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[1] The series of labour market reforms recently introduced across Europe may have struck many observers in North America, as it did critics on the continent, as incongruous. The reforms, whose main purpose is to extend worker protection, come at a time when economic growth on the continent is slowing markedly. From the perspective of German, French, Spanish and European legislators, however, the reforms are sensible and timely, conducive to international competitiveness. How can these diametrically opposed assessments about such a fundamental matter be explained? [2] The following article will show how the divergence of views on the reforms' wisdom may be traced back to different understandings about what kinds of government policies improve economic performance. In light of the dominant European understanding, it will justify the introduction of the labour market reforms. Ultimately, it is the author's intention to show how the reforms may represent not a so-called deviation from best practice but an exercise in rational policymaking.
[3] To that end, the first section of the article will outline the terms of the reforms themselves. The second section will set their advent in the context of contemporary global competition. The third section will review explanations offered for the reforms. The fourth section will assess the legislators' justifications in light of the dominant European economic structure. The concluding section will offer some general observations on the development of economic strategy in different countries.
II. The Terms of the Labour Market Reforms [4] The German government's plan to enhance employees' rights has probably attracted the most attention from observers, concerning as it does Europe's largest economy. The legislation will reform a part of the country's system of labour-management cooperation, the 1976 law of Mitbestimmung (co-determination). It aims mainly to strengthen works councils, bodies elected by employees that serve in effect as company-by-company in-house unions. The councils represent employees in management decision-making (with a seat on the supervisory board in the case of joint-stock companies) and possess broad powers over working conditions and a variety of personnel matters (including lay-offs and job assignments). The new law will, inter alia: a) open up companies without works councils by allowing small companies to have a works council; b) simplify procedures to form a works council in a factory or office by reducing the threshold for mandates; c) increase the number of companies required to employ a full-time administrator for the council at company cost by lowering the number of employees required for release from duty; and d) expand the basis for the calculation of company employment by including hitherto uncounted workers. The co-determination reform follows on other recent reforms of the German labour market. Since assuming office in 1998, the administration of Chancellor Gerhard Schröder has rescinded some measures of its predecessor administration, such as those reducing statutory sick pay and facilitating firing by small companies; has imposed new social-security contributions on low-paid employment; and has tightened restrictions on self-employment, part-time work and fixed-term contracts.
[5] In France, the National Assembly amended its labour laws a little over a fortnight ago to make it harder for employers to announce economic redundancies. The new law provides that a company may only announce economic redundancies if it is in untenable financial straits; if it is faced with irresistible technological change; or if it has exhausted "all other means" of preserving jobs. Before it lays off any employees, however, a company must negotiate with a works council authorized to offer other solutions and, in the event of deadlock, submit to the arbitration of a government-approved mediator. In recent years, the administration of Prime Minister Lionel Jospin has otherwise reformed the French labour market. It has relaxed regulations on part-time work, fixed-term contracts and temporary-work agencies; has reduced social-security contributions for low-paid employees and eliminated those for domestic help; has tightened rules for claiming unemployment benefits; and has introduced a 35-hour work week.
[6] The latest reforms of the Spanish labour market have a similarly Janus-like character: on one hand, some employees will as a result enjoy greater job protection; on the other, companies will be able to hire employees with less risk and fire them at less expense. The latest reforms constitute a follow-on to earlier measures intended to rebalance the Spanish labour market. In 1994, the then government introduced short-term contracts that could be terminated without compensation. In 1997, the first government of Prime Minister Jose Maria Aznar lowered the amount of maximum and minimum severance pay required for most new hirings but also tried to limit the excesses of short-term contracting and to help those groups that typically experience the most difficulty in finding employment. With the latest reforms the government has extended the lowered amount of minimum severance pay even more widely; has introduced some compensation for employees on short-term contracts; and is offering to subsidize employers' social-security costs for the hiring of younger female workers and older male and female workers.
