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The New Politics of the Welfare State$

Paul Pierson

Print publication date: 2001

Print ISBN-13: 9780198297567

Published to Oxford Scholarship Online: November 2003

DOI: 10.1093/0198297564.001.0001

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The Political Economy of Social Pacts: ‘Competitive Corporatism’ and European Welfare Reform

The Political Economy of Social Pacts: ‘Competitive Corporatism’ and European Welfare Reform

(p.165) 6 The Political Economy of Social Pacts: ‘Competitive Corporatism’ and European Welfare Reform
The New Politics of the Welfare State

Martin Rhodes (Contributor Webpage)

Oxford University Press

Abstract and Keywords

This is the third of three chapters on the role of economic interests, and of systems for representing those interests, in the politics of welfare state reform; they explore the linkages between national welfare states and national economies, and examine the processes through which economic actors press their interests on policy makers. Here Rhodes explores the implications for welfare states of nationally negotiated social pacts in bridging and making innovative linkages between social security systems and employment rules and wage bargaining. The essential argument of Sect. 1 is that the emergence of social pacts is linked to common domestic and external pressures for welfare state reform in the European Union, and that contrary to the expectations of many commentators, these pressures are neither ‘disorganizing’ European capitalism nor neutralizing the power of the state; furthermore, rather than fragmenting political‐economic structures, pressures for reform have in many instances modified or even bolstered efforts at coordination via bargaining. Section 2 introduces the notion of ‘competitive corporatism’, and shows that underpinning these social pacts are varying degrees of associational cohesion, and two types of coalition — seeking distributional deals and productivity gains — which have complex linkages and overlaps. In ideal typical terms, it can be suggested that competitive corporatism is successfully achieved if underpinned by a close but flexible interlocking of these two types of coalition, although in practice it is not always possible, as has been demonstrated in various continental European countries.

Keywords:   associational cohesion, coalitions, competitive corporatism, continental Europe, distributional deals, economic interests, employment rules, European Union, political economy, pressures for welfare state reform, productivity gains, social pacts, social security systems, wage bargaining, welfare state, welfare state reform

One of the most significant achievements of the post‐war era has been the reconciliation of economic growth with varying degrees of social justice within Western European welfare states. Yet the capacity for achieving this compromise has been thrown into question by a number of major challenges. Pressures for retrenchment including ‘globalization’, low economic growth, and unsustainable public sector deficits have hit up against counter‐pressures for larger social outlays. The latter comprise demographic change (a higher ratio of active citizens to passive welfare recipients), the rising cost of health care, the appearance of new social risks linked to high and persisting rates of unemployment and the changing nature of the labour market, household patterns, and family/gender relationships.

At the same time, the ‘disorganizing’ impact of socio‐economic change (post‐Fordism and the transformation of production, the emergence of the service economy, and the breakdown of former welfare‐supporting coalitions) has purportedly rendered impotent the capacity of welfare systems to negotiate their way to a new and sustainable equilibrium. Efficiency and equality, growth and redistribution, competitiveness and solidarity are frequently referred to as polar opposites, able only to thrive at each other's expense. In many quarters, this formulation of the problem has become accepted as common wisdom.

Yet one of the most important, but until now neglected, aspects of the ‘new politics of welfare’ in Western Europe are new nationally negotiated social pacts, designed precisely to bridge these apparent polar opposites. These were referred to in a previous article (Rhodes 1998) as ‘competitive corporatism’ (an apparent oxymoron) in order to signal their search for elaborate equity‐based compromises and trade‐offs. These pacts, which have proliferated since the late 1980s, have major implications for welfare states by bridging, and (p.166) innovating in linkages between social security systems and employment rules and wage bargaining.

Despite important differences between them—due to membership of diverse welfare state models and industrial relations traditions—all social pacts consist of new market‐conforming policy mixes. But they are far from being vehicles for neoliberal hegemony or economic nationalism (cf. Streeck 1996). The essential argument of Section 1 of this chapter is that the emergence of social pacts is rather linked to common domestic and external pressures for reform in the European Union. As is argued in some detail, contrary to the expectations of many commentators, these pressures are neither ‘disorganizing’ European capitalism nor neutralizing the power of the state, although they certainly do present a series of challenges unprecedented in the post‐war era. While governments may have lost their power to expand social spending at will, due largely to their inability to sustain growing public deficits, they remain the principal architects of welfare states and employment systems.

Furthermore, rather than fragmenting political‐economic structures, the impact of pressures for reform have in many instances modified or even bolstered efforts at coordination via bargaining. For, as discussed in Section 2, which introduces the notion of ‘competitive corporatism’, underpinning these pacts are varying degrees of associational cohesion and the development to one extent or another of two types of coalition—seeking distributional deals and productivity gains—with complex linkages and overlaps between them. In ideal‐typical terms, it can be suggested that ‘competitive corporatism’ is successfully achieved if underpinned by a close but flexible interlocking of the two. Admittedly, certain countries will be unable to put such pacts in place. The recent experiences of Germany (where coalitions seem to form more readily at the regional (länder) level, Belgium (where successful experiments along Dutch lines have been ruled out by the salience of ethno‐linguistic conflict), and France (where concertation has always been prevented by the weaknesses and fragmentation of union and employers' organizations) all attest to problems of innovating in relations between private and public actors in complex political economies.

1. The Political Economy of Negotiated Reform

Social Pacts and European Welfare Reform

Despite the forecasts of the bulk of analysis in recent years, corporatism—apparently a now defunct feature of Europe's organized political economies of the 1950s–1970s—has not gone away, either as a mechanism for coordinating (p.167) wage bargaining or for negotiating wider policy options. Indeed, recent years have witnessed the preservation (in modified form) of corporatism in countries where it has always been strong, as well as its emergence in those where the traditional prerequisites (e.g. strong, centralized, hierarchically ordered interest associations) have been weak.

Apart from Sweden, the traditional corporatist countries of Central and Northern Europe have seen their centralized or coordinated bargaining systems modified or recast rather than abandoned. The Swedish case, in which coordinated bargaining broke down under pressure from employers and the strains of sustaining solidarity wages in a more competitive international environment, turned out to be the exception (Wallerstein and Golden 1997). By contrast, bargaining remains ‘centralized’ in Finland, Denmark, and Norway, even if the structures of bargaining have become more supple as a result of buffeting by macroeconomic policy turbulence in the 1980s. In Denmark, the 1990s have seen the emergence of five large bargaining cartels, with even greater controls on plant‐level bargaining than in the past. Meanwhile, state influence has ensured that the ‘free and voluntarist’ system of collective negotiation has taken account of new contingencies, especially participation in phases 1 and 2 of EMU (Lind 1997). In Norway, centralized negotiations were re‐established in the late 1980s after a period of industry‐level bargaining. In 1992, the so‐called ‘solidarity alternative’ (solidaritetsalternativet) forged with the trade union confederation, LO, put in place an incomes policy to help strengthen the competitiveness of Norwegian companies and reduce unemployment (Dølvik and Martin 1997). In Finland, a reunification of blue‐collar unions in the late 1960s has assisted the government's strategy in the 1990s of combining fiscal consolidation with a centralized wage bargaining (Kiander 1997). Institutional adaptation and preservation of social consensus has helped the Nordic welfare states weather the recessions of the 1980s and 1990s while also accommodating pressures for changes in social programmes and labour market regulation. As the authors of a recent survey conclude, despite some ‘shaky ground’ there is no evidence of retrenchment and dismantling and ‘all of the traditional hallmarks of the Nordic model appeared to be very much alive’ (Heikkilä et al. 1999: 271). Meanwhile Austria—with especially high levels of openness and tertiarization (purportedly the two major threats to social partnership and negotiated reform)—has also remained highly corporatist, although with considerable flexibility in its wage bargaining structures (Traxler 1997b; Wallerstein, Golden, and Lange 1997).

Then there are the countries—all to be discussed in detail below—where new social pacts have grown on apparently arid ground In some, a moribund corporatist tradition has been revitalized. Among these the Netherlands takes pride of place. After an interlude of industrial relations strife, the mid‐1980s saw a revival of Dutch corporatist policy making—again with flexible, decentralized bargains within a coordinated structure. This has produced (p.168) something of a model—to be discussed in greater detail below—for advocates of a ‘third way’ between neoliberal deregulation and the traditional solidaristic European model (Visser and Hemerijck 1997). In Ireland, a country which frequently tried but failed to put in place a workable incomes policy in the 1970s (Hardiman 1988) has now developed a rather comprehensive social pact. Negotiated in successive phases—in 1987, 1990, 1993 and most recently in 1997—this pact has addressed tax, education, health, and social welfare issues in addition to incomes.

