Institutional Reforms for Growth,

Employment and Social Cohesion:

Elements of a European and National Agenda

Robert Boyer
CEPREMAP, CNRS, E.H.E.S.S.
142, Rue du Chevaleret 75013 PARIS, France
Phone: +33 (0)1 40 77 84 28 - Fax: +33 (0)1 44 24 38 57
e-mail: [email protected]

November 1999

This paper has been prepared as background paper for the Portuguese Presidency of the
European Union. It deals with the theme : “The recent evolution of Institutional forms and the
reforms at stake to undertake this transition with growth, employment and social cohesion.
Institutional forms at European and national level and policy mix”.
 i
Institutional Reforms for Growth, Employment and Social Cohesion:
Elements of an European and National Agenda

ROBERT BOYER

Executive summary
1. After quite an uncertain period, some optimism about the future of Europe is observed, but it is far from
sure that this movement will go on several years ahead, without further and significant institutional
reforms. Three factors do motivate such a strategy. First, the EU has exhibited some weaknesses specially
in terms of Information and Communication Technologies (ICT), job creation. Second, a totally new
institutional architecture and style for economic policy are required, given the globalisation of finance, the
internationalisation of competition. Third, after the Amsterdam treaty and the subsequent processes
created by the European Councils, governments are facing a totally new institutional context, made both
of new constraints (a common monetary and exchange rate policy) as well as promising opportunities
(stimulate growth and employment by better co-ordination among national States via new processes).

2. There is a European paradox. Seen from outside, the EU appears to be quite an impressive economic
entity in terms of market size, quality of skills and diversity of scientific and technological knowledge.
Observed from within, major co-ordination problems have recurrently emerged and have to be overcome
if the member States want to reap and share the benefits of the closer integration implied by the Euro.
They concern the policy mix, the transformation of the bargaining arena between firms and wage
earners. The structural reforms and the dynamism and diversity of systems of innovation.

3. What broad development strategy should Europeans adopt in order to foster growth and fight against
unemployment for the next decade?
 A deepening of mass-production via differentiation by quality and innovation seems within European
reach, even if it is no longer the most promising strategy.
 The revolutionary impact of ICT has been mitigated in Europe by the legacy of post-world war II
institutions, even if some countries have been quite efficient in coping with this challenge.
 Given its traditional strength and variety of academic systems and its concern for the training of
workers, the EU could be at the forefront of a Knowledge Based Economy (KBE)…but probably the
nature and density of relations between research and economic activity should be reconsidered and
extended.
 A welfare reform driven development regime would be quite adequate to the old continent: the
movement towards gender equality could benefit both production and demand and help in solving the
problem of an ageing population.
 Last but not least, some regions of Europe are probably in a good position and able to cope with a
finance led regime, with highly specific consequences upon the adaptation of industrial relations and
State regulations.

Probably the emerging development regime will borrow some components from most if not all of these
ideal models. And this perspective opens to a significant national and local variability in the institutional
reforms required to promote a steady and job creating growth.

4. The report argues that a recovery of investment is quite essential for employment performance, but this is
not at all sufficient since capital formation has to be directed towards (and governed by) smart
organisations that propitiate interactive and permanent learning and are inserted into regional, national
and international networks. But given the large diversity of national institutions, benchmarking of best
practices should be used carefully: more adaptation than pure adoption, innovation more than simple
 ii
replication. In this respect, European initiatives should respect one of the old continent major assets: the
large diversity of national innovation systems that may provide a lot of adaptability and potential
economic performance at the European level.

5. The report proposes four general orientations for institutional reform.

 The quality of the policy mix could be significantly improved by a relational approach, i.e. if all the
relevant actors (the Central Bankers, Ministers of finance, business associations, unions,…) could
exchange a lot of information about their analyses, objectives, intentions and decisions,. This could
take place within the macroeconomic dialogue proposed by the Cologne Council.
 The Community and European level co-ordination should be restricted to the only domains where a
large and significant spill-over flows from one country to another. The various methods available
(harmonisation at the European level, ad hoc co-ordination process, general set of rules governing
national decisions,…) should be carefully assessed since they are unequally efficient according to the
size of externalities, the administrative costs involved and the context.
 Within Euroland, contrasted trajectories for employment patterns and evolutions coexist. Thus, there
is a scope for bargaining among social partners in order to negotiate labour contracts that are
structurally compatible with the single European monetary policy. The last decade suggests that there
is no single best way, since both national employment pacts and a large decentralisation of wage
negotiation seem to deliver a variable mix between employment creation and objectives of social
justice. (According to the international specialisation, social legislation and political configuration,
solutions to unemployment do exist and should be seized by social partners and governments.)
 A “time for reform” fallacy has to be resisted against. Why make unpopular reforms when the
macroeconomic context is so good that public opinion and most government think: “the crisis is over,
why bother?”. Conversely, when a major recession or structural crisis burst out, it is generally too late
to implement the reform. Thus, the present recovery should be used in order to decide and implement
the most necessary reforms and not to yield to the easy strategy “wait and see”.

6. How could these general ideas be implemented within the European agenda for the coming years? By an
ordered flow of reforms in order to transform a short run recovery into a medium-long term growth. By
chance, the complex architecture of the Amsterdam treaty, the Cardiff, Luxembourg and Cologne
processes addresses these issues, but they are so complex, interrelated and overlapping that their possible
inconsistencies by recomposing them and grouping all the mechanisms promote a coherent set of positive
spill-over from one domain to another. Thus, more clarity and efficiency could be brought into these
processes by recomposing them according to their contribution to one or another of the key strategies
presented earlier. The idea is to stop the various vicious circles that have generated a recurring and rising
unemployment and to promote one or another of four major virtuous growth circles.
 A relational approach to the policy mix may enhance a steady boom of the investment, directed
towards material and immaterial components, thus generating favourable expectations about the
stability of a given win/win strategy. This should be the major concern for ECB and Ministries of
finance.
 Organising the shift from ICT to KBE is another method for initiating a virtuous circle, built upon
innovation, growth and job creation. This strategy is up to Ministers of science, technology,
education, in close connection with social partners.
 Welfare systems if adequately reformed, may well be a major trump for Europe. A better
implementation of gender equality and the phasing out of early retirement could trigger a surge in
demand, innovation, and activity that would ease the financing of welfare systems. This is a matter
for social affairs Ministers and social partners.
 Coping with a finance led regime may be on the agenda of countries already specialised in financial
inter-mediation and business related services. The objective of the ECB should incorporate the
curbing down of asset inflation, social partners should negotiate profit sharing and pension fund
management and the supply of welfare could be progressively transformed by the privatisation of
some components. The task of Central bankers, Ministers of finance, and social partners could be to
define rules of the game ensuring the financial economic and social stability of such a regime.
 iii

The public opinion in each society may prefer one or another of these strategies. Clearly the subsidiarity
principle preserving national political preferences, is important indeed for the long run viability and
legitimacy of European integration.
 iv
Institutional Reforms for growth, employment and social cohesion:
Elements of a European and National Agenda

INTRODUCTION: IN RESPONSE TO THE NEXT DECADE'S CHALLENGES, IT IS TIME TO REFORM................1

The turning point of the nineties has pointed out some of Europe's recurring weaknesses of Europe...........................1
Cope with the complete reversal of the post-World War II institutional architecture......................................................2
European integration: work in progress…not at all the end of history............................................................................3

THE DILEMMA OF THE EUROPEAN UNION.............................................................................................................3

A potential economic giant…............................................................................................................................................3
…in search of a post-Amsterdam strategy…....................................................................................................................4
…facing severe and new economic and political co-ordination problems.......................................................................4

STRENGTHS AND WEAKNESSES OF EUROPEAN UNION......................................................................................4

From Fordist mass-production to Toyotism?....................................................................................................................5
The rise of information and communication technologies: a shift in the productive basis.............................................5
Towards a knowledge based economy?.............................................................................................................................6
Are contemporary economies service led?........................................................................................................................6
A constant deepening of competition, the basis of a new growth regime?......................................................................7
Is a finance led regime possible for the EU?....................................................................................................................8
Each growth regime calls for a specific institutional architecture...................................................................................8

SOME GENERAL PRINCIPLES FOR NATIONAL AND EUROPEAN POLICIES...................................................9

Convert the diversity of Social Systems of Innovation into a strength............................................................................9
Besides benchmarking, tailor economic policy to each national configuration.............................................................10
Organisational redesign: as important as tangible investment or RD!..........................................................................10
Networking: the buzz word of the early 21st century?....................................................................................................10

ADAPTING AND REFORMING ECONOMIC INSTITUTIONS................................................................................11

At what level should externalities be internalised?........................................................................................................11
Mixing short term management with long run structural policies................................................................................12
The Euro: working out a new and satisfactory policy mix.............................................................................................13
Same monetary policy, but different unemployment performance.................................................................................13
Adjusting wage and employment negotiations to the common monetary policy...........................................................14
Redesigning all legal and tax incentives in order to promote the adoption of new growth regimes.............................15
Recompose the European budget around growth and social cohesion objectives..........................................................16

HOW DO THESE IDEAS FIT INTO THE EUROPEAN AGENDA?..........................................................................17

Convert the current recovery into a long term boom......................................................................................................17
The Broad Economic Policy Guidelines: a mirror image of the new institutional architecture....................................18
Making virtuous circles? A method for co-ordinating complex European procedures..................................................18
Putting the subsidiarity principle at work.......................................................................................................................20
Mapping institutional reform into the various European processes...............................................................................20

REFERENCES....................................................................................................................................................................21
v
 vi

Institutional Reforms for Growth, Employment and Social Cohesion

Elements of a European and National Agenda
Robert BOYER

LIST OF FIGURES

Figure 1 – The post W.W.II capital-labour accord shaped most other socio-economic institutions...............................25
Figure 2 – The Euro implies a new hierarchy and architecture of each national socio-economic regime.....................26
Figure 3 – European Union : a potential economic giant…...........................................................................................26
….But a lot of co-ordination problems..........................................................................................................27
Figure 4 – European countries suffer from both low wage and high wage employment gap in the services.................31
Figure 5 – What strategy against European unemployment ?.........................................................................................36
Figure 6 – The impact of technological co-operation upon the sales of new or improved products..............................37
Figure 7 – The Euro sets into motion a series of complex transformations, both at the national and European level,
with unintended fallout..................................................................................................................................38
Figure 8 – A possible outcome of the macroeconomic dialogue: a better policy-mix.....................................................41
Figure 9 – Why economic policy remains difficult within Euroland..............................................................................42
Figure 10 – European Union : the same macroeconomic environment but contrasted unemployment rate evolutions. .43
Figure 11 – Good news : the new hierarchy among institutional forms is taken into account by the structure
of European treaties and subsequent decisions..............................................................................................44
Figure 12 – Strategy one : Use the dividend of faster growth to lower the tax and remove welfare related barriers to job
creation and launch the macroeconomic dialogue.........................................................................................46
Figure 13 – Strategy two : Convert the information and communication technologies (ICT) into the basis for
Knowledge Based Economy (KBE)...............................................................................................................47
Figure 14 – Strategy three : Gender equality and responses to ageing as the source of a new service led growth..........48
Figure 15 – Strategy four : Riding the financial globalisation..........................................................................................49

LIST OF TABLES

Table 1– A comparison of the degree of co-ordination among the triad......................................................................28

Table 2– What growth regime for the early 21st century ?............................................................................................29
Table 3– Net job creations take place in quite diverse sectors, not only in high tech ones.........................................30
Table 4– Can European growth be finance led?...........................................................................................................32
Table 5– Alternative emerging growth regimes and the redesign of institutional forms............................................33
Table 6– Three Social Systems of Innovation are coexisting within EU.....................................................................34
Table 7– Toward a Knowledge Based Economy : the need for new policies in order to cope with the
related externalities........................................................................................................................................35
Table 8 – At what level should each economic institution and economic policy component operate?........................39
Table 9 – The new style for economic policy: a condition for optimising the European policy mix............................40
Table 10 – What reform of industrial relations in order to cope with European monetary policy ?..............................44
Table 11 – The institutional setting for strategy one.......................................................................................................46
Table 12 – The institutional setting for strategy two.......................................................................................................47
Table 13 – The institutional setting for strategy three.....................................................................................................49
Table 14 – The institutional setting for strategy four......................................................................................................50
Table 15 – Mapping of institutional reform into the various European processes..........................................................51
 1

“The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify (…)
into every corner of our minds” John Maynard Keynes, December 13,
1935.

