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The European Union's two faces on globalisation

Fintan O’Toole
22 March 2006

European Union economy ministers met in Brussels on 13 March 2006. It was not a joyful assembly. Piotr Wozniak, the economy minister in Poland's new right-wing government, complained bitterly about the amendments made in February by the European parliament to the so-called services directive, a key piece of legislation aimed at completing the drawn-out process of creating a single EU market.

Just before the European parliament vote, Wozniak – along with like-minded colleagues Alan Johnson, the British secretary of state for trade and industry, Etele Baráth, the Hungarian minister for European affairs, Laurens Jan Brinkhorst, the Dutch minister of economic affairs and Milan Urban, the Czech minister of industry and trade – had written to Charlie McCreevy, the internal-market commissioner, warning against any watering down of the directive.

Immediately after the parliament voted to do precisely that, Wozniak had declared: "I am not sure if it's worth supporting the law in its present form." Now, at the meeting of EU economy ministers, he claimed that as many as fifteen countries, including most of the EU member-states in east-central Europe which had acceded to the union in May 2004, were unhappy with the amended version of the directive; Wozniak went on to argue, in effect, that the council of ministers should refuse to accept the amendments.

On the same day that Wozniak was complaining in Brussels, some of his fellow Poles were making the news in Ireland. It emerged that sixty-six Polish fitters and welders, employed as service contractors on the refurbishment of a power plant, were being paid less than a third of the legal minimum rate for the job and significantly below the absolute minimum legal wage for any job in Ireland. The workers were receiving €5.20 an hour. The agreed and registered minimum for the job (which has statutory status) is €18.97 an hour. The absolute minimum wage is €7.65 an hour.

The theology of European services

These particular workers are a prime example of the emergence of a European Union labour market as a tangible reality. They are working in the west of Ireland on one extreme fringe of the union. Their ultimate employer is the Irish state, which owns the Electricity Supply Board. A German firm, Lenties, won the contract to refurbish the power station. It, in turn, subcontracted much of the work to a Polish company, ZRE Katowice (Ireland) Construction. With three nation-states involved in one run-of-the-mill job, the obvious question is which state's law applies?

At the moment, at least in principle, the answer is clear enough: Ireland's. The workers are entitled to Irish wages and conditions and the failure to pay them properly is an offence. But if the kind of services directive that Piotr Wozniak supports is implemented, Polish law would apply. A Polish company could bid for the Irish contract and treat its workers according to Polish labour standards. For supporters of the original services directive, this is precisely the point: the new member-states could exploit their competitive advantage in cheap skilled manual labour, costs would fall and all European economies would ultimately benefit. For opponents of the original directive, the same point would be expressed differently: workers in developed EU economies would be forced to accept the wages and conditions that apply in Poland or Lithuania. The difference in this case can be precisely measured. It is that between €18.97 an hour and €5.20 an hour.

The argument over the services directive can seem at times like that within a conclave of medieval theologians arguing over the difference between transubstantiation and consubstantiation. For example, in the draft of the directive sent by the European commission, there is the following passage: "It is therefore necessary to remove barriers to the freedom of establishment for service providers in Member States and barriers to the freedom to provide services as between Member States and to guarantee providers and recipients the legal certainty necessary for the exercise in practice of those two fundamental freedoms of the Treaty." Among the amendments suggested by the European parliament's report on the directive was the replacement of the phrase "providers and recipients" with the phrase "recipients and providers". The change was justified because "(the) emphasis should be placed on recipients of services, who, unlike service providers, are unfamiliar with how things work in this area."

The economics of open borders

Yet, if the conduct of the argument can be as tedious and obscurantist as only EU institutions could possibly make it, the argument itself is refreshingly sharp. For those who think that left and right are obsolete terms, the debate provides a quick primer on ideological differences that are by no means vestigial. Those who have sought to modify the substance of the directive have used classic leftwing arguments: large areas of public provision are best protected from raw market forces; competition and the liberalisation of trade are not ends in themselves but means to achieve broader social objectives. Those who have demanded its full-blooded implementation use classic right-wing arguments: liberalisation will sharpen competition, bring down costs, create jobs, and indirectly benefit not just European economies but European societies.

The sharpness of the conflict, moreover, reflects the importance of the issue. Both sides in the debate accept that while the EU has largely succeeded in creating a single market for goods, it has not managed to create a single market for services. Services play a key role in the EU economy, accounting for 40% of foreign direct investment and almost 70% of both jobs and GDP in most EU countries. In many of the more advanced economies, even this figure understates the importance of services, since much of what is defined as manufacturing work increasingly includes a service component and the line between manufacturing and services is becoming ever more blurred. (The world's largest service corporations are two traditional US manufacturing giants, IBM and General Electric.)

