ROME TREATY

1957

2007

-Master’s thesis: International Business and Management -

“Diverging States in a converging

Europe?”

FACULTY OF MANAGEMENT AND ORGANIZATION GRONINGEN m.a.p.hoorn@student.rug.nl 1st Supervisor: DR. B. KIBRISCIKLI 2nd Supervisor: DR. H. STEK August, 2007

ABSTRACT

This paper researches if the role of the state has changed since the Rome Treaty of 1957. Four different countries (Germany, the Netherlands, France and Belgium) with different business

systems (forms of economic organization) are the basis of this research. 50 years of European collaboration led to laws, treaties and agreements between the member states. But did it also lead to

European integration? This thesis researches if certain liberal EU policies (privatization and restriction on State aid) have influenced the role of the state in that sense that one can speak of convergence, divergence or maintenance. The results show that certain decisions on EU-level have

influenced the policies of privatization and State aid and thus the role of the state, but that the four countries (and their governments) are still very different because of their business systems. A lot is

TABLE OF CONTENTS

1 INTRODUCTION... 7

1.1 Research question and sub questions ... 9

1.1.1 Research question... 9

1.1.2 Sub questions... 9

1.2 Conceptual model... 10

1.2.1 Elaboration conceptual model ... 10

2 METHODOLOGY... 11

2.1 Choice of topic and variables ... 11

2.2 Research strategy and method... 12

2.3 Process of data collection.... ... 13

2.4 Operationalization variables... 14

2.5 Criteria for judging the quality of this research in terms of Gill & Johnson... 15

2.6 Paper outline... 17

3 THE EUROPEAN UNION AND ITS POLITICS... 18

3.1 Rome Treaty... 18

3.2 Europeanization, European integration or Eunification ... 18

3.3 The impact and development of the EU... 19

3.4 Liberalization/Deregulation policy EU ... 20

3.5 Institutional context of the EU and its policy-making process.... ... 21

3.6 Privatization ... 22

3.7 Rules on competition (State aid).... ... 25

3.7.1 Methodology of State aid ... 28

3.7.2 Excluding aids to agriculture, fisheries and railways... 29

4 REVIEWING THE THEORY ON CAPITALISM ... 29

4.1 Business systems ... 30

4.2 The “Varieties of Capitalims” approach ... 31

4.4 The “Regulation theory” and the discussion of convergence/divergence... 34

5 COUNTRY LEVEL BUSINESS SYSTEM DESCRIPTIONS ... 36

5.1 Germany ... 36

5.2 The Netherlands ... 40

5.3 France... ... 43

5.4 Belgium ... 46

6 RESULTS PRIVATIZATION AND STATE AID... 50

6.1 Privatization ... 50

6.1.1 Germany ... 51

6.1.2 The Netherlands.... ... 55

6.1.3 France ... 59

6.1.4 Belgium.... ... 62

6.1.5 Comparisons privatization in numbers... 65

6.1.6 Sub conclusion privatization.... ... 68

6.2 State aid ... 69 6.2.1 Germany ... 71 6.2.2 The Netherlands.... ... 73 6.2.3 France ... 75 6.2.4 Belgium ... 77 7 CONCLUSIONS ... 79 7.1 Germany ... 79 7.2 The Netherlands ... 82 7.3 France... ... 84 7.4 Belgium ... 86 7.5 Overall conclusion... 88

8 LIMITATIONS AND RECOMMENDATIONS... 89

Appendix A ... 97

Appendix B ... 98

Appendix C ... 99

Appendix D ... 101

1. INTRODUCTION

Since the mid-1980s, the process of European integration has produced rapid policy changes in the member states of the European Union. One can think of the “Single European Act” in 1986 and the “Maastricht Treaty” in 1992. The EU policies all have a liberal principle, based on the "four freedoms" agreed upon during the “Rome Treaty in 1957”: freedom of movement of goods, services, capital and people.

Convergence theory suggests that these similar pressures (liberal EU policies) lead to similar behavior at firm and country level. The “Varieties of Capitalism” or “National Business System” (NBS) approach however, argues for different adjustment paths depending on the wider institutional environment in which firms operate (Börsch, 2004). Morgan et al. (2005) are doubtful about the contributions of both theories: “Why should some distinct feature among which we see complementarities and coherence today be given the position to count as crucial for the future viability of such systems?” (Morgan et al., 2005, pp. 387).

A fact is that the impact of European integration on national models of governance is a rapidly expanding field of research in the political economy. Research has been done on how EU-member states reacted to certain processes of European integration. Think of Héritier et al. (2001), who described EU countries’ reforms and adjustments to privatization policies. Or Alexander Börsch (2004), who described corporate governance adjustments, because of liberalization in the telecom sector. Or think of Georg Menz (2005), who describes national response strategies to the Single European Market.

of the European integration process: privatization and restrictions on competition (more specifically the State aid policy), I will do research on the role of the state. Did and does the role of the state change into a converging liberal state, because of certain EU policies which push all member states in the same general direction? Or does capitalism lead to nationally specific and path dependant economic policy adjustments, in other words divergence? Or, did the role of the state not change, and is it a stable actor in the process of European integration?

According to Morgan et al. (2005) the role of the state concerns two features: 1): “The extent to which the state is actively involved in coordinating and steering economic development” 2): “The extent to which states actively encourage and structure independent intermediary associations.” (Morgan et al, 2005, pp. 195). Role 1) According to Whitley (2005) there are “arm’s length states” and “promotional states”. Arm’s length states focus on establishing clear rules of the competitive game within which economic actors are free to pursue their objectives as they wish. While promotional states are more concerned with the development of actors and sectors. This means the latter can be interpreted as a supporter involving assistance both financially and non-financially, as well as sanctioning failure. Role 2) Concerning the encouragement of intermediary associations, arm’s length states leave it up to individual firms, unions and other groups. More promotional states tend to standardize interest group representation. An example of the latter is Korea, where industry associations function as an agent of the state. In this research, the definition of Morgan et al (2005) concerning the role of the state is followed. This means the state as actor in terms of coordinating economic development as well as their role towards other parties, as for example employer or employee representation.