The real surprises are Italy, Portugal, and Spain. In these countries, the institutional preconditions for national pacts are particularly weak, and the potential for conflict—over both labour market and social policy reform—especially high given the intensity of pressures for change and the strength of veto groups (Ferrera 1996; Rhodes 1997a). In Italy, negotiations in the early 1990s on reforming automatic wage‐indexation were extended to the rationalization of bargaining structures, the reform of workplace union representation, improvements to the training system, the legalization of temporary work agencies, employment regulation reform, and the May 1995 agreement on pension reform. In Portugal, five tripartite pacts since 1987 have focused on incomes and social and labour market measures. The 1996 agreement also covers social security issues, including a minimum wage, a reduction of income tax for low‐income groups, and a more favourable tax treatment of a range of benefits, including health and education and pensions. In Spain, a long period blockage in welfare and labour market reform has given way to a new national bargain—the Toledo Pact—allowing progress on pensions reform and innovations in loosening up a highly rigid labour market (Rhodes 1998). In all cases, a process of new coalition building has been embarked upon, with greater success in some than in others. In those countries with weak prerequisites for national bargains, functional equivalents have been put in place, either by institution building (making representational change part of the bargain) or via complex package deals (extending the bargain from incomes policy to social security and tax reform).

Why is this happening? A good place to start is the globalization debate —a logical embarkation point given that trade competition, global financial markets, and the power of transnational capital has supposedly made such corporatist pacts impossible.

‘Disorganized’ Capitalism? Globalization and Socio‐Economic Change


Many engaged in the debate about the welfare state's future have tended to downplay or at least relativize the impact of globalization and its interaction with other, domestic, challenges (e.g. Pierson 1997d; Fligstein 1998). (p.169) The following argument takes the globalization arguments more seriously, while also maintaining that globalization works within domestic national contexts. Indeed, it is the relationship between external pressures (both in the international and integrating European economies) that is rendering the search for new negotiated solutions essential in much of Continental Europe. Given the prevalence of ‘strong globalization’ assumptions it is worth stating from the outset that national economies have neither been wholly absorbed into a new global order nor their governments totally incapacitated. Non‐tradeables remain important in most European economies and national comparative advantage and specialization remain critical for international competition (see Perraton et al. 1997). Good arguments for the compatibility of large welfare states with internationalization are regularly rehearsed. Welfare states emerged in line with the growing openness of economies and facilitated the consequent process of socio‐economic adjustment (e.g. Rieger and Leibfried 1998). Government consumption appears to play an important insulating role in economies subject to external shocks (Rodrik 1996).

Moreover, rather than globalization being the main culprit welfare states have, as Pierson (1997d) argues, generated many of their own problems. By helping improve living standards and lifespans they have created new needs that social services were not originally designed to meet. Rising health care costs and pensions provisions have contributed massively to welfare budgets and fiscal strains. Other problems—e.g. the decline in demand for low or unskilled manufacturing workers—stem from the increasingly post‐industrial nature of advanced societies (Rowthorn and Ramaswamy 1997). Post‐industrial change has created a ‘service sector trilemma’ (Iversen and Wren 1998) in which the goals of employment growth, wage equality, and budgetary constraint come increasingly into conflict (see also Esping‐Andersen 1996a and Scharpf 1997a; 1999). Creating private service sector employment may entail lower wage and non‐wage costs, risking greater inequality, while generating such employment in the public sector has hit up against budget limits in many countries. The interaction between these developments and globalization are far from straightforward. To cite Pierson (1997d), while ‘it is important to recognize the linkages between international and domestic developments . . . such links are likely to be more modest, complex and bi‐directional than is commonly suggested.’

But these links do exist and should be taken seriously. Consider the issue of trade competition. The thesis that trade with the South will lead to declining demand for unskilled labour and either lower wages or higher unemployment in the North (as strongly argued, for example, by A. Wood 1994, 1995) has been contested. Thus better qualifications command a return to human capital and protect many workers in the North (R. B. Freeman 1995a). Specialization in different goods reduces downward wage pressures in developed (p.170) nations (Thygesen, Kosai, and Lawrence 1996). Others (e.g. Slaughter and Swagel 1997) argue that technological change is the principal culprit in the shift from lower to higher skilled labour demand. It is unlikely, though, that trade has nothing to do with this. Snower (1997) links trade competition with skill‐biased technological change and ‘the organizational revolution’ in firms (flatter hierarchies, flexible specialization, the adoption of ‘lean’ and ‘just‐intime’ methods), which adds a further dimension to the service sector trilemma. By making jobs less secure, argues Snower, these developments create greater reliance on unemployment insurance, public support for education and training, and a wide variety of welfare services. This may create a ‘quicksand effect’ as welfare structures designed for a different era get weighed down, generating negative effects, destroying incentives, and making redistributive policies inefficient. Such developments can be generated not just by international, but by more competitive intra‐European trade, circumventing the argument that trade with the rest of the world (around 14 per cent) is too small to explain European employment problems (cf. Fligstein 1998).

What about the globalization of finance? Although its effect is often exaggerated, the interaction of a number of developments should be acknowledged. First, there is the Mundell–Fleming theorem or the ‘unholy trinity’ which states that exchange rate stability, capital mobility, and domestic monetary independence cannot be achieved simultaneously (Andrews 1994; see also Webb 1991; Frieden 1991; Goodman and Pauly 1993). In an environment of international austerity, it becomes increasingly costly for individual states to pursue an expansionary monetary policy as part of an effort to stimulate growth and employment. Second, the emergence in the 1970s of a new world market for capital has resulted in an explosion of global short‐term flows, making capital restrictions more difficult to maintain. In the absence of relative capital immobility, domestic policy priorities—e.g. full employment—must be subordinated to defending the balance of payments, a priority to which both fiscal and monetary policies are redirected (Moses 1995). Third, increased financial integration has increased the social and political power of capital—in particular capitalists with mobile or diversified assets. The power of multinationals to ‘arbitrage’ diverse national structures and force deep, structural convergence across diverse societies has been described as ‘chimerical’ (Pauly and Reich 1997: 24 ff.). And the evidence shows that the bulk of FDI continues to go to relatively high‐wage and high‐tax countries (Weiss 1997: 10). Nevertheless, the relocation threat can exert a powerful influence on domestic policy and institutional arrangements, as shown, for example, in Germany where large firms have used it to weaken the power of unions and force concession bargaining (F. Mueller 1996).

Then there is tax competition. Swank (1998a) has argued against the claim that international capital mobility has generated a shift away from capital taxation. Governments continue to rely on corporate taxes for a significant, (p.171) and in some cases, a growing share of revenue. Changes in the structure and rates of taxation have coincided with attempts to make the overall changes revenue neutral or protect the revenue needs of the state. Rate cuts have been offset by broadening the tax base and eliminating investment‐related allowances, credits, and exemptions. Nevertheless, Clayton and Pontusson (1998) argue that even if corporate tax reforms have not shifted the tax burden onto labour, by limiting the use of the tax code as a means of boosting investment and employment, life is made a lot harder for social democratic governments. As Ganghof and Genschel (1999) point out, while revenues from capital income taxation may not have fallen since the 1980s, on average, they have also not increased. This has contributed to the fact that the average total tax ratio of the eighteen most advanced (and largest) OECD countries has stagnated since the mid‐1980s and has failed to keep up with increasing public expenditures. Tax competition may not be the main cause of the financing problems of the welfare state, but it has constrained policy responses by making some forms of revenue‐raising more costly at a time when pressures for increased spending abound.

What are the policy implications for European welfare states? Interpre‐tations differ. While Garrett (1995, 1998b) concludes that the ‘propensity to deficit‐spend’ has not been constrained by increasing trade and capital mobility, he also points out that the integration of financial markets has put a premium on left‐wing policies in terms of higher interest rates. Keohane and Milner (1996) suggest that financial market integration or capital mobility have potentially a much more detrimental effect on the policy making autonomy of Left‐Labour governments than trade integration. Swank, on the other hand, argues that more important are the pressures placed on taxation by trade competition and low rates of growth (1998a: 678–9). Whatever the particular interpretation, at a time when EMU has forced a reduction in deficits and debts, and rendered competitive devaluation impossible for its member countries, even a ‘globalization sceptic’ has to accept the constraining nature of these developments.

