Macroeconomic Constraints, Social Learning and Pay Bargaining in Europe

Macroeconomic Constraints, SocialLearning and Pay Bargaining in EuropePaul Teague

Abstract

This paper argues that European integration has constrained the discretionof industrial relations actors. The result has been not the widely predictedinstitutional fragmentation of collective bargaining, but a change in the func-tioning of these systems. At the same time, widespread `social dumping' on thepart of firms and member states has not materialized. The paper argues thatthe `race to the bottom' thesis gives insufficient weight to the socializationmechanisms attached to the European integration process. Thus macro-economic constraints and social learning processes are co-mingling with oneanother in European industrial relations.

1. Introduction

A number of puzzles are emerging in European industrial relations. Somepessimistic accounts suggest that deeper market integration in the EUalongside other influences such as technological change and corporatedecentralization are having a negative impact on established collectivebargaining structures. Yet when we scan most national employment systems,it is readily seen that institutionalized pay-setting continues and in someinstances has enjoyed a revival. Should we conclude that the pessimistic viewis off beam, out of touch with developments on the ground, or shouldwe look beneath the veneer of continuity to see if anything new is afoot inorganized wage bargaining? Similar hard-to-interpret developments arearising concerning the future direction of pay bargaining inside Euro-land. The hot prediction is that a European single currency will fragmentcentralized wage bargaining systems and encourage more enterprise-basedpay-setting. Against this assessment there is a flurry of activity, mainly onthe part of trade unions, to generate some form of pan-European wagecoordination. Should we view efforts at European wage emulation as thefirst building blocks in a new EU-wide industrial relations area, or as the lastgasps of the social corporatist model?

Paul Teague is at the School of Management and Economics, Queen's University Belfast.

British Journal of Industrial Relations38:3 September 2000 0007±1080 pp. 429±452

# Blackwell Publishers Ltd/London School of Economics 2000. Published by Blackwell Publishers Ltd,108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA.

This paper seeks to throw some light on these puzzles. It suggests thatmost industrial relations (IR) systems are operating in a more constrainedmacroeconomic and business environment. The creation of Euroland broughtabout by the single currency and the completion of the EU internal markethas altered the functioning of collective bargaining in a manner that marksa departure from the national social corporatist structures of the past.Institutionalized pay-setting is now used to align national labour marketbehaviour with deeper European integration. At the same time, movestoward a non-hierarchical from of pay co-ordination across the member-states suggest that European integration embodies important social learningproperties. These properties may prompt a new type of `focal point'bargaining in the EU, with potentially far-reaching consequences for Euro-pean industrial relations. Thus, the argument is that the twin dynamics ofconstrained discretion and social learning are interacting with one another.The implications for the European labour market are important, but arehard to predict.The paper is organized as follows. The following section charts how the

macroeconomic rules associated with the European monetary project haveimpinged on national collective bargaining. Then in Section 3 it is explainedwhy the emergent multi-tier bargaining systems should be seen not as acase of institutionalized neo-liberalism or social corporatism, but rather asa process termed `credibility bargaining'. Section 4 argues that credibilitybargaining has a strong European dimension that at once reflects andadvances the socialization dynamics of European integration. Section 5shows how this account stands apart from existing thinking about thecourse of pay bargaining in Euroland. The conclusions draw together thevarious arguments developed in the paper.

2. Pay bargaining, credibility and European monetary union

Credibility is the new byword of macroeconomic management. Its`invention' corresponds to the rise of open economies and the resultingconstrained policy discretion of governments (Balls 1998). In concrete terms,a credible macroeconomic policy amounts to the pursuit of price stabilityand sound public finances. The road to monetary union in Europe has beenguided by this thinking. The envisaged European Central Bank (ECB),described as the most politically independent in the world (Berman andMcNamara 1999), has as its sole modus operandi the maintenance of pricestability and enforcement of a no-bail-out rule, so that profligate nationalpublic finance regimes are not rewarded. Moreover, member-states can gainentry into the single currency club only if they make their own central banksindependent, and this is now a reality across virtually all of the EU. In theeconomics literature, this monetary regime is usually described as stronglynon-accommodating. But the obligations do not end here. Monetary unionparticipation also involves national governments enacting strict rules to

430 British Journal of Industrial Relations

# Blackwell Publishers Ltd/London School of Economics 2000.

control public debt and government deficits. Thus, national fiscal policyregimes are restrictive and in many instances are based on the Maastrichtguidelines on public expenditure. In addition, by signing a Stability Pact, themember-states have committed themselves to operating tight fiscal policiesinside Euroland. Whether this will actually happen is a matter of somedebate, but it is unlikely that monetary and fiscal policy will deviate too farfrom this agreement (Artis and Winkler 1998).

Whether non-accommodating fiscal and monetary policies are sufficientlystrong institutional commitments to secure a favourable credibility ratingwith financial markets is an open question Ð the New Zealand experiencewould suggest not (OECD 1999). Most member-states, not wanting to leaveanything to chance, have gone further to enhance their reputation asmonetary union players. In particular, they have endeavoured to make wagedetermination systems consistent with the pursuit of tight monetary andfiscal policies. Unruly labour market behaviour is seen as a sure-fire way ofdamaging macroeconomic credibility. Thus, across the EU, quasi-centralizedcollective bargaining has been encouraged by governments in an effort tocapture wage moderation (Ferner and Hyman 1998). The wage fixing systemsin the EU, outlined in the Appendix to this paper, show that multi-tiercollective bargaining institutions are in place almost everywhere. Aligningwage bargaining behaviour with the pursuit of credibility macroeconomicregimes represents an effort to build added social and political support formonetary union. Weak public legitimacy for a single currency may inhibitthe enactment of restrictive fiscal and monetary policies, thereby causingfinancial markets to question the robustness of the strategy. Organizedcollective bargaining systems are thus seen as a mechanism to create socialcredibility for non-accommodating macroeconomic policies.

