The Future of the European Union - CFJ Conference
27 Sep 2005
Economic Growth, Social Cohesion and Sustainability
Address by David Begg to CFJ conference, September 27th, 2005
According to his biographer, Francois Ducene, Jean Monnet had a clear vision of Europe as a political entity shaping the course of world events. He cites an extract from a handwritten letter sent by Monnet to the French Prime Minister, on 23 August, 1950:
"Of all the countries of the West the United States is the readiest to accept change and listen to long straight talk, so long as one throws a constructive idea into the ring. The United States are not imperialist, they are efficient...... Alone, they will not develop the political vision of which the world stands in need. I think that is our task."
This latter sentence seems almost prophetic. If the earlier part of the paragraph is more generous than current circumstances will allow then let it be remembered that Monnet was an Atlanticist speaking of an America that favoured European integration. It was a polity much removed from Donald Rumsfeld's antipathy to "Old Europe".
Fifty-two years on the mission of the European Union is no longer to prevent wars of the type that disfigured the Twentieth Century but rather to be an alternative pole of Western influence - alternative to the United States that is. The hope of those who want an integrated, political entity is that it can tame the worst excesses of globalisation by presenting to the world the social market model as against the more brutal turbo capitalism which is the hallmark of the United States.
It is true, of course, that not everyone takes this view. The alternative holds that the social market model is dismissed as an outdated failure, straining under the burden of unaffordable welfare entitlements and employment rights. A serious dose of liberal market economics is needed to enable it to compete with the more virile American business model. This debate has come to the fore as a result of France's rejection of the European Constitution, but not in the way the "No" voters had expected, and in the general election in Germany.
Tony Blair has seized on the unfolding crisis, and the happy coincidence of Britain's EU Presidency, to push for more market liberalisation, despite the fact that this vision is precisely what the French people though they were voting against.
The Lisbon Strategy sought to make Europe the most competitive country in the world when it was promulgated five years ago. But its formulation was balanced. It was built on three pillars given equal priority - economic, social and environmental. It was stated thus: "To make Europe the most dynamic knowledge based economy in the world with more and better jobs, social cohesion and protection of the environment". Progress on this agenda has been slow mainly, in my opinion, because the differences of perspectives outlined earlier have not been resolved but rather have been camouflaged in the language of the Lisbon document.
Although usually couched in terms of sovereignty and national identity, the real question at the heart of the European debate has always been one of political economy. Conservative opinion was comfortable with Europe when its social model was a bulwark against Soviet influence, but turned against it in the 1980's when the American new right began to assert itself.
It is somewhat ironic that the British Labour Party should be the principle advocate for liberal politics in Europe and that their main opponent should be a French centre right politician. It is ironic, not just because of political labels, but because Britain has a million civil servants more than France and a country that spends 46 per cent of its GDP on public services can hardly be considered to be on the same wavelength as the US. And yet that is the perception that clearly led the French to reject what they saw as the imposition on them of the Anglo-American model via the new Constitution. The force of the perception can be judged from the fact that the rejected Constitution text contained nothing to project it as being Anglo-American in orientation. It is probably the most comprehensive compendium of Citizens' Rights anywhere and specifically enshrines the social market economy model. It was not as if the French did not understand this, after all books about the Constitution were best sellers.
So what is it about the UK that so alarmed the French? The Labour leadership peddles the myth of US superiority but it would wrong to dismiss their motives as right wing. They hope that by importing US style capitalism Britain can maximise efficiency and growth and generate the revenues needed to raise long term investment in public services. In other words they want to marry a neo-liberal economy to the social democratic state.
The problem with this approach is that the economy does not form a discrete and separable sphere of human activity. Economic structures generate values and outcomes that help to shape political culture. If they result in ever widening disparities of wealth, as they tend to do in both Britain and Ireland, the ethic of social solidarity from which public services draw their legitimacy will weaken. There are also resource and other limits on the capacity of the state to compensate for the failure of the market to provide security and a decent income when standards are constantly being driven down. The looming crisis in pensions is a case in point. On this analysis the French were right to be wary of the Anglo model but, in truth, the picture is more complex than is allowed by the current debate in Europe.
In my opinion the Lisbon strategy is now moribund. It is impossible to advance it in a community of nations where opinion is polarised between conflicting visions of the future. The problem is that the advocates of the respective visions are unwilling to engage in the rigorous analysis that would give a direction to Europe. Wim Kok tried to do that in his Task Force report on employment but that seems to be more or less sidelined. The statements of President Barroso about the Lisbon Strategy appeared to prioritise economic growth over social cohesion and the environment. The ham fisted approach by Bolkenstein to the Services Directive was incredibly stupid and no doubt helped to fuel French concerns about the Constitution. President Barroso's statement to the Lisbon Council in June in which he described opponents of the Services Directive as "reactionaries" as ill judged.
