Europeanization and Globalization

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Comparative Political Studies
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DOI: 10.1177/0010414001034003001
2001 34: 227 Comparative Political Studies
DANIEL VERDIER and RICHARD BREEN
Union
Europeanization and Globalization : Politics Against Markets in the European
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COMPARATIVE POLITICAL STUDIES / April 2001 Verdier, Breen / EUROPEANIZATION AND GLOBALIZATION
The authors attempt to sort out three exogenous factors affecting the domestic societies of Euro-
pean Union (EU) member countries: market globalization, the European single market, and
European supranational institutions. They offer a research design to separate the respective man-
ifestations of each factor and apply it to four domestic dimensions: labor market, capital market,
electoral competition, and center-local government relations. Although they find systematic evi-
dence in the cases of the labor and capital markets supporting the widely shared claimthat the EU
is an agent of globalization, the results also point to the importance of the voluntarist component
in the electoral and subgovernmental domains.
EUROPEANIZATION
AND GLOBALIZATION
Politics Against Markets
in the European Union
DANIEL VERDIER
RICHARD BREEN
European University Institute
T
he academic debate about European integration no longer bears on
whether there is integration, as it used to until 15 years ago. It also does
not seemto bear on whether the actual agent of this integration is the council,
the commission, or the court. The debate bears, instead, on the mechanism
that is responsible for that integration: Is it the market or the will to build a
polity?
227
AUTHORS NOTE: We thank Geoffrey Garrett, Dennis Quinn, and Duane Swank for supplying
us with some of their data. We thank our colleagues at the European University Institute, Jim
Caporaso, three anonymous reviewers, and Brian McCormack for useful comments. A draft of
this article was presented at the 1999 Meeting of the International Studies Association, Omni
Shoreham, Washington, DC, in February 2000. Correspondence concerning this article should
be addressed to Daniel Verdier, European University Institute, Via dei Roccettini 9, 50016 San
Domenico di Fiesole (FI), Italy.
COMPARATIVE POLITICAL STUDIES, Vol. 34 No. 3, April 2001 227-262
2001 Sage Publications, Inc.
The debate is complicated by global trends. In Europe, as elsewhere, fac-
tor markets are being deregulated, partisan identification is eroding, local
governments are becoming more active, and so forth. Yet from a European
Union (EU) residents perspective, the origins of these ubiquitous changes
are unclear. It is unclear whether they reflect global trends, referred to as
globalization, or the play of forces that are directly attributable to European
integration, Europeanization.
When trying to explain changes in EU countries, therefore, observers are
faced with a trinity of plausible factors: global markets, the single market,
and the political union. Sorting out their respective effects is a daunting task,
to which we give a first crack. We first try to theorize the general implications
of each effect and then empirically test for their actual occurrence. Although
we find evidence supporting the widely shared claim that the EU is an agent
of globalization, our results also point to the importance of the voluntarist
component.
THE QUESTION
European integration can theoretically proceed in two ways. One is the
construction of a single market without a political union. The other way is to
build a political union with a wide range of centralized policies. Although
reality falls somewhere in between these two ideals, political scientists are of
the opinion that European integration as of late has leaned toward market
integration more so than political voluntarism. Apologists praise what
Majone (1996) calls the gradual depoliticization of the Common Market
(p. 330), which has taken common market countries away from planning,
corporatist self-regulation, and the public ownership of natural monopolies
toward the regulation by experts and regulatory commissions of private and
privatized monopolies. Consistent with this line of argument is the creation
of a single currency managed by an independent central bank. Critics alike
lament what Scharpf (1996) and Streeck and Schmitter (1991) call negative
integrationthe practice of striking down national regulation without
replacing it with supranational regulation. The policy of merely purging mar-
kets frombarriers to competition worked because, as Lange (1992) put it with
respect to social policies, There is no compelling need to harmonize social
policies in order for the single market to operate effectively (p. 253). The
outcome is even deemed by some as biased toward big business: Grahl and
Teague (1989) equate European integration with the gradual erosion of
social constraints on the normless self-definition of economic objectives by
the strongest enterprises themselves (p. 50). The only dissenting voice
228 COMPARATIVE POLITICAL STUDIES / April 2001
comes from two American economists. Alesina and Wacziarg (1999) write
that
Europe is going too far on many issues that would be better dealt with in a
decentralized fashion, while it is not going far enough on policies that guaran-
tee the free operation of market both across and within the countries of the
Union. (p. 3)
Except for these two, the consensus among Europeanists is that EU institu-
tions have promoted an exclusively economic form of integration, doing lit-
tle to construct a centralized system of interest representation and decision
making in a broad range of issuesa polity.
If Europeanization is de facto synonymous with deregulation (or mar-
ket-conforming re-regulation, as Majone, 1996, puts it), then its effects
should be similar to the effects of globalization. The globalization of national
markets is indeed a case of market integration by deregulation, involving the
enlargement of the national market to the global market and requiring no
(inter-)governmental action other than the deregulation and opening of mar-
kets.
1
The deregulatory effects of globalization, presently the object of a
voluminous literature, are commonly said to be four-pronged. We quickly
survey these results, temporarily suspending judgment on their empirical
validity.
First, the openness of product markets intensifies competition between
firms, forcing the path of innovation (see Castells, 1996; M. E. Porter, 1990)
and increasing the instability of input markets, in particular, the labor market
(see Streeck, 1987). The capacity of firms to locate newinvestments in wage
havens makes domestic investment sensitive to domestic wage levels (see
Chase, 1998; Thurow, 1996). Labor instability creates a demand for govern-
ment to insure workers against market risk through unemployment benefits,
government employment, and the provision of assorted social services.
Second, and simultaneously, cross-border capital mobility undermines
the capacity of the government to deliver this much-needed insurance. Capi-
Verdier, Breen / EUROPEANIZATION AND GLOBALIZATION 229
1. The identity between globalization and market competition is not absolute. Global mar-
kets do not exist in an institutional vacuum but are embedded in NATO, the OECD, the GATT,
the World Trade Organization, and the belief, held by the most advanced countries, in the desir-
ability of trade and financial openness. The difference between these global regimes and the
European Union (EU) is one of degreethe latter has stronger coordination mechanisms than
the former. Because all EUcountries are also members of all global regimes, the potentially spu-
rious impact of global regimes on markets is automatically controlled for, allowing the analysis
to focus on the added impact of EU regional institutions. Furthermore, although some non-EU
countries are also involved in some formof regional organization (European Free Trade Agree-
ment, North American Free Trade Agreement, Mercosur, and so forth), none of these schemes
have reached a level comparable to the EU.
tal mobility increases the elasticity of the domestic tax base with respect to
the tax rate (see Bates & Da-Hsiang, 1985; Rodrik, 1997; Steinmo, 1993).
Capital mobility also deters governments from financing budget deficits by
printing money or over borrowing (see Kurzer, 1993; Strange, 1986). Which
of these two forcesthe rising demand for public insurance and the sinking
capacity to meet that demandprevails is a priori indeterminate and a matter
for empirical research. Both Garrett (1995, 1998) and Swank (1998) argue
that some of the alleged effects, far from being general, are mediated by
domestic institutions.
Third, as markets are becoming more important, governments are becom-
ing less so. Loyalty to political parties declines, along with voter turnout and
government stability. Politicians are losing the capacity to govern at the same
time as government loses some of its prior relevance to market allocation.
Fourth, greater factor mobility frees up latent economies of agglomera-
tion, causing a territorial relocation of mobile factors away from poor or
declining peripheries to wealthier and upcoming centers (see Fujita,
Krugman, & Venables, 1999; Krugman, 1991). Increasing territorial
inequalities between local jurisdictions raises the demand for offsetting terri-
torial transfers administered by the central government. The capacity of the
central government to supply these transfers, however, is on the decline. Dis-
tricts that win from relocation oppose these transfers (see Bartolini, 1998).
Lower dependence on the national market makes secession a credible threat
(see Alesina &Spolaore, 1997; Bolton, Roland, &Spolaore, 1996). Which of
the two forcesthe increasing demand for offsetting territorial transfers or
the declining supply of such transferswins, here again, seems to be an
empirical matter.
All the presumed effects of globalizationthe emphasis on labor market
flexibility, bank privatization, financial deregulation, low voter turnout,
increasing electoral volatility, the threat of secessionare not unfamiliar to
EUcountries. These similarities fuel the claims of the above-mentioned liter-
ature that Europeanization is globalization by another name. The EU is seen
as a simple agent of globalization or an irrelevant intervening factor. Euro-
