Vehicle of Influence: Building a European Car Market

by Roland Stephen

Overview

This study examines a crucial period in European integration, ending in the early 1990s, when significant progress was made towards the dream of a unified European market. It shows how European automakers were part of these changes and how their influence within the institutions of the European Union (EU) yielded a wide range of policy compromises governing a single European car market.
The book begins by reviewing the history of the EU and the logic of regional free trade, and goes on to develop a political explanation for the kinds of changes that actually occurred. The author argues that European automakers enjoyed a privileged place in the political arena, albeit one much transformed by the new institutions of the EU. Therefore, these firms often significantly influenced regional policy outcomes. The argument is applied to policymaking in the important areas of environmental regulation, trade, subsidies, and anti-trust regulation.
This work lies at the intersection of business, economics, and political science and is of interest to both experts and non-specialists with an interest in the tremendous economic and political changes brought about by the creation of a united Europe and, more generally, by the worldwide process of regional economic integration. Academics, professionals, businessmen, and leaders in government all have something to learn from the way in which firms and governments combined to build the largest car market in the world.
Roland Stephen is Assistant Professor in the Department of Political Science, North Carolina State University.

Product Details

ISBN-13:	9780472111213
Publisher:	University of Michigan Press
Publication date:	09/06/2000
Series:	Michigan Studies In International Political Economy
Pages:	240
Product dimensions:	6.00(w) x 9.00(h) x 0.90(d)

About the Author

Roland Stephen is Assistant Professor in the Department of Political Science, North Carolina State University.

Read an Excerpt

Vehicle of Influence: Building a European Car Market

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By Roland Francis Stephen

University of Michigan Press

Copyright © 2000 Roland Francis Stephen
All right reserved.
ISBN: 0472111213

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CHAPTER 1 - Completing Europe's Internal Market: The Single European Act in Perspective

The Puzzle of European Integration

In 1991 the European auto industry seemed to be in deep trouble. A controversial trade agreement between the European Union (EU) and Japan restricting Japanese imports had just been completed, and Raymond Levy, chairman of the French automaker Renault, was defending the agreement before a committee of the European Parliament. His comments were defensive, reflecting the views of many at that time.

We are told that we must make adjustments . . . but my enterprise [Renault] has already laid off 40,000 employees over the last five years. Europeans . . . are subject to social exigencies. We have a debt to our workers . . . especially older workers; the social environment matters. For this reason the agreement is indispensable. The European auto industry needs eight years to adjust.

The fear in the industry was palpable. It wasn't just fear of the Japanese, but more generally of the changes being forced on this privileged industrial sector by a program of accelerated market liberalization. How had the industrial champions of Europe been brought to such a pass? What was this program of market liberalization, and what had brought it about?

In 1987 the member states of the EU signed the Single European Act (SEA). It was a public commitment by each government to eliminate the barriers that continued to obstruct trade among them, and to open up Europe's markets by the end of 1992. This ambitious goal attracted plenty of press coverage, on both sides of the Atlantic, and seemed to give a dramatic new impetus to the process of European integration. However, upon reflection, there was good reason to wonder whether the public rhetoric could be matched by the necessary, wide-ranging policy changes required of each national government and of the institutions of the EU. If the past history of the EU was any guide, these countries were going to find it very difficult to implement the terms of this bargain. Although the agreement was the first significant institutional modification of the Treaty of Rome (which established the EU), it was seen by many as a minor, incremental change.

In the event, much of the "1992" project was accomplished. At the same time, Raymond Levy's fears proved to be exaggerated. Even the powerful automobile industry, which employed hundreds of thousands of people and faced an uncertain economic future, had to swallow a dose of market liberalization. Market segmentation was reduced, subsidies were subject to increased control, and a variety of other regulations were harmonized. In other words, the results of the SEA exceeded past practices and expectations. On the other hand, old habits died hard. While subsidies were reduced, they were by no means eliminated, and external trade remained subject to a costly regime of voluntary restraint on the part of Japanese automakers. Overall, outcomes across the four issue areas examined by this study ranged widely, from a significant change over the status quo to little or no change. Specifically, there was a dramatic increase in harmonization in the case of emissions control, increased transparency but limited reductions in the case of national subsidies, the development of a clearly defined if producer-friendly antitrust regime, but changes in external trade policies that could be construed as positively retrograde. What was the constellation of political and institutional factors that explains these mixed outcomes?