Yet the proportion of internal EU trade that was made up of services actually fell during the 1990s. Legal and regulatory constraints imposed by national governments create barriers that often make it difficult for a company in one EU state to provide services in another. The relative underdevelopment of the internal services market undoubtedly costs jobs in the most employment-intensive areas of the European economy. Women, for whom service employment is especially important, are the biggest losers in this process. Opening up the services market will almost certainly help European economies to create much-needed jobs. (The EU commission estimated that the original, unamended services directive, would create 600,000 jobs.).

The problem is that the regulations that make it hard for companies to compete in other states are there for a reason. "Efficiency" is often just a nice name for exploitation – of the environment, of consumers, of workers. The experience of Hungarians working sixty-nine hours a week on the redevelopment of Spencer Dock in Dublin and being paid less than a third of the legal minimum rate is not untypical; this, and the case of the Polish workers in Ireland shows that contractors will pay employees as little as they possibly can, even as regulations are there to stop them doing so. Businesses pursuing profit will flout health and safety laws, cause environmental damage, and rip off consumers – if they can get away with it.

Some regulatory regimes have grown up to protect special interests or to feed bureaucracies, but most came into being in order to correct actually existing abuses. Freed from these regulations, companies can undoubtedly operate more "efficiently". If you force or encourage your workers to work twelve hours a day, seven days a week for €5 an hour, you will get the job done faster and cheaper than an employer who obeys the rules. That employer will, in turn, lose out in the competition for contracts and will be forced either to go out of business or to adopt your methods. The result will be highly efficient in the short term but it will be socially, economically and economically unsustainable. It will also, in the context of a multi-ethnic EU, provide a firm basis for xenophobia.

The politics of globalisation

If all EU countries had broadly similar levels of labour regulation, and social, environmental and consumer protection, a free market in services would encourage real efficiency: those who could do the job best would get the work. But in the real world, where the new member-states have much lower levels of protection, competition between companies becomes competition between countries. Companies – and indeed workers – from the newer, poorer member-states will be able to compete on the basis of their poverty.

To put it simply, the low expectations of the Polish worker for whom €5.20 an hour is a decent enough wage (or at least an acceptable one) become a weapon to be used against the high expectations of the Irish worker who is used to €18.97 an hour. And this quickly ceases to be the abstract economic mechanism that free-market ideologists imagine it to be. It becomes a recipe for a protectionist backlash. The worker who has fought for decent wages and conditions for decades and now sees them being eroded is invited to see the foreign contractor as the enemy.

The mainstream European left has tried to deal with the tensions implicit in the services directive – wanting the jobs and growth, not wanting the erosion of national standards – by invoking a "country of destination principle": companies from across the EU should be free to compete, provided they do so according to the rules that apply in the country where they are operating. Thus, the Polish firm working in Ireland has to meet Irish standards.

The mainstream right (including, poignantly, Britain's prime minister Tony Blair) has insisted, to the contrary, on the "country of origin principle" – the rules that apply are those of the state in which the company is established. The Polish minimum wage, not the Irish one, applies to the Polish contractors in Ireland. What has emerged so far from the European parliament, where neither left nor right commands a majority, is a classic Euro-fudge: the "country of origin principle" is dropped but the "country of destination principle" is not endorsed.

There is no clear resolution to the fundamental conflict, and unless the commission or the council of ministers, to whom the directive now returns, come up with a direct statement of principles, the whole issue looks like it will ultimately be decided by the courts. Yet this mess is itself eloquent. The core of the problem is not, as some leftwing critics would have it, that, with the services directive as originally drafted, the EU is acting like a superstate. The problem is that it is acting on the economic plane as if it were a superstate while on the political and social plane, it patently isn't one.

A political superstate would have common levels of social, environmental and consumer protection and a popular sense of common interests. The EU, especially since its expansion, has neither of these things. Poland and Ireland, for example, have vastly different labour markets, utterly different levels of labour regulation, and even different currencies. At the same time, national identities remain as strong as ever. In theory, it ought not to matter that a Polish company gets a contract in Ireland by underbidding an Irish company because all belong to the collective European "us". In practice, that "us" has yet to come into existence. On the ground, the services directive can become a zero-sum game: they gain, we lose.

This whole episode ought to be the moment when the EU as a whole recognises the disjunction between its economic ambitions and its social realities. The services directive is trying to push the union further along the road to being an economic superpower. Yet, the collapse of the proposed EU constitution has shown, in the starkest terms, that it is trying to do this without having, at a popular level, a common political and social identity.

The European Union seems unable to decide, in essence, whether it wants to be an agent of globalisation or a protection for its citizens against the harshest consequences of globalisation. Most of its citizens probably want it to be the latter, but most of its dominant economic ideology is directed towards making it the former. The European Union has to articulate itself, not as a set of institutions or as a marketplace, but as a political and social project. Until it manages to do so, the contradictions exposed by the debate over the services directive will gape ever wider.

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