Other methodological approaches were also considered but it was felt they would not offer sufficient insights. In particular sectoral analysis was looked at. Christine Ingebritsen (1998) argues that the sector approach is well suited to the study of European integration insofar as it has proceeded according to a sectoral logic – from coal and steel to agriculture, capital goods, and services. She opines that the small Nordic states are particularly appropriate for the application of sectoral analysis because of their high degree of dependence on a limited number of exports. This may be true for the Nordic countries but it would not necessarily assist in understanding, say, the complexities of consociational democracy underpinning the polder model in the Netherlands or the imperatives for policy that arise from overarching features of European integration such as EMU. Nor would it be particularly helpful in explaining the dualist nature of the Irish economy which relies on foreign companies for 90 per cent of its exports. These FDI companies enjoy a completely different and higher status in the power constellation than do indigenous companies. Whereas Nordic states which are export-dependent might seek to defend leading sectors in foreign economic policy, Ireland would be much more motivated to defend its independence in areas of fiscal policy such as corporation tax so as to attract inward investment. Moreover, as Ingebritsen (ibid:44) acknowledges, sectors do not always define the choices available to the State (geopolitical issues might be a factor, for example) and sectors are caught in a two level game because by their very nature they bridge the international and domestic political spheres.
Ingebritsen (ibid) herself considers and rejects certain theories of EU integration as unsuitable for the study of small open economies. Neofunctionalism she believes does not allow for the fact that the shift from national policy making to supernational policy making has been much more contested in the Nordic States. She also asserts that intergovermentalists miss important variations in the political influence of social actors. Citing Maria Green Cowles (1995) she uses the example of the European Roundtable of Industrialist (ERT), set up by the Swedish industrialist Pehr Gyllenhammar, as strongly influencing the Single European Act. In any event Ireland, it will be seen later, never attempted to strongly influence the course of European integration through intergovernmentalism.
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Conclusion
This research takes as its starting point the study of a number of small open economies conducted by Peter Katzenstein (1985). It concludes with an assessment of where the comparator countries – Finland, Denmark, the Netherlands, and Ireland – find themselves on the fifth anniversary of the collapse of Lehman Bros. Bank on 15th September, 2013. The periodisation book ended by these events is organised to reflect key phases of European integration and its impact on developmental outcomes in each country.
The objective of the research is to evaluate how the world of Katzenstein changed with Europeanisation – and with globalisation and financialisation more generally – and how the development models of the individual countries evolved with that change.
In Ireland’s case the research methodology goes deeper and draws on the fields of international relations and political science. A conceptual framework first developed in 1971 and substantially reengineered by Allison and Zeilkow in 1999 is refined by incorporating new institutionalist approaches. A number of precautions are taken to mitigate potential flaws which might otherwise skew the explanatory output from the model in one direction or another.
The refined model aims to give a ‘thicker’ explanation of why Ireland performed as it did over the periodisation by looking at specific aspects of Europeanisation including; the general stance of the country towards European integration, economic and monetary union, and social policy and social pacts. This approach is also consistent with certain requirements of analysis proposed by Hemerijck (2013) when he observes that policy actors reflect not only on policy problems and their resolutions, but also on causal links between institutions and their power positions.
It accommodates his call for, ‘a better understanding of how policy relevant ideas get selected, modified or ignored depending on constellations of power’ (ibid: 46).
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CHAPTER 3: Katzenstein’s World and The Comparator Countries
Introduction
Katzenstein (1985) was writing against the background of quite impressive political advancement in Europe as a whole. In 1974 the Caetano regime in Portugal was ousted in a military coup. By 1976 Mario Soares had settled the country down into peaceful democratic rule. The military dictatorship of the colonels was also ended in Greece in 1974 clearing the way for the election of the Karamanlis led government.
A year later, in 1975, General Franco of Spain died allowing that country also to transition to democracy. It should not be forgotten, however, that the EEC and United States had been willing to deal with these states as dictatorships for reasons of geopolitical and military expediency. There were added complications in Portugal’s case, which complicated life for the EEC, because it had colonial possessions in Mozambique and Angola from which it disengaged in the mid 1970s.
