Monetary integrationhas long played a central but complicated part in Belgian politics. Exchange rates and their stability are important: the country depends on transformation of intermediate goods, and its industry exports approximately two-fifths of its output to neighboring countries (France, Germany, and the Netherlands). Belgium thus had a high stake in the first wave of EMU – to have failed would have meant pressures on its currency, inflationary tendencies, high interest rates, and increased unemployment – all with political costs. As a founding member of the European Community (EC), Belgium has been one of the strongest supporters of political integration, with an electorate which is one of the most pro-EU among the member states. Failure to qualify for EMU at its inception would have therefore discredited Belgium's claim to more European (federal) integration. Failure might also have undermined a source of national cohesion, as Europe, and the constraints imposed by monetary integration, have counterbalanced long-standing regional divisions. European monetary integration and its effect on the Belgian labor regime are thus tightly connected with Belgian political integration and national identity.

Belgium is divided into three regions: Dutch-speaking and largely Catholic Flanders, Francophone and largely secular Wallonia, and the bilingual capital region, Brussels. Cultural differences have coincided with changing economic conditions. Wallonia was the more prosperous region in the early postwar period but its old industries have suffered continuing decline.

The system of governance in the EU gives national governments a central role. Brussels has not supplanted nor replaced national capitals, and thus the EU co-exists with powerful national political systems. While governance takes place in Brussels, government takes place in the member states. It is there that electoral accountability, legitimacy, and identity are anchored (Sbragia 2002). Even those who argue that the EU “bears a growing institutional resemblance to the established multi-tiered systems of traditional federal states” accept that national governments “remain extremely powerful” (Pierson and Leibfried 1995: 6).

Federalism has been an attractive referent for scholars precisely because the national governments retain so much power within a system of governance in which an important “center” is nonetheless present (Sbragia 1992b: Rodden 2002). That center is so strong that the EU is no longer simply a sophisticated international organization, but it is weaker than the center found in the decentralized federations of Canada and Switzerland (McKay 2001, 2002; Nicolaidis and Howse 2001: Börzel and Hosli 2002).

Although placing the EU within the universe of federal states certainly presents analytic problems, it does permit useful although not rigorous comparisons. In particular, it highlights features of the process of European integration which might not seem significant if analyzed in isolation.

The issue of policy change is particularly interesting in both the EU and the US. Both systems of governance must cope with a large population, a territorially diverse economy, and the dispersal rather than the centralization of power.

The political structure of the European economy has been fundamentally transformed by the two decades of monetary integration culminating in Economic and Monetary Union (EMU). Centuries-old national currencies were replaced by the Euro and monetary policy, a core function of the modern state, was transferred to a supranational European Central Bank (ECB). The ECB was endowed with more autonomy from EMU's member states than any other European Union (EU) institution except the European Court of Justice (ECJ) and greater independence than any other central bank in the world. The Stability and Growth Pact (SGP), also applicable to member states remaining outside EMU in addition limited member states' discretion over fiscal policy, their remaining macroeconomic policy instrument. There is no other policy domain where centralization of power in EU institutions has gone so far.

In contrast, the EU's treaty/constitution leaves authority over welfare state and employment relations institutions in member state hands. These institutions largely shape individuals' relation to the economic life of their societies throughout the life course, before, during, and after participation in the labor market. Despite important national differences, these institutions have enough in common in European countries, Britain excepted, to be understood as variants of what Europeans typically refer to as a “European social model.” This model is distinguished from the American, or Anglo-Saxon, model by its greater protection against economic insecurity, inequality, and unilateral employer power. Much domestic political conflict and partisan competition is focused on the distributive and normative issues raised by these social models.

The Netherlands is an exemplar of peaceful nationhood, democratic stability, and commercial prosperity. It has followed a small-state development strategy of export-led growth, partnership among government, capital, and labor, a mixed economy, and pragmatic crisis management (Katzenstein 1985). Since 1945, it has withstood major changes such as decolonization, the emancipation of citizens and households, European unification, immigration, and the globalization of markets and communications. Beginning in the mid-1970s, however, the Netherlands came to be seen as a model of European sclerosis. Exploitation of natural gas drove up domestic producer costs through currency appreciation and there was rapid expansion of social security and public transfer expenditures (Ellman 1984a, 1984b, 1986). Unemployment rose to 11 percent by 1983 and stayed high for the entire decade.