[7] At the supra-national level, the European Union's Council of Ministers passed a directive on June 11, strengthening the obligations on local companies to "inform and consult" employee representatives about company management. The directive sharply increases both the number of companies concerned and the extent of their obligations. As it now stands, European law obliges multinationals with more than 1000 employees to inform and consult employees prior to deciding on substantial restructuring such as mass layoffs. From 2008, all companies with 50 or more employees in the EU, whether or not the company operates outside its home country, will be required to engage in "ongoing" information and consultation with workers about company management. Exactly how far the new rights will extend is as yet unclear: the details of the directive have still to be settled (including what information and consultation entails - does it mean formal recognition of works councils?); the directive must be passed by the European Parliament (which may, as the European Commission is urging, include tougher legal sanctions for breach of its provisions); and lastly, the directive must be legislatively implemented by member states (which is to be done in line with national traditions). The terms of the directive may be further strengthened or weakened in the course of this protracted process depending on political circumstances. The proposed directive constitutes, nevertheless, another significant instance of recent European labour market reform. Moreover, such supra-national reforms are expected to continue: the Commission appears poised to propose a directive on the use of agency workers that would equalize the compensation (wages and pension benefits) paid to the temporary workers and permanent employees at a given company.
III. The Context of Contemporary Global Competition [8] Coming during a marked economic slowdown, possibly even a recession, this series of labour market reforms has been closely scrutinized in terms of its expected impact on continental economic performance. The measures that extend worker protection have in particular been the subject of much debate.
[9] The criticisms do not vary much and are not essentially novel. They may be readily summarized. Employers tend to adopt a micro-economic perspective. For example, business leaders in Germany quote estimates from the Institute for Economic Studies in Köln that claim that compliance with the new German law will mean a burden of DM 2.7 billion in annual costs for industry. They also stress the resultant red tape and loss of agility for small companies like Internet start-ups, which characterize the new economy, and for the Mittelstand (mid-sized companies), the traditional backbone of the German economy. Employers contend that their country already ensures an unmatched degree of worker representation and that "no reform is the best reform." (1) Similarly, Spanish employers complain that their labour costs are still too high even with the introduction of short-term contracting and the cuts in severance pay. (2) At the supra-national level, the European employers' federation, UNICE, criticizes the proposed EU directive as an unnecessary new burden on business. (3) In the words of the federation's secretary-general, "[s]maller companies don't have the bureaucracy to deal with the bureaucracy." (4) UNICE reckons that European laws to protect workers are 14 times stricter than those in the United States. (5) [10] For their part, economists tend to adopt a macro-economic perspective. For example, the OECD has sharply criticized Germany for failing to deregulate its labour market. (6). Private-sector economists blame weak consumer spending and thus the slow growth in Germany on a job market that has curbed real incomes. (7) Experts in France predict a drop in national economic strength and foreign investment with the passage of their new law. (8) Most often, economists express the fear that the reformed regulations and taxes will make Europe's stiff labour market even less flexible. As a result, innovation and enterprise, which are said to be the key to higher productivity and increased competitiveness, will be stifled. Perhaps one economics journalist put it most succinctly, certainly most colourfully, "[m]uch more than slow-moving tankers, [investors] like agile speedboats that are able to cruise through the choppy waters of international markets." (9) [11] Criticisms by such observers constitute one view of the kinds of government policies that improve economic performance. Whatever language they use (red tape, additional costs etc.) or whatever aspect they focus on (consumer spending, start-ups etc.), the critics prescribe the same: pro-business policies. Pro-business policies, they argue, are conducive to sustained growth. Some go further and contend that the better the economy performs, the more inclusive is the society. These observers ultimately equate what is good for business with what is good for the nation, much as Henry Ford famously did in the 1920s regarding the well-being of his company and of the United States.
