Social Policy as Ceremony

Walter Bagehot, in his famous study of The English Constitution, distinguished between its ceremonial and efficient components: the monarchy was for show; Parliament and the cabinet exercised power. If the same distinction were applied to the European Union today it might separate the social from the economic aspects of European integration.

In the economic sphere one finds hard law, tight constraints on national policy, justiciable rights. The core of the EU is the single market, defined by the four freedoms – to move goods, services, capital and labour without hindrance through all twenty-seven member states. If these rights are infringed the economic actors concerned – usually corporations – can obtain a remedy not only in the European Court of Justice but from national courts which have thoroughly internalized the logic of market integration.

In the sphere of social policy one finds soft law, declarations of principle and the “open method of coordination.” The language of the EU emphasises the European social model but in reality this remains an abstraction, based on certain family resemblances among the social models of individual member states (and only some of them – many of the newer member states have never had the comprehensive systems of social protection usually denoted by the term).

Indeed, the progress of the single market itself has led member state governments to guard their autonomy in the social policy sphere. The competition rules of the single market deprive member states of most forms of economic intervention. For instance, it is very difficult to use public procurement to support firms or employees in the home economy without infringing the rules which require that all EU enterprises have an equal right to bid for public sector contracts. Thus only social policy measures may be available to respond to the economic pressures inseparable from the processes of European integration and globalization.

The Nordic countries, possessing the most elaborate and generous systems of social protection have consistently rejected integration of social policy, for fear that harmonization would lower their own standards of provision. This attitude is certainly justified – the European Commission repeatedly advises the Scandinavian countries to cut their tax rates although high rates of taxation are absolutely necessary for their social models – but it has reduced political pressures for social policy initiatives at EU level.

In the eurozone, the loss of economic policy instruments is even more acute, since control over interest rates and the exchange rate has been ceded to the European Central Bank (ECB). In the course of the crisis, moreover, the weaker eurozone members have lost control of fiscal policy to a newly reinforced system of policy surveillance.

Thus the basic structure gives the EU competence in the economic sphere but leaves social policies to the member states. This is too simple a view, however, because there are obviously some overlapping areas where competences clash.

EU Labour Market Legislation

The most important intersection of EU and member state policy fields is in labour market policy. There are functional reasons for this: to leave labour market policy in its entirety to the states would risk impairing the single market because they might use labour market interventions to circumvent the rules of the single market. On the other hand the big corporations which are extremely influential at EU level would not welcome an integrated, Europe-wide labour market regime. This would prevent them from regime shopping across member states and put an end to the regime competition to which that leads. Competence divided between Union and member states is the logical outcome.

In the early days of European integration, EU legislation attempted to set rather high minimum standards for the working conditions of employees. This was at a time when powerful enterprises in Northern Europe tried to avoid competition from lower-income economies based only on cheaper labour, on what was called “social dumping.” As the big German, French, Dutch and Swedish companies became multinational their interests changed – lower labour costs in other member states were now an opportunity rather than a threat.

During the eighties and nineties, EU labour market legislation was somewhat ambiguous. In most member states there was a strong drive for labour market “flexibility,” and especially for the introduction of “atypical” contracts covering temporary work, agency labour and so on. EU leaderships certainly promoted these “reforms” but at the same time attempted to regulate the terms of atypical contracts to establish minimum standards for the workers concerned. In some countries, notably Britain, where employment law was very permissive, this approach was to the advantage of employees.

By the early years of the present century this regulatory agenda was complete. Many millions of EU workers were now covered by atypical contracts; on the other hand the adverse consequences of flexibility for low-paid and vulnerable workers were now undeniable. EU leaders began to promote “flexicurity” as the key theme of labour market “reform.” The rhetoric of flexicurity refers to labour market conditions in Denmark and the Netherlands, where employment protection rules are, supposedly, rather weak but active employment measures avoid long-term unemployment. It is certainly the case that working conditions and social protection in these two countries are of a high standard, well above those that prevail in most other member states.

In reality there is no intention to generalise the Danish model which depends on large-scale, tax-financed, public-sector employment. The essence of flexicurity is very different: it is a matter of weakening the provisions of standard employment contracts, so that employment protection is reduced. This objective is substituted for the multiplication of non-standard contracts which was generating acute social inequalities. The move is justified by reference to the “privileged” position of “insiders” on standard contracts as against the “outsiders” on atypical ones. It is to be legitimated by active measures to reintegrate the unemployed. In practice it is the weakest and most vulnerable of standard contract workers who will be the victims of flexicurity.

In any case, the flexicurity agenda seems to mark the end of major employment legislation at EU level. The nature of employment contracts is a matter for the member states. There is certainly no intention to promulgate a standard labour contract for the EU as a whole; that would be a hostage to political fortune – were such a general contract to be strengthened in the interests of workers, employers would have no way to avoid it.

