United Germany's place in Europe is intact. Bonn (soon to be Berlin) remains an ardent proponent of the overarching goals of integration, and along with France continues to occupy the activist political fulcrum in Brussels. Since the collapse of the wall in November 1989, the German government has contributed vital support to the ambitious goals of political and economic integration enshrined in the Maastricht Treaty and its more staid progeny, and it has made eastern enlargement a central objective of the European Union. The Federal Republic's integration policy reveals new accents since 1990, to be sure: a greater frugality and a more sober appraisal of the limits of the European project, to name just two. Nevertheless, the appearance is one of seamless continuity with the past.

Yet beyond the glamor and glare of grand bargaining in Brussels, conspicuous shifts in Germany's approach to European regulative policies have emerged since, and in many instances because of, unification. In sum, the preceding chapters reveal a complex pattern of change and continuity, stretching across both the constitutive and regulative dimensions of Community politics. In this final chapter, I delve more deeply into the empirical findings, and construct explanations based on the analytical framework outlined in chapter 1. I then consider the longterm implications of constitutive continuity underpinned by regulative change for the larger relationship between an integrating Europe and a unified Germany as the twentieth century draws to a close.

The economic policies developed by the González government closely fit our theoretical expectations (and statistical results) about the policy choices made by social democratic cabinets in an era of highly interdependent economies. In Spain, macroeconomic discipline was given precedence over countercyclical demand management. Inflation was driven down from 14.4 percent in 1982 to 4.8 percent in 1988. The public deficit was cut by half between 1982 and 1987. Within a deflationary framework, the Socialist cabinet directed the public sector to raise the stock of fixed and human capital. Public revenues rose by over a fifth in a decade. Until the late 1980s almost all new revenues were spent on increasing public savings, building infrastructures, and financing education and training programs. Public businesses in key sectors stepped up investment and the government engaged in the formation of several internationally competitive “national champions.”

Nevertheless, the PSOE's two-pronged economic strategy of macroeconomic stability and state interventionism was constrained by two factors: in the first place, Spain's industrial relations system and union movement; in the second place, the increasing difficulties González experienced in reconciling the demands of (anti-tax) moderate voters and (pro-spending) radical voters, who had jointly supported him in the first half of the 1980s.

The institutional organization of the Spanish economy, particularly the structure of its labor market, was only partially conducive to the PSOE's most preferred strategy.

As argued in the two first chapters, governments eventually have to choose between two alternative economic strategies to spur economic growth and sustain the competitiveness of domestic firms in the medium run. In one case, governments employ the public sector to raise the level of domestic savings and total investment and boost the productivity of capital and labor. In the other case, they rely on market mechanisms and private agents to maximize the rate of investment and thus foster economic growth. Although equally geared toward improving economic performance, each economic strategy has distinct redistributive effects. Public investment strategies, developed to equalize conditions without forsaking growth, require higher taxes on well-off sectors. Private investment strategies imply a reduction in taxes and in current levels of social protection – particularly when exogenous shocks exacerbate the employment–equality tradeoff latent in all advanced democracies. The two strategies accordingly receive the support of different parties and electoral constituencies. Broadly speaking, social democrats and working-class voters rally around active supply-side policies. Conservatives and the middle classes defend privatization policies and tax reductions. We must now turn to the task of empirically testing the model put forward in Chapters 1 and 2.

This chapter is organized as follows. The first section shows how supply-side policy choices have diverged substantially across countries and over time. The data presented dispel a rather widespread belief that there is a unique governmental strategy toward the supply side of the economy.

For a decade and a half, the British Conservative government engineered a radical break with the economic management practices in place during most of the postwar period. On the one hand, demand management policies coupled with a periodic resort to income pacts were replaced with tight monetary policies and fiscal discipline. The public budget was balanced by 1988 and public debt was cut in half from 1979 to 1990. Inflation went down from an average of 16 percent in 1974–79 to less than 4 percent in the early 1990s. On the other hand, the Tory cabinet engaged in a drastic overhauling of the structural conditions of the British economy. After overshooting in the early 1980s, public spending was contained and progressively reduced. Tax rates were cut to spur private savings and investment. The labor market was deregulated. Finally, the public business sector was thoroughly dismantled.

As in the case of the Spanish Socialist government, Thatcher's economic strategy must also be thought of as a political strategy – intent both on making Tory principles hegemonic and on building a stable social and electoral coalition that could maintain the Tory Party in power. In a period of increasing partisan and social dealignment, the Conservative government consciously deployed its economic strategies to secure high levels of electoral support.