The focus of this research is on four countries, which were actively involved in the earliest phase of European integration. Belgium, France, Germany and the Netherlands were four of the six initiators of the European Coal and Steel Community in 1951. Two other factors make this country choice interesting; France and the Netherlands rejected the European Constitution. Secondly, the countries can be clustered concerning their business system. Schmidt (2003) typifies France as “State capitalism”, and although Belgium is an underdeveloped country in terms of research on capitalism, both Schmidt (2003) and Menz (2003) indicate that Belgium has many similarities with France. Menz (2003) indicates that the Netherlands has many similarities with Germany’s ideal form of “Neo corporatism”.

1.1 Research questions and sub questions

1.1.1 Research question:

“How and to what extent did the role of the state change in Germany, the Netherlands, France and Belgium as a result of liberal EU-driven forces as privatization and restricting State aid?”

1.1.2 Sub questions:

1) “How did the process of Europeanization (European integration) evolve with the Treaty of Rome (1957) as a starting point?”

-“What is the idea behind the liberal policy concerning State aid?” -“What is the role of European integration concerning privatization?”

2) “How can the German business system be described, with the main focus on the role of the state by reviewing the existing literature?”

-“How can the Dutch business system be described, with the main focus on the role of the state by reviewing the existing literature?”

-“Is there an overlap in the business systems of Germany and the Netherlands?”

-“How can the French business system be described, with the main focus on the role of the state by reviewing the existing literature?”

-“How can the Belgian business system be described, with the main focus on the role of the state by reviewing the existing literature?”

-“Is there an overlap in the business systems of France and Belgium?”

3) “How can State aid and privatization policies be described in…?” -Germany?

-The Netherlands? -France?

-Belgium?

4) “What are the main differences or similarities concerning the role of the state of this research compared to the existing literature?”

5) “Did the role of the state change in and if so in what way …?” -Germany?

-The Netherlands? -France?

-Belgium? 1.2 Conceptual model:

1.2.1 Elaboration conceptual model:

The deregulation/liberalization policy of the EU is the central element of this conceptual model. Since the treaty of Rome, which can be seen as an important act of Europeanization, the EU has produced a vast array of rules and initiatives with a liberal character. Two of these liberal initiatives are: rules on competition between member states (more specifically the restriction on State aid by law) and privatization.

Business system The Netherlands Business system Belgium Deregulation/Liberalization Policy Business system France

Privatization State aid

Liberal convergence in terms of the role of the state? (divergence or maintenance)

Business system Germany

Figure 1: Conceptual model

Several scholars suggest that these liberal EU-driven forces of integration will lead to a converging Europe. Other scholars indicate that despite EU policies that tend to push all members in the same general direction, national economic policy adjustments remain specific and path dependant. These specific policy adjustments are influenced by the country’s business systems. So, this study researches if the liberal policy leads to liberal convergence or not? (This question represents the arrows from the central block “Deregulation/Liberalization Policy” to the block “Liberal convergence in terms of the role of the state?”) Another question has to do with the influence of business systems on the deregulation/liberalization policy. This works two ways (that is the reason for two-sided arrows). First of all, the deregulation/liberalization policy can influence the business system. For example, the policy of privatization could lead to a change in the financial system of a country’s business system. The extra domestic and foreign investment could change the structure of the stock market. The other way around, the business system can have an influence on the deregulation/liberalization policy in the country as well. A country with a business system of strong unions could have more problems with initiating a certain policy. Think for example of serious rail strikes in France in 1995, when the EU proposed opening up rail freight to cross-border competition. This is a character of the business system, which influenced the policy.

2. METHODOLOGY

The purpose of this chapter is to explain the choice of the research topic and the accompanying variables, the research strategy including the used method, the process of data collection and the limitations of the data. I will also discuss the quality of the results and provide a visual overview of the paper outline.

2.1 Choice of the topic and variables

integration led to freedom of movement of goods, services, capital or people, but did it lead to a union? According to the dictionary a union is “the act of making or becoming a single unit”1. But did the Rome Treaty lead to a single unit? Is the rejection of the European Constitution by the Dutch and French population an act of becoming a single unit? Are European countries becoming more alike or are the differences too large to speak of a Union? My interest goes to four countries, which were initiators of the Rome Treaty, and are different in terms of economic organization. With the latter I mean different business systems and more specifically the role of the state. As noted earlier the EU principles are based on four freedoms. In order to pursue these freedoms, there are several EU laws, agreements and initiatives made between the member states. My interest goes to two EU initiatives which deal with economic organization and the role of the state. These two are the process of privatization and the restriction of State aid. All EU countries (and therefore also Germany, the Netherlands, France and Belgium) have been dealing with these issues and thus these variables enable me to research if the role of the state has become more or less similar in four EU-countries.

Finally, the choice of the European Union as a unit of analysis fits into the master of International Business and Management. The same can be said about the comparison of four countries in terms of business systems.

2.2 Research strategy and method

The literature of Yin (2003) is well known for describing the research process. A research strategy is a plan that “guides the investor in the process of collecting, analyzing and interpreting observations or data.” (Yin, 2003, pp. 19). The research plan has the following outline: in order to test if the role of the state changed because of liberal EU policies as privatization and the restriction of State aid, the research starts with a review of these EU policies and the context in which they were developed. Then I will review the existing literature and describe the business systems of Germany, the Netherlands, France and Belgium. Then I will use data to describe the different privatization programmes and private sectors in these countries. The research will provide an overview of the role of the state during the period privatizations were executed and provides an overview of the size and importance of this sector in terms of data as well as. The State aid policy will be described by providing a longitudinal data analysis of the extent of this sector as well as an

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analysis of the distribution of State aid. Then I will combine the literature and the data to conclude if the role of the state did change or not.

The research method is usually characterized by three kinds of research: descriptive, explorative and explanatory (Baarda and de Goede, 2001). This research can be defined as an explorative comparative research. An explorative research focuses not only on a description of characteristics, but also on the relationships between certain characteristics and motives for certain relationships (Baarda and de Goede, 2001). The keyword here is exploration, meaning that before the research starts, one does not have a definite direction yet. This research focuses on underlying differences (business systems) between countries that can affect the motive for certain decisions. (for example grant State aid). It has a comparative element as well, because this study compares four countries: Germany, the Netherlands, France and Belgium.

There are several strategies to come up with information for a research. Yin (2003) describes five popular strategies to do research. These are survey, archival analysis, experiment, history and case study. This research fits best with Yin’s archival analysis, because certain conclusions will be drawn from available longitudinal data of the EU.

