopted neo-liberal ideas and policies at a dramatic rate for the better part of two decades. The phase of revolutionary liberalism has now ceased.1 Whereas neo-liberal ideas have shown resilience in some Central and Eastern European countries, a trend towards greater statism is clearly visible in others. Alternatives to neo-liberalism are being advanced and considered in significant parts of the region, including among the member states of the EU. Central and Eastern European countries are no longer breaking world records as they ‘sprint’ to adopt neo-liberal ideas. To the contrary, the ‘dependent-market economies’ (DMEs) of Central and East- ern Europe are struggling with how to resuscitate growth in small, open economies when global financial flows have dried up and promises of increased standards of living have been disappointing for many.2 The DMEs of Central and Eastern Europe are characterized by extreme dependence on outside forces. Central and Eastern European countries do not fit easily into other well-known varieties of capitalism because the locus of economic decision making does not lie within their own borders. These economies are radically open – more open still than the small, open economies of Western Europe – and thus dependent on trade to an even greater extent. Although the DMEs benefited greatly from a massive inflow of capital in the 2000s, they also suffered disproportionately from the ‘bust’ after the 2008 collapse of Lehman Brothers. This experience of being buffeted by the economic winds – and the sense that the effects were increased by the extreme openness generated by the adoption of neo-liberal policies – has forced a reassessment of neo-liberal ideas in some parts of the region. In today’s Central and Eastern Europe, an alternative set of economic ideas is on the march, specifically the more interventionist state- capitalist ideas championed by China in the past several decades and by Russia under President Vladimir Putin. To distinguish it from West- ern liberalism, Prime Minister Viktor Orban´ of Hungary called his approach – adopted after his 2010 election victory – the ‘Eastern winds’ approach to economic policy. Some countries, such as post-Socialist Belarus, have been so far behind in the adoption of liberal economic

1 See Ackerman 1992. 2 See Nolke¨ and Vliegenthart 2009. 376 Part III: Neo-liberalism in comparative perspective policies that they now find themselves in the avant-garde of this new state-capitalist trend. Yet, even in those countries that rapidly adopted neo-liberal ideas, alternative models of economic policy are gaining momentum. Russia, for instance, which embraced neo-liberalism in the 1990s, reversed course in the 2000s and moved towards a state- owned and state-directed market economy, jailing or exiling a number of uncooperative oligarchs who refused to make the shift. Hungary has taken the lead among EU member states in Central and East- ern Europe in adopting a more statist approach to economic policy. Yet, other countries in the broader region are following suit, especially those that never quite made neo-liberal ideas work. Ukraine (not an EU member state but a country that has been in negotiations for associate status) rejected IMF prescriptions and adopted a more state- controlled capitalism. Romania and Bulgaria, which never quite fitted into the neo-liberal mainstream, have created a crony capitalism with party, state, or ‘Mafia’ control. It seems that in Central and Eastern Europe, neo-liberalism is resilient only in a narrow sense. It is true that countries have not backed far away from the neo-liberal policies they adopted in the past; however, further progress has halted, and current trends point in many countries towards a more statist future. This chapter focuses primarily on the EU-10 (eleven including Croatia), which are those countries from Central and Eastern Europe that have joined the EU in 2004 or later, with particular emphasis on Poland and Hungary – two contrasting cases that illustrate factors that have made neo-liberal ideas more resilient or challenged. The EU-10 countries were deeply in the thrall of socialist ideology for more than forty years, and that experience shaped their approach to neo-liberal ideas. Many policy makers in the region wanted to reject socialism in its entirety and apply its purest antidote, one that would make Karl Marx and Vladimir Lenin turn over in their Highgate grave and Red Square mausoleum. The adoption of neo-liberal ideas was an ideological reaction – or over-reaction – in a heavily ideological region of the world. I often wonder why Central and Eastern European policy makers seem to implement radical new ideas more completely than their counterparts in the West would dare or desire. Do they love ideas more? Do they adopt radical ideas out of a burning desire to catch up with the West? Or are they more vulnerable to influence from leading powers? Whatever the reason, it is notable that Central and Eastern European countries exited communism and adopted neo-liberalism with remarkable alacrity. Neo-liberal development model in Central and Eastern Europe 377

One thing that this penchant for radical economic ideas does for Central and Eastern European countries is to make the region more central to global theoretical debates about economic policy. Central and Eastern Europe comprises a vast region of twenty-eight countries with subregions including the Baltic States, the western states of the former Soviet Union, the so-called Visegrad states of Central Europe, and the Balkans. The battle of economic ideologies in Europe during the late twentieth century was fought out largely in Central and Eastern Europe. What this region does, for good or for ill, seems to presage or determine history to a remarkable extent. Because Central and Eastern European countries have been set up as testing grounds for neo-liberal ideas, the disillusionment with these policies in the region could prove to be a great blow to the ideology itself, with far-reaching consequences. As with the armies of Napoleon or Hitler, many inno- vations of the West have died a painful death on the Eastern steppes before collapsing in the centre of Europe.

The rise of neo-liberalism in Central and Eastern Europe Neo-liberal ideas took Central and Eastern European governments by storm after 1989. Although their victory was never complete, the speed and extent of the shift from socialism to free-market ideology was remarkable; it was the most radical reforming region on Earth. Other countries started from a more liberal position than Central and Eastern European countries and remain more liberal, but few came as far as fast. The speed of the neo-liberal revolution can be attributed to numerous factors: their relative lateness in adopting liberal economic ideas and a process of catching up, the weak economic position of Central and Eastern Europe and the power of Western international institutions after 1989, the strength of neo-liberal discourse at the time of the breakdown of communism (i.e., the third line of analysis in the first chapter of this volume), and – of course – a thorough rejection of communism and a desire to react. Whereas neo-liberal ideas were developed in Western countries in the 1970s and 1980s, only faint echoes permeated the corridors of power in Central and Eastern Europe. Bockman and Eyal documented how an elite group of Central and Eastern European economists was exposed to Western economics through participation in conferences 378 Part III: Neo-liberalism in comparative perspective that sought to bring economists together across the Iron Curtain.3 Many of those economists began to wish that their country would also embrace the market. Yet, the number of people exposed to neo- liberal ideas remained small – an elite group entrusted with dangerous information. They would become important later but, under communism, their impact was marginal. Most of the rest of the population was kept forcibly ignorant of market economics. Schools and universities trained students in an entirely different paradigm: that of socialist economics. Students at the ‘Karl Marx’ universities and higher party schools in Central and Eastern Europe learned the superiority of techniques for planning complex systems. Because markets were mostly banned, their operation was not deeply studied. Even basic statistics such as GDP were measured differently, in ways that made comparisons with the West difficult. Communist and free-market economies operated in parallel universes. In the communist countries, Western social-science books and journals were cordoned off in special reading rooms in leading libraries, where access was carefully controlled. Controls began to loosen in the 1980s, particularly in Poland and Hungary, two of the countries that went the farthest along the path of reform communism. In these two countries, Socialist governments experimented with liberal economic reforms, allowing managers and workers to operate mini-cooperatives, plan their own businesses, sell their products at market, and retain profits. These reform Socialist experiments helped to pave the way to economic transition. Indeed, the collapse of communism was precipitated by a measure intended by the Hungarian government to encourage free trade with neighboring Austria. In 1988, they cut down the barbed-wire fences that lined the frontier with Austria and liberalized travel. This move in favour of economic liberalism had the side effect of allowing waves of East Germans to stream to the West via Czechoslovakia, Hungary, and Austria. This frantic and disorganized exodus constituted a visible rejection of the communist system that was symbolized by the Trabant automobiles that the emigrants abandoned along the way. Neo-liberal ideas took hold of government policy starting in late 1989 and 1990, when reformers were put in charge of finance ministries and economic policy in Poland, Czechoslovakia, and other countries after communist regimes had suddenly collapsed. Leszek

3 See Bockman and Eyal 2002. Neo-liberal development model in Central and Eastern Europe 379

Balcerowicz – a liberal economist who studied for an MBA at St John University in New York City and returned to Poland to run a neo- liberal economics discussion group as professor at the Warsaw School of Economics in the 1970s and 1980s – launched his ‘Balcerowicz plan’ as the first post-communist Minister of Finance. Vaclav´ Klaus, a market-oriented economist who worked for a Czechoslovakian state bank yet traveled in reformist circles, became Finance Minister and then Prime Minister of Czechoslovakia. In many countries, the small group of economists who had been imbued with Western neo-liberal economics were put in charge of ministries of finance and economics and given free range in economic policy. They were often paired with Western advisers, who poured in with extensive financing and technical assistance from the World Bank and the IMF. This so-called Marriott brigade – jetting back and forth from Washington, DC, and Cambridge, Massachusetts – contributed greatly to the thinking that transformed economic policy in the East, developing and approving policy agendas.4 This was truly a revolution from above, run and operated by a small cabal of Western-trained economists with help from their Western advisers, allies, and mentors. There is a vigorous debate over the extent to which neo-liberal economic programmes in Central and Eastern Europe were mostly homegrown or internationally influenced.5 Whereas domestic neo-liberals made a major impact on policy, it is also true that neo-liberal programmes of economic reform in Central and Eastern Europe took their cues from ‘Washington consensus’ policies implemented in the early 1980s in Latin America after the debt crisis.6 Ultimately, Central and Eastern European countries had few choices if they wanted to integrate into Western economic structures. They could choose to adopt neo- liberal economic ideas and enjoy Western support or choose to adopt another alternative and lose the support. For countries that wanted to escape the Soviet bloc and join the EU, there was no real choice; adoption of neo-liberal ideas was a sine qua non for membership in the Western ‘club’. Western governments and international institutions launched an enormous assistance effort to help Central and East- ern European countries implement neo-liberal ideas. This effort was

4 See Wedel 1998. 5 Cf. Appel 2000, Bockman 2011, Bohle 2006, Gowan 1995, and Manzetti 2009. 6 See Williamson 1990. 380 Part III: Neo-liberalism in comparative perspective coordinated at the governmental level by the G-24 and organized through the IMF and the World Bank, as well as the EU’s PHARE programme. For the West, the main dilemma that the Central and Eastern Euro- pean transitions posed was how much the different starting point of the communist countries would affect the implementation of the neo- liberal programme. Western neo-liberal economists quickly concluded that despite significant differences in the post-communist context, the same basic rules applied: what the post-communist countries needed was monetary stabilization and economic liberalization on a grand scale plus privatization of the largely state-owned economy.7 Neo-liberal ideas exported from the West found fertile ground in Central and Eastern Europe as the small band of economists exposed to Western economics took positions of power in finance ministries and other institutions of economic policy. They welcomed Western advisers and together developed radical programmes for economic reform. When out of power, these same reformers created neo-liberal think tanks, often with funding from Western neo-liberal supporters and counterparts such as Heritage and the Cato Institute. These think tanks became important transmission mechanisms of neo-liberal ideas into government policy.8 Central and Eastern European ‘reformers’, including Vaclav´ Klaus, Mart Laar, Ivan Miklos,ˇ Leszek Balcerow- icz, Lajos Bokros, and Yegor Gaidar, were lionized by conservative think tanks in the West as heroes whose ‘gutsy’ adoption of radical neo-liberal ideas created a fine example for most Western politicians. The power of these think tanks represent the fourth and fifth lines of analysis in the first chapter of this volume on the power interests of the winners of reform and the force of institutions supporting neo- liberal policies These neo-liberal think-tank networks became closely intertwined. One example is a book introduced by Gary Becker and published by the conservative US National Center for Policy Analysis that features the writings of Czech Prime Minister Vaclav´ Klaus. Klaus underscored his closeness to neo-liberal ideological heritage when he

7 See Blanchard et al. 1993. This is a key statement of the mainstream of neo-liberal thinking on economic reform in Central and Eastern Europe. Co-authored by leading economists, including Jeffrey Sachs, Lawrence Summers, and Richard Dornbusch, it provided a blueprint for neo-liberal reform programmes, a ‘Washington consensus’ for post-communist countries. 8 See Appel and Orenstein 2013. Neo-liberal development model in Central and Eastern Europe 381 wrote: ‘In the economic sphere, we have been consistently trying to follow basic, well-known, conservative axioms. We have insisted on healthy ﬁnance and on a balanced budget ...wehave insisted on continuous reductions in the state budget’s share of . . . GDP, on vigorous deregulation and liberalization and on rapid mass privatization of what used to be the state-owned economy’.9

Neo-liberalism and its discontents Neo-liberal reform programmes in Poland and elsewhere in Central and Eastern Europe began with liberalization of prices, trade, and government regulation.10 Neo-liberals advocated suddenly freeing most prices that had been established by state planners for most goods under socialism (with the exception of transportation, energy, and public wages, where changes would be phased in), liberalizing international trade, deregulating the economy, and employing a draconian monetary policy to control price inflation. The basic objective was to get the price mechanism working properly through the quick establishment of free prices in a stable macroeconomic environment. Then, neo-liberal economists expected economic actors to behave rationally, producing what the market demanded and selling it at a market price. The result was expected to be a short, sharp transition recession followed by sustained economic growth. Unemployment was a concern but primarily during a short transition period. Undervalued currencies would enable Central and Eastern European countries to export internationally, spur foreign investment, and curb consumption. Main- stream Western economists believed that ‘a shift to democracy leads workers to have increased and unrealistic income aspirations’ that can lead to an inflationary wage–price spiral.11 These expectations would have to be destroyed before growth could occur. Neo-liberal reform programmes ended subsidies and price controls on a wide variety of staple living necessities and sent prices soaring, thereby impoverishing millions. This revolution, like Stalin’s, could not begin without ‘cracking some eggs’. Neo-liberal reformers believed that this was necessary to control inflation and to ensure that the price mechanism worked efficiently. Continuing to enhance public welfare

9 See Klaus 2005: 9. 10 See Blanchard et al. 1993. 11 See Blanchard et al. 1993: 3. 382 Part III: Neo-liberalism in comparative perspective through subsidies, they believed, would only delay the market’s ability to provide the goods that people needed. However, the extent of the transitional recession was truly catastrophic – and much deeper than initially expected. Although there is an extensive debate over the depth of the economic collapse, which differed significantly among countries and among regions, life-expectancy figures show a frightening and incontrovertible truth: average male life expectancy in Russia dropped from sixty-six to fifty-seven, despite a rapid increase in the ownership of televisions, automobiles, and washing machines.12 Populations of most countries in the region declined – in some countries by as much as 5 to 10 per cent due to early mortality, decreased family formation, lower fertility, and out-migration. Moreover, these damaging effects persisted much longer than economists had predicted – as long as twenty years or more in some countries such as Ukraine. Although other countries in Central Europe did not suffer such a catastrophic fate, rebounding within a few years, the post-communist transition still caused the largest collapse in life expectancy recorded in modern history outside of wartime. Neo-liberal policies, such as the decision to eliminate food subsidies – which at least one prominent neo-liberal economist later judged to be unnecessary – certainly contributed to this misery.13 It is often argued that this suffering could not have been avoided. Yet, social policy was not a major preoccupation of neo-liberal economists or reform programmes. Neo-liberal policies launched what became an economically induced Darwinian struggle in which the young, the strong, and the well educated won out. The old, the ill trained, and the ethnic minorities lost, particularly the Roma (i.e., gypsy people), seven million to nine million of whom live in Central and Eastern Europe. The Roma had benefited from economic subsidies and affirmative- action programmes during the communist era. After the collapse of communism, many found that their jobs, their housing, and their benefits had been stripped away and affirmative action was replaced by racial discrimination.14 The most innovative and controversial neo-liberal reform, that which truly set Central Europe apart from other recipients of the ‘Washington consensus’, was mass privatization. Because neo-liberal

12 See Philipov and Dorbritz 2003. 13 See Blanchard 1999. 14 See Ringold et al. 2005. Neo-liberal development model in Central and Eastern Europe 383 economists did not believe that enterprises would conform to price signals if they were state-owned, they advised rapid privatization of industry. Privatization took place in a variety of ways, depending on the size of ﬁrms and their marketability. However, given the large number of enterprises that had to be disposed of in a short period, free- market advocates felt the need to move beyond traditional methods of direct sale.15 They quickly formulated a variety of ‘mass-privatization’ programmes that gave enterprises to new owners at nominal cost, often through the free or nearly free distribution of vouchers that citizens could trade for shares in enterprises. At the time, mass privatization was heralded as a brilliant innovation and advocated by international ﬁnancial institutions throughout Central and Eastern Europe as an antidote to the power of ‘red directors’ and a way to make all citizens shareholders. However, in retrospect, many analysts believe that mass privatization empowered cabals of connected individuals to take possession overnight of the commanding heights of the economy. The unscrupulous found ways to take control of businesses for free. In many cases, these individuals were criminals or were connected through corruption to the governments of the day. Mass privatization contributed to extreme forms of political corruption and appears to be correlated with declining living standards.16 The advice of prominent neo-liberal economists of the time to hold off on privatization and wait until enterprises could be sold to ‘real’ owners was not heeded.17 The long-term effect of the rush to privatize through vouchers and other means seems to have created an industrial and political structure that most people believe to be corrupt and unfair. According to a 2006 survey conducted by the World Bank and the European Bank for Reconstruction and Development (EBRD), at the height of the economic boom in Central and Eastern Europe that took place in the mid 2000s, most people in the region still believed that they and their families were economically better off before 1989.18 After the initial phase of neo-liberal ‘shock therapy’ in each country, ‘real politics’ set in and interest groups began to reorganize to oppose neo-liberal ideas from a number of directions.19 First, right-wing nationalists tended to oppose neo-liberalism because it implied excessive dependence on the West. They perceived market