But the way out of this conundrum does not necessarily involve neoliberal deregulation. Thus many countries are engaged in policy innovations to reduce the ‘quicksand’ effect of social policy provisions by tackling the costs of transfer‐heavy welfare states and redesigning benefit formulas so as to make them both financially sustainable and more employment friendly. They are also reconfiguring a range of fiscal policies and their relationship with social security expenditure. Moreover none of the above are necessarily inimical to negotiated paths of adjustment. Nor is responding to the accentuated power of the markets. As Glyn (1995b) has argued, globalization has often been made the scapegoat for the failure of certain countries to control their domestic sources of social conflict and spending. The real task is to build or rebuild domestic coalitions and arrangements containing trade‐offs that make such (p.172) policies ‘credible’. The same can be said of multinationals, often assumed to be instrumental in diminishing state autonomy. Domestic bargaining arenas in all parts of the world impose huge social, political, and financial constraints on multinationals (Ruigrok and Tulder 1995) and the ‘rootlessness’ of such firms has been much exaggerated. They too can be linked into new national bargains sustaining high‐wage, high‐productivity solutions.

Socio‐Economic Change

Such bargains are supposedly made harder by broader processes of socio‐economic change, some of which are also linked to globalization. Crepaz (1992) maintained that corporatist policies had retained their capacity to achieve their desired macroeconomic goals in the 1980s but he was a lone voice. Most concurred that organizational fragmentation and decentralization, spurred on by flexible specialization and the ‘disorganizing’ effects of globalization, had brought the corporatist era to a close. Grahl and Teague (1997: 418) argued that ‘as a strategic programme for the resolution of employment issues, neo‐corporatism is moribund—defeated on the ground by the actual evolution of employment relations before reluctant abandonment by its academic proponents’. Lash and Urry (1987) developed a persuasive thesis that the transition to post‐Fordism meant a widespread process of flexible decentralization, undermining traditional hierarchies and associations. Others, such as Hirst and Zeitlin (1991) were more cautious, suggesting that while not necessarily undercutting corporatist concertation, flexible specialization did require increased scope for the adjustment of employment arrangements at the firm or local levels. Invoking changes in the macroeconomic environment, Streeck and Schmitter (1991) powerfully argued that a combination of the business cycle effect and European integration would unravel the logic of corporatist exchange. Loose labour markets meant less need for centralized bargaining institutions for stabilizing wages and prices while an integrated European economy with constrained macroeconomic policies would reduce the scope for state package deals or side payments to unions and employers. Gobeyn (1993: 20) neatly summarized a common view: ‘contemporary economic realities—slow growth, de‐industrialization, the continuing installations on shop floors of labor‐saving technologies—make corporatism largely unnecessary. Market forces alone can presently achieve labor discipline and wage demand moderation.’

In reality, the effects of contemporary socio‐economic change are much less straightforward. Contradictory tendencies are at work. Decentralization in centralized industrial relations systems has occurred. The new international division of labour within large transnational firms and the presence of the latter national bargaining arenas have made collective bargaining more complex. So too have divided interests between traded and non‐traded capital and labour. A shift to more sectorally based forms of bargaining (p.173) has followed employer and worker demands for greater wage differentiation. Meanwhile, employers in all systems are searching for greater company‐ and plant‐level flexibility in three areas: internal (or functional) flexibility in the workplace; external (or numerical) flexibility vis‐à‐vis the wider labour market; and greater pay flexibility at local levels. At the same time, the creation of the single market and the achievement of EMU have placed new pressures on wage‐cost competition.

But labour market rules and the wider systems of social security to which they are often linked are not dysfunctional for growth as such. Nor is it the case that labour market institutions are in the grip of such deep uncertainty that the importation of the UK's neoliberal deregulation policies to the rest of Europe is on the cards (cf. Grahl and Teague 1997; Teague and Grahl 1998). Given the service sector ‘trilemma’ there may have to be some selective deregulation of the labour market to enhance flexible (i.e. part‐time or temporary) employment. There are also varying degrees of insider/outsider dualism in the labour markets of many countries, created by over‐protective regulations for those in full‐time, standard employment (see Siebert 1997). But as Hall (1998) argues, there is no reason to expect that this will push Europe's organized, cooperative economies down the slippery slope to AngloSaxon style deregulation and inequality. First, not all protective measures impede employment creation or growth: it depends on the context. Thus, generous unemployment benefits are desirable for social cohesion, as long as they are accompanied by strict benefit durations and measures to help the jobless back into work. High levels of unionization and union coverage are also compatible with employment creation and growth, as long as they are offset by high levels of coordination in wage bargaining and unions do not become insider monopolies. Both such combinations of policies have been aspired to by new social pacts and their older corporatist counterparts. Selective deregulation, promoting part‐time employment, has been achieved in the Netherlands within a broad social pact sustaining coordinated wage bargaining and minimizing the impact on real income disparities (Visser and Hemerijck 1997; van den Ploeg 1997). New forms of wage coordination and attempts to bolster the representative strength of union organizations have been undertaken in the Italian and Irish social pacts.

Crucially, the interaction of external pressures with domestic labour markets is also demanding centralization, as well as high levels of national (and European) employment protection. This has been one of the unexpected effects of the spread of new forms of ‘human resource’ management and work organization in highly unionized environments. Both imply the creation or maintenance of cooperative labour relations and a high‐trust firm environment. As Negrelli (1997) shows in the Italian case (although the lesson also applies elsewhere) employers and workers become increasingly interdependent in such systems, and industrial relations systems make an important (p.174) contribution. This is not to say that in weaker union environments (e.g. France) such developments do not compound existing labour movement problems. But the general point is that well‐designed systems of labour market rules remain essential for the new world of work. As argued in a previous article (Rhodes 1998) (and following the prescriptions long made by Wolfgang Streeck 1992), the optimal world of internal flexibility is built not by unilateral management action but on teamwork and low levels of hierarchy within firms. High levels of skills and capacities for skills acquisition are critical. These depend, in turn, on national education and training systems which, again contrary to expectations, are proving to be flexible to new demands where they are institutionally strongly rooted. Too high a level of external flexibility—i.e. the absence of regulatory constraints on firms—destroys trust and undermines internal flexibility. This trade‐off—producing a productive form of ‘regulated cooperation’—is a critical one for sustaining both competitiveness and consensus in European labour markets.

Furthermore, both cost competitiveness and stability require a means of preventing wage drift and inflationary pressures. This has focused the attention of governments on revitalizing incomes policies. This has been true especially of the social pacts of Italy, Ireland, and Portugal, and now Spain is following with a similar set of institutional innovations as a means of moderating wage inflation (see Pérez 1999). As argued below, rather than disrupting these forms of concertation, and fragmenting governance in the European labour market, the completion of the single market and movement to full EMU is likely to lock the bargaining partners even more closely together.

Institutions and the Scope for Negotiated Adjustment

The argument to this point has stressed that pressures for change stemming from the international economic environment as well as from processes of economic change may well require concerted, coordinated national responses. This is not to say that there is one ‘best way’ or even convergence on a particular policy path or institutional model. The point to be stressed though is that neither neoliberalism nor institutional fragmentation follow logically from such pressures. Two other considerations confirm this view: the interlocking nature of national production, industrial relations, and welfare systems; and the institutional context of the ‘new’ European politics of welfare.

First, crude convergence arguments ignore three essential limits on radical deregulatory change in both policies and institutions in the organized market economies of Continental Europe: path dependence, the prevailing distribution of organizational power, and the ‘efficiency’ (or competitiveness) deriving from the complex links between systems of regulation and production firms (see Gourevitch 1996). This is also true for the liberal market economy of the United Kingdom where an absence of an ‘organized’ economic framework (p.175) pushed governments in the 1980s towards deregulation as a means of improving efficiency (Soskice 1999). Path dependence and resistance to change derive from the fact that forms of labour market regulation are deeply embedded in national systems of law and collective bargaining. The fact that the existing distribution of power is located in the associational strength of both employers' and trade union organizations clearly limits the scope and content of reform. As for economic performance, Continental systems retain enormous economic strength and their large and successful export sectors and trade surpluses demonstrate that their regulatory systems—including their labour market rules—are far from dysfunctional.

This partly explains why flexible specialization has failed seriously to threaten corporatist arrangements or collaborative industrial relations. For, contrary to expectations, employers have typically not used it to weaken trade unions where flexibility of various kinds depends on their participation. The example of Italy has already been cited. German Mitbestimmung also retains its functional value in providing an effective framework for flexible and negotiated solutions to employment and innovation problems (Rhodes and van Apeldoorn 1998). As Thelen (1999) argues, most German employers are acutely aware of the costs of a decentralization strategy that seeks a radical shift in the balance of power with labour. It is this rather than union countervailing power that explains ‘why German employers cannot bring themselves to dismantle the German model’. As discussed in Section 2 below, other countries which seek to follow a high‐wage/high‐productivity path of economic adjustment are seeking to develop similar coordinating capacities in their own economies.

