Varieties of Europeanization in the Network Industries

Table of Contents

1. Introduction

2 . Theoretical Debate
2.1 Europeanization: Impact dimensions and the question of goodness of fit
2. 2 Varieties of Capitalism: Production regimes and their path-dependencies

3. Non-EU explanations for inertia and change in the utilities sectors
3.1 Sector characteristics and incremental reforms prior to Europeanization
3. 2 Operationalizing internationalization for the explanation of regulatory change

4. Varieties of Europeanization in the utilities sectors
4.1 Economic and legal ambivalences: integration of European telecommunications
4. 2 Two-level games: political negotiations for the integration of European electricity

5. Conclusion

6. References

1. Introduction

Questions of de- and re-regulation of network-based utilities lay at the heart of the creation of the European single market. Whereas a broad discourse concerning better regulation has been launched and developed over years in the European Union (EU), advanced by the gradually re-formulated Lisbon Strategy, different explanatory concepts of European inte­gration and its effects on national economic regimes persist without cross-fertilizing one another. These thoughts are inspired by the apprehension that we will have to present an encompassing evaluation of the outcomes of the Lisbon Agenda as soon as 2010, while still lacking a differentiated understanding of the foundations of this common European economic and regulatory space which is now about to become the most dynamic, competitive and sustainable in the world.

Having left behind the ontological phase of European integration and its classical theories (S. Schmidt, 1996), predominant models which are used to explain the impact of internationalization and globalization on national public policies and political economies remain the concept of Europeanization and the Varieties of Capitalism (VoC) approach.

In the following, their comparative biases towards convergence and divergence, respectively towards change and persistence and their implications are tested applying them to two major utilities sectors targeted by EU liberalization and regulation: telecommunications and electricity. Case selection was driven by the aim to present valuable objects of investigation which are, by their nature, challenging for each of the compared approaches. Tele­communications and electricity have been subject to domestic regulation during decades, both being capital intensive as well as politically and economically highly important for the national interest. Whereas these facts alone would favor VoC approaches, either sectors have been under high de-regulatory pressure imposed by the European Community (EC) since the late 1980s. Although differing in time, in each of the sectors significant institutional changes were introduced in many member-states. Moreover, network industries display good examples for coordination problems between governments, firms, associations and regulatory agencies. The subsequent thoughts will try to isolate causal mechanisms in order to clarify why such a broad regulatory effort could be conducted, how specific designs of the EU regulatory policies were influenced and whether national differences still persist or the Europeanization of the sectors has to be stated. Derived from this analysis, the argument will be advanced that the concept of Europeanization does succeed in explaining institutional changes in regulatory Europe but an integration of the member-states' Varieties of Capitalism is crucial in order to trace the idiosyncrasies which influence both, the processes that led to the regulatory advances, and their outcomes differing across sectors and nations. In order to comply with the most different design of such a comparative argument, country cases will comprehend Britain, Germany and France. Starting with a contrasting outline of the theoretical frameworks, a cross-sectoral and cross—national analysis will form the second and third parts of the paper.

2. Theoretical Debate

2.1 Europeanization: Impact dimensions and the question of goodness of fit

One of the most prominent concepts which is used to explain the character of European public policy and its domestic impact is the theory of Europeanization. Drawing upon a two-level game of policy-making, it analyzes how member-states try to influence decisions and shared understandings on the EU level (upload) and how EU regulations subsequently manage the "construction, diffusion, and institutionalization of formal and informal rules" which are then "incorporated in the logic of domestic discourse, identities, political structures and public policies" (cf. Radaelli, 2003, p. 30) (download). Hence, the focus clearly lies on EU legislation and its isomorphic effects. The impact dimension can be operationalized by distinguishing four sources of Europeanization — coercion, mimetic pressure, professionalization (normative pressures) and domestic politics (DiMaggio and Powell, 1991/ Lodge, 200 2). Coercion is mostly exercised in terms of vertical pressures of Community Law, in our cases especially competition law. A more horizontal logic is characteristic for mimetic pressures of integration. A fusion of national and EU interests is meant to be achieved through the transnational interaction among national civil servants dealing with EU-related questions. The aspect of professionalization presents another horizontal mechanism which stresses the growing interaction of transnational societal actors involved in policy-making. The evolution of European policy communities and the recently discussed emergence of a network of national regulatory agencies provide good examples of institutions where common understandings are formed across national boundaries. The last source is again more vertical in nature. It highlights the observation that domestic political actors use the supranational level to impose their vested interests, above all to promote policy changes. While incorporating a certain bias towards isomorphism, the theory is very well aware of the fact that different policy sectors vary in terms of their reaction to pressures of Europeanization. Institutional outcomes can be inertia, absorption and transformation (V. Schmidt, 200 2, p. 87). A strategy of maintenance of the system in place is expected either in the case of a great equivalence of national and EU policy or of a significant mismatch. Partial policy changes often consist in an adoption of policy aspects that are internally valued by civil servants without changing the core of the policy. Finally, instruments of policy making are altered in case of transformation. Besides sources of impact and possible national reaction strategies, the interaction of the national and EU levels is operationalized by means of the distinction between assimilation, exporting and collision (Lodge, 200 2, p. 51). The former describes the gradually growing similarity between national and EU models which is achieved through domestic decision-making procedures with certain supervision by the European Institutions. A condition of exporting can be stated if national actors try to upload their policy strategies onto the EU level in order to minimize adaptational pressures and the latter process becomes traceable if EU policies conflict with national ones in the course of EU and domestic decision-making.

Having outlined three dimensions of the concept of Europeanization, the major causal transmission mechanism and necessary condition for the domestic impact of EU policy diffusion can be isolated: goodness of fit.