15 See Blanchard et al. 1993 and Sachs 1994. 16 See Stuckler et al. 2009. 17 See Kornai 1990. 18 See EBRD 2007. 19 See Balcerowicz 1994. 384 Part III: Neo-liberalism in comparative perspective liberalization as a change of masters from Moscow to Brussels, and they preferred, instead, to pursue more classically national- istic economic policies. For instance, this was the standpoint of Poland’s Kaczynski twins, who caused a furor in Europe by rejecting Germany and hunting down former communists and secret-police col- laborators who collaborated with Moscow rather than pursuing liberal reforms. A second group of opponents of liberal economic reforms were those who profited from partial reforms and imperfect markets to make a fortune during the transition – for instance, by buying subsidized products cheaply and selling them abroad at world prices. People who benefited from extraordinary niche opportunities opposed further reforms that might threaten their profitable position.20 Finally, Social Democrats and Socialists opposed neo-liberal reforms on ideological grounds, believing that a ‘good’ society would have a greater role for state regulation, state planning, labour unions, and welfare institutions. Social-democratic politicians were often elected to power in Central and Eastern Europe, although they rarely delivered on their promises.21 Neo-liberal hegemony and the pull of the West, it seems, was too strong. Indeed, some scholars have posited that the typical relation between left-wing parties and social spending in Central and Eastern Europe has been reversed: the right wing registers greater social spending on average because left-wing parties have needed more than others to demonstrate their market-oriented credentials.22 During the mid 2000s, the transition recessions were over in most Central and Eatern European countries except the hardest-hit countries (e.g., Moldova, Ukraine, Georgia, and Armenia – countries that stood on a geopolitical ‘fault line’ between Europe and Russia), and Central and Eastern Europe seemed to achieve the high growth rates that they had been promised. Economic growth took off at a rate of 5 to 7 per cent per year in most countries of the region. Nokia opened factories in Romania; Ikea built furniture; Volkswagen manu- factured trucks and SUVs; and property markets in Prague, Bratislava, and Moscow boomed. Central and Eastern Europe, a region viewed with great scepticism by Western investors in the 1990s, suddenly became one of the top regions in the world for inward investment. Capital flowed in at a rate that exceeded, on a per-capita

20 See Hellman 1998. 21 See Cook and Orenstein 1999. 22 See Tavits and Letki 2009. Neo-liberal development model in Central and Eastern Europe 385 basis, the amount into similar small developing countries in Asia and Latin America. The boom, however, proved short-lived and ended in the global bust of 2008. Then, it seemed that Central and Eastern Europe had ‘over-heated’, pumped up by a wave of inward investment channelled largely by banks into starved markets for consumer finance. There was another anomaly: it was not only the countries that had embraced neo- liberal reforms that benefited. Countries such as Belarus, which had done the least reforming, also boomed in the 2000s. Russia, which had rejected neo-liberal policies in favour of state capitalism – including the creation of a dominant state sector of the economy through the de facto renationalization of major companies – also grew rapidly. Therefore, as the responsibility of neo-liberal economists for the debacle of the 1990s can be debated, so also can their responsibility for the growth of the 2000s – which appears to have had much to do with the revival of Russia after the chaos of the 1990s.23 After the wild ride of the past two decades, Central and Eastern Europeans are split on the results of neo-liberal economic reforms. On the one hand, these countries have rapidly caught up in aggregate income with the countries of Western Europe. They enjoyed rapid economic growth in the mid 2000s as Central and Eastern Europe became a major target for inward investment, with billions of dollars flowing into the banking sectors of these countries to finance mortgage and credit-card debt. Yet, on the other hand, the economic bust that followed was equally radical. Latvia lost 17 per cent of GDP in 2009. Since the crisis, Central and Eastern Europe has had the longest recessions and the weakest recoveries of any developing region in the world. As Asia and Latin America quickly took off, Central and East- ern Europe continued to stagnate while European investors took care of problems at home. Then, there are the effects of inequality. While aggregate living standards have increased, the returns have been shared unequally. Many people have been left behind. One particular problem is the low employment rate in Central European countries. Whereas people working in the transformed and Western-oriented sectors have great jobs, a large share of the workforce has no employment at all. Employment rates in Central Europe hover at approximately

23 See Orenstein 2009. 386 Part III: Neo-liberalism in comparative perspective

55 per cent, compared to 75 per cent before the transition. Hungary, for instance – a country of ten million people – has lost one million jobs since 1989. Growth has benefited some but has never reversed the economic devastation experienced by millions of others. This helps to explain why Central and Eastern Europeans have a penchant for protest voting. Finally, corruption has left a bad taste in peoples’ mouths. Cor- ruption is the primary political issue in the region and the sudden freeing of state controls bears some of the blame. Although neo-liberal economists believed that once the state got out of the way, orderly markets would arise, this proved to be a textbook fantasy. In reality, in many instances, criminal organizations, clans, and mafias of various sorts took the reins that were dropped by the communists. That legacy has poisoned the economics and politics of many Central and Eastern European states. It is the most significant cause of popular discontent, and many Central and Eastern European governments are turned out for their corruption, to be replaced by governments that are equally corrupt or otherwise fail to make inroads in fighting the rule of the clan.24 In many countries, people associate the rise of corruption and criminality with the imposition of liberal reforms. All of this has caused a serious rethinking of the neo-liberal development strategy adopted in Central and Eastern Europe after 1989. From autarkic communist economies, neo-liberal reform programmes turned Central and Eastern Europe into some of the most open small economies in the world. The process was incredibly painful, causing a massive depression that cut populations and life expectancies. Although these economies have recovered, jobs remain scarce. Certain sectors and people have advanced; others have not. Meanwhile, mass privatization has contributed to high levels of corruption that poison the political systems of these countries and make public-interest reforms difficult. Moreover, because their growth was so dependent on massive inflows of foreign capital, Central and Eastern European countries face a considerable dilemma in restarting growth in the midst of a Europe in crisis. Pavol Demes, a former Slovak foreign minister and head of the Central and Eastern European office of the German Marshall Fund, a US think tank, stated that ‘People are questioning liberal democracy, the markets and the EU. They see countries like

24 See EBRD 2007 and Weiner 2013. Neo-liberal development model in Central and Eastern Europe 387

France going for national solutions when international solutions are needed. They feel excluded’. Ivan Krastev, head of the Centre for Lib- eral Studies in Bulgaria, perceives a shift in the pro-Western middle class as people lose their jobs and are engulfed by their mortgages: ‘These people identiﬁed with the West and now feel betrayed. “We did our best”, they say. “We followed the best practices and now we are toldtheseweretheworstpractices”....Therecould be a loss of faith in the West’.25 International ﬁnancial institutions have dismissed these concerns since 2008, seeking to prove through academic analysis that Western banks have contributed to greater stability and growth in the region. However plausible this appears in economic papers, the experience of people living through a dramatic economic collapse suggested a different interpretation to many.

The DME dilemma Because of their extreme openness to and dependence on foreign capital – a consequence of neo-liberal development policy – ‘varieties-of- capitalism’ scholars have christened the Visegrad countries of Cen- tral Europe ‘dependent-market economies,’ or DMEs.26 This section focuses on two DMEs, Poland and Hungary, that struggled with a common ‘DME dilemma’ of creating growth in small, open economies but resolved it in vastly different ways due to contrasting domestic politics. What differentiates the Central European DMEs from other Euro- pean varieties of capitalism – liberal-market economies (LMEs) and coordinated-market economies (CMEs) – is their limited sovereignty. Much of the varieties-of-capitalism literature presumes that independent countries have the ability to create different institutional structures to govern the domestic economy. Yet, for DMEs, the main locus of economic decision making lies outside the country. Most large companies are ‘daughters’ of multinational companies based in the West. DME banks are foreign-owned. This makes it difﬁcult to speak of the domestic basis of economic coordination, as in the case of other varieties of capitalism. Hence, DMEs are deﬁned by their extreme openness to the international economy and the extreme dependence on foreign investors, primarily from Western Europe. This extreme

25 See Wagstyl 2009. 26 See Nolke¨ and Vliegenthart 2009. 388 Part III: Neo-liberalism in comparative perspective openness and dependence has been one of the legacies of neo-liberal economic policies in Central and Eastern Europe since 1989. The global financial crisis revealed a core dilemma that the DMEs of Central Europe face with their neo-liberal development model in coming years. The DMEs’ comparative advantage in the international economy is underpinned by relatively high-skilled and low-cost labour. As a result, it is cheaper to manufacture many goods in Central and Eastern Europe than in Western Europe and even China, given the proximity to markets and membership in the EU. Relatively low-cost labour allows DME countries to attract much-needed foreign capital and to create a niche producing cell phones, furniture, automobiles, software, durable goods, and services for largely European markets. Yet, citizens and consumers in these countries do not want to be low- cost labour forever; they want to increase their standards of living and catch up with the West. These two desires must necessarily undermine one another. During the boom, they were reconciled by massive foreign-capital inflows that financed consumer spending and mortgage debt as well as investment. When these flows disappeared, however, living standards and production plunged. The question is: How will these countries manage the rising consumption expectations of voters in highly integrated economies while maintaining cost competitiveness in the global economy? This is the DME dilemma that Central and Eastern European countries face as they consider new models of economic development. It is not clear that the neo-liberal development strategy they adopted in previous decades will provide a compelling answer. Yet, the answer to the DME dilemma also differs among countries based on political and economic decision makers and institutions. Each DME is unique in some respects, with a different relation to the Euro- pean and global economy, a different trajectory of neo-liberal reform, different politics, and different reactions to the global financial crisis. Although we could compare a wide range of cases, Poland and Hun- gary provide one of the most significant contrasts. These two countries share much in common but have navigated the DME dilemma in strik- ingly different ways. Poland used prudent macroeconomic policies to avoid the worst of the ‘overheating’ in the 2000s and remained in relatively good condition thereafter, whereas Hungary fell prey to large, pro-cyclical budget deficits and experienced a sharp contraction after 2008, which has been reflected in political instability. Since the crisis, Neo-liberal development model in Central and Eastern Europe 389

Hungary has led the way in adopting alternatives to neo-liberalism and to addressing the DME dilemma that neo-liberalism has produced. Poland has long been a stellar neo-liberal reformer and adopter of neo-liberal ideas. The poorest and also the largest Visegrad country, Poland adopted ‘shock-therapy’ policies of economic reform in 1989 and barely looked back. Politically, Poland experienced a rough road. The fact that the neo-liberal programme was adopted on the backs of the Solidarity movement and its workers, who were most vulnerable to subsequent plant shutdowns and layoffs, meant that political stability was compromised.27 Parties of the left and the right alternated in power and changed policy approaches but without departing from the core neo-liberal policies of stabilization, liberalization, integration, and privatization. In large part, this was because the reformed communist party in Poland embraced neo-liberal reforms as a way to be accepted into the EU. Right-wing parties took a more sceptical approach to neo-liberal ideas but ultimately proceeded with neo-liberal reforms in exchange for moving ahead with issues like cultural policy, religious policy, education policy, and policies for dealing with the communist past. Leszek Balcerowicz had a major impact as finance minister, central bank governor, and think-tank leader in keeping Poland on the path of neo-liberal reforms, and it helped that the results were positive. Poland’s growth rates have been consistently higher than for other countries in the region, although many countries caught up with Poland during the 2000s. Poland was not only more consistent in its application of neo-liberal ideas; it also was more effective at suppressing citizen demands. In the years leading up to the economic crisis, Poland used bank regulation to avoid a high level of foreign-currency mortgages. Regulators were rightly concerned that such mortgages were dangerous because a sudden change in foreign exchange rates could make it difficult for many borrowers to repay. Poland adhered to strict fiscal discipline and, as a result, had relatively low levels of government debt when the crisis hit. In part, this is because the 1997 constitution wrote the Maastricht criteria into the basic law of the land: total government debt cannot exceed 60 per cent of GDP. Poland was not forced to implement severe austerity measures when the crisis hit but instead had room to expand through ‘automatic stabilizers’. Its general government deficit

27 See Ost 2005. 390 Part III: Neo-liberalism in comparative perspective increased from 2 per cent in 2007 to 7 per cent in 2009. As a result of these factors, Poland’s economy continued to grow through domestic demand, despite the export shock. For Poland, the avoidance of recession was celebrated as a major affirmation of its existing policies. Former Finance Minister Leszek Balcerowicz promptly went on a lecture tour promoting Poland’s exceptionally good performance during the crisis. Although the government of Donald Tusk has not pushed further neo-liberal reforms and he backed away slightly from policies such as pension privatization, he has not abandoned the neo-liberal development strategy. Indeed, Poland has been a model of stability compared to Hungary, which had an altogether different political and economic trajectory. Hungary perhaps typifies the DME dilemma and the difficulties that Central and Eastern European countries have had in reining in consumption while catching up with the West. Hungary began the transition early, under reform communism in the late 1980s. Hungarian governments, even under communism, had always been more sensitive about imposing economic costs on the population. This was a legacy of the fierce civil war of 1956 that left governments with a sense that they needed to use economic rewards to prevent serious outbreaks of social discontent. Hungary’s communism was called ‘goulash communism’ for a reason: because it sought to provide the goulash and also because it made a ‘goulash’ of economic policy – mixing a variety of different ingredients and never saying no to any organized interest group. The same practices continued into the democratic-capitalist era. The first post-communist governments hesitated to impose the same burdens as in Poland. Many reforms waited until the (former communist) Socialist Party took over in 1994 and launched the Borkos package of reforms. Subsequent governments habitually spent more than they taxed, which culminated in government deficits that exceeded 10 per cent of GDP per annum in the years before the crisis. At the same time, Hungary experienced a dramatic runup in foreign-currency loans as consumers sought to catch up with foreign standards of living. Net foreign-currency assets as a percentage of GDP reached 47 per cent in Hungary, one of the highest in the region.28 By 2007, 85 per cent of mortgages were denominated in foreign currency, mostly Swiss francs, which were attractive to consumers because of their much lower

28 See Kattel 2010. Neo-liberal development model in Central and Eastern Europe 391 interest rate compared to Hungarian-forint loans. However, when credit expansion ceased in 2008, the forint devalued by about 10 per cent against the euro, making the foreign-denominated loans that much more difficult to repay. As these debts accumulated, the Hungarian government sought to lie and cover them up. After winning re-election in 2006, Prime Minister Ferenc Gyurcsany of the Socialist Party was recorded as stating that his party had ‘lied morning, noon, and night’ to cover up the extent of Hungary’s fiscal deficit during the election campaign. Hungary’s fiscal deficit had reached 10 per cent of GDP and the government needed to impose severe austerity measures. This revelation caused a massive public reaction from right-wing and extreme-right parties that mobilized often-violent public demonstra- tions. Total government debt reached 153 per cent of GDP in 2008, among the highest in Central and Eastern European countries, putting the economy in severe risk on the eve of the financial crisis that dramatically increased the cost of borrowing. An IMF package agreed to in 2008 imposed even more severe austerity measures. Hungary’s economy plunged by 6.3 per cent before turning around in 2010. As domestic demand shrank, Hungary became even more dependent on exports. Hungary’s crisis demonstrated the irresponsibility of high pro-cyclical borrowing and the need to be more prudent in managing capital inflows. More striking than the bizarre series of events leading up to the crisis in Hungary was the aftershock. In 2010, Hungarians gave the right- wing Fidesz party a two-thirds majority in parliament, an historical landslide as voters rejected the discredited Socialists. Yet, this Fidesz government proved more radical than many had expected, revising the Hungarian constitution and enacting many reforms that the EU judged unconstitutional. Some of these changes gave power to the Fidesz party well into the future by creating special oversight boards whose Fidesz appointees would reign for long terms, well past the date of the next elections. They changed numerous laws and then required that future changes would have to be by a two-thirds majority. In economic policy, the Fidesz government also represented a major shift, rejecting core elements of the neo-liberal policy agenda. Hungary has charted a new statist course that other countries in the region seem ready to follow. Yet, why did its policies differ so much from those of Poland? Although it is tempting to suggest that Poland and Hungary simply happened to take different approaches to managing international 392 Part III: Neo-liberalism in comparative perspective economic integration, there is reason to believe that the differences are structural. In particular, one major differentiating factor among Central and Eastern European countries is the structure of political competition: especially the extent of executive insulation and concen- tration of power, executive–legislative relations, the polarization of the party system, and the extent of civil society and specifically organized- labour representation in politics. Here, Hungary and Poland diverge considerably. Hungary’s 1989 constitution established a mixed-ballot parliamentary election system that combined features of ‘first-past-the-post’ with proportional representation; as a result, small pluralities of the popular vote are magnified into large parliamentary majorities. In addition, its political system has been polarized between a centre-left Socialist Party and a centre-to-extreme-right Fidesz Party, each of which tends to exclude the other from consideration during periods in government. Hungary also suffers from weak civil-society organizations and trade unions that are tied to political parties through patronage. As a result, economic policy making in Hungary has followed patronage logic as each successive party takes control of and loots the state – at least since 1998, when Fidesz took control and ruptured the previous Hungarian practice of power-sharing in government.29 Poland, by contrast, has a proportional-representation parliamentary system with multiple veto points. Political parties must respect public opinion and other parties in parliament, as well as the president, who has considerable power in foreign policy. Civil society is relatively highly mobilized and trade unions, in particular, have a significant role within each of the major parties. The result has been a more democratic, inclusive policy process in Poland. These differences in political–institutional setup and policy-making style have translated directly into significant differences in economic management. In Hungary’s polarized, majoritarian political system, there appears to be a stronger impetus to spend rather than conserve resources; economic electoral cycles are stronger; and the state budget suffers. One of the peculiarities of Hungary may be that it has generally been the left wing (after a while) that imposes austerity, not the populist right wing. In Poland, by contrast, the right-wing liberal parties have been more fiscally conservative and the left-wing socialists have been heavily

29 See Grzymala-Busse 2007: 67. Neo-liberal development model in Central and Eastern Europe 393 in favour of EU membership, which tends to make them relatively conservative in ﬁscal policy. Governments have often been weak and reliant on opposition support at times, particularly for economic-policy decisions. A two-thirds majority that enables the Orban´ government to enact a radical shift in economic policy would not be likely in Poland.