“The outstanding faults of the economic society in which we live, are its failure to provide for
full-employment and its arbitrary and inequitable distribution of wealth and incomes”.
John Maynard Keynes, General Theory, Chapter 24, 1936.

INTRODUCTION: IN RESPONSE TO THE NEXT DECADE’S CHALLENGES, IT IS

TIME TO REFORM
The recovery of the EU economy has brought a lot of optimism among European business and
consumers. Hasn’t GDP growth gone up from 2.7 % in 1997 to 2.9 % in 1998, propelling an
unprecedented job creation? The forecast for 1999 and 2000 are extrapolating this recovery,
since the growth rates are supposed to reach respectively 2.1 % and 2.7 %. Would the
European sclerosis be over, since the national and European institutions would now be in line
with the requirements of global finance? This report proposes a balanced view: many reforms
have already been done, but they are quite unequal across the fifteen member States and in any
case new challenges are to be met during the coming years. It argues that since the 90s, the
Europeans are living a brand new period that deserves careful and new analyses. Thus, most of
the items on the political agenda should be reassessed and probably redesigned according to
three major concerns.

The turning point of the nineties has pointed out some recurring weaknesses
of Europe
It is now clear that the 90s exhibit intense and multi-faceted transformations with quite
unequal consequences for the three members of the triad:

 The previous Fordist productive paradigm has progressively led to alternative principles,
based on a knowledge economy (OECD, 1999; see Soete’s contribution).

 Nevertheless the dynamism of financial innovations has overcome the speed of

technological and industrial advances (Boyer, 1999b).

 The so-called globalisation of finance and diffusion of export led growth strategies to
Newly Industrialised Countries (NICs) has propagated local financial crises to the rest of
the world.

 A large de-synchronisation of the business cycles has nevertheless been observed since the
early 90s, with some impact upon the misalignment of exchange rates Euro/Dollar and
Yen/Dollar.

 More basically, the miracles of 60’s (France, Germany , Scandinavian countries, and even
Japan, East Asian NICs,…) have turned into seeming failures and major crises. Therefore,
many experts think that any government struggles to implement market friendly
institutions.

 The perception of a crisis of the welfare State, specially of its financing, has been triggered
by the post-1973 growth slowdown and more recently by the prospect of an ageing
population (See Gosta Esping-Andersen’s contribution).
 2

Most European countries have been adversely affected by these structural transformations. It
took a long time for economic and political decision makers to take the measure of the far
reaching consequences of this turning point. Many firms are lagging in terms of the diffusion of
information and communication technologies (ICT) and still more in the production of the
related hardware and software components. Macroeconomic performance has been poor,
specially when compared with contemporary American or past European growth during the
60s. Last but not least, unemployment has resisted to many therapies, at least for medium size
European countries. The legacy of the 90s in terms of macroeconomic disequilibrium calls for
new directions for economic policies. But this is not the only argument.

Cope with the complete reversal of the post-World War II institutional

architecture
It is now more and more evident that these difficulties have a deeper root than a mere
mismanagement of the European policy mix after the German reunification and the costs
associated to the preparation for the launching of the Euro. Much converging research
suggests that the institutions that were at the core of the Golden Age unprecedented growth
have been destabilised by the very success of this regime and the related surge of new trends
within the world economy (Boyer, Saillard 2000; Aglietta 1999, Baslé, Mazier, Vidal 1998). A
sharp contrast emerges when the 90s are compared with the 60s.

 Clearly, during the 60s, an original capital labour accord was the corner stone of the
diffusion of mass production and consumption, since it was generally organising the quid
pro quo between the acceptance by workers of Fordist productive methods and the
institutionalisation of real wage increases in line with productivity (Figure 1). Basically all
other institutional forms were organised in accordance with this core compromise:
oligopolistic competition on a national basis was the rule, the State was organising the
Welfare State along with Keynesian fine tuning policies, the monetary policy was reflecting
an abundant credit supply, at the possible cost of periodic devaluation when inflation was
no more in line with world trends. The whole macroeconomic regime was built upon this
clear institutional hierarchy.

 During the 90s, the picture is quite different (Figure 2). The leading institutional form
relates to the insertion of each economy into the world system, in terms of trade,
investment, credit and global finance. Thus, the competitive forces permeate from one
country to another, even if they may finally tend to the formation of international
oligopolistic groups, as shown by the international merger mania of the late 90s. Similarly,
national monetary policies are governed by the appraisal by the international financial
community and thus, the fine tuning of the policy mix is made far more complex. In the
early 90s slow growth has brought recurring and long lasting public deficits, difficult to
finance given the high interest rates implied by the strict monetary policy implemented by
Central banks and the international unbalance between investment and saving trends.
Finally, the capital labour accord is under strong pressures, since it has to cope with the
constraints exerted by the stiffening of competition and the emergence of a lean State. The
frequency of the call for more labour market flexibility is good evidence of this complete
reversal of the institutional hierarchy of the post-World War II.

This shift might well be one of the underlying and neglected factors explaining why Social
Europe is so difficult to implement, but conversely more required than over (Maurice 1999).
 3

But there are many other difficulties facing the present European institutions after the
Amsterdam Treaty.

European integration: work in progress…not at all the end of history

On top of these world-wide issues, European decision makers are facing quite specific issues:

 Does monetary integration mean the end of the economic and political process
contemplated by the founding fathers of Europe? What compatibility is there with the still
independent budgetary policies and national political processes.

 What about the long run economic and political viability of a system that is partially
federalist (on the issue of money, competition, international trade policy,…) but still deeply
embedded in national political arena, in spite of the growing role of the European
Parliament? (Boyer, 1998).

 While foreign analysts tend to blame and fear the so-called “fortress Europe”, is not the
Old Continent suffering from a lack of co-ordination among member States, specially in
terms of foreign policy and defence?

 Is the European common monetary policy compatible with the persisting diversity of
national regulation modes, political coalitions, welfare systems and life styles?

 Last but not least, many experts and political leaders have come to express some doubts
about the desirability and long run viability of the so-called European social model in the
era of finance and globalisation.

This report tries to investigates some of these issues.

THE DILEMMA OF THE EUROPEAN UNION

The launching of the Euro has made the paradox of European integration quite clear. Seen
from outside, the Old Continent displays a quite an impressive economy, but analysed from
within, many structural and institutional disequilibria have to be overcome, in order to convert
this economic and political strength from potential to effective.

A potential economic giant…

Much more than a wide and overwhelming globalisation, the last decades have experienced the
emergence of a triad configuration, among which Europe is not at all a minor partner (figure
3). More populated than the US, the European Union has a market-size nearly equivalent to
that of US and the average productivity level is similar to the Japanese one. The research and
development expenditures are more important than Japanese ones and the number of scientists
and engineers roughly equivalent. Nevertheless, given the relative heterogeneity of the member
States, the level of productivity, is far inferior to that of US in terms of purchasing power
parity, and simultaneously, the American scientific and technological potential is far superior.
But the most severe European problems are elsewhere.
 4

…in search of a post-Amsterdam strategy…

First of all, even if the Maastricht and Amsterdam Treaties follow the continuity of the process
of economic integration launched with the Single Market Act, they imply quite a significant
restructuring of the distribution of responsibilities between national authorities, the European
Commission, the European Parliament and the European Central Bank. Far from being a
totally determinist trajectory, the process that has been initiated is open to various new issues,
emerging political difficulties and the need for redesigning the policy mix. Many futures can
thus be contemplated with quite contrasting outcomes (Boyer, 1999d). Self satisfaction,
dogmatism or inertia in the readjustment of priorities could be quite dangerous indeed.

…facing severe and new economic and political coordination problems

A major challenge is still the question of the European employment. If back to the 70s and 80s
it could be analysed as the consequence of the international crisis and the breaking down of the
Fordist growth regime, in the 90s, unemployment is clearly a European disease, at least among
developed countries. In spite of the current recovery, the average European unemployment rate
is twice as high as the American and Japanese ones. This feature is conventionally interpreted
as an evidence for labour market rigidities and the absence of strong competition. But it is a
evidence too that major co-ordination problems have not been solved. First, between firms,
unions and workers even though by chance strong national counter examples do exist. Second,
between monetary authorities and Ministers of Finance: high real interest rates have worsened
public deficit and thereby reinforced the lack of credibility of national government strategies, as
assessed by the international financial community. Third, in spite of ambitious TSER
programmes, the national strategies for innovation and technology do not display the synergy
that might be expected from the European Union. Fourth, the external representation of EU is
not fully established and this weakness may have played some role in the surprising
depreciation of the Euro with respect to the Dollar, during the first semester 1999. In one
word, Europe is suffering from a lack of co-ordination mechanisms in quite all the domain of
economic policy (table 1). Of course, all the actors are beginning to experience the cost of such
a failure and they may learn quickly, but it might be useful to help in diagnosing some major
issues and their mutual links.

The European dilemma is rather simple: how to foster growth and employment while
preserving or even extending social cohesion? Is there a single best way? The basic message of
this contribution is that several options are opened to EU, they are not at all equivalent and
they call for alternative institutional redesign and economic policy strategy.

STRENGTHS AND WEAKNESSES OF EUROPEAN UNION

They differ significantly according to the various economic paradigms (table 2) that may
prevail in the early 21st century (Boyer, 1999a).
 5

From Fordist mass-production to Toyotism?

If the source of competitiveness were closely related to differentiation by quality and possibly
by innovation in terms of mass-produced goods, then Japan should still be leading in the
production of typical Fordist goods, whereas the low accumulation rate of the US is far from
implementing such a model in North America. Given the diversity of production paradigms in
Europe (Boyer, Durand 1997) and the intermediate rate of investment, Euro15 is not that bad
(table 2, first column). But the current difficulties of Japanese economy as well as a more
prospective approach seem to suggest that deeper transformations have occurred during the
90s and that this mere modernisation of the post-world war regime is not sufficient, even if
necessary. Furthermore, the permanent capital deepening (more capital per worker) is no
longer associated with major labour productivity increases and the deterioration of the
output/capital ratio in Europe might be one of the origins of a difficult recovery of profitability,
hence of the creation and persistence of mass-unemployment.

The rise of information and communication technologies: a shift in the

productive basis
The long history of industrial revolutions suggests a second and quite different hypothesis: the
emergence and diffusion of such generic technologies as information and communication
technologies would mean the implementation of a totally new productive paradigm. This is a
typical Schumpeterian hypothesis, now more and more widely accepted. In this respect, the
competitive position of EU is quite preoccupying: in spite of high RD efforts, the European
firms seem to have been unable to extend their world market share in ICT (Amable,
Boyer 1993), and this is one of the major weakness for Europe (Soete 1999). Many statistical
indexes confirm such a lagging position of most European countries (Table 2, column 2). On
the production side, the EU is relying on a significant flow of import from US and on the
demand side, on average, European firms invest less than Japanese and American corporations.
In terms of diffusion of the use of modern technologies such as computers by employees, the
European situation is intermediate between that of the US and Japan.