IV. Explanations for the Reforms [12] Convinced of the propriety of their policy prescriptions, critics of the recent European labour market reforms have dismissed the legislators' economic rationales and ascribed the reforms' advent to 'political expediency'. (10) This allegation bears closer examination, not because one should believe everything that politicians say, but because not everything that politicians say is necessarily unbelievable.
[13] German Chancellor Gerhard Schröder has defended his government's plans by arguing that co-determination should be seen as a strength and not as a weakness by foreign investors considering Germany as a business location. Critics, Schröder contends, often overlook the usefulness of works councils during times of crisis: councils could help manage necessary restructuring of the workforce much better than management alone. (11) For their part, union leaders argue that the system has maintained labour peace and productivity, but that the quarter-century old co-determination law needs to be updated in keeping with today's working world. (12) Lastly, as one economics journalist cautiously observers, works council blockades have largely become "a thing of the past" in Germany: the proportion of co-determined companies has fallen rapidly over the last decade; unions dominate works councils to a lesser degree than previously; and most importantly, works councils have shown a willingness to agree to substantial restructuring. (13) [14] Critics largely dismiss these arguments with scorn: rather than engage the arguments on their own terms, they tend to attack their proponents. They seem unwilling to accept that the reforms may be motivated not by self-service but by altruism and that the reform could lead to anything other than economically sub-optimal outcomes. Specifically, critics of the new German law point significantly to the fact that Schröder faces re-election next year; that he needs union support for his campaign; that Schröder's Labour Minister previously worked as vice-president of an industrial union; and that the influence of unions, which clearly stands to benefit from the reform, is otherwise fast eroding in industrial relations.
[15] In France, the recent reform was justified by legislators on the basis of "social modernization", i.e. as an attempt to improve employee-employer relations. (14) The new law follows on a slew of very controversial mass layoffs that came just as companies (sometimes one in the same) posted record profits and as the French economy was shown to be outperforming all others in the euro-zone. Employees angrily accused their employers of "economic self-interest" (i.e. of wanting to boost share prices or to satisfy pension funds) and called for the enhancement of employee rights. Employers countered that the layoffs were merely a rational response to a slowing economy and ever-increasing foreign competition. (15) Employers have accordingly denounced the passage of the amendment making it harder for employers to announce economic redundancies as political expediency. They note that French employees have recently engaged in huge street demonstrations in Paris protesting a lack of consultation on substantial restructuring; that the Communists, who are part of the Prime Minister's coalition, threatened to vote against their partners unless they were satisfied with the amendment's wording; and most significantly, that Jospin is likely to stand in next spring's presidential election. (16) [16] The express purpose of the Spanish government's recent reform is to widen and open the country's labour market. It hopes to rebalance the paternalistic laws from General Franco's time, which have provided excessive job protection on one hand and insufficient job opportunities on the other. (17) Complain as they might about the effect of the reform on their costs, it is hard in this instance for critics (here employees as well as employers) to impugn the government's motives. Prime Minister Aznar leads a centre-right government; was reelected with an absolute majority last year; has declared that he will not stand a third time for election; and perhaps most damningly, has successfully furthered reforms begun by the predecessor Socialist government. Aznar has even convinced the neo-liberal Economist newspaper of the propriety of his policies: "[i]n sum, undramatic, nuts-and-bolts changes, and no promise of Utopia - just of a better and fairer way of working life." (18) [17] Likewise, the motives of the supra-national legislators are difficult to impugn. Any allegation of political expediency on the part of the EU institutions founders on the reality of the democratic deficit. It appears that the Council of Ministers in passing the directive is indeed concentrating on building a "social Europe" after a decade of efforts towards building a single market. According to this vision, the supra-national agenda should be less concerned with economic reform and more with the protection of employees' rights and extensive welfare systems. (19) The proposed directive