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Edited by Claude Ménard and Mary M. Shirley

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Claude Ménard and Mary M. Shirley

When New Institutional Economics (NIE) first appeared on the scholarly scene in the early 1970s, it was a transformative movement. NIE aimed to radically alter orthodox economics by showing that institutions are multidimensional and matter in significant ways that can be statistically measured and systematically modeled. In the decades since, thousands of articles and books have pursued this premise and NIE has evolved from an upstart movement to a major influence on researchers in economics, political science, law, management, and sociology. What made New Institutional Economics a radical idea was that it abandoned: [. . .]the standard neoclassical assumptions that individuals have perfect information and unbounded rationality and that transactions are costless and instantaneous. NIE assumes instead that individuals have incomplete information and limited mental capacity and because of this they face uncertainty about unforeseen events and outcomes and incur transaction costs to acquire information. To reduce risk and transaction costs humans create institutions, writing and enforcing constitutions, laws, contracts and regulations – so-called formal institutions – and structuring and inculcating norms of conduct, beliefs and habits of thought and behavior – or informal institutions. (Menard and Shirley, 2005, p. 1)

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Richard Eccleston and Ainsley Elbra

Economic liberalisation and the rise of MNCs in recent decades have been a double-edged sword. With the exception of the 2008 Financial Crisis and its aftermath, the rise of global capitalism has been a key driver of economic growth and technological innovation, but at the same time has undermined state sovereignty and exacerbated inequality (Mikler 2018). Nowhere has this dualism been more apparent than in the realm of corporate taxation, which has become a prime example of what Martin Wolf (2012) describes as a ‘contemporary tragedy of the global commons’. The ‘tragedy’ is such that MNC tax avoidance is now estimated to deny governments over a quarter of a trillion US dollars per year, and after years of ignoring the issue governments and firms are being forced to act (Clausing 2015; OECD 2015).

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Ainsley Elbra and Richard Eccleston

Blatant corporate tax avoidance has attracted the ire of politicians, citizens and consumers the world over in recent years. Since the financial crisis of 2008, international taxation has become a mainstream political issue championed by social justice campaigners and the progressive press the world over. Globally, governments and intergovernmental organisations have announced a range of reforms designed to ensure that MNCs pay their ‘fair share’ of tax, while some of the world’s most powerful and profitable firms have been subjected to multibillion-dollar fines.

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Ulf Bernitz, Moa Mårtensson, Lars Oxelheim and Thomas Persson

The introductory chapter provides an overview of the great social challenge that the EU currently faces. The editors raise the question of what can be done to bridge the prosperity gap in Europe. First, they briefly describe the background: the social dimension of European cooperation and its historical development. Second, they identify the new social challenges that the Union faces in the wake of the Great Recession, the ongoing refugee crisis, and the Brexit referendum. Third, an analytical point of departure for examining these challenges is presented, consisting of an interdisciplinary approach that pinpoints a number of overarching problems and possibilities associated with the social dimension of European integration. Fourth and finally, the book’s chapters are introduced, and their key policy recommendations are summarized. The chapter concludes with the argument that much of the EU’s future relevance and ability to stay together depends on its capacity to counteract the prosperity gap and reverse the negative trend that emerged during the crisis.

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Jaan Paju

This chapter analyses the future of national systems of social insurance in the EU. In Europe, social insurance remains a national responsibility, but the EU’s power to promote the internal market and to develop the social rights connected to EU citizenship challenges the autonomy of the member states. The chapter explains and analyses the tensions that arise in this area when different interests contend. Legal developments in this field raise the question of how the member states’ social security systems should be organized in the future, in conjunction with an expansive body of EU law. The author concludes that the models developed for the future should aim to bridge the gaps in social well-being which currently characterize the EU, without altogether eroding the differences between the welfare models of the different member states. In an increasingly globalized world, the EU’s future lies in community and not in national particularity.

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Pär Nyman

This chapter analyses how the tension between fiscal discipline and responsiveness to popular demands contributes to widening the prosperity gap in Europe. On the one hand, the author argues, the countries most affected by the Great Recession still have a pressing need to strengthen their budget balances and to reduce their debt levels. If they fail to improve fiscal discipline, they will remain vulnerable to economic crises in the future. On the other hand, austerity is often met by public resistance. The political consequences of going against the voters’ preferences can be dramatic and pave the way for populist parties. Thus, governments should not only increase their budgetary safety margins during upturns in the business cycle, but also take measures to increase public support for fiscal discipline. This will reduce the tension they experience between fiscal responsibility and electoral responsiveness.

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Edited by Ulf Bernitz, Moa Mårtensson, Lars Oxelheim and Thomas Persson

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Joakim Ruist

This chapter looks at how the prosperity gap between the member states is affected by the free movement of workers within the EU. One key purpose of free movement is to even out economic imbalances between the member states. The author’s analysis shows that labour mobility within the Union is too limited to make any significant contribution to economic equalization between the member states. However, mobility still has positive effects in terms of the income gain it implies for the migrants themselves and by helping to reduce labour shortages in specific sectors in specific countries. Contrary to common belief, moreover, migrants contribute somewhat more to the public purse than they cost. The author concludes that the Union and its member states should strive to uphold the free movement of labour, although it has never been as questioned as it is today.

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Nicholas Charron and Bo Rothstein

This chapter explores the factors that operate at a societal level to build or destroy social trust. The analysis is based on unique data about the quality of public institutions at the regional level within the EU, and the authors test the tenability of four common explanations for variations in social trust: economic inequality, ethnic diversity, the quality of public institutions, and the degree of political participation by citizens. The analysis shows that the quality of public institutions is the strongest factor underlying regional variations in trust within countries. Economic inequality also proves to be a factor to be reckoned with for explaining variations in social trust. By contrast, the degree of ethnic diversity and the extent to which citizens participate politically have less importance for variations in trust. The overall conclusion is that increasing the quality of public institutions should have first priority if our aim is to reduce the prosperity gap between countries and regions in Europe.