Path dependence, power, and efficiency arguments also suggest that EMU will not lead to a radical restructuring of European national wage bargaining systems, as many have predicted. Because EMU places a greater burden of adjustment on labour costs, some argue that this may draw its member countries into a deflationary vicious circle of labor cost dumping, or competitive internal depreciations (see A. Martin 1998: 20). But neither an ‘Americanization’ of labour relations, nor a rapid shift to cross‐border sectoral bargaining is likely, even if powerful unions like the German IG Metall are promoting such a project. Much more likely is what Martin (1998: 21) refers to as the ‘re‐nationalization’ of wage bargaining, a notion that fits with the resur‐gence of national wage coordination in the social pacts discussed below. We can also understand continuing attempts to shore up Scandinavian bargaining systems in this way. Just as German employers perceive the broader knock‐on costs for themselves of decentralization in terms of competitive bidding for labour and wages among firms, so employers and governments elsewhere recognize the benefits—above all in EMU—of national coordination.

But in addition to the productive side of existing institutional trajectories, there is a downside when it comes to welfare reform. To use Esping‐Andersen's (1996a) metaphor, despite some thawing at the edges, there is a (p.176) ‘frozen landscape’ in European welfare. This is reflected in sustained levels of social transfer spending and limited institutional reform. Thus, according to a recent OECD study of fifteen countries (1996h), transfer spending fell in only seven cases, and generally by very modest amounts (Pierson 1997d). The most important institutional changes have been managerialism; attempts to make certain benefits (especially unemployment support) more ‘incentive compatible’; a marginal degree of privatization (mainly in health, and mainly in Britain), some decentralization; and attempts to control budgetary expansion (see Therborn 1997 for a survey).

This is not necessarily cause for celebration. Indeed, the ‘frozen landscape’ indicates sclerosis rather than a stable and sustainable equilibrium. Pierson (1998) construes the crux of the problem in terms of ‘irresistible forces’ (post‐industrial pressures, unmanageable increases in health and pensions budget) meeting ‘immovable objects’. The latter stem from a mix of electoral incentives, ‘institutional stickiness’, and the veto points created by powerful vested interests devoted to defending transfer‐heavy welfare states and their redistributive outcomes. Reforms to health care systems, pensions, and labour markets all require a careful process of adjustment if social cohesion is not to be sacrificed and if core constituencies and their representatives (welfare professions, the labour movement, citizens) are not to erect insuperable im‐pediments to change. Complex policy packages are made inevitable by the imbrication of social security systems and employment regulation. The most difficult cases of reform can be found in those countries where labour market insiders are also social security insiders (in Italy, for instance, around half of the members of all three major union confederations are pensioners, creating major problems for left‐wing reformists in the governing majority). This all suggests why, as Pierson (1998: 556) puts it, the ‘new’ politics of the welfare state in Europe ‘involves a complex two‐level game, incorporating both an electoral arena and a corporatist arena’. It is on the latter that we concentrate in the remainder of this article.

2. ‘Competitive Corporatism’ and Welfare Reform

To recap the points made above, we have argued thus far that:

  1. ∂ globalization (and market integration in Europe) are interacting with domestic employment and welfare problems, making their resolution more difficult;

  2. but at the same time neither globalization nor socio‐economic change are necessarily reducing the scope for a concerted process of social market reform. Indeed, in some respects, the necessity and capacity for such reform may both be enhanced.

  3. (p.177)
Before examining a number of such ‘pacted’ transitions to reform in practice, we need to explore the logic and coalitional supports of ‘competitive corporatism’.

The Logic of ‘Competitive Corporatism’

In an earlier article (Rhodes 1998), I argued that the logic of the new social pacts is rather different from traditional forms of social corporatism. First, they are less routinized (although they may become so) because the very necessity of a pact signals the absence of a tradition of institutionalized political exchange. Second, and partly as a result, the partners will be institutionally weaker and the exit costs lower, although once again, this will change over time as ‘emergency’ or state‐sponsored concertation consolidates and puts down stronger institutional roots. Third, unlike traditional Scandinavian corporatism, where the state was either a marginal or absent participant in the central incomes bargain, in the new pacts the presence of the state is much more strongly felt, either as a coercive force or provider of incentives.

In greater need of explanation, however, is how actors in weakly organized systems can strike bargains and then sustain them, given that only strong, centralized associations of capital and labour have been deemed capable of such exchange.

First there is the role of the state. Even in the Dutch case, we are talking about what Visser (1998) (after Fritz Scharpf) has called ‘bargaining in the shadow of hierarchy’—in other words, a context in which the state legitimates and ratifies the bargain and sanctions or compensates potentially wayward, free‐riding or ‘free‐booting’ partners. This itself provides important cement for otherwise institutionally fragile bargains. Here, once again, European economic and monetary union has contributed to concertation over macroeconomic policy issues via a process of what Della Sala (1997) has called ‘hollowing out and hardening’ the state. In countries where the boundaries of the state machine were always porous, making the state itself accessible to interest groups and therefore incapable of striking or enforcing clear‐cut bargains, EMU has made state structures less permeable and displaced authority within them towards technocratic elites. Italy is the clearest case in point. One should acknowledge, however, that there is a danger in such an activist state role. For as Pekkarinen, Pohjola, and Rowthorn (1992) pointed out with regard to similar tendencies in traditional social corporatism, in the long run state action to shape or steer employers' and workers' organizations may inadvertently undermine their legitimacy and reduce their ability to mobilize support for government policies. This tension is already visible in a number of cases.

(p.178) Second, there is a tendency, as Marino Regini (1999) has described it, for actors to be less conditioned by pre‐existing institutions when ‘an economy [is] close to a convergence between the opposing requirements of deregulation and concertation’. In this situation, it is therefore the set of constraints on, and incentives to change provided by each actor that largely determines the behaviour of the others: ‘a co‐operative game will last longer the more all actors have been able to develop a capacity for strategic learning’. All of the cases discussed below provide illustrations of such learning processes. One can also note in this regard that partisan politics becomes much less important as time goes on. Economic policy had already ceased to be a central valence issue after the mid‐1970s, with both left and moderate rightist parties (Christian democrats, liberals) moving towards the pro‐market right (Kitschelt 1997b). Under EMU, one can suggest that class‐based differences regarding economic management have narrowed further, making it more likely that parties of all political stripes will seek pragmatic solutions to macroeconomic management and imperatives for micro‐policy reform. Thus, contrary to the idea that ‘turning vice into virtue’ (Levy 1999) is a left progressive project, ‘unfreezing’ the Continental European welfare landscape has become a cross‐party concern.

Third, not only does the interlocking nature of European social security and employment systems require simultaneous action on multiple fronts, but as Traxler (1997) has argued, broadening and deepening the bargain may also compensate for the absence of conventional organizational prerequisites. Thus, as has most explicitly occurred in the Irish and Portuguese cases, the best way to generalize the process of exchange is to synchronize industrial and structural with social and employment policy and/or extend concertation levels upwards or downwards by making associational strength itself a part of the bargain. This requires a complex and cautious process of coalition building. It is to this process that we now turn.

Social Pacts and Coalition Building

Not all of the new social pacts perform the same function, nor do they all rest on the same coalitional foundations. As Casey (1999) observes, social partnership and social dialogue can be involved at a number of different points. They can be involved at the level of planning, or involve simply consultation. They can be involved in policy formulation, monitoring, and the implementation of policy. In the pacts below, however, there has been a tendency for such functions to broaden over time from pay determination and macroeconomic policy, to issues of training, labour market policy, and social security. In the process the coalitional base may also shift correspondingly from a classic insider bargain on wage issues to what Casey (1999) calls a ‘broad insider’ bargain in which unions and employers bargain (p.179) over issues affecting other groups. In its most expansive form, a social pact may include an ‘augmented social dialogue’ (of the Irish type) in which the ‘outsiders’ (in this case organizations of the unemployed) become parties to the bargain themselves.

If we take the objectives of these pacts, and consider their final goals, we can construe them analytically in terms of the constitution of two types of coalition—distributional coalitions and productivity coalitions—and the attempt to forge effective and enduring political and functional linkages between them. Although differing, sometimes markedly, from one country to another, these pacts derive precisely from their common attempts to link negotiations over both the formal and informal welfare states (i.e. formal welfare programmes and the labour market component of the social wage) with more general policies to bolster competitiveness. Some countries (the Netherlands, Denmark, and Portugal) are simultaneously building both types of coalition—although inevitably some are more successful than others in forging the complex links between them. Others have been relatively successful in creating a productivity coalition (Italy) but have been less successful—although much progress has been made—on the distributional side. Italy, for example, is struggling to find the distributional support for a further reform of the pensions system—something made rather difficult by the strength of pensioners in the labour movement. Ireland, by contrast, has put in place a broad distributive coalition, but the formal productivity bargain remains weak. We can hypothesize that the most enduring examples of competitive corporatism will be those that create the most complete coalitions of both types and forge the most functional links between them —functional, that is, for a politically acceptable and legitimate trade‐off between equity and efficiency.