To the extent that services are the fastest growing economic sector it makes sense to legislate to maximize the potential of the sector. What does not make sense is to allow service industries to base themselves in the low cost Eastern European countries and from there to export personnel to provide services in the EU 15 on pay rates and conditions of employment which apply in the base country. This is known as the 'country of origin' principle. It is a 'no brainer' that this crazy proposition would cause fear and resentment and undermine support for the whole European project. The role played by the so-called 'Polish Plumber' in the French Referendum is testament to that. Europe also needs a clear framework within which to deal with public services or "services of general interest" as they are called because constant threats of privatisation of public services convey the impression that the Commission is on an ideological crusade.
It is not as if we don't know what the consequences of the country of origin provision would be. Up to the time of the GAMA dispute this might have been in the realms of speculation but GAMA revealed the face of exploitation in very graphic form and the subsequent awarding of more public capital contracts to that company shows how difficult it is to do anything about it - and GAMA is based in Turkey, a country not even in the EU. This week we have further evidence of potential social dumping with Irish Ferries trying to replace their staff with agency workers paid €3 per hour.
At face value Mr Barroso's agenda is of limited interest to us in Ireland. But while we have managed to make great economic progress in recent years we remain a very unequal society in terms of the division of wealth and the level and quality of our public services. The concept of a Social Europe, first advocated by Delors and now formally part of the EU draft constitution, and embodied in social systems of the majority of the EU 15, is what we in the trade union movement aspire to. Mr Barroso's apparent abandoning, or at least downgrading, of that pillar of the Lisbon Strategy is very disappointing. Preventing a race to the bottom in terms of employment conditions is our biggest single challenge in a globalised world and the studied attempts to undermine the concept of a social Europe make it very difficult for those of us in the trade union movement who support Europe.
What of this crusade to Americanise Europe? Has it any basis in empirical experience? Although the US is not looking very good at the moment, with its inability to handle the New Orleans humanitarian crisis, its twin fiscal and trade deficits and its entanglement in Iraq, we should still look at the reality of the respective economic performance of Europe and the US over time. It is worth adjusting this perspective to take into account, not just the current state of the continents, but a comparison of how they have developed since the war. As Jeremy Rifkin has pointed out in his recent book 'The European Dream', what is so remarkable is how fast Europe caught up to the United States. In 1960, the US economy was producing nearly two times more goods and services per hour than France and the United Kingdom. By 2002, however, Europe had virtually closed the productivity gap with the US boosting labour productivity per hour worked to 79 percent of the US level.
European productivity growth outperformed the US during virtually the entire half Century following World War II. Between 1950 and 1973 European productivity grew by 4.44 percent, compared to 2.68 percent in the US and from 1978 to 2000, the productivity growth in Europe increased by 2.4 percent compared to 1.37 percent in the US. Between 1990 and 1995, twelve EU countries showed higher productivity growth than the US. While US productivity moved slightly ahead in the last half decade of the 1990s showing a 1.9 percent increase in growth compared to a 1.3 percent growth rate in Europe, seven of the EU countries still grew faster. In 2002, even with the surge in US productivity, six European countries achieved higher productivity. As a matter of interest the 'Financial Times' reported on 13 September, 2005 that figures from the British Office for National Statistics showed that UK productivity was 11 percent behind France in 2004 as against 10 percent in 2003.
Thus it can be stated that, while some European countries have problems, Europe as a whole cannot be denigrated. Moreover, performance comparisons with the US reflect differences in demographic circumstances, such as migration flows, fertility rates and population density, which have nothing to do with levels of market regulation or taxation. The biggest single contribution to America's recent productivity growth has been in the retail and wholesale sector, where consumer exuberance has kept the tills clattering away.
But, critics of Europe will say, unemployment rates in America are half those of Europe. On the face of it this is true but closer examination reveals that the difference between the two continents on this measure is also less than official statistics allow. Consider that there are, according to Jeremy Rifkin, two million Americans so discouraged that they have dropped out of the workforce and are no longer counted in official statistics. Consider also that nearly 2 percent of the male population of the US is in prison. While the US Department of Labour put the official unemployment figure at 6.2 percent in the Summer of 2003, real unemployment, when discouraged workers who have given up are counted, is 9 percent of the workforce, similar to that of Europe.
Europe's industrial base is also stronger than that of the US. When the German auto giant Daimler-Benz bought out America's third largest carmaker, Chrysler, a few years ago it was treated as something of a fluke. But actually sixty-one of the 140 biggest companies on the Global Fortune 500 Rankings are European, while only fifty are US companies and twenty nine are based in Asia. While Germany, as the country accounting for 30 percent of European GDP, is the key target of pro-American commentators it is the strongest exporting country in the world and the only one of the G8 to increase its market share in recent years.
It is against this background that the debate about the future of work in Europe is taking place. Liberals argue that high unemployment, high taxes, burdensome welfare systems, and convoluted regulatory regimes will perpetuate economic stagnation. People in Government, industry and civil society are locked in a fierce ideological battle about whether the rules governing commerce, employment and trade need to be reformed and, if so, how. Liberals want these reforms to bring Europe's economic politics in line with the United States.