Maybe the situation is not as bad as it may seem at first look. First, detailed statistical and
econometric studies suggest that the impact of ICT on growth and employment is positive and
significant but the size of the effects are rather modest indeed (Boyer, Didier 1998). Second,
even in the US, the leader in ICT, job creation in the related industries is important but does
not represent the major source on the so-called American miracle in terms of the job creating
machine. Nearly the same hierarchy is observed for job creation for the whole OECD during
the period 1980-1995 (table 3). Third, some international comparisons show that there is no
clear correlation between the mastering of any single emerging technological paradigm and
unemployment performance (Amable, Barre, Boyer 1997a). Fourth, no innovations in the
contemporary world can be reduced to ICT since many other sources of technological and
scientific advances are observed and may play a major role in fostering growth.

Towards a knowledge based economy?

 6

Clearly, the mechanisms for diffusing information should not be confused with knowledge
creation and use. Thus, there is an alternative interpretation of the contemporary
transformation in production and marketing organisations: the advances in basic knowledge
would be more easily converted into profitable new products by the close interconnectedness
of scientific research, market analysis and flexible manufacturing. This may well define a new
paradigm, premise of knowledge based economy (KBE). Of course, ICT do help the efficiency
of this paradigm and speed up the diffusion of knowledge, they provide the infrastructure, not
the essence KBE. From a theoretical point of view, information and knowledge are to be
distinguished. Various statistical indicators have been built to capture the two diffusion of ICT
and KBE, and they tend to be somehow different.

Actually, the statistical indexes recently elaborated and diffused by OECD (1999) tend to show
that the situation of Europe is finally close to that of the US, whereas the Japanese society
would suffer from the relative poor performance of its academic system (Table 2, column 4).
This assessment takes into account the fact that RD expenditures, public education, software
(but design and copyright are not presently incorporated into the OECD indicators), are all
factors that enhance transferable knowledge, thus the ability to develop new ideas, products,
processes and organisations.

But this trend toward the abstraction of production and the new sources of economic
performance simultaneously generates some forms of tacit knowledge that raise the power of a
limited fraction of the employees able to implement the radical innovations that determine the
competitive position of a firm: creative people in advertising, financial experts creating new
options, software designers, artists at the core of the leisure industry,…. One might recognise
the symbolic analysts pointed out by Robert Reich, highly internationalised and that play a
significant role in the widening of income and wealth inequalities. In this respect, the highly
regulated institutional context of most continental European countries seems to have been
detrimental to the maturation of such a leading group. The European Council resolution on the
1999 Employment Guideline tackles this issue and proposes various measures in order to
develop entrepreneurship. It has recently been proposed to introduce cross European mobility,
just to fully exploit the potential of a KBE economy (Soete 1999). Note that it seems to prevail
a trade off between economic performance and reduced income inequalities, a dilemma that
Europe has to overcome.

Are contemporary economies service led?

But there is still another vision of the future of growth and employment. It starts from the
evidence that quite all net job creations take place within the service sector, even if the precise
distribution may vary from one country to another (European Commission 1997; 1999b).
Nowadays, the manufacturing sector experiences a slimming down by the subcontracting of
many tertiary activities to highly specialised firms in accounting, finance, marketing, human
resources management… Therefore, many sources of firm’s competitiveness are manufactured
within the so-called service sector, specially for modern business services (Petit 1998).

Thus, when job creation perspectives for the next decade are analysed (Soete 1999; Table 2
and Table 3), one gets quite an unconventional picture, by comparison with the clichés about
the future of employment. Again the US seem to be leading: according to the Labour
Statistical Bureau forecast, the employment linked to computer and data processing is
supposed to have a 7.6 % annual growth rate until 2006. But simultaneously, all the jobs
related to health care will grow at 4.0 %, higher than the business and financial services, not to
forget environment related and leisure activitiy jobs, that will experience a fast growth. One
 7

gets the same picture for OECD as a whole (Table 3). Therefore, the ICT and even knowledge
based activities will represent a significant contribution to employment growth. But not at all
the totality.

Nevertheless, a more radical picture of a service led growth can be proposed. Actually, many
components of the services try to cope with the needs of social life in large urban centres, for
instance taking care of children within families where both the father and the mother have a
job, either full-time or part-time, day care for elderly people, restaurants, retailing, distribution
and transportation, education services, and of course the bulk of health care. Some analysts
even think that the transformations related to an equal gender opportunity inside the family
and within the whole society are powerful enough to engineer a new virtuous circle of changed
life style – consumption transformations – insertion of new talents into the economy – new
directions for innovation - and so on (Majnoni d’Intignano 1999).

According to this interpretation and prognosis, the slow growth of unemployment in Europe
would be attributed mainly to the lag in the development of a fully fledged service economy, a
statement found in many European reports (for instance, European Commission 1999: 16).
Actually, should the share of the services in total employment reach the American level, Europe
could enjoy an employment rate 14.6 % higher than actually observed. Of course, the situation
is quite unequal across member States : fewer services in Germany but highly developed in
Denmark, UK, Sweden and so on. But the question is then: could Europeans create as many
jobs as Americans do, while preserving relatively high wage and good social protection? Some
evidence suggests that the EU has fewer persons employed both in the high wage and low
wage industries (Freeman 1998 and Figure 4).

A constant deepening of competition, the basis of a new growth regime?

A different view stresses that European growth is directly linked to the competitiveness of the
Old Continent, in a world wide open to trade, investment, finance and even some highly skilled
professionals. During the long and painful 70s and 80s, each European country struggled in
order to restore its competitiveness, either by labour cost reductions or by innovation and
quality. From a theoretical point of view, the form of competition, among firms and nations, is
now governing the structural adjustment in the wage labour nexus (employment flexibility,
wage moderation, rationalisation of the welfare state…), the relative degree of taxation of
mobile and immobile factors. Economic policy formation itself is affected. Thus, the recovery
of growth has been frequently assumed to be dependent on the emergence of a totally new
growth regime: cost and price moderation, increase of exports, spill-over from investment to
consumption, and finally recovery of demand. A cumulative growth pattern would result from
the interaction of competitiveness and domestic demand.

This model is quite relevant for small open economies and has been imposing itself on medium
size economies during the 80s. But precisely, the constitution of the single market and the
creation of the Euro do change the respective importance of competitiveness and internal
market dynamism. Of course, each firm in order to stay in business has to be profitable, but the
vanishing of exchange rate variability and the changing pattern of expectations associated to
the European Monetary Union (EMU) give a better chance to a domestic led growth regime.
After all, globally Euro15 is nowadays less open than US or Japan (Table 2, two last columns)
and this gives more degrees of freedom to the design of a better policy mix combining
monetary stability, growth dynamism and job creation. All the players will progressively learn
the new properties of a common monetary policy and the essential benefits associated to it.
Thus external competition could be mitigated by comparison with the 90s, even though a
 8

significant degree of internally enforced competition is necessary to promote innovation and a

permanent search for efficiency.

Is a finance led regime possible for the EU?

There is still another interpretation of the macroeconomic divergence between US and EU
stressed by Luc Soete (1999). North America would have fully incorporated the consequence
of financial innovation and globalisation by transforming the governance mode of corporations,
the management of the financial system, by privatising large segments of the welfare and
developing pension funds (Boyer 1999c). This would lead to a totally novel “régulation
mode”, currently labelled “the new economy”: labour market flexibility, price stability, surge of
high tech sectors, booming stock market and credit in order to sustain a rapid growth of
consumption, and a permanent optimism of firms and financial markets. The poor performance
of the EU would be closely related to a large lag in catching up with this finance led regime.
From some authors, this would be the real follower of the Fordist mass production growth
period (Aglietta 1998).

The boom of mergers and acquisitions in Europe after January 1999 seems to confirm such a
hypothesis: the concentration on many manufacturing sectors, the constitution of large
financial groups, the project of implementing pension funds in order to complement previous
systems perceived to be under severe strain due to the ageing of European population, all these
factors seem to be evidence for the next convergence of European and even Japanese
configurations toward such a finance led regime, already at work in North America.

Nevertheless, a closer look at the organisation of financial systems of the triad and simple
statistical indexes suggest that with the exception of UK, few European countries are able to
enter into such a finance led regime (Table 4). Furthermore, some theoretical analyses hint that
the exhilarating phase of the diffusion of new financial instrument, which is favourable to
growth, may end up in a zone of structural instability, by the very success and generalisation
of behaviour of businesses and households quite exclusively governed by the optimisation of
financial rates of returns (Boyer 1999c). Therefore, the EU should be careful in reaping the
benefits of financial liberalisation, without entering the dangerous zone of financial and
economic instability. Incidentally, Europeans should be quite active in promoting a viable new
architecture for the international financial system, that remains quite shaky, in spite of a
renewed optimism at the end of 1999 (Davanne 1998 ; Boyer 1999b).

Each growth regime calls for specific institutional architecture.

This brief survey tends to conclude that each interpretation captures some significant aspects
of the contemporary structural transformations but that none should pretend to be exclusive
and define a “single best way”, that should polarise all the efforts of national governments and
European decision makers. This complexity and apparent lack of determinism is actually good
news for the EU. For instance, the recurring weaknesses in the production of ICT does not
mean that Europe is unable to grow faster and improve productivity, since it may be
compensated by potential strengths in the use of ICT and the implementation of a Knowledge
Based Economy. But of course, decision makers have to be fully conscious of the related
 9

opportunity and take the needed structural measures accordingly.

Basically, each emerging growth regime calls for a precise institutional architecture, even
though some reforms may enhance simultaneously the likelihood of several of them (Table 5).
Conversely, given the precise economic, social and political configuration of each country, the
chance of implementation, maturation and success of one regime may be easier to reach than
another. For instance, Japan may still be leading in terms of a modernisation of the post World
War II mass consumption paradigm, whereas the equivalent of industrial districts might be
crucial for ICT and competition led growth still a characteristic of small open economies.

According to this diagnosis, the task of European initiative is to promote equally the
emergence of these diverse regimes, that may jointly contribute to European competitiveness
and performance, while preserving the social cohesion that has been manufactured by the long
run historical process of nation state formation.

SOME GENERAL PRINCIPLES FOR NATIONAL AND EUROPEAN POLICIES.

Besides the optimisation of the short run policy mix, one major task for public authorities is to
create incentive constraints that push economic actors to innovate in the direction of one or
another of the alternative growth regimes. Four major hints are to be discussed.

Convert the diversity of Social Systems of Innovation into a strength.

The frequent comparison of the American trajectory with the European integrating process
leads us to consider that Euro11 is far from being an optimal monetary zone and therefore that
the European Central Bank policy is bound to run into trouble. Growth theorists add that the
irrevocable fixing of internal exchange rates will foster a deepening of specialisation across
countries and regions; consequently, asymmetric shocks could be more frequent than initially
expected.

Recent research on European economic geography suggests a more balanced view. Only few
sectors exhibit increasing returns to scale in the production of homogeneous goods, since the
majority of them search for product differentiation by quality ladders and innovation in order to
cope with an extended competition (Maurel 1999). Therefore, the intra European
specialisation according to quality differentials could continue to prevail in the next decades,
possibly with the exception of some sectors such as finance.

Thus, the large diversity of production and innovation systems could be preserved, even
though of course some transformation and structural adjustments will take place during the
next decades (Amable, Barré, Boyer 1997). This could be a strength since it would make it
possible to jointly reap the benefits of contrasted social innovation system (SSI): market based,
in UK, social-democrat for Sweden, Finland and Austria, as well as public institutions based
SSI, with France, Netherlands, Germany (Table 6). But of course, the national and European
science and technology policies have to take into account this variety in the design of adequate
subsidies, incentives and statistical indexes of performance of SSI….and it is not necessarily an
easy task.

Besides benchmarking, tailor economic policy to each national configuration

 10

With the process of globalisation, searching for best practices has been a leading phenomenon
for firms and organisations. This method has been extended to public policy, for example by the
Luxembourg summit on employment policies (European Council 1999b) or more recently for
technology policies (OECD 1999). But it has to be remembered that a successful partial
device may not succeed when inserted into a totally different institutional architecture: this is
the central message of the recent research about institutional complementarity (Aoki 2000) and
the hierarchy of institutional forms (Boyer, Saillard 2000).