Prior to proceeding, it is important to note that the potential sources of tensions within these coalitions cannot be reduced to divisions between traded and non‐traded capital and labour (Frieden 1991; Garrett and Lange 1995). Although such a division may make theoretical sense, in practice it is criss‐crossed and may even be overridden by other, more conventional conflicts, some of which will be latent, others more explicit. This is partly because even a sophisticated analysis of the politics of traded/non‐traded divisions such as that of Schwartz (1997) assumes that the main external influence is that of exposure to increased trade competition. Whereas in the European case there is in reality a much more complex mix of pressures, as illustrated in Section 1 above. The ways in which external pressures interact with and are filtered by domestic institutions and challenges to the welfare status quo rule out simple dichotomies in favour of more complex tensions between white collar and blue collar, service sector versus manufacturing, employed and unemployed, ‘insider’ and ‘outsider’ employees. Social pacts in the 1990s are highly vulnerable to such tensions, yet in unpredictable ways, since they (p.180) rarely find organizational expression in terms of conventional capital/labour, traded/non‐traded associational or party political terms. To one extent or another, the new social pacts attempt to bridge these divisions with complex strategic trade‐offs, selective incentives, and solidarity deals, some ad hoc and transitional, others longer term and institutionally embedded. In certain cases (e.g. the Irish) even representatives of the socially excluded (the anti‐poverty lobby) have also become part of the bargaining equation.

New Social Pacts in Practice

All of the social pacts that have emerged since the mid‐1980s seek to combine wage moderation, the quest for lower social charges and greater flexibility of work conditions. The latter two objectives in particular imply (a) reform to social security systems (often with greater equity as a goal) and (b) a response to employers' demands for new productivity trade‐offs. The latter will involve, for example, an exchange of shorter working hours or the maintenance of employment levels for greater freedom of labour use, in terms of hours and deployment of workers. To this extent all the pacts contain both distributive and productivity‐linked innovations. But this does not necessarily mean that they will be based on stable or enduring distributional or productivity coalitions.

Creating or consolidating the first of these requires that the traditional social partners break with their defence of conventional insider privileges and entitlements, and accommodate the needs of other social groups, while building a productivity coalition demands a new deal between capital and labour based on a negotiated strategy of industrial adjustment.

Building a distributional coalition requires policies that are inclusive of former labour market ‘outsiders’, via, for example:

  1. a national incomes policy that has a degree of flexibility at lower levels so that less productive workers are not priced out of the labour market;

  2. the relaxation of high levels of security for full‐time core workers, in return for greater protection for peripheral (although increasingly central) temporary and part‐time workers, as in the Dutch 1996 central agreement on ‘Flexibility and Security’ (see below for details);

  3. a redesign of social security systems to prevent implicit or explicit disentitlement, in relation to two groups in particular: women workers (who are often discriminated against by male breadwinner‐oriented social security systems); and those not in permanent, full‐time employment who may also be discriminated against in terms of entitlements;

  4. and a parallel redesign of social security systems to allow a guarantee of access to skill acquisition and social services at any point during the life cycle, especially through education and training.

(p.181) Constructing a parallel productivity coalition requires, at least in principle:
  1. a shift away from legislated or rule‐governed labour market regulation to negotiated labour market regulation, e.g. in minimum wages, as has occurred, for example, in the Irish and Portuguese social pacts;

  2. the development of decentralized components within the national wage bargaining system that provides employers with the possibility of striking productivity‐linked deals;

  3. the agreement on consultation through firm or company concertation that allows for a negotiated adjustment to new demands from markets or technologies;

  4. a shift away from adversarial industrial relations towards a more consensual model;

  5. and the joint implementation of training mechanisms and priorities.

It is important to note that key elements of both types of policy objectives can be found in all of the social pacts considered below. But in only certain cases are both types of coalition strongly present behind such deals.

The chart below summarizes roughly the strength or weakness of these coalitions in the countries examined here.


Distributional coalition

Productivity coalition
















The ‘Dutch Miracle’

Perhaps the most interesting developments have been in the Netherlands where, as a result of monetary stability, budgetary discipline, and social security reform, something of a ‘model’ attracting policy emulation in other countries has begun to emerge (for the most extensive analysis, see Visser and Hemerijck 1997). In the Netherlands, the early and mid‐1980s witnessed one of the most severe employment crises in Western Europe, with unemployment reaching 15.4 per cent in 1984. This was attributable in part to the immobilism in industrial relations between the early 1970s and early 1980s (which followed twenty years of centrally guided, corporatist governance before 1968), a period during which both trade unions and employers rejected a state‐led system of incomes policy. In the 1970s, when the twin oil‐price shocks fuelled inflation and rising unemployment across Western Europe, the negative consequences for the Netherlands were compounded by a breakdown in relations between the social partners that helped produce a vicious cycle in which real labour costs accelerated ahead of productivity gains, profits deteriorated, firms substituted capital for labour or relocated (p.182) to low labour cost areas, and unemployment rose spectacularly (Hemerijck and van den Toren 1996).

Since 1982, however, the picture has been quite different. In the early 1980s, the Dutch social partners responded to the crisis the economy was then experiencing in similar ways to their Irish and Italian counterparts just over a decade later. Since the signature of a national social pact (the Wassenaar accord) between employers and trade unions in November 1982, there has been a return to corporatism, but a more flexible and responsive bipartite rather than tripartite version, one involving a considerable degree of decentralization in wage bargaining that is compatible with intensified competitive constraints. This has provided the basis for industrial relations peace, wage moderation, and an ongoing process of labour market reregulation that has helped to keep wage costs down, prevent increasing inequality, and boost employment (above all in part‐time and temporary contracts) to the point where the present 4.5 per cent unemployed is one of the lowest in the OECD area. Between 1983 and 1993, job growth (at 1.8 per cent per annum) exceeded both the OECD and EU averages (Hemerijck and van den Toren 1996). The 1982 agreement was consolidated in 1993 at a time when a new rise in unemployment began to place the consensus under pressure. In the 1993 accord, there is provision for greater decentralization of bargaining to company level within the overall coordinated structure—described by Visser (1996a) as ‘centralized decentralization’.

In addition to wage moderation, over this period, concertation has also produced agreements on social security contributions, work sharing and industrial policy, training, job enrichment, low‐wage levels for low‐skilled workers, the development of ‘entry‐level’ wages and, most recently, the 1995 ‘flexicurity’ accord in which rights for temporary workers have been strengthened in return for a loosening of dismissal protection for core workers. This consolidates the general trend in Dutch reforms to build a distributional coalition by breaking down the traditional barriers between labour market insiders and outsiders. In the 1980s, a relinking of the minimum wage and benefits to wage inflation was coupled with a decision to boost labour market participation by closing down easy exits from employment (early retirement, sickness, and disability schemes) and generally minimizing the incidence of moral hazard. Low‐income workers have been compensated for low wages by targeted tax breaks. Trade unions rescinded their opposition to the creation of part‐time and temporary jobs and became the champions of such workers, bridging the gap that usually divides the ‘insider’ from the ‘outsider’ workforce. Hourly wages for such workers have subsequently been bargained to the levels enjoyed by full‐time workers: thus, employers can recruit such workers to bolster flexibility, but not as a means of following a low‐price production strategy based on wage exploitation. The 1995–6 ‘flexicurity’ accords mentioned above have guaranteed pension and social security benefits to all part‐time and temporary employees.

(p.183) There has also been a recent revival of tripartite corporatism, with the reorganization of Dutch employment services along tripartite lines in 1991 and calls by the tripartite Social and Economic Council (which has been marginalized by the shift to bipartism in recent years) for a renewal of national consensus creation, involving government, employers, and trade unions in the face of European integration and international competition.

The productivity elements in the Dutch pact would seem to derive mainly from the positive consequences for economic growth and labour market flexibility stemming from the distributional bargain. Most importantly, government intervention—an essential, albeit ‘shadowing’ influence, accord‐ing to Visser (1998)—has been essential in helping break the blockage in negotiations on social security reform, an area where it has proven much more difficult to find agreement on changes to the amount and duration of benefits. The whole focus of social security, as a result, has been shifted away from providing protection through passive income support towards strengthening incentives for labour market participation.