2.3 Process of data collection

The process of data collection of this research can be divided in two parts. The first part examines the existing literature on the EU, privatization, State aid, the public sector and business system theory. To obtain relevant theories on these topics, literature was examined on the basis of exploring books, magazines and articles (both hard copy as well as internet databases). Most articles were found using the university database Business Source Premier and Scholar Google.

Sub questions 1 and 2 will be answered by collecting information from these sources. The literature on business systems is better developed in the countries Germany and France than in the Netherlands and Belgium. A consequence here is that it is easier to review the existing literature in the first two countries and more alternative sources (for example IMF country reports) are needed in the Netherlands and Belgium.

study privatization will not only be looked at as a single unit of analysis, I will also relate privatization to the overall private sector. In order to realize this, government consumption and government expenditure data are used from the database WDI. (World development Indicators) Data on State aid is less straightforward than public sector data. More about this can be found in paragraph 3.7.1 Methodology of State aid. The data comes from the section “Competition” of the European Union. This section enforces the competition rules of the Community Treaties, in order to ensure that competition in the EU market is not distorted and that markets operate as efficiently as possible. From 1997 until 2005 there is data available through the website, where the EU collects State aid data annually. In order to obtain data prior to 1997, I copied papers from the section on State aid in Brussels.

According to Yin (2003) there are three principles of data collection. It is important to use multiple sources of evidence. In this research this will be done by not only reviewing the existing literature, but combining this with data. Secondly it is important to create a study database. Because of the large amount of data this keeps the data collection phase structured. At last, it is important to maintain a chain of evidence. A step by step research increases reliability. An overview of the steps taken in this research can be found in 2.6.

2.4 Operationalization variables

An important step in the research process is the operationalization of concepts. This process contains the definition of the most important concepts. The most important concepts of this research are:

Privatization: Act of converting a publicly operated enterprise into a privately owned and operated entity. Shares formerly owned by the government, as well as management control, are sold to the public. The theory behind privatization is that these enterprises run more effectively and offer better service.

Business system: Distinctive patterns of economic organization that vary in their degree and mode of authoritative coordination of economic activities, and in the organization of, and interconnections between, owners, managers, experts and other employees.

Deregulation: The lessening or complete removal of government regulations on an industry, especially concerning the price that firms are allowed to charge and leaving price to be determined by market forces

Liberalization: The promotion of a market economy via private ownership and competitive allocation of resources.

Convergence: The process of becoming more alike. In an international context, it often refers to countries becoming more alike as a result of trade or other forms of economic integration.

Divergence: Opposite of convergence. A situation in which two or more variables fail to show confirming trends.

Other definitions can be found in appendix A.

2.5 Criteria for judging the quality of this research in terms of Gill & Johnson

According to Gill and Johnson there are two ways to judge the research (validity and reliability)

-Internal validity (The degree to which the researcher can be sure that the 'cause' is what actually produces the effect)

This thesis researches if the role of the state has changed, because of certain policies (more specific policies on privatization and State aid), and the influence business systems have on this. One needs to realize that there are more variables which influence this relationship, so there will most certainly be limitations to this study. Describing the limitations will improve the internal validity.

This research is on a country level; however in some countries this does not represent the entire population. Two of the sample countries are Germany and Belgium. Within these countries there are regional differences. In Germany the policy in Eastern Germany may differ from Western Germany and Belgium has two language areas. So one needs to be careful with certain propositions on generalize ability.

-Ecological validity (Can the results be generalized across borders?)

The fundamental idea of this research is that countries differ in their business systems. This makes countries unique. Although certain countries are very much a like, this research is too specific to generalize across borders.

-Reliability (Are the results consistent?)

2.6 Paper outline

Figure 2: Outline thesis Chapter 1

-Introduction to the topic -Research question, Sub questions and

Conceptual model

Chapter 2 Methodology

Chapter 3 (Literature review) The European Union and its policies -The EU (Rome Treaty, Liberalization,

Institutional context) -Privatization (explanation) -State aid (explanation and methodology)

Chapter 4 (Literature review) -Theory on capitalism

Chapter 6 (Results) -Privatization in Germany, the Netherlands, France and Belgium

Chapter 6 (Results) -State aid in Germany, the Netherlands, France and Belgium

Chapter 7

Results and Conclusions Chapter 8

Limitations and recommendations Chapter 5 (Literature review) - Overview Business systems in Germany, the Netherlands, France and

3. THE EUROPEAN UNION AND ITS POLICIES

“How did the process of Europeanization (European integration) evolve with the Treaty of Rome (1957) as a starting point?”

“What is the idea behind the liberal policy concerning State aid?” “What is the role of European integration concerning Privatization?”

This chapter covers the following aspects: there are widespread perceptions that Europeanization is the driving force behind liberalization of the EU’s member states. But what is Europeanization? How did it influence the EU’s member states? And why a liberal policy? What are the legal implications of State aid and privatization? And to start with the Rome treaty of 1957.

3.1 Rome Treaty

In 1951, six countries (Belgium, France, West Germany, Italy, Luxemburg and the Netherlands) signed in Paris a treaty, which established the European Coal and Steel Community. On the 25th of March 1957 these same six countries established the European Economic Community. The purpose of the EEC was to establish a customs union, which was based on "four freedoms": freedom of movement of goods, services, capital and people. The growth of this European Community into what is currently the European Union can be said to consist of two parallel processes -- first the structural evolution and institutional change into a tighter bloc with more competences given to the supranational level, located in Brussels, which can be called the process of European integration. The other process is the enlargement of the European Community (and later European Union) from 6 to 27 member states. This thesis focuses on institutional change of European integration. In 2007, the EU celebrated its 50th birthday.

3.2 Europeanization, European integration or Eunification

What does Europeanization mean? “It is a process of structural change, variously affecting actors and institutions, ideas and interests” (Featherstone et al, 2003, pp. 3).

