Crisis and opportunity: Varieties of capitalism and varieties of crisis responses in Estonia and Slovenia

Introduction

The global economic crisis beginning in 2008, or ‘Great Recession’, has raised great political and economic challenges to many countries in the world. There is by now a growing literature on the economic policy responses, especially in Western Europe and North America (Bermeo and Pontusson, 2012).

This article contributes to the literature on the crisis in Central and Eastern Europe (CEE), a region hit very hard by the global downturn. It focuses on the politics of economic adjustment in the face of the Great Recession and explores the significance of economic institutions and industrial relations in mediating the effects of the crisis. I revisit two central questions in debates about capitalist diversity and industrial relations in the context of economic crises. First, to what extent do institutions shape crisis responses? Second, do crises undermine existing institutions and lead to institutional change? Many existing studies of the crisis in this region have focused on its causes and determinants. To the extent that the literature has explored the consequences of the crisis and responses to it, such studies have generally tended to focus on general regional trajectories, individual countries or sub-regions with similar institutions, such as the Baltic States (Kattel and Raudla, 2013) or the Visegrád countries, rather than compare the impact of the crisis across different institutional configurations.

In order to explore the role of institutions and crisis responses, I focus on the two countries with the most different sets of economic institutions among the new member states, namely, Estonia and Slovenia, commonly described as emerging liberal and coordinated market economies respectively (Crowley and Stanojević, 2011; Feldmann, 2013b), to assess whether pre-existing institutions have shaped crisis responses and whether these institutions have remained stable in the face of the crisis. I argue that pre-existing institutions have indeed shaped crisis responses in the two countries to a significant degree, but that the Estonian institutions have displayed greater stability than those in Slovenia.

The article is structured as follows. The next section provides a more detailed overview of the core political economy debates about institutions, crises and economic policy and situates the article in relation to those debates by emphasizing industrial relations and social policy. The following section discusses capitalist institutions in CEE and explains the case selection of Estonia and Slovenia in more detail. After that, I analyse the crisis experience in Estonia and Slovenia; and the concluding section of the article discusses some further implications and general lessons from this study for the prospects of egalitarian reform of institutions governing labour and work in the region.

Institutions, crises and economic policy

In this article, I seek to contribute to the extensive literature on institutions and crises in industrial relations and political economy and to revisit the two key causal linkages analysed in that literature.

The first relationship explored in scholarly debates is the effect of institutions on crisis responses. There is a large literature stressing the importance of institutions as determinants of economic policy during crises. One of the most influential treatments of this topic is the classic account by Gourevitch (1986) of a number of economic crises since the second half of the 19th century. He found that institutional arrangements, along with a number of other factors, such as interests, ideas and international pressures, had a significant impact on how countries adjusted to crises. The corporatism–pluralism debate also highlighted that institutions shaped crisis responses during the 1970s in the aftermath of the oil shocks (Lehmbruch and Schmitter, 1982). The more recent Varieties of Capitalism (VoC) literature makes similar claims and implies that different capitalist systems are likely to respond differently to common shocks or crises (Hall, 2007).

More generally, much of the political economy literature suggests that institutional variations can cause different responses to common shocks or common trends, such as the rise of the service economy or globalization. However, while recent scholarship has shown that differences between liberal and coordinated market economies may have contributed to the build-up of global imbalances and the global economic crisis (Iversen and Soskice, 2012), there is no strong evidence to suggest that such differences have systematically shaped the variation in crisis responses across the OECD (Bermeo and Pontusson, 2012).

As there is considerable debate about whether CEE countries should still be seen as being ‘in transition’, the economic crisis is a good opportunity to explore not just to what extent institutions have shaped crisis responses in the region but also whether the institutions as such have been strong enough to survive the crisis. This relates to the other core focus of the existing literature, namely, how crises contribute to institutional change. Much of the historical institutionalist literature argues that institutions shape policy-making and outcomes in systematic ways, but that crises may constitute critical junctures during which the institutions themselves are likely to be in flux. At such times, the institutions may be renegotiated and changed before a new framework can be established. Such situations may be particularly conducive to institutional change, for example, by empowering ‘institutional entrepreneurs’ or because of rising tensions in the institutions themselves that may lead to exhaustion. Similarly, much recent literature highlights the central role of crises as a trigger of economic policy reform. Most of the literature on the recent crisis does not suggest that such a transformation of institutions has occurred in Western Europe and North America, at least so far (Bermeo and Pontusson, 2012). But what are the elements of continuity and change in Slovenian and Estonian economic institutions during and after the recession?