The widespread use of multi-tier bargaining to re-orient labour marketbehaviour is significant, as it was widely assumed that an unstoppable marchtowards pay decentralization was occurring across Europe. The argument wasthat centralized wage arrangements were too rigid to allow enterprises tocope with the volatility of contemporary business life brought about by therapid rate of technological change and highly fluctuating patterns of demand(Katz 1993). Thus, the political imperative to align the macroeconomic dimen-sion of wage-setting with the monetary union project appears to have over-ridden the increased business demand for greater pay decentralization. At thesame time, a fair degree of national peculiarity remains in the organizationalshape of European collective bargaining. In some countries `encompassing'national wage bargains are pursued, in others sector or regional-level paybargaining is favoured, while a further alternative is some combination ofmacro and micro-level pay negotiations: a combination of pay centralizationand decentralization is occurring at the same time. Despite these importantinstitutional variations, almost all the bargaining systems have given toppriority to pay moderation to bolster the `national effort' to join the singlecurrency club. Thus, while national bargaining structures remain diverse,there is a new convergence in relation to the functioning of these systems.

Macroeconomic Constraints and Pay Bargaining 431


In particular, pay systems display four common features. First, it isaccepted by virtually all governments that the Maastricht criteria formonetary union (and the Stability Pact) constitute the non-negotiablemacroeconomic framework for pay determination. Claims for wageincreases that threaten to infringe these criteria are strongly resisted.Second, the theme of competitiveness, particularly in terms of controllingunit labour costs, is dominant in most agreements. Setting pay levels thatallow domestic industry to compete in global markets is the new refeÂreÂntialpervading collective bargaining negotiations across the EU. Keeping unitlabour costs in check highlights the extent to which the completion of thesingle market has intensified competitive interdependence between themember-states. Third, there appears to be an acceptance that the scope ordiscretion for distributional deals is small. Although some of the nationalwage deals contain conventional quid pro quos on the `social wage' Ðwhereby increased public expenditure on welfare matters is exchanged forpay moderation Ð these are fairly insubstantial trade-offs.Fourth, there seems to be little attempt to use national wage bargaining

arrangements to orchestrate or sustain interconnections between distribu-tional and productivity coalitions in the economy. Streeck (1992) suggeststhat the powerful attraction of institutionalized wage relations betweenemployers and trade unions is that, not only may they allow for the orderlysharing out of the economic pie, but they also give rise to collective labourmarket goods that reduce negative externalities in the employment system.In other words, they address equity and efficiency concerns at the same time.Thus, while pay-setting has been tied to tight macroeconomic policies,

employers have been given a fairly free hand to pursue productivity andwork innovations in the absence of effective institutionalized constraints.This has particularly been the case in systems such as the UK, which Traxler(1998) has described as disorganized decentralization. As a result, Europeanindustrial relations appears to be travelling along a twin track: organizedpay-setting is promoted alongside disorganized workplace change (Teague1999).

3. The social content of credibility bargaining

The significance of these developments has been interpreted differently,particularly as to whether or not we are witnessing the breakup of the `socialcorporatist' model of wage determination. One pessimistic account is thatthe `new' agreements represent the recasting of the `peace formula' betweenEuropean employers and unions and the institutionalization of a newemployer-defined industrial relations agenda (Streeck 1998). Social corpor-atism, with its emphasis on balancing equity and efficiency, has ended andpay bargaining is travelling down a new institutionalized neoliberal route.An alternative more optimistic interpretation is that the present wageagreements can be justifiably labelled `social corporatism'. Normally this



position is defended on two grounds. One is that competitiveness has longbeen a preoccupation of social corporatism and thus the heavy emphasis onthis theme in recent agreements cannot be regarded as a new departure(Schmitter and Grote 1997; Compston 1998; Turner 1998). The other isthat centralized pay bargaining structures still function in such a way as tocompress wage structures in Europe, thereby ensuring that wage inequalityis held in check to a far greater extent than in the USA (for example Soskice1999 and Pontusson and Rueda 1997). In other words, the `new' centralizedagreements continue to have an equity dimension (Traxler 1998).

The Pessimistic Scenario

Both the pessimistic and optimistic accounts of the current direction ofpay-setting in Europe are unsatisfactory. Consider first the claims of thepessimists that the `new' wave of national agreements amounts to littlemore than institutionalized neoliberalism. This argument is not an accuratereflection of actual developments on the ground. For instance, neither theRepublic of Ireland nor the Netherlands, two countries at the forefront ofthe `credibility pay bargaining' experiment, can be described as pursuing aneoliberal form of economic governance. In the Irish Republic, a spilloverfrom trade unions and employers engaging in national wage negotiationssince 1987 has been a radical redesign of domestic public administration.Throughout the 1990s, there has been a proliferation of social partnershiparrangements that have prised open the often bureaucratic and hierarchicalstructures of government. Thus, for example, regional and local economicdevelopment has been more or less transferred from the civil service topartnership boards made up of community groups, trade unions andrepresentatives from the business community. As a result, the agenda-setting, implementation and monitoring of public policy are heavilyinfluenced by social partnership principles. Associations from civil societyand civil servants are interacting with one another in a manner unheard ofeven a decade ago (O'Donnell and Thomas 1998).

The Irish case is interesting because the new emerging system ofgovernance is unlike the organizational structures associated with estab-lished forms of corporatism. Thus, economic and social decision-making donot rely on encompassing groups, with a virtual representational monopolyin a few well-defined functional areas, bargaining with one another toconclude mutually acceptable agreements. Instead, a more amorphousinstitutional system is taking shape, made up of a diffuse group of socialpartners mobilized and coordinated by state agencies to: (1) solve policyproblems; (2) engage in deliberations to reach a shared public understandingon particular matters; and (3) improve the knowledge and informationstructures of public bodies so that they can make new types of intervention.All in all, credibility pay bargaining is closely linked to social innovations ina way that defies established corporatist and neoliberal policy frameworks(National Economic and Social Forum 1997).