European integration is the process of political and economic (and in some cases social and cultural) integration of European states into a tighter bloc2. Many scholars use Europeanization and European integration as substitutes. But, according to Schmidt (2006) there are important differences. She defines Europeanization as: “The top-down process of member states adaptation to

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the EU in order to distinguish it from European integration as the bottom-up process of projecting influence.” (Schmidt, 2006, pp. 673). In this research the process of “European influence” is a two sided relationship. The EU policies exert pressure on the national business systems, while business systems exert pressure on the mode of liberalization. (as earlier explained in the section of the conceptual model). This double process of both bottom up as well as top down European influence, makes the definitions of Europeanization and European integration unusable. To prevent misinterpretations, a better name for the double process of European influence would have been EU-unification. (Eunification)

3.3 The impact and development of the EU

As noted earlier in the introduction, the six initiating countries agreed on “four freedoms". Although it is not easy to summarize compactly the activities of the European Union, one can define them as the free flow of economic factors, in pursuit of greater affluence of the states and its citizens. The law of the Single Market plays a key role there by removing the barriers that member states might otherwise impose on trade originating in other member states. It was not until the Single European Act (SEA) (1986) that the final barriers to free movement of capital, labour, goods and services were removed. The EC formally became a single market in 1992 when the Maastricht Treaty was signed.

The Single European Act was the first major revision of the Rome Treaty. There was a tremendous amount of discontent among European Community members in the 1980s. Leaders from the business and political worlds were eager to harmonize laws between countries and resolve policy discrepancies.3 Examples of existing discrepancies in the 1980s are: the “Cold war”, with a threat of expanding communism, the results of the oil and energy crises in the 1970s, dictatorial regimes in Eastern Europe and Spain and the Iran-Iraq war.

For the SEA, a commission was formed to analyze, whether a common market was possible in Europe, and what steps would need to be taken to achieve that goal. The commission put forth the proposals that became the Single European Act. More specifically an aim of a single market by 1992 was set. A next step in this process was the Maastricht Treaty. The Treaty was signed on February 7th, 1992 in Maastricht. This treaty initiated the road to a political and economic, and

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monetary union. This treaty led to the creation of the Euro (then EQU) as well, and introduced the three pillars of the European Union. These are: I: European Community II: Common Foreign and Security Policy III: Police and Judicial Cooperation. At the time of the Maastricht Treaty, the European Union had twelve members. Maastricht was followed by Amsterdam and Nice with themes as EU enlargement, institutional adaptation in terms of greater transparency and simplification. In 2004 EU-member states had the opportunity to vote for an EU Constitution through a referendum. French and Dutch voters rejected the EU Constitution. (France 55% to 45% and the Netherlands 62% to 38%). In 2007 the EU consists of 27 member states and during the 50th celebration of the Rome Treaty, Ms. Merkel “Bundeskanselier” of Germany and for one year head of the European Union, indicated Europe should give the Constitution a second chance.

3.4 Liberalization/Deregulation policy EU

customers, in particular better quality and a variety of products (goods and services) and reduced prices, and on the other hand promoting economic integration within the internal market and hence competitiveness and employment.

3.5 Institutional context of the EU and its policy-making process

The European Union is governed by a number of institutions, these primarily being the Commission, Council and Parliament.

At the heart of the EU is the European Commission, to which every member state appoints one commissioner for a five-year term. (In 2007, there are 27 commissioners) This “college” can be interpreted as the executive body of the EU. The commission also has the sole right of initiating legislation, administering the budget and has independent powers including deciding competition cases and representing the union in trade negotiations.

The European Council forms half of the Union's legislative branch. It is made up of the 27 heads of member states’ governments and meet four times a year. The European Commission takes its political cue from the Council.

The other half of the legislative branch is the Parliament. It has 785 members, directly elected in rough proportion to each country’s population. Most EU laws are subject to “co-decision” by the council and the parliament. Other important European institutions are: The European Central Bank and the European Court of Justice. According to Schmidt (2006) the policy-making process of the European Union does not fit with any national model of policy-making. It is most comparable to the pluralism of the United States. It means that political power in societies does not lie with the electorate, but is distributed between a wide number of groups. These groups may be trade unions, interest groups, business organizations, and any of a multitude of formal and informal coalitions.4 The implementation follows a pattern of legalistic and regulatory enforcement with rules that apply equally to all (Schmidt, 2006). However, it differs from the American system on the following aspects; The European Commission with great powers of policy initiation and control over certain policies adds a statist element to the system, on the other hand the EU is more co-operative in dealing with interests in policy formulation (with wide consultation through committees), which has

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similarities with a corporatist system (Schmidt, 2006). So, the policy-making process of the EU is not an ideal type of pluralism, but more a “semi-pluralist” policy.

3.6 Privatization

Before the Rome Treaty, Europe was characterized by welfare states, state interventionism and Keynesianism. Obviously, this is in contrast with the liberal policy of the European Union, which promoted through the years: market based reforms of deregulation, regulation of competition, privatization and the establishment of separate and independent regulatory authorities (Levi-Faur, 1999).

Rhodes (1996) suggests that European integration represent a form of “subversive (dangerous to the state) liberalism”. This means that liberalism through Europeanization limits the role of the state. Although privatization is named as one of the liberal forces of the EU, the Treaty of Rome remains neutral on the matter of economic ownership, leaving each state free to privatize (Wright, 2004). This does not mean there is not a strong correlation between privatization and European integration. Clifton et al. (2006) proved that EU privatization can be placed in the context of economic and political integration. Van Miert (2000) states that liberalization of State monopolies has been an unavoidable consequence of the establishment of the internal market. “It is obvious that a market based on competition and free circulation of goods, services, people and capital is at odds with systems based on national monopolies.” (Van Miert, 2000, pp. 1). Although remaining neutral, the Treaty of Rome is clear about the principle of free trade. Article 37 EC Treaty: “Member states shall progressively adjust any State monopolies of a commercial character as to ensure no discrimination exists between nations and member states.”

As noted earlier state ownership expanded in the post war period. According to Toninelli (2000), there are many factors that explain the establishment of state-owned and state-managed enterprises. There are three categories of factors:

1. Political and ideological reasons 2. Social motives

3. Economic reasons

society. It was based on diminishing power of private capital and increased power of labour. The deep crisis between the two world wars did no good to liberal capitalism as well.

2) Social motives for nationalization are the desire to guarantee full employment, to offer better working conditions to the work force and to improve industrial relations. Especially France and Italy acted as pioneers in the field of social innovations (Toninelli, 2000).