Were the European Union to abandon much of its social net in favour of a more libertarian market approach, its 455 million people might find themselves saddled with the kind of deep social ills that now plague the United States, from greater inequality to increased poverty, lawlessness, and incarceration. Precisely the type of social ills so brutally exposed by Hurricane Katrina. That would be a high price for European citizens to pay when we consider the fact that the American model not only has failed to deliver real job growth but has forced millions of Americans into long-term debt and bankruptcy.
And, of course, Europeans will not pay this price but until the political elite of Europe accept this reality Europe cannot move on.
But what does moving on mean in practice? First of all Europe needs to stimulate consumer demand in its major economies. Only 12 percent of Europe's trade is external to itself. The problem is lack of consumer confidence. Europeans have to be convinced to spend more money. Confidence is a key factor but other options are necessary too. Fiscal policy has limited potential. The ECB could reduce interest rates and its reluctance to do so reflects a flaw in the Eurozone system. The ECB's remit (price stability) is too narrow and it should never have been ceded the power it has in a single currency zone. Here we could learn something from the US. The FED is required to consider broader economic conditions, not just inflation. Bluntly too, Europeans need better pay rises. The extraordinary wage moderation of recent years has gone too far.
The liberal solution which favours labour market and welfare 'reform' - actually a euphemism for worsening employment security - has the effect of making people uncertain about the future and less willing to spend money. As such it is a self defeating ordinance.
Nothing in this paper so far should be construed as a case for the status quo. The libertarian pro American argument is, for reasons which I hope are persuasive, discredited and should be pushed to the margins of debate. Only then can a realistic and mature approach to the future be embraced. Wim Kok had good ideas about how to operationalise the Lisbon Strategy and his reports, particularly his first delivered in November 2004, deserve more attention than they got.
On the other hand there is no one European social model to defend. The Belgian Economist, Andre Sapir, claims that there are in fact four distinct models; the Rhineland, the Anglo-Saxon, the Mediterranean and the Nordic, all with different characteristics. What there is is a broad set of Social Democratic values which hold that best outcomes do not come from markets and require active intervention by the State. In my opinion, if there is a model that can provide the optimum mix of economic dynamism and social justice for Europe to succeed it is to be found in Scandinavia. In recent years, as Wim Kok points out, the Scandinavians have combined healthy growth, low unemployment, rising productivity and large export surpluses with some of the lowest levels of inequality in the world. Moreover, a strong welfare state and a framework of social bargaining that involves trade unions are the mechanisms through which they have managed economic change successfully. According to neo Liberal orthodoxy these are the very things which are supposed to be holding Europe back.
The debate on Europe is about much more than constitutions and currencies. It is fundamentally a question of whether an alternative to the Washington consensus remains possible. No one who occupies a position on the Centre Left of politics should be in any doubt about what is at stake.
As mentioned earlier, at a certain level the Lisbon Strategy has but limited relevance to Ireland. Whereas only 12 percent of Eurozone trade is external, over 60 percent of Ireland's trade is external. We are a very open economy categorized as the most globalised in the World. Our main markets are outside the Eurozone and so our competitive position is much more vulnerable to currency fluctuations. Our demographics are much more favourable than the rest of Europe in that we have a younger population. We have an economic growth rate that is 3 times the EU average. We have virtual full employment, low public spending and an overall low tax burden. We also have very light product and labour market regulation. We are, for example, the only country in Europe (and including the US as well) which has no statutory right to collective bargaining.
On the other hand we are, according to successive United Nations Human Development Reports, one of the most unequal countries in the World. We have very serious public service deficits, most notably in health and an infrastructure of caring for children and elderly people which is almost non existent. Our private pension schemes cover less than half the population and those that do exist are woefully inadequate. We spend less than anyone else in Europe on social transfers and our public expenditure is only 34 percent of GDP by comparison to an average of 47.5 percent for the Eurozone countries. In short we are very much part of the Anglo-American group of nations except in one respect - we have embraced the European approach to social dialogue.
The question is do we want to stay where we are? To be sure we would be crazy to abandon what works for us but we cannot live indefinitely with the social deficits I have described earlier. It is already clear, for example, that healthcare and childcare are major political issues that no government or prospective government can ignore. In time too the consequences of an ageing population, pensions provision and the fact that an Irish worker, albeit on a lower income (but not direct) tax regime, has to shell out his or her wages on things that their fellow European citizens get for free as part of the social wage, will hit home. Behind it all the greatest threat to our well being lies in the erosion of social cohesion that will certainly happen if we continue on the trajectory we are on now.
One day soon Ireland will have to choose what sort of a country it wants to be - not so much Boston or Berlin, more like Chicago or Copenhagen. To the extent that Europe's future prosperity is linked to the Lisbon Strategy it matters to us what happens to it. I believe passionately that Ireland's future lies in a more deeply integrated Europe. A Europe that is successful, that can engage with a globalised world without sacrificing the welfare of its citizens in some kind of Darwinian race to the bottom. A Europe that stands for civilised values, a Europe that can influence the world by use of soft power as it has the Balkans and Iran. If Europe can manage its way through its current difficulties then, with confidence restored, perhaps we can resume our journey towards the vision set out by Monnet all those years ago.