Can the European "Social Market" Survive 1992?

As the European Community continues the bold march toward a single market, its ideological import is very much in contention. EC President Jacques Delors has viewed 1992 as the first major step in political confederation, creating a continental polity to match the emerging pan-European market. In contrast, the Thatcher view, cheered on by American conservatives, was that EC-1992 would liberate market forces from the sclerotic regulation of inward-looking nation states; Thatcher fell, in part, because she seemed outside the emerging consensus.

For American liberals, postwar Europe has been a beacon of social policy -- proof that a dynamic economy can coexist, however uneasily, with an advanced welfare state. The 1992 project, initially a response to faltering economic dynamism, will signal whether the European social market can keep pace with rapidly globalizing private commerce.

The international economy, in many ways, has outstripped the capacity of nations to govern. The increasing openness of national economies disrupts settled national compromises between market imperatives and social measures intended to protect health, safety, environmental, and labor standards. In this context, Europe-1992 presents both opportunity and danger. The opportunity is that market forces, operating continent-wide, will reinvigorate the economy and extend the social policies of affluent European democracies to the less developed member states of the EC. The danger is that these same market forces will sweep away the social standards of Europe's nation states, and overwhelm emerging arrangements for a continental social economy.

The European situation invites comparison with American experience. Both are large, open economies in which political authority is divided between a central government and regional ones. The two systems have very different political structures, institutions, and traditions. Yet they confront the common danger that competition among firms to reduce costs, and competition among states to attract investment, will undermine regulation of private commerce and depress social standards.

Effective social regulation in a large federal system is an ongoing political challenge. A central government must be able to constrain competition among states to lower standards. At the same time, social, economic, and governmental institutions must generate the political support for regulation, and be flexible enough to adapt general standards to local conditions -- without gutting them. All the mechanisms must be compatible with market-driven adjustment and growth.

As we shall see, the American approach to social regulation, though grounded in an appropriately strong federal government, is overly legalistic and relatively underdeveloped politically. The legitimacy of any governmental action is constantly questioned. This contrasts with the accepted place for government and the more eclectic mix of bureaucratic, political, and social devices found in Europe. While Europe's "federal government" is still in its formative stages, its political and corporatist traditions offer greater promise for reconciling social regulation with an enlarged free market. In the end, it may be easier to redirect statist impulses to more flexible and measured roles than to energize a government that has been content to regulate haphazardly and from afar.

Promoting Social Standards

Social standards constrain profit-maximizing by private firms, in order to achieve social values imperfectly signalled by market incentives. Some social standards, such as environmental and safety regulations, are widely accepted as necessary to compensate for the tendency of individual firms to dump costs onto society. Others, such as labor standards, are often attacked by conservatives as producing more economic harm than social good. Over time business opposition to regulation per se may change into disagreement over detail, as companies adapt and even grudgingly acknowledge benefits. For example, giving new parents leave for several months may initially disrupt many firms, but over time firms adjust labor practices to minimize costs. These adjustments may produce a net efficiency gain, both socially and at the workplace, if they ease the strain of juggling career and family life.

Rising social standards can also enhance international competitiveness. Common health, safety, environmental, and labor standards can spur companies to compete through innovation rather than through "social dumping," and can protect high-productivity firms from socially irresponsible competitors.

However, harmonizing social standards is difficult, politically and practically. Social standards are set through a combination of governmental and private processes, and models of regulation vary. At one extreme -- the U.S. model -- government enacts a standard and enforces it with legal sanctions. Though interest groups intervene intensely in the drafting of regulations, they have little responsibility for making them work. At the other extreme -- more typical of some European countries and Japan -- a standard evolves from social and political bargaining among intermediate institutions or interest groups. Government may participate or simply wait in the background, intervening only if the non-governmental processes reach impasse. Examples include everything from Swedish wage bargaining, to German apprenticeship, to French environmental standard-setting.

