The Price of Political Crisis

Economic Adjustment and Political Transformation in Belgium and the Netherlands

Erik JonesSAIS Bologna Center

Thanks

Honored to be here– Great to be back in Belgium– Even better to be at the University of Antwerp– Still very humbling to get to talk to you about Belgium

Thanks to all involved– Dirk De Bievre and Cas Mudde (for the idea)– Linda Rogiest (for the practical arrangements)– All of you (for turning up to hear me)

Apologies for False Advertising

Original title was for non-academic audience at the Itinera Institute in Brussels.

At the time, the economy was doing well even if politics was unstable – now the situation is at least partly reversed.

New goal is to emphasize my contribution to the literature (aka how we understand the world).

Promise to give some take-homes for those of you more interested in current events.

Three Part Structure

First, I want to sketch how my research question connects to the literature.

Second, I want to talk about what I found in the empirical record.

Third, I want to suggest what this means for today.

Part 1

Theoretical Context

The Context

Draws on two strands in the literature

– ‘Varieties of Capitalism’ – national economic performance is institutionally determined.

– ‘Small States in World Markets’ – democratic corporatism and political consensus can combine flexible specialization with political stability and so explains small country success.

The Conventional Wisdom

Theoretical: Institutionalized democratic corporatism (or political consensus) is part of a ‘winning formula’ for national success in world markets.

– Combines market liberalization abroad with– Redistributive compensation at home.

Empirical: This formula is more likely to be found in small states.

Un-packing Convention

Four questions are relevant:– Why do states engage in world markets?– Why do states redistribute in domestic politics?– Where does political consensus fit in?– How is any of this related to being ‘small’?

Bottom-up Approach (start w/ small)

Three Dimensions of Size

Conventional use (population or output)

Economic (price-taker or dependence)

Political economy (efficiency vs. homogeneity)

Small as Consensual

Katzenstein’s case selection– Seven consensual countries– Chosen for success– Just happened to be ‘small’

Empirical not tautological – two kinds of consensus– Liberal democratic (divided societies)– Social democratic (homogenous societies)

Consensus in Divided Societies

Classic consociational democracy model of Daalder, Lijphart, Huyse, etc.

Tends to include large welfare states to cushion impact of world market forces as in Cameron.

Only looks ‘liberal’ compared to Scandinavia because it maintains responsibility for policy implementation outside the state.

From Consensus to Success

Consociationalism – (vertical social and political organization)

Corporatism – (centralized functional interest intermediation)

Competitiveness – (policy manipulation of relative costs and prices)

My Research Question

How do the break-down of consociational democracy and the process of de-pillarization change the possibilities for economic policymaking in Belgium and the Netherlands?

Why De-pillarization Should Matter

Pillarization – or consociational democracy – was the formula for consensus

Consensus was the basis for social partnership

Social partnership was necessary for wage moderation

Wage moderation was the key to competitiveness and flexible adjustment

Without pillarization, Belgium and the Netherlands should not succeed in manipulating relative prices and so cannot maintain their own competitiveness (at least not in a way that is superior to market performance)

They may begin to question the merits of European integration as well

The Theoretical Stakes

If de-pillarization doesn’t matter, then we need to explain enduring consensus in heterogeneous societies like Belgium and the Netherlands.

If de-pillarization does matter, then we need to reconsider the durability of the small state model for success both in terms of domestic compensation and in terms of engagement with the outside world.

The Argument (Three Claims)

First, the possibilities for economic policy making are now more restricted in Belgium and the Netherlands.

– Hence we need to reconsider the durability of small state success (at least in heterogeneous states).

Second, the practice of consensual economic adjustment has encouraged the process of de-pillarization.

– Hence the small state model is not only unstable but also self-destructive (at least in heterogeneous states).

Third, whatever the causal relationship between them, the combination of de-pillarization and economic vulnerability is changing domestic attitudes about relations with Europe and the outside world.

Part 2

Empirical Narrative

The Method

Paired longitudinal comparison of B and NL

– ‘most similar’ in the sense that they share many common features but differ in performance. I use this aspect to highlight the influence of elite behavior.

– ‘most different’ in the sense that they begin to share performance attributes as common features diverge. I use this aspect to highlight common sources of structural change.