Indeed there are signs that the European Commission would like to dilute existing EU employment legislation, especially as regards maximum hours of work. However, this seems to be politically difficult, although some recent decisions in the European Court of Justice have seriously compromised one important set of regulations – those which secured certain host country rights and standards for workers temporarily “posted” to other member states. If these rules can be undermined, employers will be in a position to intensify competitive pressures on many employees throughout the EU.

An Economic and Monetary Union without Social Content

Apart from the labour market directives just discussed, the EU had, until the present crisis, virtually no purchase on social policy, which remained the responsibility of member states. This does not mean that nothing happened at EU level. There were important studies of social issues such as poverty and unemployment; statistical data bases were constructed; recommendations were made to national governments; a European policy community began to emerge. But decisions remained at national level and many member state governments felt free to ignore European debates. In Britain, for example, researchers sometimes found it difficult to find any civil servants with knowledge of the European Employment Strategy – the Commission’s central attempt to “coordinate” member state policies for employment promotion.

Meanwhile the economic side of the European project developed apace. In 1999 eleven member states introduced a common currency. The monetary union was launched as an exclusively economic structure – no social initiatives accompanied it unless one attaches importance to the macroeconomic dialogue. This is a ceremonial
gesture towards the “social dialogue,” which, like the “European social model,” is ubiquitous in EU discourse.

The social dialogue derives from the corporatist traditions in certain member states which have delegated decision-making powers in the sphere of employment to the “social partners,” that is, to organised representatives of workers and employers. These bilateral structures, sometimes extended to trilateral forums including also national governments, have frequently made an important contribution to both social advance and economic efficiency at member state level. Even at that level, however, they are currently in retreat because most employers now prefer decentralised bargaining where they can make full use of their increased market power.

At EU level, social dialogue has been much less important, except in a few sectors where unions retain effective bargaining power. The macroeconomic dialogue brings together the Commission, the ECB and representatives of workers and employers. In principle it might connect wage bargaining to the formulation of monetary policy. In practice it cannot do so both because the ECB would refuse any such negotiations and because, there being no wage bargaining at EU level, the social partners would have nothing to offer in return for influence over macroeconomic policy.

Thus, the monetary union, centralising power over interest rates and exchange rates, meant an even greater loss of economic control for participating member states, but offered them no EU-level social policies to mitigate the resulting pressures.

The first decade of the monetary union coincided with the ten years of the Lisbon strategy. This was a drive to widen and deepen the single market, in the simplistic view that reinforced competition would suffice to close what was seen as a menacing gap between US and EU economic performance. The Lisbon Strategy did have some social policy content but this was completely subordinated to its economic objectives: social policy meant improving the efficiency of labour markets.

In this period there were some extremely aggressive single market initiatives with very adverse social implications. The most notorious example was the Bolkestein directive, so named after the Commissioner for the single market. The proposed directive would have comprehensively deregulated service provision in the EU by giving anyone providing services across national borders the right to substitute the regulations of their country of origin for those applicable in the country where the services were in fact rendered. The deregulation originally extended to employment linked to such service provision. Only a much diluted version of the Bolkestein directive was eventually passed by the European Parliament; there had been intense opposition from unions and other threatened groups but also a purely practical fear that to give service providers a free choice among some twenty-five regulatory regimes would lead to juridical chaos.

A further single market initiative concerned financial integration. The deregulatory way in which member state financial regimes were brought together certainly increased Europe’s exposure to the sub-prime crisis of 2007-8. The Commission was in fact planning to go much further: its proposals for an integrated mortgage regime would have endowed the EU with its very own sub-prime market but fortunately the outbreak of crisis put an end to this project.

The Lisbon strategy did include targets for employment growth and, prior to open crisis in 2008, these were nearly achieved. However, this had nothing to do with successful market integration; most of the employment growth took place in five member states – Italy, Spain, Greece, Portugal and Ireland. In other words the growth of employment was not due to the single market or to the monetary union as such but to their malfunctions – to the unsustainable and speculative flows of capital towards member states with increasing payments imbalances. The outbreak of crisis soon reversed all these employment gains.

Crisis and the Surveillance Union

The story so far is of increasing pressure on social conditions in the member states from market-based integration with ever tighter and more intrusive competition rules. In the wake of the crisis this erosion was displaced by a full-scale assault on wages, employment conditions and social standards in the weaker economies.

The banking crisis of 2008 partly created problems of public sector debt, partly revealed, in the case of Greece, pre-existing problems. There was no necessity for these problems to lead to crisis in the bond markets or to the threat of state insolvency. Decisive pre-emptive action to contain the earliest pressures, first on the Baltic republics and then on Greece and Ireland, would have avoided the contagious spread of crisis to Spain and Italy and would have cost almost nothing in relation to the immense wealth of the EU as a whole.

