Chapter 8 The Political Economy of Adjustment in Mixed Market Economies: A Study of Spain and Italy Óscar Molina and Martin Rhodes In Hancké, R.; Rhodes, M.; Thatcher, M. (eds.) Beyond Varieties of Capitalism. Conflicts, Contradictions and Complementarities in the European Economy, Oxford: OUP, pages 223-252 8.1 Introduction Critics of the ‘Varieties of Capitalism’ (VoC) approach, as defined in Hall and Soskice (2001), have focused on its alleged weaknesses – its neglect of the state, its divorce of the firm from national contexts, an over-concern with institutional equilibrium rather than dynamics of change and its incapacity for dealing with non Liberal Market Economies (LMEs) and Co- ordinated Market Economies (CMEs). But as the editors argue in their introduction, none of these problems present fatal flaws. To some extent, it is true, VoC theory seems to be caught in a trade-off between parsimony and explanatory capacity. It provides high heuristic value-added for analysing countries where performance-enhancing complementarities rely on clearly different patterns of actor interaction and forms of coordination. It appears more difficult to extend to ‘deviant’ cases where there is a mix of logics, a high degree of institutional incoherence and an apparent absence of complementarities. Yet that is the task we undertake in the following analysis. We use the tools of VoC to explain how mechanisms of market and non-market coordination work and change in two ‘mixed market economies’ (MMEs) - Italy and Spain. We focus in on the relationship between production regimes and welfare systems, and specifically the wage-labour nexus and employment protection. In doing so we are responding to Hall and Soskice’s (2003: 249) call