Framing Assumptions (Economic Policy Choice)

Fixed exchange rates

Hard currency

Macroeconomic stability

Free trade (different from regional integration)

Illustration: The 1950s and 1960s

Similar institutions, different outcomes, common patterns

– Consensus was not automatic, it was constructed– Even once constructed, it required political will to operate– That will tended to break down over time

Initially ambiguous relationship with ‘Europe’– Emphasis on national autonomy and market liberalization

Interregnum: The 1970s

Without commitment to social partnership, the economy became ungovernable

Distributive conflict undermined international competitiveness (and even basic policy assumptions)

Conflict began to break down the institutions for consensus as well

Shift in attitude toward Europe from market liberalization to economic stability

Revival: The 1980s

The institutions for wage coordination remained strong enough for one more use

The challenge was generating the will

But the wage moderation was successful

And the EMS/ERM ensured the relative price change had effect even as the 1992 project enhanced its usefulness

Measuring Success (1)

Figure 1: Adjusted Wage Share in Manufacturing in Belgium

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1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

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Measuring Success (2)

Figure 2: Belgian Real Deutschemark Exchange Rates

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1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

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Unit Wages Costs in Manufacturing Consumer Prices

Measuring Success (3)

Figure 3: Belgian Net Exports of Goods and Services

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Measuring Success (4)

Figure 4: Satisfaction with Democracy in Belgium

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The Netherlands Looks Similar

This is the story of the famous ‘Polder Model’

Ironically it was celebrated more by the Germans than by the Dutch

The commentary at the time was ‘less democracy for a better economy’

Satisfaction with democracy increased nonetheless– And enthusiasm for ‘Europe’ as well

Even So, the Cost Was High

Decline in trade union membership – More in the Netherlands than Belgium

Divisions between trade unions and political parties– Early in the Netherlands but now in Belgium as well

Loss of support for traditional political parties– More dramatic in Belgium than in the Netherlands

Ouster of Christian Democrats from government

The Purple Alternative Did Not Last

Consensus fuelled opposition and dissent

Reformist parties (D66, Agalev) fared worst

Christian Democratic opposition repositioned itself to the right (NL) and toward the regional level (B)

Elites began to manipulate ‘Europe’ in domestic political conflicts

Economic Performance Was Good

Remarkable consolidation on fiscal accounts

Continuous net trade surpluses

Declining unemployment

Difficult (yet still significant) welfare state reform

But Responsiveness Remained Weak

Problem was evident in the both countries– Increasing immobility at home as reforms ran out of steam– Heightened concern about lack of influence abroad (and in

Europe in particular – cf. Nice Treaty)

In any case, ‘Europe’ was not the solution – Lisbon strategy promised new momentum but then fell short– Meanwhile, budgetary wrangles and ‘Laeken Declaration’

suggest that Europe may even have been part of the problem

Waiting for the Shock

Not an issue so long as things worked.

The problem only threatened to arise if things got knocked out of line.

The 2002-2003 recession was a first test.

The current situation is worse.

Part III

Current Implications

The Future is Now

The combination of shocks is significant

The need for adjustment is growing

The apparent choice is between coordination and the market– Price–wage coordination at home and fiscal coordination at the

European level, or– A long grinding recession until things work themselves out.

If current trends continue, the market is the only viable choice

Is there a Non-Market Alternative?

Politicians must express a will to cooperate– Within and across Belgian regions– But across countries as well

This implies an agreed sense of priority– Economics over institutional reform– Stimulus over regulation– Inter-personal solidarity over inter-regional distribution

It will necessitate institutional support as well– Highlighting the role of social partnership– Underpinning the national interest (e.g. Deschouwer)– Strengthening coordination at the European level

Making Clear What is at Stake

Before politicians choose, they should explain what is at stake to the voters

The choice is not just between Flanders and Wallonia, or between Belgium and Europe, but also between cooperation and the market

The market is not necessarily a bad thing, but . . .

Cooperation has been the key to Belgium’s past success

The question is what will determine that success in the future

The price of the crisis is that this choice can no longer be put off

What Does this Mean for the Literature?

Institutions can determine national performance, but there is to institutions than just their design:

– How politicians use institutions matters– How the people react to institutional manipulation matters as well

Hence there is no single formula for national success and no obvious reason why any successful formula should be stable.

On the contrary, there is reason to believe that every ‘successful adjustment’ creates challenges of its own.

Many thanks for your attention