This hint is globally confirmed for innovation policies. All of them look for internalising the
externalities associated to the very process of innovation, but given the large variety of
mechanisms involved, the exact economic policy tools may differ drastically. Just to give an
example, enhancing human capital formation calls for different incentives than those required
for tangible capital (Table 7). Furthermore, the permanent development of skills and
competence may be the common outcome of contrasted institutional settings: an extended
democratic educational system (Japan), implementation of a dual training system (Germany) or
alternatively an intense retraining of workers hit by the obsolescence of their competence
(Sweden) (Boyer, Durand 1997: 53).

Organisational redesign: as important as tangible investment or RD!

During the last two decades, Europe has suffered from a low investment rate and the
progressive recovery of profitability has been counterbalanced by high real interest rates until
the launching of the Euro and the subsequent decline in the interest rate. Clearly, the
unemployment rate seems inversely correlated to the investment share in GDP (European
Commission 1999:10). One could expect that the wage moderation accepted by unions and
workers, associated with the stable macroeconomic environment created by the rules set by the
Amsterdam Treaty in terms of monetary policy, should now lead to a recovery of investment,
growth and after a while of employment. Such a trend can be observed since 1998 in many
European countries.

Nevertheless it would be too optimistic to consider that a good policy mix in the short run on
one side, favourable demographic trends in the long run on the other are sufficient conditions
for the progressive phasing out of mass-unemployment. If the investment is made along wrong
and now obsolete productive paradigms, the rate of return may even be negative with a totally
adverse long run impact on employment. The quality of the decision process, the relevance of
the managerial tools of the firm and more generally the ability to implement the complete set of
procedures that allows to be competitive in contemporary world, all these factors are necessary
to get positive effects from investment (Boyer 1995). Similarly, the content of the investment is
important indeed and closely related to the quality of the internal and external information
systems of the firm. This shows up out of international comparisons: for instance access to
internet and to a lesser extent access to internet seem to play a role in reducing unemployment
on top of the investment rate (Figure 5).

But of course it is a difficult task for public authorities to deliver a fine tuning of their
intervention in accordance with such an objective, since the quality of internal managerial
routines is not easy to be assessed by external auditors.

Networking: the buzz word of the early 21st century?

The shift from the linear model – that used to convert basic science into economic
 11

performance via technological innovation – to an interactive conception – combining the

synergy between innovation, market and production – has a definite impact upon innovation
policies. The large public programmes, mission oriented, are largely replaced by more
numerous but smaller projects with flexible economic objectives, associating all the relevant
actors implied by the success of innovation.

Similarly, the large vertically integrated firm is no longer efficient in organising research and
development if the competence belonging to various sectors and entities is to be combined.
More generally, horizontal as well as vertical networking seem to be a key organisational
structure in the era of ICT, specially given the major uncertainties linked to the
internationalisation of production and research.

Recurrent evidence shows that technological co-operation has a definite and large impact upon
the success of innovation (Figure 6). But the question is the level at which such a networking
should operate: in the case of ICT, European joint ventures seem to have been less successful
than the co-operation with the American or Asian partners (Soete 1999). But a precise analysis
of the related externalities (see Table 7 supra) suggests that the relevant level may vary
drastically from the local community to the entire world, with a lot of intermediate levels
including the Nation or the region. It should be essential for European policy to carefully select
the innovation sectors that are to be managed at the continental level. Even so, networking
should be privileged.

ADAPTING AND REFORMING ECONOMIC INSTITUTIONS

So far so good, since only the theoretical analysis is concerned. The real trick is to wisely
implement such principles in a timely way. Then the most difficult problem is the respective
role of regional, national authorities and finally the community level (Figure 7). Let us mention
only two polar cases.

 If adequate negotiation and co-ordination mechanisms could be implemented at the

European level, maybe a modernised configuration of Fordist mass-production could be
engineered. All the properties of the growth regimes of the “Golden Age” would be
translated from the national to the EU level. Of course, this is quite optimistic about the
relevance of this productive paradigm, a view that is largely contradicted by the fact that
Fordism is more and more perceived as obsolete.
 By contrast, the subsidiarity principle may be invoked in order to delegate to national or
regional governments the task to decide and implement the structural reforms on labour
markets, welfare systems, public spending and taxation. For instance, the negotiation of
national pacts or a complete decentralisation of wage negotiation define alternative
strategies, that deliver interesting results in terms of employment.

At what level should externalities be internalised?

The answer is again closely related to the issue about the precise nature of externalities at work
and the ability to implement co-ordination procedures in order to internalise them and get a
more satisfactory outcome for the EU as a whole. The existing European Treaties define
general principles about this distribution of responsibilities, but it is not totally evident that they
are fully coherent both from a political and economic point of view (Table 8).

 Monetary policy and exchange rate management are irreversibly a matter of common
 12

concern, the task being given mainly to the European Central Bank with some role to the
European Council about the strategic choice of an exchange regime.

 By contrast, budgetary policies, that exert similar externalities, are kept under the control
of national authorities, but the Stability and Growth Pact imposes a limit to public deficits
as well as sanctions (C.A.E. 1998). This discrepancy has been playing a role in the
evolution of the Euro/Dollar exchange rate during the first semester 1999, as explained
more fully in the next section.

 Competition policy principles are common to all member States but the implementation
and control remain national. In the long term this might trigger the constitution of a fair
trade and competition agency, US style. This would mean a large breakthrough by
comparison with the previous juxtaposition of contrasted national styles for governing
competition (Dumez, Jeunemaître 1996).

 Innovation is mixing a large degree of subsidiarity along with European programmes

aiming at building transborder networks in the domain of applied research or academic
activity. May be with the evolution toward a KBE, the mobility of scientists and
professionals across Europe should be promoted (Soete 1999)

A theory of such a complex socio-economic system remains to be elaborated and the task is
overwhelmingly difficult and it will take some time and a lot of learning and experimenting.
Thus, meanwhile some pragmatic rules have to be invented and discussed in order to initiate
quite a pragmatic process, with largely unintended configurations one or two decades later
(Boyer 1999b).

Mixing short term management with long run structural policies

Decision makers are facing two dilemma.

 The first one relates to the fact that the time required for any institutional reform to deliver
the expected (or unexpected) results, is far longer than the sequencing of elections and still
more the speed of financial quotations. The scrutiny by financial markets of any
government decision is an incentive for public authorities to focus upon short term issues.
But in the long run, everybody is now convinced that structural reforms are required, but
they may take ten or fifteen years to deliver all their (hopefully) positive outcomes. The
reforms of the Dutch welfare system and labour contracts are a good example of such a
long lag between the negotiation of a social pact and the decline in unemployment.

 The second dilemma concerns the links between the timing of structural reforms and the
business cycles. When the economy is booming, governments are happy to distribute the
related surplus and do not perceive any need for painful structural reforms, since they are
enticed to consider that “the crisis is over!”. They could do reforms but they are not
induced to do so. Conversely, when a major crisis bursts out, the need for structural
reforms becomes self evident but the cost is so huge and the lag so important, that they are
postponed to better days. Even if they are done it is too late to overcome the current crisis.

Thus the real trick is to conduct a “wise” short run economic policy, while sequencing the
structural reforms that will be operative several years later. Again, the good prospect of
European growth for 2000 enlightens the temptation to postpone quite necessary reforms.
 13

The Euro: working out a new and satisfactory policy mix

A fraction of European unemployment in the 90s could be attributed to an unsatisfactory policy
mix, caused, among others, by the absence of co-ordination of national budgetary policies in
response to the German reunification (C.A.E. 1998). Therefore, any improvement in the
dialogue between the partners of economic and social policy is welcome. The communication
between the ECB and the 11 Ministers of Finance has been improved by the creation of the
informal Euro11, besides the official Ecofin Council. The learning process that has thus
started, may initiate an interesting scenario in order to overcome some of the ambiguities or
weaknesses of the Amsterdam Treaty (European Commission 1999a; Boyer 1999d).

Thus, the implementation of the Euro is part of a deeper move in the conceptions and tools of
contemporary economic policies. Back to the 60s, a highly centralised management of the
policy mix was organised, in most countries, by the national Ministries of finance that had a
clear control over the Central Bank. Information was mainly originating from the State and
was inserted into macro modelling and annual forecasting exercises. By contrast, in the 90s,
the main players have become formally more independent but have to exchange information
about their strategy: the actual policy mix is the outcome of this complex process (Table 9). In
a sense, the creation of the ECB is a step in that direction, with the need to organise a forum
for co-ordinating strategies that have now to operate both at the European level and the
national.

The decision of the Cologne European Council to implement a macroeconomic dialogue may
mean a new stage in this process of mutual information and co-ordination. By inviting social
partners to discuss wage and employment issues, some emerging conflicts could be cured at an
early stage and this could significantly improve the performance of EU in terms of job creation
(Maurice 1999). Price stability would be largely warranted by collective negotiations delivering
a near stability of unit labour cost, thus the ECB could deal with symmetric shocks affecting
European growth, while delivering monetary stability (Figure 8).
Nevertheless, the European policy mix is facing a major challenge (Figure 9). On one hand,
the Amsterdam Treaty formalises a clear asymmetry between the Central Bank that is given
both a clear autonomy and precise objectives, governed first by price stability and second by a
contribution to general economic policy. Furthermore, the Stability and Growth Pact puts an
institutional constraint upon the autonomy of each national budgetary policy, precisely to
preserve the credibility of a low inflation monetary policy. But on the other hand, the ECB
policy is itself under the close scrutiny of international financial markets, that assess, on a
permanent basis and in real time, the viability of the current policy mix. Consequently, the
European monetary policy is itself disciplined by the rules and evolution of the international
economy. That feature makes the process operating within Euro11 specially important and by
extension the process implemented by the Cologne European Council.

Same monetary policy, but different unemployment performance

If organisational choices matter for firms performance, similarly institutional reforms matter for
employment creation, for any given policy mix. Contrary to the idea conveyed by typical
Keynesian theory, much evidence suggest that the European unemployment is not totally
caused by pure co-ordination problems between monetary and budgetary authorities. The
nature of collective negotiations, the incentives brought by the welfare and tax systems, the
degree of reactivity of hours, wages, bonus and employment to various shocks do matter for
macroeconomic performance.
 14

 Among medium size European countries, the pattern for unemployment is quite different
between continental Europe and UK, specially since the early 1993 (Figure 10a). This can
be interpreted as a premium to decentralisation, privatisation of public services, slimming
down of welfare compensation. This is the origin of the Third way strategy that tries now
to develop new security and social rights benefiting the “employability” of workers
(Giddens 1998). By contrast the strategy “wait and see” has proved to be quite
detrimental.

 Small open economies display, on average, far better results since they are benefiting, at
the end of the 90s, from a quasi full-employment (Figure 10b). This can be explained by
the fact that since the 50s, social partners have taken into account the need for
competitiveness and expressed a major concern for full-employment. Nevertheless, the
discrepancy between the inherited welfare and tax system and the new pressures
associated to internationalisation have triggered the need for major reforms in the mid 80s.
When national social pacts have been struck, the outcome seems to have been quite
favourable indeed. Netherlands is a good example to this alternative to the Third way.

Consequently, in the long run social bargaining matters, along with fine tuning the policy mix
in the short run. This gives a lot of meaning to the subsidiarity principle and significance of
responsibility to social partners. The Luxembourg process may help in pointing out the
diversity of institutional arrangements across European countries and give some hints for
reforming the legal and conventional procedures that have proved to be detrimental to job
creation and social cohesion (European Commission 1999b; 1999d). But mere importation and
copy are generally not sufficient, since national industrial relation systems are quite
idiosyncratic and call for an adaptation of any one best way, the search for functional
equivalents and even radical innovation (Boyer, Charron, Jurgens, Tolliday 1998).

