The model of competitive federalism is one in which efficient rules are "selected" through the mechanism of competition between states to attract and retain the factors of production. As we have seen, the conditions under which this market can be said to work perfectly are extremely exacting, and legal intervention is needed to bring about "second-best" solutions. But while promoting market access, these legal interventions do, in their turn, threaten to undermine one of the other essential conditions for a market in legal rules, namely the possibility of diversity at state level. It is in this context that rules limiting market access may be desirable, at least in the sense of restricting the scope allowed to concepts of substantive market access. Thus, there is a role for the courts in ensuring that there is a space in which experminentation can occur. We consider this below. Equally important are regulatory or other legislative mechanisms which aim to preserve spaces for experimentation in rule-making, and which promote regulatory learning through the exchange of information between different jurisdictional levels. This approach, which elsewhere we have termed "reflexive harmonisation",82 can be seen operating in several contexts within the EU, most notably in the debate over the harmonisation of labour and company law and in the recent emergence of the "open method of coordination" (OMC) as a technique of regulation in economic and social policy. We will briefly examine the way reflexive harmonisation works.
A number of economic justifications may be offered for harmonising legislation in the fields of labour and company law.83 A case can be made for company legislation to establish a core of uniform rules which, because of network externality effects, may save on the transaction costs of company formation and thereby promote cross-border capital mobility. In respect of employment protection, justifications range from the defensive goal of avoiding "social dumping" to the more proactive goal of promoting the efficient use of labour by ruling out low-productivity strategies of firms engaged in regulatory arbitrage between systems.84 Directives of this kind have a complex relationship to regulatory competition. They mostly set basic or minimum standards as a "floor of rights" which Member States must not derogate from, but upon which they may improve by setting superior standards.85 These interventions, then, can be thought of as implicitly encouraging a "race to the top", while ruling out less socially desirable forms of competitive federalism. They encourage a process by which rules are selected not on the basis of the threat of exit by the factors of production, but through mutual learning by states: legislators may observe and emulate practices in jurisdictions to which they are closely related by trade and by institutional connections.
In this context, it is not inaccurate to speak of "reflexive harmonisation" by analogy to the idea of reflexive law.86 The essence of reflexive law is the acknowledgement that regulatory interventions are most likely to be successful when they seek to achieve their ends not by direct prescription, but by inducing "second-order effects" on the part of social actors. In other words, this approach aims to "couple" external regulation with self-regulatory processes. Reflexive law therefore has a procedural orientation. What this means, in the context of economic regulation, is that the preferred mode of intervention is for the law to underpin and encourage autonomous processes of adjustment, in particular by supporting mechanisms of group representation and participation, rather than to intervene by imposing particular distributive outcomes. This type of approach finds a concrete manifestation in legislation which seeks, in various ways, to devolve or confer rule-making powers to self-regulatory processes. Examples are laws which allow collective bargaining by trade unions and employers to make qualified exceptions to limits on working time or similar labour standards,87 or which confer statutory authority on the rules drawn up by professional associations for the conduct of financial transactions.88
A procedural orientation also implies an important difference in the way in which the law responds to market failures or externalities from the way in which it is normally represented in the law and economics literature. Reflexive regulation does not seek to "perfect" the market, in the sense of reproducing the outcome which parties would have arrived at in the absence of transaction costs (the so-called "hypothetical bargaining" standard). This is partly because it is understood that information problems facing courts and legislatures make the process of identifying an "optimal" bargaining solution extremely hazardous. It is also because of a perception that the essence of competition is that it is a process of discovery or adaptation, rather than the achievement of optimal states or distributions.
In the context we are considering here, this implies a particular role for the transnational harmonisation of laws. The purpose of harmonisation would not be to substitute for state-level regulation; hence, the transnational standard would not operate to "occupy the field" in the manner of a "monopoly regulator", but instead to promote diverse, local-level approaches to regulatory problems by creating a space for autonomous solutions to emerge when, because of market failures, they would not otherwise do so. This may involve what some regard as a restriction of competition, in the sense of ruling out certain options which could be associated with a "race to the bottom", while leaving others open. As we have seen, this is a familiar technique in labour law, where directives mostly set basic labour standards as a "floor of rights", allowing member states to improve on these provisions but, on the whole, preventing "downwards" derogations. Reflexive harmonisation operates to induce individual states to enter into a "race to the top" when they would have otherwise have an incentive do nothing (the "reverse free rider" effect) or to compete on the basis of the withdrawal of protective standards (the "race to the bottom"). This is done by giving states a number of options for implementation as well as by allowing for the possibility that existing, self-regulatory mechanisms can be used to comply with EU-wide standards. In these ways, far from suppressing regulatory innovation, harmonisation aims to stimulate it.