Finally, it should be noted that the two often discussed causal effects are not necessarily mutually exclusive. It is quite possible that pre-existing institutions shape crisis responses in the short run, but that a longer and more drawn-out crisis eventually leads to far-reaching institutional change. For example, Hall (1993) distinguishes between three different kinds of change: first-order change (changes to the settings of policy instruments), second-order change (change of policy instruments) and third-order change (a paradigm shift affecting the terms of policy discourse, thereby reshaping the aims and principles of policy-making, like the shift from Keynesianism to monetarism in economic policy-making). His analysis shows that the initial responses to the crisis of the 1970s corresponded to first- and second-order changes, or what Hall describes as normal policy-making. Only later, when these changes were seen to be inadequate and not to provide appropriate solutions to the pre-existing economic problems, did more radical third-order change ensue.

Institutions and the crisis in CEE: Estonia and Slovenia

The economic crisis constitutes an opportune moment to revisit the debate surrounding institutional diversity in CEE. There has been extensive debate about how to classify post-communist capitalism, and if capitalist institutions in the region can be seen to fall into several varieties, scholars have asked how precisely to conceptualize this diversity and whether the institutions in these countries should be seen as a reasonably stable end-point of post-communist transition or whether they should be expected to change further, for example, as a result of deeper integration with the rest of the Europe and the world economy or in the aftermath of shocks and crises. As the current crisis is the biggest economic shock these countries have faced since the collapse of communism in the early 1990s, it is a good opportunity to explore the extent to which institutions have structured crisis responses and whether the institutions themselves remained stable in the face of the crisis.

In order to facilitate comparisons with other countries and regions, this article draws on the VoC approach, which has been widely used to study economic institutions across the OECD. This approach is also a common starting point for many studies of capitalist diversity in CEE. The application of the VoC framework to CEE raises specific challenges, notably given that capitalism was only recently established. For example, given the high degree of external dependence on Western European finance and investment, corporate governance arrangements generally differ from the canonical VoC model (Feldmann, 2013b). Therefore, the framework has also been challenged and extended in various ways to capture key features, such as the centrality of foreign direct investment in the Visegrád countries, which is not adequately captured by the standard VoC typology (Nölke and Vliegenthart, 2009). Other studies have compared different patterns of integration into the world economy (Myant and Drahokoupil, 2012) or integrated Polanyi’s insights to explore the role of the state in governing markets, mobilizing support and compensating losers of market reform (Bohle and Greskovits, 2012). Nevertheless, the core insights of the VoC framework, notably that economic systems vary with respect to economic institutions and modes of economic coordination, could apply to CEE as well. If modified in an appropriate way that acknowledges the specificities of emerging post-communist institutions, then the VoC framework can be a useful starting point for understanding capitalist diversity and key economic outcomes in the region (Feldmann, 2013b).

There is an extensive literature which demonstrates that Estonia and Slovenia are located at opposite ends of the spectrum of capitalist diversity in CEE. Estonia has consistently had one of the most open economies, and its state has been described as pursuing a neoliberal version of capitalism with a small welfare state (Bohle and Greskovits, 2012). As part of the process of monetary reform in 1992, a currency board was established with the function of maintaining the external value of the kroon. As noted above, Estonia is generally regarded as a liberal market economy with decentralized market institutions and a very limited role for social dialogue or wage bargaining (which tends to occur mostly at the firm level). By contrast, Slovenia emerged as a coordinated market economy, adopting a more selective approach to global economic integration, and the role of foreign direct investment has been more limited than elsewhere in the region (Bandelj, 2004). Slovenia’s state has also been described as neocorporatist, and its welfare state is relatively generous by regional standards (Bohle and Greskovits, 2012; Crowley and Stanojević, 2011). By highlighting different ends of the spectrum of capitalist institutions in the region, the comparison of Slovenia and Estonia gives a sense of contrasting patterns in CEE.