Measures encouraging beneficiaries to actively seek work and reducing labour costs in general (and those of unskilled workers in particular) have been prioritized. Pay flexibility is being enhanced by an agreement on the part of employers and unions, encouraged by government, to close the gap between the legal minimum wage and minimum wages set in collective agreements. A new Social Insurance Organization Act (OSV), in force since March 1997, has shifted the governance of social security laws from bipartite Industrial Insurance Boards (run by the social partners) to a tripartite national public authority and their implementation to private organizations. This it is hoped will help minimize the flows of workers into social security schemes (OECD 1998d). This removal of the social partners from part of the social security system administration followed a unilateral privatization of the sick‐leave scheme in 1994. It should be acknowledged that a weak spot in the Dutch system remains its dependence on disability benefits as a cushion for unemployment and the extension of subsidized employment programmes to compensate for the lack of jobs for the unskilled at prevailing wages. Despite the successes of the so‐called ‘Dutch miracle’, broad unemployment (a measure which adds those on such schemes to the registered unemployed) is still a massive 25 per cent of the broad labour force (OECD 1998d: 6).

The Dutch case, then, as Visser describes it, is one of corporatism, but not one that is ‘against the market’. Rather, it is a system of ‘corporatism and the market’ (Visser 1996a) in which monetary stability, budgetary discipline, and competitiveness have been achieved, while also reforming social security and boosting employment. It is important to note the absence of a master plan —which is also true of our other cases here. Rather, via a process of what Visser and Hemerijck (1997: 150) call ‘learning and puzzling’—a ‘cumbersome, uncertain and politically risky process of renegotiation over guaranteed social rights’—the Dutch social security system has been transformed. To its great (p.184) credit, the increase in social inequality that has occurred in Britain, and the breakdown in consensus and large‐scale social unrest suffered, for example, by France, have been avoided. En bref, it is perhaps the most advanced example of ‘competitive corporatism’ in Western Europe.

Ireland: Coalition Building and Incomes Policy in the Celtic Tiger

In the mid‐1980s it was feared that Ireland was consigned to a vicious circle of weak economic performance, increasing public sector deficits and debt, and rising unemployment. The social partners hammered out their first tripartite response to the crisis in 1986, leading to the first neocorporatist deal in 1987 in the form of the Programme for National Recovery (1987–90). The PNR was negotiated amidst a crisis in public finances with government debt peaking at 117 per cent of GDP. The success of the PNR led to the 1990 PESP—Programme for Economic and Social Progress (1990). Subsequent pacts negotiated in 1990 (Programme for Competitiveness and Work), 1993, and most recently in 1996 (Partnership 2000), were linked to a centralization of wage bargaining and a growing willingness to address tax, education, health, and social welfare issues via central negotiation as well (O'Donnell 1998). The emphasis of all four agreements has been on macroeconomic stability, greater equity in the tax system, and enhanced social justice. Specific innovations include inflation‐proof benefits, job creation (in manufacturing and international services sectors), and the reform of labour legislation in the areas of part‐time work, employment equality, and unfair dismissal. Nevertheless, the labour market remains characterized by a high degree of rigidity, with unemployment and poverty still exacerbating the problem of long‐term unemployment (Rhodes 1995).

Like several of the other case studies here (Spain, the Netherlands, Italy), Ireland has witnessed a remarkable transformation of its industrial relations system over the last ten years or so. It has made a transition from one bearing a strong resemblance to the British adversarial system, to one with strong corporatist elements, capable of delivering low inflation, a high rate of economic growth, and widespread innovation in social security, taxation, and labour market policy. There has been a gradual expansion of bargaining to include a wide range of social groups, creating, at least formally, one of the most inclusive distributional coalitions among the countries in this study. But problems of unemployment and social exclusion have still to be effectively tackled. Also, despite a growing convergence of opinion on the need for a ‘high road’ competitive strategy, and attempts to extend the neocorporatist consensus beyond distributive issues, little has been achieved so far in fostering industrial relations reform or in building a national productivity coalition. A fragmented industrial structure, with a large number of small firms alongside multinationals which dominate in particular sectors, has made reaching a consensus on a national strategy of industrial partnership (p.185) (rather than firm‐level, human‐relations based strategies) difficult to achieve (Gunnigle 1997; Roche 1998).

Nevertheless, there do seem to be solid corporate foundations to Ireland's economic progress in recent years, based on an active diffusion of human resource management innovations across the country (McCartney and Teague 1997). For some commentators, this process has been facilitated enormously by the stability brought to the economy by the national incomes policy agreements. By introducing in the early 1990s a local bargaining clause (allowing management to tie negotiations to local labour market conditions) while maintaining wage moderation at the national level, this has encouraged employers to innovate in flexible work practices, employee status, and social organization (Taylor 1998). In this view, then, the distributive bargain has had important implications for productivity gains, even in the absence of an explicit productivity coalition (see Taylor 1996; cf. Durkan 1992). The most recent national bargain (Partnership 2000) explicitly addresses this issue by confronting issues of product development, training, and the introduction of new work and organizational patterns. A National Centre for Partnership has subsequently been established to develop partnership at the enterprise level by benchmarking and disseminating best practice (O'Donnell 1998).

There are dissenting voices though. Roche and Geary (1999) maintain that although collaborative production is undoubtedly significant in Ireland in the 1990s, exclusionary forms of decision making can be shown to dominate the postures of establishments towards handling change. O'Donnell (1998: 93) agrees that the challenge is now to build greater links between the distributive and productivity side of the bargain, using the atmosphere of solidarity to improve technology, products, marketing, and training in indigenous Irish firms. But the distributive side has also been criticized. A rather sceptical evaluation of these pacts has concluded that they have not delivered much when compared to Scandinavian ‘social corporatism’. Main objectives such as employment creation have not been achieved, tax reforms have been only incompletely implemented and there has been little serious consideration of how training is linked to the wage‐formation system or to how it should be developed as a collective good (Teague 1995). O'Donnell (1998) responds by pointing to trends in social and health spending and progress on employment legislation and in creating wage bargaining structures that work against greater income inequality. Meanwhile, social partnership agreements underpin the credibility of a non‐accommodating exchange rate policy. As a result Ireland has escaped most of the negative effects of Britain's business cycle, while sustaining a higher level of social solidarity. Government commitments across a range of issues have been respected, including increasing resources in education, public housing, and health care, while also extending social protection to part‐time workers and introducing legislation on unfair dismissal, employment agencies, and conditions of employment.

(p.186) Until 1996, these agreements were largely tailored to the demands of the insider unionized sector and the main emphasis was on protecting the post‐tax income of the employed ‘insiders’ (Kavanagh et al. 1997). The aim of the 1993 PCW sought to innovate in this respect and reduce taxes on low‐income workers and raise the income threshold at which higher rates of taxation come into play. However little real progress was made in this respect. Single workers in 1996 were still liable for the top rate of tax at four‐fifths of average male earnings while the married (spouse not working) become liable for the top rate of tax when earning just 1.5 times average male earnings (Taylor 1998). In a significant step forward ‘Partnership 2000’ (1996–7) was negotiated with a larger number of partners, including the Irish National Organisation of the Unemployed and other groups addressing the problems of social exclusion, includes a National Anti‐Poverty Strategy, and was much more oriented to issues of poverty and industrial democracy than the previous PCW. It responded to union demands for a radical tax reform that would provide tax relief for public sector workers, a new flexible pay agreement to benefit the low paid, and initiatives to encourage profit‐sharing in companies. With regard to welfare state reform, it introduced some major initiatives on public service provision, especially in the areas of health care, improving flexibility in the deployment of resources, and the use of performance measurements. In a separate deal, the growing problem of union derecognition was addressed and a landmark deal reached between employers and unions.

Although broadening the bargain has been a key element in sustaining the Irish pact, strengthening the associational base has also been important. Hardiman (1988) showed how attempts at national agreements in the 1970s failed because of an absence of a dominant social democratic party, cohesive employers' organizations, and a centralized trade union movement. But in the 1980s and 1990s there have been union mergers backed by state grants, helping to create a union movement capable of engaging in political exchange across a wide agenda, including pay, taxation, social policies, public finance management, and EMU convergence (O'Donnell 1998). As mentioned above in exploring the logic of the new social pacts, O'Donnell also argues that the absence of a strong social democratic party may no longer matter. A narrower ideological distance between the political parties than in the past tends to encourage stable and long‐run agreements between economic interests, primarily by reducing the likelihood that a change of government will cause a sharp reversal of economic policy.

Italy: Steps Towards a New National Bargain

In the Italian case, negotiations in the early 1990s that initially focused on reforming Italy's automatic wage‐indexation system—the scala mobile—were extended to include the rationalization of bargaining structures and the reform (p.187) of union representation in the workplace. In the significant agreement of July 1993, the scala mobile was abolished and a far‐reaching reform of incomes policy and collective bargaining was achieved. Henceforth, biannual tripartite incomes policy and collective agreements were to set macroeconomic guidelines and establish a framework for incomes policy. Sectoral agreements were to be signed at the national level on wages (valid for two years) and conditions of employment (valid for four); and enterprise level agreements were to be concluded for four years and negotiated by workers' representatives. The latter innovation created a new form and level of representation within the firm—Rappresentenza sindacale unitaria—in which two‐thirds of representatives were to be elected by the entire workforce (and not just union members as before) and one‐third appointed by representative unions.