on information and consultation squares with the terms of a proposed directive on takeovers intended to further economic integration: while the latter's provisional text would make it harder for European companies to use so-called poison pill defences to ward off takeovers, it would also require hostile bidders to inform employees about potential job losses from restructuring. Rising above the cynicism that it has shown towards the recent German and French labour market reforms, the Economist has admitted the fact that "both the liberalising and the regulating instinct are powerful ones within the EU" and that either one, or the other, or both instincts may motivate the supranational legislators. (20) [18] Even assuming, without admitting, each of the critics' allegations of expediency on the part of the national and supranational legislators, a reasonable argument may be made in favour of such an approach to policymaking. Seen in the best light, political expediency may be defended as democratically responsive: what democrat is to gainsay Jospin, if in his policymaking he has "no intention of upsetting the voters."? (21) More than that, at a time of growing concern about voter cynicism and apathy in Western democracies, shouldn't instances of the direct involvement of voters in policymaking be applauded? Seen in the worst light, political expediency may reflect the unequal ability of rent-seeking interest groups such as unions to organize and influence the political process. If the tenets of public choice theory hold true, then employers should focus their efforts either on having the flaws that they perceive in the political process corrected or on profiting from the process themselves as another rent-seeking interest group. Inasmuch as they engage in the latter course of action, allegations that, for example, Schröder's labour market reforms are "designed to placate the unions," (22) will smack merely of sour grapes. Further, such allegations will come across as disingenuous: Schröder has also pushed through some important structural reforms, such as reducing business taxes, at the urging of the business lobby as well. Lastly, such allegations will sound exaggerated: neither the unions in Spain nor Germany have seen all their wishes fulfilled. (The Spanish unions say that their country will still have far too many employees on short-term contracts. The German unions would have preferred, for example, if the threshold values for exempting works committee members had been dropped further.) V. The Significance of the Prevailing European Economic Structure [19] As documented, critics of the labour market reforms have largely dismissed out of hand the legislators' economic rationales. Out of deliberative fairness and for the sake of their own arguments, critics should attempt to engage the reformers' economic rationales on their own terms. It may well be that such engagement cannot realistically be expected in circumstances viewed, as they were in Germany, as a battle royale of "Big Business against Big Labor in Europe's biggest economy." (23) Nevertheless, in the spirit of academic inquiry it is worth considering the possibility that the recent labour market reforms could in fact lead to an economically optimal outcome.
[20] Before beginning this inquiry, it is necessary to prepare the factual ground. First, though it is indisputable that the labour market reforms come at a time when economic growth in Europe is slowing markedly, dropping below its long-term potential rate of 2.5 percent, it is becoming increasingly plain that U.S. growth has fallen close to zero in the current quarter. (24) This inversion of economic performance between continents may be demonstrating that "the flip side of flexibility is volatility." (25) Europe may not be able to achieve the over 8 percent growth rates that the U.S. enjoyed as recently as the last quarter of 1999, but it is unlikely to suffer the same 8-percentage-point deceleration that the U.S. is currently suffering either. Put otherwise, the "inflexibility of the European labour market offers the advantage that jobs remain relatively secure even when the economy turns down." (26) Comparisons of economic performance should therefore be made on the basis of long-term and not short-term statistics. Second, when such comparison is made between transatlantic growth rates in output and productivity, it reveals that "Europe outperformed America for most of the last decade." (27) Lastly, it may be safely predicted that the euro area "could enjoy GDP growth at least as fast as America's, if not faster" over the next 20 years. Such performance could come even without labour markets as flexible as the U.S.'s through the Euro-area approximating the employment ratio of its rival, adopting the U.S.'s best practices in information technology and continuing to pursue regional economic integration. (28) In short, Europe's economies have not been, are not and will likely not be as sclerotic as critics make them out to be - notwithstanding the matter of labour market inflexibility.