In a federal system, business may play off one regional government against another. In most federations a regional government may not limit commerce; a company that invests in one state can sell freely to the others. Regional governments, accordingly, often compete to attract investments for economic and employment growth. Such competition is desirable where regions vie to offer better schools or transport systems, or otherwise to enhance economic growth. But other forms of competition among regions to attract private investment can erode social standards -- competitive tax abatements, wasteful subsidies, or weakened environmental, health, or employment regulation opposed by business interests.

Such competition produces, if not quite a "race to the bottom," a decided inhibition on regulation. When many regional governments offer these inducements, the result is not necessarily more jobs for any competing region, but a net transfer of resources to employers or a suppression of social standards throughout the federation. In social science jargon, states in an open market confront a "Prisoners' Dilemma," in which the logic of isolated bargaining leads to a result nobody wants. The usual remedy for a Prisoners' Dilemma is for the competing parties to find a way to cooperate, so that each will refrain from self-defeating activities, reassured that the others will do likewise.

In the European Community, regulatory federalism is being built on two complementary and occasionally contradictory principles for governance: "harmonization" and "subsidiarity." Harmonization, as its name implies, means adoption of common, Community-wide standards, in order to remove national barriers that distort trade. The hope is that harmonization of social standards will be upwards, modeled on the more advanced states. Yet upward harmonization invariably confronts both political opposition and practical obstacles to enactment of uniform standards throughout diverse economies.

Subsidiarity, a concept less familiar to most Americans, has been explained by President Delors as meaning "that what can be done at the company level should not be done elsewhere, that what can be done at the regional level should not be done at the national level and, finally, that what can be done in the member states should not be done in Brussels." The very terms of the debate suggest that Europe is meeting head-on the task of devising a new system of effective social regulation that meets the requirements of healthy federalism and effective interest mediation embedded in a dynamic economy.

Social Standards in America

In the United States social regulation is hobbled by the interaction of three factors -- legalism, federalism, and a paucity of mediating institutions suitable for leavening the regulatory process. This latter factor is surprising in light of Tocqueville's famous observations about the American penchant for voluntarism, and it merits further investigation.

The narrow legalism of much American social regulation reflects the basic characteristics of U.S. political structure: a strong legal system, contrasting with underdeveloped analytic and programmatic government capacity, and weakness of national intermediate institutions -- most notably political parties, labor unions, and trade associations. As a result, American regulation of social standards tends to be legalistic and relatively inflexible. In practice, the choice is often coercion or capitulation -- coercion of business through legal processes, or capitulation to business through inaction or cooptation. Moreover, the absence of a strong tradition of career government service has virtually precluded continuous balanced relationships of the sort that normally operate in nations where the civil service is more prestigious. The absence of strong non-governmental institutions has limited the efficacy of more flexible and balanced bargaining among labor unions, business, and other social interests -- what Europeans call "social partners."

Under these circumstances, American federalism can also undermine effective social regulation. States have historically been reluctant to enact measures that might frighten away business. In the 1920s and 1930s, for example, several states considered unemployment insurance systems, but only Wisconsin enacted one; the rest feared competitive disadvantage. Elsewhere, unemployment insurance came only with the New Deal and a federal mandate. More recently, only two states enacted even modest laws requiring advance notice of plant closings and mass layoffs. Liberal governors who favored a national plant closing law were reluctant to create even the appearance of disadvantage for employers in their home states.

For much the same reason, states seldom raise a minimal national standard to higher levels within their own jurisdictions. For example, when Congress failed to increase the minimum wage between 1977 and 1989 as purchasing power dropped dramatically, only ten states increased their own minimum wages above the $3.35 per hour national minimum. In the U.S., federal law often gives states loopholes with which to compete, such as "right-to-work" laws that undermine union organizing efforts even though they are technically consistent with federal laws. In Europe, by contrast, the traditions of strong social regulation and strong corporatist institutions antedate the process of European political confederation; and strong intermediate institutions serve as barriers against a regulatory race to the bottom.

In general, then, social standards in the United States are the product of federal (central government) legislation: Pensions, employee benefit plans, occupational safety and health, labor standards, industrial relations, unemployment insurance, employment discrimination, and environmental pollution are all principally regulated by the federal government. These standards are usually enforced through a combination of formal rule-making and governmental and private litigation.

