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2.1.1. Can we speak of a European socio-economic area?

There is a great diversity among the states and regions of the European Union for reasons related to history, language, geography and climate.   Their economic structures also differ a great deal.  These differences are growing with each new enlargement of the Union and they have become particularly marked following the last two.

Prior to the enlargement of 1 May 2004, what was then the Europe of the 15 was a heterogeneous economic area, but scarcely more so than any other large economic grouping, say the United States, for instance.  That country is similarly diversified in its production of goods and services and in the way this output is distributed over its territory and, due to this fact, it, also, has disparities in income and differing economic situations in different geographical areas.       

The main question is whether the European project, by sticking in principle to the common economic goals involved and establishing mechanisms of integration - large market, free movement of people and goods, the introduction of a single currency – is capable of reducing these disparities and making the socio-economic cultures converge.

2.1.2. The economic philosophy of the European project: what do the treaties say?

The treaty of Rome states – and the Treaty on the European Union reiterates in its article 2 – that “the task of the Community is…..  to promote harmonious and balanced development of economic activities throughout the Community”…..”.  By harmonious, we understand that the mission of the Community is to reduce disparities in income between rich and poor regions.  This is what brought about the Community financing of regional development, the second largest item of Community expenditure (30% of the Community budget) after the financing of the Common Agricultural Policy (50%).

The Treaty on the European Union (signed in Maastricht on the 7th of February 1992), sets out, at article 3.A.2, the objective of bringing in an economic policy “conducted observing the principle of an open  market economy where competition is free1”.  Following the European summit of June 2007,  the reference to a market open to free competition has been turned into to a footnote at  the request of France.         

Meeting in Copenhagen in June 1993, the European Council, deliberating over the problem of enlarging the Union to take in the former Communist countries, stipulated that the accession of a new country would be made subject to prior conditions (“the Copenhagen criteria”),  including an “economic criterion: a viable market economy as well as the capacity to face the pressure of competition and the forces of the Union’s internal market”;

Finally, the “Draft of a Treaty Establishing a Constitution for Europe” which emanated from the Convention in July 2003 and was signed in Rome on 29 October 2004 states in its article 3 the objectives of the Union and, in particular, that:

“2. The Union offers to its citizens a space of freedom, security and justice without internal frontiers, and an internal market where competition is free and not distorted (see earlier comment).

3. The Union works for the lasting development of Europe based on balanced economic growth and on stability of prices, a highly competitive social market economy encouraging full employment and social progress and a high level of protection and improvement of the quality of the environment.  It promotes scientific and technical progress.”

In these words the insistence on the expressions “market economy” and “free competition” has led some people to describe the European project as “neo-liberal”.

2.1.3. Market Economy, free enterprise economy, capitalism, neo-liberalism: are these terms synonymous?

In taking a “critical look at capitalism”, we must bear in mind three aspects:

• Capitalism – or, if you like, the free enterprise or market economy – as a system for organising economic activities so as to produce and distribute wealth is acknowledged as being imperfect.  It makes individual interests work for the common good, but it doesn’t achieve this unaided and must, therefore, be surrounded by a framework of political institutions, civil society and  rules of good conduct, as its promoter, Adam Smith*, was  wont to say.  Opinions differ as to how much of a framework is desirable and the weighting given to the social balancing mechanisms as against those of free competition.
• The representation of a market economy as a simplified model, or maquette  for teaching purposes, called the competitive model.  One of these simplifications involves supposing that the active players in the market are perfectly informed but, in real life they never are.  Hayek* and Mises*, economists of the Austrian school, have shown that the capitalist system is the one that can accommodate itself best to imperfect information.  Another simplification consists of paying no attention to the part played by the collective will in the workings of the market and in their result, but the system does not condemn the manifestations of this will.
• Neo-liberalism, which is an ideology, that’s to say a “more or less systematised set of beliefs, ideas and doctrines influencing individual or collective behaviour” (Larousse Dictionary).  This ideology makes the mistake of wishing to achieve the competitive model, taking the term no longer as a model but rather as something to be imitated. It seeks to reduce collective intervention in the economy to a strict minimum and to privatise public services and deregulate competition to the maximum extent possible. Like any ideology, it is reductive and takes no account of the complexities of real life with its national and socio-cultural components.  It pursues the imperialist ambition of imposing itself upon the entire world – just like the communist ideology used to.  