pean economies would have reached a qualitatively similar state of market
deregulation by simply exposing themselves to the global winds without
engaging in the costly and painstaking construction of Europe. The commis-
sion is taking the praise (or alternatively, the blame) for an outcome over
which it has limited control.
What would be an alternative to globalization? Assuming for a moment
that Europeanization is not reducible to globalization but that the political
component is as active and as much developed as the market component,
what would Europeanization look like? We venture that the strengthening of
the political dimension, had it occurred, would translate into the preservation
of the existing (and/or the development of an alternative) interventionist
capability. The reasoning runs like this: Political voluntarism, irrespective of
its substantive goals, is ineffective without a centralized decision-making
process, easing coordination among all interested partiesnot only the
national governments but also a comprehensive system of interest represen-
tation, including the political parties that are temporarily in opposition, trade
associations and trade unions, employers and employees peak associations,
consumers associations, and so forth. The superiority of such a centralized
system of interest representation is its unique capacity to produce policies
that are not enforceable without the consent of the interested parties. The
existence of such a mechanism was found to be essential to the stabilization
of European economies in the wake of the oil shocks.
In the context of the EU, such a centralized and comprehensive deci-
sion-making process can take one of two forms: intergovernmental or fed-
eral. The intergovernmental mode of centralized decision making, the one
that is more prevalent in the present state of bounded federalism, relies on the
maintenance of separate centralized interest representation mechanisms in
each member country and their coordination at the supranational level
through government delegates (the existing Council of Ministers and derived
committees). It is a case in which interest groups and political parties remain
linked to national governments for two reasons. First, these national govern-
ments enjoy veto power within the EU legislative process. Second, the
absence of an EUbudget makes any compensatory policy the province of the
national government. Among the four issue areas that we survey below, this
intergovernmental decision-making process prevails in threelabor market,
financial market, and electoral volatility.
The second type of centralized interest representation is federal. It would
involve the creation of regional forms of interest representation in factor mar-
kets and the politythat is, social corporatism at the unions level in the
labor market, EU-regulated credit allocation in the capital market, disci-
plined parties in the European Parliament, and centralized bureaus in
Brussels. This form of interest representation is unknown to Brussels (see
Streeck & Schmitter, 1991; Turner, 1996). Its closest, yet still far remote,
approximation is the structural funds policy. This is a rare case in which the
EUhas a budget and the commission enjoys some real spending power. Cer-
tainly, governments decide on country quotas; but mutual suspicion, backed
by experience, that funds might be wasted on consumption by national recip-
ients forced governments to establish strict standards on spending, relin-
quishing monitoring to the commission. Governments also agreed to dele-
gate spending authority to subnational jurisdictions and allow direct
bargaining with the commission. The upshot has been the growth of a central-
ized system of subnational interest representation in Brussels (see Marks,
Nielsen, Ray, & Salk, 1997; Smyrl, 1998).
Although these two modes are usually represented as theoretically anti-
thetical (viz. the debate between so-called intergovernmentalists and the
manifold heirs to Haass neofunctionalism), they are both distinct from
integration via market deregulation. Either one could supply European politi-
cal elites with a voluntarist capability, enabling them to pursue outcomes in
concurrence with markets or beyond what markets can deliver. There is no
necessary one-to-one correspondence between political voluntarismand fed-
eralism or between market liberalism and intergovernmentalism. The
absence of EU-wide collective bargaining is no evidence that European inte-
gration is irrelevant to labor policy in Europe.
We should also note that the intergovernmental and federal facets of polit-
ical voluntarism are not empirically incompatible. A regional system of
interest representation, if any, would have to be built in a first stage on the
shoulders of the existing national ones. European peak associations and
European parties will be conglomerations of national units for an indefinite
amount of time.
We recapitulate the argument. Europeanization, unlike globalization,
walks on two legsmarket efficiency and political voluntarism. The market
has decentralizing and deregulating effects, making Europeanization synon-
ymous with globalization. In contrast, the polity has centralizing effects, dis-
tinguishing Europeanization from globalization.
Equipped with these definitions, we are now in a position to sort out the
relative impact of the single market and the political union while controlling
for the impact of globalization. We consider four areas of interest representa-
tionthe labor market, the capital market, and the political system, with the
latter subdivided into political parties and subnational governments. In each
case, we ask two questions: Are any of the changes that are observable in
interest representation attributable to Europeanization as opposed to global-
ization? If so, are any of these changes associated with the voluntarist compo-
nent of Europeanization as opposed to the market component? We answer
both questions in the affirmative with respect to the party system and
subnational governments only. In factor markets, we find Europeanization to
be globalization by another name.
We first present the research design followed by a quantitative survey of
the four points of impact of globalization and Europeanization. The article
ends with some general conclusions.
RESEARCH DESIGN
Our choice of method should enable us to separate three hypothetical
effects: market globalization, market Europeanization, and voluntarist
Europeanization. Either of the last two effects, moreover, may either be trig-
gered by globalization or be sui generis.
2
This makes for five hypothetical
situations:
1. The first, termed globalization-plus, implies that Europeanization is a
regional case of market broadening and deepeninga regional instance of
globalization. According to this hypothesis, EU-member countries are subject
to two cumulative forms of market broadeningglobal and regional. As a
result, European countries should evince a stronger case of globalization than
non-European countries. The globalization-plus effect implies that
Europeanization is driven by the market.
2. The opposite state, dubbed globalization-minus for reasons soon to be appar-
ent, implies that Europeanization is an insurance against external market
vicissitudes. According to this hypothesis, European countries are subject to
two opposite demandsglobalization and antiglobalizationwhich force
them to choose a lower level of globalization than non-European countries.
Cases of globalization-minus directly reveal the impact of the voluntarist
component of Europeanization.
3. The sui generis market effect implies that Europeanization has effects that are
unique to EU countries (that is, an effect associated with Europe that is not
caused by globalization). Two cases are possible depending on whether this
sui generis effect is generated by the market or by voluntarist policies.
4. The sui generis voluntarist effect is the second case of sui generis effects.
5. Last, the null effect corresponds to the situation in which Europeanization has
no discernible impact one way or another. According to the null hypothesis,
European countries should exhibit the same level of globalization as
non-European countries.
We will test for the first, second, third, and fourth hypotheses combined
and the fifth by means of one multiple regression equation. We will then sep-
arate the third and fourth hypotheses by resorting to two different specifica-
tions of the Europeanization variable.
Our generic equation examines the impact of globalization and
Europeanization together and interactively.
Y
t
=
1
+
2
(Y
t 1
) +
3
(Glob
t
) +
4
(Euro
t
)
+
5
(Glob
t
*Euro
t
) +
6
(X
t
) +
t
.
(1)
2. We assume that globalization is exogenous to Europeanization.
Our dependent variable is one of the four areas of interest representation
(Y
t
) already referred tolabor, finance, elections, and local governments.
Our model specification says that the domestic dimension at time t can
depend on its prior value (Y
t 1
), globalization (Glob
t
), Europeanization
(Euro
t
), the interaction of globalization and Europeanization (Glob
t
*Euro
t
),
and a set of control variables (X
t
) to be specified in each case.
The coefficients
3
,
4
, and
5
play the central role in tests of our hypothe-
ses. The presence of the interaction termbetween Europeanization and glob-
alization means that we can interpret
3
as the effect of globalization where
Europeanization is absent (see Friedrich, 1982). This is most easily seen
where Europeanization (Euro
t
) is simply captured by a dummy variable dis-
tinguishing the EUcountries (coded 1) fromthe other countries (coded 0). In
the case in which Euro
t
is equal to zerothat is, for the non-EU coun-
triesEquation 1 reduces to:
Y
t
=
1
+
2
(Y
t 1
) +
3
(Glob
t
) +
6
(X
t
) +
t
.
(2)
In Equation 2, the coefficients
4
and
5
do not appear because non-EU
countries have a zero score on the variable to which these coefficients apply.
3
is the effect of globalization in non-EU countries. In the case in which
Euro
t
is equal to1that is, for EUcountriesthe corresponding equation is
Y
t
=
1
+
4
+
2
(Y
t 1
) + (
3
+
5
)(Glob
t
) +
6
(X
t
) +
t
.
(3)
In this case, the coefficient for the EUdummy variable (
4
) can be thought
of as an extra term added to the intercept of the regression model, and the
effect of globalization on EU members is given by the sum
3
+
5
. In sum,