This emphasis on the associational basis of the agreement has played an important part in consolidating the Italian social pact, forging an important link between the workplace and higher levels of union organization (Regini and Regalia 1997). From late 1998, legislation has been developed on the basis of trade union proposals to consolidate the bargaining system and strengthen the role of the major unions in it. The main aim of the proposals, which employers strongly support, is to prevent the further fragmentation of wage bargaining and to marginalize breakaway and small unrepresentative organizations. By reregulating the relationship between representation, representativity, and the enforcement of collective agreements, unions hope to guarantee union democracy for workers but also consolidate their own positions. A major aim is a rule to ensure that only unions that represent an average of 51 per cent of workers (calculated through a combination of election results and union membership) should be able to sign national sectoral agreements. These will be enforced by law across the whole sector to which they apply (EIRR 1998). Centralization—and cross‐sectoral coordination of bargaining—will henceforth be easier to achieve.

Apart from contributing to Italy's fulfillment of EMU entry conditions —which it has achieved by effectively taking inflation out of the labour market—the social pact signed in 1993 also covered a number of other areas. In broadening its areas of concern, the weak associational basis of the pact was strengthened. These included new measures to compensate those laid off in restructuring, improvements to the training system (boosting internal flexibility), the legalization of temporary work agencies (improving external flexibility), assistance for the unemployed to enter the labour market, and improving the general performance of Italian industry. The establishment of these principles of intent in 1993 led to the so‐called ‘Treu package’ of reforms on labour market flexibility in 1997. Although not as extensive as employers wanted, these reforms simultaneously legalized temporary work agencies as well as the use of fixed‐term and part‐time work contracts, while also seeking to protect or improve the rights and entitlements of such (p.188) workers. Important innovations were also made in the national training system to improve the quality of training, improve access to training, and promote the role of companies in shaping training courses.

One downside of the Italian deal is that the active labour market policy that accompanied the incomes policy of 23 July 1993 has not had much effect. This is due to the lack of effective mechanisms for policy implementation in Italy. This situation may begin to improve, however, with the decentralization of employment services introduced from 1997, which seeks to improve the operation of job placement and pro‐active policies at the level of the regions and provinces. Although the evidence of success is so far limited, territorial pacts (patti territoriali) and area contracts (contratti di area) introduced between 1995 and 1997 should also assist in combatting unemployment, by linking private and public actors via concertation in pooling programmes, resources, and structures to promote economic growth and job creation (Ferrera and Gualmini 2000). Unemployment—at 12 per cent nationwide and rising to over 20 per cent in the south—remains Italy's number one problem. On the other hand, as noted by Negrelli (1997), the possibility of successfully combining human resources management with industrial relations has already been realized in Italy. Negrelli maintains that an important degree of complementarity derives from the possibilities for mutual enrichment by these two different systems for organizing the workplace. The most beneficial effect has been a trade‐off between job security and flexibility at work, beginning in public sector companies and spreading more recently to private ones. There, unions moved from a determined defence of rigid working practices at all costs to a policy of flexible working through collective bargaining, avoiding the dangers of deskilling. The emphasis in Italy has been on functional flexibility rather than numerical or wage flexibility.

Thus, from the industrial relations crisis in the 1970s, Italy has been edging towards a new productivity coalition in which an uneasy truce between employers and unions has led to important labour market innovations. But it has also become the forum for bargaining the future of broader aspects of social regulation. To this extent, the distributive elements in the new Italian bargain are also being developed, although the future of this side of the bargain is now in doubt. The most significant step in this regard was the agreement signed between the unions and the government on pension reform in May 1995 (the employers abstained). The bargain was put to referendum in the workplaces by the unions where it obtained a hard‐won but significant majority backing. This consensus was achieved at the expense of a more radical reform (it retained the previous pension system for elderly workers and introduced, whether partially or in full, a more rigorous system for less senior workers). But it also, avoided protracted industrial dislocation, as occurred in the case of the Juppé reforms in France (Regini and Regalia 1997). Also prevented were any adverse knock‐on effects on other (p.189) aspects of the social pact, despite the fact the implementation of the incomes policy has favoured an increase in company profits at a time of reductions in purchasing power.

It remains to be seen whether the system can survive the current challenges. The Italian pact withstood the introduction in 1996 and 1997 of ‘one last push for Maastricht’ austerity budgets as well as discontent with constrained pay agreements in various powerful sections of the labour movement (not‐ably the metal workers). And the fact that the October 1997 governmental crisis over the 35‐hour week and pension changes provoked by the left‐wing Rifondazione comunista only shook, rather than shattered, ongoing negotiations between the government, trade unions, and employers, provided grounds for optimism. So too did the distance taken by the trade unions from Rifondazione when it brought down the Prodi Government in 1998. Major reforms have been implemented which realize both efficiency and equity gains in the social security system. In pensions, despite the complicating—and delaying—concessions made to Rifondazione comunista, special privileges were eliminated for a whole range of public sector workers. The possibility of retiring with a full pension after 35 years of contributions, regardless of age, was terminated (although this innovation is being gradually phased in); the pensions of high‐income groups were curbed; and self‐employed workers henceforth have to shoulder a larger share of the costs of their pensions. With Rifondazione now outside the governing coalition, further reform in eliminating the many remaining inequities in the system should theoretically be possible. Nevertheless, the D'Alema Government encountered major resistance from the unions who wish to draw a line in the sand over pension reform. Their predicament—with pensioners forming around half of their membership—reveals the ongoing institutional fragility of the Italian case.

In sum, there have been major innovations in Italy, in terms both of institutional change and policy reform, and EMU entry has been guaranteed, as in the Irish and Portuguese cases, by the commitment of steadily more cohesive trade union organizations to an incomes policy pact. But as in Ireland—and unlike in Portugal—success on the employment front has not been great, and building a distributional coalition that can bring in the large number of unemployed younger people seems to be an insuperable challenge. High levels of unemployment—albeit among different categories of workers—in both countries remains the Achilles heel of their respective social pacts.

Portugal and Spain: Converging Southern Models?

Some observers suggest that, in the absence of adequate levels of human capital and physical infrastructure, these countries face a stark choice, neither of which is without high costs, between two ‘models’. On the one hand is a so‐called ‘European model’, entailing convergence in terms of entitlements, employment protection, and the expansion of an efficient, capital (or R & D) (p.190) intensive high‐wage sector. The disadvantage of such a strategy is that it may well hasten the demise of low productivity firms in Portugal and lead to high, long‐term unemployment rates. This would bring that country into line with Spain where growth based on productivity has prevented the absorption of the unskilled workers coming from agriculture (Marimon 1997). The other alternative would be an ‘American’ or Anglo‐Saxon model which would exacerbate unequal income distribution and entrench a dual labour market with very low‐wage sectors in otherwise affluent economies (Barry, Bradley, and McCartan 1997).

In order to embrace the ‘high‐wage’ alternative, while reducing its costs, a coordinated system of wage determination would seem essential to minimize the impact of high productivity growth coming from a relatively small section (in terms of employment share) of the economy. This is one more reason for pursuing the ‘corporatist path’ in these countries if the ‘European model’ is chosen. Portugal, like Ireland, has consciously sought to follow the ‘high road’ since the early 1990s, even though its industrial structure makes that difficult. Even if its productivity coalition is weak and that side of the national bargain underdeveloped, it has at least built a strong distributive coalition behind a national strategy of adjustment. Spain embarked on the same path much earlier but until recently has been unable to build either type of coalition.

In the Portuguese case, the period until the mid‐1980s saw attempts at incomes policy and concertation, but an inadequate institutional framework undermined them. Particularly problematic—as in the Italian case—was the absence of strong authority on the part of the trade unions and the need for a strengthened role for the state, making it a more reliable and consistent bargaining partner (Rocha Pimentel 1983). In that period, the PSD–CDS (Social Democrat–Christian Democrat) coalition government was unable to control growing macroeconomic imbalances and the country experienced a severe balance of payments crisis. High inflation coincided with a commitment to full employment. In the mid‐1980s, however, inflation was reduced even if public sector imbalances could not be tackled. Also as in Italy, it was the commitment to eventual EMU membership after 1990 (under an enlarged‐majority PSD government) that led to an emphasis on an anti‐inflation, lower public debt strategy. At the same time there developed a broad consensus on the need for a new distributional coalition linked to the country's aspiration for full EMU membership and the macroeconomic stability it was imagined this would bring.