The way forward Central and Eastern Europeans increasingly have become disenchanted with neo-liberal economic policies. The development model of the past twenty years has met with successes and failures, with the balance differing among countries.30 The dilemma of growth through low-cost production in new democracies with rising consumer demands and European aspirations hovers heavily over a region that experienced a dramatic boom-and-bust cycle in the 2000s and now confronts a Europe that is unwilling and unable to finance a new boom. This has caused many Central and Eastern Europeans to re-evaluate the neo- liberal development strategy and to consider alternatives. The main alternative that has arisen has not been Social Democracy – which surprised many leftists given the Marxist feel of the current crisis – but rather state capitalism. Given the travails of Western Euro- pean welfare states and government debt induced by the crisis, Social Democracy has been perceived as unattainable in Central and East- ern Europe. Instead, countries have experimented with a more state- coordinated form of capitalism, following the experience of leading Asian and Eurasian countries – namely, China and Russia. As awareness has grown of the weaknesses of the neo-liberal development model in many countries, it appears that some form of coordination is the best antidote. The only organization capable of providing that coordination in a situation of Mafia and crony capitalism is the state. To do so, the state must command additional resources, take a different approach to regulation, and place itself above the many private monopolies and Mafia organizations in the country. It must consolidate power and create an economic policy that furthers state power and control. Although post-socialist China has successfully run a state-capitalist development strategy for several decades and has attained success in its transition to capitalism that far outpaces the limited successes achieved

30 See Sachs 1994 and Szacki 1995 [1994]:9. 394 Part III: Neo-liberalism in comparative perspective in Central and Eastern Europe, the state-capitalist leader and innovator in Central and Eastern Europe is quite clearly Russia. When President Vladimir Putin came to power at the beginning of the 2000s, he initiated a radical shift in Russia’s policy towards economic reform and democracy. His top priority was order. To remedy the chaotic social situation bequeathed to him by President Boris Yeltsin, Putin decided to impose order. He did this by asserting state control over the ‘oligarchs’ – the wealthiest capitalists in the country – who were ordered to stay out of politics and relinquish assets that the state demanded, particularly in media and oil and gas. Putin developed ‘national champions’, such as Gazprom, that were closely held by the state and sought to achieve geopolitical as well as economic goals. Indeed, Ian Bremmer argues that the major difference between state capitalism and other forms of capitalism is that the business organizations are placed at the service of state power.31 Although some argue that Russia remains a market economy and that a large percentage of business is in private hands, the freedom of business in Russia is, in fact, limited and constrained to certain non-strategic sectors. The ‘heavy hand’ of the state is everywhere, and the rules of the game are such that the state is a vital partner in all major businesses. This state-capitalist model is exactly what the government of Viktor Orban´ in Hungary sought to achieve after his re-election in 2010. When Hungarians were tired of the economic mismanagement of the Socialist governments of the previous eight years and the effects of the economic crisis – which fell heavily on Hungary due to its considerable exposure to foreign-denominated mortgage loans and its enormous pro-cyclical budget deficit – they voted decisively for a new approach in 2010. It remains uncertain whether this new approach is working, but there is no doubt that it departs significantly from the neo- liberal development model. Orban´ has concentrated power by using the two-thirds majority in parliament that his Fidesz party won to pack the Hungarian Constitutional Court – which has acted as an effective check on government policy – to reduce the number of ministries and ministers, to eliminate many institutions that gave the opposition a voice in policy, and to change the constitution in ways that make it difficult for future governments to rule without Fidesz. For instance, he appointed a new budget committee that under the constitution will

31 See Bremmer 2010. Neo-liberal development model in Central and Eastern Europe 395 have a veto on government budgets. In economic policy, the Orban´ government publicly flouted the IMF (despite needing an IMF rescue package in 2008), sought to resist the most stringent efforts to cut budgets, nationalized the private pension funds that were created in a 1998 privatization of the public pension system, used the money to pay off debt, and forced banks to resolve the foreign-denominated mortgage crisis by adopting a fixed exchange rate and swapping mortgages into Hungarian forints. Orban´ also vigorously opposed measures to make the central bank more independent. Needless to say, the foreign banking community is outraged. It remains to be seen how these policies will play out, but there is no doubt that the Orban´ government represents the greatest departure from the neo-liberal development model yet attempted in Central and Eastern Europe. Orban´ appears to have inspired other governments – notably that of Jozef Fico, president of neighbouring Slovakia and whose government has promised to strengthen the government’s role in the economy. Fico’s 2012 government ‘manifesto’ states: ‘Recent developments have shown that globalization, apart from accelerating the development of national economies, can also complicate it [sic]’, and he promised ‘an effective use and formation of the development potential of the state’.32 His government reversed the flat-tax system of personal-income taxation adopted by a previous government, increased corporate income taxes, and consolidated health insurers into a single state-run company, among other measures. Similarly, Romania’s government programme for 2009–2012 states that ‘The financial crisis that began in 2007 propagated rapidly in an increasingly globalized economy, turning in short time into not only the most serious postwar economic crisis but also in the first crisis that prefigures a resettlement of the world economic order . . . it is time to start a debate at the national level, about the long-term objectives and projects. A historic stage has come to an end and we have to shape the road for the future’.33 Orban’s´ experiment with state capitalism is being closely watched in Central Europe and lessons are being drawn, which is why Orban’s´ statements in favour of statist economic policies combined with a return to authoritarian rule have raised such concerns in Europe. In July 2012, Orban´ drew a clear connection between the pursuit of unorthodox economic reforms

32 See Government of the Slovak Republic 2012. 33 See Government of Romania 2009. 396 Part III: Neo-liberalism in comparative perspective and state control when he stated in a speech to a business association: ‘and let us hope that God will help us and we will not have to invent a new type of political system instead of democracy that would need to be introduced for the sake of economic survival’.34 He also stated: ‘It makes no sense to copy Western Europe but, in the spirit of freedom, we must establish our own economic systems’. The moment when governments in Central and Eastern Europe blindly followed neo-liberal ideas, at greater or lesser speed, has passed. Governments are considering other options, and they do so because of perceived failures of the neo-liberal development programme. Although the successes and failures of neo-liberalism in Cen- tral and Eastern Europe can be endlessly debated and there are good points on both sides, the neo-liberal programme did not live up to its promise, its successes have been uneven, and other development strategies adopted by other post-Socialist countries have performed better in some respects.35 China is the shining example. Although its starting conditions differed greatly, China undertook a similar post-communist transition without neo-liberal shock therapy. Instead of privatizing and bankrupting its state sector, shedding employment and output, China maintained a large state sector alongside a burgeoning private sector. To this day, state enterprises compose a large percentage of total output and employ millions of Chinese. Most of the largest banks in China remain state-owned, and they channel credit primarily to the state sector. China’s reform model can best be described as ‘dual-track’, with a large state sector maintained to provide full employment and direct investment and a growing private sector given scope to develop new sectors. Russia is another important example because its economic rise coincided with the imposition of the authoritarian government of Pres- ident Putin and his state-capitalist model of development. Whatever the ultimate cause, Russia had a rough ride with free-market capitalism and democracy, and the public now embraces a different approach.

How resilient is neo-liberalism? How resilient has neo-liberalism actually been in the countries of Central and Eastern Europe? To be sure, these countries are deeply

34 See Free Hungary 2012. 35 See Orenstein 2009. Neo-liberal development model in Central and Eastern Europe 397 imprinted with their two-decade-long experiment with neo-liberal policies and ideas. Central and Eastern European countries are among the most liberal in the world; they are perhaps the most open small economies on the planet. They have the highest rates of foreign-bank ownership of any developing or developed set of countries. Many are now members of the EU, with all that membership implies in terms of free markets and openness to trade. In many of these countries, liberal parties espousing neo-liberal economic platforms continue to be successful – notably in Poland, where the Citizens’ Platform Party of Don- ald Tusk has proven to be a durable force, at least for the time being. Yet, discontent with the results of the neo-liberal development model has risen. Other alternative programmes have been launched, and the era of neo-liberal revolution appears to have ended in Central and East- ern Europe. Some countries have rolled back important neo-liberal reforms (e.g., the flat tax and pension privatization) and imposed a more heavy-handed form of regulation, as in Hungary. Countries are again promoting ‘national champions’ in economic competition and experimenting – at the margins – with nationalist economic policies. In the end, it depends on how we judge resilience. Is a set of ideas resilient because no one can formulate, for the moment, a better alternative? Is a set of ideas resilient because it has endured a crisis without collapsing? I find this to be a thin notion of the concept of resilience. Instead, from the perspective of Central and Eastern Europe or the European Central Bank, it appears that neo-liberalism is in mid- crisis. It has been seriously challenged, found wanting, but not yet replaced. Tempers have cooled. Advocates of radical neo-liberalism have changed over to more commonsense approaches. The future will not be the same. As the editors of this volume have indicated, Europe is muddling through. That is also true in Central and Eastern Europe: lands where great new ideas are readily embraced and then angrily rejected. Liberalism has gained a certain constituency in these countries, but this is not a majority coalition.36 At the very least, it will have to be tempered by combination with other economic approaches emanating – first of all – from the conservative right but also the state- socialist left of the political spectrum. This may allow neo-liberalism to persist, according to the editors of this volume. However, the

36 See Jacoby 2006. 398 Part III: Neo-liberalism in comparative perspective economies of many countries in the region will continue to serve the interests of the non-ideological cabals and maﬁas that have gained control of the commanding heights of the economies who are allied to no set of ideas in particular but rather to the compulsions of their own power. Powerful interests may support neo-liberalism, in line with the fourth line of analysis discussed in this volume, or they may not.

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Philipov, Dimitur,˘ and Jurgen¨ Dorbritz. 2003. ‘Demographic Consequences of Economic Transition in Countries of Central and Eastern Europe’, Population Studies, Issue 39. Strasbourg: Council of Europe. Ringold, Dena, Mitchell A. Orenstein, and Erika Wilkens. 2005. Roma in an Expanding Europe: Breaking the Poverty Cycle. Washington, DC: The World Bank. Sachs, Jeffrey. 1994. Poland’s Jump to the Market Economy. Cambridge, MA: MIT Press. Stuckler, David, Lawrence King, and Martin McKee. 2009. ‘Mass Privatisa- tion and the Post-Communist Mortality Crisis: A Cross-National Analy- sis’, The Lancet 373: 399–407. Szacki, Jerzy. 1995 [1994]. Liberalism after Communism. Budapest: Cen- tral European University Press. First published as Liberalizm po komu- nizmie. 1994. Warsaw: Znak and Fundacja Im. Stefana Batorego. Tavits, Margit, and Natalia Letki. 2009. ‘When Left Is Right: Party Ideol- ogy and Policy in Post-Communist Europe’, American Political Science Review 103: 555–69. Wagstyl, Stefan. 2009. ‘Variable Vulnerability’, Financial Times (25 Febru- ary). Wedel, Janine. 1998. Collision and Collusion: The Strange Case of Western Aid to Eastern Europe. New York: St. Martin’s Press. Weiner, Mark S. 2013. The Rule of the Clan: What an Ancient Form of Social Organization Reveals about the Future of Individual Freedom. New York: Farrar, Straus, and Giroux. Williamson, John. 1990. ‘What Washington Means by Policy Reform’. In Latin American Adjustment: How Much Has Happened?, edited by John Williamson (7–38). Washington: Institute of International Eco- nomics, Washington. part iv Conclusion

14 Conclusion: Explaining the resilience of neo-liberalism and possible pathways out mark thatcher and vivien a. schmidt

This volume begins with a puzzle: Why has neo-liberalism proven so resilient in Europe, despite multiple internal difficulties and external challenges? Chapter 1 sets out a definition of ‘neo-liberalism’ and its ideational resilience. It notes that the term is broad and can be used in different ways and that resilience can vary. It specifies the resilience of neo-liberal ideas as characterized by their continuity, dominance, and survival. The first chapter offers five lines of investigation to explain such resilience in political and policy debates: (1) neo-liberalism’s generality, diversity, and mutability enables it to adapt to and hence resist challenges; (2) neo-liberal ideas have predominated because they have remained at the level of rhetoric; (3) neo-liberal ideas have been stronger than competitors in policy debates and political discourse; (4) neo-liberalism remains dominant because of support by powerful interests who gain from it; and (5) institutionalization of neo-liberalism has given it a superior and protected position relative to possible alternatives. This concluding chapter draws on the preceding chapters to pursue the five lines of analysis set out in the Chapter 1. We begin by following through the five lines of analysis, demonstrating how they relate to the empirical cases. Then we examine possible pathways out of the ideational dominance of neo-liberalism. Our aim is not to provide a simple mystery-writer ‘whodunit’ response to the initial puzzle – the chapters in the book have already shown the complexity of the answers – but rather to trace the diverse forms of the resilience of neo-liberalism and the factors responsible for it. Resilience is a process, not a fixed state – it occurs and must be assessed over time. It is highly political, marked by struggles to determine agendas, set goals, and select policies. Furthermore, it varies across both domains and countries. In a few domains – notably welfare – after extending their reach, neo-liberal ideas have

403 404 Part IV: Conclusion faced social-democratic counterattacks and then evolved into a new synthesis, such as liberal neo-welfarism. In other domains, neo-liberal ideas may have produced the opposite of what they initially intended, such as how the roll-back of the state to free up the markets metamorphosed into state roll-out and a new synthesis of liberal neo-statism. Moreover, in some Eastern European countries, policies justified by neo-liberal ideas have come to face strong opposition after years of unquestioning acceptance, whereas neo-liberal rhetoric has long faced rejection in France. However, be this as it may, the core principles of neo-liberalism have continued to predominate. Competition has been the central concept for debates about the organization of markets at both the EU level and the national level, not only in Anglo-Saxon polities such as the United Kingdom and Ireland but also in more corporatist and social-democratic countries such as Germany, Swe- den, and Denmark. ‘Competitiveness’ has been the goal for national economies and firms across Europe, including in statist countries such as Italy and France. Austerity and ‘structural reform’ continue to dominate Eurozone-crisis debates, with active labour market policy focused largely on increasing labour-market ‘flexibility’. Overall, it is striking how often neo-liberal ideas have been resilient in the past thirty years or so in political and policy debates in Europe. So how, then, do we explain such resilience? Moreover, given that resilience, are there any pathways that lead beyond neo-liberalism?

Five lines of analysis of the resilience of neo-liberal ideas The lines of analysis developed in the ﬁrst chapter of this volume provide insight into the resilience of neo-liberalism. They offer explanations not only of why it has continued over time – with its ideas enduring, recurring, and adapting – but also why it has won against competitors and survived despite its own failures. Ideational ﬂexibility, remaining at the level of rhetoric, robustness in debates, and support by powerful interests and institutions all had important roles in sustaining neo-liberalism.