Where labor standards are concerned, minimal standards tend to remain truly minimal. With less than 15 percent of the private work force unionized and unionized workers concentrated by region and industry, there is scant development of labor standards through intermediate institutions (collective bargaining, informal labor-industry agreements, joint undertakings, and so on). Although individual companies sometimes adopt more progressive labor practices, they may discontinue these practices fairly quickly when economic growth slows.

Environmental standards have sometimes fared better, perhaps because of mainstream conservationist traditions in broad-based membership organizations such as the Sierra Club, the National Wildlife Federation, and the Environmental Defense Fund. States often enact environmental laws stricter than federal standards, though frequently these laws regulate products rather than production (for example, tighter auto emissions controls, deposits on bottles). Environmental regulation may be a special case where local business opposition is largely neutralized, for these tighter state standards often restrict trade from other states rather than investment in-state. In other realms, for the most part, effective social regulation tends to occur almost exclusively at the federal level.

However, even at the federal level, American reliance on litigation and administrative law limits the effective social regulation in several distinct respects. The costs, delays, and adversarial nature of the American system stymie implementation of social standards and discourage their passage in the first place.

The Limits of Legalism

The problem with legalism is not that social standards are given the force of law. Virtually all nations accord this status to their standards. A highly developed legal system can have virtues. Giving aggrieved individuals a private judicial remedy for discriminatory employment practices, for example, has helped maintain momentum for social change, even when a particular administration was uninterested in fighting discrimination. Likewise, legal compulsion, initiated by both governmental and private parties, has been crucial in combatting environmental and occupational hazards.

Rather, the weakness of American-style legalism arises from the deficiencies of politics in the United States, and the consequent extension of law to so many social and economic realms. Litigation is a lengthy and expensive way to resolve problems -- so expensive that it is an unrealistic avenue for pursuing many social goals. A highly particularized right, such as a requirement that dismissals from employment be for just cause only, cannot be enforced effectively through the judicial system alone; it requires political and social implementation, through institutions such as unions. In states where courts have developed such a right in classic common law fashion, the chief beneficiaries have been highly paid professionals with the knowledge and resources to pursue their claims.

Moreover, the due process guarantees that have evolved to guard against arbitrary government action not only increase costs and delays. They also give moneyed interests ample opportunity to delay or derail administrative initiatives. Even when activist administrations govern, other problems arise. In response to dilatory tactics and exaggerated prophecies of doom by business, the agency may discount all business claims, warranted and otherwise. Coercive regulation all too frequently appears lumbering and inefficient, providing fodder for conservative broadsides against all government action.

Businesses, in turn, often have little incentive to transmit information or begin discussions with government in a spirit of accommodation, or to devise alternative ways to realize a social standard. Lack of confidence in "the bureaucrats" makes trust or cooperation seem a risky strategy, unless an agency has adopted a deregulatory posture advocated by business.

Exclusive reliance on the legal system for the diffusion of social standards is particularly unsatisfactory where application of those standards involves many variables and interests, for example in dealing with school segregation, or the siting of a new prison, or the abatement of a pollution source. In a legal setting, a neutral decision-maker is called upon to decide who is "right" and who is "wrong," not how all these interests can be accommodated to produce the most sensible remedy.

Without the political and social institutions to broker and diffuse social standards effectively, advocates of improved standards have little choice but to resort to the legal approach of coercive regulation. Even so, the choice between coercion and capitulation is badly tilted in American politics, in favor of business. Massive and prolonged political efforts are necessary to pass even modest measures like the plant closing notification law. Not only does business usually outspend and outflank those seeking improvements in social standards. The adversarial and litigious nature of the implementing process makes even reasonable business groups skeptical about new standards, and gives consumer and labor advocates doubts about whether the results are worth the struggle.

Finally, dependence upon law can be addictive -- a trade union that relies substantially upon labor law litigation may forget how to organize and innovate. A kind of vicious circle exists in American regulatory politics, in which the very recourse to litigation weakens the political institutions that do exist, the adversarial nature of the legal system reinforces political divisions, and regulation seems unattractive even to its logical allies.