Since the mid-1990s, however, the Polder model has been praised far and wide because of a complete turnaround created by wage restraint, welfare state reform, and seamless entry to monetary union. Unemployment was 2.8 percent in 2000, employment having risen by more than 2.5 million people between 1983 and 2000 (more than 25 percent in labor-years) (Wolfson 2001: 209). There was price stability, a trade surplus, and moderate wage and income inequality, relative to both the Dutch past and to other Western countries today. Indeed, the Dutch record of economic growth, declining unemployment and inflation in the 1990s approached the outstanding performance of the American economy, while public policy remained broadly in line with embedded liberalism – that is, public coverage of the basic risks of an open economy and ongoing internationalization (UNDP 2001).

Much of contemporary French history is about defining and maintaining the French version of the European social model in changing economic conditions. By the early 1970s, a solid, if comparatively idiosyncratic, employment relations system balanced weak, politicized, competitive unions and anti-union employers, both reticent about bargaining, with a strong state and legal order. The French welfare state was a Gallic translation of Bismarckian social insurance with “paritary” management, once again backed by a strong state.

In the 1980s, however, French politicians took the lead in consolidating the European Monetary System (EMS), in making it happen, and opening the road to EMU. As the major actors in renewing and changing the shape of European integration, they also were the instigators of new European-level economic constraints that would force reforms to France's employment relations system and welfare state. In the 1980s, when France committed to achieving price stability within EMS, labor market and welfare state changes were largely improvised in the face of a rapidly changing economic environment. In the 1990s EMU “convergence” period old and new leaders partially absorbed these new constraints to conform to the new situation, in large part through significant reforms. French leadership toward EMU thus paralleled developments in French social policy.

The French postwar economy was successful until the 1970s. Growth, state-stimulated and state-centered, then boosted by the coming of the Common Market, was so robust (5.6 percent annually) that in the 1960s, France became the international model of the day, despite chronic inflationary propensities managed by periodic devaluation (Shonfield 1965).

Monetary integration and EMU have fundamentally transformed the European political economy. EMU transfers monetary policy, the key instrument of macroeconomic policy and a core function of the modern state, to the exceptionally independent European Central Bank (ECB). At the same time, it strictly limits the member states' discretion in using fiscal policy, the main macroeconomic policy instrument remaining in their hands. Power has been more centralized and supranationalized in EMU than in any other European-level policy domain.

Member states have retained the power to shape the social policy and employment relations institutions at the core of the European social model, however. These institutions lie at the heart of domestic politics because of the central roles they play in the distribution of burdens and benefits among citizens. They help define voter expectations around which contenders for political power mobilize support and the normative basis of political legitimacy. With such basic issues at stake, national governments have consistently resisted transferring authority over core social model issues to the EU. EMU has not changed this.

The allocation of powers between the EU center and its constitutive units creates a European polity whose effects and even sustainability are problematical. Tensions between centralized macroeconomic policy and decentralized control over national social models are inherent in the interdependence of the two policy domains. Macroeconomic policy significantly affects the burdens on social policy and capacities to meet them. It also changes the distribution of bargaining power among actors in the labor market and politics.

The culmination of two decades of monetary integration, Economic and Monetary Union (EMU) fundamentally transforms the European political economy. Replacing national currencies with the Euro, EMU shifts monetary policy, the key instrument of macroeconomic policy and a core function of the modern nation state, to the European Central Bank (ECB), the most independent in the world. Although EMU leaves fiscal policy in the hands of the member states, it sharply limits their discretion over its use. In no other policy domain has there been such a centralization of power in a supranational EU institution. By providing increased economic policy autonomy against the forces of globalization, monetary union as such has the potential for enabling Europe to overcome the high unemployment that has increasingly strained the “European social model” since the 1980s. Offsetting this potential, however, EMU institutionalizes a highly restrictive macroeconomic policy regime which subordinates growth and employment to price stability. Unemployment can be reduced consistently with that goal, the ECB insists, only if “rigidities” in Europe's labor markets are eliminated by far-reaching changes in the social policy and employment relations institutions at the heart of the European social model.

The member states retain formal power over those institutions, however. There have been reforms in those institutions in response to problems internal to the national variants of the European social model, as well as pressures from monetary integration.