Neo-liberalism’s ideational generality, diversity, and mutability The first line of analysis focuses on the substantive content of neo- liberal ideas. It explains their resilience mainly in terms of their Conclusion 405 generality, diversity, and mutability. Although the generality of neo- liberalism makes it difficult to pin down, its diversity enables it to encompass many different and even contradictory ideas while its mutability enhances its capacity to adapt to changing and even hostile terrains. The mechanisms of this type of resilience, as discussed in Chapter 1, encompass processes of metamorphosis, absorption, and hybridization. The resilience of neo-liberal ideas is witnessed in the continued presence or recurrence of certain very general core principles or themes over time. These include certain ‘holy grails’, such as the centrality of market allocation, the value of competition, and the importance of individual responsibility. It also involves certain broad orientations, such as the primacy of negative freedom (especially from state ‘interference’) over positive freedom, the priority accorded to ‘sound money’, and the suspicion of collectively provided rights – especially in the welfare domain. All of these orientations remain present even as policies and programmes are revised over time to changing realities. Neo-liberalism’s adaptability is apparent in its ability to encompass evolving and sometimes conflicting ideas. One key example concerns ideas about the limited role of the state. Conflict and contradiction in this core idea have led to conceptual expansion, not retreat. Initially, reducing the role of the state went hand in hand with the idea of ‘deregulating’ markets in the financial and network utilities sectors in the 1970s, which was also intended to promote the other core ideal of market competition. However, critiques (and experience) then rapidly showed that without re-regulation, market competition was ineffective or corrupted. Instead of acknowledging defeat, proponents of neo- liberalism subsequently theorized the state as ‘market enhancing’, as if such activity were different from other (undesirable) state action. The result has been a process seen in much of regulation – namely, ‘freer markets, more rules’1 – as well as the move from ‘roll-back’ to ‘roll-out’ of the state.2 Similar conflicts are replicated in the labour and welfare arenas, with the move to ‘active’ (meaning more state involvement in) labour-market policies, to make workers ‘employable’, away from an earlier assumption that deregulating the labour market would on its own be enough to put people back to work.3 The result is not only an extension of neo-liberal ideas into areas of labour and welfare policy

1 See Vogel 1996; see also Mugge¨ and Thatcher, both in this volume. 2 See Schmidt and Woll in this volume. 3 See Martin in this volume. 406 Part IV: Conclusion that were previously based on principles of rights, collective provision, and social solidarity but also – as with regulation – new neo-liberal policy ideas that the state should support and ‘enable’ markets. The metamorphosis of neo-liberal ideas – as old neo-liberal ideas have reappeared in altered forms or at least with new labels – has been clearest in the treatment of ideas about fiscal and monetary policy.4 Theories of the gold standard and ‘sound money’ were discredited by Keynes and subsequent generations of economists after the Great Depression. Yet, from the 1960s onwards – although few took seriously ideas of a return to gold – ‘sound-money’ theories were reincarnated as ‘monetarism’ with new labels and ideas that governments should focus on managing the monetary supply to prevent inflation and avoid fiscal policy ‘crowding out’ more productive forms of spending. Monetarism, in turn, was fiercely attacked in the 1980s because controlling the money supply proved largely impossible, had little connection to inflation, and was insufficient as a central policy framework. Nevertheless, in the 2000s, especially in response to the Eurozone’s sovereign-debt crisis after 2008, ideas about reducing government deficits and debt levels have reappeared with new labels and justifications such as ‘sustainable debt’ and rhetoric that smaller government will result in economic growth.5 Battles fought (and lost) over a neo-liberal idea in one period are not condemned to failure in later periods as a result of neo-liberalism’s ever-changing labels, policies, and instruments. Absorption, as neo-liberalism has incorporated parts of other frameworks or even critiques, is most marked in the welfare arena. Faced with attacks by non-neo-liberal thinkers concerned with issues of social justice and equity, policy makers and commentators have engaged in ideational bricolage and conversion as they melded neo-liberalism with these other ideas to form what Maurizio Ferrera (see his chapter in this volume) defines as the discourse of ‘liberal neo-welfarism’. This synthesis maintains the neo-liberal emphasis on negative freedom but assimilates or responds to critiques by extending its reach to new areas, such as non-discrimination on grounds of gender or sexuality and balancing equality of opportunity with that of outcome. The result is a new and much less contested version of neo-liberalism, more attuned

4 See Gamble in this volume. 5 See also Jones in this volume. Conclusion 407 to questions of social justice. A similar process characterizes the development of active labour market policies, in which traditional Social or Christian Democrat ideas of state support for the unemployed have been joined to (and perhaps thereby undermined by) neo-liberal principles of individual rather than collective responsibility for employment and principles of enhancing competition and ‘employability’.6 The hybridization of neo-liberalism, which explains its capacity for diffusion and translation in diverse national contexts, can be witnessed even in countries seemingly most resistant to neo-liberal ideas. For example, despite their traditional social-democratic and corporatist ideals, both Germany and Sweden integrated key principles of neo- liberalism (e.g., use of markets to allocate resources or competition), thereby producing hybrids of ‘corporatist-managed liberalization’ in which ‘social partners’ are important participants in ensuring internationally competitive firms.7 However, as they adopted neo-liberal ideas, they adapted them to national specificities. In Germany, ideas about liberalization focused on seeking competitiveness through low wage and welfare costs without undermining key beliefs about matters such as co-determination in ‘core’ parts of the labour market. In Sweden, liberalizing ideas have centred on aiding the rise of high- technology sectors and risk-venture capital. Even in countries with strong ‘statist’ traditions, neo-liberal ideas have experienced a degree of integration as a result of hybridization. They have made inroads in Italy, where their supporters (including in centre-left political parties) have presented neo-liberal ideas as part of a programme to modernize the state and reduce its inefficiency and nepotism.8 In France, although neo-liberalism is perceived as an attack on the state and the term has been largely rejected, both the political left and the right have used key neo-liberal policy ideas (e.g., the promotion of ‘international competitiveness’ by reducing domestic ‘burdens’) in similar efforts to modernize the state and its relationship with business. The mutability of neo-liberalism via adaptive processes of metamorphosis, absorption, and hybridization offers a heady ‘cocktail’ for policy makers and ideational entrepreneurs who can draw on neo-liberal intellectual traditions and lineage dating to at least the nineteenth century in order to legitimate contemporary programmes, policies, and

6 See Martin in this volume. 7 See Schnyder and Jackson in this volume. 8 See Gualmini and Schmidt in this volume. 408 Part IV: Conclusion instruments. British policy makers (usually from the right) can refer to thinkers such as Adam Smith, Milton Friedman, and Friedrich Hayek or successful ‘Victorian values’, whereas German neo-liberals can refer to ordo-liberal thinkers. They can also use those traditions, however, to adapt policies and policy aims to contemporary circumstances. As Cathy Martin (see her chapter in this volume) shows, whereas liberalism in the nineteenth century often meant upward social mobility for the able but lowly born set within a context of social class, today its application to active labour market policies involves freeing individuals from ‘state shackles’. Thus, the nature of neo-liberalism as an overall orientation – characterized by a core set of first principles rather than a specific and falsifiable set of theories or doctrines or proposals – is a key part of an analysis of its resilience. However, this is insufficient alone because explanation also requires identification of political processes and actors, as well as the context within which they operate. Hence, the nature of neo-liberalism invites consideration of further explanatory factors, namely, policies, rival ideas and discourses, interests, and institutions that are considered in the other lines of analysis.

Neo-liberal rhetoric versus reality, or the benefits of non-implementation The second line of analysis focuses on the apparent paradox that non- implementation may, in fact, benefit neo-liberalism. This is linked with many examples of neo-liberal policy ideas that are impossible to achieve in practice and yet repeatedly return in debates and political programmes. Such impracticable ideas are espoused not only by commentators, academics, and think tanks but also by political parties in and out of government. Although actors may sometimes behave irrationally in terms of their own self-interest, the repeated nature of the phenomenon suggests that proposing impossible policies has its rationale. This may be related to political entrepreneurs’ ideological commitments, regardless of the practicality of those ideas; their oppor- tunism during elections; or their pragmatism once elected, as noted in the first chapter of this volume. It may also be related to political entrepreneurs seeking to change the terms of the debate, who repeatedly present ‘true’ neo-liberalism as something yet to be accomplished. Conclusion 409

Preserving the ‘purity’ of neo-liberalism, which is not sullied by the inevitable compromises of practical politics, is one rationale for the gap between rhetoric and reality. Partial or non-implementation allows the regular re-use of neo-liberal ideas in policy debates, especially at the level of discourse about general principles and overall policy directions. One example is seen in relation to the state that, as noted previously, is both an enemy to be ‘cut down’ in size and ‘rolled back’ in scale and power – and yet also a central player in the enforcement of competition. Many governmental promises to reduce the state, spurred by ideological commitments, have been made and failed. Thus, in the United Kingdom, the inability to reduce total public spending in absolute real terms in aggregate and even as a share of GDP in the 1980s, including under Margaret Thatcher, did not stop the Conservative– Liberal government after 2010 from promising to reduce state spending in ways not seen since the 1920s. Past non-implementation allows current neo-liberal politicians to distance themselves from the policies of their predecessors, whether from their own party or those of their opponents. Although the rhetoric of spending cuts without their substance is an attractive political strategy, actual implementation may lose the next election. The setting of far-reaching but impossible targets also diverts attention from current problems. Thus, the promise of future spending and tax cuts leading to economic growth in the United Kingdom and Ire- land directs the public’s gaze away from the grim reality of recessions, increased deficits and debt, and even public spending rising as a share of (falling) GDP.9 The ‘promised land’ of neo-liberalism is more allur- ing than contemporary realities of policy inertia, incremental change, and outright failure. Indeed, a further rationale for impractical neo-liberal ideas is that failures of implementation can legitimate yet further efforts towards neo-liberalism. For example, in regulation, unachievable promises in the rhetoric have offered good cover for accretions of power by regulators. Difficulties in achieving effective competition in network industries or the financial sector have been used by both the European Commission and national regulators to justify new ideas about re- regulation to enforce such competition.10

9 See Hay and Smith in this volume. 10 See Thatcher and Mugge,¨ both in this volume. 410 Part IV: Conclusion

Moreover, neo-liberal ideas may be designed not for implementation but rather to alter the terms of political debate. Although much ‘austerity’ is unachievable in practice, the central questions in political debate have become ‘how fast to cut’ rather than whether to do so. Responses to the crisis beginning in 2007–2008 focused on state debt and deficits, despite the crisis being caused in large measure by private debt in countries such as Ireland and Spain.11 Thus, the dogmas of fiscal conservatism that were subject to devastating critiques by Keynes and others have returned.12 In welfare and labour-market policies as well, the rhetoric of ‘cutting back’ has contributed to debates in which pensions or welfare payments are viewed as ‘wasteful burdens’ more than the earned rights of citizens.13 This second line of analysis offers a powerful response to arguments that neo-liberalism does not exist because many of its specific policies have not been implemented. Indeed, the ideational breadth and inclusion of contradictory elements make it particularly likely to benefit from the gap between rhetoric and policy reality. However, this explanation also raises a number of important questions. First, why have policy makers not taken up alternative ideas that are more practicable? This draws attention to the political value of neo-liberal ideas in political debate. A second question concerns the uses made of neo-liberal ideas – for instance, by political parties or firms – and hence points to the role of interests in sustaining debates centred on impracticable policy objectives. A third issue is why the political system permits impossible ideas that resemble fairy tales to be told and re-told, despite contrary experiences – which again suggests that interests and institutions are at work.

The strength of neo-liberal ideas in policy debates and political discourse The third explanation for the resilience of neo-liberal ideas is that they have proven stronger than their rivals in policy debates and political discourse. The relative strength of neo-liberalism refers here to debates,

11 See Hay and Smith and also Jones in this volume. See also Grant and Wilson 2012. 12 See Gamble in this volume. 13 See Schmidt and Thatcher, Martin, and Ferrera, all in this volume. Conclusion 411 not to its academic or inherent virtues. Indeed, despite myriad academic critiques, neo-liberal discourse has offered – or at least appeared to offer – clearer and more ‘practicable’ ideas for solutions to current policy problems under current international constraints than alternatives linked to Social or Christian Democracy, let alone Socialism. This may arise from the actual content of the ideas, how political entrepreneurs use these ideas to frame the problems of the day, and how they communicate those ideas. Alternatively, it may be due more to the weakness of alternative ideas than to the strength of neo-liberal ideas per se. One of the clearest yet most surprising examples of the strength of neo-liberal ideas relative to rivals lies in responses to the Eurozone crisis. The debates have centred on neo-liberal policies because the crisis has been framed as one of public profligacy and ‘excessive’ state debt requiring austerity and the reduction in public spending.14 In contrast, the brief neo-Keynesian ‘moment’ after the collapse of Lehman Broth- ers, when G20 governments agreed to stimulus packages, has largely been presented as a ‘failure’ – despite the plausible argument that without it, recession would have been deeper and that its main weakness was too small a stimulus.15 Neo-Keynesian policy ideas remain marginalized and have appeared (at least in policy debates) to struggle with problems such as administering fiscal stimuli in open economies with massive capital flows and therefore have not represented a strong ideational rival. Similarly remarkable examples are provided in EU regulation of economic markets and financial regulation. Notwithstanding evidence that ‘financialization’ was at the root of the 2007–2008 crisis and that competition in many financial and other markets is harmful, debates have focused on the failures of state regulation – on ensuring ‘fair competition’ and ‘enhancing the market’.16 Traditional European alternatives such as public ownership, monopoly, and industrial policy are not only marginalized but also the target of EU action in the name of ‘the Single European Market’ and international competitiveness.17 At the national level as well, neo-liberalism has seemed better placed in policy debates than its competitors. In Eastern Europe, it appeared

14 See Jones in this volume. 15 See Krugman 2012 and Stiglitz 2010. 16 See Mugge¨ in this volume. 17 See Thatcher in this volume; see also Jabko 2006. 412 Part IV: Conclusion to promise eventual economic growth, whereas the alternatives were dependence on a state that has suffered from links with past communism or present right-wing nationalism in countries such as Hun- gary and Poland.18 In France and Italy, Christian Democrat or statist paradigms have been tarnished by association with past policies of state spending and failures (e.g., corruption, misuse of funds, and inadequate, unresponsive public administration).19 Even the disasters of private-sector financialization in Britain and Ireland were followed by debates about how much state austerity to pursue rather than structural reforms of the housing and financial markets or Keynesian policies to offset falls in private-sector demands.20 For all of these countries, moreover, discourse about the challenges of globalization and the pressures of the international financial markets served to further reinforce the neo-liberal message that there are no alternatives.21 Why do such neo-liberal ideas appear stronger than their competitors? One reason is related to the content of the actual ideas as presented in policy debates and political discourse. Key neo-liberal concepts such as the virtues of competition, the inefficiencies of the state, and the importance of ensuring (negative) freedom for ‘productive’ firms and entrepreneurs generally form a focused and interlinked whole in the discourse. These core principles can underpin policy programmes that have been ‘updated’ to meet current conditions, thereby offering ideational models to guide policy makers – whether in macroeconomic policy, EU regulation, or financial regulation. In contrast, the policy programmes of neo-liberalism’s opponents on the centre-left (Social Democrats in particular) are often underdeveloped in these areas. For example, despite the fact that the financial markets and the operation of the euro and EMU lie at the heart of the economic crisis, alternative paradigms offer no clear alternative programmes to formal commitments about debt and deficit limits or to rhetoric about principles such as ‘sound money’, competitiveness, and ‘excessive’ state deficits.22 This is equally the case for financial and EU economic regulation.23 Where they do offer proposals, they often seem outdated and ill suited to open economies facing fierce international competition.

18 See Orenstein in this volume. 19 See Gualmini and Schmidt in this volume; cf. Cassese 1998. 20 See Hay and Smith in this volume. 21 See Schmidt 2002: ch. 1; see also Hay and Rosamund 2002. 22 See Jones in this volume. 23 See Mugge¨ and Thatcher, both in this volume. Conclusion 413

Another reason that neo-liberal ideas predominate is that their sim- plicity and apparent ‘good sense’ provide cognitive power and normative resonance in policy debates and political discourse. Thus, the neo-liberal conception of the state budget as analogous to that of a household budget is cognitively powerful at the same time that, it res- onates normatively with individual personal experiences; conveying a neo-Keynesian argument about the differences in nature between state and individual budgets is more difficult.24 More generally, Keynesian policies of supporting demand through fiscal policy face ‘commonsense’ claims that states cannot continue to spend more than they earn – a position taken up even in France, which has not run a budget surplus for almost forty years.25 In elections, moreover, the state always makes an easy target, and campaigning against opponents in power – or even one’s neo-liberal predecessors – is aided by the argument that the state needs to be scaled back and reformed to meet the neo-liberal ideal. Similarly, normatively portraying welfare spending as ‘wasteful’ or pointing to ‘unsustainable’ rising costs due to ‘longevity risks’ is easy to convey in political discourse. Conversely, alternative ideas that such spending supports the competitive economy or reflects changing social preferences about collectively provided benefits are difficult to explain and communicate simply and quickly. Even notions of ‘solidarity’ have shifted through neo-liberal reframing as the term has become synony- mous with economic loan bailouts rather than mutually advantageous support mechanisms.26 Yet another factor responsible for the ability of neo-liberal ideas to ‘beat’ ideational competitors has been the effectiveness of communication by neo-liberal ideational entrepreneurs in policy debates and political discourse. Such entrepreneurs include political elites and entrepreneurs such as Reagan in the United States, Thatcher in the United Kingdom, Balcerowicz in Poland, and Klaus in the Czech Republic. However, the group of ideational entrepreneurs extends to technocratic elites such as members of the European Commission, whose authority results from their expertise, and also to academic elites, mainly economists such as Friedman, Hayek, and contemporary economists whose simple models embed neo- liberal assumptions about rational actors in free markets and

24 See Gamble in this volume. 25 See Gualmini and Schmidt in this volume. 26 See Crespy and Schmidt 2012. 414 Part IV: Conclusion provide ‘authoritative’ references for both technocratic and political elites. This third line of explanation has many virtues, notably in highlighting the central place of neo-liberal values, theories, and paradigms in public-policy debates. However, it also has a number of problems. First, it cannot explain why in some domains, speciﬁcally welfare, clear alternative values and paradigms exist – sometimes with deep historical roots and widespread popularity – whereas in others, they are lacking. Another problem is that it cannot explain why – given the Eurozone crisis and neo-liberalism’s own weaknesses – alternatives have not been seriously attempted. These weaknesses suggest that other explanatory factors also matter, notably the interests of key actors and the institutional framework within which neo-liberal ideas are formed, developed, disseminated, debated, and adopted by policy makers. If we analyse political debates as a competition for ideas, then the nature of the markets, including markets for ideas, is likely to be inﬂuenced by the actors engaged in the competition as well as by the context in which it occurs.