estimating Equation 1 yields the impact of globalization on EU countries
(
3
+
5
) and non-EU countries (
3
).
The globalization-plus hypothesis implies that the effect of globalization
in the EUcountriesnamely, the sum
3
+
5
has the same sign as its effect
on non-EU countries
3
and is significantly larger than it (significantly
and significant are used throughout to mean statistically different from zero
at the 5%level).
3
In this case, globalization is operating in the same direction
within and outside the EU, but its effect is stronger within the EU. A special
case occurs when
3
is not significant but
3
+
5
is. In this case, globalization
would be having an effect within the EU but not outside it. European mem-
3. The standard error of
3
+
5
is given by the square root of the sum of the variance of
3
plus the variance of
5
plus twice the covariance between these two parameters. These quantities
can all be obtained fromthe variance-covariance matrix of the parameter estimates. Note that
3
and
3
+
5
are significantly different if
5
is significantly different from zero because
5
is the
difference between
3
and
3
+
5
.
bership would thus be revealing the otherwise latent effect of globalization.
Although it is a subcategory of the globalization-plus hypothesis, we will
refer to this case as one of revealed globalization.
4
The globalization-minus hypothesis implies (a) that
3
+
5
has the same
sign as
3
and that
3
+
5
is significantly closer to zero than
3
or (b) that
3
and
3
+
5
have different signs and are significantly different. In the first
case, the overall effect of globalization is weaker in the EUthan outside it; in
the second, the effect runs in different directions in each.
5
If
3
is statistically significant but
5
is not, then the impact of globaliza-
tion is the same within the EUas in the rest of the OECD. In this case, neither
the globalization-plus nor the globalization-minus hypotheses would be
supported.
Our third hypothesisthe sui generis European effectis tested using
the
4
coefficient. If this is statistically significant, it means that there is a dif-
ference between the EU and the other countries in our sample that does not
arise as a result of the differential effects of globalization (because these are
captured in
3
and
5
). Specifically, the change in the dependent variable
would, on average, be either larger (
4
positive and significant) or smaller (
4
negative and significant) in the EU than outside it. Note, however, that if
4
were significant and the conditions for the globalization-plus hypothesis,
given above, were met, this would be a case in which there were two sorts of
Europeanization taking placecatalyzed by globalization and sui generis.
Similarly, we could also find a globalization-minus effect operating together
with the sui generis effect.
Finally, our fourth hypothesisthe null effectwould be supported if in
Equation 1, given
3
is significant, neither
4
nor
5
was significant. In such a
case, the impact of globalization would not be distinctive in Europe and there
4. The revealed-globalization effect is not to be confused with a sui generis effect of
Europeanization soon to be presented because the latter does not require the presence of global-
ization in order to occur.
5. A (fictitious) example may help visualize the difference between the two cases. Were
greater trade openness to have the overall effect of decentralizing wage bargaining between
employers and unions fromthe national to the plant level, European governments could weaken
that impact by raising trade barriers. In such a case, globalization would decentralize wage bar-
gaining outside the EU(
3
is negative and significant) and would have a different impact among
EU countries (
5
is positive and significant), that is, no impact whatsoever (
3
+
5
not signifi-
cantly different from zero). Alternatively, European employers could respond to the trade chal-
lenge by increasing coordination with the unions at the central level, as in a planned economy. In
this second case, globalization would still decentralize wage bargaining among non-EU coun-
tries (
3
is negative and significant) and would still have a different effect in EUcountries (
5
is
positive and significant), that is, to centralize wage bargaining (
3
+
5
is positive and
significant).
would not be any sui generis European effect. Asubcategory of the null effect
is no effect anywhere, inside and outside the EU.
The same strategy applies in those cases in which Europeanization is mea-
sured as a continuous rather than as a dummy variable. The only minor com-
plication is that the effect of globalization will be given by
3
+
5
*Euro
t
for all countries and, because the coefficient for globalization is then a
function not only of parameters but also of the value of the Europeanization
variable, its statistical significance will likewise depend on the value of
Europeanization.
In summary, four of our five hypotheses are tested by focusing on the
coefficients of Equation 1. It remains to explain how we differentiate be-
tween Hypotheses 3 (sui generis market effect) and 4 (sui generis volun-
tarist effect). We need two distinct measures of Europeanization, differ-
ing in terms of their relative sensitivity to each effect. The simplest measure
of Europeanizationa dummy variable taking a value of 1 for countries that
are part of the EUand 0 for countries that are notis a reasonable measure of
the voluntarist component of European integration. But it is not a good mea-
sure of the market component, for it presumes that all member countries have
the same exposure to European market forces when in fact they do notthe
large countries are much less exposed than the small ones. Conversely, a
measure of the trade dependence of a country on the EU countries is a good
measure of the market component of European integration but a poor mea-
sure of the voluntarist component of that same integration. It ranks Switzer-
land, which is not a member of the EUalthough almost totally dependent on it
for its trade, above Germany, which although one of the original members of
the EU, is a large country whose economy is comparatively less exposed to
external market forces in general. Hence, we will choose between Hypothe-
ses 3 and 4 according to whether the sui generis effect is stronger with the
European transaction dependence variable or with the EU dummy.
We will pattern the European transaction dependence variable after the
globalization variables. A commonly used measure of globalization is trade
dependence, calculated as the sumof a countrys imports and exports divided
by that countrys gross domestic product. The equivalent measure of the mar-
ket component of Europeanization can be calculated as the sum of a coun-
trys imports and exports with members of the common market divided by
that countrys gross domestic product. Another common measure of global-
ization is dependence on capital flows. Several variations of it are conceiv-
able. Quinn (1997) built a yearly index of legal openness that summarizes
each countrys exchange restrictions during the 1950-1993 period. One may
also use differentials in interest-covered parity (Shepherd, 1994) on the
grounds that the absence of flows does not constitute a priori evidence of
market segmentation. Or more simply, one may use the International Mone-
tary Fund and OECD measures of actual capital flowsdirect, portfolio,
loans, or total. However, there is a problem with all these measures, for they
do not allow for the calculation of an equivalent Europeanization index, the
first two because a countrys exchange controls and interest rates are undif-
ferentiated by countries of destination, the last one (actual flows) because of
data limitations. Country-by-country breakdowns of capital flows exist for
direct investment only, and flowdata are not available before the mid-1970s.
Because it takes about 10 years of flowdata to calculate a reasonably accurate
measure of stock, stock data are not available before the mid-1980s or even
later for many countries.
6
The models are tested on the population of OECDcountries. The OECDis
a club of rich countries, and this makes for a homogeneous sample of cases.
The fact that all EU countries are OECD members but not all OECD coun-
tries are EU members provides us with the requisite control group, without
which it would be impossible to distinguish between the effects of the two
external mechanisms. Moreover, the fact that not all European countries are
EU members is also important in separating the effects of EU membership
from the effects that derive from a common political history and geographic
proximity. All findings reported below are robust to the inclusion of a Euro-
pean geopolitical dummy, coded 1 for the countries located in the geographic
region of Europe and 0 for others.
The dependent variables are several dimensions of domestic societies that
are affected by globalization and/or Europeanization. We cover the two fac-
tor markets (labor and finance) and, within the political arena, national par-
ties and local governments.
The estimation method varies with the type of data and their availability.
In the presence of time-series cross-sectional dataour standardwe use
generalized least squares with panel-corrected standard errors (see Beck &
Katz, 1996). We include dummy variables for each country but one to elimi-
nate idiosyncratic differences in scale between countries (fixed effects).
Our standard specification is Equation 1, including the lagged dependent
variable. We will refer to it as the lagged dependent variable model. We will
use it as default, except in three cases.
First, if the coefficient on the lagged dependent variable exceeds 0.9, we
test for cointegration. A coefficient close to one indicates that the dependent
variable has a long memory or is path dependent. We then look for variables
6. Flow (unlike stock) data are also notoriously volatile, making their use hazardous other
than in the form of 10-year averages. Data were extracted from the annual issues of OECDs
International Direct Investment Statistics Yearbook and National Accounts over a 30-year
period.
that maintain a predictable relationship (are cointegrated) with the depend-
ent variable in the long run and are weakly exogenous to it. The cointegra-
tion model we use is identical to the one suggested by Beck and Katz (1996,
p. 11):
Y
i, t
=
1
+
3
Glob
i, t
+
4
Euro
i, t
+
5
[Glob
i, t
*Euro
i, t
]
+
6
X
i, t
+
2
(Y
t 1

