J Evol Econ (2004) 14: 211–215

DOI: 10.1007/s00191-004-0191-2

c Springer-Verlag 2004

Evolution of structures of European economic policy

Ewald Nowotny
Wirtschaftsuniversität Wien, Augasse 2–6, 1090 Wien, Austria

1 The “Perlman-dilemma” and the EU-single market

If European policy makers would have read the work of Mark Perlman, they would
have avoided a number of unhappy surprises. Summing up his studies on foreign
trade, Mark wrote in 1996: “I still do not begin to fathom how national states can
finance their social welfare programs if they have no control over the location of
industry within and particularly without their borders.”1
Even allowing for a number of qualifications, this is exactly the core of the
problem and is characteristic of Europe’s economic policy dilemma. Opening the
markets has not brought the growth effects anticipated or promised. Discussion
therefore has shifted to necessary “structural reforms” as a prerequisite to the
achievement of the potential benefits of the Single European Market. The main
tendency of these “structural reforms” means in essence a more or less far reach-
ing dismantling of traditional European systems of workers protection and social
benefits. This means an overhaul of the European “welfare state model”, which is
a core element of a “European identity”. The dilemma, which Perlman foresaw, is
Europe’s policy dilemma of today.
This dilemma – or, optimistically, challenge - has two levels. One concerns
the effects of Europe’s further economic opening to the rest of the world in the
context of WTO-negotiations, where policy responsibility is in the hands of the
EU-Commission for EU-positions. With export and import shares of around 10
percent of GDP, the EU, like the US, is still a relatively closed economy, so the

Ewald Nowotny is Professor of Economics and Vice-Rector of the Vienna University of Economics

and Business Administration, Austria. 1999–2003 he had been Vice-President of the European Invest-
ment Bank, Luxembourg.
1 Characteristically, Mark goes on: “But true to the principles laid out for me by Shackle, the real

measure of the greatness of man is his inventiveness, and I do not completely despair.” (M. Perlman, The
Character of Economic Thought, Economic Characters and Economic Institutions, Ann Arbor 1996,
pp. 27–28
212 E. Nowotny

challenges coming from this side exist, but are minor. The other level concerns the
effects of the Single European market, which means the integration of EU national
economies. This is a far reaching historical process, and it is this perspective which
will be discussed in this paper.

2 Structures of European economic policy governance

The EU Single Market is based on the concept of the (euphemistically) “four free-
doms”, or fields of liberalization.
– free movements of goods
– free movement of capital
– free movement of services
– free movement of labor
The program of the four freedoms has been basically achieved. The main driver
was a strong policy cooperation between the EU-Commission and the European
Court of Justice, which by far-reaching interpretation has helped the Commission
to overcome cases of national resistance. The Commission itself was driven by its
policy role as “safeguard of the EU-Treaty.” and by an evolving political tendency to
use the four freedoms as an instrument for general economic policy liberalization.
Behind the concept of the European Single Market, there are, however, two
basically different approaches to European economic policy. A strategy of policy
coordination (basically via detailed EU-directives), on the one hand, and a strategy
of policy competition, where EU-directives (only) have the role of ensuring free
access for all markets participants. The main economic policy example for policy
coordination is the European Monetary Union (EMU). For the member-states of
EMU, all responsibilities with regard to monetary policy have been transferred to
the European Central Bank (ECB). A very far reaching concept of central bank
independence in the EU-Treaty results in a constellation, where the central field of
monetary policy is de facto out of democratic control. The degree of independence
of the ECB goes far beyond the independence of central banks in a national con-
text (and beyond the former independence of the German Bundesbank). National
legislation with respect to central banks could be changed by national parliaments.
Changes in the EU-treaty, however, need unanimous approval of all member coun-
tries, which is much more difficult to achieve. The main economic policy example
for policy competition is the field of direct taxation, where the need for unanimous
decisions means that, de facto, no harmonization exists.
The formal structure of economic policy governance in the EU consists of four
levels:
– Council, representing the member states and their interests.
– Commission, acting as “guardian of the treaty” and with the role to be the
dynamic element of EU-integration
– Parliament, representing the (direct) democratic element as an assembly of 626
(in future 732) directly elected members, voting mainly (but not always) along
(European) party lines.
Evolution of structures of European economic policy 213