Dogmatic economic doctrines and an extremist commitment to market disciplines have ruled out such a pragmatic response. Emergency credits for governments under pressure have been accorded always very late in the day and in inadequate amounts, which barely suffice to avoid immediate state bankruptcy. The terms on which such credit has been supplied involve not just temporary programmes of austerity but the construction of a permanent system of surveillance – in principle surveillance of all member states by the European Commission and European Council, in practice surveillance of the weak by the strong.

Two key aspects of the new regime are the “six-pack” of directives enacted late in 2011 and the “Fiscal Pact” signed in March 2012 and currently awaiting ratification. The former greatly intensifies the constraints on the fiscal policies of eurozone states, prescribes in detail the statistical and budgetary procedures which they must observe, adds new constraints on various macroeconomic “imbalances” to the existing ones on public sector deficits and debt and renders the penalties for infringement more severe and more automatic. The Fiscal Pact (Treaty for Stability, Coordination and Governance) reinforces these provisions, seeks to give them constitutional status at both member state and EU levels and tightens the constraints on public finance even more.

The regime is concretised in a set of procedures called the “European semester.” In the first half of each year member states must submit two plans, one for fiscal and macroeconomic stability, and the other for “reforms.” The latter include some social and environmental targets but are largely of a neo-liberal nature: deregulations, privatisations and so on. These plans are then scrutinised by the Commission, which may request amendments, or, if the thresholds of the new stability rules are transgressed, demand amendments. The procedures are now enhanced by a “scorecard” of ten macroeconomic indicators which may signal the possible launch of “excessive deficit,” “excessive debt” or “excessive imbalance” litigation against the delinquent member state.

Like the works of Kafka, these provisions have a comic as well as a sinister side to them. However, their social implications follow directly from their economic content. They are essentially directed at competitiveness. The diagnosis of member states in difficulties is that they have neglected this imperative and the prescribed therapy is to restore competitiveness by all available means, including the sacrifice of basic social objectives.

This view of things ignores the role of Germany in the emergence of imbalances within the eurozone. From the very first day of monetary union, German policy makers pursued an aggressive export-oriented strategy, although the temporary trade deficits resulting from German reunification were soon replaced by massive and chronic surpluses. Although the main instrument of the strategy was wage compression it was also promoted by other policies, including an astonishing switch from social security contributions to higher VAT – exactly equivalent to a devaluation in an economy with a trade surplus second only to that of China. This neo-mercantilist stance is largely responsible for the imbalances which destabilised the eurozone periphery. The new surveillance regime, however, puts all the responsibility for adjustment on the weaker states – with drastic economic contraction as a consequence.

The actual social distress resulting from austerity measures in the periphery is well known. Some examples can be added to suggest that what is happening is not a temporary adjustment but an active dismantling of the social models of the countries concerned.

In Greece, a condition for the latest bailout was the decentralisation of wage bargaining, a measure which will allow employers to exploit to the hilt the balance of market forces in their favour. It would be quite illegal for the EU as such to impose such changes to employment relations in a member state, but here it is a question of the demands of the Troika (ECB, Commission, and IMF) in financial negotiations for which the EU as such is not directly responsible.

In Ireland, the latest National Reform Plan makes it clear that Irish anti-poverty targets are being jettisoned in the pursuit, perhaps futile, of fiscal stability and that poverty will increase again as a result. EU Treaties explicitly call for an upward convergence of working conditions and social provision. Here the EU is imposing divergence through a degradation of conditions in weaker states.

The drastic new rules for fiscal probity contain one (and only one) significant exception. Member states are permitted to run public sector deficits in order to move to funded pension systems. They are not permitted to do so for any other purpose – to finance a social housing programme for example. Again the tutelage to which the weaker, crisis-struck states are subjected is being used to reshape social models and to impose external priorities on member state social policy.

Anything Left of Social Europe?

EU social policy was not always a ceremonial affair. The European Social Fund, today of vestigial significance, actually dates back to the European Coal and Steel Community, the first of the institutions which would become the EU. The purpose of the Fund was to compensate those who lost from economic integration. It effectively did so, its main early beneficiaries being Belgian miners. Under French pressure early European treaties promoted gender equality in labour markets.

The war against social dumping attempted to eliminate competition based on lax employment standards and inadequate social provision. No doubt it protected workers in the more successful economies; but it also encouraged the development of social protection in the more backward ones.

Today it is scarcely an exaggeration to say that social dumping has become the actual social strategy of the EU, as the drive to restore competitiveness, that is, to reduce labour costs, by any means available has become the central component of a dogmatic, regressive and dysfunctional response to the crisis of public debt, a crisis itself largely attributable to the myopia and pusillanimity of EU and northern European leaderships.

No doubt the best resolution would be a complete change of direction at EU level, a return to the construction of a genuinely social Europe. But populations under acute pressure are hardly to be criticised if, in the absence of a general reappraisal they seek to defend their societies by challenging the rules and the structures of the actually existing European Union.

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John Grahl is Professor of Economics at Middlesex University Business School. He has published widely on problems of European integration. He is an active member of the EuroMemo Group which works for an alternative strategy in the EU.

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