2.1.4. What is the role of the State in a market economy?

According to traditional economic thinking, the State carries out three economic functions (over and above those of justice, security, national defence, etc.) in a market economy:

• it allocates resources with the aim of shaping or altering the assignment of factors (work, capital, energy, land) to the production of various types of goods and services which market the does spontaneously, whenever the State considers that this assignment is unsatisfactory;
• it redistributes  with the aim – through taxation and the social security system –  of correcting the share-out of income and wealth resulting from the spontaneous  working of the market for goods and services and the factors of production;
• it stabilises with the aim of reducing the swings in activity brought about by overall economic factors.  For instance, when the economic climate is poor, pessimism reigns and the man in the street, not knowing what tomorrow holds in store for him (bankruptcy? the sack? a fall in the stock-market?) prudently decides to spend less and save more, the overall result of this “sensible” behaviour by individuals is not the common good, since it depresses global demand in the economy and can make matters worse.  In such a case, as John Maynard Keynes* has recommended, the public authorities must intervene to make up for the fall in global demand arising from private causes by spending more themselves or by encouraging the private sector to spend more through tax cuts.

2.1.5. What are the different socio-economic “cultures” to be found in Europe?

People often speak of “the European social model”, but the reality is more complex. The Belgian economist, Andre Sapir* has listed four European social models, which differ mainly in the way social protection is organised and the labour market is regulated:

• the Nordic model (The Scandinavian countries and the Netherlands) is characterised by high public spending on fairly wide social cover; the trade unions are strong there and the spread of wages is narrow; it is relatively easy to dispense with a worker’s services but the public authorities intervene actively in labour markets through measures of support and help with job-finding for the unemployed;  
• the Anglo-Saxon model, also called “ultra-liberal” (Ireland and the UK) has narrow social cover and rather weak trade unions, the wage-spread is wide and employment is high, but with a lot of poorly paid jobs;
• in the Continental or Rhine model  (Germany, Austria, Belgium, France and Luxemburg) social expenditure is high and based on the principle of insurance. The trade unions still have a lot of  influence,  sackings are very circumscribed and compensation for unemployment is rather generous;
• finally, the Mediterranean model (Spain, Greece, Italy, Portugal) combines high social expenditure (mainly on pensions) with measures to protect employment and encourage early retirement.

The results of these models can be judged in terms of economic efficiency (mainly from the job-creation angle) and social justice (the amount of poverty).  Schematically, it can be said that the Nordic model is best because it seems to win on both fronts; the Anglo-Saxon model does create jobs, but at the price of great inequality of incomes; the Continental model makes for a better social balance, but its performance in terms of job-creation is disappointing; finally, the Mediterranean model combines at once high unemployment and a relatively high incidence of poverty.

2.1.6. An interdependent economy: what lies behind this term?

Whoever mentions the word “competition” is saying that the active players in the economy are vying with one another.  This competition exists among individuals buying and selling goods and services on more or less free markets and also among socio-economic classes over the redistribution of the national income and the (mainly fiscal) policies which affect this. It goes without saying that this system generates winners and losers because it respects the differences that are innate among individuals and inherent to the efficiency of organisations.  A competitive system in a free market acts like a relatively objective examination. It measures the capacity of individuals and organisations to stand up to the economic buffeting brought about by technological progress and the development of trade.

Economic competition does not exclude social solidarity. Quite the opposite, it presupposes a degree of “social cohesion”  To avoid the losers becoming “left-aside” and outcasts who would become increasingly numerous opponents of the system, several conditions must be met:

• mechanisms are needed to compensate the losers at least partially so that they can “stay in the economic race” and get another chance next time round;
• those who can no longer participate in the competition because of age, unemployment or ill-health must be able to remain part of society;
• it is necessary to avoid handicaps being handed down from one generation to another and guarantee a certain “equality of chances” favouring social mobility.

Policies of redistribution of income through taxation, of social security (retirement pensions, unemployment-insurance, health care), and of the free or subsidised supply of public goods and services (education, vocational training and job-finding, public transport) are intended to bring about these conditions and how widespread they are defines the degree of solidarity (or interdependence) of the system.

2.1.7. Why is Europe accused of being too liberal?

The Single Market, thought up and promoted by the European Commission under the Presidency of the Socialist Jacques Delors*, put into practice the principle of the free movement of people, goods and capital.  This freedom of movement doesn’t just mean abolishing border controls:  it also requires that the rules governing competition should not be distorted by interventions of Member States.  It has been established that national governments were intervening to protect national interests at the expense of this freedom of action for economic agents originating from other EU countries.  In fact, these interventions are probably one of the reasons why the abolition of the frontiers and the adoption of the euro have not given rise to the economic and social benefits expected (see for instance end of chapter 1.3.2.).

