Single market, EMU, and activation through social pacts

Although the English-speaking world spearheaded the rise of neoliberalism, Europe followed suit from the mid 1980s onwards. Nonetheless, different welfare states followed strikingly divergent social policy responses and labour market strategies. The social democratic welfare states of Scandinavia seemed to be able to sustain high levels of both employment and equality by expanding public-sector service jobs. Liberal welfare states in English-speaking countries such as the US and the UK seemed to be able to create large numbers of private-sector service jobs, following the additional neoliberal recipe of labour market deregulation and welfare retrenchment. The conservative or Christian democratic welfare states of continental Europe, on the other hand, maintained budgetary restraint, but at the cost of low levels of employment in both public and private services, which not only led to growing divisions between labour market 'insiders' and 'outsiders', but also triggered a vicious spiral of increasing payroll charges, rising indirect costs, and declining employment which could eventually undermine the financial sustainability of the Continental welfare states themselves. In southern Europe, the Continental 'inactivity trap' has been intensified by strict labour market regulation (Scharpf and Schmidt, 2000b).

The Single European Market Act of 1986 and the Economic Monetary Union (EMU) of 1999 were negotiated at a time when neoliberalism was riding high. The understanding behind the introduction of the EMU, and the founding of an independent European Central Bank, was that an integrated market does not function properly when inflation and exchange rate fluctuations and competitive devaluations remain optional. The Maastricht convergence criteria for Member States joining the EMU thus followed the neoliberal logic of the primacy of hard currency and balanced budgets. Membership required participants to achieve a stable inflation rate (within 1.5 per cent of the three best performing states in the EU), a low government deficit (equivalent to no more than 3 per cent of GDP), a low debt level (below 60 per cent of GDP), and stable interest rates (within 2 per cent of the three best performing states). A number of academic observers saw the Single Market and EMU policy package as a Trojan horse for a fully-fledged neoliberal policy shift across the Member States of the EU, believing that this would trigger a vicious cycle of deflationary 'beggar-thy-neighbour' strategies of internal devaluation through social dumping and competitive wage moderation (McNamara, 1998).

Partly as a result of the early 1990s currency crisis, most European countries went into recession, marking another rise in unemployment. As a result of high interest payments on the public debt and rising unemployment, public debt rose considerably in the majority of countries. This predicament left many Member States little choice but to compensate for the loss of macroeconomic fiscal and monetary policy tools by strengthening the institutional responsiveness of domestic industrial relations systems and welfare state arrangements through labour market and social policy reform. Ironically, EMU pressures seemed to mobilize a far less hostile labour market policy response, marked by a shift towards activating social insurance and active labour market policies, in part based on the return of 'social pacts' between government, employers, and trade union organizations (Ebbinghaus and Hassel, 2000). Apparently policymakers, especially on the European continent, did not dare follow the example of Thatcherist class warfare with the trade unions, but instead sought to negotiate with their unions, however much weakened by high unemployment. Under the slogan 'make work pay', specific attention was given to the removal of obstacles that hinder labour market participation, especially for the low-skilled, women, and the elderly (Blanchard, 2006; Hemerijck and Eich- horst, 2008). These social policy and labour market reforms included a broad range of in-work benefits, employment subsidies, tax deductions, individual counselling, working-time flexibility, and social and family service provision. These proactive reforms, however, were accompanied by benefit cuts and a tightening of eligibility requirements, especially in the areas of unemployment insurance and social assistance, in countering poverty traps (Hemerijck, 2011b). Towards the end of the decade, the experiences of the more successful European countries, such as Denmark and the Netherlands, seemed to suggest that there need not be a trade-off between equity and jobs. It should, however, be pointed out that the new generation of social pacts and labour market reforms were designed to accommodate markets, under conditions of austerity, rather than to correct them (Streeck, 2009).