There are good substantive and analytical reasons why these complex changes in policy warrant closer scrutiny. At the time, of course, many people in the United States had reservations about the prospect of "Fortress Europe." There was a fear that Europe's integration would be accomplished at the expense of its trading partners--in other words, that internal trade creation would be offset by the diversion away from Europe of U.S. and Japanese products. This proved to be an exaggerated danger, but the willingness of the EU to play a liberalizing role in international trade has remained uncertain. For example, the consequences of the EU's mixed economic policies are most acutely felt in the economies in the East struggling to make the transition from Soviet central planning. German leaders may promise Poland and others rapid membership in the European club, but Polish pigs cannot be exported to the EU, while Polish steel piping has been subject to anti-dumping suits brought by the EU Commission. This book develops a refined analytical framework that captures the interaction of special interests, national governments, and the institutions of the EU that explains these contradictory policies.

The objective of this book is to move beyond broad-scale discussions of globalization and interdependence and develop the tools with which to analyze the actual policy outcomes that shape economic integration. I begin with the role of national and private interests: the governing elites of the member states stood to reap political benefits if the SEA delivered economic gains, and many large and medium-sized corporations trading in the European market would benefit from the elimination of barriers. Other firms and their employees, however, would face acute adjustment difficulties and served as a significant check on the political process of integration. In my research I show how variation in the costs and benefits from integration across issue areas resulted in variation in the ability of governments and firms to combine in their efforts to shape the future of the European economy.

This account of firm and government preferences is then incorporated into an analysis of the heterogeneous institutional environment of the EU. The institutional environment varied across issue areas, and as a consequence the independent effect of institutions varied. Furthermore, I also discover that the member states, on occasion, were able to refine the institutional environment in order to realize superior political and economic outcomes. In short, the explanation for the policy outcomes combines an analysis of preference formation and collective action problems with an analysis of political institutions. This approach gives new understanding to issues at the core of political economy: the way economic interdependence shapes the formation of transnational interests, and how institutional design--under certain circumstances--may foster policy-making that serves a general interest over the particular.

In this introductory chapter I place the research reported in this book in historical context. Specifically, I sketch the background to the SEA and establish its significance in the light of the previous history of European integration. I go on to map the degree to which economic theory is a useful guide to expected outcomes. I then offer a brief summary of existing approaches commonly used to understand EU policy and compare them with the salient elements of my own analytical framework. I finish by presenting a telegraphic account of my findings. Simply stated, they are as follows: the interests of firms and governments were determined by their exposure to economic adjustment. They were often able to act collectively in shaping outcomes, in ways occasionally structured by the institutional environment of the EU. I argue that this interaction between more or less well-articulated interests and various institutional arenas accounts for the observed variation in the level of integration and harmonization accomplished.

The Single European Act in Historical Perspective

It was in July 1987 that the member states of the EU finally ratified the SEA. This was the first modification of the institutional architecture originally put in place by the Treaty of Rome, the treaty that founded the EU in 1957. In the SEA, and in conjunction with the accompanying "White Paper" published in 1985, these governments committed themselves to full economic integration (defined here as economic openness and regulatory harmonization). This commitment had always been the fundamental objective of the EU, but over the years it had remained elusive. The member states now set themselves the ambitious goal of finally eliminating the remaining barriers to trade, and harmonizing regulations across a range of economic sectors and issue areas before the end of 1992. This agreement was to be the cornerstone of a concerted effort to revitalize the European economy and close the gap in productivity, innovation, and growth that seemed to divide European firms from their U.S. and Japanese competitors. It was hoped that the aggregate economic gains from increased openness would act as a spur to the sluggish economy and promote a beneficial cycle of income growth and investment. (On the SEA see De Ruyt 1989; Taylor 1989; Moravcsik 1991; and Garrett 1992.)