Over time, the impact of EMU on the European social model (ESM) is likely to depend most fundamentally on its effects on unemployment. If EMU makes it possible to significantly reduce unemployment, it poses no threat to the ESM. On the contrary, EMU could facilitate its reconfiguration, preserving its high level of social protection and labor rights while adapting it to new needs and improving its equity and efficiency. If EMU instead keeps unemployment high, it threatens the ESM's two main components: the welfare state's financial viability and the trade unions' capacity to bargain over wages and working conditions. Monetary union as such could potentially help Europe reach the reaffirmed goal of full employment. But the EMU macroeconomic policy regime, as the European Central Bank (ECB) interprets it, could make that goal unattainable.

This chapter argues that EMU is likely to keep unemployment at high levels. The argument hinges on two propositions: (1) in order to bring unemployment back down after an extended period of disinflation which has kept growth below its potential and unemployment high, a period of economic growth above its long-run potential – a growth spurt – is necessary, and (2) the EMU macroeconomic policy regime, as interpreted and implemented by the ECB, blocks such a growth spurt. Section 1 describes the policy regime, arguing that the ECB's implementation of it so far and the bank's rationale for doing so indicate an unwillingness to permit the growth spurt needed to significantly reduce unemployment.

Recent decades have strained the national systems of industrial relations and collective bargaining that were a cornerstone of the postwar European social model. EMU is widely expected to intensify this strain and change European industrial relations profoundly. The supranationalization of monetary policy and economic governance implies relative decentralization of collective bargaining systems, as national systems become regions of the eurozone economy. Improved transparency of prices and wages and elimination of currency risk will intensify competition among producers and nation states. Without the option of adjusting national exchange rates (and interest rates) and with fiscal policies constrained by the Stability and Growth Pact (SGP), labor market actors will increasingly bear the burden of fluctuating economic circumstances and preventing new unemployment. All this poses a dual challenge of increasing labor market adaptability and enhancing policy coordination both within and across national systems.

The implications of EMU for industrial relations are ambiguous, however. With fiercer regime competition and contradictory pressures for adaptation of national systems, the responses of social actors and governments will depend largely on EMU's effects on growth and employment and hence on the macroeconomic policies adopted by EU authorities, and the ECB in particular. At the same time, however, differences in national systems and responses will produce as much potential for diversity as convergence. Three broad scenarios emerge:

• First, a status quo scenario assumes that the economies and industrial relations systems in the major eurozone countries have already become accustomed to operating under the conditions of fierce competition, strict monetary policies, and high unemployment and that most of the constraints of the Euro-regime have already been absorbed. The emerging path will thus codify trends observable during the 1990s. The central issue for this path will be the long-run influence of present trends on national systems.

• […]

Economic and Monetary Union (EMU), on the one hand, and existing models of labor market regulation and welfare provision within the European Union (EU), on the other, have often been assumed to stand in contradiction to one another. The re-appearance of EMU on the European agenda in the late 1980s, following the de-regulation paradigm of the Single European Market (SEM), raised widespread concern that it might serve as a “Trojan horse” for a neo-liberal policy shift across EU states. The “sound money, sound finances” principles underlying the particular design of EMU, strengthened in the Stability and Growth Pact (SGP) of 1997, seemed to threaten traditional social models and the scope for national differentiation. By the time the new Euro currency was launched in 1999, the evidence to confirm or remove such fears was, in reality, limited and varied. As in other spheres, it has been hazardous to judge the relationship between endogenous and exogenous pressures for reform. External pressures are mediated within distinct institutional settings, with different roles and interests on the part of actors. Moreover, pressures of “Europeanization” and of “globalization” may be difficult to distinguish. Indeed, some equate the two (Wylie 2002). Case study investigations, such as those presented in this volume, are needed to assesscausation rather than incidental correlation.

The argument of this chapter is that progress may be made by examining the more limited issue of how EMU has been used within different institutional settings: that is, how it has been deployed as a strategic lever for reform and as a stimulus to a shift of norms and beliefs affecting policy in contingent areas.