The labour market experience of the Netherlands during the past fifteenyears or so also fits uneasily with the pessimistic account (Visser andHemerijk 1997). While it is true that the Wassenaar agreements have kept atight lid on pay levels, there are important dimensions to the `Dutch model'that can hardly be called neoliberal. For instance, an important theme inemployment policy has been balancing labour market flexibility andsecurity. Thus, while the Netherlands has the highest share of part-timeworkers in the labour force in the EU, laws have also been enacted toimprove social protection for those in `atypical' jobs. In response to theincreased concern that fewer and fewer jobs will be for life, a neweducational initiative has been introduced whereby workers in employmentcan build up `training miles'. The idea is that, if a worker is made redundant,or simply wants to pursue an alternative career, they would have theopportunity to build up enough credits to finance a retraining package. Thewelfare system has also been a site for similar reform. On the one hand,the government has revised the welfare system so to limit the duration ofcertain benefits and to widen the gap between the average level of benefitsand the average real wage Ð the replacement ratio. On the other hand, ithas introduced a number of `passport' benefits whereby the unemployed canmaintain certain forms of social assistance if they accept low paid jobs sonot to fall into a poverty trap. Behind this search for a balance betweenflexibility and security in labour market policy is an attempt to rewrite theestablished bundle of responsibilities and entitlements underpinning theDutch model of economic citizenship. To write off this exercise as a cosmeticpresentation of neoliberalism seems excessive.Other countries are pursuing similar reform paths. In Italy the bargaining

system has been reorganized to allow gain-sharing at the the enterprise levelto coexist with sector and national wage norms. At the same time, labourmarket regulation is being recast to relax restrictions on the recruitmentof atypical workers, but also to give people in such positions new socialguarantees. In France the new socialist government has not abandoned themacroeconomic principles of deÂsinflation competitive, but it has attempted tointroduce a number of modernizing employment reforms such as shorten-ing the working week. In Sweden solidaristic wage bargaining may havecollapsed, but the trade unions are eagerly attempting to put in place a moredecentralized form of wage coordination. In addition, the government isstrongly resisting pressure from the OECD to include more incentives andfewer entitlements in the welfare state. In Britain the new Labour govern-ment has by no means dismantled all the labour market policies of theConservative era, yet it has enacted a number of important employmentreforms, such as the New Deal, which combines old and new active labourmarket measures.None of these reform paths being pursued suggest that social democratic

capitalism is once again triumphant in Europe. Equally, it cannot be claimedthat we are experiencing the forward march of neoliberalism. Thus, thepessimistic accounts which regard credibility pay bargaining as the macro-



economic sibling to labour market deregulation are misreading develop-ments in employment systems.

The Optimistic Scenario

The alternative optimistic interpretation of the recent national agreements isalso open to a number of challenges. First, it underestimates the difficultiesassociated with managing labour markets along social corporatist lines. Inthe past, social corporatist arrangements were economically functional inthat they interlocked economic and social structures in a way that securedlow unemployment and wage equity (Rowthorn 1992). But since the 1980sthese systems have been unable to positively combine economic efficiencywith social equity. For example, the wage formation institutions in theNordic countries, long regarded as the social corporatist Mecca, becameincreasingly `lopsided'; they could keep pay dispersion in check, but theycould not prevent substantial increases in unemployment.

Thus, the optimists fail to recognize the extent to which socialcorporatism has broken down as an economic system and the degree towhich the recent national pay deals operate within a new economic policyframework. They also overlook the constrained strategic choices facingorganized labour in Europe. For the most part, trade unions have notentered the recent central agreements with the expectation of building aninstitutional edifice to advance social regulation. Their motivation has beenmore defensive, in that participation in credibility pay bargaining is widelyseen as a way to stave off the Americanization of the European labourmarket.

This point needs further clarification. Almost all economists agree thatthe EU does not represent a particularly well defined optimum currencyarea to be governed by one money. Diverging living standards and economicstructures are the main reasons why complete monetary integration may bebad news for Europe. To some extent, credibility macroeconomic policiesare an effort to compensate for these `structural' shortcomings. But monetaryunion could also be made more workable if the participating countries hadflexible economic structures to respond to idiosyncratic shocks. For theEuropean labour market, this would involve enacting a far-reachingderegulation programme. In such circumstances, monetary union couldwell turn out to be the nadir of social Europe. Thus, the only strategicchoices open to trade unions in the prevailing context of deep Europeanintegration is either macroeconomic credibility or labour market flexibility.Given this, it is unsurprising that organized labour organizations have, inthe main, been willing signatories to the new centralized agreements. Credibilitycollective bargaining is as likely to secure trade unions an institutional placein the new Euro-zone as any other strategy.

Thus, the optimists are underestimating the extent to which changes ineconomic and political circumstances in Europe are altering the functioningof collective bargaining systems. The process of deeper European integration



has delivered agenda and policy shocks to institutional wage-setting inEurope. Monetary union, alongside deeper market integration, is reshapingthe political and constitutional boundaries between the member-states andthe EU centre. This has altered the agenda for most wage bargainingsystems in Europe without undermining existing institutional structures. Inparticular, making national labour market structures compatible with singlecurrency membership has reduced the scope for domestic social corporat-ism. But the new context of constrained discretion has not opened the doorto any full blown neoliberalism. Instead, industrial relations actors havebeen busy modernizing and revising labour market protectionist systems.Streeck's model of an employment system promoting economic efficiencyand social equity may have taken a direct hit, but Europe is not yet a case ofembedded neoliberalism.Almost everywhere in Europe, some form of multi-tier bargaining is being

practised. The economic logic behind this move is to recruit labour marketactors into the fight against inflation and for the maintenance of stability. Inaddition, locking national governments into a similar type of labour marketregulatory regime not only ensures that there is a predictable and stablewage policy environment in place across the EU, but also reduces thechances of any one member-state cutting loose and pursuing an aggressivesocial dumping programme that could fragment the internal market.Socially, the multi-tier bargaining systems are an attempt to widen thelegitimacy of the monetary union project. Of course, the big cost, at leastfor the trade unions, is to accept that they now live in a fairly restrictivemacroeconomic environment that minimizes the possibilities of large-scalesocial corporatist deals. At the same time, the presence of extra-firm wage-fixing institutions keeps alive the principle of social dialogue. And the roomfor manoeuvre that does exist is being used by trade unions to modernizelabour market support structures in a manner consistent with widertransformations in economic and social life. What is emerging in Europerepresents neither old-style social democratic corporatism nor Americanneoliberalism, though components of both these models are certainlypresent.