3
Glob
i, t 1

4
Euro
i, t 1

5
[Glob
i, t 1
*Euro
i, t 1
]
6
X
i,t 1
) +
i, t
,
(4)
with, on the right-hand side, coefficients for the change variables measuring
short-termeffects (
3
,
4
,
5
, and
6
) and coefficients for the lagged variables
measuring long-termeffects (the
2
s). Cointegration between the dependent
variable and an independent variable is verified when both
2
and the product
between
2
and the coefficient for the lagged independent variable are sig-
nificant. If Euro is a dummy variable, Equation 4, like Equation 1, reduces to
two simpler equations, with
2
3
measuring the long-term impact of global-
ization on non-EUcountries,
2
(
3
+
5
) measuring that on EUcountries,
2
5
measuring the long-term difference in the way globalization affects EU and
non-EU countries, and
2
4
measuring the sui generis effect.
Second, if the coefficient does not exceed 0.9, we use the specification
given by Equation 1. But following Beck and Katz (1996), we test this model
against the more general model in which it is nested. We refer to this as the
all-lagged model:
Y
i, t
=
1
+
2
Y
t 1
+
3
Glob
i, t
+
4
Euro
i, t
+
5
[Glob
i, t
*Euro
i, t
]
+
6
X
i, t
+
3
Glob
i, t 1
+
4
Euro
i, t 1
+
5
[Glob
i, t 1
*Euro
i, t 1
]
+
6
X
i, t 1
+
i, t
.
(5)
Finally, if pooling time and cross-sectional series is impractical, we
regress the change in domestic dimension against its value at the beginning of
the period and corresponding changes in the other right-hand-side variables.
We will refer to this specification as the cross-sectional change model.
7
Although quite intelligible, this method presents two drawbacks. First, it
misses nonlinear changes (that is, changes between the initial and terminal
value of the dependent variable that bounce around the trend spanning these
two values). This is a minor problem, however, in the presence of data exhib-
iting trends. A second drawback of the cross-sectional design is the small
number of observations that we can feed into it, requiring that we be watchful
for potential outliers. We want to guard against reporting as finding results
7. It is similar to Equation 1 except that all variables on both sides (except for the lagged
dependent variable) appear as first differences, and t-1 refers to the starting value of a multiyear
period and t to its terminal value.
that are driven by outlying values and against discarding correlations that are
hidden by outliers.
ORGANIZATION OF THE LABOR MARKET
There exists a consensus in the labor literature that globalization of mar-
kets is forcing employer-employee relations to become less corporatist and
more fragmented. The internationalization of capital is rendering national
labor confederations irrelevant because these national organizations are
unable to coordinate across national boundaries and together establish an
international labor confederation. As a result, wage bargaining is decentral-
ized to lower levels, rates of unionization are dropping, strike activity is
declining, and government employment is shrinking. On the rise are unem-
ployment, part-time employment, and performance-related pay (see Crouch,
1993; Ferner &Hyman, 1992; Streeck, 1987). Is this trend equally felt among
EU countries?
Two hypotheses are plausible a priori. On one hand, European labor mar-
kets are not immune to market shocks but, in fact, are even more affected by
themin light of the more advanced level of product and financial market inte-
gration achieved in Europe. On the other hand, prospects for coordination
among national labor confederations are brighter inside than outside the EU.
The existence of intergovernmental institutions, along with the prodding of
the commission and the court, makes it at least conceivable that enough regu-
latory coordination could be achieved to offset the worst effects of capital
internationalization. The social pillar of the 1992 Maastricht Treaty, how-
ever fledgling it may look, signals a different choice for Europe. In sum, EU
membership may offer trade unions and their governments additional politi-
cal options besides market adjustment, justifying the preservation of social
corporatism at the national level.
We test these two hypotheses against each other and the null hypothesis on
two labor market dimensions: trade union density and wage-bargaining
level. Our findings offer support for the market integration hypothesis. We
find that Europeanization has no bearing on trade union density. With respect
to bargaining level, we find that financial openness has a globalization-plus
effect in which the EU significantly outperforms the rest of the OECD.
We start with union density. We control for the presence of left parties
in government. Because the literature is unanimous about the idea that left
government is positively correlated with corporatism, the test gains in accu-
racy if that effect is held constant. We also control for the four cases in
which the payment of unemployment benefits is administered by the unions
Belgium, Denmark, Finland, and Sweden. In these countries, unemployment
increases the incentives for workers to join a union. We finally control for
geographic presence in Europe.
8
We use two alternative measures of globalization: nominal capital open-
ness and trade dependence. Data availability allows us to pool data for 16
countries during 30-plus years of observations. The coefficient of the lagged
dependent variable is very close to one, requiring the use of the cointegration
method presented in Equation 4.
Two series of results are worth reporting (see Table 1). First, two of the
control variables confirm existing claims. Left government is positively
related with trade union density in the long run; it tests significant in the
financial globalization regression (Equation 1), and marginally so (at the
5.6% level) in the trade dependence regression (Equation 2). Long-run
upward shifts to the left of the ideological spectrum generate long-run
upward growth in trade union density. Also, countries in which unemploy-
ment benefits are distributed by the unions show a long-term level of union-
ization higher than average. The European geopolitical dummy fails to test
significant, however, suggesting that there is nothing particular about Euro-
pean geography or history with respect to trade union membership.
Second, we find three types of effects of Europeanizationa globalization-
plus effect adding to the demobilizing effect of globalization, a sui generis ef-
fect pointing to mobilization, and a null effect. The first two effects are found
in Regression 1 (the financial globalization regression). The globalization-
plus effect can be read fromthe coefficients
2
3
,
2
5
,
2
(
3
+
5
); they are all
negative and significant. Nominal capital openness has a significantly
greater negative long-term impact on trade union membership in EU than in
non-EU countries. This globalization-plus effect is supplemented with an
equally long-termsui generis effect.
9
That effect works in the opposite direc-
tion of globalization (
2
4
is positive and significant), canceling the latter at
low values of globalization but being canceled at higher values. The tipping
point, before which the sui generis effect prevails and past which the global-
ization-plus effect predominates, is equal to 8.11.
10
Every EU member had
already passed that threshold by the time it joined the common market, sug-
8. Our fixed-effects specification also controls for all factors that are country specific and
time invariant.
9. The sui generis effect disappears if one substitutes the variable European trade depend-
ence for the EU membership dummy, suggesting a political rather than a market origin.
10. The calculation of the tipping point runs as follows. The two effects on EUcountries add
up to
2
4
+
2
(
3
+
5
)*Glob
i, t 1
. When the net effect is equal to 0, Glob
i, t 1
is equal to
2
4
/
2
(
3
+
5
)that is, 8.11 in Regression 1.
Table 1
Trade Union Density (cointegration model with fixed effects, generalized least squares esti-
mates, and panel-corrected standard errors)
Dependent Variable:
Trade Union Density
1 2
Trade union density
i, t 1

2
0.02 (2.51)
a
0.02 (2.50)
a
Nominal financial openness
i, t

3
0.12 (1.18)
Trade dependence
i, t

3
0.79 (0.98)
EU membership
i, t

4
0.17 (0.25) 4.98 (1.49)
i, t
*EU membership
i, t

5
0.37 (0.48)
Trade dependence
i, t
*EU membership
i, t

5
30.02 (1.49)
Left party cabinet portfolio
i, t
0.004 (1.42) 0.003 (0.93)
i, t 1