3) The most common economic reason is market failure. Market failure is a term used to describe a situation in which markets do not efficiently allocate goods and services (Wright, 1994). This could lead to diseconomies of scale for consumers, mainly in terms of increased prices, as well as the unreliability of supply. (Think of services as firefighting or postal services in a remote area.) Public enterprises base its decisions on long term considerations instead of short term profit making (Toninelli, 2000).

A second economic reason is linked to the promotion of growth in underdeveloped regions. The state can foster modernization in neglected sectors by initiating public activities. It also includes the construction of infrastructures, such as railways.

A third economic argument for state ownership is industrial rescue programs. The state may decide to help private businesses that are affected by crises. This form of nationalization has often occurred in Italy (Wright, 1994).

The great age of public enterprises and nationalization policies started after World War II, when governments took over property and control of large sectors of economic activity. Many countries had “left” governments with nationalization and economic planning as central issues of their political programs. However, since the 1970s, the public enterprises are in decline. In most Western countries privatization led to an erosion of the public sector. There are several rationales for privatization. Parker (1999) comes up with four:

1. State industries are inefficient and privatization will lead to efficiency

2. Privatization can make a useful contribution to developing domestic capital markets 3. Selling state assets is a legitimate way of reducing government debt

1) The existing literature on privatization has many examples of how government ownership is closely linked to political involvement. In France state industries have been used to control prices and to preserve jobs (Parker, 1999). In Finland state industries were supposed to supply private firms with cheap supplies (Willner, 1998). These examples show that state companies were utilized for other than profit maximizing goals.

2) Privatization is a way of increasing stock market capitalization and providing domestic and international investment opportunities (also for attraction of small investors).

3) Meeting the Maastricht criteria5 for eligibility to join a single currency has become a very important consideration driving privatizations in a number of EU-countries. Privatization receipts can be used to reduce government debt. (Condition 3, Maastricht criteria) Indirectly, lowering government debt influences the budget deficit, because of less interest payments. 4) The EU worked hard to remove restraints on trade resulting from regulation. This had

implications for the nature of ownership in industries previously protected from competition. This deregulation policy implied a change in the relationship between governments and state-owned utilities. A logical consequence was selling it to the private sector.

As noted earlier, the liberalization process can lead to certain benefits for many social actors in the economy. Privatization (as one of these liberal forces) of a previously closed sector means higher efficiency (flexibility and productivity and lower costs) (Geradin, 2000). Furthermore, through the offering of better services at cheaper prices, the overall competitive position of the entire economy in the world is improved (Van Miert, 2000). This has also positive consequences for employment.

Clifton, Comín and Diaz Fuentes (2006) researched the ideology behind why governments privatized between 1960 and 2002. According to their study there are three paradigms for privatization. They constructed three hypothesises based on these paradigms. The three paradigms are: the “Multi logics approach”, “British paradigm” and the European Paradigm”. The “Multi logics approach states that the reasons for privatization in Europe are so diverse and complex that there is not one way to interpret this process. The “British paradigm” stresses that British

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privatization is a single, homogeneous process which can be implemented in diverse countries (Megginson et al. 2001). The right-wing ideology of Margaret Thatcher as the founder of this paradigm. The third approach states that “Europe in a changing global context from the 1970s of economic crises and technology change is an important force for policy reform including deregulation and privatization.” (Clifton et al, 2006, pp. 739). According to their empirical research only hypothesis three (European paradigm) is accepted. So the major initiator of privatization is the process of European integration.

3.7 Rules on competition (State aid)

“State aid is a form of state intervention used to promote a certain economic activity. It implies that certain economic sectors or activities are treated more favorably than others and thus distorts competition, because it discriminates between companies that receive assistance and others that do not.” (Scoreboard EU, Spring 2003, pp. 8)

The State aid-rules originate from the Treaty of Rome. The Treaty sets out the principles of fair competition within and between EU-member states. This policy on competition aims to increase benefits to society by securing competitive markets; it aims to remove national barriers to inter-state competition and to prevent private barriers to competition (Schina, 1987). There are different ways the EU deals with competition, on the one hand there are policies for companies, and on the other hand there are policies for governments. Policies for companies deal with cartel agreements between competitors and the abuse of a company’s dominant position in a market. This is for example the case for predatory pricing aiming at eliminating competitors from the market. But, competition can also be restricted by governments, if they grant public subsidies to businesses. (State aid) State aids can frustrate free competition not only by preventing the most effective allocation of resources, but also by being used to the same effect as tariff barriers and other forms of protectionism.

would have to bid against each other with aid, which would have severely impeded progress towards the unity of the common market as well as damaging free competition and reducing welfare by the resulting misallocation of resources.” (1st survey on State aid in European Community, 1981, pp.1) “Governments may easily be tempted to use State aid in order to remain in office because their cost, being thinly spread, is not noticed by the voters whereas their value is very strongly felt by the beneficiaries.” (Schina, 1987, pp. 4). The legal implications of State aid can be found in appendix D.

The EU identifies five different forms of State aid: 1) Agriculture 2) Fishery 3) Transport 4) Horizontal 5) Vertical 1. Agriculture:

This sector is characterized by several social and economic factors: a social structure, based mainly on family farms, the need to protect farmers from the excessive buying power of their customers, the instability of the market owing to weather conditions, the inelasticity of demand for certain products and the need for stability in supply. “In this sector State aid is used not only to provide marketing and price guarantees, but also to organize these markets.” (Schina, 1987, pp. 96). 2. Fishery:

Special forms of aids, which are allowed in the fishery sector are: aid to temporary store fishing activity, aid to invest into fishing vessels for the processing and marketing of fishery products, which would help to develop the industry more, research aid for the development of new techniques, aid for training, advisory work or technical assistance and aid for the promotion of fishery products.

3. Transport (Railways):

live. Secondly, an underdeveloped infrastructure discourages the move of industry in such areas. Thirdly, closure of certain infrastructures is rejected by law on terms of several constituencies.

The EU identifies four different transport sectors: Railways6, Maritime transport, Air transport and Road transport.

4. Horizontal:

In 1998, the European Commission decided that, “certain categories of aid which are compatible with the common market”7 should be allowed. Such categories include: aid for small and medium-sized enterprises, research and development, environmental protection, employment, training and grant of regional aid8. Although the effects of some grants are not immediate, they may increase the long term competitiveness of beneficiaries and enable governments to save financial resources for other purposes.