4. Credibility pay bargaining as European wage emulation

Alongside the internal recasting of institutionalized pay bargaining at thenational level have been attempts at EU-wide trade union collaborationon wage-setting. In Belgium, the benchmark for national pay bargainingnegotiations is a weighted calculation of wage increases in neighbouringcountries, specifically Germany, France and the Netherlands. More recently,trade unions from Belgium, Netherlands, Germany and Luxembourg gottogether to conclude a cross-border agreement on collective bargaining co-operation. The thrust of the agreement is to obtain sufficient co-ordinationamong national bargaining systems to `prevent a bidding-down of collectively



agreed pay'. In addition, the unions committed themselves to exchangeinformation on agreements with employees covering training, the humaniz-ation of work and job security. More recently, the European MetalworkersFederation launched a process of internal reform so that it is better placedto improve the co-ordination of national collective bargaining rounds inthe EU (EIRO 1999). These reforms involve monitoring national bargainingoutcomes and enhancing the ability of members to learn from each other.The interesting feature of this initiative is that it amounts to a certainEuropeanization of national bargaining systems as opposed to a transfer ofindustrial relations competence from the domestic to the EU level.

In addition to these first efforts at pay bargaining co-ordination acrossthe member-states, evidence is emerging of trade unions promoting reformsso that domestic wage-setting institutions are able to live within theconstraints of monetary union. Thus, for example, the Finnish trade unionconfederation is the author of a new national `buffer-zone' fund attached tothe centralized collective bargaining system. The fund has been set up tohelp finance unemployment insurance and pensions during recessions, but thereal purpose is to ensure that equilibrium unemployment is not disrupted byany `external' shock caused by membership of Euroland (Calmfors 1998).The operation of the fund is relatively straightforward: good economic timesare used to build up the coffers of the fund so that when any downturnarrives employers can avoid paying any extra national insurance contribu-tions to offset the likely increase in government debt to fund the increase inunemployment. Another positive benefit from the fund is that employerswill be less likely to squeeze actual nominal wages during the downturn.

A further example arises from the early discussions to renew the nationalpay agreements in the Irish Republic. Normally, these agreements set downrates of wage increases for a four-year period. While long-term wage con-tracts of this type have clear benefits in terms of reducing negotiation costs,they may not be suitable for Euroland, at least not in its formative years.Partly because the member-states do not represent a robust optimal cur-rency area and partly because of the presence of transitional problems in themove to a single currency, the chances of demand shocks occurring inEurope have increased. In this situation, long-term wage contacts mightbe the source of a major labour market rigidity in that money wages maybe insufficiently flexible to allow the member-states to respond compre-hensively to any demand shock. One option would be to dismantle thecentralized wage bargaining process and accept pay flexibility, but thatwould undermine the institutional framework for social partnership andpossibly weaken the role of trade unions in Irish society. As a way out of thisconundrum, trade unions are suggesting that greater use be made of profit-sharing and pay bonus mechanisms in the national pay agreements so thatgreater variability is built into the centralized system. In other words, thereis recognition on the part of organized labour that downward money-wagerigidity is a legitimate cause for concern inside Euroland and that suitablecontingencies should be made to cope with the problem.



These developments may represent a new horizontal wage co-ordinationprocess which allows national bargaining to persist in the context of deeperEuropean economic and monetary integration. Viewing credibility paybargaining as of a piece with a new wider non-hierarchical, `horizontal'European wage emulation process has not been given much airing, apartfrom a refreshing and thoughtful paper by Marginson and Sisson (1998).The basic proposition is that credibility bargaining should be interpreted asan institutionalized manifestation of a social learning process thatencourages national economic and political actors to draw lessons fromeach other's experience and to transfer policies and programmes acrossnational frontiers: Europe is beginning to learn from Europe (Joerges andNayer 1997). On this view, a range of socialization interactions mayaccompany the establishment of monetary union, and this may result insome form of non-hierarchical wage co-ordination in a monetary union.Thus, the revival of multi-tier bargaining in Europe and the new converg-ence in the functioning of these systems Ð tying pay to the single currencyproject Ð has not been driven by spontaneous market influences. Nor havethey been steered by Europe-wide centralized institutions.This proposition rests on a fairly distinctive theoretical perspective of how

labour markets work. The point of departure of this account is that mostmarket situations exhibit limited information and high transaction costs andthat such imperfectly competitive situations encourage imitative behaviour(Grahl and Teague 1992). In a limited information context, for example,market agents have a powerful tendency to take each other's behaviour asan indicator of their own optimal strategy. Mutual imitation of this kind canintroduce and sustain social conventions that limit possible distortionsarising from market imperfections. On the other hand, the same imitativeprocesses can lead to social contagions that cause and amplify departuresfrom market equilibrium positions. A recent study of the enduring influenceof a `going rate' dynamic in British pay determination in the absence ofmulti-tier national collective bargaining structures highlights the importanceof imitative behaviour in labour markets (Ingram et al. 1999). This researchshows that the breakup of national bargaining structures has not producedany marked variation in regional wage pay settlements. Pay determinationin the British private sector still approximates to a national `norm'.Informal pay norms Ð a form of social convention Ð can be interpreted

as an information structure: firms focus on the recent pay awards made byrival companies as a way of reducing the indeterminacy of their internal payprocedures and avoiding the competitive risks of divergent behaviour. Fromthis point of view, the survival of the `going rate' in Britain in an era ofrelative trade union weakness is not surprising: the belief that market-oriented reforms would make performance at company level the basicreference point for decentralized pay bargaining ignored the chronicinformation shortages to which decentralized markets are exposed. Yetthe absence of multi-tier wage institutions in Britain could be a handicap inthis latest round of deeper European integration.