2
3
0.10 (2.45)
a
Trade dependence
i, t 1

2
3
0.81 (2.03)
a
EU membership
i, t 1

2
4
2.19 (2.31)
a
0.33 (0.73)
i, t 1
*EU membership
i, t 1

2
5
0.17 (2.08)
a
Trade dependence
i, t 1
*EU membership
i, t 1

2
5
0.52 (0.89)
i, t 1
0.004 (2.10)
a
0.003 (1.90)
Unemployment benefits paid by
unions (dummy for Belgium,
Denmark, Finland, and Sweden)
i
1.13 (1.67) 2.46 (3.41)
b
Geopolitical Europe
i
(dummy) 0.35 (1.39) 0.77 (0.66)
Intercept 1.39 (2.41)
a
1.52 (1.85)
3
+
5
0.12 (1.18) 0.79 (0.98)
2
(
3
+
5
) 0.27 (3.76)
b
1.32 (2.94)
b
Number of observations 592 512
Number of groups 16
c
16
c
Number of time periods 37
d
32
e
Log likelihood 685.7757 535.6337
Probability (chi-square) 0.0000 0.0000
Note: EU=European Union. The dependent variable is the first difference in trade union density
adjusted for missing data by Golden, Lange, and Wallerstein (1997). Nominal financial open-
ness is the level of nominal financial openness coded on a 0 to 12 scale by Quinn and Toyoda
(1997). Left power is the percentage of all cabinet portfolios held by left parties; the source is
Swank (1998). Trade dependence is the ratio (imports + exports)/gross domestic product; the
source is OECD (National Accounts; see note 6). EU membership is a dummy variable coded 1
for member countries at year t, 0 for all others. Geopolitical Europe is a dummy coded 1 for the
countries located in the geographic region of Europe and 0 for others. All the multiplicative
variables are the product of their unstandardized components. Values of z statis-
(continued)
gesting that the net effect of EUmembership on trade union membership was
always negative.
The impact of trade dependence on trade union membership is also gener-
ally negative. Regression 2 suggests that trade dependence is cointegrated
with the decline in trade union density within and outside the EU (
2
3
and
2
[
3
+
5
] are negative and significant). However, there is no difference
between EUand non-EUmembers (
2
5
is not significant). The findings con-
formwith the null hypothesis, according to which Europeanization makes no
difference one way or another.
We now turn to the bargaining level (see Table 2). The coefficient on the
lagged dependent variable (
2
) is well below 0.90, allowing us to bypass the
cumbersome cointegration technique. Moreover, tests for residual serial cor-
relation suggest that the lagged dependent variable takes out most of the
serial correlation fromthe data.
11
We also estimated both the full all-lagged
model (Equation 5), in which the lagged values for both the dependent and
the independent variables are included on the right-hand side of the regres-
sion, and the simpler model (Equation 1), including only the lagged depend-
ent variable. We then performed a likelihood-ratio test. The hypothesis that
the two equations are identical could not be rejected at the 5% confidence
level. These results allow us to use the simple lagged-dependent-variable
model of Equation 1. The left government variable tests positive and signifi-
cant in Regression 1 and marginally significant in Regression 2. The dummy
for European geography and history tests positive and highly significant in
the second regression.
The story about financial globalization is much the same as for trade union
density. Although its impact on non-EU countries (
3
) is indeterminate, that
on EUmembers is significantly different (
5
) and negative (
3
+
5
)a typi-
cal revealed-globalization effect, that is, a subcategory of globalization-plus.
Table 1 Continued
tics are given in parentheses. All Greek symbols refer to Equation 4 in the text. The unit of obser-
vation is the country year.
a. z is significant at the 5% level.
b. z is significant at the 1% level.
c. Australia, Austria, Belgium-Luxembourg, Canada, Denmark, Finland, France, Germany,
Italy, Japan, the Netherlands, Norway, Switzerland, Sweden, the United Kingdom, and the
United States.
d. 1955 to 1992.
e. 1960 to 1992.
11. We regressed the residuals against their lagged value and found no significant
correlation.
Simultaneously, the EU dummy exhibits a positive sui generis effect (
4
),
prevailing over the former effect for values of globalization inferior or equal
to 8.33a threshold barely higher than the one we calculated for trade union
density (see Regression 1, Table 1). Once again, because all EUmembers had
more or less passed that threshold by the time they joined the common mar-
ket, the net effect of EUmembership on trade union membership was always
negative.
The effect of trade dependence on bargaining level in Regression 2 is
unclear, hesitating between a weak case of globalization-minus and the null
Table 2
Bargaining Level (lagged-dependent variable model with fixed effects, generalized least
squares estimates, and panel-corrected standard errors)
Dependent Variable:
Level of Wage Bargaining
1 2
Bargaining level
i, t 1