That is why the European treaties insist on free competition and have put in place mechanisms for checking its application in the Single Market. These references to free competition are not, then, the reflection of liberal political will, but a way of defending the freedom to move and to carry on business in all countries of the EU irrespective of one’s national origin.

If the system favours those countries where the taxation and social charges are lowest, that’s because the member states have refused to harmonise these policies. In this way, Europe offers the individual citizen the chance to choose the system he (or she) prefers and not to be subject to the dictates of national administrations in fiscal matters. It also allows the poorer regions or countries to make the most of their comparative advantages and catch the richer ones up, which fits in with the European principle of “harmonious” development.

2.1.8. Has globalisation come to “confuse matters”

Globalisation is irreversible because “you can’t stop progress”.  This (progress) has been, firstly, technological, bringing about a fall in the cost of transporting goods (the invention of the container 50 years ago) and information (telecommunications).  On top of this have come politico-economic developments: cycles of international trade negotiations to lower trade barriers; European integration; the adoption of the market economy by the former Soviet Block, China and India, to mention only the main ones.  This last upheaval has, in a way, brought into the world economy 2.5 billion people who used not to be a part of it.

The result of this is a considerable widening of the field of international trade in goods and services, both in geographical area and in depth (in terms of the numbers of goods and services concerned).  In 1970, 10% of the developed countries’ imports of manufactured goods came from developing countries; in 2007 it is nearly 50%.

This globalisation has been of particular benefit to the developing or “emergent” countries, which – thanks to it – have been able to make the most of their comparative advantages (especially an abundant labour supply) and so enjoy more rapid economic growth.  The fruits of this growth are distributed very unequally, but it is allowing hundreds of millions, nay billions of people progressively to emerge from poverty and destitution.  China and India are good examples of this.  On the other hand, the catastrophic situation of many African countries is that they have been by-passed by globalisation for reasons connected, inter alia, with the “asymmetric” liberalisation of the markets (there has been liberalisation as far as industrial products are concerned, while agricultural produce, the staple of African output, remains heavily subsidised in Europe and the USA). Other causes of this situation are lack of education (40% of the African population has no access to good basic education), poor governance (customs protectionism, corruption and political instability) and under-development of the transport infrastructures.

In the developed countries, the winners are the producers of the goods and services which the emergent countries are buying in growing quantities, and particularly the consumers who, thanks to globalisation, have been able to enjoy cheaper products.  For instance,  for “bottom of the range” clothing in particular, the opening of the European frontiers to clothing produced in China has caused a fall in prices and been tantamount to an injection of purchasing power,  with the less well-off, who tend to buy these types of products, reaping most of the benefits                 

But there are losers, as well: they are the unskilled workers of the developed and under-developed countries.  They have suffered downward pressure on their wages (felt particularly in a country like the United States) and job-losses (more serious in Europe, where wages are more rigid at the bottom). Their lack of education makes them harder to retrain for another job when they lose the one they had.  This means that the (at least partial) compensation of the losers by the winners, which is required for globalisation to remain socially acceptable, must be done not only by guaranteeing a certain level of income through social security but also by improving the educational and vocational training systems and by helping the unemployed in their search for another job.

2.1.9. How has the constraint of global competition affected European States and companies?

As far as the companies are concerned, the effects of this constraint have been felt very unevenly and have depended on the type of products they manufacture. The German capital goods industry, particularly the machine-tools sector, has remained highly competitive, despite high labour costs, because of the quality and variety of the equipment it produces.  So it has seen its exports to emergent countries increase sharply. The same goes for the European pharmaceutical industry, which uses highly skilled labour. Other industries using low- skilled labour have found it a hard job to withstand the competition from countries with low labour costs and have found themselves being relocated to emerging countries. .

However, some European firms have been able to stay competitive by “relocating” (“out-sourcing?”) one or more of their production stages to low-wage countries and so reducing their overall costs. International specialisation no longer occurs only with finished products, but now it is happening more and more with their components: the manufacture of a finished product is broken down into different operations which are done either by sub-contractors or by production-units of the same company located abroad (off-shoring). In this way intermediate products are a growing part of international trade. The disappearance of the Soviet block and the Eastward enlargement of the European Union have furnished Western European companies with new opportunities in this respect, for instance in the motor industry, where Slovakia has become a very important constructor.