There is thus a broad consensus linking the major parties and trade union and business groups on increased economic and social cohesion, including an active employment and social policy to help avoid the dependency of particular groups/geographic areas on social transfers (Torres 1994). Reflecting this consensus, and regardless of the continuing fragility of trade union structures (p.191) (Stoleroff 1997), there have been five tripartite pacts since 1987 (the latest was signed in 1996) focusing on incomes and social policy and labour market measures. They have been presented from the outset as critical for improving the competitiveness of the Portuguese economy and for integration into EMU. The agreements have been very wide‐ranging, covering pay‐rise ceilings, levels of minimum wages, easing regulations on the organization of work (rest, overtime, and shift work)—i.e. internal flexibility—on the termination of employment contracts (external flexibility) and the regulation of working hours. Broadening the bargain has been Portugal's means of compensating for weak associational structures.

The critical difference with Spain was that while Portugal's reforms were slow and labour protective (building the basis for a distributional coalition —with productivity elements—that could be linked to broader economic goals), Spain's were faster and labour‐compensating (Bermeo 1994: 198). This was partly for constitutional reasons: whereas the Spanish Socialists began liberalizing labour markets in 1984, Portugal's Constitutional Tribunal blocked the Portuguese Socialists when they tried to do the same in 1987. This meant that Portugal started restructuring its economy after having joined the EC (and when intra‐European transfers were beginning to flow), while Spain began earlier in a different economic climate. This prevented the creation of either a distributional or a productivity coalition: indeed, during the late 1980s and 1990s, employment and social policy issues became the object of intense conflict at a time when they were increasingly the object of consensus in Portugal. Unemployment rose in Spain—accompanied by a massive increase in temporary contracts once these were liberalized in the 1980s—while insiders kept their protective privileges and wage levels (Rhodes 1997c; Toharia 1997). In Portugal, by contrast, insider barriers were reduced under a wages versus jobs trade‐off. This helped reduce the persistence of unemployment in the face of various demand, productivity, and labour‐supply shocks, while also providing foreign investors with lower labour costs and strike rates (Bermeo 1994: 198–206; Bover, Garcia‐Perea, and Portugal 1997; Castillo, Dolado, and Jimeno 1998).

In Portugal, social pacts have played an important role in ensuring this result. Following the pacts of the late 1980s, the 1990s have seen a strengthening of both their distributive and productivity elements. The 1992 agreement, for example, was broadened to cover social security issues, including improvements in health insurance reimbursements and tax relief on housing. The 1996 short‐term agreement (consolidated by a ‘Strategic Social Pact’ in 1997) also implements an incomes policy, linking wage rises to inflation and productivity forecasts (with scope for variation within margins at lower levels) (Campos Lima and Naumann 1997). Union agreement has been ensured by a commitment to training and employment placement services, to the enforcement of various rights for part‐timers, and a broad programme (p.192) of working time reduction, with the introduction of a 40‐hour week in two stages. The new agreement also covers numerous social security issues, including the reduction of social security contributions for those employers belonging to employers' associations (a measure clearly conceived, as in the Irish case, to strengthen organizational cohesion) and the introduction of a minimum income on an experimental basis. In addition, income tax for those on low incomes will be reduced, a more favourable tax treatment will be made of a variety of health and education benefits, and old age pensions will also receive more favourable tax treatment. The government's commitment to improve the equity of the social security system has been honoured, with the latest (mid‐1998) innovation taking the form of legislation to raise the level of state retirement and contributory pensions, requiring significant changes in the way the system is financed.

Recent developments in Spain reflect a general shift away from the pacts based on the protection of insider rights that emerged from the Franco period (Encarnación 1997), towards a more broadly based pact mirroring those struck in Portugal and Ireland. This reflects a commitment on the part of the state to reform in the labour market, demands from employers for greater flexibility, and the need of unions to strengthen their own organizational base. Given low membership and a correspondingly low level of financial resources, and their need for the legitimacy that bargaining with the state can confer on them, the incentives for union involvement are high. Innovations in wage bargaining have also been important. As in the Italian case, these reflect, as argued by Pérez (1999), a recognition by employers, unions, and government that a new wage bargaining structure—containing decentralized flexibility within a national framework—is essential for containing inflationary pressures under EMU.

The most important step so far has been the 1994 ‘Toledo Pact’ signed by the government and the trade unions, which included a focus on the rationalization and consolidation of the public social security systems. The pact has facilitated subsequent deals on labour market flexibility and pensions, as well as—more recently—the first sectoral agreements on reduced working hours (in savings banks) and talks on incentives to encourage part‐time working. Although more limited in content than many had hoped (and perhaps most important as a symbolic means of linking the unions to a centre‐right government's policy ambitions) (Chulià 1999), the pensions reform deal, struck between the government and the social partners in October 1996, made major innovations. These included the reduction in the number of special regimes (an equity increasing measure); an increase in the proportionality between contributions and benefits; the financing of health care and social services through taxes (so that contributions can only be used to finance contributory benefits); and the reduction of employers' contributions in order to foster job creation (Guillén 1998). The labour market reform of April 1997 (p.193) was also extensive, and saw the first major concession by Spanish unions to labour market outsiders when they agreed to a decrease in high redundancy payments (a stricture on employers inherited from the Franco years) in exchange for a reduction of insecurity for those working on temporary contracts. Bolstered by such progress, Spain too appears to be working its way towards an institutionalized pact, although the coalitional supports in this case remain particularly weak.

3. Conclusions

Although more weakly embedded in social and institutional structures than in the traditional corporatist countries of Northern Europe, the new ‘competitive’ corporatisms cannot simply be dismissed as short‐term tactical manoeuvres to improve EMU entry prospects or expedient combinations of nationalism and neoliberalism (cf. Streeck 1996). Nor, for reasons elaborated above, can they simply be seen as (mistaken) mechanisms for solving employment problems (cf. A. Martin 1997). It is certainly true that EMS membership and the movement towards monetary union have played a critical role in inducing and consolidating new consensual labour relations (cf. Teague and Grahl 1998: 5–6). However, while social pacts may not succeed in creating fully‐fledged, corporatist‐style, organized labour markets, they are frequently much more than short‐term pay bargains, and combine traditional incomes policies with wider and more innovative forms of social security and labour market reform. This makes them critical for linking macroeconomic objectives with microeconomic adjustment. They may also prove to be a precondition for a European‐wide expansionary policy, which as Martin (1997) argues will provide the real stimulus to employment creation that supply‐side reform alone, cannot deliver. At the same time, while competitiveness may be a key concern, it is not the overriding concern. These pacts contain important trade‐offs between equity and efficiency of the kind that have always characterized welfare states, even during their ‘golden age’, despite claims (e.g. Teague and Grahl 1998) that such trade‐offs are no longer possible. In fact, the new trade‐offs are often responses to the solidarity dilemmas and contradictions generated by those earlier bargains and may actually improve on them if older equity gaps are filled and new forms of disentitlement prevented.

We are witnessing a period of transition in which the market is clearly more important than in the past and in which international constraints and influences have increased. While domestically generated problems and solidarity dilemmas remain the key to understanding the contemporary politics of the welfare state, their interaction with globalization is complex (p.194) but when linked with European market integration and EMU deserve serious consideration in understanding the genesis of these pacts. Despite much uncertainty about where current trends are leading, we can be clear, at least, about the following. If globalization is important, there is little evidence that states have lost their capacity for designing and redesigning social welfare systems. Nor does globalization appear to be irretrievably unravelling established national social compromises. Indeed, in many countries it seems to be one factor among many in sustaining them, while in others it has encouraged new social pacts to emerge. Welfare states are not in deep crisis; nor are they losing support from publics. Yet the creation of new distributional coalitions seems essential if the requisite reform is to proceed. No doubt, those coalitions are shifting, and their degree of support for traditional welfare arrangements is changing: and as a result, a process of adjustment and experimentation is occurring in the form, financing, and orientation of welfare provision. In addition, the nature of such coalitions is becoming more complex, partly because of the links being forged with parallel and overlapping productivity coalitions. But neither deadlock nor neoliberal convergence is the result of these developments. What we are witnessing instead is a concerted process of adaptation in which the core principles of the European social model are being sustained.

Thus, there may well be a European ‘Third Way’ (or at least a series of national ‘third ways’) at the dawn of the twenty‐first century. In many countries, an elaborate social, economic, and institutional compromise is being found within pragmatic and productivity‐oriented social pacts. Even in those countries that have failed thus far in their attempts to replace contested with concerted relations between public and private actors, a combination of strong external pressures and domestic demands for policy innovation may lead from experimentation with new organizational forms to their consolidation if the alternatives are deadlock and a blocked process of welfare reform. Capitalism is being liberalized but not unbound. Negotiated modes of adjustment are prevailing over unilateral implementation of welfare reform.


() I am grateful to Jonathan Zeitlin for his very useful comments on an earlier version of this article.