In the early 1980s, the dominant preoccupation of European policy-makers was with `Eurosclerosis'. Rising unemployment led to a policy emphasis on supply-side measures to encourage real wage moderation, labour market flexibility, a strengthening of competitive forces and pruning of public sector deficits. So long as labour markets in Europe were characterized by real wage rigidity, it was argued, unilateral or coordinated demand expansions would be offset by increased nominal wages.
In Discussion Paper No. 317, Research Fellow Louka Katseli examines how political and economic pressures led to the single market initiative and how the corporatist evolution of European decision-making may threaten its political support. 1992, she argues, reflects the Commission's response to disaffection among industry and labour at Europe's inability to keep pace with its competitors, exacerbated by a deflationary bias in macroeconomic policy encouraged by the EMS.
The new policy preoccupation, according to Katseli, is a Europe-wide strategic trade policy designed to secure a competitive advantage in oligopolistic industries, especially those with strong demand growth, high R&D and increasing returns to scale precisely those sectors where Community-based firms have recently lost market share. The presence of significant economies of scale allow greater international specialization and cross-country mergers and acquisitions within the EC to lead to expanded production and reduced average costs. Such sectors, which include electrical goods, motor vehicles, transport equipment and office machinery, account for about 55% of EC industrial production.
The heavy concentration of production and employment in these sectors, primarily in the larger Community countries, helped these interests in their quest for completion of the internal market. This concentration also means, however, that the gains from market integration will be unevenly distributed among EC members. In order to prevent increasing friction as member states attempt to create and protect `national champions' in key industries, the Commission has had to assume a powerful role as a regulator, a mediator between governments and a development agency for the backward regions of the Community, which are more likely to lose out from market integration.
What is now emerging, Katseli argues, is a `Eurocorporatism', in which conflicts are resolved through close intermediation between the Commission, business interests and the larger country governments. She identifies several sources of potential conflict within the EC in the 1990s: between the financial sector and monetary authorities over macroeconomic policy stance; among the larger industrialized country governments over industrial restructuring and location; between the countries that gain and lose from market integration; and between the Commission and national governments over jurisdiction. The corporatist evolution of EC decision-making will be important for labour and the smaller member states, Katseli warns, as they seek more equitable representation. Unless issues of democratic participation and equitable distribution are seriously addressed, conflicts over the economic and political outcomes of 1992 may jeopardize its eventual success

The Political Economy of European Integration: From Euro-Sclerosis to Euro-Corporatism
Louka T Katseli

Discussion Paper No. 317, August 1989 (IM)