Time to get serious about the Lisbon Strategy

19 Feb 2004

Address by David Begg, General Secretary of Congress, to Ambassadors of EU and Accession Countries 19 February 2004

The Trilateral meeting between France, Germany and the UK which took place yesterday has been interpreted as a dawning realisation of the enormous change which EU enlargement will bring and an effort by the Big Three to "take charge". Indeed it can hardly be disputed that the challenges are formidable for the Union at this time embracing the following:

  • Accession of ten new countries;
  • A new Parliament;
  • Installation of a new Commission;
  • Adoption of a new Constitution;
  • Dealing with large migration flows;
  • Countering the unique political influence of the US in the world;
  • The competitiveness challenge to Europe from the US on productivity and employment;
  • The competitiveness implications of a strengthening currency;
  • Outsourcing of large numbers of jobs;
  • The need to re-launch the Lisbon Strategy.

The first priority of the trade union movement has always been full employment and in that context it is appropriate that I should focus on this latter point. The Lisbon Strategy promised not only to make Europe the most dynamic knowledge based economy in the world but also to create "more and better jobs". The recently published report of the Task Force on Employment, chaired by Wim Kok, aims to chart a course for achieving the goals of the Lisbon Strategy. In my opinion it is a good report - not congenial to workers in all respects - but on the whole realistic and achievable. It recognises that Europe needs not just to respond to the current slowdown, but also to address the structural challenges of globalization and economic integration, and the changing demographics of its population. To sustain employment and economic growth in the longer term, Europe needs more workers, working more productively. If anything, the urgency of embracing this agenda has become more acute since the publication of the Kok report with the mounting evidence of job losses from outsourcing, not just to Eastern Europe but to India and China. In a nutshell our problem may be stated thus: As our manufacturing disappears to China, our services to India and our scientists to America how can we stop ourselves from falling seriously behind?

What is particularly revealing about the phenomenon of outsourcing is that it is not just affecting low level manufacturing and service jobs but, as the recent experience in this city with the Philips company shows, relatively high quality market service jobs as well. This tends to stand conventional wisdom about "moving up the value chain" on its head. What is at issue is certainly moving up the value chain and using Life Long Learning to do this, but other initiatives are also necessary including:

  • Involvement in research and innovation to bridge the gap with the US;
  • The ability to adapt and change quickly;
  • The need to reengineer the economic governance of Europe;
  • The need to build social infrastructure particularly relative to care of children, people with disabilities and older people.

The fact that high quality jobs are at risk from outsourcing is potentially very significant in political terms. When manufacturing or call centre jobs are lost there is a certain acceptance that this is the way of the world. But peoples' outlook on politics and world affairs could change. Support for globalization could crumble and demands for protectionism could emerge. Is there not some evidence of this in the United States already?

Productivity, in an age when demographics are changing rapidly, can only be sustained by increasing labour force participation. In practice this means more women working and since women have always fulfilled the role of carer in European society there is a social cost to their involvement in increasing numbers in the workforce. We cannot ignore this and expect that there will be no consequences. Every country needs a universal infrastructure of caring and, with people living longer, this has pretty substantial cost implications. Moreover, there are currently huge differences in the quality and availability of childcare in different European countries. Ireland, for example, could not be remotely compared to Denmark because we have no effective public policy on childcare. Tight labour market conditions in recent years have forced employers to begin to consider childcare and work/life balance - but not to a great extent.

If Europe is to pursue the Lisbon Strategy it must do so in a coordinated way both in terms of industrial strategy and social development. It seems to me that failure to approach it in this way would lead ultimately to no more than a shallow common market of 25 in which Europe could never reach the potential underpinning the Lisbon vision.

I realise that a shallow common market of 25 countries is, in reality, the outer limits of the aspirations of many people in public life, particularly those of the neo liberal persuasion. They pursue negative integration in the sense that they want coordinated action only insofar as "it removes the barriers to free trade" in the internal market. But that was never Delors' vision for Europe and it is Delors' objective of gradual political as well as economic integration that the European Trade Union movement has embraced. If there is complacency on the centre right about this it is misplaced. The twin impacts of outsourcing to and migration from the accession countries may be more significant than anticipated. Actually this is the conclusion of a report published by the IFo economic institute in Germany and the University of Munich, published earlier this week. If the projections of the report turn out to be accurate, it could alienate public opinion within the existing 15 EU countries. We need to be aware of these risks and prepare to deal with them as far as possible. Europe's institutions are already seen as remote by the people and unless people are persuaded that the European project is about more than completing the internal market then there will be a real problem of legitimacy for the union.

Let me now try to define what questions are posed for public policy in Ireland by the foregoing analysis. Ireland has made enormous progress since joining the European Union although it took quite some time to manifest itself. Although Ireland joined in 1973 the real achievements only began to become clear from about 1994 onwards. We moved from a position of 17 per cent unemployment and a GDP per capita of 60 per cent of EU average in the late Eighties to an unemployment level of 4.9 per cent and GDP per capita in excess of the average today. I know that many accession countries see Ireland as a model for what they themselves can achieve.