By the 1980s each country was part of a stable, if divided, liberal democratic Europe. That was only the beginning of the transition. Few could have imagined in 1985 that six years later, the USSR would cease to exist and that Germany would be united. The end of the bi-polar cold war world could not have been foreseen in 1985 nor could the savage conflict in the Balkans which was to erupt on the European Union’s doorstep (Fukuyama, 1992; Hobsbawm, 1994; Huntington, 1997).
Katzenstein (1985:20) identified three dominant political forms of contemporary capitalism: liberalism in the United States and Britain; statism in Japan and France;
and corporatism in the small European states and, to a lesser extent, in West Germany. Those models of capitalism were engaging with what Katzenstein (ibid:22) described as ‘rapid change in the global economy’. Some of these changes have already been adverted to in Chapter 2 and can be summarised as including:
global inflation, escalating energy prices, prolonged recession, increases in trade rivalries and protectionism, volatile foreign exchange markets, skyrocketing interest rates and debts, and structural readjustment. The oil crisis of 1973/74 had been compounded in 1979/80 by a major conflict between Iran and Iraq. Whereas
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exporting or pre-empting the costs of change in adversity might in certain circumstances be options available to large industrial states, it was Katzenstein’s (ibid) contention that small open European economies had no choice but to accept economic adjustment forced on them by markets while using a variety of social and economic policies to prevent the cost of change from causing political eruptions. In other words, economic flexibility and political stability are mutually contingent (ibid:191).
Nevertheless, Katzenstein (ibid: 192) acknowledged that in the early 1980s increasingly adverse economic trends were putting the corporatist model under strain. A 50 per cent decline in the growth rate of world trade (from 8.6 per cent in 1960-73 to 4.2 per cent in 1974-80) had created a more difficult economic environment for small countries depending on trade with others. The five small countries (including the Netherlands and Denmark) that accounted for most of the engineering exports from small countries had been losing market share from the mid-1970s. This crisis in industrial production created the phenomenon of stagflation, that is simultaneous inflation and unemployment. From the vantage point of the mid-1980s this trend appeared to be structural rather than cyclical.
These structural problems were compounded by economic policy decisions by large countries which caused high interest rates more damaging even than the 1973 and 1979 oil crises. Specifically, changes in US monetary policy in 1979/80 led to a major increase in international interest rates (Mjoset, 1992:72).
Scharpf (1991) observes that a coherent social democratic or Keynesian economic policy – one which gives priority to full employment – was objectively still possible during the 1970s. Mjoset (1992) refers to a period when Keynesian and non-Keynesian approaches co-existed but often produced unintended outcomes. He describes this as a phase of ‘fumbling’ or ‘muddling through’, which reflected the contradiction between domestic priorities and economic feasibility. However, the crisis of the early 1980s marked the transition to a new more liberal era.
Katzenstein (ibid:197) noted that political leaders in the Netherlands and Denmark were already contemplating welfare reforms to bring social spending into line with the new realities but he predicted that even conservative leaders would not be
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allowed to dismantle the welfare state. But he also observed that the calibration of welfare policies with international competitiveness had intensified political conflicts in the small European states. As an example of this he cited Swedish prime minister, Olof Palme, calling businessmen ‘Baboons and Elephants’.
Katzenstein was concerned to keep things in perspective. He pointed out that while the formal ‘consociational’ arrangements made between political parties in the 1960s in several of the small European States had eroded, and Social Democratic hegemony in Scandinavia partially decomposed in the 1970s, both developments had left democratic corporatism remarkably unchanged. The reason he gave for this is that democratic corporatism is not an institutional solution to the problems of economic change but a political mechanism for coping with change (ibid:198).
The purpose of this chapter is to chronicle the major historical events which contributed to the formation of the polities of Denmark, Finland, the Netherlands and Ireland, and, in addition, the 1987 to 1994 period will then be used as a reference baseline against which to compare how the development models evolved once European integration began to intensify as the Maastricht Agreement came into effect. The chapter will conclude with a reflection on the key differences which characterise the political economies of the four countries.