Although it is plausible to argue that the well established institutional andinterpretative structures of nation-states can give rise to and sustain socialconventions in labour markets, it is a less convincing thesis in relation to theEU. Intuitively, one would assume that deeper European integration wouldbe more likely to generate social contagions in labour markets. Therelatively limited scale of labour mobility, the national fragmentation oflabour markets as well as persistent linguistic and cultural divisions suggeststhe absence of a pan-European information structure in employmentmarkets to facilitate orderly wage behaviour on the part of social partnersand governments. The argument developed here is that social conventionsand not social contagions have emerged across wage bargaining systemsinside the EU due to important socialization mechanisms inside theEuropean integration process.

5. Social learning and European integration

Ohrgaard (1997) ably identifies some of these socialization processes insidethe institutional system of the EU. One category is what the French callengrenage, which refers to the growing frequency and intensity of inter-actions between national interest groups and policy-makers inside EUdecision-making structures. Active engagement with EU-level policydeliberations not only introduces national actors to new ideas, routinesand practices, but also, on occasion, encourages them to pursue regulatoryor collaborative solutions to integration problems that are more ambitiousthan were first considered necessary. Eichner (1997) shows how this `delib-erative supranationalist' process has occurred in the field of health andsafety. More specifically to the industrial relations field, engrenage has lednational interest groups to open up a close association with sister organiz-ations at the EU level. After a time, these connections encourage nationalgroups to consider the competence, representational status and activity oftheir European `peak' organizations, particularly to assess whether or nottheir authority should be increased. Dolvik (1997), in an authoritative accountof the Europeanization of trade unions, has shown how the European socialdialogue in Brussels pushed organized labour to rethink the role of theEuropean Trade Union Congress (ETUC). This evaluation in turn spurreddeeper reflection about what objectives the trade unions should pursue inEU-level discussions on industrial relations.

A second category centres on the notions of `splitting the difference' and`upgrading common interests'. These two concepts underline that EUpolicies go further than the minimalist `common denominator' agreementsnormally produced by mainstream international organizations and caninvolve deep forms of co-operation among member-states. In the sphereof industrial relations, the trade unions and employer organizations areincreasingly using the `splitting the difference' tactic to reach accommo-dations and compromises in the social dialogue process. It is this behaviour



more than anything else that accounts for the small but increasing numberof European framework agreements on employment matters. Upgradingcommon interests refers to the situation where parties in the integrationdecide to put areas of potential conflict to one side and focus on matters onwhich there is a greater chance of advancing co-operation. It is a sign ofpolitical maturity that the various parties to the policy dialogue are sensitiveto each other's positions and are prepared to give and take to improvethe legitimacy of the whole process (Falkner 1998). Again, this type ofbehaviour can be detected in the actions of the social partners in Brussels:each is eager to avoid positions that would drag both into a stalemate andmore keen to focus on those issues open to agreement.A third category is spillover. The meaning given to this term here is

inspired by, though not the same as, the mainstream neo-functionalistdefinition (Haas 1958). Spillover can be viewed as the intended or un-intended consequences of one act of integration on other spheres of socialand economic action. Thus, for example, the Europeanization of corporatestrategies is likely in one way or another to impinge on the functioning ofnational social institutions. In the realm of industrial relations, Cremers(1997) vividly shows how the Europeanization of enterprises in theconstruction sector across the member-states has virtually rendered nationalindustry-wide collective bargaining pointless. In this situation, trade unionsare obliged to re-evaluate the effectiveness of purely domestic forms ofaction. Another example would be how European labour law triggersinnovatory forms of social co-operation. Thus, for example, although thestatutory obligations imposed on firms by the European Works CouncilDirective are rather puny, this piece of legislation has given a biginstitutional push to `horizontal' forms of action by different national tradeunions organizing within the same multinational. In turn, greater`horizontal' trade union collaboration rebounds back into the `vertical'institutional sphere, giving the EU added legitimacy to extend its legal reachon the theme of enterprise-level information and consultation (Lecher andRub 1999). Thus, it should come as no surprise that the EU Commission isin the process of drafting a new Directive that obliges all enterprises withmore than 50 employees to establish some form of consultation mechanism.

6. Social learning and the institutional design of the EU

The various social learning mechanisms built into the process of Europeanintegration have given rise to a complex web of `vertical' and `horizontal'institutional connections within the EU. This complex is not defined orexplained by established political categories such as federalism or inter-governmentalism Ð that is why the French like describing the EU as apolitique non-identifieÂe. The distinctive character of the EU lies in separatenation-states being bound together through deep ties of economic andpolitical interdependence, with the Brussels centre playing the role of



conductor (Checkel 1998). Thus, while member-states have control of EUdecision-making, it is hard to think of any aspect of national economic andsocial governance that has not been touched by European integration.Although the EU may not have the capacity to `steer' the Europeaneconomy or polity, it is European law and regulations that in many casesset the conditions for national policy action. Thus, in the new Europesovereignty and supranationalism sit nervously beside each other.

The coexistence of sovereignty and supranationalism within the samepolitical space accounts for some of the key structural properties of theEuropean Union. First, no one member-state has the capacity to act as ahegemon. To use the language of game theory, it is unlikely that `Stackle-berg' solutions will arise in the European integration process whereby onemember-state has the ability to tie other countries to its declared preferences.The one clear exception to this rule, the hegemonic role of Germany in thelater phases of the EMS, helps to explain the strength of the commitment ofEU members to a common currency which, whatever its defects, was boundto dissolve national monetary hegemony.