There can be individual exceptions to these general patterns, to be sure. The National Labor Relations Act (NLRA), a creature of the relatively corporatist 1930s, established a government-sponsored framework for collective bargaining between employers and labor unions. For several decades, the NLRA framework did improve labor standards through a de-facto system of industry-wide bargaining. But no system of national bargaining over broader social and economic issues emerged out of what was essentially an enterprise-centered approach to private labor relations. Moreover, even before the steady decline in union strength began in the 1970s, the NLRA had itself fallen victim to excessive legalism.

At times the United States has also flirted with such corporatist experiments as the National Recovery Administration (NRA) during the New Deal and the Steel Tripartite Committee during the 1970s. Both efforts addressed labor standards, and the steel experiment included consideration of environmental issues. But these efforts were born of desperation, in crisis. They were not built within a network of sustaining institutions and political arrangements. Government was far too weak a partner to deflect efforts to cartelize industries during the NRA or to prompt genuine adjustment by the steel industry to international competition in the 1970s. Industry was inclined to disband the effort when the government did assert itself.

American efforts at ongoing business-government relationships have been attacked as little more than government-sanctioned cartels, as relegating non-business interests to the role of junior partner, and as failing to promote either economic adjustment or the improvement of social standards. Usually "partnerships" either become dominated by business or they become inconsequential. It is thus not surprising that advocates of improved social standards remain committed to legal compulsion, despite its obvious and even self-defeating shortcomings.

The European Social Tradition

In contrast to the United States, Europe has stronger central governments. Yet European regulation relies on numerous political processes and institutions in which government plays a subordinate or complementary role. European corporatism has diverse roots, including monarchic, Catholic, labor, and socialist traditions. In addition, Europe's mostly parliamentary systems enable even non-majority left democratic parties to press social demands. Ever since Bismarck, conservatives have competed with socialists to provide social welfare benefits, and the Catholic Church has provided a safely conservative rationale for a social market. In most of Europe, the civil service is a high-prestige and reasonably well-compensated vocation that attracts able and dedicated university graduates. Limited planning and other forms of state activism have been more accepted. Along with political parties, stronger unions and employer associations have provided the kind of institutionalized interest mediation that is generally lacking in the United States. For better or, occasionally, worse, European countries rely considerably less on law and litigation for economic and social regulation.

The result of all these differences is that social standards become embedded more firmly in European economic and political institutions. Labor participation prompts an ongoing and particularized process for elaborating labor standards in a plant, industry, or the entire economy. Local or regional employers' associations are often the focal point for worker training systems and management schools. Business interactions with governments at all levels are much more sophisticated and subtle than the gimmicky "public-private partnership" in vogue in the United States. The manifold connections between business and other social institutions have produced an ethic of business responsibility to society that has a real, if variable, effect on corporate behavior, quite apart from legal compulsion.

Despite these traditions, many Europeans worry about social dumping, by which companies operating in the new continental market would shift production from high-wage, high-standard countries (Germany, France, Belgium, the Netherlands) to lower-wage, lower-standard countries (Greece, Spain, Portugal, Ireland). Similarly, firms located in member states with extensive environmental controls have complained of competitive disadvantage since the early 1980s and have argued against strengthened national laws on this ground. It is, of course, both inevitable and desirable that some industrial activities be shifted to less affluent EC countries -- a free market for capital and labor is the very centerpiece of 1992. The task is to make sure that a more open European market does not exert general downward pressure on social standards.

The Challenge of European Integration

In the past, European countries maintained standards in a variety of ways -- through cooperative programs of economic adjustment, through commitment to high-productivity and high-wage economic activity, through state assumption of benefits like health care, or sometimes through straightforward protectionism. Most countries adopted a combination of these strategies, based on a kind of national social contract among business, labor, and government. But national social contracts are just that, and it is not yet clear what kind of social contract can be recreated at a continental level, based on a synthesis of divergent national practices and traditions.

