European Integration and the Welfare State

Economic Regulation - Competition - EU-Social Policy


by Shirley Hixson


The EUROPEAN UNION (EU) is both a complex and unique supranational entity designed to move its member nations toward their goal of an ever closer union. The EU's treaty-based constitution, created and ratified by its member nations, sets forth legislative acts in the form of regulations and directives under which the EU must operate. These regulations identify both the EU's legal constraints and responsibilities. Treaties are designed by member nations to define areas of national sovereignty while, at the same time, encourage integration.

Recognizing this, one must conclude that the link connecting economic regulation, competition and internal market reforms to social policies at the European and national levels is based on law. An inherent obstacle to this seemingly straightforward process, however, lies in the fact that the line that separates the EU's constraints and responsibilities often becomes blurred. Therefore, in order to explore and understand this link, it is first necessary to identify the institutions through which these processes have evolved and to examine the parallel evolution of both economic and social policy within the legal framework of the EU.

Five distinct institutions exist within the EU. The EUROPEAN COUNCIL (EC), comprised of all members nations, controls the EU's extraordinary agenda. This includes any changes or adaptations to existing treaties and the drafting of new treaties. The EU's ordinary agenda, which encompasses the day-to-day affairs of the EU, is the province of the remaining four institutions. The EUROPEAN COMMISSION (Commission), the executive branch of the EU, initiates all legislation and serves as the guardian of the EU's treaties. The legislative branch, composed of the COUNCIL OF MINISTERS (Council) and EUROPEAN PARLIAMENT (EP), receives proposed legislation for debate and possible enactment. The Council is the more powerful of these two institutions; however, the EP -- the only EU institution that is directly elected by European citizens -- has gained increased powers during the late 1990s. The EUROPEAN COURT OF JUSTICE (ECJ) is the authoritative interpreter of all EU treaties. Their rulings are final and supersede the national courts of member nations, as well as international law.


The development of social policy at the European level has been an incremental process that has continued to evolve. Once the sole responsibility of EU nation-states, the expansion of the EU's role in public programs has often occurred as a consequence of economic integration. Change or modification to policy is usually accompanied by a revision to the EU's treaty-based constitution and the most significant changes have occurred during the implementation stage of new treaties. Social policy within the EU has evolved in five discernible stages:

  1. The Rome Treaty

    The 1957 TREATY OF ROME, the founding treaty on which the EU Constitution is based, created the European Economic Community (EEC), that later evolved into the European Community (EC) and, subsequently, the European Union (EU). The roots of European social policy are found in the Rome Treaty; however, because the national sovereignty of the six (6) original nations was still highly protected during this early stage of the EU, no decision-making authority was granted. The dominant ideology granted by Rome was that social programs would be funded through economic growth that was brought about through integration, rather than via regulatory or distributive methods. Specifically, the Commission was charged with the responsibility to promote close cooperation between member nations in the social field, especially in the arena of employment; labor law and working conditions; vocational training; social security, workplace safety and collective bargaining. The hesitation of EU nation-states was evident in the constraint that the above could only be accomplished through conducting studies, delivering opinions and arranging consultations. In addition, the Treaty also established equal pay between men and women and created the European Social Fund.

  2. The Summit of Paris

    At the 1972 Paris Summit, Council members decided that economic expansion should include goals that would improve the living and working conditions of European citizens. This important policy shift expressed recognition by the member states that they now perceived that social policy intervention would necessarily become an integral part of the economic integration process. Paris specifically addressed issues such as occupational safety (in the original coal and steel industries) and sponsored research to develop new safety standards for workers. During this stage, the EU expanded its original membership to represent nine member governments.

  3. The Single European Act

    In addition to completing the Common Market, the 1987 SINGLE EUROPEAN ACT (SEA) was a treaty that revised sections of Rome that pertained to social policy. SEA also connected economic integration to welfare policies. It eventually led to the proposal for a Social Charter that identified the EU's wide-ranging social commitments, including the right to freedom of movement, employment and remuneration, improved living and working conditions, social protection, and vocational training. During this period, the EU expanded from nine to twelve member nations.

    The SEA did not have the force of law and implementation depended upon the member states, as well as business and labor union cooperation. At this stage decision-making authority on most issues involving social policy remained within the realm of the European Council. However, despite the barriers erected by member governments to retain control of social policy, the EU's success at economic integration resulted in the escalation of enormous pressures on national welfare budgets, creating an increasing need for changes in national policies.

  4. The Maastricht Treaty

    The 1991 MAASTRICHT TREATY (Maastricht), also known as the Treaty on European Unity (TEU), revised the EU's founding document, the Rome Treaty. It was ground-breaking for many reasons, but for purposes of this discussion, Maastricht granted broad authority to the EU in matters regarding the development of the Single Market (SM). In Section 3b on Subsidiarity, Maastricht states that:
    . . . the EU may act in the broad areas where it has competence only when objectives of proposed action cannot be sufficiently achieved by member states.
    While this statement was intentionally worded by member states to restrict the Union's decision-making authority, the gradual expansion of the Union from its original six members (1957) to fifteen members (1995) introduced a wide diversity of opinion. The unanimous voting requirement within the European Council, required on issues regarding social policy, further complicated their decision-making ability. Over the years, these factors enabled the Commission to invoke Section 3b frequently and legitimately when any complex issue was under discussion. For this reason, the Union maintains its strongest level of influence and autonomy in the economic arena and its institutions possess decision-making ability that often extends beyond that of individual member nations. During the period between the Treaties of Maastricht and Amsterdam, the EU accepted three additional applicant states, increasing its membership to fifteen European nations.