5. Vertical (or Sectoral aid):

This is aid for rescue and restructuring of firms in difficulty. Vertical aid may assist the development of economic activities of any kind. However, aid which only covers the running cost without any structural adjustment has less chance of being granted by the Commission. Structural adjustment in terms of job creation and restructuring the company has more chance. Vertical aid

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The Railways sector is excluded when determining State aid, for an explanation see the section: methodology of State aid on page 28

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http://europa.eu/scadplus/leg/en/lvb/l26043.htm 8

Regional aid: Aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest

SME aid: Enterprises which offer opportunities for the creation of new products and jobs. SMEs are usually labour intensive and have limited access to capital markets. Aid can be given for: R&D, technical assistance in business and management methods

Research and Development aid: Industries of advanced technology which are not sufficiently competitive to take advantage of the rapid growth in world demand. (for example aerospace or electronics)

Environment aid: Investments for the protection of the environment

Employment aid: Employment subsidies which are neither regionally or sectorally specific. The Commission makes a distinction between maintaining jobs and the creation of new jobs. The latter is favoured

Training aid: Aid granted by a member state to a company for training purposes. The training may be in any field. It is defined as specific where it is principally applicable principally to the employee's present or future position and general where it provides qualifications that are largely transferable to other firms or fields of work

Regional aid: Aid to reduce disparities between parts of the country. These disparities reflect the different geographical, political, social, demographic and technological endowment of each region. (For example the East Länder)

includes the following categories: manufacturing (steel and shipbuilding), other non-manufacturing sectors, coal and financial services.

In 2001, the member states of the European Union made a commitment, during an EU conference in Stockholm, to reduce State aid (especially vertical aid) as a proportion of GDP and to reallocate aid to horizontal objectives. However, the report of the EU on State aid in 2006 shows no downward trend in State aid. While the overall level of State aid dropped to 50bn euros in the 1990s, today the aid to the private sector is a stable 65bn euros. (see appendix C for a recent news article on State aid) The objective of this thesis is not to judge the overall EU policy on State aid, more interesting is the distribution and trend of State aid in the countries of this research in perspective with the role of the state. Especially differences ánd similarities between these countries in terms of State aid and this linked to the institutional character of the countries.

3.7.1 Methodology of State aid

State aid data collected by the European Union and presented in their Scoreboards are grouped to primary objectives. (Agriculture, Fishery, Transport, Horizontal and Vertical) In some cases there is a lack of information on secondary objectives, which means that some categories of aid may well be underestimated as they are classified elsewhere. For example, some aid classified under “Research and Development” may also be aimed at “Small and Medium sized Enterprises” or it may be for a particular sector and so on. Furthermore, it should be noted that the data does not provide an accurate picture of the final beneficiaries. For example, aid granted under a regional development scheme may end up going to a variety of sectors or be destined largely for Small and Medium sized Enterprises, etcetera. The Commission is currently working on improving the detail and quality of the data it collects. This is a continuous process, which means that every year the data for the previous year is adjusted to improve information on secondary objectives.

3.7.2 Excluding aids to agriculture, fisheries and railways

Regarding State aid, there are different policies for agriculture, fisheries and transport aid. Reason for this is treaties, which allow these sectors to be treated differently in terms of competition. The treatment, at Commission's level, of the specific cases related to State aids in the agricultural sector (including fisheries) are under the responsibility of the Directorate General of Agriculture. Reason for this is that State aid rules in the agriculture sector have to be coherent with the Community's common agricultural and rural development policies and the rules have to be compatible with the Community's international obligations, in particular the WTO Agreement on Agriculture. These perspectives have resulted in some legal instruments, which are in force only in the agricultural sector (including fisheries). For this reason aid to agriculture are excluded by the EU when determining State aids.

Another sector which is treated differently is the transport sector, more specifically Railways. Railways are by far the least liberalized sector (Geradin, 2000). There is not much competition in rail and many railway companies enjoy the advantages of being a monopoly. Member states are required to report the overall public expenditure to Railways, however much of the public financing of this sector is not identified as State aid in terms of Article 87 (1)9. It represents compensation in terms of Regulation 1191/69, which states that governments should ensure adequate transport services. For this reason State aid to the transport sector excludes railways.

4. REVIEWING THE THEORY ON CAPITALISM

This chapter reviews the existing literature on business systems. It reviews the major concepts and theories. The focus is on the four countries: Germany, the Netherlands, France and Belgium. The role of the state, within the theories of “Varieties of Capitalism”, “National Business Systems” and “Regulation Theory”, has a central role in this research.

This chapter contains the following questions:

“How can the German business system be described, with the main focus on the role of the state by reviewing the existing literature?”

“How can the Dutch business system be described, with the main focus on the role of the state by reviewing the existing literature?”

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“Is there an overlap in the business systems of Germany and the Netherlands?”

“How can the French business system be described, with the main focus on the role of the state by reviewing the existing literature?”

“How can the Belgian business system be described, with the main focus on the role of the state by reviewing the existing literature?”

“Is there an overlap in the business systems of France and Belgium?”

I will start this chapter with an overall review of the exiting literature on business systems.

4.1 Business systems

Business system-theory is about coordination. The question is how is economic behavior coordinated in the structure of ownership of firms, in inter-firm networks, and by management inside firms? A business system is the set of coordinating mechanisms.

There is an ongoing debate about the different forms of capitalism among developed high income countries. Most known is the “Varieties of Capitalism10” (VoC) approach with its dichotomy of liberal market economies (LMEs) and coordinated market economies (CMEs) on the basis of four key related areas (Hall and Soskice, 2001). A dichotomous approach has both pros and cons. A con of the VoC approach is that it provides a convincing argument to identify and understand continuity, however it faces a challenge when trying to understand change. Another con of the VoC is the minor categorizing ability of Hall and Soskice’s theory. Not all countries fit neatly in the dichotomy of LMEs and CMEs. The remaining countries are “mixed market economies” (MMEs) or hybrid forms of capitalism (Campbell and Pedersen, 2007). More elaborate (and non-dichotomous) theories on business systems are developed by Whitley (1999), Schmidt (2003) and Boyer (2005). Whitley and Schmidt represent the stream of the “National Business System” approach, while Boyer developed the “Regulation theory”. In the next section the three major approaches on capitalism are explained.