Consider, for example, the systems for regulating labor standards in France and Germany, the two largest EC member states. The French system is more dependent on law (though not litigation in an American sense), with a detailed labor code to govern industrial relations. Because fewer than 20 percent of French workers belong to unions, there is little possibility for a nation-wide bargain among employers, employees, and the government. Political compromise is reached within Parliament, which enacts the code. The code is enforced by the Factory Inspectorate, a highly professional branch of the civil service. French law requires major employers to establish works councils for efficient resolution of local industrial relations issues.

German law, on the other hand, provides few substantive labor standards. Instead, the law mandates frameworks for industrial relations, such as works councils and substantial board representation for workers at most large enterprises. Coordinated employer federations and the membership of over 40 percent of the German work force in relatively strong unions have produced a kind of nationwide collective bargaining over major issues such as the normal work week. Finally, the sophisticated national apprentice system is a basic labor market institution that fosters accommodation among firms, labor, and government across a range of work-related issues.

Each system has been fairly successful in raising and maintaining labor standards. Yet each is peculiar to its country's circumstances and has depended upon some degree of insulation from outside economic forces, as well as on tolerance of relatively high unemployment. There is no certainty that either system could survive steady downward pressure on labor standards from a low-wage EC country with guaranteed access to the entire EC market. Nor is it clear that the French system, for example, could be generalized to apply in Germany, or vice versa.

To some extent, the higher wages and standards in northern Europe reflect the higher productivity of local workers, and this will continue to be a bulwark against a race to the bottom. Yet Europeans would be unwise to discount too much the potential power of market forces to sweep away social and political institutions.

The evolution of the United States from a series of local economies into a truly national economy occurred gradually, allowing for adjustment and resulting in relatively even regional distributions of income and wealth. Even so, it was the poorer South that touched off the deleterious competition described earlier. The North-South disparity in the United States pales next to the current disparity in Europe --national unemployment ranges from less than 2 percent in Luxembourg to 15 percent in Spain and Ireland; per capita gross national product is six times greater in Denmark than in Portugal. The integration of eastern Europe into the EC economy increases chances that countries will compete for investment by neglecting social standards, particularly if the expected worldwide shortage of investment capital actually develops.

Failure of the 1992 project to improve the international competitiveness of European industry could further undermine social standards. In his recent book The Competitive Advantage of Nations, Michael Porter observes that firms losing "higher-order" competitive advantage often resort to competing via lower prices rather than better products. European companies that cannot sustain the innovative pace of Japanese or American companies, even with the base of a large home market, may turn to simple price competition based on cutting labor and regulatory costs.

In sum, existing social and political institutions cannot be relied upon to prevent a degeneration of social standards. The success of an ambitious integration program will render many national institutions obsolete. Europe's new economic era calls for a combination of (1) continental institutions -- governmental and corporatist -- that can establish general standards and directions with (2) decentralized institutions that can adapt these standards to local conditions and preferences and cultivate political support for them.

The beginnings of such continental institutions can be found in the environmental, health and safety, and labor areas. Yet national institutions, whether government regulatory agencies or trade union confederations, still resist ceding too much authority to European counterparts. The efforts of the EC itself will be critical to achieving a new and effective regime to protect social standards in ways consistent with an integrated market.

Social Standards in Post-1992 Europe

The diffusion of strong social standards is out of step with the original, business-driven 1992 program of "completing the internal market" by removing barriers to the flow of goods, services, capital, and people across national boundaries. Indeed, the "social dimension" of 1992 was almost an afterthought, initiated by the commission after outcries from the EC Parliament and some trade unions over the conservative bent of the 1985 White Paper that laid out the program. Some business groups and governments (notably Britain) continue to argue that the 1992 undertaking is intended to enhance the competitiveness of European business, not to reimpose at a continental level the kind of regulation that has purportedly harmed national competitiveness.

The political battle over social standards is centered around the relationship between the earlier-mentioned principles of harmonization and subsidiarity. Trade unions in the EC have argued that extensive harmonization of labor standards is required, while business interests have countered that the principle of subsidiarity requires that issues like worker participation, working time, subcontracting, and part-time workers be left for local regulation or collective bargaining. Parallel arguments are made in the environmental area.