Adjusting wage and employment negotiations to the common monetary

policy.
These contrasted performances may represent an incentive for lagging countries to foster
significant reforms in order to be sure that the unemployment level will not be the disciplining
device for curbing down labour costs and contributing to monetary stability. The process
towards EMU and then the launching of the Euro have clearly triggered a major concern for
this issue from social partners (Maurice 1999).

 On one hand, the task may seem easy since at least eight solutions are available, with
contrasted features and outcomes in terms of dynamic efficiency and social justice. Social
partners could pick up their preferred solutions among this rather large menu (Table 10).
However it seems that a fully integrated collective bargaining at the European level is, for
the time being out of reach, as far as quantitative issues are concerned (Kim 1999).
CLearly it is quite difficult to make compatible a set of national wage demands given the
remaining large heterogeneity of productivity levels within the same sectors across Europe.

 But on the other hand, in the absence of well organised business associations and workers
unions or if, when existing, they are prone to conflict and the adoption of “loss-loss
strategies”, most of these co-operative solutions are out of reach (Boyer 1998b). The only
path available is then a large social deregulation, that would be a threat to domestic social
and political stability and could mean the end of the ideal of a social Europe (Maurice
1999; Freyssinet 1999). It can even been argued that in the emerging new economy, the
 15

market cannot elicit the requested commitment from workers by pure market mechanisms,
without provoking in the long run major instability (Bowles, Boyer 1990).

With respect to the Luxembourg procedure, that launched the benchmarking of employment
policies, a lot of initiatives have to be delegated to national or regional actors in order to select
what innovations could possibly be imported and adapted to the local context. Again the
subsidiarity principles is quite essential for the future of the EU.

Redesigning all legal and tax incentives in order to promote the adoption of
new growth regimes.
All experts, economists (including the Keynesians!) and of course the politicians should take
seriously the warning from Keynes. Most of us are consciously or not following the ideas and
theories of economists of the past, who themselves were analysing a now largely obsolete
economic system or vanishing “régulation mode”. The institutional contemporary systems have
been built by the sedimentation of a series of compromises and legislation over one or two
centuries. The task is now to scrutinise this complex architecture in order to detect possible
shifts in these compromises or, in some cases, to propose brand new arrangements. But the
real difficulty is then: how to build a self sustaining political and social majority in favour of
such reforms? Just to mention some items at the top of this agenda:

 Given the issue of the ageing European population, it is important to shift from
unemployment policies that aim at reduction of activity rates for old workers towards
more active policy of job creation (European Commission 1999; European Council
1999a,b). The facility of early retirement should be phased out, the more so the more
dynamic the European economic recovery and the more likely the emergence of labour
scarcity for some professions (Taddei 1999).

 A plan for training the less privileged members of European societies would be welcome
for many reasons. From an economic point of view, whatever the growth regime that will
prevail during the next decade (ICT or KBE), the access to general education is more
essential than ever. The evolution towards a learning society is a common feature to many
of these scenario. Similarly, the changing productive paradigm may hurt the practice of on
the job training and call for a renewed interest for vocational training systems, promoting
some transferability of skills (Caroli 1995). This is specially important given a trend
toward a large heterogeneity of labour contracts according to the level of competence and
their transferability (Beffa, Boyer, Touffut 1999). Some workers get out of the educational
system without any clear competence and are unable to acquire some professional
expertise, given the large mobility they experience from one low skill job to another. The
objective about the reduction of social inequality is thus more essential than ever. Last but
not least, modern democratic societies need informed and learned citizens.

 The welfare systems that had been designed in order to fight against the social inequalities
observed after the World War II have in a sense succeeded. For instance, in most European
countries, retired people are no longer poorer than the rest of the population. But, in some
cases, they have become counterproductive (concerning for instance the rise of labour
costs due to the financing of welfare) and still more these systems totally neglect the new
sources of inequalities (youth unemployment, social exclusion, unequal access to
education, single parent family, emerging urban ghettos,…). This is a major topic for social
security reforms (Esping-Andersen 1999).
 16

 The reform of the tax system is facing another dilemma. On one hand, a Schumpeterian
conception would imply a shift of taxation from innovators and entrepreneurs to the new
rentiers who have prospered during the last fifteen years…But, in turn, this could trigger
wide income differentials when for instance stock options dramatically inflate the revenue
of top managers by comparison with rank and file workers. On the other hand, the social
heterogeneity brought by the diffusion of market led capitalist institutions puts a new
emphasis on the agenda set forward by John Maynard Keynes during the 30s,…even
though the regulation modes and international regime are not at all the same. But then
governments may fear a brain drain of the most talented individuals, a loss of dynamic
efficiency and finally less growth and less employment. European contemporary social
democrats are muddling through this dilemma.

 Last but not least, EU should contemplate extending financial supervision at the
community level in order to prevent the emergence of speculative bubbles that could be
quite detrimental to growth stability in the medium-long term. For the time being, the issue
is hotly debated among experts. On the one hand, moral hazard arguments would attribute
the role of supervision to national authorities over their domestic banking and financial
systems and confirm the clauses of the Amsterdam Treaty. But, on the other hand, what
about the globalisation of finance and the spill-over of the systemic risk from one country
to another? (C.A.E. 1998; Aglietta, De Boissieu 1998; 1999). In the long run, won’t the
European financial system be integrated and call for a common supervision?

This is an invitation to consider what new domains should be attributed to the European
Community responsibility, thinking ahead of emerging problems. But conversely, other areas
of present intervention should be phased out.

Recompose the European budget around growth and social cohesion

objectives
By constitutional design, the European budget cannot play any role in the formation of the
policy mix, since no deficit, nor surplus is allowed and no tax is levied directly at the European
level. Therefore, the objective should be to optimise the contribution of the European budget
to the long term dynamism of the Old Continent, along with the implementation of some
solidarity across national and regional borders. Such a process of European budget
restructuring has taken place during the last decade, but it should continue. Here are some
possible guidelines.

 The common agricultural policy is evolving from administrative price formation of

selected agricultural products to income maintenance of some disadvantaged farmers who
would eventually take charge of environment preservation in rural areas. Ecological
concerns and the solidarity with farmers would shape totally new public interventions.

 At the national level, the subsidies should be shifted from mature industries to sunrise
industries, as far as such a strategic move is allowed by the political configuration that
governs typically for each society. Furthermore, the numerous lobbies present around the
European Commission seem to be more active in mature and declining industries than in
sunrise and emerging industries.

 A new design of the regional and structural European funds would be useful, in order to
 17

take into account that some targeted regions are now developed, that new sources of
inequalities may emerge from this new phase of European integration and finally that the
admission of new members will increase heterogeneity and call for new solidarity
principles.

 Finally, the targeted socio-economic research programmes should resist to the temptation
of launching large public projects, mission oriented. It would be far better to propitiate the
building of European networks, mobilising medium and small firms as well as large
corporations along with the academic world. To convert the diversity of social systems of
innovation into a European asset would be quite a rewarding objective. That would give a
lot of adaptability to Europe, given the coexistence and dynamism of contrasted growth
regimes among the EU (Amable, Barré, Boyer 1997).

But there is a major difficulty: how to actually implement such broad orientations? It is not an
easy task. By chance, the recent processes launched by the various European Councils provide
some tools.

HOW DO THESE IDEAS FIT INTO THE EUROPEAN AGENDA?

The current context is quite good, since many conditions governing the appeal and feasibility
of such a programme are fulfilled. Nevertheless, the agenda is far from simple and many
obstacles have to be overcome. These short remarks are quite preliminary and introductory.

Convert the current recovery into a long term boom

It is important to stress again that a short term recovery does not mean the end of all the
structural problems experienced by the member States in the EU. Quite the contrary, all the
actors should be convinced that the current European institutional architecture is far from
being totally coherent (Boyer 1999d), that some reforms have to be made about the national
industrial relations systems, the links between schools, universities, research centres and firms,
the financial organisation of the welfare, not to mention the tax system itself.

If European leaders look with some envy to the so-called American “New Economy”, they
should notice that the remarkable performance of the 90s have been reached after a series of
structural reforms, starting back in the early 70s and affecting nearly each aspect of social and
economic life. Even so, the long run viability of such a regime, is still to be assessed (Boyer
1999c). The problem is still more acute for Europe, since, for some if not all countries, major
reforms are still to be made in order to consolidate the current optimist expectations and
growth perspectives. Only a well ordered flow of reforms will transform the current recovery
into a long term growth regime.
 18

The Broad Economic Policy Guidelines: a mirror image of the new

institutional architecture
Many policy tools have been created in order to coordinate the national reforms and these
initiatives may seem, to some distant observer, as highly ad hoc and probably quite difficult to
implement. The present report brings a kind of optimism, but stresses the need to simplify the
complex architecture of these various processes. Basically, the actual architecture of the
relations between the monetary and exchange rate policy and the Broad Economic Policy
Guidelines (BEPG) is a mirror image of the emerging architecture of the institutional forms
after two decades of restructuring out of the Fordist regime (Figure 11).

For instance, the redesign of the objectives and tools of public interventions, implied by the
concern for credibility and the emergence of a lean and smart State, could be propitiated by the
stability and convergence programmes. Initially conceived as methods and principles for
controlling by peer review excessive public deficit, they should evolve towards an analysis of
the efficiency of various public spending strategies. Similarly, the Luxembourg process defines
guidelines for making the wage labour nexus more reactive to technical change,
macroeconomic fluctuations, gender equity issues,…. Even the Cologne process is part of this
evolution, since it recognises that a viable “régulation mode” has to make the initially
disconnected transformations of monetary policy, budgetary strategy, wage bargaining and
competition compatible.

Therefore, the various European processes are tuned with the major structural transformations
taking place both at the international and national levels: this feature creates some room for
success.

Making virtuous circles? A method for co-ordinating complex European

procedures
Quite rightly, most recent reports from the European Commission and Council have recurrently
pointed out the dangers associated with the multiplication of the European processes: they may
have large administrative costs, trigger possible conflicts among them and may lack
transparency. For many domains, the various initiatives overlap (European Commission 1999a;
European Council 1999a & b). Without any clear orientation, the whole architecture may well
be ineffective and call for an easy criticism about the excessive bureaucratic burden associated
with Europe. The effectiveness of European procedures is quite important for the legitimacy of
European integration, and the adhesion of citizens (Quermone 1999).

The present analysis provides one hint: why not consider that the unit of analysis for public
intervention is not the precise domain (tax, welfare, industrial relations, …) but the whole set
of positive spill-over that may define a coherent development mode or at least a complete set
of mechanisms linking the various domains? This is no more than converting the analysis of
the third section into a practical tool for assessing the coherence of a strategy. This could
possibly define new frontiers among the existing Cardiff, Luxembourg and Cologne processes.
Only four examples will be given.

 Channelling the dividends of a relational policy mix is a first and important option, since it
relates the short run to the medium and long run perspectives (Figure 12). The success of a
 19

pragmatic approach to the policy mix, based upon mutual learning among a densely
organised arena for exchange of information, may be an ingredient for a steady boom of the
investment, directed towards material and immaterial components, thus generating a
positive and increasing sum game. This should be the major concern for ECB and Ministry
of finance typical decisions. This is the first virtuous circle, relatively well defined, at odds
with the vicious circle that emerged during the early 90s in Europe. But then, the reforms
concerning competition policy, labour market organisation and public budget should be
explicitly coordinated according to this specific virtuous circle (Table 11).
Macroeconomists could be the architects of such a strategy, in response to the strategy
adopted by the European Councils and debated within the European Parliament.