The power of interests as the winners from neo-liberalism This fourth line of explanation points to the power of interests behind neo-liberal ideas. It suggests that self-interested actors strategically promote neo-liberal ideas – whether or not they believe in them – to gain from their continued dominance. These self-interested actors may be individuals acting on their own or as part of economic and political interest groups or as institutional actors, such as unelected officials in state administrations or non-majoritarian institutions at both the national and supranational levels. As part of efforts to further their own interests, these actors contribute to the production and propa- gation of neo-liberal ideas in policy venues and to the more general public. Firms are the most obvious self-interested economic actors sustaining neo-liberal ideas – especially large, transnational firms – and their senior managers. Some act directly in popularizing neo-liberal ideas, such as the mass media companies, the most flagrant examples of which have been those controlled by politically active media ‘moguls’ including Rupert Murdoch in the United Kingdom, Silvio Berlusconi in Italy, and Martin Bouygues in France. Others contribute more indirectly Conclusion 415 to the production or popularization of neo-liberal ideas by establishing, supporting, and financing neo-liberal societies, think tanks, and research institutes (e.g., the Mont Pelerin` Society and the Institute of Economic Affairs)27 or by participating in the shaping of policy agendas or the creation of specific policy ideas. It is important to note that firms generally do not act on their own but rather form broad coalitions to promote their interests. They have needed vital ‘accomplices’ – not only elected politicians and political parties but also unelected officials. Coalitional influence is visible in EU debates about regulation of financial markets, mergers, and corporate governance, in which large firms and their managers have coalesced with EU and national government officials to form advocacy coalitions behind neo-liberal ideas of expanding and protecting competition.28 At the national level as well, alliances have formed among large firms, unelected officials, and political parties to promote neo-liberal ideas, not only in Britain and Ireland but also in coordinated market economies such as Germany and Sweden.29 Such coalitions also benefit from feedback mechanisms that enable them to grow as other self-interested actors join or become more integrated in a type of ‘band-wagon’ effect. This has happened in many different areas, including EU competition policy, in which initial opponents – particularly from ‘statist’ countries such as France and Italy – subsequently redefined their policy preferences.30 However, it may also be the result of rationally self-interested calculations, in which actors may decide that they must be within the ‘winning coalition’ of the battles for ideas – a dilemma faced by many parties of the centre-left from the 1990s onwards.31 Among political actors, parties are naturally the most important set of interests in the strategic use of ideas. Those on the political right have used and propagated neo-liberal ideas in efforts to re-centre political debate around themes that offer favourable terrain, such as reducing the size and scope of the state, replacing rights to welfare

27 See Mirowki and Plehwe 2009; for Britain, see Denham 1996. See also Schmidt and Thatcher, Schmidt and Woll, and Gamble, all in this volume. 28 See Mugge,¨ Thatcher, and Vitols, all in this volume. Cf. Coen 1997; Coen and Richardson 2009; and Coen, Grant, and Wilson 2010. 29 See Schnyder and Jackson and also Martin in this volume. 30 See Thatcher in this volume. 31 See Gualmini and Schmidt and also Schnyder and Jackson in this volume. 416 Part IV: Conclusion with duties to prepare for the labour market, and creating labour- market flexibility.32 However, neo-liberal ideas have also been used by centre-left Social Democrats (not only the now ill-starred Third Way Blairites but also parts of the Italian left) and centrist parties that are liberal socially and economically (e.g., the FDP in Germany) to gain or retain power. Neo-liberal ideas have also served as weapons against their opponents. Thus, for instance, ideas about obstacles to ‘efficient’ labour markets leading to higher unemployment or state spending as ‘wasteful’ have helped in such actors’ attacks on trade unions and public employees or to portray social-democratic parties in France and Italy as ‘conservative’ (i.e., anti-progressive).33 Senior unelected public officials in organizations such as the Euro- pean Commission, ECB, and national governments have also been both producers and beneficiaries of neo-liberal policy ideas and agendas. This has been most evident through their membership in the epistemic communities and advocacy coalitions formed to promote financial- market liberalization, competition policy, and liberalization of services in the Single Market, as well as to push the ‘austerity’ agenda for the EMU over time. At first glance, the support of senior officials may appear odd, given neo-liberalism’s hostility to collective state benefits; however, as noted previously, it favours a strong state for certain functions. Hence, senior public officials can use neo-liberalism to increase their powers in certain domains and to avoid unwanted tasks and responsibilities in others – notably, the often difficult and expensive task of updating the collective provision of services, a process suggested by a ‘bureau-shaping’ model of policy.34 An interest-based explanation is valuable because it brings to the fore those who gain and lose from neo-liberalism. However, actor interests do not always simply map onto ideational preferences. Thus, the chapters in this volume also suggest that institutional actors such as firms may not always have simple interests in supporting neo-liberalism but can support hybrids that incorporate elements of alternative paradigms such as corporatism and Social Democracy.35 Moreover, an interest- based explanation cannot account for how and why labour and the

32 See Gamble 2009 and in this volume. 33 See Martin and also Gualmini and Schmidt in this volume. 34 See Dunleavy 1991. 35 For instance, see Schnyder and Jackson in this volume. Conclusion 417 beneficiaries of a wide range of social policies have lost in the policy debates or reversed their views. This is especially puzzling because these actors are more numerous than large firms and their managers. Whereas part of the answer may rest in the difficulties of collective action or theories about ‘capture’ by interest groups that highlight the costs of organizing numerous actors with limited stakes, as compared with a small number of large firms,36 another part relates to the (re)construction of actors’ ideas, which refers to the previous three lines of analysis about neo-liberal ideas. Attributes such as flexibility, high levels of generality, and appeals to ‘common sense’ and personal experience also help to explain why neo-liberal ideas may be particularly suitable for rewarding powerful supporters, creating coalitions, and selling them to the public. The strongest objection to interest-based explanations is internal, however. Frequently, neo-liberal policies damage their supporters. Rarely have political parties and politicians espousing radically neo- liberal ideas successfully weathered the transition into political office. Thus, for example, the German FDP is struggling to survive, at the same time that, in France, the ‘economic liberals’ headed by Alain Madelin have been conspicuous by their failures – whereas mainstream politicians such as Sarkozy and Berlusconi soon dropped their neo-liberal rhetoric.37 Ideas of reducing collective benefits such as healthcare, pensions, and education are vote-losers. Even in Britain – the most favourable ‘micro-climate’ for neo-liberalism in Western Europe – the evidence suggests strong popular support for collective provision of welfare services such as the National Health Ser- vice and pensions, whereas in Central and Eastern Europe, the initial popularity of neo-liberalism has given way to disillusionment with perceived results such as increased poverty and inequality.38 Hence, the most penetrating questions may concern how and why those interests are constructed and especially why actors find neo- liberal ideas to be the best way to serve those interests. This returns us to the other explanatory factors but also takes us forward to the role of institutions in shaping incentives or in constraining action.

36 See Olson 1965, Peltzman 1976, Stigler 1971, and Wilson 1980. 37 See Gualmini and Schmidt in this volume. 38 See Orenstein in this volume. 418 Part IV: Conclusion

The force of institutions as supports and constraints The final line of analysis points to the force of ‘institutions’ in sustaining neo-liberal ideas and in disadvantaging alternatives. Institutions – understood primarily as formal organizations or informal and formal rules and norms at the supranational and national levels – have affected the adoption of neo-liberal ideas in a variety of ways. Their influence can be best analysed in terms of different ‘neo-institutionalisms’, including the rationalist shaping of actors’ institutional incentives to favour neo-liberal ideas; the historical institutionalization of neo- liberal ideas, such that these become ‘path-dependent’ constraints or set the limits to opportunities for incremental change; the sociological framing of agents’ institutional engagement, whether through mimesis, norm-following, or coercion; and the discursive interactions that in turn structure the (re)construction and spread of ideas. In terms of organizations, the EU’s new non-majoritarian institutions from the 1980s onwards have actively promoted neo-liberal ideas.39 Thus, the ECB and many national central banks have been powerful institutional proponents of ideas about reducing the size of state deficits and debts through cuts in public spending and reforming welfare and labour markets through ‘structural reforms’.40 The Euro- pean Commission and especially DG Competition have been given new functions and powers over the Single Market since the mid 1980s, and they have used this role to promote a model of liberalizing markets by ending national legal monopolies.41 In financial regulation, new agencies for stock exchanges and other financial services have been established that have then also promoted neo-liberalism in terms of mod- eling ‘rational actors’ and ‘efficient markets’ in greater competition.42 New or strengthened private bodies have also had a significant role in promoting neo-liberal ideas. Credit rating agencies provide a good example: despite their multiple failures to accurately assess risk, their neo-liberal criteria for ratings of public debt have weighed on private and public decisions about ‘acceptable’ state deficits and debts or the ‘credibility’ of policies and even governments. In terms of rules, neo-liberal ideas have often been ‘institutionalized’ through legal constraints. Macroeconomic policy at both EU and national levels provides particularly clear examples. The Treaty rules

39 See Thatcher and Stone Sweet 2002. 40 See Jones in this volume. 41 See Thatcher in this volume. 42 See Mugge¨ in this volume. Conclusion 419 on EMU set formal requirements for national debt and deficits, as well as a single target for the ECB (i.e., control of inflation) and a ‘no bailout’ clause. Since the crisis of 2007–2008, many policy debates have centred on how to meet the Treaty rules.43 There are strong rational incentives for this focus: rewriting the rules would have required a Treaty change – a difficult undertaking requiring unanimity. More- over, institutional and political actors have become strongly invested in the ideas behind these rules – a constructivist might say defined by them – making reversal difficult. Often, the rules prove coercive, particularly when authoritative institutions use their powers of imposition rather than persuasion. The most visible examples are in Eastern Europe, where EU and IMF conditionality was important for countries such as Hungary,44 and then, of course, in recent Eurozone bailouts of Greece, Ireland, and Portugal or the threat of bailouts for other countries such as Spain and Italy. Even without a direct quid pro quo, however, coercion is significant, whether through the succession of pacts and compacts requiring member states to adhere to increasingly more stringent rules regarding EMU or through less formally institutionalized means, such as when member states face pressures to adopt neo-liberal prescriptions in order to maintain credibility with the markets or to keep credit rating agencies from lowering their ratings. Finally, neo-liberal ideas can inspire mimesis because they have become ‘fashionable’ or, due to norm-following, because they are perceived as the only legitimate course of action. These ideas are therefore copied across countries and domains irrespective of their applicability45 and the diversity of national conditions.46 EU organizations in particular promoted policy ‘recipes’ and helped to create neo-liberal norms about ‘legitimate’ policy ideas. These include promoting powerful orthodoxies such as linking unemployment benefits to aiding recipients to ‘return to the labour market’,47 the value of competition in markets,48 and the need to ‘reform the state’ by introducing ‘new public management’ mechanisms into the state.49

43 See Jones in this volume. 44 See Orenstein in this volume. 45 Cf. DiMaggio and Powell 1991. 46 See Schnyder and Jackson, Gualmini and Schmidt, and Orenstein, all in this volume. 47 See Martin in this volume. 48 See Thatcher inthis volume. 49 See Schmidt and Woll in this volume. 420 Part IV: Conclusion

Mimetic and normative forces can also be perceived as creating strong pressures for actors to adopt such ideas by altering payoffs from following neo-liberalism, as more rational-choice work on diffusion of liberal economic institutions demonstrates.50 The force of institutions, whether considered as organizations or rules, can also be illustrated by their ability to hinder alternatives to neo-liberalism. Rival ideas generally are opposed by powerful organizations such as the European Commission and the IMF, backed by legal powers. They may also run counter to rules, whether legal (e.g., EU Treaties as interpreted by European Court of Justice judgements) or more informal norms, or they may be excluded simply because they are branded as ‘unorthodox’, however well founded. In finance, the proposed and rather modest ‘Tobin tax’ on financial transactions resembles long-standing national duties on trading in financial instruments, yet it was cast as unconventional until recently. The ‘stakeholder value’ model continues to be shelved as an approach to corporate governance.51 Similarly, traditional ideas such as monopolies and public ownership that were the dominant model in most countries prior to the 1990s52 are now branded ‘radical’ because they run counter to dominant institutions, as well as both formal and informal norms. Institutionalist analyses of neo-liberal ideational resilience have many virtues. They underline the importance of institutionally derived resources and positions and bring out the restrictions and constraints within which policy makers think about policies. Thus, in contrast to the first three explanations, an institutionalist analysis views ideational debates as embedded in organizations and structures. It also differs from an interest-based analysis in emphasizing that actors and their interests are created by and operate within wider structures. Hence, it includes the importance of the broader institutional context for the adoption of neo-liberal ideas, which helps to explain the variation in the embedding of neo-liberal ideas in the member states. Exam- ples include the differential success of active labour market policies in Britain versus Denmark53 or even between countries within one variety of capitalism, whether Britain versus Ireland or Poland versus Hungary.54

50 Cf. Simmons et al. 2006 and Simmons and Elkin 2004. 51 See Vitols in this volume. 52 See Thatcher 2007. 53 See Martin in this volume. 54 See Hay and Smith and also Orenstein in this volume. Conclusion 421

Institutionalist analyses also face criticisms and harbour weaknesses, however. First, there is frequently considerable room for interpretation within a given set of rules; indeed, sometimes rules can conﬂict. Thus, for instance, there is space within EU rules on competition for pursuit of objectives other than competition, including forms of public service and industrial policy, or within the rules on monetary union for the ECB to take ‘unorthodox measures’ to save the euro.55 Second, changes in rules have sometimes countered neo-liberal movements. In welfare policy, for example, neo-liberalism faced alternative ideas about rights based on gender, sexuality, and disability that drew strength from EU law and European Court of Justice decisions.56 Third, some of the organizations perceived as carriers of neo-liberal ideas have acted to promote alternative ideas, as when the European Commission initiated discussions about the stakeholder model of corporate governance and alternative modes of regulation of network industries.57 Even the IMF, a core carrier of neo-liberalism, called for Keynesian measures and slower moves towards austerity after 2008, and in 2013 criticized its own policies with regard to the Greek bailout, along with those of the Commission. Finally, referring to the previous lines of analysis, the political process can offer a source of friction, new ideas, and coalitions against neo-liberalism, particularly when events – or interpretations thereof – seem to run counter to neo-liberal policy and programmatic ideas.58

Pathways out of neo-liberal ideational dominance Neo-liberal ideas remain resilient because they continue to deﬁne the problems of the day and frame approaches to the solutions in most economic-policy domains. We have yet to see any overall paradigm change, let alone a Polanyian social ‘countermovement’ to the neo- liberal market movement. That said, it may be simply too soon to tell whether new ideas, new interest coalitions, and incrementally changing institutions are in fact already generating a shift to an alternative set of ideas. We should remember that neo-liberalism also took a long time to come to dominate, even after the early 1970s crisis that gave it an opening.

55 See Thatcher and Jones in this volume. 56 See Ferrera in this volume. 57 See Vitols, Ferrera, and Thatcher, all in this volume. 58 Cf. Lieberman 2002 on sources of change of existing ideas. 422 Part IV: Conclusion

So, our ﬁnal question is: How could such neo-liberal resilience end? Stated another way, is there any hope for those who may have long opposed neo-liberalism and long decried what they have perceived as its ideational ‘slipperiness’, its broken (and unfulﬁllable) promises, its ‘sleights of hand’ in debates, the cynical support of powerful interests, and the bias in choices due to its institutional embeddedness? As a preliminary response to this multifaceted question, we return to each line of analysis to discuss how it could be reversed. We draw on the chapters that offer variations in neo-liberal resilience and on the exceptions to the general picture of neo-liberal dominance in political and policy debates.

Breakdown due to internal conflicts and contradictions One pathway out of neo-liberalism would be by the concept being perceived as stretched too far and discredited by its internal conflicts and contradictions. Although neo-liberalism is highly elastic, even rubber bands can snap when stretched too far and too often. The very processes that have aided the resilience of neo-liberalism as a high-level set of principles – that is, metamorphosis, absorption, and hybridization – may actually undermine it. The pathway may well resemble Kuhn’s analysis of paradigm change. Over time, these processes lead to increasing anomalies, which at some point become unsustainable because internal contradictions cannot be contained. The outcome would be a replacement of neo-liberalism as an overarching framework with another paradigm for understanding the relationship between politics and the economy along with the way that an economy operates. Which other paradigm might emerge is unknown and probably unpredictable but, for our purposes, the point is that neo-liberalism as a set of first principles or overall framework would be superseded. There are certainly important signs of internal ideational strains in neo-liberalism. Thus, for instance, the principle of the limited state has been modified beyond recognition by the idea of a strong state that should enforce neo-liberal principles.59 In the field of regulation, this can be seen in the idea that the state is now supposed both

59 See Schmidt and Woll in this volume; cf. Gamble 1988. Conclusion 423 to be limited and yet ‘enhance’ markets.60 Moreover, the absorption of diverse and often rival principles has undermined neo-liberalism’s coherence. Thus, in the field of welfare and active labour market policies, ideas include ensuring rights and equality among different groups on grounds of gender, sexuality, and racial origins, as well as assisting workers to become ‘fit for work’.61 These principles not only prevent a limited state but also conflict with competition as they enter the realm of different forms of equality – of outcome, access to resources, and capabilities. In addition, hybridization has seen neo-liberal ideas meshed with social-democratic, corporatist, and statist ideas such that its core principles of competitive markets and a small state are sac- rificed to others, such as the state playing a central role in market outcomes.62

Unsustainable gaps between rhetoric and reality Thus far, lack of implementation has aided the resilience of neo-liberal ideas by performing valuable political functions, such as maintaining ideational purity, legitimating more neo-liberalism, diverting attention, and altering the terms of debate. However, increasing gaps between the rhetoric of neo-liberalism and the realities of policy making may lead to the opposite effects.63 Our chapters offer several pieces of evidence for such effects. The impracticability of neo-liberal ideas – instead of allowing continued avoidance of the messy compromises of implementation – may lead to the abandonment of neo-liberal principles. Fiscal and monetary policies are possible candidates for such a process: repeated failures to introduce ‘austerity’ policies of curbing public spending and the negative results of attempts to do so are leading to the breakdown of the Brussels–Frankfurt consensus, which targets only inﬂation and limits

60 See Mugge¨ and Thatcher, both in this volume. 61 See Ferrera and Martin, both in this volume; cf. King 1999. 62 See Schnyder and Jackson and also Gualmini and Schmidt in this volume. 63 For a discussion of growing governance challenges to neo-liberalism after the crisis, see, for instance, Calhoun and Derluguian 2011; or, for a possible breakdown due to the misguided pursuit of ‘austerity’, see Blyth 2013. For the effect of implementation failures leading neo-liberalism to ‘hit a wall’ and thereby enabling the rise of new ideas in social policy, see Jensen 2010; and for the possible effects of self-induced crisis, see Peck, Theodore, and Brenner 2010. 424 Part IV: Conclusion public spending and debt regardless of the broader economic situation; even the ECB is open to new theories as it wrestles with ideas that do not work in practice.64 Equally, the failures of neo-liberal–inspired policies may lead to loss of legitimacy, as the ‘Teﬂon’ protecting neo- liberalism wears off and it is blamed for economic and social problems. Here, regulation at national and EU levels offers at least some ‘straws in the wind’.65 The often-trumpeted virtues of greater competition are now held responsible (by some policy makers and commentators, at least) for problems such as excessive risk, vast undeserved banker bonuses, and repeated patterns of privatizing gains and socializing losses.66 The capacity of distant neo-liberal goals to divert attention from current problems also may be decreasing. These goals are generating higher levels of unpopularity and have increasingly been viewed as part of the problem rather than a long-term solution in countries such as Italy and Hungary.67 Moreover, whereas the solutions proposed by ideological neo-liberal entrepreneurs have increasingly come to be seen as out of touch with reality, those promoted by pragmatic and opportunist leaders may be seen as demonstrating that neo-liberalism cannot, in fact, be implemented. Finally, the gap between rhetoric and reality ultimately may even make neo-liberalism irrelevant to political debates – even if there is little sign of this at present!