[21] How European economies could be as competitive as the U.S.'s and how the recent labour market reforms may reasonably be justified ultimately hinge on one's understanding of the existing models of capitalism. As noted, the transatlantic economies display significant institutional differences in inter alia their labour markets. To many observers in North America and critics on the continent these differences represent deviations from 'best practice' that can be expected to decline as Europe catches up to the technological and organizational leader, America. (As Al Gore put the matter during one of the presidential debates, all other peoples on earth aspire to be like the United States in terms of "freedom and free markets." (29)) Put less bluntly, the conventional view of globalization predicts substantial deregulation and convergence in economic institutions across countries. In light of the risk of companies exiting the economy for more hospitable jurisdictions, governments are said to be facing increasing pressure from business to reform their regulatory frameworks so as to reduce domestic labour costs etc. Trade unions can be expected according to this understanding to resist such steps, seeking to protect the wages of their members. It is the duty of responsible policymakers, however, to speed the process of deregulation and convergence where possible. Government measures that perpetuate - or worse, strengthen - institutional differences are by definition counter-productive and to be avoided.
[22] Peter A. Hall and David Soskice elaborate a new framework for understanding institutional differences among developed economies in Varieties of Capitalism (forthcoming). The two academics take a similarly dynamic view of the political economy to that conventionally held: they expect national institutions to evolve in response to contemporary challenges the institutions face. Hall and Soskice do not assume, however, that this evolution will necessarily be towards convergence. The principal issue in political economy raised by globalization is "will institutional differences among nations [...] remain significant or will the processes of competitive deregulation unleashed by international openness drive all economies toward a common market model?" (30) [23] Hall and Soskice's own prediction is more nuanced than that popularly held, the political dynamic associated with globalization being contingent on the variety of capitalism. They build their analysis on the idea that institutional differences do not represent deviations from best practice but are "the distillation of more durable historical choices for a particular kind of economy and society, since economic institutions are closely linked to the levels of social protection, distribution of income, and collective goods that reflect a nation's conception of social solidarity." (31) These institutional differences influence in turn the character and strategy of companies - and ultimately the whole economy - by virtue of the various competitive advantages they confer. While companies' relationships to the home country render them less likely in point of fact to exit, government and business interests may still be expected to react to more intense international competition. In what Hall and Soskice call liberal market economies such as the United States, Canada and Britain, governments are "likely to be sympathetic" to pressure for deregulation, much as the conventional view predicts. "[B]ecause the comparative advantage of the economy as a whole rests on the effectiveness of market mechanisms," (32) deregulatory measures that sharpen those mechanisms will tend to be welcomed. More importantly for our purposes, in so-called coordinated market economies such as Germany and to a lesser extent France and Spain, governments "should be less sympathetic to deregulation." (33) Deregulation in this context would threaten the country's comparative institutional advantages, namely the systems of relational contracting that depend on the presence of accommodating regulatory regimes. Inasmuch as deregulation is actually introduced, it should aim at "coordination-conforming competition" and not "corrosive competition." (34) Lastly, any deregulation must take into account institutional complementarities, i.e. the effects that change in one sphere of the economy may have on another.