But the ability to realize mutual economic gains through international cooperation is always problematic. While cooperation might be sure to yield such gains in the aggregate, the adjustment imposed on privileged domestic interests is often the source of insurmountable political difficulties. For example, although it was understood at the founding of the EU that economic intervention by national governments distorted free competition, all too often in the past the member states had shown themselves willing to protect and subsidize large industrial and commercial enterprises. Even in the years between 1986 and 1988, long after the recession of 1982-83 was over, the average annual expenditures by European governments on state aid represented 2.2 percent of the European Union's gross domestic product (GDP) (CEC [Commission of the European Community] 1991a, 13). Like secret drinkers, they publicly embraced the virtues of sobriety, yet all the while they clung to the bottle in order to dull the political pain that would come from shaking off the claims of powerful clients.

The telegraphic account that follows of the first 25 years of European economic and political integration highlights its many past difficulties. In particular it will serve to emphasize three important points: (a) the uncertain path of European integration--the way in which it has always been episodic, a function of political bargains rather than of some relentless economic logic; (b) the role of divergent national interests and policies in giving rise to this unsteady progress; and (c) (as a result of the first two factors) the significant limitations on European integration that persisted up until the passage of the SEA. Taken together, these elements highlight the distinctiveness of the SEA and its central place in the puzzle that motivates my research project. Given the political character of the integration process, the forces often arrayed against it, and its unsatisfactory record of accomplishments, it is hardly to be wondered that the accomplishments of the SEA were mixed, even if it did move the process of European integration forward further and faster than skeptics initially imagined. The explanation for these mixed outcomes that forms the core of this book will also increase our understanding of the many dilemmas and obstacles that the EU has faced in the past.

The First Twenty-five Years

In the years immediately following the end of the Second World War the international community, under the leadership of the United States, actively sought to establish international institutions that would foster economic stability and political security. Since interstate rivalry and economic instability in Europe had been the source of both world wars, it was there that the search for appropriate international institutions was most energetic. Experiments with a wide range of regional institutions culminated in the establishment of the European Economic Community (EEC), for which an agreement was signed by six European countries, but not the United Kingdom, in 1957. The Treaty of Rome was formally aimed at establishing a free-trade area, but it is important to remember that it was, fundamentally, an economic means to a political end--that of amity and political cooperation. (On the origins and early history of the EEC see Milward 1984, 1992; Pinder 1991; and Moravcsik 1998.)

In its early years the EEC, or EU, as it later became, succeeded in meeting many of the high expectations its founders had for it. Under the energetic leadership of Walter Hallstein, the first president of the European Commission (the supranational body established to forward the purposes of the treaty), progress toward the reduction of tariffs and the expansion of the authority of European institutions seemed impressive. The generally favorable economic conditions of the postwar period no doubt played an important part in lowering the political costs, while magnifying the economic gains associated with these developments.

This halcyon period was disrupted by the policies of the French leader General Charles de Gaulle in the 1960s, who sought to protect French sovereignty. He was responsible for the de facto institutionalization of national vetoes in the Council of Ministers, the governing body of European institutions. He was also responsible for the exclusion of the United Kingdom from EU membership. Earlier progress seemed, as a result, to suffer a political check. However, with the fall from power of de Gaulle and the admission of the United Kingdom, together with Ireland and Denmark, at the beginning of the 1970s, the pace of change seemed to pick up again. The last tariff barriers were eliminated at the end of the 1960s, and in an effort to minimize the consequences of a profligate U.S. monetary policy, the member states began to coordinate their exchange rates within an exchange rate mechanism known as the "snake."

But the 1970s was a period in which the industrial economies endured numerous economic shocks, beginning with the oil embargo in 1973. These occurred in the context of slow rates of growth and widely divergent national economic policies. As a result the level of coordination of policies across Europe actually declined as the decade wore on. The member states proved, for the most part, to be unable to maintain stable exchange rates. At the same time, they resorted to divergent fiscal policies, state interventions, and other strategies that carried with them all kinds of negative collective consequences. In particular this was the era of the "national champion," a state-sanctioned and subsidized firm in a key sector that was to act as an industrial and technological leader. Several auto companies were thought of in these terms (see chapter 3). The result was that by the end of the decade not only was cooperation within the context of the EU paralyzed, but economic performance had begun to sag. Europe seemed trapped by a combination of low growth, high inflation, and increasing unemployment. It was at this time that people began to speak of both "stagflation" and "eurosclerosis" or "europessimism."