The rise of stronger alternatives to neo-liberalism The third line of analysis suggested that neo-liberal resilience has been due to its greater ideational strength relative to its competitors in policy debates and political discourse. However, the advantages in the ‘battle of ideas’ with rivals may be undermined. The Polanyian double movement may ﬁnally take place. On the one hand, the content of neo-liberal ideas may be weakened from the inside by its increasing internal incoherence and gaps between rhetoric and reality, as discussed previously. On the other hand, rival ideas may gain strength, whether they are existing or new ideas that are reformed. They may arise from novel sources such as new movements in Latin America

64 See Jones in this volume; see also Blyth 2013. 65 See Mugge¨ and Thatcher, both in this volume. 66 See Nouriel Roubini’s Global EconoMonitor, 28 September 2008. 67 See Gualmini and Schmidt and also Orenstein in this volume. Conclusion 425

(following its extensive experience of neo-liberal–inspired policies) or even the United States under leaders such as Obama.68 Such ideas may be able to reframe the policy debates, for example, by placing politics before, rather than after, economics. This would facilitate a return to a more positive view of the state and its role, or to even a more ‘Republican’ view of democracy, in which what is good for the polity determines decisions about the market rather than vice versa.69 A new policy discourse could also present very different views of how markets can and should operate – especially because even economics is now (re)discovering the limits of agent rationality and the role of culture, psychology, inherited institutions, and politics. Our chapters offer evidence of the potential for the rise or return of powerful rivals to neo-liberalism. Some of the evidence is based on alternative ‘liberal’ theories. In welfare, neo-liberal ideas have faced strong challenges from rights-based philosophies and have been transformed if not superseded by them.70 Other evidence is based on the return of more traditional ideas of markets subject to state action to secure the ‘general good’ that extends beyond promoting competition. Thus, in corporate governance, the ‘stakeholder model’ represents a long-standing alternative to the narrower shareholder model, whereas in regulation, ideas focused on addressing ‘systemic risks’ point to policy aims that are superior to those more narrowly focused on competition alone.71 Similarly, in monetary and ﬁscal policy, alternatives to weakened neo-liberal ideas based on principles of austerity are being discussed.72 Moreover, critics of ‘new public management’ have turned the contradictions in neo-liberalism to their advantage by arguing that seeking to ‘incentivize’ individuals to reduce corruption or rent-seeking – that is, by ﬁghting greed with greed – cannot work in theory and has not worked in practice. They argue that the only workable solution is to increase trust by reintroducing notions of community and collective responsibility.73

68 For new ideas in Latin America, see Grugel and Riggirozzi 2012; for diffusion of rival ideas to neo-liberalism from Latin America in social policy, see Jenson 2010. 69 See Schmidt and Woll in this volume; see also Scharpf 2012. 70 See Ferrera in this volume. 71 See Vitols and Mugge,¨ both in this volume. 72 See Vitols, Mugge,¨ Thatcher, and Jones, all in this volume. 73 See Schmidt and Woll in this volume; see also Pollitt and Boukaert 2011. 426 Part IV: Conclusion

Traditional alternatives to liberalism may also be renewed and rein- vigorated. Thus, social-democratic ideas remain strong and appear more successful in countries such as Germany and Scandinavia, sometimes enhanced by having added elements of neo-liberalism concerning competitiveness.74 However, powerful extremist alternatives are also on the rise – especially nationalist alternatives, whether based in nation-states or regions, which promote xenophobic, statist, and protectionist ideas. The extreme right-wing nationalist government in Hungary provides a powerful example, but similar ideas promoted by extremist right-wing parties have achieved popularity in other countries, such as France, Italy, Greece, and even the United Kingdom.75 Although Socialist ideas appear to remain marginal, they too have achieved some return in many countries.

Powerful interests pressing for new ideas Neo-liberal ideas have enjoyed support from powerful interests that gain from them. Yet, these actors may withdraw their support for neo- liberalism if they calculate that it is damaging their interests. Moreover, new powerful actors and coalitions advancing alternative ideas may emerge or existing actors may be mobilized.76 The chapters in this volume provide support for these potential developments. Powerful unelected officials have begun to be more critical of neo-liberal tools. One surprising example is illustrated by financial organizations, such as the ECB and even the IMF, which are raising questions about standard neo-liberal Brussels– Frankfurt consensus ideas, such as the overriding importance of stable prices, the value of attempting to rapidly curb budget deficits in recessions, and the efficiency of factor markets.77 The European Commission sometimes pursues alternative ideas, such as protecting ‘services of general interest’ from the effects of competition.78 However, it is political parties and social movements that show the greatest movement away from neo-liberal ideas, at least at the level of political discourse. This is certainly the case of parties on the moderate left that have engaged in strong criticism of

74 See Schnyder and Jackson and also Martin in this volume. 75 See Orenstein, Gualmini, and Schmidt, all in this volume. 76 See Cahill 2011. 77 See Jones in this volume. 78 Cf. Thatcher in this volume. Conclusion 427 neo-liberalism, such as in France,79 whereas social-democratic parties have been winning elections in the Netherlands, France, and Italy with arguments favouring growth and questioning neo-liberal orthodoxy. At the same time, new radical actors have also emerged, from the ‘Grillo movement’ in Italy to the extreme nationalists in Eastern Europe.80 Populists on the right have also seen the gains from abandoning neo-liberal ideas, including the embodiment of an opportunistic politician, Silvio Berlusconi. Even if rarely implemented by governments thus far, the new discourse suggests the potential for self-interested actors to modify their calculations or for new actors to put forward substitutes for neo- liberal ideas. If current policies continue to allow or cause increasing unemployment, slow growth, extreme inequalities, and rising poverty, that potential is likely to expand, and new coalitions may form that challenge and win against the neo-liberal status quo.

Institutional breakdown or new institutions Change in the organizations and rules, formal and informal, that sustained neo-liberalism provides a ﬁfth pathway out of neo-liberalism. New organizations may be established that will promote alternative ideas, or existing organizations can be altered to achieve the same outcome (e.g., by modifying their objectives or composition). The legal framework of policy making that has appeared so constraining to non- neo-liberal policy ideas is also open to modiﬁcation. Equally, informal institutions can change as professional norms evolve, different ideas are copied, and actors create new meanings for existing rules. More- over, institutions may be transformed in ways already theorized by institutionalists, from radical alteration from one punctuated equilibrium to another in response to a major catastrophe (e.g., if the Euro- pean economy were to suffer a prolonged recession or even collapse) to incremental change or gradual processes such as conversion of existing institutions or layering of new ones over them.81 The chapters offer several examples of actual or possible institutional developments that could undermine neo-liberal ideas. Powerful existing organizations are witnessing alteration of their formal or informal

79 See Gualmini and Schmidt in this volume. 80 See Orenstein in this volume. 81 See, for instance, Streeck and Thelen 2005, Hall and Thelen 2009, Pierson 2004, Baumgartner and Jones 1993, and Krasner 1984. 428 Part IV: Conclusion mandates, thereby promoting ideational conversion. Some modifications are surprising. Thus, the ECB’s formal and informal responsibilities have been extended, from stabilizing the Eurozone economy via injections of liquidity to rescuing euro member states and their banking systems. In turn, this has created pressures for the ECB to find new ideas about the role of central banks and the operation of economies.82 In addition, regulatory institutions have seen significant reforms that point to a modified environment for neo-liberal ideas, notably the new provisions under the Treaty of Lisbon and legal rulings on the importance of ‘services of general interest’.83

Conclusion Neo-liberal ideas have been at the centre of debates about economic policy since the 1980s. Despite the successes of Social and Christian Democracy after 1945, the strength of the ‘embedded liberalism’ in which state action sought to offset or limit market competition, and the presence of powerful alternative traditions, neo-liberal ideas have spread across countries, beginning with the United Kingdom but also reaching across Continental Europe to the north, south, and east, as well as to the EU. Equally, they have stretched from welfare to regulation and from ﬁscal and monetary policy to labour markets and corporate governance. Moreover, neo-liberal ideas have continued to dominate through (small) booms and (big) busts; even the crises of the 2000s have not ended their predominance. Political scientists are notoriously poor at predicting the future.84 It may be that ‘It is always darkest just before the Day dawneth’,85 and just as we are writing a book about the resilience of neo-liberalism, those ideas collapse. Yet, it is also very possible that neo-liberalism will remain strong and central in debates for many years to come as a result of its own ideational characteristics, combined with support from interests and institutions. Regardless of the future, the resilience of neo-liberalism is worthy of analysis due to its importance and the puzzle it provides. It also offers a major example for the study of policy ideas as phenomena in

82 See Jones in this volume. 83 See Thatcher in this volume. 84 See Blyth 2006. 85 See Thomas Fuller, ‘A Pisgah-Sight of Palestine and the Conﬁnes Thereof’, 1650. Conclusion 429 themselves, just as institutions, interests, and discourse have been subjects of investigation. As Keynes argued, ideas are central to political debates and choices; understanding when, how, and why some ideas endure despite multiple challenges is a fascinating and essential task.

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absorption advocacy coalitions, 32–3 neo-liberalism, 406, 407–8 aging population, 88 paradigm change, 422 Ahern, Bertie, 299 plasticity, 25 Alfano, Angelino, 104 resilience, 405 Alliance for Jobs, 332 welfare, 406 Alliance for Liberals and Democrats welfare reform, 28 for Europe (ALDE), 102 accounting, fair value, 217–18 Alliance of Socialists and Democrats, accounting practices, 157 102 Action Plan on Company Law and altruism, 120–1 Corporate Governance, 258, American economists, 126–7 273–4, 278 American egalitarian liberalism, 91 active inclusion, social promotion, anarcho-capitalists, 4, 58 97–8 Anglo-American school, 89–90, 97 active labour-market policy, 227–8 Anglo-liberal growth model, 20–1, agenda, tensions, 233–4 289–94, 305 alterations in power, social classes, constructivist institutionalists, 293 235 easy access to credit, 291 austerity, 238 global financial crisis, 304–5 diverse goals, 234 house price Keynesianism, 291–2 evolving neo-liberal positions, institutional configurations, 304–5 26–7 Ireland, 306 flexible labour markets, 227–8 lack of conscious design, 294 incentives, 238 origins, 293–4 institutional context, 229 private debt financed, 291 institutional influences, sustainability, 304–5 implementation, 228–9 virtuous cycle, 291 investment in marginal workers, Anglo-liberalism 237 construction of, 295–301 multidimensional, ideological Ireland, 306 appeals, 227 Aristotle, 63–4, 116–17 new direction, 235 Armack-Muller,¨ Alfred, 9 policy intervention, unemployment, Austen, Jane, 226 233–6 austerity social benefits, 235 active labour-market policies, 238 supply-side policies, 317 budgets, acceptance of, 354 Sweden, 237, 317 Bulgaria, 238 win-win alternative, 238 climate of, 238 active labour-market spending, 244–5, consolidation, 158–9 246, 250 debt versus growth, crisis of, 295

432 Index 433

European Central Bank, 151–2, internal-risk models, 210–11 166–7 investment decisions of, 59 European Monetary Union, 106, liquidity, 159–60 354 recapitalization of, 305 financial, monetary, 83 refinancing, 159–60 fiscal, 74 regulation, Poland, 389–90 fiscal consolidation, 151–2 strategies of, 264 France, 368 takeover of, 18 Germany, 133–4, 331–2, 337 Barnier, Michel, 278–9 Greek bailout, 368 Basel II, 210–11 growth versus appropriate balance, Beckert, Jens, 25 151–2 Bell, Daniel, 65–7 Ireland, 158–9 Berlin Wall, 14, 57 Italy, 356–7 Berlusconi, Silvio, 24, 30, 355–7, member-state compliance, 368 417 the Netherlands, 158 Bernanke, Ben, 74 new ideology of Europe, 356–7 Big Government, 77 pension reform, 133–4 Big Society, 92, 102 Poland, automatic stabilizers, Blair, Tony, 6–7, 24, 30, 84, 128–9, 389–90 243–4, 296–7 before recovery established, 300 Bolkestein, Frits, 267 reduced benefits, 126 Bolkestein directive, 180 reduction of, 74 bourgeois revolution, 231 severe policies, 133–4 Bretton Woods, exchange rates, 10 Sweden, Social Democrats, 126 bricolage, 406 UK economy, 300 British Conservatism, 92 universalistic welfare state, 126 British East India Company, 261 austerity packages, 71 British Financial Services Authority, Austin, Jane, 227 210–11 Austrian School, 58, 59 Brittan, Leon, 175–7 inflation, 58 Brussels–Frankfurt consensus, 18, 21, market order, 58 145, 151–2, 160, 163 state intervention, 58 alternatives, proposals, 167–9 automatic stabilizers, 237 collapse, 145–6 efficient local factor markets, 160–3 balanced budget, 59, 72, 380–1 fiscal consolidation, 152 Balcerowicz, Leszek, 126–7, 390 fiscal stimulus, 152 Balcerowitz plan, 378–9 ideas, ideologies, paradigms, 151–3 Bank of Italy, 350, 351–2 ideological differences, 152 banking-sector liabilities (bailouts) inflation rates, Eurozone, 145 Belgium, 158–9 interdependence, 163 Ireland, 158–9 intra-European macroeconomic banks imbalances, 163 credit, low fixed rates, 159–60 price inflation, 147–8 credit available to, 164–5 price stability, 147 European Central Bank (ECB), resilience, institutional inertia, 168 159–60 rule-based framework, 146–51 failing, 18 sound finances, 157–60 government bonds, purchase of, sound-finances rule, 148–9 159–60 stable money, 154–6 434 Index

Brussels–Frankfurt consensus (cont.) popular discontent, 386–7 virtuous policy combination, recession, 381–2 163 right-wing nationalists, 383–4 welfare-state structures, 148–9 Central and European countries bubble, recession, political central to theoretical economic implications, 301–2 debates, 377 Buchanan, James, 9, 118 dependent market economies, Bulgaria, austerity, flexicurity, 375–6 238 international influence, 379–80 Bundesbank, 165 revolutionary liberalism, 374–5 inflation, 133–4 shift from socialism to free market, monetary policy, 123 377 Bush, George, 71–2 change, rates of, 21–2 Bush, George W., 59–60 Charter of Fundamental Rights, business cycle, 157 83 Chicago School, 120–1, 182–3 Callaghan, Jim, 299 economic model, 59 Camdessus, Michel, 131 mathematical model, 59 Cameron, David, 92, 102, monetarist critique, Keynesianism, 302–3 59 Cantillon, Bea, 100–1 Chicago School of Economics, 9, capabilities–expectations gap, 59 161 China, style of reform, 396 capital allocation, 204–5, Chirac, Jacques, 30, 125, 365 211–12 Chirac government, 125 capitalism, state-led, 347 chrematistics, 65–6 postwar, non-liberal, dirigisme, Churchill, Winston, 112 dirigiste, 347, 360–1 Ciampi, Carlo, 351–2 Capitalism and Freedom (Friedman), civil rights, 96–7 8–9 class mobility, 231–2 capitalist era, ideological development, classical Christian solidarism, 91–2 53–4 coalitions Carlsson, Igmar, 319–20 neo-liberal ideas, 171–2 catallaxy, 63–4 promotion of ideas, 35 private economy, 68 coalitions, discursive, 122 Cato Institute, 380 Colloque Lippman conference, 7–8 Central and Eastern European commercial society, 60–1, 66 countries Committee on Banking Supervision, alternatives, 393 208 boom and bust, 384–5 communicative discourse, 32–3 corruption, 386–7 Communism, fall of, 130, 135 criminal organizations, 386–7 Communitarian thinkers, 91–2 dependent market economies, Community Method, 134 387–9 competition, 149–50 deregulation, 381–2 criteria, mergers, 193–4 development model, 393 domestic exchange, 175–7 global financial crisis, 388 European integration, 175–7 mass privatization, 382–3 law, 174–5 orderly markets, 386–7 policy, excessive market power of Poland, shock therapy, 389 firms, 173 Index 435 competitiveness, 161–2 state intervention, 278–9 equity and efficiency, 161–2 term, 260 market efficiency, 162 trade unions, 281–2 Competitiveness Council, 273–4 worker involvement, 274–5 conservative neo-liberalism, 135–6 worker participation, 267, 278–9 Conservatives, disavowed intervention, corporations 303 eighteenth-century, 64–5 Constant, Benjamin, 362 fair-value accounting, 217–18 constructivism, 23 history, laissez-faire, 261–2 continuity, 16 modern, strategic market actors, historical institutionalism, 37–8 65 contructivism, 22–5 origins of, 261 coordinated market economies, corporatist management, 122 313 creative destruction, 126–7 coordinative discourse, 94 credit corporate governance bad-asset accumulation, 164 company law, 272–4 banks, unlimited credit, 159–60 corporate failures, 269–70 effect on domestic prices, 164 employees as key stakeholders, European Central Bank, 159–60 277–8 expansion of, peripheral, 164 environmental disclosure, 278–9 explosion of credit, 74, 159–60 exploitation of investors, 261–2 income inequality, unsustainable flexibility, credit, 201 275–6 unsustainable credit, 201 growth of multinational companies, credit cycles, 216–17 263–4 credit-rating agencies, 202, harmonization philosophy, 275–6 210–11 High Level Group, company law, “The Crisis of the Tax State” 271–2 (Schumpeter), 67–8 High Level Group, takeover Croce, Benedetto, 349, 350, directive, 270–1 369 interest groups, support, 263 cross-border deposits, 164 laissez-faire model, 262 Cross-Border Mergers Directive, management remuneration, 276 274–5 market-based view of firm, cross-border trade, 175 265–7 Crouch, Colin, 55 minority shareholders, 264–5, Czechoslovak state bank, 378–9 281–2 postwar stakeholder model, 262 de Tocqueville, Alexis, 362 privatization, 263–4 deficits, excessive, 148 reforms, 335–6 deficits, political choice, 157–8 separation, ownership, control, deficits, rule enforcement, 157–8 260 dependency culture, 124–5 shareholder–director relationship, deposit insurance, 153 269 deregulation, 55–6 shifts in financial savings and derivatives, 214 regulation, 263–4 desert-based liberalism, 89–90 social disclosure, 278–9 Difference Principle, 89–90 stakeholder model, 276–7, Director of the Internal Market 281–2 Directorate, 267 436 Index