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4.2 The “Varieties of Capitalism” approach

Hall and Soskice (2001) use a framework for analyzing how companies, employees, owners of capital and customers organize their relationships within an institutional framework. This framework is defined at a national level. This framework consists of a number of incentives and constraints which are set by market-related institutions. The most important institutions are the financial system, the industrial relations system, the education and training system and the inter company system. These frameworks can be divided into two main patterns: “Liberal Market Economies” (LMEs) and “Coordinated Market Economies” (CMEs). CMEs differ in their institutional framework from LMEs.

CMEs:

-Financial system: allow long term financing of companies.

-Industrial relations system: unions play an important role; they allow cooperative industrial relations within the company and coordinated wage bargaining across companies.

-Education and training system: encourages initial vocational training of young people, and in which organized business and/or individual companies are closely involved.

-Inter-company system: enables substantial technology and standard setting cooperation to take place between companies.

LMEs:

-Financial system: imposes relatively short-term horizons on companies, but at the same time allow high risk taking.

-Industrial relations system in deregulated labour markets discourages effective employee representation within companies-hence weak unions, but which facilitate unilateral control by top management.

-Education and training system: emphasizes general education, discourages long-term initial vocational training, but encourages subsequent bit-by-bit skill acquisition, especially for those with sufficient general education.

-Inter-company system: imposes strong competition requirements and hence limit possible cooperation between companies.

4.3 The “National Business System” approach

Whitley (1999) identifies four institutional features related to business system characteristics:

-The state: there are three main features of state structures and policies, which affect forms of economic organization. Firstly, states dominate the economy and share risks so that business would depend on state policies and actions. Secondly, states encourage the establishment of important intermediary economic associations, and thirdly, it may deal with the formal regulation of markets.

-The financial system: the critical feature measures if this process is capital or credit-based. In capital-based systems, financial systems mobilize and distribute capital through large and liquid markets, which trade and price financial claims through the usual commodity market processes. On the other hand credit- based financial systems, where the financial system only plays a minor role in mobilizing and pricing investment funds.

-Skill development and control system: there are three critical features of organization and control of labour markets. Firstly, the extent to which the availability of skills and capabilities are controlled by independent trade unions; secondly, the extent unions are organized around certified expertise and are strong; thirdly, the extent centralized bargaining influences the internal coordination of employer’ groups and unions.

Regarding the business system type, Whitley defines six:

Institutional characteristics: Types of business systems: Fragmented Coordinated industrial district Compartment-alized State organized Collaborative Highly coordinated The state

Strength of the state’s coordination/development role Low Considerable locally, limited nationally

Low High Considerable High

Strength and incorporation intermediaries

Low Considerable locally

Low Low High High

Strength of market regulation

Low Considerable locally

Low High High High

Financial system

Capital or credit based

Low risk sharing banks

Some local risk-sharing

Capital market Credit Credit Credit

Skill, development and control

Strength public training Low High Low Limited High Limited

Union strength Dominant organizing principle unions Low Varies High Skill/sector Low/some Skill Low Employer High Sector Some Employer Centralization of bargaining

Low Low Low Low High Low

Trust and authority

Trust in formal institutions

Low Some High Limited High Some

Paternalist authority Communitarian authority Some Low Variable Limited Low Low High Low Low High High Some Contractarian authority Business environment Limited Particularistic Variable Locally collaborative High Arm’s length Low Dirigiste Low Collaborative Low State guided

Table 1: Institutional features with different types of business systems (Whitley 1999)

Institutional characteristic: Types of business systems:

Market Capitalism Managed Capitalism State Capitalism Government role

Policies towards business Liberal (arbitrator) Enabling (facilitator) Interventionist (director)

Policies towards labour Bystander Bystander Organiser

Business relations

Interfirm relations Competitive

Contractual Individualistic Co-operative Mutually reinforcing Network based State led State mediated

Investor sources Capital markets Banks State

Time horizons Short-term view Long-term view Medium term view

Goals Profits Firm value National

political-economic priorities

Industrial relations

Management-labour relations Adversarial Cooperative Adversarial

Wage-bargaining Fragmented Co-ordinated State controlled

Table 2: Institutional features with different types of business systems (Schmidt, 2002)

4.4 The “Regulation theory” and the discussion of convergence/divergence in the literature The regulation theory is “a school of thought that tries to describe how institutional forms of capitalism have changed over time” (Boyer, 2005, pp. 510). Regulation theory is more focused on analysing capitalism’s stages than on a variety of forms at a particular moment in time. Boyer (1996) focuses on the divergence/convergence discussion and found evidence for both convergence and divergence. Convergence: the collapse of the Soviet economic regime with a switch towards democracy, the growth of international capital markets and the ambition of the European Union in terms of the Maastricht Treaty. Statistical evidence however does not provide evidence in terms of convergence. According to Boyer (1996) there is no trend of convergence in productivity levels and standards of living. Ghemawat (2003) shows that cross-border activity has not increased dramatically since the 1960s. Also Europe is still diversified in terms of ideology, ethnicity and religion.

Instead of two or three, he comes up with five forms of capitalism: Market Based (similar to the LME model of Hall and Soskice), Social Democratic model (moderate employment security, high levels of social welfare, widespread labour retraining and a coordinated wage-bargaining system) Continental European system (similar to socio democratic model, but the welfare state is less developed, the financial system is more long-term orientated, coordinated wage-bargaining and less labour retention), the Mediterranean model (more employment protection and less social provision than the Continental European model, it has a workforce with more limited skills and education and is less feasible for a high-tech industry strategy) and the Asian model (highly dependent on the state and a centralized financial system) (Amable, 2003).

Many of these theories categorize the countries of this study differently. Where the “Varieties of Capitalism” approach groups Germany as a typical CME, it has no clear judgment on Belgium, France and the Netherlands. Schmidt’s “National Business System” theory classifies France as State capitalism and Germany as Managed capitalism. Whitley classifies at least one country for all of six categories. The categorization of the work of Amable can be found in figure 3.

In the next section of this research, the three streams in the literature on capitalism will be review the on the four countries of the research. I will start with Germany.

“How can the German business system be described, with the main focus on the role of the state by reviewing the existing literature?”