The differences between the two countries with respect to industrial relations are stark. The most important feature of Slovenian corporatism has been tripartite concertation in the Economic and Social Council (Ekonomsko-socialni svet), and a number of national agreements have been concluded between social partners since 1994 covering effectively the entire labour force. In recent years, national bargaining has become less significant, and the sectoral level has instead become the most important bargaining level (Feldmann, 2014). As shown in Table 1, the coverage rate of collective agreements remains high (70% in 2012), although it has fallen in recent years from 100 percent in 2005 to 92 percent in 2009 (Visser, 2015). There is also functional representation in the second chamber of the Slovenian parliament. In addition, the consultative nature of the political system also contains direct democratic elements, notably provisions for referendums that can be initiated by social partners. Therefore, Slovenia is the main exception to the common view that CEE is characterized by ‘illusory corporatism’, whereas Estonia comes closer to the regional norm of fragmented industrial relations (Ost, 2000).

OPEN IN VIEWER

Table 1.

Union density and collective bargaining coverage in CEE member states, 2012 (%).

	BG	CZ	EE	HU	LV	LT	PL	RO	SK	SI
Density	17.5	14.3	6.5	10.7	13.1	9.0	12.7	19.8	13.6	22.0
Coverage	29.0	50.4	23.0	26.0	15.5	9.9	14.7	35.0	24.9 a	70.0

Source: Visser (2015).

a

2013.

By contrast, as Table 1 demonstrates, Estonia has decentralized industrial relations, including the lowest unionization rate among the new member states and relatively low collective bargaining coverage. As in most of CEE, the company level is the primary bargaining level, with the transport and energy sectors being the most successful examples of social dialogue and collective agreements at the sectoral level (Espenberg and Vahaste, 2012: 32–33). In addition, there have also been a few social pacts at the national level, usually when the Social Democrats (Sotsiaaldemokraatlik Erakond, until 2004 known as the Moderates, Mõõdukad) have been part of the government.

Therefore, a comparison of Estonia and Slovenia makes it possible to examine some of the most different institutional arrangements in CEE. Since both countries were severely affected by the crisis, this is also a very good setting to explore the significance and resilience of these institutions in the face of the crisis.

The crisis in Slovenia

Slovenia has stood out from the rest of the CEE transition countries given its gradual and negotiated transition to capitalism and a welfare state which is generous by the standards of the region. As noted above, centralized industrial relations and peak-level bargaining in the Economic and Social Council have played an integral role in the distinctive and consensual path to the market adopted by the country (Feldmann, 2014; Stanojević, 2012). After many years of steady growth, Slovenia was hit very hard by the global economic crisis. There was a sharp gross domestic product (GDP) contraction of 8 percent in 2009, and moderate growth of 1.4 percent in 2010 and 0.6 percent in 2011, followed by further contractions of 2.6 percent in 2012 and 1 percent 2013. In other words, the Slovenian crisis has been prolonged, and in 2013, the country was frequently referred to as the ‘next Cyprus’: a small Eurozone country in need of an international bail-out. However, growth resumed in 2014 and reached 2.6 percent.

To what extent has the Slovenian crisis response been shaped by the country’s distinctive institutions? On the one hand, and consistent with its coordinated market institutions, negotiations and managed adjustment as well as burden-sharing have played a much more significant role here than elsewhere in CEE. For example, in February 2009 a €100–€120m cutback in public sector spending was based on a negotiated pay deal with employers and union confederations. Another distinctive feature of the Slovenian response to the crisis was the Law on Partial Refund of Pay Compensation adopted in May 2009. This is described as a ‘temporary waiting for work scheme’, under which employees receive 85 percent of their pay and devote 20 percent of their time to education and training (Skledar, 2009). Compared to compulsory redundancies of the kind experienced elsewhere in the region, this more egalitarian response put a greater emphasis on burden-sharing and job protection (Feldmann, 2014: 81). There have also been other agreements at various points during the crisis. For example, on 20 May 2013, most public sector unions (24 out of 34) and the government reached an agreement to allow wage cuts to avert the danger of a bail-out (Skledar, 2014). In addition, the minimum wage has remained quite high, which has also contributed to attenuating the distributive consequences of the crisis and containing increases in inequality.