 Organising the shift from ICT to KBE is another method for trying to initiate a virtuous
circle of innovation, growth and job creation. This is one of the interpretations of the “New
Economy” and this strategy should be implemented by Ministers of science, technology,
education, of course in close connection with social partners (Figure 13). It is important to
note that this mechanism is largely independent from the previous one and calls for
different institutional reforms that might therefore be congruent with the first strategy
(Table 12). In contrast with the previous virtuous circle, this one is specially appealing for
private actors, entrepreneurs, employees, teachers, researchers and so on...

 Welfare reform led virtuous circle may well be a major trump for Europe. This might sound
quite strange in an era when the burden of the European welfare is frequently considered as
the major obstacle to European job creation. Clearly the idea is not to keep unchanged the
complex welfare systems progressively built during the “Golden Age” and amended
afterwards, but to reform them in accordance with new social demands and
macroeconomic opportunities and constraints. A better implementation of gender equality
and the phasing out of early retirement could trigger a surge in activity rate and generate
new demand, all movements that would ease the financing of welfare systems (Figure 14).
The more so, the more they would be redesigned in order to cope with the new forms of
social exclusion, related for example with an inadequate initial general education and the
inability to master modern technologies. This is a matter for social affairs Ministers and
social partners. Again, the institutional reforms necessary for the implementation of such a
mechanism are not necessarily contradictory to the previous ones (Table 13). The benefit of
such an approach is to provide a clear rationale and various tools for coordinating a series
of reforms and check that they are more complementary than contradictory.

 Coping with a finance led regime could define another alternative, specially relevant for
the countries already specialised in financial inter-mediation and business related services
(Figure 15). The objective of the ECB should then incorporate the curbing down of asset
inflation, social partners should negotiate profit sharing and pension funds management and
probably the supply of welfare could be more or less significantly transformed by
privatisation of many components, including retirement payments (Table 14). The logic of
such a mechanism seems so strong, that according to some extreme scenarios, it may enter
into conflict with the three previous virtuous circles. Furthermore, it is not sure that the
related regime is stable in the very long run. In any case, it is far from being widely diffused
across Europe, specially if new members joined the EU. Nevertheless, this framework may
help in conceptualising the issue brought by the implementation in Europe of pension
funds. Can Europe find out some functional equivalents to the American system or should
the whole institutional setting be redesigned? This is a major political choice, that has to be
enlightened by more investigations.
 20

These proposals raise another important issue: at what level should these virtuous circles
operate?

Putting the subsidiarity principle at work

It is clear from the previous developments that some parts of it operate at the European level
but are necessarily linked to mechanisms operating at the national or even regional levels. It
can be argued that some member States may follow one regime, whereas others adhere to a
different one, while complying to the same European rules and general evolution. After all, it is
precisely the meaning of the subsidiarity principle, that a priori grants some autonomy to each
local authority in order to follow the common European principles and rules. Furthermore,
these rules do result from the interaction of national governments and they thus link the
various levels of governance: regional, national and European.

This is specially important for the long run acceptability of the European integration
(Quermone 1999). It has to be simultaneously politically legitimate and economically
efficient: the subsidiarity principle and the emergence of jointly decided rules of the game may
provide these two requisites.

Mapping institutional reform into the various European processes

Of course these ideas remain quite general. They require a lot of discussions among academics
and the vast expertise of the European Commission should be mobilised and translated into
concrete measures (Table 15). This task was out of the scope of the present report.

Last but not least, these ideas and proposals should be made simple enough and sufficiently
attractive to be submitted to, discussed and amended by European and national political
leaders. Maybe such a project is not totally out of reach. Here comes Keynes warning: “The
difficulty lies not in your ideas, but in escaping from the old ones, which ramify into every
corner of our minds”.
 21

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 25

FIGURE 1 – THE POST W.W.II CAPITAL-LABOUR ACCORD SHAPED MOST OTHER SOCIO-
ECONOMIC INSTITUTIONS

the capital-labour accord

Acceptance Wages are nego- Institutionalisation

of Fordist tiated according of Welfare
methods to productivity

A wage earners
Oligopolistic state Beveridge
competition Mark-up High and Stable + Keynes
pricing growth

Coherent and
Credit money Possible permissive
regime permanent Exchange international
inflation Rate regime
adjustment

LEGEND : 5 institutional forms

Macroeconomic links

Hierarchy of institutional forms

Adjusting variable
 26

FIGURE 2 – THE EURO IMPLIES A NEW HIERARCHY AND ARCHITECTURE OF EACH

NATIONAL SOCIO-ECONOMIC REGIME

CONFLICTING/uncertain
principles for the world
economy

In search of new No clear

institutions follower of
WTO Bretton
Woods
Tendency towards regional
blocks

more project of
competitive a single European
markets currency

Ideal of No more Need

zero intra for
inflation European credi-
exchange bility
rates

Growing
heterogeneity Weak transnational workers
of labour organisation

a lean state :
no deficit, minimalist social
transfers, fewer instruments

the wage-labour
nexus under
restructuring

Market
forces Wage/
permeate employment
production as adjustment Rationalisation
organisation variables of welfare

FIGURE 3 – EUROPEAN UNION : A POTENTIAL ECONOMIC GIANT….

 27

A MAJOR POLE OF THE TRIAD…..

1999

POPULATION PIB
Japan
Japan
16%
15%

EU
41%
EU
49%

US
35% US
44%

…..STILL SOME LAG IN PRODUCTIVITY, SCIENCE AND TECHNOLOGY

PRODUCT PER INHABITANT/PURCHASING POWER PARITY

160 148,3
140
120 108,5
100
100
80
60
40
20
0
EU US Japan

RD EXPENDITURES SCIENTISTS & ENGINEERS

Japan
EU Japan
EU 20%
26% 25%
34%

US
US 49%
46%

….BUT A LOT OF COORDINATION PROBLEMS

 28

....BUT ON AVERAGE A HIGHER UNEMPLOYMENT RATE

1999
UNEMPLOYMENT RATE

12
10,2
10

6 4,7
4,2
4

0
Euro11 Japan US

TABLE 1 – A COMPARISON OF THE DEGREE OF CO-ORDINATION AMONG THE TRIAD

European Union US JAPAN

Monetary Policy Independent ECB Independent FRB Towards an independent
Central Bank
Budgetary Policy 11 budgetary policies One federal budget, Control by Ministry of
constrained by the several States budgets Finance
stability and growth pact
Tax Policy Emerging principles for Federal taxes and State Homogenous tax system
co-ordination, but not taxes differentiation
harmonisation
Quality of the Policy Improving via learning A long experience in co- Previously obtained via
Mix process within the ordinating monetary and Ministry of Finance
informal Euro11 budgetary policies
Wage Bargaining Heterogeneous institutions Near complete Mix of largely firm based
across nations, sectors, decentralisation, rather decentralised wage
skills : largely unco- competitive forces systems and synchronised
ordinated process mixing wage increases
competition for some and
protection for others
Competition From national oligopoly After the wave of The structure of the
to the search for a single deregulation a trend Keiretsu allows both
market towards large financial internal co-ordination and
concentration, but large significant external
entry of new firms competition
Insertion into the Single external tariffs and Variety of tools (lobbying, Traditionally, discrete but
International Economy exchange rate but still anti dumping devices) in strong controls over the
different national interests order to cope with inflow of goods,
diversity of interest across investment, manpower
States
 29

TABLE 2 – WHAT GROWTH REGIME FOR THE EARLY 21ST CENTURY ?

Toyotism as a Information and Knowledge « New » Export led Foreign

Regime follow up of Communication Based service led growth Competition
Fordism Technologies led Economy Economy led growth
FBCF/GDP Expendit Personal (Education + RD Employment Share of export Intensity of
Economies ures in computer/ + Software) / in the /GDP competition
ICT/GDP Blue collar GDP service/ E
worker Working 1999 Variation
population 1991-99
European Union 19.0 5.8 54 8.0 39.2 10.0 +2.9 27.6
US 17.5 7.6 103 8.4 53.8 11.4 +1.1 29.7
Japan 28.5 6.3 18 6.6 46,0 12.2 +2.0 21.2

(1) (2) (3) (4) (5) (6)

Source : (1), (2), (3), (4) : OECD « L’économie fondée sur le savoir », Juin 1995
(5) Economie Européenne, n° 66, 1998, p. 149, 142.
(6) OECD Perspectives Economiques, Juin 1999, p. 237.
Intensity of competition is defined as: E = X/Y + (1-X/Y).M/D X export, M import, D domestic demand, Y production.
 30

TABLE 3 – NET JOB CREATIONS TAKE PLACE IN QUITE DIVERSE SECTORS, NOT ONLY IN
HIGH TECH ONES.
OECD : 1980 – 1995 (Variation in percent)

Collective, social and personal services 65,0 %

Financial services and services to business 62,5 %
Rubber and plastic 24,9 %
Retailing, Hotel, Restaurants 18,4 %
Pharmaceuticals 14,6 %
Computers and related 8,6 %
Transport and logistics 7,4 %
Paper and printing 7,3 %
Electronic components 4,6 %
Chemistry 3,9 %
High tech sectors 3,3 %
Cars 0,3 %
Medium – Average technology -8,2 %
Low technology sectors -10,9 %

Source : Second European Report on Scientific and Technological Indicators (1997 :34)
 31

FIGURE 4 – EUROPEAN COUNTRIES SUFFER FROM BOTH LOW WAGE AND HIGH WAGE
EMPLOYMENT GAP IN THE SERVICES

EMPLOYMENT TO POPULATION RATIOS, BY SECTORS

A. Low wage services

0,2
0,177
0,18
0,16
0,139
0,14
0,12 0,113
0,106
0,098
0,1
0,08
0,06
0,04
0,02
0
U.S. Germany France U.K. Italy

B. High wage services

0,2
0,179
0,18
0,16 0,147
0,14
0,12 0,111
0,097
0,1
0,08
0,08
0,06
0,04
0,02
0
U.S. Germany France U.K. Italy

Source : Richard B. Freeman (1998 :21)

 32

TABLE 4 – CAN EUROPEAN GROWTH BE FINANCE LED?

1998
Countries United UK Canada Japan Germany France
Parameters
States
1. Average propensity to
0.95 0.926 0.956 0.869 0.884 0.908
consume (1996)

2. Wealth in shares/
disposable income 145 75 95 30 25 20
(1997) %

3. Extent of capital
gains /disposable 35.5 15 11 -7 7 5
income (%)

4. Proportion of shares and

bonds in households’ 28.4 52.4 n.a. 25.3 21.3 14.5
financial assets

4. Monetary market rate 5.34 7.38 5.20 0.32 3.5 3.46

5. Return on bonds 6.51 5.59 7.30 1.06 3.97 4.23

6. Reference profitability 12%-16% 12%-16% 12%-16% 5% 6%-7% 9%

Sources : Line (1) Japan 1998, Keizai Koho Center, An international comparison, p. 97.
Lines (2) and (3) The Economist, September 19 th –25th, 1998, p. 129
Line (4) Japan Almanach, Asahi Shimbun 1998, p. 26
Line (5) The Economist, September 19th –25th, 1998, p. 129
 33