On the other hand, there is a deep reluctance on the part of most member-states to engage in persistently bad behaviour. For the most part, member-states do not renege on agreements entered into at the EU level. Neither arethey willing to consistently block EU proposals even though these may notbe in their interests. Britain stands as testimony to the political costs thatarise when a member-state repeatedly engages in opportunistic behaviour.Persistently holding out for national preferences is not usual behaviour,because most member-states recognize that such action runs the risk offragmenting the entire integration project. Thus, non-cooperative bargain-ing is partly held in check by a self-interest calculation on the part of themember-states, but the socialization mechanisms inside the European inte-gration also play a role. These have triggered an interaction, interpretationand internalization dynamic among national governments, policy elites andinterest groups with regard to EU affairs (Hongju Koh 1997).

This dynamic has disturbed well established and finely tuned nationalinterpretative frameworks through which domestic actors understand andgive meaning to various economic and political matters. These frameworkshave become less solipsistic in character and more exposed to `European'ideas and methods of doing things (Scharpf 1998). As different nationalpolicy paradigms and procedures mingle in a more intimate way, domesticactors are being encouraged to `internalize' new ways of addressing problems.As a result of this learning process, the three processes of interaction,interpretation and internalization have developed an informal `belief system'inside the European integration process which strongly influences the waythe member-states relate to each other (Weingest 1995).

This is not to say that social and institutional linkages inside the EU arefree from faultlines. Constructing Europe-wide solutions to policy problems,particularly in the social sphere, is seldom an easy exercise. Nevertheless,the informal normative boundaries to European integration have tamed



opportunistic behaviour on the part of the member-states. Thus, forexample, there is no widespread evidence of member states practising socialdumping, at least not to any significant degree. Socialization mechanismsunderpinning the EU framework have created informal rules to the politicalgame that act as `social glue' in the complex structure of connectionsbetween the member-states. Those accounts that portray European inte-gration as a purely market-creating exercise fail to give due weight to thissocial substratum of the EU which allows the member-states not only tointerlock expectations and commitments, but also to seek out mutuallybeneficial ways of working together.These social boundaries to European integration can be detected in pay

bargaining systems in Europe. Credibility pay bargaining reflects a recog-nition on the part of industrial relations actors that European monetary andfinancial integration places macroeconomic constraints on ambitious nationaldistributional wage deals. This narrowing of the social space across Europehas intensified the search for new `lighter' forms of public intervention thatbalance flexibility and protection in employment systems. Thus, credibilitypay bargaining is an attempt simultaneously to align national labourmarkets behaviour with a single European currency and to modernize SocialEurope.It is still early days to do anything other than speculate about the

direction of pay bargaining in Euroland. But the recent initiatives on thepart of European trade unions to co-ordinate national collective bargainingdemands inside the single currency club can be interpreted as efforts tocreate non-hierarchical, decentralized procedures to synchronize wage-settingacross Europe. Trade unions clearly recognize that without such collusionthe possibilities of destructive forms of wage competition between themember-states increase considerably. This form of collaborative actioncannot be described as pattern bargaining practised by American unions inthe early part of this century. It is better seen as `focal-point' bargaining,since the emphasis is on ensuring that national wage negotiations are notin collision with one another. Such wage bargaining behaviour, whichembodies national and European influences, cannot be properly explainedby the standard intergovernmentalist or supranationalist political accountsof the EU. A more convincing approach is to see it as a manifestation of thesocial boundaries to European integration (Garrett and Weingest 1993).

7. Rethinking the European monetary union and collective bargainingconnection

Interpreting wage bargaining inside Euroland as a horizontal emulationprocess stands apart from most of the mainstream thinking about theimplications of European monetary union for collective bargaining. Oneposition is that a European single currency will fragment multi-tierbargaining inside the member-states irrespective of whether or not it is



`credible' in character (Martin 1997). Monetary union and national collectivebargaining are regarded to be in collision for a number of different reasons.One is that transferring monetary policy from the national to the Europeanlevel will weaken the capacity of central banks to promote orderly, even`co-ordinated', domestic wage-setting. From this point of view central bankshave played a key role, particularly in northern Europe, as an institutionalsanction against unruly wage bargaining behaviour (Soskice and Iversen1998). Thus, if trade unions pursued a pay claim that was likely to have aharmful impact on unemployment, inflation or general competitive con-ditions, the central bank would signal that an appreciation of the currencyor an increase in interest rates was imminent to offset the damaging impactof the wage rise. In other words, by indicating that they would use monetarypolicy to offset any damaging macroeconomic spillovers from opportunisticwage-setting behaviour policy, central banks helped promote orderly collec-tive bargaining negotiations. But with European monetary union removingthe powers of national central banks, this national monetary constraint onwage formation all but collapses.

A related argument is that monetary union will weaken establishedeconomic and social boundaries to collective bargaining (Jackman 1996).On this view, wage claims on the part of workers and employers embody aprocess that involves making external normative comparisons to ascertainwhat is a socially fair and economically affordable pay rise. Traditionally,these external orbits of comparison have been nationally embedded. Thus,on the economic front, domestic economic conditions Ð unemployment andinflation rates as well as balance of payments figures Ð have been used togauge the extent to which pay demands are consistent with prevailingeconomic conditions. On the social front, workers have made comparisonswith the pay levels of other workers with similar labour market status. Aninfluential argument, particularly among economists, is that monetaryunion will erode these national reference points. A single currency doesaway with national inflation rates as well as balance of payments figures,and national employment/unemployment levels are less salient. Thus, thepotential benefits of conducting collective bargaining against the backdropof a well established domestic political framework come to an end. Inessence, the political structures that allowed wage formation to be tied tomacroeconomic circumstances all but disappear.