On the other hand, it should be noted that there has not been any comprehensive negotiated crisis response in the form of a general social pact or an ambitious corporatist agreement, which may seem somewhat surprising given that tripartite negotiations in the Economic and Social Council were established in 1994 and have been viewed as highly institutionalized. Attempts to reach a comprehensive agreement after the last one ended in 2009 were not successful until February 2015, but even this agreement was not signed by the Slovenian Chamber of Commerce and Industry (Gospodarska zbornica Slovenije, GZS), the dominant employers’ organization in Slovenia since the early 1990s (Mrčela, 2015). There have been considerable difficulties associated with reaching agreement on pension reform during the crisis as well (Guardiancich, 2013). It should also be noted that the economic policy options have been constrained by Economic and Monetary Union (EMU) membership. Slovenia adopted the Euro in January 2007, the first of the new member states to do so – which meant that devaluation could not be used to adjust to the crisis and also that Slovenia has faced additional scrutiny of its fiscal and economic policies by the European Commission.

In addition to the lack of a comprehensive social pact or centralized agreement and the associated weakening of corporatism in Slovenia, there is further evidence of institutional change, which casts some doubt on the future of some of the most exceptional features of the Slovenian model. As noted above, the coverage rate of collective agreements has also fallen in recent years. Widespread concerns about a possible bail-out and corruption allegations against members of the political elite provoked mass public protests in 2012–2013, culminating in a no-confidence vote in the cabinet of Janez Janša. The government headed by his successor, Alenka Bratušek, agreed a variety of reforms as a part of a more far-reaching programme to combat the crisis. The austerity policies also involved some centralization of policy-making (Pevcin, 2014). These measures included tax increases, notably a change in value added tax (VAT) from 20 to 22 percent, which was later replaced by other measures, such as increases in excise duties and the creation of a ‘bad bank’ to deal with the high percentage of non-performing loans in the Slovenian banking system. In addition, the government announced its intention to privatize 15 state-owned firms, including parts of the banking sector. Eight of these firms had already been privatized by 2016. This includes a 91.8 percent share of the state-owned Adria Airways that was sold to a German investment fund. It is possible that these reforms will contribute to further change in the Slovenian economy, notably by increasing the ownership stakes of foreign companies, which may be less committed to corporatist institutions.

There are several reasons for these institutional changes. First, given the prolonged crisis and lingering fears of an international bail-out, increasingly radical measures were widely perceived as inevitable. This pushed governments to seek quick solutions, often without consulting the social partners. As in other countries (most notably in Greece), there has been considerable pressure from both the EU institutions and financial markets (Bermeo and Pontusson, 2012).

The crisis has also led to greater domestic challenges to the Slovenian model. First, it has strengthened the perception that the financial sector ought to be reformed. Notably, the combination of significant public ownership with extensive and risky foreign borrowing in the banking sector created particular vulnerabilities in the run-up to the crisis (Epstein, 2013). These problems have also led to heightened criticism of the Slovenian model as such, with suggestions that the crisis reflects the weaknesses of partial and gradual marketization and that further market reforms are needed. Some changes were already underway prior to the crisis. In particular, there had been some erosion of centralized wage bargaining with the sectoral level gaining in importance. This was partly related to changes in the structure of Slovenian business, including internationalization, the rise of small and new businesses and economic liberalization under the Janša government in 2004–2008 (Stanojević, 2012). Various smaller and newer businesses in particular pushed for decentralization, as the national agreements were seen to benefit larger privatized companies disproportionately. In that sense, the crisis has strengthened the alliance for further change – not least since some of the key political supporters of tripartism have been weakened, including the centrist Liberal Democratic Party (Liberalna demokracija Slovenije, LDS) that was in government in the period 1992–2004 (Feldmann, 2014). While the strengthening of the sectoral level does not necessarily imply any erosion of the coordinated market economy model, as the centrality of sectoral bargaining in countries like Germany shows, there has been growing dissatisfaction with some aspects of the Slovenian model over the last decade, with conservative parties arguing for further market liberalization.

