Difficult chapter opens in saga of EU social policy

Date: 13/02/1997

By Tim Jones

BORN little more than three years ago, the European Union's infant rule-book for establishing common social and employment legislation has never been under greater attack.

Negotiations between employers and unions over how to protect the rights of 'atypical' workers - such as those working seasonally or at home on part-time contracts - appear close to collapse.

At the same time, UK Prime Minister John Major has chosen to make business opposition to the social chapter of the Maastricht Treaty a central plank of his campaign for re-election in the spring.

Major believes this chapter, which was adopted by all member states except the UK at the Maastricht summit in December 1991, is the Trojan Horse which continental Europeans will use to force their excessive employment protection standards on to reluctant Britons.

While some business executives claim that adopting these policies would do little harm (indeed, 108 UK companies including United Biscuits and Coats Viyella have already established works councils), many have sided with the government against the social chapter and seized on the news last week that German unemployment had soared a staggering 500,000 in one month to reach its highest level since the Nazis took power in 1933.

This, they say, is largely the result of Germany's over-protective legislation which makes it ridiculously expensive and risky for an employer to hire staff.

The sceptics feel strongly that what the Union needs is a levelling-down of policies rather than any pan-European harmonisation of legislation which will simply add to its 18-million-jobless tally.

They argue that it is precisely because of the deregulation of the British labour market and the dismantling of the negotiating power of trade unions that the UK has become so attractive to foreign investors.

In 1994-95, it attracted a record 434 new investments from 30 countries, creating 37,000 jobs and safeguarding another 50,000, according to the Invest in Britain Bureau (IBB).

These bare figures tell only part of the success story. More than 40&percent; of total Japanese investment in Europe has gone to the UK and the recent decision by Korean consumer electronics group LG to build a 2.2-billion-ecu plant in Wales, creating 6,000 jobs, represents the biggest-ever single foreign investment in Europe.

All this, say the sceptics, would be put in jeopardy by the social chapter.

Under its terms, member states can take decisions by a qualified majority in five areas of labour-market policy: protecting workers' health and safety; improving working conditions; harmonising systems for informing and consulting workers; establishing equal opportunities for men and women; and bringing people 'excluded' from the labour market back into it. Decisions on social security, the costs of dismissing workers and union recognition must all be taken unanimously.

Despite the furore in the British press about the chapter, it has hardly produced the 'raft' of new laws of which the sceptics constantly warn. So far, the UK government has only had to exercise its opt-out twice - over the establishment of European works councils and the adoption of EU-wide laws on parental leave.

At the moment, talks aimed at agreeing common rights for part-time workers, which the European Commission has been trying to introduce since the early Eighties, are going so badly that the opt-out will hardly be necessary.

Social Affairs Commissioner Pádraig Flynn has, however, made it clear that he wants a wider range of policies to be decided by qualified majority vote instead of unanimity. As many as 30 proposed directives on the transfer of undertakings, health and safety, and equal opportunities are waiting in the wings.

The UK government's case for claiming that the legislation planned for the coming years under the social chapter will undermine European competitiveness is not strong.

A study published recently by the London School of Economics found that the majority of EU legislation in the social field had tended to codify existing rights.

But London's assertion that excessive labour-market interference could, in the longer run, stymie attempts by European firms to compete on the global stage has more bite.

Everywhere in Europe, governments are trying to withdraw from the labour market as much as they can. National rules on how and when to hire and fire staff, prevent racial and sexual discrimination, set working times and professional demarcation, and establish rigid wage structures and overtime payments, are all under review.

In several countries, excessive protection has certainly distorted the entire labour market. In Spain, a large part of the workforce is so highly protected that the rest is either unemployed or has been forced to take temporary employment. In Belgium, one-quarter of under-25s are unemployed but only 6&percent; of their seniors are looking for work, while millions opt for the status of indépendant, with its low social protection, in order to find work.

According to classical economic theory, over-generous employment protection makes firms reluctant to hire staff during an economic upswing, with employers preferring to squeeze extra productivity out of the employees they already have. In time, this will lead to a higher-than-necessary rate of unemployment to keep inflation in check.

“Of course, the converse is also true,” says a Commission official. “In countries where social protection is highly developed, companies will be reluctant to lay people off during a downswing.”

Indeed, it appears that what countries lose on the swings, they can gain on the roundabouts.

A recent study of labour-market performance by the Organisation for Economic Cooperation and Development (OECD) found that while deregulation had ensured an improvement in the UK's employment growth record, it was still only on a par with highly regulated economies such as France, Germany and Italy.

Moreover, as Japanese car giant Toyota has revealed in the past fortnight, there is much more to an investment decision than non-wage costs. Chairman Hiroshi Okuda warned that if the UK did not join the single currency bloc when it is set up, his company might think twice before expanding its 1-billion-ecu plants on British soil.

Yet the Union is certain to scale back the ambitious social harmonisation plans of the late Eighties to avoid losing investment to south-east Asia.

A recent survey of 320 senior European managers carried out by consultants Arthur Andersen warned that Asia was likely to overtake western Europe as the world's most favoured destination for foreign direct investment. It is a challenge the EU cannot ignore.