One of the most striking developments in the discipline of political science today is the extent to which the research on democratic politics and performance and the literature on political economy are at odds with each other. On the one hand, political scientists have managed to accumulate an impressive array of knowledge and models on political participation, the formation of voter attitudes, electoral behavior, and partisan competitive strategies that provides very powerful insights on the workings of modern mass democracies. On the other hand, however, political economists have downplayed the significance of voter preferences and partisan programs to explain policies and economic outcomes. Until the early 1980s, corporatism, that is, the continuous bargaining among organized economic interests, was offered as the paradigm of how politics was (or ought to be) conducted in most parts of the advanced industrial world. Several scholars then turned to the analysis of the state and its political institutions to account for the notoriously different levels of inflation and budget deficits that the OECD countries experienced in the aftermath of several consecutive oil shocks. Today many have decided that globalization and economic interdependence are finally washing out any differences that may remain among nations. What all these research agendas have in common, however, is the rather tangential role they have ascribed to electoral politics and the impact of partisanship.

This study does not try to overturn all these explanations. Domestic institutions and the various constraints imposed by the international economy are clearly needed to understand the different political–economic equilibria that characterize advanced countries.

Apart from providing physical and human capital directly through the public budget, whose political determinants have been explored in Chapter 3, the government may equally choose to shape the supply conditions of the economy by “indirect” means. The state may affect the provision of supply factors through the creation of a public business sector. Also, it may affect the levels of both domestic savings and private investment through tax and regulatory measures.

This chapter starts by examining the political factors that motivated the distinct strategies that OECD nations have been pursuing toward the public business sector since the late 1980s. Besides confirming again the key role partisan forces have played, this first section highlights how increasingly strained economic conditions (since the mid-1970s) broke down an already tepid consensus around postwar industrial policies and generated substantially divergent policy responses across the political space. The second section then explores the evolution of tax policies. In light of the empirical results obtained in both this chapter and Chapter 3, the third section offers a first appraisal of the political dimensions of economic policymaking in advanced nations.

STRATEGIES TOWARD THE PUBLIC BUSINESS SECTOR

Although in the 1960s public firms played, on average, a sizable role in the OECD, the size of the public business sector differed sharply across nations. As a result of the emergence since the late 1970s of an extensive political debate about the role of state-owned firms and their potential privatization, these differences only increased in the following twenty years.

As a result of a prolonged economic crisis beginning in the mid-1970s, the European political scenario went through an unprecedented shift of electoral fortunes in the early 1980s. While Northern European conservatives seized most cabinets, in Southern Europe the Left experienced an unprecedented wave of electoral victories. In 1981 the French and the Greek Socialist Parties secured strong parliamentary majorities. In 1983 the Portuguese Socialist Party rejoined the government, and the socialist Bettino Craxi was appointed prime minister in Italy. The Spanish Socialist Party – Partido Socialista Obrero Español (PSOE) – proved, however, to be the most successful one in the electoral arena. Elected to office in October 1982 with an impressive majority and a lead of 21 percentage points over the conservative opposition, it governed alone until 1993 and, in a minority cabinet with external support from moderate regionalist parties, until 1996.

The Spanish Socialist government provides an excellent opportunity to examine the development of full-fledged left-wing economic policies, particularly in an era of high financial and trade interdependence. The failure of the French expansionary policies initially pursued by Mitterrand and swelling public and trade deficits convinced the Spanish Socialist cabinet of the need to avoid any countercyclical measures to fight unemployment. Unable to rely on weak and divided trade unions, the Spanish government willingly embraced a strategy of macroeconomic discipline as the best means to attract investment and open Spain to the world economy throughout the decade.

In Chapter 1 I emphasized that, contrary to the findings of the current theoretical literature and contrary, as well, to popular wisdom, political parties, understood as coalitions of interests and ideas, play a rather pivotal role in the economic-policymaking process and in the evolution of the economy. More precisely, I pointed out that, although they are constrained by the configuration of domestic institutions and the international economy in regard to macroeconomic policymaking, all governments have substantial autonomy to affect the production factors or structural conditions of the economy in line with their ultimate partisan preferences. Broadly speaking, social democratic governments primarily mobilize the public sector to shape the supply side of the economy – in order to reconcile growth and equality. Conservative governments believe instead in employing market mechanisms to optimize the savings and investment rates and thus maximize economic growth.

To shed light on the nature and consequences of these economic strategies, and to pave the way for the statistical and historical analysis undertaken in the rest of the book, this chapter starts by developing a stylized model of the political economy of advanced nations. The second section then provides empirical evidence on the economic trade-offs revealed by this model (essentially between unemployment and economic inequality), that all advanced countries face. The third section examines the alternative economic strategies that different parties will embrace, depending on their initial preferences (presented in Chapter 1) toward the distribution of income, to manage the supply side of the economy.