Second, to some extent, the economic crisis has also turned into a crisis of social partnership and consensus politics. On the one hand, governments have increasingly sought to adopt reforms and manage the crisis on a unilateral basis, partly as they have felt that resolute action would be required and feared that the social partners might not support it. However, in the absence of a comprehensive and far-reaching social pact to address the crisis, and given the diminishing influence of the Economic and Social Council, social actors have chosen protests and contestation of key policies. This has included strike action, such as the high-profile strike in the port of Koper in 2011 and the general warning strike in March 2008 involving over 145,000 workers, the biggest strike in Slovenia during the independence period, which was co-organized by six union confederations and which forced the employers back to the negotiating table (Skledar, 2008). This contestation has also involved initiating referendums on government policies. The government’s unilateral approach has turned out to be counterproductive, as several initiatives, notably on pension reform and the introduction of mini-jobs, were voted down in successive referendums. This illustrates some of the dangers of unilateralism by governments in a country with corporatist traditions, active trade unions and civil society actors, as well as provisions for binding referendums (Feldmann, 2014).

Popular dissatisfaction has also been manifested in the instability of the party system in recent years. The rise and fall of several new leader-centred parties associated with specific political entrepreneurs, such as the centre-left Positive Slovenia (Pozitivna Slovenija) of Zoran Janković or the liberal Civic List (Državljanska lista) of Gregor Virant (both of which were very successful in the 2011 election, but failed to gain any parliamentary representation in 2014), reflect growing discontent with the political elite and its approach to the crisis. In the 2014 elections, the Party of Miro Cerar (Stranka Mira Cerarja or SMC), founded just a few months before, won the largest number of seats and became the dominant party in the new government, with Cerar himself assuming the position of Prime Minister. (The party was renamed the Modern Centre Party – Stranka modernega centra – in 2015, preserving the original acronym.) While the new government has continued most of the earlier reforms, growth resumed in 2014, and the external pressure on Slovenia has subsided somewhat. In the summer of 2015, the international media began writing about the success of the Slovenian reforms and how the country had managed to recover from the crisis. It remains to be seen whether the Party of the Moderate Centre will turn out to be a more permanent part of the political system than the other new parties that emerged in recent years.

The big question remains whether the recovery will be associated with a revival of social dialogue and tripartism in Slovenia. As noted above, a new tripartite agreement (albeit not signed by the GZS) was reached in February 2015, although it is too early to tell how significant this is. If there is further privatization and internationalization, then there may be a further weakening of the coalition in favour of social dialogue (Feldmann, 2014; Stanojević, 2014). However, the significance of protests and resistance against many reform initiatives also indicates that many Slovenes are still committed to an egalitarian social model and that liberalization attempts may not succeed.

The crisis in Estonia

The economic crisis in Europe had its most severe effect in terms of GDP decline in the Baltic States and Ukraine. Estonia, along with the other two Baltic States (Latvia and Lithuania), suffered a very sharp contraction in 2008–2009. Its GDP fell by 3.7 percent in 2008 and 14.3 percent in 2009, but this was followed by a recovery from 2010 onwards. Growth rates since that time have been among the highest in Europe.