The shortcomings of the European economy became even clearer following the recovery in the West after the recession of 1981-82. While the United States and Japan recovered quickly, the EU's return to health was slow. Worse, it proved to be, by comparison, a "jobless" recovery. While the EU grew at an average annual rate of 1.9 percent between 1981 and 1986, the United States grew at 2.9 percent, and Japan at 3.6 percent (CEC 1988a, 42). At the same time, unemployment in the EU remained stubbornly above 10 percent up until 1986 (as a percentage of the civilian labor force), while in the United States it fell below 7 percent (CEC 1988a, 126).

At this point the preferences of the member states, which had diverged in the 1970s as each sought to solve its economic difficulties autonomously, now began to converge. Keynesian management of the economy had failed, and inflation was now perceived as more of a threat than unemployment; as a result monetary policies with a deflationary bias became widely accepted (McNamara 1998; see also Oatley 1997). At the same time, European business had become much more regionally integrated and so found the existing barriers to regional trade increasingly burdensome. Finally, and partly as a consequence of the foregoing, the political balance in many European countries shifted to the right. Taken together, all this led to the focus on a neoliberal strategy of economic openness in the region. That is to say, the SEA and the White Paper were part of a general set of supply-side measures designed to stimulate demand and investment and therefore economic growth. Indeed, the agreement was one of the most important elements in a comprehensive European recovery (inasmuch as external liberalization was more politically acceptable than, for example, eliminating rigidities in domestic labor markets). However, it was also an enterprise that was likely to be very difficult to accomplish.

The Single European Act

The SEA was, therefore, a political project from which the governments of the member states anticipated political payoffs of some kind. Nevertheless, in spite of the shift in political and economic strategies in Europe in the 1980s, this project's success should not be thought of as inevitable. Its success is what makes it an interesting object of inquiry: a favorable (Pareto-superior) outcome was not preordained; it had to be realized by a process of political bargaining over numerous details that cut across issue areas and sectors and that was subject to the institutional structures of the EU.

Significantly, these structures were deliberately modified by the SEA in order to foster rapid political progress. Indeed, these institutional changes were the most important aspect of the SEA, rather than the particular policies it embraced, which were notable for their specificity rather than for their overall purpose (which was no more than the completion of the project envisaged by the original treaty). The crucial institutional change was that, in issues relating to the internal market (which was the focus of the action program), supermajority decision making was adopted. This was called "qualified majority" voting, under which the small states enjoyed voting power in the Council of Ministers somewhat greater than would be warranted by a strictly proportionate rule.

Clearly, qualified majority voting was a less demanding form of self-rule than unanimity and would lead to more decisions being taken more quickly (but see Golub 1999 for an empirical challenge to this view). The adoption of qualified majority voting would make it easier to realize the mutual gains associated with international cooperation. However, what of the costs inevitably commingled with those gains? Perhaps other aspects of the institutional arena could help overcome these political costs. The discussion will return to the question of institutional innovation in the conclusion and will examine these characteristics of the SEA with reference to the specific policy outcomes it fostered. For the moment all that I wish to observe is this: to the extent that the political costs of integration were ameliorated by an appropriate institutional technology, so the set of politically possible outcomes--in this case, liberalization and harmonization--was enlarged.

In conclusion, the puzzle posed at the beginning is a significant one: what explains the mixed success enjoyed by the member states in their effort to increase regional openness and regulatory harmonization? The difficulties were significant, notwithstanding the underlying structural changes that had occurred by the middle of the 1980s that may have made regional integration more politically viable. As noted, progress in European integration had encountered numerous stumbling blocks in the past--the old habits of tending to domestic political clients would be hard to break, even in good economic times. Yet much was accomplished, even if outcomes across issue areas varied. The chapters that follow will show how weighty domestic interests responded to the adjustment that was imposed on them, how the governments of the member states coalesced around specific policy outcomes, and how the institutional environment framed--and directed--the political process.

The Economics of European Integration

Before discussing the political economy of regional integration, it is necessary to establish the economic background. What does economics reveal about the winners and losers from integration? The degree to which economic outcomes are indeterminate will define the role to be played by politics.

Economic Theory

The basic insight is that the formation of a customs union leads to trade diversion and trade creation; if the former outweighs the latter, then the welfare effects of such a union would be negative (Viner 1950). A simple guide to the consequences of a customs union is the level of the common external tariff and the complementarities between the economies of the member countries.



Continues...

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