TABLE 5 – ALTERNATIVE EMERGING GROWTH REGIMES AND THE REDESIGN OF INSTITUTIONAL FORMS

Institutional forms Insertion into the Coherence and

Wage Labour Form of Monetary regime State/Society international dynamic of the Typical case
Growth regimes Nexus competition relations regime growth regime
Employment By quality and Active Central Bank, Developmentist Phase of export led The follower of
stability against product promoting growth. State growth typical Fordist Japan
Toyotism work malleability. differentiation of growth regime Until 1990
mass-production.
Strong Local oligopolistic Trade off between Strictly limited Internalisation of Extensive growth
Service led heterogeneity/ for traditional inflation and State, promoting modern business with rising US
inequality across services. unemployment. flexibility. services. inequality. (1980s)
industries.
Information / Dualism according to Linked to a
Role of risk capital Building of public New international Difficult to achieve
Communication the ability to master dominant position in and credit. infrastructure for division of labour for lagging countries. Silicon
Technologies led ICT. ICT ICT. according to the Valley
(ICT) mastering of ICT. (since mid-80s)
Knowledge based Dualism according to Governed by the Credit, finance and Schumpeterian New international Difficult to
economy schooling and speed of innovation. even monetary policy welfare State and division of labour implement in US
(KBE) cognitive skills. pulled by innovation. State. according to KBE countries, with few (1990s)
academic resources.
External market Privatisation, de- Stability of monetary Pro-active and Wider opening to Risk of over capacity Most OECD
Competition led flexibility and regulation, policy. market enhancing international trade, and deflation. countries (since
competitive wage. liberalisation. State investment, finance. 1985)
Frequently By price and/or by Targeted towards New mercantilist Key institutional Strong dependency East Asian NICs
Export led competitive, but quality. Price and exchange strategy. form. from external (Before 1997)
exceptions. rate stability. disturbances.
Employment Mainly on financial Prevent the Under scrutiny by Trend towards global Risk of systemic
Finance led flexibility, profit markets, but trend emergence of financial markets: finance. financial instability. US & UK
sharing and pension towards oligopoly. financial bubbles. search for credibility. (1990s)
funds.
 34

TABLE 6 – THREE SOCIAL SYSTEMS OF INNOVATION ARE COEXISTING WITHIN EU

A previous work (Amable, Barré, Boyer, 1997:42­3) has proposed a theoretical analysis about the existence of
alternative social systems of innovation, gathered a series of statistical indexes in order to capture the major
features   of   twelve   OECD   countries,   showed   the   clustering   of   data   around   four   configurations:   the   social­
democrat   model   (Sweden,   Norway,   Finland);   the   meso­corporatist   model   (Japan);   the   market­based   model
(USA, UK, Canada and Australia); and the public­institutions­based model (France, Germany, Italy and the
Netherlands).
It is interesting to notice that within the fifteen countries belonging to the European Union, three distinct social
systems of innovation are observed.

The market­based model. 
The US, UK, Canada and Australia form this group. Competitiveness is low, unemployment and growth are at
average  levels. Other characteristics include difficulties in implementing post  Fordist  productive principles;
strong   industrial   specialisation   in   aerospace   and   chemicals;   important   military   R&D;   high   level   of
publications/GDP but low levels of patents/GDP; flexibility of the labour market; and high level of expenditures
in education but weak training. The financial system is sophisticated, and venture capital available.

The social­democrat model
Sweden, Norway and Finland constitute this group. Competitiveness is average, unemployment (during the 80s)
is low and growth is moderate. Foreign­based subsidiaries of domestic firms are important for their laboratories.
Firms have adopted most of the principles of the 'new production model'. Industrial specialisation is strong in
resource­intensive   activities.   Public   research   plays   an   important   role,   scientific   specialisation   is   clear   in
medicine and biomedical research. Mobility and skills of the labour force are rather high. Education expenditure
is high. The financial system is not very sophisticated, no venture capital is available and the cost of capital is
rather high, but the ability to raise funds on international markets is good.

The public­institutions­based model
France, Italy, Germany and the Netherlands form this group. Competitiveness is rather high, unemployment (in
the   early   90s)   is   high   and   growth   is   slow.   Income   distribution   is   favourable   to   the   poorest   20%   of   the
population. Adaptation to the new productive model is average. Otherwise, this group is characterised by a
certain   number   of   specialisation   characteristics.   Scientific   and   industrial   specialisation   is   marked   in
pharmaceuticals, aerospace and chemicals. Low level of scientific publications/GDP. External flexibility and
mobility of the labour force is low. The financial system is relatively unsophisticated. Public expenditure in
education is relatively high, but total education expenditure is moderate.

As we see here, the scientific profile does not mechanically determine technological specialisation, any more
than technological specialisation mechanically determines macro­economic performance. It is neither necessary
nor sufficient to have a dominant position in high tech to enjoy low levels of unemployment and high growth.
Institutions that organise the innovation process are determinant : there is no ideal configuration to organise the
relationships between science, technology and the economy.
35
 36

TABLE 7 – TOWARD A KNOWLEDGE BASED ECONOMY : THE NEED FOR NEW POLICIES IN
ORDER TO COPE WITH THE RELATED EXTERNALITIES.

ROBUSTNESS
NATURE OF INTENSITY OF
OF ECONOMIC POLICY TOOLS
EXTERNALITIES IMPACT ESTIMATES
Tangible capital Strong High  Low taxation of capital, efficient
financial market, stable
macroeconomic environment.
Intangible capital Variable across Rather large  Intellectual property rights.
industries (high  Interconnectedness of academia/
in science related research industry.
industries)  Tax and credit neutrality with
respect to the choice between
tangible and intangible capital.
Knowledge and ideas Assumed to be Major difficulties,  Capital and labour mobility.
quite important little robust  High priority to education and
for the future. econometric training.
evidence.  Subsidy to networking and joint
venture.
 Openness of national research to
world community.
Human capital Important. Rather well  Subsidy to education and
documented. vocational training.
 Definition of tracks and diploma.
 Easy access to credit by students.
Learning by
 doing Significant. Not so much  Employment stability but need for
statistical evidence, the stimulus by competition.
but some
monographic
evidence.

 Using Seemingly Little clear evidence.  Exposure of the population to new

increasing and generic technologies.
Localised externalities Potentially very Uncertain, but some  Incentive to science parks.
(industrial districts, important monographic  Quality of local infrastructures.
science parks,…) (Detroit, Silicon evidence.  Closeness of the links between
Valley, Route 128) education, research and
entrepreneurship.
Quality ladders Positive upon Indirect statistical  Polyvalence and high skills of
firms profit estimates workers.
 Demanding collective norms
(minimum wage, environment).
Public infrastructures From strong to Rather problematic.  Detect the nature of infrastructures
vanishing actually limiting growth.
 Redesign public budgets
accordingly.
Forms of competition Usually perceived In many high tech  Tune taxes in order to foster the
as important, but sectors positive optimum innovation intensity for
ambiguous impact (telecomm…) the society.
 37

FIGURE 5 – WHAT STRATEGY AGAINST EUROPEAN UNEMPLOYMENT ?

 38

A. Investing still matters

20

Spain
18

16
Standard Unemployment rate (1998)

14

Italy
12 France
Finland

10 Greece
Belgium Germany

8 Sweden Canada
Ireland

UnitedKingdom
6
Denmark Portugal
United States Austria
4 Netherlands Japan
Norway
Luxembourg
2

0
10 12 14 16 18 20 22 24 26 28 30
Investment/Gross Domestic Product (1995)
 39

FIGURE 6 – THE IMPACT OF TECHNOLOGICAL COOPERATION UPON THE SALES OF NEW

OR IMPROVED PRODUCTS.

B. The Role of Computer Literacy...

20

Spain
18

16
Standard Unemployment Rate (1998)

14

12 Italy France
Finland

10 Greece
Belgium Germany
Sweden Canada
8 Ireland

United Kingdom
6
Portugal Denmark
Austria United States
4 Japan Netherlands
Norway

0
0 50 100 150 200 250 300 350 400
Personal computer (1998)

C. …And of Internet literacy

20

Spain
18

16
Standard Unemployment Rate (1998)

14

Italy
12
France
Finland

10 Greece
Belgium
Germany
Sweden Canada
8 Ireland

United Kingdom
6
Portugal Denmark
Austria United States
4 Japan Netherlands
Norway
Luxembourg
2

0
0 20 40 60 80 100 120
Internet Host (1998)
 40

Without technical cooperation

With technical cooperation

Source : European Community Survey on Innovation (1997).

 41

FIGURE 7 – THE EURO SETS INTO MOTION A SERIES OF COMPLEX TRANSFORMATIONS, BOTH
AT THE NATIONAL AND EUROPEAN LEVEL, WITH UNINTENDED FALLOUT

A three level analysis.

European institution
building

TRANSFORMED ENDOGENOUS CHANGES

NATIONAL POLITICAL IN INTERDEPENDENT
ARENA REGULATION MODES

 Keynesianism and Fordism at the European level : A first scenario.

+
European institution
building

TRANSFORMED ENDOGENOUS CHANGES

NATIONAL POLITICAL IN INTERDEPENDENT
ARENA REGULATION MODES
- -
 National structural reforms of labour market: a second scenario.
-
European institution
building

TRANSFORMED ENDOGENOUS CHANGES

NATIONAL POLITICAL IN INTERDEPENDENT
ARENA REGULATION MODES
+ +

+ : stronger changes - : slower changes

 42

TABLE 8 – AT WHAT LEVEL SHOULD EACH ECONOMIC INSTITUTION AND ECONOMIC

POLICY COMPONENT OPERATE ?

Domain Nature of the externalities / Institutional

co-ordination problems arrangements
Monetary policy Monetary stability enhances the European Central Bank, as a
single market and financial federal entity.
integration.
Spill over from one country to A common rule for each country :
Budgetary policy another of any national deficit or the stability and growth pact
surplus. embedded in the Amsterdam Treaty.
Regime competition for the more Ad hoc co-ordination among
Tax policy mobile factors (capital,Ministries of Finance in response to
professionals). emerging problems.
Policy mix Strategic interaction between Co-ordination within an informal
monetary and budgetary policy group (Euro11)
 Limited labour mobility across A large variety across countries :
borders.  Negotiation of national pacts
Wage / employment  At the structural level, spill over (Netherlands, Spain, Italy,
from managerial strategies Finland).
(restructuring) to the financing  Decentralisation and more
of welfare (early retirement). heterogeneity across various
forms of labour contracts (UK,
France).
Possible distortion by national Monitoring of competition by a
Competition policy of fair competition on the European body, but national
single market. enforcement.
The externalities may be operating The related institutions differ :
at :
 The world level (Science,  Open science and uniform/
Pharmaceutical, Software). universal patenting.
Innovation  The European level (transport  European programmes
infrastructures, co-ordination fostering networking
of research centres and firms). (subsidies, credit).
 The national level (legacy of  National science and technology
each system of innovations...). policies.
 The regional level (industrial  Regional policies
districts, science parks,...)
 Strategic use of competitive  A single exchange rate for all
devaluation. members of Euro11.
Insertion into the world  Rules governing exchange rate
policy for other countries
economy  Strategic and new interaction  Single representative in
between exchange rate policy of international negotiations about
the EU, US and Japan. trade.
 Shared responsibility for finance
between ECB and head of
European Council.
 43

TABLE 9 – THE NEW STYLE FOR ECONOMIC POLICY: A CONDITION FOR OPTIMISING THE
EUROPEAN POLICY MIX

The top-down approach The relational approach

Key actors National Ministry of Finance Independent European Central

Bank

Centralisation / Strong centralisation Shared responsibility of the

Decentralisation of decisions policy mix

Source of efficiency Coherence of a centralised Credibility, reputation

program compatibility with private
actors expectations

Information flow From public authorities to Informal cross exchanges

private agents via public among separate public bodies
statements and major private players

Method to take decision Mainly centralised tools with Learning from interactions
little concerted action between actors with different
objectives

Tools Macroeconomic modelling Rational expectations models

with static or adaptative or at least forward looking
expectations reasoning

Emblematic example French Ministry of Finance Euro11

Periods 60s and 70s 90s - Early next century

Source : Freely inspired from EC/DGE “Reinforcement of mechanisms for economic policy
co-ordination”, July 28, 1999.
 44

FIGURE 8 – A POSSIBLE OUTCOME OF THE MACROECONOMIC DIALOGUE: A BETTER POLICY-MIX.