Although Estonia was not a member of the Eurozone when the crisis hit, devaluation was not considered. Euro adoption was a strategic priority of the government, and maintaining the fixed exchange rate under the currency board and satisfying the Maastricht convergence criteria were key goals shaping Estonian policy-making despite the sharp downturn. Since a devaluation was ruled out and the Maastricht criteria also put constraints on the use of countercyclical fiscal policy, the Estonian crisis response focused on restoring competitiveness by bringing about an internal devaluation (Feldmann, 2013a). Despite the sharp fall in GDP and rapidly increasing unemployment in 2009, Estonia eschewed standard countercyclical adjustment policies and instead opted for dramatic cutbacks in public spending and wages, which constituted one of the most radical austerity plans in Europe, in effect making bigger cuts in 1 year than the British coalition government was planning to make over 5 years (Bohle and Greskovits, 2012: 233–234). According to European Commission estimates, discretionary fiscal consolidation in 2009 amounted to over 9 percent of GDP in Estonia (Raudla, 2013: 32). Fiscal consolidation was implemented in three phases, involving two supplementary budgets as well as a variety of one-off measures in the autumn of 2009, and it included a variety of salary and benefit cuts as well as increases in VAT (from 18% to 20%), unemployment insurance contributions and excise duties on fuel (for more detailed overviews, see Feldmann, 2013a: 359; Raudla and Kattel, 2011: 170–172).

In terms of process, and unlike in Slovenia, there was no significant role for negotiated adjustment. Indeed, the government reneged on various commitments made in a national social pact prior to the crisis, such as planned increases in unemployment benefits and changes to eligibility criteria for unemployment insurance. These changes were introduced without consulting the social partners or inviting them to new negotiations (Espenberg and Vahaste, 2012: 28–29). Changes in public spending and taxes were imposed unilaterally, and similar adjustment mechanisms were enforced at the firm level, including pay cuts and lay-offs. There were no attempts by the government to intervene in a more activist fashion, and bank bail-outs were not on the agenda, largely given that the main banks were foreign-owned and likely to be supported by the Swedish central bank, if necessary. This could be said to represent considerable policy continuity, in the light of Estonia’s liberal market economy and the long-standing emphasis on market-based economic policy (Kattel and Raudla, 2013). In addition to decentralized industrial relations and weakly institutionalized social dialogue at the national level, this was also enhanced by relatively flexible and decentralized markets and also highly centralized budgetary procedures (Raudla, 2013).

Although the recession was sharp and the policy responses could be seen as draconian, this did not lead to any significant protests or popular backlash, certainly compared to other countries in the region (Beissinger and Sasse, 2014). Indeed, levels of trust in the government remained comparatively high during the crisis (Kuokštis, 2015). There were limited protests and contestation, partly given that high levels of private borrowing in foreign currency and the associated fear of a devaluation were perceived to strengthen the economic case for maintaining the currency board and also given the strong political emphasis on adoption of the euro to anchor Estonia in Western Europe (Feldmann, 2013a: 363–365). It should be noted that the two centre-right parties in government, the Reform Party (Eesti Reformierakond) and the Union of Fatherland and Res Publica (Isamaa ja Res Publica Liit), which were most closely associated with the austerity policies, actually increased their representation in parliament at the 2011 election. Centre-left parties, such as the Social Democrats, one of the three parties in government during the period 2007–2009 and the party of which the then Minister of Finance Ivari Padar was the leader, did not seriously contest the general approach of internal devaluation and fiscal consolidation, although they did question the methods of bringing about this consolidation. The centre-left would have favoured further tax increases in addition to spending cuts in order to bring about fiscal consolidation in a more egalitarian way.

