A Brief Guide to the European Economic Space

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by Robert Hosking. This is the fifth part of our series on EU governance.

The differing attitudes towards organising western European economies can be traced back to the 19th century where one finds two traditional characteristics that still influence capitalist organisation today.

The first is economic governance by political means. The regulation of markets by a hierarchically-driven public sector. Regulatory orders are associated with governance by de jure, meaning,  direct state intervention whereby political decisions are relatively free from, and not subject to, commercial criteria. The emphasis here is on overt bureaucratic control that stimulates economies.

The second feature is the idea of decentralising markets, whereby no single agent or institution controls the system. Market orders are allegedly managed by the price mechanism, which supposedly co-ordinates the economy and private economic initiative without any direct interference. This approach is understood as governance by de facto, one that offers private agents the opportunity to take decisions on trade and investment, providing alternative ways of organising capitalist economic life.

These two distinct but mutually compatible systems of governance have greatly influenced the economic development of the European Union. States can either regulate, or through methods of regulation, decentralise economies, so that favourable conditions are created for those who own land, factories, offices, machinery, tools, capital and workers.

In such an environment an individualistic competitive system is created, one which is supposedly made up of freely contracting individuals. Nevertheless, in such a system only a small fraction of the population enters into contracts on the basis of freedom. Selling one’s time or labour-power to eat and clothe and house oneself and buy a few manufactured joys in a market economy has nothing to do with freedom, for this kind of practice is better likened to a system of forced labour.

Following the establishment of the Bretton Woods system (1944), and the Treaty of Rome (1957) which set-up the European Economic Community (EEC), trade between European countries increased significantly. From these developments the economic evolution of Europe can be split into three distinct stages:  the reconstruction of a capitalist Europe after 1945; the golden age of capitalism between 1950 to1970; and the rise of neo-liberalism.

Between 1950-70 the economies of Europe enjoyed substantial growth and there was a general consensus that markets had to be regulated in the interests of full employment. In Europe there was common interdependency in the rising scale of trade between EU nations, and at the same time a convergence of ideas of how economic governance should be developed: a mixed capitalist economy of regulatory and market orders, with diversity in the varying mixes of this activity. However, interdependency means that something happening somewhere has effects elsewhere; in other words, economies can be interdependent and remain diverse. European integration implies that economies are closely co-ordinated, unifying economic policies into a single process or goal.

In the early 1970s this initiative was given a significant push. Oil prices shot up, a rise which brought with it a shock to Europe’s continuing advance in wealth and share of world trade since 1958. The effect of the oil crisis was violent in most European countries: unemployment increased, average inflation rates doubled and exchange rates fluctuated chaotically. This macroeconomic turmoil drove France and Germany to reform the abandoned Bretton Woods system, which had liberalised the trade of goods and managed capital flows, into the more localised European Monetary System (EMS) in 1979.

Over the next twenty years unprecedented transformation and economic unification took place in Europe. The EU more than doubled in size. In 1986 the Single European Act (SEA) brought the first measure towards permitting qualified majority voting. In 1987 the foundations of a common European Currency and Monetary System were laid (although the UK did not accept them), and it was settled that in 1992 a Single Market would be inaugurated, across whose national borders the four economic freedoms would  give goods, people, capital and services the right to move freely.

To construct international institutions of this order requires explicit co-ordination. Decisions must be taken by centralised public authorities at the European level which will organise and direct aspects of all national economies. It is also clear that Union-wide management of say, a Single Currency, or Single Market, demands a convergence of national macroeconomic performance, a criterion that significantly compromises the member states' democratic ability to pursue their own policies.

The rationale for this movement is diverse. Moving traditional mechanisms of economic governance to the supranational level removes the threat of democracy interfering with the well-being of private power. Capitalists benefit from the rewards of trade liberalisation and access to bigger markets that aid the exploitation of economies of scale, that is, mass production. Many nations hoped to modernise their developing economies, and there was a general belief that Europe would recapture economic power lost since the break up of the Bretton Woods system. If interest or exchange rates differed there was little incentive to create a Single Market. Macroeconomic criteria were converged, then, to aid this creation and enable Europe to become an optimum currency area, wherein every nation-state benefited from joining the economic institutions created.

Maintaining internal free trade also necessitates the removal of tariffs, including non-tariff barriers (NTB) such as preferential trade arrangements. As a consequence Member States must adopt common trade policies not only within the EU, but also against those outside the Union. These attempts to create a single economic space require both policies of negative integration (the removal of trade barriers), and positive integration,   seeking to re-regulate the area as trade barriers are removed.

These methods of organising capitalism are intrinsically linked to specific ideological perspectives. Positive integration is associated with organised or regulatory capitalism and Keynesianism, whilst negative integration is identified with neo-liberalism and decentralisation. Over the years the EU has actively pursued policies of negative integration, especially in the way the Court of Justice (ECJ) interprets how the four economic freedoms are to be maintained.

The best example of positive integration has been the introduction of a Single Currency.  Promoting the free movement of capital and goods by market friendly regulatory policies has increased trade and foreign direct investment (FDI) which in turn encourages further economic convergence. In consequence, governments have transferred economic, monetary and fiscal policies to the European Central Bank (ECB), a supranational institution that sets interest rates, regulates money supply, supervises the Euro’s exchange rate and effectively eliminates democratic mechanisms that influence macroeconomic policy.

Nevertheless, within this context divergent methods of managing the Member States’ market system do continue. In most European countries the ownership of a corporation through possession of shares (which is a form of regulatory creation) is the only basis for a claim in governing the corporatio; in Germany, however, shareholders, workers and owners all have a legal right to be consulted in the business of management. This form of organised capitalism, known as neo-corporatism, accommodates diverse social interest groups into the role of social partners, in which most members play a part in the conduct of economic activity. This form of governance has in recent years been under huge ideological threat, mainly from the neo-liberals, and will more than likely be dismantled in the near future.

Divergent attitudes within the state have also influenced the organisation of employment rights. In decentralised orders bargaining wages and working conditions are separated from the state, negotiated between the unions and employees on an industrial or occupational basis. In more centralised, regulatory systems, such as Sweden, labour conflicts are addressed at the level of the entire industry. Moreover, there are specific national labour codes and statutes ensuing a minimum foundation of rights that the workers in the UK, for instance, are denied. 

As indicated, the transference of economic functions to the EU level is creating patterns of ever closer economic integration, while within this supranational order the nation-state’s mechanisms of governance still play an important role in regulating the subordination of the worker in the interests of the capitalist. 

The dismantling of the welfare state in every nation across Europe, the rise in privatisation, the Europe-wide restrictions on public spending in health, pensions and education, the increment in flexible working contracts, the loss of workers' rights, and the complete absence of democratic control over national economies does not indicate a loss of national sovereignty. The master class have only transferred economic concerns to the European level, placing them out of reach from the interfering herd, a trade off to yield ever bigger profits from a more coherent European market system.