NATIONAL OR EUROPEAN PACTS EUROPEAN CENTRAL BANK

BETWEEN SOCIAL PARTNERS

UNIT PRICE
LABOUR STABILITY
COST AND
STABILITY GROWTH

PUBLIC DEFICIT DISCIPLINE

CREDIBILITYOF A DE FACTO
PUBLIC SPENDING COORDINATION
AND TAXATION OF NATIONAL
POLICY POLICIES

MEDIUM TERM PUBLIC SPENDING STRATEGY

NATIONAL BUDGETS
 45

FIGURE 9 – WHY ECONOMIC POLICY REMAINS DIFFICULT WITHIN EUROLAND

Nested hierarchy and large role of global finance

New rules for the

international economy

World International financial

markets

Assesses

Economic Union European Central Bank

Credibility

Stability and Assesses

growth pact

Nations National Ministers of

Finance
 46

FIGURE 10 – EUROPEAN UNION : THE SAME MACROECONOMIC ENVIRONMENT BUT

CONTRASTED UNEMPLOYMENT RATE EVOLUTIONS

A. Medium size European countries: a premium to social deregulation?

Source : Seibel (1999: 24)

B. Small open economies: The primacy of new social pacts?

Small countries 1988 1998 Variation

Austria 3.3 4.4 
Ireland 16.1 7.8 
Denmark 6.1 5.1 
Portugal 5.5 4.9 
Netherlands 7.5 4.0 
Finland 4.4 11.4 
Sweden 1.8 8.2 
Luxembourg 2.0 2.8 
Source : OECD (1999) Economic outlook.
 47

TABLE 10 – WHAT REFORM OF INDUSTRIAL RELATIONS IN ORDER TO COPE WITH EUROPEAN MONETARY POLICY ?
RESULTS STRENGTHS SHORTCOMINGS LIKELIHOOD
CONFIGURATIONS

  Few actors are capable of negotiating within

1. EURO-CORPORATISM Entirely compatible with the new
this sort of framework
Collective bargaining at a European level monetary system. Very likely to somewhat
according to the European Central Bank’s  The German model is transposed to all of
 Inside of Europe, there are many different improbable
monetary policy conceptions of how the Union should turn
Europe
out
 Limited applicability , may lead to the
 Emergence of a pan-European type of further heterogenisation between
2. XENO-CORPORATISM solidarity between employees employment contracts in national vs.
Emerging, but of limited
Collective bargaining within the European  Extension of the 1994 EU directives international firms
scope
multinationals concerning the circulation of information  Upsets the balance of power between the
within transnational companies. tripartite institutions – capital can migrate
more readily than employees
3. INTERLOCKING INDUSTRIAL RELATIONS :
Multipartite bargaining and interlocking  The country reconciles its
systems of structuring industrial relations macroeconomic constraints with the  Complexity of an approach that requires
situations in its various sectors and separate but interlocking negotiations.
 At the European level : depends on price
expectations firms.  Uncertainty as to the level at which Conceivable – might even
 At the national level : depends on benefits and  The system is coherent with the way in negotiations should be carried out. Plus, who
be probable
solidarity which power is distributed to collective should be the catalyst - local firms or the
actors – not all of whom have the same European Union?
 At the company or industry level : profit- hierarchical level
sharing
 A fragile mechanism that can be
destabilised by domestic German political
 To preserve the differentiation of interactions (cf. the 1999 wage adjustment Very likely (de facto co-
4. HIERARCHISATION OF INDUSTRIAL RELATIONS national practices, the supervisory ordination between
negotiations)
 The German tripartite mechanism was the first institutional mechanisms must become Germany, Holland,
to set wages according to the European flexible  In theory, the Euro is supposed to establish Belgium and Austria) but
Central Bank’s monetary policy a completely pro-rata symmetry between problematic in countries
 The aforementioned asymmetry the various member countries, reflecting
 Afterwards, tripartite institutions in the other (between Germany and the other their weighting in the macroeconomic
where negotiations are
European countries negotiated their own trade European countries), is perpetuated, but totally decentralised
aggregates (already the case in the UK
off between wages and employment monetary policy can be transposed into
the wage setting realm  Certain countries lack any tripartite , soon to be in France)
institutions that are willing to adopt this
strategy
5. NATIONAL NEO-CORPORATISM  The coherency between existing laws  Companies may prefer complete
The national pacts adopted by the firms and and institutions facilitates compromise of decentralisation to this new version of neo- Very likely (already
employees in each country in light of the this ilk corporatism operational in Italy, Spain,
policies of the European Central Bank’s  An opportunity to negotiate reforms that  High unemployment can weaken unions’ Holland and Finland))
policies. can improve the job market bargaining position
6. MESO-CORPORATISM  The variability of each sector’s  Different sectors have very heterogeneous Possible in a small number
The whole sector becomes involved in competitiveness is taken into account pay systems of sectors (automobile,
collective bargaining at a European level chemicals, freight…)
 Forces that support this kind of  What to do with protected national
 48
negotiation are emerging inside of
industries?
Europe
 Attempt to improve the trade off  If employees are not particularly mobile,
Very likely in countries
between wages and employment wage differentials can rise
7. MICRO-CORPORATISM where very few
Negotiations are only held at the company level  Corresponds with the 1980s and 1990s  In certain configurations, unemployment negotiations are
trends towards decentralised wage coexists with inflationary tendencies (UK in centralised
bargaining the 1980s)

 Full employment (at least in theory)

 Undermined by modern microeconomic
theories concerning the prerequisites for full
 No need to co-ordinate collective employment
8. LABOUR MARKETS structures Not to be excluded, but not
Competitive labour markets are set up
 Strong unions can keep this from happening inevitable
 Corresponds to the American model -
 What to do if the free market loses
a “job-making machine”
popularity because it engenders inequalities
(ie France)?

FIGURE 11 – A GOOD NEWS : THE NEW HIERARCHY AMONG INSTITUTIONAL FORMS IS TAKEN INTO ACCOUNT BY THE STRUCTURE OF EUROPEAN
TREATIES AND SUBSEQUENT DECISIONS

World Financial Trends Monetary Policy Stance

European monetary regime Monetary policy Exchange rate

ECB Council (+ECB/Commission)
Internal External article 105 Article 111

Broad Economic Policy Guidelines

Council
Article 99

State / Society Form of Wage labour Stability and Cardiff process Luxembourg
Relations competition nexus growth pact proc
ess
Article 127
Lean State More Reactive wage / Stability / Competitive Employment
 49
competition on hours / Convergence product markets guidelines
product markets Employment program

A viable “régulation mode” Cologne process

The need for coherent institutional architecture The need for macroeconomic dialogue
 50
FROM A MACROECONOMIC RECOVERY TO THE IMPLEMENTATION OF A VIRTUOUS CIRCLE and LONG TERM GROWTH regime.

FIGURE 12 – STRATEGY ONE : USE THE DIVIDEND OF FASTER GROWTH TO LOWER THE TAX AND REMOVE WELFARE RELATED BARREERS TO JOB
CREATION AND LAUNCH THE MACROECONOMIC DIALOGUE

Low real Invest in immaterial More skilled

Interest rate capital work force

Constant labour unit

Mutual information Pragmatic approach to costs via wage Incentive for job
within Euro11 policy mix bargaining creation

Extra Budgetary Lower taxation More job offer

resources of labour

Incentive to business
creation

Mutual interest for the Self enforcing

macroeconomic tripartite Job creation
dialogue agreements

TABLE 11 – THE INSTITUTIONAL SETTING FOR STRATEGY ONE

European level National level Decentralisation

Wage labour nexus European collective agreements National pacts Decentralisation of wage formation
Form of competition Possible contribution of the extension of
the Single market
Monetary regime Reaction to symmetric real shocks

State/Society relations Pro-labour reforms of the tax and welfare

financing
Insertion into the international
regime
 51

FIGURE 13 – STRATEGY TWO : CONVERT THE INFORMATION AND COMMUNICATION TECHNOLOGIES (ICT) INTO THE BASIS FOR A KNOWLEDGE
BASED ECONOMY (KBE)
New business
Smart enterprise (services to firms, New jobs
e-mail commerce)

The learning economy More polyvalent

Subsidies and credit Diffusion calls for innovation in and New work
for ICT/KBE of ICT education and training reactive workers organisation

From production to More

Digital State monitoring of productivity
collective goods

Redesign of most Endogenous Acceptance The positive impact of

institutional shift towards by workers diffusion of ICT is
rules a KBE of mobility higher than the direct
deficit in ICT production

TABLE 12 – THE INSTITUTIONAL SETTING FOR STRATEGY TWO

European level National level Decentralisation

Wage labour nexus Mobility of scientists and professionals Ambitious programs for training and
retraining workers to ICT and the KBE
Form of competition Facilitation of business creation, clear
property rights for information/ knowledge
Monetary regime Stable monetary rule with low real interest
rate. Active financial trading in order to
transfer capital from mature to sunrise
industries
State/Society relations Provide the education, infrastructures and
tax incentives for KBE
Insertion into the international Import of ICT against export of KBE
regime
 52

FIGURE 14 – STRATEGY THREE : GENDER EQUALITY AND RESPONSES TO AGEING AS THE SOURCE OF A NEW SERVICE LED GROWTH

Supply of skilled More supply of new

labour and mature goods

Reforms of labour Extension of women

legislation, welfare activity (two incomes More service
and tax system family) related jobs

New care and other

services
Extended
demand
Health and social
services

Ageing of
population

Redesign Easier financing of

of public budget and
institutional rules welfare
 53

TABLE 13 – THE INSTITUTIONAL SETTING FOR STRATEGY THREE

European level National level Decentralisation

Wage labour nexus Promotion of gender equality  Life long cycle of activity
 Extension of retirement age
Form of competition Facilitation of new services Tax reduction for the services sheltered
from international competition
Monetary regime
State/Society relations Complete redesign welfare for a two
incomes family
Insertion into the international Relative autonomy of a welfare based
regime growth regime

FIGURE 15 – STRATEGY FOUR : RIDING THE FINANCIAL GLOBALISATION

Monitoring of Low taxation of Careful assessment

public policies capital of public spending

Search for
Redesign of oligopolist power
prudential and Financial Redesign of Renewal of Changing
surveillance tools Globalisation corporate governance competitive hedge production pattern
Incentive to
innovation

Reactivity of wage Profit sharing /

labour nexus Stock-options

Privatisation of Transformation of Finance led

welfare social stratification consumption

High profit Fast employment adjustments

 54
TABLE 14 – THE INSTITUTIONAL SETTING FOR STRATEGY FOUR

European level National level Local

Wage labour nexus General guidelines about profit Negotiation about the sharing of the Highly differentiated formula across firms,
sharing/stakeholder society dividends from finance regions,…
Form of competition Enforcement of fair competition in spite of Possible exceptions for local activity
oligopolistic trends sheltered from international competition.
Monetary regime Preventing asset inflation, as another Sharpening of national enforcement of
objective of ECB prudential ratios and control.
State/Society relations General guide lines Privatisation of some components of
welfare. Monitoring of the private
production of public goods
Insertion into the international Role in the restructuring of the
regime international architecture of finance
 55

TABLE 15 – MAPPING OF INSTITUTIONAL REFORM INTO THE VARIOUS EUROPEAN PROCESSES

IMPACT UPON INSERTION INTO

MONETARY STATE/ECONOMY RELATIONSHIP WAGE LABOUR FORM OF COMPETITION THE
REGIME NEXUS INTERNATIONAL
ECONOMY
European Monetary policy Budgetary policy Tax policy Policy mix Wage/Employment System of Competition External relations
Council innovation regime (trade, finance)
Amsterdam Run by the
Council European Central
June 16-17th, Bank according to
1997 the objectives set
by the Treaty
Luxembourg
Process
November 20-
21st, 1997
Cardiff
European
Council
Vienna Council Experiment about
reduced VAT in
labour intensive
services not
internationalised
Cologne Council Participation of Employment Fostering
June 1999 social partners to guidelines entrepreneurship
economic policy Employability,
discussion entrepreneurship
Adaptability, equal
opportunities