There is no evidence of institutional change, as the fundamental institutions of the Estonian economy are unaltered. As the Estonian economy began recovering in 2010 and Estonia was able to adopt the euro in January 2011, many Estonian observers feel that these outcomes have validated the economic policies adopted by the government. There have even been attempts by Estonian politicians to promote the country’s response to the rest of Europe as an optimal solution to the crisis, although this has been controversial and not entirely successful (Lindstrom, 2015). In terms of industrial relations, there have been a number of challenges. The number of collective agreements concluded each year fell dramatically during the recession, from 97 in 2007 to 54 in 2010 (Espenberg and Vahaste, 2012: 44). An important controversy occurred at the end of 2011 when the government wanted to centralize decisions on the funds used by the Employment Service (Töötukassa) and the Health Insurance Fund (Haigekassa), and to make any reserves available to the national budget. The social partners viewed this as an encroachment on the financial autonomy of these bodies and on tripartism more generally, and they have also criticized the government’s unwillingness to reduce unemployment insurance contributions when the economy started to recover (Espenberg and Vahaste, 2012: 30). The economic recovery also triggered the biggest strike since Estonia regained independence, the 3-day teachers’ strike in March 2012, in which over 17,000 employees in the education sector participated. This action also prompted sizeable sympathy strikes, including a strike organized by the national trade union confederation Eesti Ametiühingute Keskliit (Estonian Trade Union Confederation (EAKL), 2012). This also prompted intense debate in Estonia about the status and legality of sympathy strikes, including under what conditions they should be viewed as appropriate (Espenberg and Vahaste, 2012: 38–43). There was a strong perception among teachers that they had made considerable sacrifices during the recession and that teacher pay in Estonia was far too low. This has met with great understanding in large parts of the population, and the government approved increases in teacher pay from 1 January 2013. In addition, while the traditionally market liberal Reform Party has provided the Prime Ministers of all Estonian governments since 2005, the increasing popularity of the Social Democrats in opinion polls was one of the reasons why the Reform Party, traditionally committed to free market policies, chose to form a new coalition government with the Social Democrats in 2014. The gradual strengthening of the Social Democrats along with the continued strength of the Centre Party (Eesti Keskerakond, the first choice of most Russian voters, which also enjoys considerable support especially among older and low-income Estonian voters) and the rise of new protest parties (the far-right Estonian Conservative People’s Party and the anti-establishment centre-right Free Party) in the election of 2015 are also indications that there is some demand for change in Estonia.

Given that the economy has recovered and that Estonia has the lowest debt to GDP ratio in the entire EU (Feldmann, 2013a), the country may have more scope for responding to welfare demands than countries that are still facing a deep economic crisis. As some of the idiosyncratic factors, such as the strategic foreign policy objectives associated with EMU accession as part of the ‘return to Europe’, recede from the policy agenda, it is conceivable that other groups may eventually follow in the footsteps of the teachers and demand a more egalitarian distribution of the fruits of economic growth. Much will also depend on the ability of the Estonian trade unions and their political allies, such as the Social Democrats – and perhaps also the Centre Party – effectively to channel such demands.

Conclusion

This article has examined and compared the Great Recession in Slovenia and Estonia, demonstrating that pre-existing institutions have shaped responses, notably by affecting both the process and distributional consequences of adjustment to the crisis. It has also analysed the effect of the crisis on the institutions themselves: there has been substantial continuity in Estonia, but more institutional change in Slovenia. Estonia’s embrace of market-based adjustment and the priority assigned to maintaining the currency board even in the face of a deep recession corresponded to the economic policy regime that the country had put in place in the 1990s (Feldmann, 2013a). Another key reason for the relatively high degree of continuity is that the recession came to an end relatively quickly. As growth resumed as early as 2010, and Estonia was able to adopt the Euro at the beginning of 2011, leading politicians felt vindicated. The two centre-right parties in government were re-elected with a stronger mandate. This outcome was hailed by the government as a testimony to Estonia’s success. In any case, despite the hardship caused by the deep contraction in 2008–2009, the rapid recovery ensured that there was not a strong imperative for institutional and policy change.

By contrast, the lessons from the Slovenian case are mixed. On the one hand, the Slovenian corporatist institutions and norms ensured that the country’s initial response to the recession was more moderate and gradual and that the distributive consequences of the policies adopted have been more egalitarian. On the other hand, it also illustrates that crises may lead to institutional change, especially if there is a prolonged downturn and if the crisis strengthens pre-existing coalitions in favour of change. Such groups may be empowered by the crisis, as they can blame pre-existing institutions for the problems the country faces. External actors, such as the European Commission and international financial institutions, can also reinforce such pressures, by advocating resolute action to bring the deficit under control. This has contributed to a weakening of Slovenian corporatist institutions, a fall in the coverage rate of collective agreements and also to other potentially far-reaching economic reforms (Feldmann, 2014; Stanojević, 2012).