2
0.56 (16.94)
b
0.56 (15.58)
b
Nominal capital openness
i, t

3
0.009 (0.60)
Trade dependence
i, t

3
0.34 (1.95)
EU membership
i, t

4
0.75 (2.22)
a
0.08 (0.39)
Nominal capital openness
i, t
*EU membership
i, t

5
0.08 (2.86)
b
Trade dependence
i, t
*EU membership
i, t

5
0.54 (2.05)
a
i, t
0.001 (2.06)
a
0.001 (1.86)
Geopolitical Europe
i
(dummy) 0.15 (1.78) 1.23 (3.92)
b
b
0.13 (0.36)
3
+
5
0.09 (3.57)
b
0.20 (0.97)
Number of observations 608 528
Number of groups 16
c
16
c
d
33
e
Log likelihood 132.2239 138.5172
Probability (chi-square) 0.0000 0.0000
Note: EU=European Union. The dependent variable is the level of wage bargaining coded on a 1
to 4 scale by Golden, Lange, and Wallerstein (1997); the higher the number, the more centralized
the bargaining. Values of z statistics are given in parentheses. All Greek symbols refer to Equa-
tion 1 in the text. The unit of observation is the country year.
a. z is significant at the 5% level.
b. z is significant at the 1% level.
Italy, Japan, the Netherlands, Norway, Switzerland, Sweden, the United Kingdom, and the
United States.
d. 1955 to 1992.
e. 1960 to 1992.
effect. Trade dependence has a marginally negative effect on non-EU coun-
tries (
3
is positive but not significant at the 5%level); it affects EUmembers
differently (
5
is positive and significant)that is, not at all (
3
+
5
is not dif-
ferent from zero). Most of the action is stolen by the geopolitical dummy, of
which the positive coefficient suggests that bargaining levels in Europe are
generally higher than elsewhere when controlling for trade dependence.
Taking all results into consideration, trade does not seemto cause much of
a difference between EU members and nonmembers. Financial openness, in
contrast, exhibits a prevailing globalization-plus effect on trade union den-
sity and wage bargaining. In sum, our analysis lends plausibility to the
detractors of European social policy and the claim that European integration
is essentially market driven. Corporatism in the labor market, along with the
possibility of market-correcting intervention, is declining fast among EU
countries, faster than elsewhere. We found no evidence that labor confedera-
tions in the EU are any more capable of coordination across national bound-
aries within the EU ambit than outside it. Employees desert national labor
unions everywhere, indeed more so within than outside the EU. European
integration does not offer trade unions and their government political options
justifying the preservation of social corporatism at the national level.
ORGANIZATION OF THE CAPITAL MARKET
Recent research has shown that capital markets, like labor markets, can be
more or less corporatist (Deeg, 1998; Verdier, 2000b). A corporatist capital
market is one in which the interests of various borrowers (savers are never
organized) are organized and articulated by various centralized institutions.
Two types of borrowers compete for cash in capital marketssmall- and
medium-sized enterprises, which do not enjoy sufficient visibility to be
traded on the market, and large enterprises, which do possess that visibility.
These groups are not directly organized into confederations, but their respec-
tive bankers are. The bankers for large firms are the large center banks, head-
quartered in the national financial center and engaged in fierce competition
with each other. The bankers for the small- and medium-sized companies, in
contrast, are typically sheltered from the competition of the large banks.
Their identities vary according to country: In Germany, Austria, Italy, Swit-
zerland, and the Scandinavian countries especially, small firms bank with the
nonprofit sector, which is composed of the savings banks, cooperative societ-
ies, and local banks controlled by local governments. In the United States, the
only country that still allows local governments to charter for-profit banks,
small firms also bank with locally chartered for-profit country banks. In
France, Belgium, New Zealand, and the Netherlands, the small borrowers
main banker is (or was) the state credit sector, which includes all the special-
ized credit facilities that enjoy state borrowing privileges.
12
The relative mar-
ket share of each sector varies greatly across countries: In 1990, the competi-
tive sector represented 92%of all banking assets in Australia but only 27 %in
Germany; the state sector captured 25% of French banking assets but was
nonexistent in Ireland, Sweden, and Switzerland.
Each banking sector in each country is organized in a national trade asso-
ciation, whose role is to ensure that the rules of coexistence between sectors
laid down by the central government agencies are not disadvantageous to its
own sector. Unsurprisingly, these sectors hold conflicting regulatory prefer-
ences: The large banks favor market mechanisms, whereas nonprofit, local,
and state banks favor, indeed need, regulatory protection from the center
banks.
Capital markets have been greatly affected by financial globalization. Dereg-
ulation has caused an increase in competition, forcing banks to concentrate
and shift away fromlending toward market activities.
13
The Basle agreement
on capital-assets ratios, one of the fewinstances of voluntarismin the domain
of financial globalization, forced banks throughout the world to strengthen
their solvability. Although the impact of financial globalization is much dis-
cussed, that of Europeanization seems nonexistent. Banking and financial
regulation has received a lot of attention from the council and the commis-
sion, especially in the early 1980s.
14
Yet, of the few studies that have looked
for a European specificity, none has found any. Firms and banks offer as much
diversity in Europe as outside Europe (Cerasi, Chizzolini, & Ivaldi, 1998).
We argue that the effect of Europeanization is a priori indeterminate; it
depends on which of the market or voluntarist components prevail. Integra-
tion through market deregulation is likely to favor the market-oriented,
for-profit sector. Although it may lead to greater concentration in that sector,
it would also yield a decentralization of interest representation. This is
because the interests of each class of borrower would no longer be allocated
through summit negotiations, involving government regulators along with
representatives of the various banking sectors but would be decided by com-
petition among a handful of oligopolies. Voluntarist integration, in contrast,
is likely to keep intact existing mechanisms for the regulation of credit (or
reproduce them at the supranational level in the European Ecofin commit-
tee), and thus freeze the existing allocation of market shares between sectors.
12. On the state sector, see Verdier (2000a).
13. On concentration, see T. Porter (1993) and Cerasi (1996); on securitization, see Thomp-
son (1995).
14. See contributions by and to Underhill (1997).
Therefore, if financial globalization favors concentration and market orienta-
tion, it should correlate with a redistribution of market shares away from the
sheltered sectors (the local nonprofit, country, and state banks) toward the
unsheltered sector (the center banks). If membership in the EU makes a dif-
ference, the impact should be significantly distinct in the case of the sin-
gle-market countries.
We ran the tests on two sectors, center and state, using respective market
shares calculated in total assets. The coefficient on the lagged dependent
variable being close to one, we use the cointegration model. We used only
two measures of globalizationnominal capital openness and trade depend-
ence because various measures of cross-border capital flows variables
yielded no results whatsoever.
15
The findings support the two sides of the null
hypothesis (see Table 3). First, long-termincreases in globalization correlate
with long-termincreases in center banks market share and long-termdecline
in state banks market share. Second, European integration makes no differ-
ence whatsoever.
Regressions 1, 2, and 3 have a common structure. The long-termimpact of
the global variable on non-EUcountries, which can be read from
2
3
, is cor-
rectly signed and significantpositive for center banks, negative for state
banks. However, the coefficient on the long-term interaction term (
2
5
) is
insignificant, suggesting an identical impact within and outside the EU.
Regression 4 also fails to show a difference between the two groups, detect-
ing no impact of globalization anywhere.
These results clearly suggest that the European capital market is an inte-
gral component of the global market. Market reform took place among EU
countries at the same speed as among non-EU countries. We found no trace
of Europeanization, let alone voluntarism, in financial markets. Furthermore,
aside from the isolated negative result of Regression 4, globalization does
have a long-term deregulatory impact on interest organization among finan-
cial institutions.
ELECTORAL TURNOUT AND VOLATILITY
As markets thus become more important in (re)distributing income, polit-
ical parties should become relatively less so. One should expect rational indi-
viduals to reallocate some of their wealth-maximizing effort away frompoli-
tics toward markets. Loyalty to political parties should decline, and the
15. The extreme volatility of annual cross-border flows data considerably reduce their effi-
ciency as a measure of financial globalization. Stock data are steadier, but time series are too
short to be used in a time-series cross section.
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247
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248
floating vote should increase. Europeanization could have a similar effect on
account of its deregulatory component. But it could also act in the opposite
direction, mobilizing parties and electorates around competing projects of
European integration, on account of its voluntarist component. The mobili-
zation we have in mind need not involve the European Parliament, members
of the European Parliament, or European elections. The electoral literature
sees European elections as opinion polls, second-order national elections,
or tests of the incumbents performance, characterized by lowstakes and low
turnout (see Eijk, Franklin, & Marsh, 1996; Franklin, Marsh, & McLaren,
1994, Reif &Schmitt, 1980). All that is required for the voluntarist leg to trip
the trend toward voters disaffection is that European coordination be seen by
national parties and electorates as a plausible alternative to global market
allocation.
We test two hypotheses: Europeanization preserves voter turnout fromthe
market-engineered disaffection with politics, and Europeanization lowers
electoral volatility. We begin with voter turnout, measured as the percentage
of electorate casting valid votes at parliamentary elections (presidential in the
United States). For years without elections, we use the score of the most
recent election. Data are available for 18 countries over 38 years
(1955-1993). We use the all-lagged model because the lagged dependent
variable has a coefficient lower than 0.90 and the lagged independent vari-
ables make a statistically significant difference.
16
The single regression of
Table 4 reports the impact of nominal capital openness (the trade variable
produced coefficients with insignificant coefficients, although with identical
signs). The fixed effect dummies, which we use throughout, are particularly
welcome here in light of the multiple national idiosyncrasies of a legal and
cultural nature affecting voter turnout. We also include a measure of rising
affluence in the regression to capture the common idea that embourgeoise-
ment demobilizes working-class voters.
The findings, reported in Table 4, point to a clear null effect: A rise in
financial globalization is associated with a drop in voter turnout, but this
effect is not significantly different within and outside the EU (
3
is negative
and significant but
4
,
5
, and
3
+
5
are not significant; none of the corre-
sponding s are significant either). Note that wealth has the expected nega-
tive impact on voter turnout, as does being a European country, a result that
can be explained by the fact that European countries used to have higher-than-
average turnout rates and have been the most dramatically affected by the
trend toward lower turnout.
16. The likelihood test ratio between the all-lagged and the lagged-dependent variable mod-
els allows us to reject the hypothesis that the two models yield similar results at the 1% confi-
dence level.
Voter turnout is only part of the story. Are EUvoters, those who still vote,
also forsaking past, or not developing new, partisan loyalties? Answering
this question raises a difficult measuring problem. Standard measures of
electoral volatility do not easily reveal trends. Aggregating variations from
one election to the next in each partys score, these measures are erraticthe
score is high when the incumbent loses, small when it wins. The infrequency
of elections (one every 5 years on average) makes the use of period averages
Table 4
Voter Turnout (all-lagged model with fixed effects, generalized least squares estimates, and
panel-corrected standard errors)
Dependent Variable:
Percentage
of Electorate
Casting Valid Votes
Turnout
i, t 1