A third argument is that national multi-tier pay bargaining will collapseunder the weight of the competitive pressures released by European monetaryunion. From this standpoint, Euroland is likely to have an important impacton the structure and conduct of European industry. On the one hand, it maytrigger a geographical relocation of certain industries as companies seekexternal economies of scale through territorial concentration (Krugman1998). With regionally defined production complexes becoming a moreprominent feature of the European industrial landscape, the corporatefoundations and institutional logic behind national pay-setting may erode.On the other hand (or perhaps at the same time), greater competitive



pressures on enterprises, reinforcing those already released by the com-pletion of the internal market, may encourage employers to walk away fromcredibility pay bargaining. Together, a single currency and open marketsmay amount to a crushing pincer movement against centralized wageformation and a victory for pay decentralization.Views differ on the consequences of monetary union dismembering

institutionalized wage bargaining. One perspective is that pay decentraliz-ation would simply be a piece of a larger programme of labour marketflexibility required to allow member-states the room to deal with theeconomic stresses and strains of monetary union (Wijkander 1997). In lesstemperate language, European monetary union would be the battering ramto break up excessive employment protection rules and over-generouswelfare states, leading to the Americanization of the European labourmarket. An alternative account suggests that the decline of national multi-tier collective bargaining would open the door to `demonstration' or `fair'wage effects across the member-states. On this view, where separate nationalcurrencies indirectly supported domestic contours to wage structures bypromoting exchange rate illusion, with a single currency removing thisillusion, different national trade unions working in similar industries mightpush for the equalization of wages across the EU, irrespective of existingproductivity differentials between countries.A second position is that monetary union will encourage a new EU-wide

multi-level institutional framework for collective bargaining. A structure ofthis kind would seek to address possible co-ordination failures arising fromEuroland's disrupting of existing national pay arrangements. The exactshape of this new multi-tier collective bargaining system is seldom set out,but presumably would entail a new division of responsibilities between thesocial partners at different levels of the EU polity. Thus, in Brussels theETUC and UNICE, and possibly even similar organizations at the sectorlevel, would conclude agreements for wage increases consistent with macro-economic circumstances in Europe. Subsequently, national collective bar-gaining structures would incorporate these agreements and diffuse themacross domestic economic sectors. In essence, the architectural scheme isabout building a Euro-corporatist system to accompany the arrival ofmonetary union.Thus, much of the established thinking suggests that monetary union will

lead to either the decentralization or the `federalization' of wage bargaininginside the EU. Both these scenarios are out of step with political andeconomic circumstances in Europe. Consider the argument for a new multi-tier collective bargaining system. Problems of scale and heterogeneity mayseriously limit the possibilities of Euro-corporatism. Sweden, one of thelargest countries to have adopted corporatist procedures, has a work-forceof some five million people with a single language and a common culture.In the EU of 15 member-states, there are some 120 million people in themost disparate circumstances, divided by language and culture as well asideological, national and religious traditions. In this situation it would be



very difficult for the EU to establish pay norms that would be credible atground level. These problems are only likely to intensify with the imminentprocess of enlargement.

Doubts can also be raised about the likelihood of `unrealistic' wageequalization strategies accompanying the single currency. In his seminalpaper on international trade union action, Ulman (1995) points out that akey factor accounting for the lack of cross-national pattern bargaining is notexchange rate illusion, but the fact that collective bargaining is embeddedwithin elaborate domestic systems of welfare and social benefits. Thus,British workers have not sought German rates of pay because the umbilicalcord between the weekly pay packet and the `social wage' has establishednormative contours to collective bargaining that militate against thedevelopment of pan-national orbits of comparison. With social welfaresystems remaining largely national in character inside Euroland, these socialbarriers to Europe-wide wage-setting are likely to remain, albeit in someweakened form. Moreover, a precondition for a European version of Americanstyle pattern bargaining is the ability of trade unions to operate in such anoffensive way. Yet the evidence suggests that across the EU trade unions areon the defensive, just about able to `keep their own' in national collectivebargaining rounds (Hyman 1997). Prevailing economic and labour marketcircumstances are not suggestive of Europe-wide `trade union pushfulness'on collective bargaining matters.

Of the two scenarios, the pay decentralization scenario is certainly thestronger. But there are grounds for scepticism here too. For a start,although trade unions are not on the front foot, they are nevertheless stillsufficiently powerful to obstruct pay decentralization, particularly if it is inthe context of a wider labour market flexibility programme. Moreover,as the `path dependency' literature emphasizes time and again, actuallyexisting social institutions are not easily dismantled, which suggests thatthere is considerable built-in inertia within multi-tier wage bargaining inEurope (Thelen forthcoming). To make the same point differently, radicaland assertive action would be required on the part of employers to break upthe new credibility bargaining structures. Whether they have the politicalwill to launch such an offensive is an open question, especially as mostmember-states have governments with a social democratic complexion. Theweathervane for European industrial relations points to a continuation ofthe pragmatic approach that has characterized the direction of employmentreform in Europe for some time now. Political conditions certainly rule outbig institution-building projects for the labour market; but they are alsoresistant to flexibility initiatives.

8. Conclusions

This paper has addressed the puzzle of why the member-states, after driftingtowards pay decentralization, have gravitated back towards some form of



multi-tier wage-setting. It suggests that the new convergence in paydetermination, labelled `credibility bargaining', has largely been driven bya desire on the part of national governments to make an orderly transitionto a single currency. This fairly synchronized movement in a single labourmarket direction shows how deeper European integration has blurred thesovereign boundaries between the member-states. Governments have lesscapacity to make domestic political bargains that reflect what Scharpf(1998) calls the solipsistic preferences of economic and social actors.The argument developed in this paper is that deeper European inte-

gration, notably monetary union and greater market interdependence, iswashing away the boundaries between internal and external sovereignty.The institutions of domestic sovereignty have become more open to theextent that it is no longer useful Ð in the sense that it no longer reflectsactual practice Ð to make such a distinction. Analytical categories thatjuxtapose the internal and the external, the domestic and the foreign, theendogenous and the exogenous underestimate the interlocking of thenational and the extra-national in European economic and social life.Slowly but surely, this development is being recognized in the literature onthe EU. Weiss (1998) talks about a fusion process whereby national and EUdecision-making have to all intents and purposes become interwoven. Somerefer to the notion of `supranational deliberation' to highlight the ubiquitousinfluence of the EU on national economic and social governance (Eriksenand Fossum 1999). Scharpf (1998) goes so far as to suggest that a new formof polyarchy may be emerging in which the democratic legitimization ofnational governments is linked to the manner in which they manage the newEuropean interdependence.It would be naõÈ ve not to accept that significant social consequences arise