But while full employment contributed hugely to social progress, it has not bridged the gap with mainland Europe in terms of the quality of our infrastructure and public services. We are funding a substantial part of our National Development Programme from our current account surpluses which means that, although we have a national GPD per capita in excess of the EU average, in reality we have less disposable income. In terms of the distribution of income, we are, according to the UNDP Human Development Report, the most unequal of the developed countries, next to the US. Inasmuch as the universal availability of high class public services can help to achieve more equality in society it is easy to understand how things are as they are. Our level of public spending accounts for 33.6 per cent of GDP overall compared to a European average of 47.5 per cent. Our spending on health is only 89 per cent of the EU average and social protection expenditure is only 14.7 per cent of GDP compared to an EU norm of 27.5 per cent.

The paradox for Ireland is that our economic development was achieved on a low tax model which is not adequate to provide European norms of public service. We are also in a unique situation in which our macro economic linkages are with the Euro zone but our micro economic linkages are with Britain and the United States in the form of trade volumes and foreign direct investment.

Interestingly, however, the UK level of public service spending is 42 per cent of GDP. A report published this week by Mr Peter Gershon proposes radical efficiency measures in the public service delivery but not a cut in spending. Mr Oliver Letwin, the Conservative Party Shadow Chancellor, has proposed a reduction to 35 per cent of GDP but even that is ahead of Ireland. It is worth recalling that when Mr Kenneth Clarke contested the leadership of the Conservative Party he said that reasonable levels of public services could not be assured with public expenditure below 40 per cent of GDP.

The trade unions, through successive social partnership agreements, bought into this low tax model on the basis of providing real increases in disposable income and moderate pay increases for employers. It did create a dynamic economy and it was probably the right thing to do at the time, but it is difficult to see how it can be viable in the longer term - assuming we want to build a more equal society with an acceptable level of social provision.

Ireland's tax regime was most dramatically changed in the area of corporation tax. The rate was reduced from 32 per cent in 1995 to 12.5 per cent today (it is 10 per cent for some sectors). This is part of a worldwide trend. OECD countries reduced on average from 37.5 per cent in 1996 to 31 per cent in 2003. It is, I think, true to say that this form of tax competition on Ireland's part is generally resented in the rest of Europe. I think it is time for a rethink on our part for a number of reasons, viz:

  • Ireland's tax base is too narrow to fund the social objectives described earlier. Personal taxes are not particularly out of line but business taxes, wealth taxes, property taxes and tax shelters for the rich are;
  • Low corporation taxes exert a strong pull on FDI but is only 12.5 per cent, a critical level - it is well below the majority of other countries?
  • The 12.5 per cent rate cannot be confined to specific companies Ireland wants to attract. It has been offered to banks, hotels and construction companies which are domestic and to that extent serves no strategic purpose;
  • Tax credits for R&D, introduced in the last budget, make sense but their incentive value is much reduced where a low corporation tax regime already exists. Congress proposed to government two years ago that R&D tax credits should be introduced with a 20 per cent corporation tax rate.
  • With enlargement other countries will be able to undercut Ireland's rate anyway.

It is clear that large multinationals are driving an agenda of tax minimisation internationally. Tax competition between countries is playing into their hands. They have sophisticated arrangements to minimize their liability through transfer pricing which tax competition effectively facilitates. The US Senate in a report in 2001 claimed that multi-nationals evaded up to $45 billion through transfer pricing. One firm sold tooth brushes between subsidiaries at a price of $5,655 each! As well as that all the big corporate scandals from Enron to Parmalat have involved tax dodging of one form or another. Parmalat has a financial subsidiary here solely to avail of the low tax regime.

Why should Europe allow the multinationals to completely dictate tax policy? We must of course to be realistic because these corporations have enormous power. It is also a fact that if corporation taxes were harmonized completely then all foreign direct investment would go to the centre. But we should at least co-ordinate fiscal policy in a way that ensures that corporation tax rates stay within a range dictated by a country's peripheral location or state of development. A band of corporation tax could be agreed allowing countries to slot in at levels which reflect these or other criteria.

In general my view is that the successful reinvigoration of the Lisbon Strategy requires a much more sophisticated co-ordination of economic governance, fiscal policy, research & innovation, industrial policy and skills enhancement at European level. It requires us also to reorientate the EU budget in pursuit of this objective which makes coordination of fiscal policy more necessary.

As I said at the beginning I believe in the social market model of capitalism. I believe also that this model is under serious threat from the "free market" variant exported from the United States. This is particularly challenging to Europe. While the United States has been able to escape - so far - the social consequences of its economic structures, both because of the commonly accepted myth of its exceptional social mobility and also because of its profound cultural attachment to particular ideas of liberty which excuse social suffering, no such avenue is open to Europeans.

Belief that the wealthy and propertied have reciprocal obligations to the society of which they are a part goes back to early Christendom. It can rationally be asserted from this that capitalism does not exist independently of society, and that it is proper for the democratic will to be asserted over business and private power.

As we embark on this great project of enlargement it is essential that the values upon which we travel can be consolidated. That is why the new constitution is important to my mind. If the constitution is not tied down we will, I fear, drift into the large shallow common market of which I have spoken and no more. I do not believe that is a sustainable outcome and certainly it will not retain the support of organised labour.

But to end on an optimistic note; we look forward to 1 May and we are planning a big welcome for our colleagues from the accession countries. May Day has a particular significance for workers and it is entirely fitting that enlargement should happen on this day because we are all workers on one way or another.