Germany's social model is a variant of embedded, non-liberal social capitalism that attempts to bridge the gap between efficiency and solidarity through interdependent socioeconomic and political institutions. These arrangements have placed Germany in the middle ranks of OECD welfare states, even though labor market regulation is well above average. Germany's macroeconomic policy institutions, in particular its powerful central bank, have given primacy to price stability (Busch 1995). The interaction between this corporatist–centrist welfare state and employment relations system (Schmidt 1998) and “institutionalized monetarism” (Scharpf 1987; Streeck 1997) has shaped the adjustment strategies for responding to changing economic conditions. Evaluations vary. Germany has often been presented as a model “middle way” between Anglo-Saxon liberal democracies and Nordic social democratic welfarism (Schmidt 1987, 2001b). For others, Germany's welfare and social model provides a negative blueprint, full of institutional rigidities, insider–outsider conflicts in a rigid labor market, and a dense network of institutional veto points built into institutions, adding up to a Reformstau (gridlock). To these critics German social capitalism, at least since the mid-1990s, is no longer a successful “diversified (high) quality production regime” (DQP) (Streeck 1997). Some even call Germany “the sick man of the euro.”

This chapter begins with a brief description of the institutions of the Federal Republic's labor and macroeconomic regimes in most of the postwar period, showing how they framed adjustment to changing environments between the end of the postwar “economic miracle” and the exceptional double challenge of German unification and the introduction of EMU in the 1990s.

In few EU member states was the tension between EMU and commitment to the ESM so apparent as in Italy in the 1990s. It was a decade of political and policy upheaval that shaped, and was affected by, the EMU process. Moreover, EMU was the catalyst and the basis for a debate about modernization in Italy that left few areas of economic and social life untouched. It will be argued that the vincolo esterno (external constraint) of monetary integration has been instrumental to bringing about changes to the basic economic, social, and political structures of the postwar order (Dyson and Featherstone 1996). It would be wrong to assume that the political and economic elites were passive, benignly accepting European dictates that might undermine their position. A constellation of social and political forces looked to use monetary integration for profoundly different reasons and objectives. For some of the forces on the left, but not exclusively, it was a means to dismantle entrenched political and economic oligarchies of the postwar constitutional order. Some of those vested interests sought to manage the requirements of the external constraints to hold on to their position. There were other political forces that looked to monetary integration as a way of bringing about some form of institutional change, be it economic or constitutional. Yet, they all framed the debate about EMU and its attendant policies as one about “modernization.”

Spain's inclusion in 1999 among the first wave of countries participating in the eurozone defied the predictions of many observers who just a few years earlier would have deemed such an outcome improbable. A late entrant into the European Community (EC), the country had been plagued by higher than average inflation and by levels of unemployment that well exceeded those of the rest of the European Union (EU). Its system of labor market regulation, a legacy of a dirigiste past, was seen to be overly protectionist and rigid (particularly concerning layoffs) and hence, a major obstacle to successful labor market adjustment. Its system of social provision, on the other hand, was still under construction when the move toward monetary union was initiated and fell short of other EU states on many dimensions. Given this labor regime, many feared that the adoption of a currency reflecting conditions in the rest of Europe would cause a sharp loss of competitiveness, with dire consequences for employment. That, in turn, might force a radical deregulation of the labor market, ending any prospect of achieving a truly “European” social model in Spain.

This chapter traces Spain's path to EMU and its implications for the country's evolving systems of social protection and industrial relations. After reviewing the basic characteristics of the Spanish social system, it examines why the Spanish government decided to pursue participation in the first wave of EMU at the end of 1998.

A welfare state world of path-dependent, but not predetermined, solutions

Since the 1980s European monetary integration has been a driving force behind domestic welfare reform across the European Union (EU). Triggered by the failure of Keynesianism in the 1970s and by macroeconomic instability in the 1980s and early 1990s, monetary integration to EMU marks a sea-change in macroeconomic policy. It has indirect effects on labor market institutions (Franzese, Jr., and Hall 2000) as well as direct effects on domestic budgetary and fiscal policy that have major implications for social policy. It means that macroeconomic policy can no longer shield labor market institutions and social protection arrangements from the need to adjust to international competition. With nominal exchange rate adjustments ruled out and fiscal stimulation greatly constrained by the Stability and Growth Pact (SGP), policy-makers must seek national solutions within the heart of European social models. Monetary integration is not the only driving force behind welfare state reform, however. Internal dynamics like aging populations, de-industrialization, changing gender roles in labor markets and households, and new technologies place severe strains on welfare state programs designed for a previous era (Daly 2000; Pierson 2001a). Such endogenous social and economic challenges are all aspects of post-industrial change (Esping-Andersen et al. 2001).

Recent comparative research shows convincingly the extent to which most EU welfare states have recast the policy mix of the national systems of industrial relations and social protection built after 1945 (Scharpf and Schmidt 2000).