In fact, both harmonization and subsidiarity measures are necessary to regulate effectively and efficiently. Too great an emphasis on harmonization risks inflexible and, ultimately, self-defeating regulation. Too great a reliance on subsidiarity risks allowing business to play one region or labor group off against another by awarding new investment to areas that agree to lower social standards.

Harmonization in Europe is still an emerging process. Despite gains in authority and power by EC institutions, the member states are still immeasurably stronger than U.S. states. Political resistance to EC activism on social standards is reflected in the new constitutional structure of the EC, which allows quicker enactment of measures to promote the integrated market than of measures to protect social standards. In 1985 the member states removed the unanimity requirement for Community measures "which have as their object the establishment and functioning of the internal market." However, the new rules on majority voting do not apply to a few key areas, notably the "rights and interests of employed persons." Furthermore, although environmental and occupational health proposals may be adopted by a qualified majority of the EC countries, and although a new treaty provision instructs the commission to "take as a base a high level of protection" in these areas, each member state may opt out of any such measure adopted with a qualified majority.

These constitutional features mean that a single country can either block adoption of labor, health, and environmental measures throughout the EC or, at the least, assure that the measures do not apply within its own boundaries. The commission has tried to avoid these problems by characterizing some initiatives as harmonization measures, to be enacted under qualified majority voting rules. For example, the directives regulating auto emissions and creating civil liability for unsafe waste disposal were adopted as mandatory harmonizing measures, on the grounds that disparities in national treatment could distort investment and trade flows.

So, too, the commission proposal to require equal job benefits for part-time employees was advanced on a harmonization measure. This approach has been questioned, even by some member states that support the substantive proposals. The relative strength of the central government is still a hotly contested constitutional issue. Supporters of social standards have also noted the irony that harmonization measures preempt all national measures, thus precluding stricter member state controls.

The Social Charter The centerpiece of EC initiatives in the labor, employment, and occupational safety areas is the Social Charter of basic rights for workers, which was endorsed by eleven of twelve member heads of state at the EC's December 1989 summit (Britain was the lone dissenter). Although not in itself binding, the Social Charter reflects the political commitment of the EC to social standards and European social welfare traditions. The EC Commission has developed a social action program of four dozen specific initiatives to implement the charter. Proposals to safeguard worker health and safety have moved smoothly through the EC legislative process. Five have already been adopted, though more recent proposals to limit the working hours of employees and require paid maternity leave are proving more controversial. In June 1990 the commission published its first proposed labor standard, a far-reaching initiative to require better treatment and benefits for part-time workers throughout the EC. The commission also has proposed that corporations chartered as "European Companies" provide for worker participation in management.

In the environmental area, the EC has proposed or adopted directives for common standards on vehicular emissions, industrial pollution, and waste management. In March 1990 the environment ministers of the EC approved creation of a European Environment Agency. Finally, the EC environmental commissioner has announced plans for a broad range of "ecotaxes," which would begin to implement the principle in the recent EC treaty amendments that polluters should pay for the environmental consequences of their activities.

As a whole, the proposed directives reflect an upward harmonization of standards and experimentation with new ways to implement standards effectively. The health and safety directive on video display units at the workplace, adopted in June 1990, is an innovative measure that has set a global standard for worker protection from the ill-effects of video display terminals. Similarly, the directive to control carcinogens at the workplace has extended the protection of the more regulated member states to the entire EC. These standards have met with little business opposition. In fact, the EC is well on its way to creating the institutions needed for continent-wide protection of worker health and safety.

A "framework" directive has been enacted which calls for extensive employer education of, and consultation with, workers concerning health and safety issues. There are plans to complement these local approaches with a European occupational safety and health administration, which would monitor implementation and enforcement of directives throughout the EC, while combining the regulatory and planning strengths of the various national health and safety agencies.

The commission's proposal for worker participation in European-chartered corporations is a potentially important experiment in merging harmonization and subsidiarity in a single proposal. It is based on the concept of mutual recognition, originally developed by the European Court of Justice in a 1979 decision requiring that each member state recognize the product standards of other states, unless there is some overwhelming health or environmental reason for enforcing national standards.