2
0.83 (36.20)
b
i, t

3
0.42 (1.85)
EU membership
i, t

4
3.88 (1.32)
i, t
*EU membership
i, t

5
0.38 (1.21)
Gross domestic product per capita
i, t
1.21 (1.45)
i, t 1

3
0.49 (2.19)
a
EU membership
i, t 1

4
4.22 (1.42)
i, t 1
*EU membership
i, t 1

5
0.48 (1.51)
Gross domestic product per capita
i, t 1
1.68 (2.00)
a
Geopolitical Europe
i
(dummy) 1.94 (2.59)
b
b
3
+
5
0.04 (0.18)
3
+
5
0.02 (0.07)
Number of observations 594
Number of groups 18
c
d
Log likelihood 938.9915
Probability (chi-square) 0.0000
Note: EU = European Union. The dependent variable is the percentage of the electorate casting
valid votes. The source is Mackie and Rose (1991, 1997); the data were compiled by Swank
(1998). All the multiplicative variables are the product of their unstandardized components.
Values of z statistics are given in parentheses. All Greek symbols refer to Equation 5 in the text.
The unit of observation is the country year.
a. z value is significant at the 5% level.
b. z value is significant at the 1% level.
c. Australia, Austria, Belgium-Luxembourg, Canada, Denmark, Finland, France, Germany, Ire-
land, Italy, Japan, the Netherlands, New Zealand, Norway, Switzerland, Sweden, the United
Kingdom, and the United States.
d. 1960-1993.
extremely sensitive to the choice of the cutting point and to the occurrence of
new elections.
Rather than measuring electoral volatility directly, we focus instead on its
consequences for government stability. We use an index developed by
Verdier (1995). For each government, each year, we calculate a position on a
left-right continuum. This number is a weighted average of the relative posi-
tion of the parties forming the government coalition. Each partys relative
position, in turn, is determined by how much it scored at the last election.
This way of positioning parties requires no outsiders judgment on the par-
ties ideological orientation except for how parties are rank-ordered on a
left-right continuum (we used Leonard & Natkiel, 1986, for the ranking).
Consider, for instance, a simplified systemof two parties, left and right, each
polling half of the votes. The left party position on the 0-1 axis (0 for extreme
left, 1 for extreme right) is its median voterthe middle of the space it occu-
pies on the continuumthat is, 1/4. The right party being to the right of the
left party, its position is 1/2 (the position of the right partys most leftist voter)
plus 1/4 (the distance between the partys most leftist voter and its median
voter), that is, 3/4. Were the two parties to govern in a grand coalition, the
government position would be the simple average of their respective median
voters (1/4 + 3/4 = 1/2) each year for the duration of the government or the
legislature, whichever ends first. Were the two parties of different electoral
size, we would weigh their presence in the government by the size of their
respective electoral shares. Once we have generated a number summarizing
the government position for each year, we calculate its standard deviation
over two different periods (1950-1979 and 1980-1996).
17
The difference
between the two standard deviations measures the change in political volatil-
ity between the two periods. The technical presentation of the variable is left
to a footnote.
18
Because we have only two data points for the dependent variable, we use
the cross-sectional change model. Globalization is measured by foreign
direct investment stocks (the foreign direct investmentflow measure
reached comparable yet outlier-sensitive results, whereas the trade and nomi-
nal financial openness variables displayed no association whatsoever). The
Swiss observation is an outlier, reflecting its strong international financial
17. The two periods were chosen to fit data availability for the independent variable.
18. The dependent variable is the first-order difference between the average standard devia-
tion of the government partisan orientation for the period 1950-1979 and that for the period
1980-1996. The index was calculated by first assigning to each party a positive integer i (i Z+)
according to the ordinal pattern: 1 to the most leftist party, 2 to the next to the most leftist, and so
forth until all parties are ordinally arranged on a left-right axis (we excluded unclassifiable other
parties but made sure that the category other always remained below 5%). Each i was then
specialization, out of line with the rest of the economy. Switzerland is also
ruled by a stable coalition, making regular elections (as opposed to refer-
enda) less prone to convey changes in electoral behavior than in other coun-
tries. As previously, we control for the initial value of the dependent variable
and for being part of the European region at large. We also control for the
growth in affluence, although the sign of the effect is a priori indetermi-
naterising affluence lessens loyalty but also makes voters less likely to
oust incumbents (the main source of instability).
The results, presented in Table 5, first point to a case of conditional con-
vergence: That is, countries with much political volatility in the past exhibit
less today and vice versa. Second, there is no significant sui generis effect (
4
is not significant) but a clear case of globalization-minus. An increase in the
financial globalization variable is associated with an increase in volatility in
non-EU countries (
3
is significantly greater than zero) but not in EU coun-
tries (
5
is significant and of opposite sign) where there is no impact (
3
+
5
is
insignificant). EU members were, on average, insulated from the effects of
increasing financial exposure that elsewhere were associated with higher
electoral volatility. The results thus unambiguously point to the impact of the
voluntarist component of Europeanization. Financial liberalization is not
associated with the dealignment of EU voters the way it is with non-EU vot-
ers. We do not observe a clear effect of the control variablesthe European
geopolitical dummy and growth in affluence.
This is not a truly surprising result. It reflects the fact that irrespective of
whether European integration is driven by AdamSmiths invisible hand or
by government, there is a political center that is there to take the praise (or
alternatively, the blame) for most of what happens in relation to integration.
It is less plausible for EU voters to sacrifice politics to markets in the face of
greater market openness than it is for non-EUvoters. The simultaneous inte-
assigned a positive real number p
i
(p
i
R: 0 <p
i
<1) to reflect each partys share of the electorate
according to the formula
p
r
r
i
i
j
j
i
j
(
,
\
,
( +
2
0
1
,
with r
i
party is percentage of votes and j an integer representing the parties on the left of i, with
0 j < i and r
j
= 0 if j = 0.
Last, the government orientation index p
g
(p
g
R: 0 < p
g
< 1) was calculated by averaging
the p
i
s for those parties in government at any point during the given period:
( ) p
T
p G
g it it
i
N
t
T
j
(
,
\
,
(
,
,
]
]
]