"(...), most studies share the proposition that Europeanization is only likely to result in domestic change if it is 'inconvenient'. There must be some 'misfit' or 'mismatch' between European and domestic policies, processes, and institutions." (Botzel and Risse, 200 2, pp. 60-61).

Drawing on this assumption, Botzel and Risse distinguish two kinds of mismatches. Policy misfits equal problems of compliance which cause adaptational costs for national govern­ments and lead to an open contest among member-states to upload their policy solutions to the supranational level. Unlike Liberal Intergouvernmentalism, concepts of Europeanization emphasize the fact that the most powerful member states, namely Britain, Germany and France, do not always meet their lowest common denominator but often face significant pressures of harmonization which can be empirically stated by means of the heterogeneous character of the European regulatory space. The second type of misfit is called institutional. Europeanization is meant to challenge domestic decision-making procedures and collective understandings. Adaptational processes, albeit long-term, take place if societal actors, such as interest groups, use the accessibility of EU institutions in order to safeguard their interests.

The following theoretical statements, to some extent, draw upon the institutional side of this distinction but without treating misfit as the major mechanism of transmission. The strong bias towards isomorphism which is entailed by concepts of compatibility or goodness of fit, can be overcome by including national actor- and interest-constellations into the equation.

2.2 Varieties of Capitalism: Production regimes and their path-dependencies

The crucial insight of VoC approaches appears to be quite abstract:

"The organizational and institutional power of relevant interest associations are embedded within different models of politico-economic governance." (Menz, 2003, p. 535).

Their specific contribution to the questions of European integration consists in the fact that the level of analysis is detached from a focus on EU legislation and its goodness of fit to national rules, regulations and decision-making processes. Instead, the interaction of different actors within a political economy as well as their very distinct coordination mecha­nisms, which make up the domestic institutional framework, matter. The current debate on the continuing absence of European independent regulatory agencies (IRAs) in finance, but as well as in the utility sectors (Thatcher and Coen, 2008), which is mitigated by the formation of cross-border networks of national regulatory institutions, provides empirical evidence for the persistence of domestic institutional arrangements in face of encompassing regulatory efforts by the EU. Although this article implicitly aims to lay the theoretical foundations of a further analysis of (i.a.) such a network-building phenomenon, the perception of institutions has to go beyond formal ones in order to fit our current scheme. Alongside Peter A. Hall and David Soskice it is to state that statutory institutions form a mutually stabilizing relationship with shared historical experiences that generate common expectations and understandings (informal instiutions):

"Among other things, this implies that the institutions central to the operation of the political economy should not be seen as entities that are created at one point in time and can then be assumed to operate effectively afterwards. To remain viable, the shared understandings associated with them must be reaffirmed periodically by appropriate historical experience." (Hall and Soskice, 2001, p. 13- 14).

In our context, the central question remains whether formal EU institutions succeeded in altering the preferences of domestic actors by providing a supranational negotiation arena in such an encompassing way, which made a profound institutional change (formal and informal) understandable. Or do European political economies just witness gradual variations of their historical experiences, which were indeed triggered through shifts of EU institutions, but rather lead to incremental changes still revealing national path dependen­cies. The preliminary answer by the Varieties approach would be that, due to high transformation costs, economic actors have paramount interests to protect the status quo which would allow, at the most, marginal reforms of the institutional equilibrium of production regimes under the influence of changes in the external environment.

In order to understand the characteristics of those politico-economic regimes, our three country cases Britain, Germany and France are in the following related to the ideal types presented by VoC approaches: Liberal Market Economies (LME), Coordinated Market Economies (CME) and Mixed Market Economies (MME). These regimes and their idiosyncratic coordination mechanisms are stabilized by variations of institutional structures in 4 spheres: corporate governance, industrial relations, inter-firm relations and vocational training.

The British economy resembles the LME model the most. One of the most decisive characteristics is low level business coordination in an economy where only about 50% of businesses are members of associations. The British experience impeded the formation of head organizations of industries or labor while workers organize rather on factory basis. Instead, coordination between firms, clients, workers and finance is conducted by de­regulated markets (Fioretos, 2001, p. 220). For instance, producers are discouraged from long-term investment in their employees which causes both, low wage equilibriums and problems of stimulating vocational training. In terms of finance, the high dependence on turbulent market mechanisms often forces businesses to conduct short-term cost cuts. Since emphasis is on costs and their influence on relative market performance, problems of these regimes mostly lay in solving issues of collective action.

Germany integrates a set of quite different coordination mechanisms within its political economy. In CMEs non-market relationships shape the interaction of the social partners, clients and finance. An extensively high level of long-term business coordination serves as an indicator: more than 95% of German firms are members of the Federation of Industry and Commerce (IHK) (von Alemann, 1989). Association-building is also a characteristic for business/labor relations in Germany. Powerful head organizations lobby for long-term collective wage agreements. As an over-all outcome, unlike in Britain, a high-skill/high-wage equilibrium is reached by leading settlements. Firms are hence enabled to conduct "production strategies that rely on a highly skilled labor force" (Hall and Soskice, 2001, p. 24). Whereas the British economy puts its emphasis on cost-cutting strategies, the German model relies on comparative advances concerning the quality of advanced manufacturing goods. Due to their corporate governance arrangements, firms can overcome short-term cost raises relying on a stable financial basis if long-term benefits can be expected. Whereas enduring interfirm- and business/labor relationships help solving collective action problems, the crucial challenge for CME regimes lies in a pathological lack of labor market flexibility. Unlike in Britain, transformations of the German economy towards the production of high-tech goods has rather been an incremental one.

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