Mediterrenean model

Social democratic model Market based model

5. COUNTRY LEVEL BUSINESS SYSTEM DESCRIPTIONS

5.1 Germany

The “Varieties of Capitalism” approach:

Financial system: In Germany banks are the key financial institutions, mediating deposits from households and channelling them into loans directly to firms. Besides close relationships between banks and industrial corporations, these systems tend to have small and underdeveloped capital markets. Companies reinforce higher dependence on debt. Financing through bank loans entails close capital monitoring and contingent control of the firm, thus inducing capital’s long-term commitment (Aguilera et al., 2003). In German firms, creditors have a strong position (Höpner, 2001). In return, banks hold seats on supervisory boards and thus a dense network of firms – through interlocking banks – exists. Major decisions can not be decided through unilateral control, but through the Supervisory Board, which includes employee representatives and major shareholders as well, and other managers with entrenched positions as well as major suppliers and customers. Goodijk (2000) states that countries with influential supervisory boards (as Germany) can have an “old boys network” culture.11

Industrial relations system: The industrial relations system of Germany can be typified by strong trade unions, powerful work councils, and high levels of employment protection. Labour markets are less fluid and job tenures are long. In most industries, wage-setting is coordinated by trade unions and employers associations. Industry associations play a major role in standard-setting with legal endorsement, and substantial amounts of technology transfer take place through interfirm collaboration. Hemmed in by powerful workforce representatives and business networks, top managers have less scope for unilateral action, and firms typically adhere to more consensual styles of decision making (Hall and Soskice, 2001). Germany can be placed in the top category of employment protection in the world (together with the Netherlands, Korea and Sweden) (Amable, 2003). Characteristics are firing difficulties, employment-protection procedures, unfair-dismissal regulation and special exceptions for temporary work (think of maternity leave).

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Education and training system: Germany produces diversified quality products (DQP), which are high quality products, which contain complicated production processes and after-sales services. Think of companies as BMW, Daimler Mercedes or Siemens.

In order to have a competitive advantage on DPQs, firms and other actors should be more willing to invest in specific and co-specific assets (assets that cannot readily be turned to another purpose and assets whose return depend heavily on the active cooperation of others) Because Germany makes extensive use of labour with high industry-specific skills, it depends more on education and training systems capable of providing workers with such skills. Germany uses industry-wide employer associations and trade unions to supervise a publicly standardized training system (Hall and Soskice, 2001).

Inter-company system: Since many firms make extensive use of long-term labour contracts, they cannot rely on the movement of scientific or engineering personnel across companies. Instead inter-company relations facilitate the diffusion of technology transfer. Because of the many close inter-firm relationships involving joint research or product development, tightly written, formal contracts are often inadequate in such relationships. (arm’s length-contracts). Germany uses strong industry associations to resolve disputes.

control (Jensen and Meckling, 1976). These large blockholders also have the ability to make their voice heard, because of their seat in the supervisory board. The two-tier system is less effective, because the presence of different stakeholders (banks, large blockholders, union members, work councils and independent members from other companies). This can create conflicts of interests and slow-down decision making (Owen, 1995). Minority shareholders have limited possibilities to make their voice heard; not through supervisory meetings, not through law or other organizations who protect shareholders as is in the Netherlands is the case. An example of a Dutch shareholder protecting organization is the “Vereniging van Effectenbezitters” which forced ABN AMRO through court to cancel the sale of its American bank La Salle.

In Germany “the state often sits at the table with management and labour as co-equals” (Schmidt, 2003, pp. 530). Many regional states control a numerous amount of the shares of companies (Faccio and Lang, 2002). An example is Volkswagen Aktiengesellschaft, where the state of lower Saxony controls over 20 percent of the shares, and thus holds two seats in the supervisory board.12

Schmidt (2003) describes the post-war period in Germany as a competitive business environment through monetary policies and industrial policies of product innovation and employee training. Business practices promoted strategic cooperation among firms through investment in plants, machinery, technology and human resources. This led to a high-skilled and a high-waged workforce with high rates of productivity. Germany was considered to be an export-driven country with high-quality, high-cost and highly competitive goods.

An important distinction in post-war Germany can be made between Eastern Germany and Western Germany. Just as Germany was divided after the war, Berlin, the former capital of Germany, was also divided into four sectors. East German troops sealed the border between West and East Berlin and started to build the Berlin Wall. From that time, East Germany completely adjourned its ties with Western Europe. East Germany was under regime of Russian communism and socialism. The political perspective and the prohibition of western influences had its effects on the organization and the coordination of economic behavior, in other words the business system. East Germany had a centrally planned economy, where the state established production targets and prices and allocated resources. In 1985, for example, state-owned enterprises or collectives earned 96.7 percent of total net national income. To secure constant prices for inhabitants, the state bore

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80% of the costs of basic supplies, from bread to housing.13 Another example that reflects the role of the state in East Germany: In 1985 about 2.8 percent of the net national product came from private enterprises. In 1989 the Berlin Wall was opened, and in 1990 a new democratic government was installed. On October 3rd, 1990 the East German state was annexed by the Federal Republic of Germany. Until now, former East Germany is less developed in terms of economic development than the rest of Germany.

In Whitley’s (1999) NBS model, Germany fits best in the “Collaborative business system” of collective organization and cooperation within sectors. The financial market is credit based, meaning that banks are dominant institutions, with fairly weak developed capital markets. And the German organization of unions, which is characterized by cooperation at a sector level. Think of IG-Metall, a sector based union for metalworkers, which represent both blue- and white-collar workers. Concerning the role of the state, the German model does not have a strong state in terms where the state dominates the economy or a weak state of “laisez faire” where the state neither wishes nor has the capacity to coordinate economic processes. In Germany the state is one of the parties, also in terms intermediary economic associations. Germany’s state is involved in interfirm cooperation, alliances and cartelization (Whitley, 1999).

Amable (2003), representing the “Regulation theory” emphasizes (also) on other characteristics concerning Germany. The relatively high employment protection is an incentive to invest in specific skills and underlines the long-term scope of German companies. This makes switching jobs more difficult and leads to a relatively high amount of structural unemployment. Furthermore, Amable shows that countries that fit in the “Continental European Model” have an institutional advantage regarding computer science and mechanical engineering. This is measured in the number of patents. Surprisingly, a low-tech industry as agriculture also shows a positive match. In short the most important features of the German business system are: a bank-based system, long-term focus, network-based relationships, important role for unions and a facilitating role of the state.

“How can the Dutch business system be described, with the main focus on the role of the state by reviewing the existing literature?”

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