This principle was applied to professional degrees in a 1989 directive requiring each member state to recognize degrees in law, medicine, accounting, etc., from other member states as meeting that state's professional educational requirements. The participation proposal, included in the draft European Company statute, essentially allows each such company to choose among three options for participation, which roughly coincide with the basic models found in Europe today: German-style co-determination, a works council, or a scheme individually negotiated between the employer and employees. Individual schemes would have to meet certain minimal standards in any event.

The worker participation proposal thus combines innovation in legal regulation with reliance on intermediate institutions to particularize the legal standards. The draft statute harmonizes practice in requiring some form of participation. It particularizes that practice by allowing a choice among forms and relying on the resulting institutionalized relationship between employers and employees to work out most specific issues. Minimal external standards would still be necessary, as would governmental oversight to ensure that the various forms of participation are effective. The approach is no panacea. Yet it does reflect the kind of experimentation needed to reestablish social standards in Community-wide economic and social institutions. It also reflects the political influence of both German trade unions and employer groups, which do not want short-term cost-cutting tactics by firms in other countries to undermine the longer-term advantages of employee participation in corporate governance.

Politics Matters

The lesson from the EC 1992 exercise is that politics matters at least as much as constitutional structure in fostering social standards. The Community's new social legislation would be far weaker without the social context of strong intermediate institutions. The challenge for the Commission is to channel political support into new governance mechanisms that will embed the ambitious social standards in the operations of companies throughout the EC. So long as the "social" dimension is understood, both by its partisans and its detractors, to be in opposition to the economic aims of 1992, it will remain vulnerable and may retard the evolution of the EC into a genuinely federal system. Conversely, when social aims are pursued in tandem with economic aims (such as through higher productivity, greater employee participation in the productive process, and more energy-efficient industry), the social standards will assume a life of their own.

Thus far, the commission's initiatives to protect social standards in post-1992 Europe present the classic case of the glass that is either half-full or half-empty. The half-empty perspective focuses on the power of unleashed market forces, the non-binding nature of the Social Charter, the decline of the unions in the larger member states, and the current weakness of EC regulatory agencies. The half-full perspective focuses on the amount of attention devoted to social issues by President Delors and the commission, the relative degree of consensus on EC-wide health and safety standards, the richness of European politics, the capacity of European civil servants for sophisticated government activism, and European social traditions.

In recent years there has been a revival of interest among political scientists in the concept of "state autonomy" -- the notion that government does more than passively distribute benefits and resolve disputes among competing interest groups based on their relative power. In various ways, and for various reasons, states take actions that are more than a power-weighted compromise among pluralist groups and promote general interests other that those advanced by groups. The state cannot simply compromise among groups, even assuming adequate representation of labor, consumer, or environmental interests. Instead, government must be able to lead -- to forge a politically feasible compromise that incorporates a coherent policy path. Paradoxically, states can do this better if strong mediating institutions exist and states are not required to carry the entire load themselves through enervating systems of administrative law.

Both the United States and Europe face considerable challenges in developing this complex form of regulatory government in a large market economy. In the European context, the task is to strengthen the emerging institutions of Euro-statehood and to recreate mediating institutions on a continental scale. Europe, in confronting these tasks, can build on its rich political tradition, which both provides social mediation of social standards and supports a state strong enough to develop new governing strategies to realize a social market.

The United States, on the other hand, has plenty of interest groups, but it lacks both the intermediate governing mechanisms and the governing traditions from which they might emerge. In America the practical choice is often between laissez faire and legal compulsion. It is of course not possible to create stronger trade unions or political parties, or more socially minded trade associations, overnight. But it is possible to experiment with strategies of regulation friendlier to an approach of social accommodation. And it is possible to experiment, in selected agencies, with new commitments to an expert civil service that could work on more equal terms with newly empowered mediating interests.

If social standards are not to be overwhelmed by global private commerce, great creativity is required. The real choice is not between public institutions and private ones, or between regulation and deregulation. The challenge is to adapt government and private institutions to forms of regulation that are both economically efficient and socially benign.