Directorate General Competition, efficiency, public management, 184–5 120–1 discourse efficient local factor markets, 151–2, discursive coalitions, 122 160 economic crisis, 132 efficient market hypothesis, 59 ideational entrepreneurs, 22, egalitarian liberalism, 83–4 114–15 egalitarian redistribution, 97–8 middle path, 129 Einaudi, Luigi, 9, 350–1, 369 morals plus the market, 103 electoral promises, 11 New Labour, 296–7 embedded liberalism, 54, 121 right-wing populism, 103 empirical evidence, welfare-state social investment, 100–1 change, 94–5 discourse coalitions, 24 Employment and Social Affairs discretionary spending, 237 Directorate, 83 discursive coalitions, 122 The Employment and Social Chapter discursive institutionalism of the Amsterdam Treaty, 83 ideological acts, 92–3 entrepreneurs, ideational, 22 individual agents, 92–3 epistemic communities, 24, 32–3 multiplicity of arenas, 92–3 equal rights, 230 discursive institutionalists, 39 equality, 97, 126 discursive neo-institutionalism, 85 equity, principles of, 83–4 discursive struggles, 31 Erhard, Ludwig, 9, 122 dissemination, 17–18 euro dominance, hegemony, 17–18 inviolability of, 166 Draghi, Mario, 165–6 speculation, 155–6 Eurobarometer, 106 e-governance, 128 Eurobonds East European economists, 126–7 European Commission, ‘stability economic activity, individual, bonds,’ 167–8 116–17 issuing of, 74 economic crisis ordo-liberal theory, 133–4 neo-Keynesian stimulus, 113–14 quantitative easing, 74 economic efficiency, 212 Europe Economic Europe, 106–7 labour-market performance, 160–1 economic freedom, 116–17 market efficiency, 161 economic libertarianism, 58 unemployment, 160 anarcho-capitalists, 58 Europe, social structures, 88 individual rights, 58 Europe, unemployment, 160 economic orthodoxy, 130–1 Europe of Freedom and Democracy, economic patriotism, 356 103 economic performance, reciprocity, Europe Unified Left, 103 97–8 European anti-trust policy, 123 economic policies, Keynesian, 360–1 European Bank for Reconstruction and economics, capital allocation, Development (EBRD), 383 efficiency, 206 European Central Bank (ECB) economists austerity, 151–2 American, 126–7 credibility, 156 East European, 126–7 credit, 159–60 economists, training of, 24–5 inflation, 151–2 efficiency, local labour, 149–50 lender of last resort, 159, 167 Index 437

liquidity, 159 European Union Commission, 131–2 long-term refinancing operations, European Union regulation, 175–7 159–60 focus on competition, 179–80 monetary stimulus, 166–7 implementation, difficulties, 179–80 securities market program, 159 law and politics, roles of, 183 sovereign debt, purchase, 159 policy disagreements, 180 European champion firms, 173 worker participation, 279–80 European Coal and Steel Community, European Union regulatory model 123 large firms, 187–8 European Commission market making, market protection, actors, institutionally disadvantaged, 183 186–7 Eurozone member states, allies, 186–7 fiscal problems, structural level, European Company Directive, 274–5 159 European Cooperative Society interest rates, 159 Directive, 274–5 Stability and Growth Pact, 37–8 European Corporate Governance Eurozone crisis, 21, 114 Forum, 271–2 Eurozone inflation rates, 145 European Corporate Governance evolutionary change, 20 Institute, 270 excess capacity, 152 European Court of Justice, 171, 174, experimentalist governance, 178–9 175, 185–6 European Employment Strategy, 83 Fabian socialism, 91 European integration, 83–4, 104, 175 fair-value accounting (FVA), 217–18 competition, 175–7 faire avec, 115, 125 key actors, 181–2 familialism, 91–2 European monetary integration, 145 feedback mechanisms, 35–6 European Monetary Union (EMU), Ferrera, Maurizio, 7, 406 81–2 Fianna Fail,´ 297, 300 austerity, 354 foul-weather Keynesianism, 300 fiscal austerity, 106–7 Fico, Joseph, 395–6 labor and pension reforms, 354 fictionality, 22–5 monetarism, 106–7 Fifth Republic, 360–1 European Popular Party, 102 financial crash, 54–5 European Single Market Programme, explosion of credit, 74 206–7 financial crisis, 203–4, 314–15 European social model, 296–7 neo-liberal finance ideas, defeat of, European Stability Mechanism, 167–8 202 European Trade Union Confederation stabilization attempts, 299 (ETUC), 237 financial markets European Treaties, 149 economic efficiency, 212 European Union (EU) liberalization, 131 competition, 177 regulation of, 411–12 decision making, 183 financial media, anti-social state, 81–2 force for liberalization, France, 348 financial regulation force for liberalization, Italy, 348 debate, 202 legal restrictions on entry, 177 delegation of, 208 member states, competitive markets, socio-economic effects, 208 178 Financial Stability Board, 208 neo-liberal ideas, 177 financial sustainability, 97–8 438 Index

Fine Gael, 297 labor markets, 366 corporation tax, 303–4 market liberalism, 367–8 firms National Front, 362–3 interests, coalitions, feedback neo-capitalism, 360–1 mechanisms, 415 neo-liberal monetary policy, 364 shareholder model, 258 non-liberal discourse, 368 First World War, 61–2, 67–8 ordo-liberal economic philosophy, fiscal conservatism, economic crisis, 368 69–75 post-dirigisme, 367–8 fiscal consolidation, 152 pragmatic neo-liberalism, 347 fiscal deficit, 157 pro-market ideas, 360 fiscal moderation, 157 selective neo-liberal implementation, fiscal stimulus, 152 207 flexibility, 130–1 state-centrered traditions, economic, flexible labour markets, 128, 365–6 227–8 state-influenced market economy, flexible solidarity, 97–8 346–7 flexicurity, 128 state-trained technocratic elite, Bulgaria, 238 360–1 Denmark, 249–50 voluntarist, efficient state, 369–70 labor markets, 128 welfare state, aspects of change, Scandinavian countries, 243 362–3 Fordist free-collective bargaining, 289 middle mass, 88–9 free market(s) welfare state, 88 choices regarding, 115 forecasting models, 156 doctrines, 57 foreign direct investment, 289 inefficiency, 127–8 Forza Italia, 81, 88–9 liberty, guarantee of, 124–5 Foucault, Michel, 20, 120 regulation, ambiguity, 182–3 Founding Treaties, European Union, rules-based approach, 118–19 123 self-regulating capacity of, 80–1 frame of analysis, 32 Free to Choose (Friedman), 118 framing, dissemination, 32–3 free trade, 62, 103–4 France Britain, 62 austerity, 368 policy, 61–2 central role of the state, 359–62 freedoms, positive, negative, 96–7, credibility with the markets, 231–2 368 French Colbertism, 130–1 dirigisme, 360–1 Friedman, Milton, 9, 59, 355, 407–8 dirigiste approach, 361 Fukuyama, Francis, 55 dirigiste economics, 361–2 double-digit inflation, 364 Geithner, Tim, 74 entrepreneurial state, 359–62 gender equality, 91–2 Euro-champion firms, 193–4 German Corporate Governance Code, Fifth Republic, 360–1 278 French national champions, 367–8 German corporatism, 123 gouvernance economique´ , 368 German Free Democratic Party (FDP), interventionism, 359–62 417 Keynesian economic policies, 360–1 German ordo-liberals, 9, 57, 407–8 Keynesian reflation, 363 German social-market economy, 122 Index 439

Germany experimentalist, 178–9 anti-monopoly strategies, 329 governing without government, austerity, 133–4, 331–2 128 corporate governance, 330–1 government policy entrepreneurs, corporate governance reforms, 241–2 335–6 grand projet, alternative European corporate tax cuts, 331 model, 173 decentralization of power, Great Transformation, 21, 121 333 Greece, bailout, 368 employment, 336 Greek elections, 104 Federalism, 333 Greens-Free European Alliance, 102 financial crisis, 314–15 growth, price movements, 154 Hartz Reforms, 244, 337–8 growth-competitiveness-inclusion industrial relations institutions, triad, 91–2 336 growth dynamic, puncturing of, 289 liberalization, 313–14, 330–1 liberalization, financial markets, Hall, Peter, 36–7, 54 333–5 harmonization philosophy, 275–6 managed austerity, 337 Hartz Reforms, 244, 337 non-market forms of organization, Haughey, Charles, 298–9 313 Hay, Colin, 5–6, 20–1, 204–5 ordo-liberal theory, 133–4 Hayek, Friedrich, 9, 57, 58, 63–4, pension reform, 133–4 118–19, 172–3 policy priorities, 316–17 Hayekian strand of neo-liberalism, policy response to crisis, 317 74 policy making, inclusive, 339–40 hedge funds, 210–11 political compromises, 338–9 hegemonic belief, 17–18 post-crisis policy, 317–18 Hemerijck, Anton, 94–5 protection, non-market mechanisms, Heritage Foundation, 9, 380 338–9 historical institutionalism, 37–8 recovery, 318–19 Hobbes, Thomas, 116–17 reform, 314 Hollande, François, 100–1, 151–2, role of welfare state, 329 368 shareholder value model, 313 election campaign, 368–9 social-market economy, 329 Hont, Istvan, 60–1 SPD–Green coalition, welfare state Hoover, Herbert, 69–70 cuts, 331 household unemployment, 331 classiclal conception of, 64 unemployment insurance, 336 corporation, 64–5 unification, 330 public, 65–6 welfare state, unification costs, household economy, metaphor, 31–2 336–7 households, types of, 63–4 Gidden’s social theory, 91 Hungarian Constitutional Court, globalization, 290, 296–7 394–5 gold standard, 62 Hungary Golden Age, 88–9, 106–7 crisis, 391 Goldscheid, Rudolph, 67–8 currency devaluation, 391 governance economic mismanagement, 394–5 EU, politically neutral, technical goulash communism, 390 mode of, 183, 195 government spending, 390–1 440 Index

Hungary (cont.) interdependence, 163–7 mixed-ballot election system, Brussels–Frankfurt consensus, 163 392 solidarity, 167 reform communism, 378 interest-based analysis, 33–4 hybridization, 25 interest-driven financial overhaul, 207 paradigm change, 422 interest rates resilience, 405 long-term, 164 low, long-term refinancing ideational operations, 159–60 entrepreneurs, 22, 131–2 International Monetary Fund (IMF), shifts, 21 71, 379–80 ideological managed globalization, 131 campaigning, 93–4 Paris consensus, 131 consensus, 87 regulation of financial capital, 131 synthesis, 85, 95 international trading system, 61–2 internal differentiations, 99–100 interventionism, state, 132, 352 ideologues, 93 France, 125 ideology market-shaping reforms, 128 dogmatic, 86–7 intra-European macroeconomic morphology, 86 imbalances, 163 philosophy, versus, 85–6 investment banks, behaviour, 65–6 plastic, 86–7 Ireland revisionism, 91 Anglo-liberal growth model, 306 implementation, lack of, 30–1 Anglo-liberalism, 306 imports, restriction, member states, austerity, 158 174 banking-sector liabilities (bailouts), income polarization, 88 158–9 individual, role of, 7 collapse of social partnership, 300 individual freedom, 118–19 international competitiveness, individualism, 20 national output, 298–9 industrial policy, state-led, 173 Keynesian techniques, 300 industrial-relation systems, 240–1 pared-down growth model., 305–6 inequality, policies enhancing, 34 regulation, 304–5 inequality, rising, 115 unemployment, 298–9 inflation Irish Congress of Trade Unions, 300 European Central Bank, Italian Democratic Party, 100–1 151–2 Italy Eurozone, 145 academic neo-liberals, policy rates, divergence, 154 leadership, 353–4 reducing public debts, 148 austerity, 356–7 unpredictable rates, 155 authoritarian reform, 356–7 Institute of Economic Affairs, 9 authoritarian reform process, 357 institutional isomorphism, 38 economic leadership, crisis, 356 institutional retrenchment, 81 economic miracle, liberal ideas, institutional structures, 239 350 institutionalist analysis, 36–7 entry, European Monetary System, institutions, non-majoritarian, 37 351–2 inter-paradigm borrowing, 299 European integration, 354 inter-service coordination, 128 European Monetary System, entry, interbank lending, 164 351–2 Index 441

