New Europe new danger

Europe is clearly of two minds on labour standards and workers' mobility, each mind represented by a different piece of legislation, one existing, and one proposed.

Those who promote a liberalised market are now seeking to advance their case through the proposed services directive, which liberalises the movement of services, placing labour firmly on the level of a commodity. On the other side are supporters of a 'social Europe,' who back the preservation of hard-won labour-protection laws, such as the EU's posting of workers directive. At issue is whether the states least concerned about regulating labour and safety standards will now set standards for the whole EU or whether standards will be set by those member states which seek to sustain the EU's long-standing commitment to improve working conditions.

The posting of workers directive has been brought to the fore by the dispute between the Latvian company Laval & Partners and Swedish trade unionists. The immediate outcome, a temporary victory for Swedish organised labour, is now subject to review by the European Court of Justice, a lengthy procedure that may take two years to resolve. Under review is a Latvian construction company's attempt to have access to Swedish building contracts. In essence, what is in question is the extent to which the posting of workers directive requires that incoming labour should keep to the standards of the host country.

What is certain is that Europe needs reform and a new sense of direction. But the danger is that European states will abandon the gains of a social democratic model, such as its implicit expectations of support for minimum labour standards, without assessing Europe's development strategy in a rounded way. The result would be a deepening social divide under the guise of 'flexibility', 'adaptability' and 'the imperatives of globalisation'. This neo-liberal prescription of breaking with past forms of labour protection and regulation might increase short-term profit, but runs the risk of atomising organised labour and transferring wealth upwards, without bringing the real structural benefits that Europe's economy needs.

The American response to globalisation has been to roll back the protections given to labour under the New Deal. The approach is based on bolstering incentives for employers. But a development strategy also requires the management of incentives. Capital takes the path of least resistance in its effort to find profit, unless pressured to do otherwise (or unless owners are enlightened enough, strong enough, and confident enough to adopt a truly long-term strategy). Gut-level hostility to all forms of regulation of labour conditions risks short-termism.

Similarly it would be unwise to assume that the primary motivation of the leading champions of liberalisation - particularly the EU's new member states - is to help find a way for Europe to compete with the world. Rather, it is a desire to compete with others by using their comparative advantage. Moreover, the 'wild capitalism' of the transition period has given birth to a business mentality that is particularly focused on short-term profit, rather than on long-term growth and innovation. That may be understandable in its context, but should not set the tone for Europe-wide debate on policies that could last decades. The Baltic states - and, indeed, most of the new member states already have lower safety standards than the rest of Europe; their reforms should not set the parameters of debate.

The danger of liberalising measures such as the services directive is that it will clear the way for letterbox companies, commercial operations moving to states whose only protection is 'for' business and 'against' workers. In the US, the same rationale has prompted companies from the North to set up offices in less-regulated states of the South - but regulation and enforcement in the poorest EU states are at levels lower even than those of the poorest and most conservative states in the American South.

Part of the problem is that the current debate focuses on regulation, perceived as per se a 'bad thing' or 'red tape'. Narrowing the debate in this way may rule out a long-term approach and denigrates the virtues of negotiation and co-operation.

For ideologues of the free market, such consensualism and inclusiveness are anathema. Yet long-termism, negotiation and co-operation were virtues that underpinned the development of Europe's various labour/state/corporatist mixes.

These are complicated models, perhaps now overly solidified, but they also created prosperity and could continue to do so. For that to happen, those around the negotiating table need to have a degree of power.

In Europe's Western half, labour retains a relatively strong voice, but in its eastern half labour has largely been neutered: there is minimal discussion between business and the state on one side and labour on the other.

A renegotiation of that mix should acknowledge that discussion with labour is needed because human capital is a key competitive advantage of the European system: higher labour costs can in fact sharpen an economy's focus, forcing more efficient organisation of labour and technology, which helps to encourage technological innovation. In some places, such as Finland, it has also encouraged significant investment in human capital. Stated differently, if liberalisers play their hand too strongly, they may not simply cut through the protections offered by 'social Europe' but also risk damaging a significant engine of prosperity: innovation.

The labour market needs to be more flexible. The response should be a managed system of labour mobility designed to improve competitiveness. Poorer EU member states should have access to labour markets of their richer peers, but not in a chaotic and unregulated manner.

There should also be acknowledgement of the role of the state as a potentially positive actor.

While commonly attributed to a more liberal approach, part of Britain's recent boom (and recovery from Thatcher's recession of the early 1990s) is based on Keynesian monetary policies. A look at the US' economic development also suggests a significant role for big spending on research and development, and not just the encouragement of entrepreneurialism. A significant proportion of US technology emerges both from its military research and from its universities, which were created and expanded under a more Keynesian model that guided the US until the 1970s. America is still benefiting from that previous government spending. Europe can take lessons from the US, Britain and the transition countries. But those lessons are not always the lessons of neo-liberals.

To be sure, the 'social model' needs to be adjusted, but an updated and revitalised European model is possible. For that to happen, it needs to find the right mix, focusing on high value-added technologies and active social investment.

A reformed European system would capture the energy of entrepreneurs, and the contribution of the state within a regulated system that also makes workers genuine stakeholders.

It would also foster a perception of legitimacy and a feeling of inclusiveness, the very core of the social model that the Europe of today seems in danger of foreclosing.

• Jeff Sommers is a visiting professor at the Stockholm School of Economics in Riga. Charles Woolfson is professor of labour studies at Glasgow University and holds the Marie Curie Chair at the University of Latvia. A longer version of this article appeared in Transitions Online. www.tol.cz

Commentary feature in which the authors warn that abandoning hard-fought labour standards and workers' rights and sinking to the levels of the Baltic states would actually harm Europe's competitiveness.