from the jumbling up of internal and external sovereignty in Europe. Onecasualty of the process has been the capacity of national governments tomaintain an employment order that simultaneously promotes the efficiencyof enterprises and the social integration of workers through the provision ofcollective labour market goods. Governments now live in an era of con-strained discretion, and the rise of credibility bargaining is an institutionalmanifestation of this situation.Thus, the new European interdependence is far from good news for

established industrial relations institutions such as trade unions and forestablished principles for organizing labour markets such as collectiveemployment law. At the same time, the doom and gloom that pervades someof the writing on European industrial relations is excessive. The EU cannotbe written off as a case of embedded neoliberalism in which establishedsystems of social protection and labour market regulation are being ravishedby unrestrained market forces.What we are witnessing in Europe at present is the institutional redesign

of existing national political systems, partly to reflect the reality of deeperEuropean integration, but also to accommodate changing patterns ofeconomic and social life. The endeavour to revamp and modernize



established economic and social governance structures has intensified policylearning and transfer across the member-states. Europe is learning fromEurope. The rise of credibility bargaining and the first moves towardsEuropean wage emulation are part and parcel of this social learning process.Thus, the reshaping of employment systems in the EU is not simply aboutthe diffusion of market-oriented reforms, but also about a new wave ofinteractions between economic and social actors committed to creating afresh and updated version of Social Europe. The outcome of this relativelyopen-ended process is hard to predict in advance.

Appendix: Wage Bargaining Systems in the EU

Greece

`Informal' national wage bargaining prevails. Governments announce`guidelines' for pay increases in the end-of-year budget. These guidelinesare used as the basis for collective bargaining negotiations that take placebetween the social partners the following month. In addition, decentralizedenterprise bargaining takes place within nationally agreed limits.

Ireland

National wage agreements have been in place since 1987. Most programmeshave been based on general annual percentage increases in wages, subjectto minimum absolute increases. Local bargaining clauses have allowedenterprise-level pay productivity negotiations subject to a centrally deter-mined cap.

Sweden

The renowned system of centralized solidaristic bargaining has collapsed.Industry-wide and local pay determination are now the norm. Employerorganizations appear resolute not to return to the past, while trade unionsare experimenting with new forms of pay co-ordination. Currently thetrend is towards three-year pay agreements permitting only modest wageincreases.

Portugal

The National Council for Social Concertation has played an increasinglyimportant role in collective bargaining in the 1990s. Normally pay deter-mination takes place at the industry and local level, but more and more, theCouncil's recommendations on wage increases have been accepted by thesocial partners. Meeting the Maastricht criteria for monetary union iswidely seen as the motor behind this policy development.



Spain

In 1997 the government introduced a series of reforms to the 1980 Worker'sStatute. An important feature of the reform package was the creation of anational structure for collective bargaining with only indirect governmentinvolvement. At the same time, an `informal code' has been created betweenthe social partners that wage determination should be consistent withgovernment efforts to join the EMU.

Finland

Non-binding framework agreements for wage increases are established bya centralized bargaining process. However, these national pay guidelines arenormally endorsed by individual unions which must give their consentbefore any collective agreement can be enacted. The latest two-year deal wasconcluded in January 1998, sanctioning only modest pay rises and allowingfor some tax concessions.

Italy

Industrial relations reform in the early 1990s created a three-tier bargainingsystem. Old style incomes policies are established via centralized wageagreements. These deals normally tie wage increases to government inflationtargets. Industry-wide bargaining is also permitted and local enterprisebargaining on such things as profit and gain-sharing is encouraged.

The Netherlands

Central Agreements (Centraal Akkoord) are widely regarded as a keyfeature of the Dutch Miracle. Since the early 1980s, national pay deals havefor the most part maintained a regime of wage moderation, allowing for therestoration of employment growth and international competitiveness. Local-level bargaining is permitted provided it is non-inflationary.

Germany

A multi-layered bargaining system exists, involving national industry-wideand regional components. A dense network of employers and trade unionshas ensured that the system operates in a co-ordinated way. Despite manyindustry-wide agreements providing opt-out clauses, and growing pressurefrom employers for greater enterprise-based pay determination, the bar-gaining system is delivering pay and price stability.

Denmark

A system of `centralized decentralization' wage bargaining exists in thecountry. Central-level negotiations determine maximum permissible pay



increases, while enterprises have sufficient freedom to create flexible paystructures. There is growing pressure for further decentralization, but thecentralized negotiations remain broadly intact and have complemented thegovernment's fairly austere macroeconomic programme even though thecountry is not joining the EMU.

Austria

The country has not got an economy-wide centralized pay negotiationsystem as is often assumed. Rather, a bargaining procedure betweenindividual unions and relevant parts of the Federal Chamber of Commerce,the national employers body, produces centralized pay deals for varioussub-parts of the economy. Company-level pay bargaining is also permittedunder the system. In recent years, like almost everywhere else, the trend hasbeen towards pay moderation.

Belgium

After a drift towards pay decentralization, centralized wage determinationhas recently been restored. In 1996, the government forced through anincomes policy that set a maximum limit to wage increases based on aweighted average of projected labour cost increases among Belgium's majortrading partners. To some extent, this formula can be interpreted as estab-lishing a European zone for national pay deals.

France

Collective bargaining takes place at the sector and local levels. Approxi-mately 95 per cent of workers are covered by sector agreements. Averagepay increases at both levels have been running at 2 per cent a year. Highunemployment along with the desire to join the EMU have promoted wagemoderation. Currently the structure of collective bargaining is underreview.

United Kingdom

During the 1980s industry-wide bargaining more or less crumbled. Enter-prise bargaining is now the norm in the private sector, although it appearsthat decentralization has not fragmented `national' pay rates in manyindustries. At the same time, centralized bargaining has largely persisted inthe public sector, which governments have successfully controlled by settingtight cash limits for public expenditure.

Final version accepted 17 March 2000.



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Macroeconomic Constraints, Social Learning and Pay Bargaining in Europe

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