However, it may still be too early to identify the long-run consequences of the crisis. As I have demonstrated, there has been substantial resistance to many of the changes in Slovenia. This has been manifested in referendums where government initiatives have been voted down, and strikes and voters’ willingness to eject established parties from government and even from parliament. By comparative standards, unionization and the coverage of collective agreements remain high, and there is a corporatist tradition that both social partners and politicians can tap into. If some of the challenges related to the financial sector – which tripartism by itself may be ill-equipped to resolve – can be addressed and Slovenia is able to return to a healthy growth trajectory that is more dependent on exports and less on financialization, then corporatist institutions may once again play a more significant role. If governments face considerable problem loads, they may once again see the appeal of seeking negotiated and consensual solutions in the form of social pacts that will not be resisted in the way many of the anti-crisis policies have been. Despite considerable challenges, it is likely that the prospects for egalitarian capitalism remain better in Slovenia than elsewhere in the region.

However, there may be some scope for more egalitarian reforms and perhaps a greater role for social dialogue even in Estonia. Admittedly, there are considerable obstacles, such as the low unionization rate and the considerable strength of free market ideas in the country. The increasing support for the Social Democrats along with the continued strength of the Centre Party and the rise of new protest parties in the election of 2015 suggest that there is some demand for change – with respect both to political processes and policies. Whether such political developments will also trigger more sustained protests, akin to the big teachers’ strike, and revitalization of tripartism and progressive politics, remains to be seen. Much will depend on how durable the economic recovery and growth turn out to be and how skilfully the Social Democrats and civil society groups mobilize key segments of society. Such mobilization may strengthen the demand for a more egalitarian distribution of the rewards of economic growth and increasing prosperity in Estonia. Now that the country has emerged from the crisis, there may be more scope to address such concerns.

The experience of these countries illustrates several challenges for industrial relations in CEE, beyond the obvious long-term problems of declining union membership and limited working-class mobilization, which remain important across the region. While Slovenia and Estonia are far from typical of the region as a whole, given that they are at two ends of the spectrum of capitalist and industrial relations systems, several lessons can be drawn from this analysis. First, their experiences illustrate how pre-existing institutions have influenced and shaped crisis responses. In that sense, the institutional arrangements that have developed since the early 1990s are sufficiently well established to shape crisis responses. Second, Slovenia and Estonia also highlight many general pressures and opportunities facing the region as a whole. High levels of foreign borrowing have created specific vulnerabilities, which are associated with severe constraints and pressures during periods of crisis when debt servicing can be problematic in the face of adverse financial market movements. For countries in the Eurozone (now comprising five of the CEE member states) or aspiring to join it, many standard macroeconomic adjustment mechanisms are not available, given that devaluations are ruled out and given the constraints on activist fiscal policy.

Third, beyond related pressures for fiscal consolidation and even austerity, an economic crisis has complex effects on industrial relations and social policy. The Slovenian experience shows some benefits of negotiated adjustment, even though it is not clear whether the initial response was adequate to stave off the crisis. Yet it also illustrates how governments may seek to exploit crises to act unilaterally and strengthen trends towards liberalization and decentralization of industrial relations. A longer and more drawn-out crisis may make countries more vulnerable to both external and internal liberalization pressures. By contrast, while social dialogue played a very limited role during the crisis in Estonia, the relatively rapid return to growth has created new opportunities for labour mobilization, not least given the sacrifices made by much of the population during the crisis. These cases suggest that the effects of the economic crisis have been complex. It has promoted market liberalization and austerity policies and weakened tripartism as well, but also strengthened resistance against government unilateralism and policies leading to adverse distributional outcomes. While the relative impact of these trends is likely to vary across the region and be conditioned by pre-existing institutions, with most countries in the region being closer to Estonia than Slovenia in terms of industrial relations, this implies that the crisis may generate some new opportunities and incentives for worker mobilization to strengthen social dialogue and also to bring about more inclusive and egalitarian policies.