Claiming that there is only one possible economic policy to solve the problems of growth, employment, and inequality that all advanced democracies face today has become a normal practice among both our policymakers and the public. This book, which I actually started as an inquiry into the causes of a muchvaunted process of policy convergence in the industrialized world in the last two decades, turns out to contend the opposite. Even in a world of open and interdependent economies, it is still possible to detect widely divergent economic strategies, all of them linked to different political projects, spawning opposed outcomes. As a matter of fact, the accelerated technological change and the process of growing economic integration we are experiencing today are only sharpening the economic and political dilemmas confronted by all advanced nations. Perhaps paradoxically for some, they are intensifying the extent of divergence among the different economic strategies embraced by governments to respond to those dilemmas. And, as this book intends to show, they are probably increasing the autonomy of politics over the economy.

This book derives partly from the doctoral dissertation that I completed at Harvard University in 1994. I would like to express my gratitude to my three thesis advisers, Alberto Alesina, James E. Alt, and Peter A. Hall. Without their support, their comments, and their suggestions, which were informed by rather different intellectual traditions, this study would not have been possible. I also benefited from the questions and extremely stimulating comments by Jose Maria Maravall and discussions with Paul A. Beck.

In the last two decades, under the impact of increasing international integration and two oil shocks, the developed world has suffered broad structural changes in its economy. Since 1973, the average Organization for Economic Cooperation and Development (OECD) annual growth rate, which had fluctuated around 5 percent in the 1960s, has dropped to 2.6 percent. Such a sluggish economic performance has been accompanied by different – and to some extent opposite – phenomena in each advanced nation. In continental Europe, which has a relatively regulated labor market and extensive social policies, the private sector has created few jobs in the last twenty years and the unemployment rate has jumped from less than 3 percent before 1973 to over 10 percent in the mid-1990s. By contrast, in the United States and, to some extent, in the United Kingdom, which have substantially lower levels of labor and welfare protection, employment creation has soared. Yet, unfortunately, they have had to pay a high price for their economic dynamism: median wages have declined and the income distribution has widened – in fact reversing a secular trend that started at the end of World War II.

The economic changes of the last two decades have, in turn, stirred up public life and galvanized the political debate within industrial democracies, hastening the alternation in power of different parties and encouraging experimentation with opposing economic policies in many advanced countries.

The same economic shocks of the 1970s that propelled the spectacular electoral victories of Socialist parties in Southern Europe led to a generalized shift to the Right among Northern European and American voters. The American Democratic Party suffered an embarrassing defeat at the hands of a resurgent Republican Party in 1980. Socialists were displaced by a coalition of Christian Democrats and Liberals in Belgium in 1981 and in the Netherlands and Germany in 1982. In Scandinavia the traditional hegemony of social democracy in both ideas and votes started to unravel for the first time in decades. Yet the most severe defeat of the Left took place in Britain. In May 1979 the strongest turnaround of public opinion since 1945 returned the Conservative Party to office. Helped by an impressive lead over a split Labour Party, the Tory Party would enjoy a comfortable parliamentary majority for the following decade and a half.

The prolonged British Tory government makes it possible to examine the systematic implementation of a conservative economic strategy, providing therefore a pointed contrast with the Spanish Socialist experience. After a long period in search of “true Conservative solutions” (Behrens 1980) to the declining British economy, which included the failed reformist attempt under Heath in the early 1970s, by the late 1970s the Conservative leadership was definitely committed to effecting a clean break with the postwar consensus built around the active involvement of the state in the economy.

Our inquiry into the sources of economic policymaking in the advanced world has pinpointed a tight relationship between the governing partisan coalition and the selection of particular structural economic strategies. As shown by both the statistical evidence of Chapters 3 and 4 and the historical examination of Britain and Spain in the 1980s, conservative governments cut taxes, slash public investment programs, sell most public businesses, and revamp the labor market to increase the profitability of capital and to induce the unemployed to actively search for jobs. Socialist cabinets, instead, raise tax rates on high-income brackets and boost public spending on infrastructure and human capital in order to ease the transition from an unskilled population profile to a well-educated workforce without having to lower the social wage.

Such a powerful link between economic policies and partisan politics has led us inevitably to explore the electoral motives that guide the behavior of parties and the electoral dynamics behind the development of each economic strategy. Accordingly, the book has moved beyond its initial assumption that parties adopt different economic policies due to the redistributive consequences they have on clear-cut electoral constituencies. This has been done in a theoretical manner in Chapter 2 and then, mostly in empirical terms, through an analysis of the Spanish and British experiences. As discussed in this chapter, the result has been a more elaborate and complex set of arguments about the electoral dimensions of economic policymaking, and hence about the actual interaction of politics and economics.