From budgetary pressures to welfare state retrenchment? Economic and Monetary Union and the politics of welfare state reform

This study examines the relationship between economic and monetary integration culminating in Economic and Monetary Union (EMU) and welfare state trajectories focusing on the cases of Belgium, Italy, and Greece in the 1990s. The conventional wisdom on this relationship expected that EMU would lead to across-the-board downsizing of the European welfare states through imposing macroeconomic austerity in general and budgetary restraint in particular. The study questions the validity of this prediction which is represented by the austerity hypothesis. Based on an analysis of social expenditure data in the run-up to EMU the study reveals that spending levels remained largely stable and therefore that the welfare states of the EMU-candidates largely escaped radical retrenchment. Avoiding significant and systematic expenditure retreat was possible not only in the face of powerful fiscal pressures but also during a period when policymakers had the opportunity to justify even the most draconian measures in the name of achieving EMU membership. Hence the study addresses the following puzzle: How could Europe's welfare states largely avert across-the-board downsizing during the 1990s despite fiscal pressures they faced on the road to EMU? Through an examination of episodes of welfare reform in three critical cases (Belgium, Italy, and Greece) which needed to go through drastic budgetary cutbacks for EMU membership, the study shows that the Maastricht criteria did compel successive governments in these member states to propose radical welfare reforms, vindicating the conventional wisdom's expectations. In episodes of welfare reform, however, governments discovered that their reform capacities were largely limited due to domestic opposition from an alliance of entrenched interests. The convergence period was marred with recurrent mass mobilization of unions against welfare reforms which forced governments to scale back their original ambitions or scrap them altogether. This shows that the expectations of the conventional wisdom that EMU would actually lead to massive retrenchment of Europe's welfare states, however, are not borne out by the evidence on welfare state trajectories in the 1990s.