[24] More specifically, Hall and Soskice's framework for understanding institutional differences goes far towards explaining the rationale behind the recent European labour market reforms. Hall and Soskice take a relational view of companies: in their operations companies must enter into potentially problematic or productive relationships with other actors. Foremost among these market actors are their employees. Companies' concern in this relationship is "to ensure that employees have the requisite competencies and cooperate well with others to advance the objectives of the firm." (35) The company is thereby able to invest in production strategies that rely on a highly-skilled labour force given substantial work autonomy and encouraged to share the information gained at work. In Germany, the industrial relations system has been designed to address directly this concern through industry level-wage bargains and company-level works councils. As noted, the works councils are employee elected and possess broad powers over working conditions and a variety of personnel matters (including lay-offs and job assignments). By providing employees with security against arbitrary corporate actions, these bodies encourage employees to invest in company-specific skills and extra effort. "[Works councils'] effectiveness is underpinned by the capacity of either side to appeal a disputed decision to the trade unions and employers associations, who act as external guarantors that the councils function as intended." (36) [25] Assessed in terms of the framework set out by Hall and Soskice, the justification of the German government and unions for the new national law on co-determination is compelling. The works council is an essential element in the German coordinated market economy, underpinning an economic structure that relies on highly skilled employees. Moreover, the system has historically maintained labour peace and productivity and has assisted management in restructuring. In each of these respects, works councils may be considered to enhance and not diminish Germany's attractiveness to foreign investors as a business location. (Such an admission may be considered implicit in a statement by the head of the Center for European Economic Research that "no reform is the best reform." (37)) If in turn the old co-determination law needs to be adapted to keep up with changes in the economy, it should be adapted, not only for the sake of the effectiveness of the law itself but also for the sake of its institutional complementarities. (Indeed, the charge by one angry business leader that the new German law proves that Schröder's "image as a business-friendly modernizer is nothing but a marketing ploy," (38) may in fact be the exact opposite of the truth.). Many German employers have themselves tried to preserve the wage bargaining system, the other pillar of their industrial relations system, in order to sustain industry-specific skills and avoid industrial conflict.
[26] The institutions used to secure the employee relationship may vary in other coordinated market economies such as France's and Spain's. Extrapolating loosely from the German case, it appears, however, that other countries' businessmen are being rather selective and short-sighted in their criticisms of the recent labour market reforms. The reforms, if faithful to the original conception of the particular national economic model, should imply not a zero-sum game where one side's gain (i.e. labour) is the other's loss (business) but a win-win proposition for all market actors. "As observed in international trade, 'nations often prosper most, not by becoming more similar, but by building on their differences to consolidate comparative advantage.'" (39) [27] Perhaps this framework for understanding institutional differences may be even more clearly distinguished in relation to the political dynamic inspired by globalization on the international level. Hall and Soskice believe that countries operate from conceptions of national interest and thus that the international economic regimes that they negotiate are determined by such conceptions, modified where agreement requires compromise. Specifically, countries' "stance toward new regulatory initiatives will be influenced by judgments about whether those initiatives are likely to sustain or undermine the comparative institutional advantages of their nation's economy." (40) Hall and Soskice apply this approach to a wide range of interstate disputes over the development of the EU and its institutions, concluding that given "the profound institutional differences among the political economies of Europe [...] it is not surprising that there has been no consensus on such matters." (40) [28] The passage of the proposed directive by the Council of Ministers of the European Union strengthening the obligations on local companies to "inform and consult" employee representatives is illustrative of this phenomenon. At last year's Lisbon Summit, Britain, a liberal market economy, called for the creation of more flexible European labour markets. At the counting of the vote on the directive Britain found itself standing alone against the 14 other member states. Likewise, it is not coincidental that the requirement in the proposed takeover directive for hostile bidders to inform employees was made in deference to the German Euro-MPs on the conciliatory committee. (41) In both supranational instances, the national positions can readily be traced to government efforts to protect the institutional differences in their economies.
VI. Development of Economic Strategy [30] In short, the recent labour market reforms across Europe demonstrate that real differences among countries' economic institutions persist. Hall and Soskice's theory of the varieties of capitalism helps explain how these institutional differences may justifiably be perpetuated. In closing, I would add that national or regional institutional differences can conceivably grow in time as economic strategy, determined by choices for a particular kind of economy and society, diverges.
[31] Policymakers may see the chance for greater prosperity not only by building on their pre-existing institutional differences to consolidate comparative advantage, Hall and Soskice posit, but also by experimenting with new ideas, policies and institutions. Much of the economic history of the twentieth century revolved around a debate over the preferability of different models of capitalism such as state-led, trust-based and corporatist forms as well as around socialist systems that offered non-capitalist routes to development. Given that the struggle for comparative advantage among states, like that among companie