Another form of reflexive harmonisation can be seen in the use of OMC. OMC involves "fixing guidelines for the Union, establishing quantitative and qualitative indicators and benchmarks as a means of comparing best practice, translating these European guidelines into national and regional policies by setting specific targets, and periodic monitoring, evaluation and peer review organised as "mutual learning processes".89 Thus, the OMC process is explicitly about experimentation and learning. OMC has already been tried and tested in the policies supporting EMU and then spilled over in to the Luxembourg employment strategy where guidelines are set which are then reflected in national action plans. OMC now peppers the Lisbon strategy. For example, in the context of modernising the European social model, targets are set (raising the employment rate from an average of 61% today to as close as possible to 70% by 2010),90 benchmarking is used (on giving higher priority to lifelong learning and improved childcare provision),91 and comparing best practice is encouraged (Member States are to exchange experiences and best practices on improving social protection and to gain a better understanding of social exclusion).92
In the context of free movement of goods and persons the Commission's communication on immigration93 provides an illustration as to how OMC might function in the internal market. The Commission suggests that OMC might complement the Community legislation by providing a framework for reviewing the Member States' implementation. The Communication provides the example of admission of migrants.94 It suggests that national measures will be adopted taking account of the criteria laid down in the Directive, including the number of migrants to be admitted and the duration of residence permits. The Commission believes that it would then be helpful to discuss such national implementation to "evaluate their efficacity and identify practice which might be useful in other national situations".95
So far we have discussed different types of regulation which may assist in the process of decentralised learning and experimentation in a federal or quasi federal structure. Where does this leave the Court of Justice? Dorf and Sabel, writing primarily in the context of the US constitutional law,96 suggest that "the courts are the institutions in which existing conceptions of constitutional democracy appear to flow seamlessly into experimentalism. ... Experimentalist courts, like the traditional courts of constitutional democracy, function by a form of direct deliberation: Citizens, as individuals or groups, speaking with the authority of their own experience, can demand that the government give reasons for its actions".97 Thus, "by insisting that actors respect the central experimentalist condition of declaring goals and measuring results, the courts can declare and defend inchoate rights without pretending to anticipate the manifold consequences of the finding".98 In practical terms this means, according to Dorf and Sabel, that the court judges the parties' abilities to gather, summarise, and use information by their ability to learn from their mistakes while drawing on the efforts of others in their situation to do likewise.99 For the European Court of Justice and the national courts hearing a free movement of goods and persons case this might mean working on the presumption of access to the market (of at least the category one or two type) but being prepared to acknowledge the existence of mandatory requirements. The Court would then give the defendant Member State the chance to explain why that access should be restricted, based not only on its own local experience, but also by reference to alternatives practised in other Member States. It would also have to explain why the national restriction was particularly suited to the conditions prevailing in that Member State. The individual complainant, on the other hand, would seek to enlarge the circle of comparisons to include responses from other Member States which would help favour the complainant's cause.100 The defendants would then present reasons based in their own experience for disallowing those comparisons.101 As Dorf and Sabel point out, "to be convincing they [the defendants] will have to show that these reasons are consistent not only with the other reasons they give for their actions, but also with those actions (and responses to the reactions they provoke) themselves".102 Dorf and Sabel conclude:
In this to and fro, it is the primary actors that define the range of alternatives to be considered in an evaluation of the appropriateness of ends to means, further publicizing the variety of possibilities in the process; and in deciding whether due consideration has been given to these alternatives, the court refers to standards of care and attentiveness - the ability to learn and learn to learn - that emerge from the practice of the relevant parties themselves.103
Some of this dialogue already occurs in developing mandatory requirements and in assessing the proportionality of the Member States' action in respect of these mandatory requirements. However, as we have seen,104 this review can vary considerably in its intensity.105 The experimentalist approach places far greater emphasis on comparison and learning from the actions of others. In this way, the court acts in part as a coordinator of information and, when adjudicating, precipitates primary social actors to devise solutions.106 Dorf and Sabel cite the example of Bosman where the Court, having recognized that the football associations could legitimately impose some form of regulation, left it up to the associations themselves to determine precisely what regulation, merely laying down the benchmark that revenue sharing could achieve the objective of competitiveness. A similar approach can be found in Heimdienst where the Court left it up to the Member State to find a way of ensuring the hygiene of foodstuffs being delivered to isolated areas of the state, while suggesting that rules on refrigerating equipment might be appropriate. This method of adjudication, which is particularly appropriate in the context of Article 234 rulings characterised by a division of functions between the European Court of Justice and the national courts, seeks to maintain national diversity while at the same time perturbing the national systems which is the precondition for effective regulatory learning.
82 See S Deakin, ibid.; S Deakin and C Barnard, "In Search of Coherence: Social Policy, the Single Market and Fundamental Rights" (2000) 31 Industrial Relations Journal 331.
83 D Charny, "Competition among jurisdictions in corporate law rules: an American perspective on the `race to the bottom' in the European Communities", in S Wheeler (ed.) A Reader on the Law of the Business Enterprise (Oxford: Oxford University Press, 1994) 365-402.
84 See generally Barnard, supra, n.4 and Deakin and Wilkinson, supra, n.80.
86 See generally, G Teubner, Law as an Autopoietic System (Oxford: Blackwell, 1993); R Rogowski and T Wilthagen (eds.) Reflexive Labour Law (Deventer: Kluwer, 1994).
87 See Deakin and Wilkinson, supra n.80.
88 See J Black, Rules and Regulators (Oxford: Clarendon Press, 1998).
89 Presidency Conclusions, Lisbon European Council, 23 and 24 March 2000, para.37.
90 Presidency Conclusions, Lisbon European Council, 23 and 24 March 2000, para.30. It also envisages that the number of women in employment be increased from an average of 51% today to more than 60% by 2010).
91 Ibid, para.29.
92 Ibid, paras.31 and 33.
93 Commission Communication on an open method of coordination for the community immigration policy COM(2001) 387 final.
94 Ibid, 6.
96 M Dorf and C Sabel, "A Constitution of Democratic Experimentalism" (!998) 98 Colum.L.Rev 267.
104 See section 3.3.
105 See, e.g. G De Burca, "The Principle of Proportionality and its Application in EC Law", (1993) 13 YBEL 105, 111. Schwarze calls proportionality "an extremely variable principle of review" (J Schwarze, European Administrative Law (Sweet & Maxwell, London, 1992), 864. But see FG Jacobs: "Recent Developments in the Principle of Proportionality in EC Law" in E Ellis (ed), The Principle of Proportionality in the Laws of Europe, (Hart Publishing, Oxford 1999) and "Public Law - the Impact of Europe"  PL 232.
106 Dorf and Sabel, supra, n.96.