– Court of Justice, which like the US Supreme Court sees itself as having a far
reaching mandate for interpreting and shaping European Law.
Over the last decade, there has been a remarkable shift of the distribution of powers
between these players: The Council, and especially the presidencies (changing
every half year), assumed much of the agenda-setting role, which traditionally had
been a prerogative of the Commission. Parliament increased its powers, but is still
relatively weak with regards to issues of economic policy. It has especially only
a very limited role to play in economic policy agenda setting and in developing
strategic policy lines. The parliament can use its powers to veto proposals agreed
between Commission and Council. When (rarely) doing so, it usually demonstrates
that the basic political majority consensus is “left” from the economic liberalism
characteristic of the majority of the present EU-Commission and EU-Governments,
and that it is not as easily influenced by lobbies as compared to the other players.
Examples are the voting down of the “take over directive”, which has been the
subject of heavy lobbying by the Commission and investment banks, and the long
battle concerning the creation of European Company Law with the sensitive aspect
of the role of instruments of workers’ codetermination.
One of the most remarkable shifts in European economic policy governance in
the last decades has been the evolution from a “social partners”-approach to a lobby-
influenced approach of economic policy. Continental European economic policy
governance traditionally had been based on the notion of “social dialogue” between
governments, trade unions and representatives of business. This dialogue had been
institutionalized in many European countries such as Germany, France, Sweden,
and Austria, and in some of these countries the institutional framework still exists,
but without much substance. In the EU, the concept of “social dialogue” is reflected
by the institution of the “European Committee of Economic and Social Affairs” –
an institution that is helpful in exposing national “social partner” functionaries to
a “European perspective”, but which is without any practical policy relevance.
Substantial policy influence instead is exerted by the thousands of lobby-groups
that have developed and have become a well-established feature of EU-economic
policy governance – including the creation of special training programs for the
newly established profession of “EU-lobbyist”. Policy in Brussels thus has evolved
from a European-encompassing institutions approach to a US-Style “special inter-
est” approach. In fact, US companies and lobbies in many cases have been able to
play this system much more efficiently than their European counterparts. This may
also be due to the fact that, for US interest-groups, it is obviously more natural to
see “Europe as a whole” than it is for European groups, based on national traditions.
As is typical for special interest groups, it is easier to organize the relatively
few and financially strong big business groups than to organize small business or
labor interests. Thus, at the European level, UNICE, the European federation of
industrialists, is a much more important player than Eurochambers, the represen-
tation of small and medium enterprises. The federation of European Trade Unions
is a loose and poorly financed organization, the members of which show a great
diversity in institutional strength, policy orientation and ability of cooperation.
“Labor”-interests therefore are mainly represented directly by some members of
the European Parliament.
214 E. Nowotny

Whereas “traditional” labor interests are only weakly represented in the evolv-
ing European policy structure, lobbies representing “civil society” interests with
regard to the environment, human rights, etc., play a substantial role – and also get
direct, sometimes quite substantial financial assistance from the EU Commission.
The strength of these civil society groups is based on a political agenda that is
appealing to important groups of middle class and upper middle class voters (or
at least is supposed do be so) and thus gets a lot of attention from the media and
parliamentarians. They are very well organized across Europe and therefore are
able to start Europe-wide campaigns. For all practical purposes, therefore, today
Greenpeace most probably has a higher political influence in the EU than the Eu-
ropean Federation of Trade Unions. Some parliamentarians see a political chance
in transporting such issues – there are, however, also increasing signs of tensions
between civil society lobbies and members of Parliament, who question the rele-
vance and representativeness of their positions. These conflicts may increase with
enlargement. The EU Commission is actively helping civil society groups to estab-
lish themselves in the new member countries. Many of the issues raised by these
groups, e.g. with regard to environmental aspects, may, however, not be in line with
the position (and the necessities) of a substantial majority of the population of the
new member countries.

3 Economic policy perspectives

The combination of new power structures with regard to economic policy gover-
nance and the non-rational mix of policy co-ordination and policy competition lead
to a series of complex dilemmas. This is of special importance in the case of those
(substantial) fields of economic policy that are still governed by the principle of
unanimity. Already today and even more so in an enlarged and thus more diverse
Union, the veto power of each single state is an invitation for blackmail and strange
deals.2 One has to be aware of the fact that, especially in a larger Union, unanim-
ity means that politics is working with a “ratchet-effect”. This means a consensus
decision reached at one time is very difficult to change in the future, as one single
member can veto every change. Thus, the important aspect of stability of institu-
tions, achieved by many national constitutions via the need of qualified majorities,
is transformed into institutional stagnation, not allowing for any policy evolution.
The most prominent example of this problem is the European Stability Pact. Even
if a large majority of European countries would like to change or modify this pact,
one single member state can block every move, as every change of the stability Pact
needs unanimity.
The result of all these constellations is a situation of policy vacuum, where
neither the EU-level nor the national level of politics is able to act. For strong
supporters of economic liberalism, this may be seen as a positive outcome. A
2 A well known example of the effects of universal veto power in a governance institution is the case

of the Polish aristocratic assembly in 17th and 18th century. This system, in which each member of
the aristocratic Parliament had veto power, contributed substantially to a development which ended in
a situation in which Poland lost its sovereignty and unity.
Evolution of structures of European economic policy 215

strong European Central Bank, which – contrary to US-structures and also contrary
to its original constitution – feels itself responsible only for price stability, and
Member States which, due to policy competition in the fields of taxation and social
policy, have ever decreasing room for intervention. This is a situation in which the
“Perlman-dilemma” becomes fully relevant, where economic integration leads to
the weakening of the more advanced social systems. This dilemma will become
greater, the larger and the more heterogeneous the future EU.
For the national governments, which are still the backbone of democratically
elected structures in the EU, this means that the divergence between the demands
of their voters (and the promises of the last election) and the actual room for
manoeuvre becomes increasingly larger. This can lead to two effects. One reaction
might be that a vote-maximizing government tries to side-step economic and social
issues and propose re-election on the basis of other issues, which often tend to
be nationalistic or xenophobic appeals. The other possible effect of a systematic
(and not just tactical) discrepancy between voters’ expectations and the ability
of governments to fulfil these expectations will be a tendency for more frequent
changes of governments. As national governments still are the main drivers of EU
policy, this will mean more instability in EU economic policy and EU policy in
general. In the end, this development may lead to a severe set-back for the historic
project of European unification.