1
1 1
* ,
with G
it
= [0,1], depending on whether party i at time t is part of the government (G
it
= 1) or not
(G
it
= 0), T = the number of years, and N = the number of parties.
gration of markets and governments in Europe maintains voters loyalty to
their political parties. Because it is quite plausible that the lower turnout dis-
proportionately affects voters without partisan loyalty, this would explain the
discrepancy between turnout, indiscriminately lower, and volatility, lower
outside the EU. Voters seem to expect something to come out of the
voluntarist component of Europeanization.
STATE DECENTRALIZATION
Local governments constitute another important level of interest articula-
tion. How is their power affected by globalization and Europeanization?
There is an emerging consensus across disciplines that modern production
Table 5
Change in Electoral Volatility Between the 1950-1979 and 1980-1996 Periods (cross-sectional
change model with ordinary least squares estimates)
Dependent Variable:
Volatility
t
Volatility
t 1
(1950-1979 average)
2
1.12 (4.49)
b
EU12
4
0.08 (1.42)
FDI stocks
t
(1980-1995)
3
0.005 (2.96)
a
FDI stocks
t
*EU12
5
0.005 (2.37)
a
Gross domestic product per capita growth
t
(1980-1995) 0.000 (1.43)
Geopolitical Europe (dummy) 0.009 (0.22)
3
+
5
0.0003 (0.19)
Adjusted R-squared 0.52
c
Note: The dependent variable is the difference between the volatility ratio defined in Note 18
calculated over the 1950-1979 period and that same ratio for the period 1980-1996. Sources for
volatility include Mackie and Rose (1991, 1997) and Woldendorp, Keman, and Gudge (1993,
1998). The lagged dependent variable is the average for the first period. FDI stocks is the
first-order change over the 1980-1995 period of the ratio (total direct investment stocks in +total
direct investment stocks abroad)/gross domestic product; source is United Nations (1995).
EU12 is coded 1 for the 12 ECmembers of the late 1980s and 0 for all others. Values of t statistics
are given in parentheses. All s refer to Equations 1-3 in the text.
a. t value is significant at the 5% level.
b. t value is significant at the 1% level.
Greece, Ireland, Italy, Japan, the Netherlands, NewZealand, Norway, Sweden, the United King-
dom, and the United States.
has a territorial, local dimension, reinforcing economic disparities between
districts. M. E. Porter (1990) writes that more open global competition
makes the home base more, not less, important (p. 58). Krugman (1991)
shows that the decline in transportation costs makes firms want to agglomer-
ate. Students of flexible specialization stress the importance of geographical
concentration in attracting talented people and the role of proximity in the
production of learning and innovation (Sabel, 1989; Saxenian, 1994; Storper,
1995). Amin and Thrift (1992) write that the world economy may have
become decentralized, but it is not necessarily becoming decentered (p. 576).
Economies of agglomeration have severe redistributional consequences for
local districts. Those with an already dense industrial base may see it further
reinforced, whereas those with a weak one risk losing what they have, and
those without any might remain barren. The most favored areas are those
located around large metropolitan regions (Tdtling, 1994). Less favored are
the industrial districts located at the periphery. The upshot is an end to the
postwar consensus. The losers of globalization want more territorial transfers
and thus more tax revenues redirected to the central government, whereas the
winners resist any further centralization, or even ask for less of it.
Like globalization, market integration within the EUcauses a need for ter-
ritorial transfers aiming at a reduction of income disparities. An essential dif-
ference, however, is that EUmembers have set up a common budget to which
they all contribute according to means and from which they draw according
to needs, with the result that some members are net contributors whereas oth-
ers are net beneficiaries. Another difference is that these transfers have a
decentralizing impact on state structures. About half of the so-called struc-
tural funds that are distributed by Brussels are earmarked for local govern-
ments, thereby forcing centralized states to revitalize local government.
France, Spain, and Britain, among others, have recently implemented decen-
tralizing reforms. The rationale for such decentralization, which in the late
1980s went hand in hand with a shift of monitoring power toward the com-
mission, hides no antigovernment motive but can be studied as a commit-
ment mechanismthat governments resorted to in order to allay mutual suspi-
cions of waste and corruption (Tsoukalis, 1993).
Therefore, whereas market integration should have the universal effect of
increasing central governments control over the flow of tax funds, political
integration among EUcountries should weaken it. One can assess the relative
importance of the market and voluntarist components of European integra-
tion by tracking which of the centralizing or decentralizing effects is empiri-
cally more pronounced.
Our measure of centralization is the ratio of central government receipts to
general (central and local) government receipts. Although available on an
annual basis, the time series are plagued with multiple breaks, considerably
weakening efficiency. Our attempts to run pooled models bore no fruit, yield-
ing contradicting and unintelligible results. We use instead the cross-sec-
tional change model, a simpler and more manageable model. The dependent
variable is the difference in state centralization between the 1994 and 1970
values. The base model includes the 1970 value of this variable and the Euro-
pean geopolitical dummy as control variables.
Table 6 reports results for the nominal financial openness variable
onlynone of the other measures of globalization test significant. Regres-
sion 1 displays the distinctive signs of a null effect
3
is positive and signifi-
Table 6
Change in State Centralization, 1970-1994 (cross-sectional change model with ordinary least
squares estimates)
Dependent Variable:
State centralization
t
1 2
State centralization, 1970
2
0.17 (1.02) 0.14 (1.14)
Nominal financial openness,
1973-1993
3
0.03 (2.18)
a
0.0256 (2.37)
a
EU12
4
0.13 (1.72)
Nominal financial openness*EU12
5
0.023 (1.61)
Structural funds, 1990
4
0.0028 (2.49)
a
*Structural funds
5
0.00042 (2.34)
a
Geopolitical Europe (dummy) 0.006 (0.15) 0.02 (0.56)
Intercept 0.03 (0.28) 0.02 (0.30)
3
+
5
0.009 (1.20)
Adjusted R-squared 0.25 0.31
Root MSE 0.05411 0.04929
c
19c
Note: The dependent variable is the first-order change over the 1970-1994 period of the ratio
central government receipts/(central and local government receipts transfers from central to
local governments); the source is OECD (National Accounts; see Note 6). Structural funds is a
variable equal to per capita receipts in ECUof ECstructural funds (regional, social, and agricul-
tural) in 1990 for the 12 European Union countries and coded 0 for all others (Commission of the
European Communities, 1994). Values of t statistics are given in parentheses. All s refer to
Equations 1-3 in the text.
a. t value is significant at the 5% level.
b. t value is significant at the 1% level.
c. Australia, Austria, Belgium-Luxembourg, Canada, Finland, France, Germany, Greece, Ire-
land, Italy, Japan, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, the United
Kingdom, and the United States.
cant, whereas
5
and
3
+
5
are insignificant. We first consider the globaliza-
tion effect. It has two dimensions. First, an increase in nominal financial
openness is positively related with a centralizing impact on states (
3
is posi-
tive). This is a result in line with the mainstreameconomic literature on econ-
omies of agglomeration. Second, this centralizing effect seems absent in
European countries (seems because although negative,
5
in Regression 1
is significant only at the 13% level). As suggested above, a possible cause
might be the decentralizing effect of the structural funds policy. We examine
this hypothesis in Regression 2. Rather than using the dichotomous EU12
dummy (EU = 1, non-EU = 0), we try a semi-dummy variable that takes into
account the varying importance of the structural funds for each EU member.
This second variable takes, for non-EU countries, a zero value and, for EU
countries, a positive, continuous value representing the per capita receipt of
ECstructural funds in 1990 (the value varies between ECU10 for the Nether-
lands and ECU209 for Ireland). Unsurprisingly, the results are similar to,
although sharper than, those in the previous regression:
3
is positive and sig-
nificant, and although we cannot calculate a fixed value for the globalization
coefficient in the case of EU countries because that coefficient (
3
+
5
*Struct Funds) varies with the structural funds variable,
5
is negative and
significant, suggesting that structural funds either cancel or reverse the over-
all effect of globalization. This is a case of globalization-minus.
But the fact that the EU variable is now a real variable with respect to
European countries allows us to say more about why European countries dif-
fer from other OECD countries. The coefficient for the financial globaliza-
tion variable can be rewritten as
(0.0256 [0.00042 * Structural]).
From this, it is clear that the impact of financial globalization is positive
for low values of structural funds, whereas it turns negative for sufficiently
high values. The threshold, which is equal to 60.95 (=0.0256/0.00042), is
crossed by four countriesSpain, Portugal, Greece, and Ireland. Put simply,
an increase in financial openness has a centralizing impact on states except in
European countries receiving substantial structural funds, where this effect is
offset.
The globalization-minus effect exists in concurrence with a positive sui
generis effect
4
is significantly greater than zero. This suggests that at zero
or low values of the financial variable, the structural funds policy has a cen-
tralizing effect on EUcountries. Indeed, the effect of structural funds on cen-
tralization can be rewritten as
(0.0028 [0.00042 * Nom fin op]),
suggesting that structural funds have a centralizing impact for increases in
nominal financial openness inferior to 6.67 (=0.0028/0.00042) but a decen-
tralizing impact for values beyond it. Only two countries fall in the latter
categorySpain and Portugal.
19
These two seemingly contrary resultsone says that a high value of struc-
tural funds cushions the otherwise centralizing impact of globalization,
whereas the other says that a high value of globalization cushions the other-
wise centralizing impact of structural fundshave one claim in common:
Only when values of globalization and structural funds are high simulta-
neously do we observe decentralization. Both values are high in the case of
four countriesSpain, Portugal, Greece, and Ireland. In fact, as shown in
Figure 1, there is a general correlation between an increase in nominal finan-
cial openness and the importance of structural funds. Fitting a line between
the log value of the structural funds variable and the nominal financial open-
ness variable yields a t value that is significant at the 3% level. The reason is
that the countries that opened last were also the most backward and thus the
most eligible for structural funds.
We conclude that the structural funds policy is associated with decentral-
ization. Whereas globalization tends to be generally associated with greater
centralization, the funds reduce centralization in accordance with the sums
involved. This is a clear instance of market-correcting, redistributive policy.
It testifies to the relocation in Brussels of a centralized decision-making pro-
Figure 1. Structural funds and financial openness.
19. The sui generis effect disappears if one substitutes the measure of European trade
dependence for the structural funds variable, suggesting a political rather than market origin.
cess in which governments no longer are the main channels of interest repre-
sentation, as testified by their willingness to accept less centralization. Note,
however, that the policy has little or no decentralizing impact on the pol-
icy-making process of the core countries institutions. It is only at very high
levels of geographic redistribution, possible only for small and/or compara-
tively backward countries, that the structural funds policy seems to modify
the relative distribution of resources between the central government and the
local governments.
CONCLUSION
There is a consensus among Europeanists that the integrative spurt of the
last 20 years has been mostly due to the market and only secondarily, if at all,
to political will. The first goal of this article was to propose a research design
to help us separate the respective manifestations of the two mechanisms. To
that effect, we hypothesized that a market-driven integration would have
observable decentralizing effects, making Europeanization synonymous
with globalization, whereas a voluntarist process would have centralizing
effects, distinguishing Europeanization from globalization. We set up a
research design allowing us to differentiate between the two hypotheses
while holding constant the additive and interactive effects of globalization.
We argued that the market-driven hypothesis would be supported in two
cases: if Europeanization adds to globalization (globalization-plus and
revealed globalization) or has effects of its own attributable to market vari-
ables. In contrast, the voluntarist hypothesis would be supported in two
cases: if European integration cancels or reverses the impact of globalization
(globalization-minus) or if it has effects of its own attributable to nonmarket
variables. Although these tests are equally valid for institutional and policy
variables, in this article, we limited our empirical foray to institutional vari-
ablesthe representation of organized interests in labor markets, capital
markets, and the polity.
Equipped with these tools, we then looked for manifestations of the mar-
ket and political facets of European integration. As in the rest of the literature,
we found no significant instances of political voluntarism in the integration
of factor markets. Our institutional hypothesis, that voluntarism, when any,
works to strengthen the interventionist capability of European institutions,
found no support in the labor market. Furthermore, trade unions also are not
sheltered against the dilution of membership, and neither is the decentraliza-
tion of wage bargaining checked. In fact, in keeping with the faster growing
financial openness of member economies, we found that corporatism was
declining faster within than outside the EU. Likewise, we found no trace of
state-correcting intervention in EU capital markets. The deregulation of
internal capital markets proceeded at the same pace within and outside the
European single market. This is a case in which European integration seems
to make no difference.
However, we found evidence that market-based integration has so far
spared the more political arenas of interest representationpolitical parties
and local governments. We found that globalization had a general dealigning
impact on the electorate, except in Europe. Although voter turnout seems to
have been negatively affected everywhere, electoral volatility, in contrast, is
not declining in relation to globalization as much within than outside the EU.
EU voters have so far been immune, or less vulnerable, to the global call for
exit frompartisan politics, exhibiting instead greater partisan loyalty. Last,
we found evidence for political voluntarism in the centrifugal effects of the
EU structural funds policy. This effect runs contrary to the consolidating
effect at the national level that greater economic openness seems to generally
have on state budgets in response to the rising disparity between local
economies.
In sum, the overall effect of globalization on interest representation is neg-
ative in the labor and capital markets; it demobilizes voters and breaks the
subnational governments common front in relation to the political center.
The effect of Europeanization on interest representation is equally demobi-
lizing in factor markets (actually worse in the labor market) where prospects
for corporatism seem remote. Absent any centralized system of interest rep-
resentation and bargaining, it is unlikely that EUpolicy in factor markets can
take a path different from that pursued by non-EU governments in response
to the challenge of global market integration.
In contrast, European countries are maintaining a comparatively vibrant
systemof voter and local government representation. Voter representation is
national and intergovernmental, whereas local government representation is
supranational. The existence or endurance of these two systems of interest
representation is the product of EU institutions and policies. Yet, they may
feed back on European integration, orienting it in an institutional and policy
direction different from that pursued by non-EU countries. Indeed, by nurs-
ing or preserving a market-correcting capacity, EU countries are likely to be
tempted to use it accordingly.
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