  5. The Amsterdam Treaty

    The 1999 AMSTERDAM TREATY was groundbreaking in that, for the first time in EU history, it directly focused on social policies. Employment was a consistent challenge for many EU nations and past treaties had addressed employment only in terms of it being a by-product of economic integration. Under Amsterdam each government was required to provide an annual assessment of employment strategies, as well as to participate in problem-solving and brain-storming at the European level. Other social issues deemed of paramount importance in Amsterdam included environmental policy and the Common Agricultural Policy (CAP) that subsidizes EU farmers.

    Amsterdam was also significant because it strengthened the EP by extending the number of policy areas in which they may exercise their powers under co-decision voting procedures. Co-decision allowed the EP to veto legislation in specific policy areas and to consult with the Council in a "conciliation committee" to iron out differences in their respective drafts of legislation.


At this point, it is important to remember that the EU is the result of a deliberate process of institution building based on law. Treaties ratified by the EU member governments can be visualized as a skeletal framework. It is during the period between the ratification of treaties, away from the control of the European Council, that the treaty's skeletal framework is given flesh through the evolution of economic policy, a process that takes place under the guidance of the ECJ.

Understanding this, it is clear that the ECJ -- as the authoritative interpreter of EU law -- retains the ability to profoundly shape the evolutionary stages of public policy while member nations find their ability to influence the process much weaker than prior to treaty ratification. Since the 1980s, the ECJ has maintained an expansive view of their own role in social policy. This is easily discernible in their rulings regulating agriculture, environmental protection and industrial policy. Member states still maintain a powerful and persuasive role in EU decision-making, but in areas involving economic integration, the ECJ's influence is clearly visible.

However, the dangers in the adoption of policy solutions solely through legal channels must also be considered. Because the ECJ has its own internal standards for determining policy outcomes, these decisions are based solely on judicial logic. When implemented in the public sphere, these "judicial" policies run the risk of failing to achieve substantive goals because, in designing the policy, the ECJ neglected to consider political constraints or exceeded the tolerance of important political or social actors in the system.

The preceding points are important in that European integration occurs, to a large extent, through unification by law. Legal documents are dominant at the EU level and they serve as binding measures regarding a diverse array of policy. For this reason, much actual integration takes place through a convoluted, low-level collection of legal decisions. It is at this level that many national governments find themselves struggling to fulfill policies that were not of their making. Once decisions are made, it is difficult to reverse them because the cost required for a member state to cease participation is very high and often carries its own negative consequences.


This brings us to the link connecting economic regulation, competition and internal market reforms to European social policy. Because economic matters must at some point touch upon every facet of governance, any policy emitting from within the EU's day-to-day agenda quickly finds itself entangled in its economic strands, where the ECJ maintains its interpretive authority. It is within this arena that actors representing the interests of business found they could employ strategic advantages, based on the needs of economic integration, to push Europe's traditional political economy in a more liberal, less interventionist and less regulated direction.

The concept of competitive deregulation serves as an example of the influence of economic integration on national social policy. This phenomenon occurs when, in areas of low social wages, businesses seek to gain a competitive advantage by undercutting the prices of competitors in high wage regions. Businesses which pay high wages to their workforce are threatened because, to compete, they must lower prices but cannot lower wages. This causes a downward spiral, as high wage firms seek to renegotiate union contracts to avoid losses in profit. Competitive deregulation can be traced to EU decisions that were originally intended to enhance and increase cross-border economic integration through encouraging common trade, employment, investment and consumer purchases. This process also tends to fragment national economic interests by enhancing the authoritative position of EU institutions, creating a self-sustaining environment, as well as legitimizing their role in this arena. It is also significant that the actors involved -- business and workers in both high and low wage areas -- now turn to EU institutions for the solution of their problems rather than relying solely on their respective national governments.

National social policies have also been significantly affected by a process that EU scholars often refer to as spillover, a development that occurs when physical and electronic national borders are opened to encourage economic integration. With the larger European arena now marked by the complete mobility of both labor and capital across borders to regions offering a more competitive business environment, national budgets have lost critical funding sources through capital flight. At the same time, member nations with generous social policies have attracted new applicants for social benefits. These dual factors have strained national budgets and have placed enormous pressure on governments to consider unpopular reforms to established social programs that risk citizen displeasure. The mobility of workers further adds to the problem. In areas that place great social value on highly skilled workers, cross-border mobility allows workers the freedom to search in a multi-national region for competitive jobs that often leaves the state that invests heavily in training with little return on their investment. Thus, local economies and public financiers found themselves constrained in their ability to fulfill their current redistributive social policies, as well as to create new, preventative programs.

Consequently, the voice of business has grown more influential within the Union, signifying a gradual shift in the balance of power that has historically existed between business and Europe's strong labor movement. Also, as the ECJ has expanded its role in shaping European market integration, the exit options have increased for business. This, in turn, further enhances their clout vis--vis governments and labor unions. As business becomes less and less constrained by national borders, the ability of member governments to direct policy initiatives within the Union is increasingly diminished. However, it is important to note that EU institutions are still restrained from regulating the labor market in all but a few. National governments, which depend on electoral support for social programs, will be reluctant to surrender their authority in this area.


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