Grow Italy decree, 358 Kok, Wim, 161–2 Keynesian ideas, 351–2 Krugman, Paul, 72–3, 202 Montism, 358–9 Kuhn, Thomas, 152–3, 211–13 Mussolini’s authoritarian fascism, analysis, paradigm change, 422 349 Kuhn’s view of change, 21 neo-capitalism, 349 Kuhnian normal science, 152–3 neo-liberal ideas, politics, 349–50 opportunistic politics, 356 Laborde, C., 90 policy paradigm, 358–9 labour costs, 246, 330, 332 political theory tradition, 77–8 labour market flexibility, 6 postwar reform, 352–3 ALMP reforms, 227 pragmatic neo-liberalism, 347 neo-liberal ideas, 415–16 pro-market ideas, 349–50 labour market performance, Europe, public trust in policies, 359 160–1 rescue of the nation-state, 354 laissez-faire, 121 Save Italy decree, 358 arguments, 205–6 Second Republic, 352–3 economics, 116–17 sound monetary policy, 354 liberalism, 121 state-assisted capitalism, 349 Lamy, Pascal, 131 state-influenced market economy, large firms, European-wide markets, 346–7 187–8 voluntarist, efficient state, 369–70 laws, universally applicable, 230 left-wing radicalism, 103–4 Jackson, Gregory, 12 Liberal Communitarianism, 101 Jealousy of Trade (Hont), 60–1 liberal market economy, 53–4 Job Securities Councils, 317 liberal neo-welfarism (LNW), 12, 79, Jones, Erik, 18, 21, 123 406 Jospin, Lionel, 129 austerity, 106–7 Juncker, Jean-Claude, 168 community, 98–9 Juppe,´ Alain, 366–7 emergence from revisionist efforts, 99–100 Kant, Immanuel, contractual tradition, equality, 97 89–90 hybridization, 99–100 Keynes, John Maynard, 1, 54–5, ideology, positive, negative 119 freedoms, 96–7 Keynesian innovation, 99–100 economic policies, 360–1 meritocracy, 98–9 macroeconomic intervention, 236 naming, ideological act, 95–6 paradigm, 54 non-discrimination, 96–7 policies, 124–5 opportunity, 98–9 pragmatism, 72–3 redistribution, 98–9 stimulus policy, market tax-transfer system, 97 deregulation, 236 Third Way, 99–100 welfare state, 55–6, 88 transformative potential, 106, Keynesianism, 106–7 107 in recession, 300 liberalesimo, 7, 77–8, 79 King, Mervyn, 74 liberalism Klaus, Vaclav,´ 378–9 embedded, 121 knowledge regimes, 24–5 nineteenth-century, 407–8 Kohl, Helmut, 329–30 liberalismo, 7, 77–9 442 Index liberalization Marx, Karl, 61–2 Germany, 313–14 mass migrations, unemployed workers, Sweden, 313–14 149 liberismo, 77–8, 79 media, pro-neo-liberal interests, 35 libertarians, economic, 58 Meidner, Rudolf, 319 liberty, 97 Mellon, Andrew, 69–70, 72 fundamental rights, 96–7 merger control, 188–94 limited liability, 64–5 merger model, 192–3 Lindbeck, Assar, 319–20 Merkel, Angela, 151–2, 168, 368 liquidity, 202 metamorphosis, 25 banks, 159–60 paradigm change, 422 Lisbon resilience, 405 European Council, 161–2 Miliband, Ed, 100–1 Strategy, 160 Mill, John Stuart, 116–17 Treaty, 91–2, 180–1 Millian liberty, 97–8 List, Friedrich, 62 the Millian perspective, flourishing, Locke, John, 77–8 96–7 Loedel, Peter, 147 Mitterrand, Francois, 363 London School of Economics, 9 monetarism, 60, 123, 124–5 Lubbers, Ruud, 125–6 monetary analysis, 154–5 Lucas, Robert, 59 monetary and financial union, Ludwig Erhard, 9, 24 connection, 153 monetary stimulus, ECB, 166–7 Maastricht agreement, 153 money supply, 154 Maastricht criteria, 148, 389–90 Mont Pelerin` Society, 9, 57, 121 Maastricht Process, 83 Monti, Mario, 30, 104, 152, 357–8 Maastricht Treaty, 82, 83, 147, moral conservatism, 80–1 148 moral vocabulary, 20 macro-prudential regulation, 215 Moran, Mick, 128–9 Madelin, Alain, 125, 417 morphological approach, 87 majoritarian political institutions, path dependencies, 92 124 marginalist economics, 77–8 national debt, British market-correcting autonomy, Napoleonic Wars, First World War, 106–7 69 market deregulation, Keynesian National Economic and Social stimulus policy, 236 Council, 297 market economies, state-influenced, National Health Service 369 Forza Italia, 82–3 market efficiency privatization, 82–3 Europe, 161 national priorities, conflicting, 161 unemployment, 162 Nea Democratia, 104 market enhancement, 217 negative integration, 81–2, 208 market globalization, 88–9 neo-capitalism, 356, 369 market instability, 218–19 France, 360–1 market intervention, 214 Italy, 349 market liberalism, state, 120 public, 346–7 marketism, 350 neo-conservatism, Thatcherite, 100–1 Martin, Kathy, 407–8 neo-conservatives, 80, 102 Martino, Antonio, 355 neo-functionalism, 181–2 Index 443 neo-Keynesian stimulus, 113–14 resilience, 13–16, 410–11 (see also neo-liberal resilience) agents, 2 rhetoric, reality, 29–31, 423–4 democracy, 131–2 rules, coercive, 419 finance, critics, 216 rules, path-dependence, 419–20 labels, 12 strategic use of, 115 think-tanks, 380 strength in political dialogue, 31–6, neo-liberal ideas 410–11 challenges to, 204 stronger alternatives, 424–5 coalitions, 171–2 Sweden, 319–20, 324–5 constructivist, 2 traditional alternatives, 426 crisis, 294–5 neo-liberalism criticisms of institutional analysis, absorption, 407–8 421 adaptability, 405–6 designed for debate, 410 agents of, 22–5 dominance, 421–2 ambiguity, 226 economic-policy debate, central, ascending phase, 82–3 428 benefits of non-implementation, European political economy, 2 26–9 finance, 204 burying the state, 112–13 firms, interests, coalitions, 415 and classical liberalism, 60–3 force of institutions, 418 continuity, 14–15, 314 future of, 428–9 core principles, 3, 25, 408 ideational entrepreneurs, 413–14 corporate governance, 259–62 individual states interests, versus, corporate governance, role of the 133 market, 281–2 institutional analysis, 420 critique of, 119–21 institutional breakdown, 427 definition of, 1, 2, 3 institutionalized, 175 deregulation, 120–1 interests, power of, 414–15 descriptions of, 3 interests, pressing for new ideas, dissemination, 17–18 426–7 dominance, 17–18 internal conflicts, 422–3 early decades, European Union, Iron Curtain, marginal impact, 172–5 377–8 economy, the solution, 120–1 key actors, institutional frameworks, embedded market labour policies, 414 242–51 merged with social-democratic ideas, employment policies, 232–8 24 endurance, reinvention, 251 neo-institutionalism, 418 endurance of crisis, 397–8 non-implementation, political engineering of souls, 121 benefits, 29–31, 408, 409 equal rights, 230 normative resonance, policy, 413 Eurozone crisis, 133–4 paradigm change, 421–2 failure to meet expectations, 105–6 policy debates, 411–12 financial crisis, 203–4 policy ideas, study of as financial regulation, 204–6 phenomenon, 428–9 financial regulation, future of, 220 political parties, politicians, 417 flexible framework, 28 positivist, 2 forms, levels of, 19–22 re-use of, policy debates, 409 forms of, 112–13 444 Index neo-liberalism (cont.) poor guide to financial regulation, fundamental contradiction within, 219–20 112–13 portrayal of, 3 generality, diversity, mutability, positivist, constructivist views, 22, 26–9 23 hybridization, 407–8 post-crisis resilience, 211–13 ideals of the founders, 121–2 post–neo-liberalism, rise of, 88–92 ideological program, 124 privatization, 120–1 ideological renewal, 113–14 putting ideas into action, 121–4 ideological roots, 56–7 radical conservatism, 124–7 impact of actors, 92–5 rational self-interest, 117 impossible targets, 409 re-regulation for competition, independent authority, delegation, 177–8 132 reactions to term, 39 individual freedom, 112–13, redefinition of the state, 116 230–1 regulatory alternatives, search for, institutional base, 239–42 215–20 institutional structures, 239 regulatory debate, schools of institutionalization, European thought, 213–15 finance, 206–11 regulatory model, analysis, 181–8 institutions, force of, 36–9 regulatory model, development, intellectual traditions, 407–8 175–81 key elements of, 5–6 renewal of the state, 135–6 liberal neo-statism, 113 resilience, 1–2, 396–7 liberal neo-welfarism, variants, resilience as process, 403–4 99–105 rhetoric, reality, 29–31, 114 liberalism, negative freedoms, shareholder model, European Union 229–32 level, 265–76 liberalization pressure, shareholder model, interests supranational, 130–3 supporting, 263–5 lines of analysis, 404–5 stakeholder model, corporate malleability, 25 governance, 276–81 merger control, 188–94 state, focus of attack, locus of metamorphosis, 406, 407–8 action, 112–13 moderate, 127–9 state, the problem, 120–1 morphological approach, 85–8 strength, in political discourse, 26–9 mutability, 407–8 strong state, 118 neo-liberal order, 118–19 survival of, 18–19 neo-statism, discursive struggle, Treaty provisions, 174–5 134–6 welfare-state transformation, 105–7 neo-welfarism, ideological synthesis, neo-statism, 135–6, 404 95–9 neo-welfarism, liberal, 95–6, 403–4, non-implementation, benefits, 406 408 historical compromise, 104–5 paradigm change, 422 supranational arenas, 104–5 philosophy, historical perspective, the Netherlands, austerity, 158 116–19 New Deal, 72 plasticity, 25 New Labour, 128–9, 296–7 political freedom, 117 new paradigm, 104 political phenomenon, 39–40 new public management, 134–5, 354 Index 445 new risks agendas, 91–2 institutional retrenchment, 81 New York Times, 202 moral conservatism, 80–1 nineteenth century neo-conservatives, 80–1 liberal political economy, 62–3 phases of, 80 liberalism, 407–8 principles of equity, 83–4 social mobility, 407–8 redefining social justice, 89–90 Nixon, Richard, 236 social-assistance benefits, 81 non-discrimination, 96–7 paradigm shifts, 54 non-implementation, 29–31, 408, paradigmatic belief, 17–18 409 Paris consensus, 131 Normpolitik, 319–20 Party of Freedom, 158 Nozick, Robert, 58, 119–20 Pasok, 104 passive transfer, 97–8 Obama, Barack, 71–3 paternalism, 124–5 Official Settlements Account, 165 path dependence, 37–8 open method of coordination, 130–1 Paulson, Hank, 71–2 Orban,´ Victor, 394–5 pension Ordnungspolitik, 150 reform, 129 ordo-liberal theory systems, 201–2 Eurobonds, 133–4 persuasion, 31 Germany, 133–4 Persuasion (Austen), 226 inflation, 133–4 philosophical contractualism, 77–8 ordo-liberalism philosophical principles, 20 EU policy, 123 philosophy, ideology versus, 85–6 foundations, 123 phlilosophical liberalism, 89–90 German neo-liberals, 407–8 Poland liberalism, first form, 57 avoidance of recession, 389–90 neo-liberalism, first form, 57 bank regulation, 389–90 position of dominance, 123 Maastricht criteria, 389–90 state role, 57–8 proportional representation, 392 Organization for Economic reform communism, 378 Co-operation and Development, shock therapy, 126–7, 389 71, 81, 201, 278 Polanyi, Karl, 53–4, 121 organizational design, 37 policy entrepreneurs, 22, 114–15 organizational power, 34 political economies, international, Original Position, 89–90 116 Osborne, George, 72–3, 74 political economy, liberal, 63–4 political expression, party systems, parabola, neo-liberal 240 alternative ideological positions, political ideas, influences of, 12–13 89–90 political liberty, 116–17 ascending phase, 82–3 polity, prior to individual, 116–17 centre-left parties, 84 Popper, Karl, 9 counter-arguments, 83–4 population, aging, 88 crisis rhetoric, 80–1 positivism, 22 critique of welfare state, 83–4 post-dirigisme, 347, 349, 369 ideological re-elaboration, 84 post–neo-liberalism individual’s rational pursuit of impact on reforms, 94–5 wealth, 80–1 label, liberal neo-welfarism, 95–6 of influence, 105 poverty, 97–8 446 Index pre-crisis regulation, 209–10 Red Toryism, 103 price stability, importance of, 152 referentiel,´ frame of analysis, 32 principal–agent concept, 258–9 reform Principles of Corporate Governance, active labour-market policies, 278 235–6 prioritarian egalitarianism, 97–8 budgetary, 352 private economy Central and Eastern Europe, 385–6 catallaxy, 68 Denmark, 126 foundation of public economy, entrenched interests, 10 68 equality, 126 privatized Keynesian model, 291 EU regulation, 187 pro-market regulation, 206–7 Germany, 314 Prodi, Romano, 84 incremental, 339–41, 366 productivist solidarity, 97–8 institutional context, 228 programmatic ideas, 20 Lisbon strategy, 160 ideologies, 85–6 majoritarian political institutions, Progressive Alliance of Socialists and 124 Democrats, 102 market-complementing, 128 Progressive Conservatism, 101 market-creating, 313–14 property rights, reform of, 64–5 market efficiency, 202–3 protectionism, 132 market-structural, 152 public debt new labour market, 249 deficit financing, 302–3 pension, 129 deficit financing, excessive, 148 radical, communist to capitalist, excessive deficits, inflation, 148 126–7 public household, US, key strong states, 134 developments, 66 supply-side, 71 public management, 120–1 Sweden, 314 public officials, narrow self-interest, tax cuts, 71 118 Thatcher, 233 public philosophy, 105–6 universalism, 126 public service, non-economic unpopular, 187 contributions, 120–1 welfare, 28 Putin, Vladimir, 393–4 regulation Ireland, 304–5 quantitative easing, Eurobonds, 74 market-enhancing, 214–15 pre-crisis failings, 213–14 radical neo-liberals, 125 stakeholders, 209 Rajoy, Mariano, 91–2 regulatory model rating agencies, criticisms of, 218 legal institutions, range of, 178–9 rational self-interest, 117 neo-liberal, challenges to, 180–1 Rawls, John, 83–4 promotion of competition, 194–5 re-regulation Rehn, Gosta,¨ 319 for competition, 177 Rehn–Meidner Model (RMM), 322 competitors, newly-permitted, resilience, 195 discrimination, 185 absorption, 405 Reagan, Ronald, 4–5, 59–60, 80–1, core principles, discourse, 25–6 362 hidden assumptions, 15 reception theorists, 89–90 hybridization, 405 recovery strategies, 236–7 liberalism, 105 Index 447

lines of analysis, 25–6 Smith, Adam, 64–5, 407–8 metamorphosis, 405 social-democratic consensus, 95 origins of term, 32–3 social-democratic productivism, 97–8 survival, 18–19 social-democratic tradition, key understanding of, 53 elements, 105 usage in social sciences, 15–16 Social Inclusion OMC, 83 resource-based egalitarianism, 89–90 social investment, 94–5 resource complaints, 183–4 social justice, 97 Rhinish capitalism, 123 social-partnership agreements, 289 right-wing populism, 103 social protection, Europe, 105–6 Road to Serfdom (Hayek), 8–9, 119 Social Protocol, Maastricht Treaty, Romney, Mitt, 59–60 83 Ropke,¨ Wilhelm, 9, 57 socialism, opposition to, 9–10 Rothbard, Murray, 58 sociological institutionalists, 38 Rougier, Louis, 361 solidarity, interdependence, 167 Rousseau, Jean-Jacques, 116–17 sound finances rule, 148–9 Rueff, Jacques, 361 sound monetary policy, 354 Ruggie, John, 121 Spain, austerity, 238 Russia Stability and Growth Pact, 133–4 national champions, 393–4 stakeholder approach, 259 oligarchs, 393–4 stakeholders, regulation, 209 state control, 393–4 starting-gate egalitarianism, 89–90 Rustow,¨ Alexander, 9, 57 state capacity to build coalitions, 241 Sarkozy, Nicolas, 24, 236, 367–8, conservative roll-back, 114 417 definition of, 116 Say, Jean-Baptiste, 362 deregulation, 120–1 Schauble,¨ Wolfgang, 151–2 distributional justice, 119–20 Schmidt, Vivien, 85–6, 115, 202–3 economic activity, 118–19 Schnyder, Gerhard, 12 efficient markets, 118–19 Schroder,¨ Gerhard, 24, 84, 129, 332 expanded, 66–7 Schumpeter, Joseph, 67–8 extended, 55–6, 74 securities market program (SMP), freedoms, negative, positive, 159 116–17 security, social, 70, 106 German ordo-liberal, 114 Seldon, Arthur, 9 individual freedom, 118–19 self-interested actors, 120–1 industrial policy, state-led, 173 separation, ownership, control, 260 inequality, 119–20 service-based economy, 88 influence of neo-liberalism, 114 services of general interest, 174 interests of individual states, 133 shareholder model, 257–8 intervention, dismantling, 10–11 coalition of interests, 259 interventionism, 125, 128 efficiency of markets, 257 intrinsic defects, 120 laissez-faire, contrast, 257–8 laissez-faire economics, 116–17 major elements, 260–1 market-enabling arbiter, 130 principal–agent concept, 258–9 market liberalism, 120 single currency, Europe, 145 market relations, 201–2 Single European Act, 82–3, 175 nanny, 88 Single European Market, 194–5 national preferences, 131–2 Single Market, 81–2, 83 negative income tax, 118–19 448 Index state (cont.) liberalization, 313–14 neo-liberalism with rules, 122 liberalization policies, 320–4 planning, serfdom, 118–19 non-market forms of organization, political driver for change, 116 313 privatization, 120–1 Palme government, 321 regulatory function, 182 policy priorities, 315–16 roll-back, unanticipated problems, policy reform, 325–8 113–14 policy response to crisis, 317 scope of action, 116–17 political discourse, 322–3 social anesthesia, 366 promotion of neo-liberal ideas, Social Democrats, roll-out, 114 319–20 social protection, 118–19 recovery, 318–19 social solidarity, 241 reform, 314 steering state, 128–9 reform, limitations, 322–3 strong, neo-liberalism, 118 resilience of neo-liberal ideas, 324–5 tax state, 65–8, 74 Swedish model, transformation, 328–9 state-influenced market economy, systemic internalization, 209–10 346–7 state-led capitalism. 347. See also Takeover Directive, 275–6 dirigisme tax state, 60–1 state–market relationship, 120 earliest analysis, 67–8 state-trained technocratic elite, France, Tea Party, 54–5, 72, 103 360–1 technocratic elites, state-trained, statism, 11 360–1 stock exchanges, 209–10 technocrats, 120–1 Streeck, Wolfgang, 123–4 Thatcher, Margaret, 6–7, 10–11, strong egalitarianism, 91 80–1, 123, 124–5 structural reform Thatcher, Mark, 11–12, 202–3 market, 152 Thatcherism, 92, 102 productivity, growth, 71 Thatcherite state project, 295–6 reconceptualized business interests, Theory of Justice (Rawls), 89–90 33 think-tanks, 24, 93–4 supply-side economics, 59–60 Third Way, 91, 100–1 cutting taxes, 59–60 Third World internationalism, 103–4 increase in debt, 59–60 trade supra-national cross-border, 175–7, 181–2 neo-liberalism, 11–12, 82–3 openness, 289 policy, 130–1 traditional corporatist Swedish model, Sustainable Companies Project, 317 279–80 transgovernmental networks, 208 Sutherland, Peter, 175–7 Treaty of Rome, 174 Swank, Duane, 241–2 Treaty provisions, 174–5 Sweden Tripartite Social Summit, 237 active labour-market policies, 237, Tusk, Donald, 390 317 austerity, 126 unemployed workers, mass migrations, corporate governance, 325–8 149 financial crisis, 314–15 unemployment institutional change, 325–8 Europe, 160 legislative measures, 321 Ireland, 298–9 Index 449

market efﬁciency, 162 reform, absorption, 28 Sweden, 317–18 reform, centre-left parties, 84 wage and price distortions, 150 reform, unemployment, 166–7 universal service, 174 system, rationalization, 123–4 universalism, 126 welfare regimes US Congress, 167 composite, 99–100 spending patterns, 99–100 Vandenbroucke, Frank, 100–1 welfare state Veil of Ignorance, 89–90 encroachment on liberty, 124–5 Victorian values, 407–8 modernization, 87 Virginia School, 9, 58–9 neo-liberal criticism, Germany, balanced-budget rule, 59 123 policy makers, altruism, 58–9 opposition to, 60 public sector, inefﬁciency, 58–9 recalibration, 94 virtue, appeal to, 31–2 transformation, 105 von Mises, Ludwig, 58 Wicksellian economic ideas, 319 Wolf, Martin, 202 Walter Lippmann, 7–8 World Bank, 71, 130, 277, Warsaw School of Economics, 378–9 379–80 Washington consensus, 130 world market, equivalence, 61 Weidmann, Jens, 165–6 World Trade Organization, 130 Weir, Margaret, 36–7 welfare Yeltsin, Boris, 393–4 absorption, 406 European model, 97–8 Zapatero, Jose,´ 84 gurus, 93–4 Zysman, John, 115