No Future for Europe Without a Social Progress Protocol

The European Union stood out until the end of the 1970s through its ambitious social agenda which became a global role model. Europe’s economies were sustained by a broad middle class; income distribution was more or less balanced. Until the late 1970s a de facto process took place of giving a federal or communautaire dimension to policy areas that, under the then treaties, lay in the hands of the member states. Directives on social policy – such as, among others, those related to equal pay for men and women, equal treatment of men and women at the workplace, employee protection from collective dismissal and/or corporate insolvency – were unanimously agreed without reference to any specific treaty basis.

Europe and its member state governments stood for solidarity and upwards convergence based upon democratic legitimacy, the availability of publicly-owned infrastructure and services of general interest as well as decent work which ensured a commensurate and dignified standard of living. With the Single European Act, the social protocol in the Maastricht Treaty and, finally, the Lisbon Treaty, the EU was empowered to set minimum standards in all areas apart from those affecting paid work, the right of association, the right to strike and the right to impose lock-outs. The common currency and a Europe without internal borders were trademarks for freedom of movement, not provincialism. These achievements are what the European Union has signified for more than 60 years.

However: ‘the incomparably high standard of social security and welfare systems’ set out in the 1957 Rome Treaties appears increasingly threatened by competition within these very systems. The essential part of the idea of an internal market has been forgotten: the foundation of a social market economy that aims at full employment and social progress. Instead, the most important European priorities have been competitiveness and price stability to which all other objectives have been subordinated. For years the Union has neglected or rejected the need for social policies.

Instead of reflecting upon joint integration and correcting the design flaws in the currency union, the emphasis is on workers being forced into precarious working conditions in the name of competitiveness. The system of euro crisis management practised since 2008 has subjected member states in difficulty to a harsh course of austerity; it promotes the dismantling of the welfare state and workers’ rights and threatens the eurozone’s economic stability. Positive European achievements such as promoting protective employment laws, gender equality and co-determination inter alia pale into insignificance given the consequences of austerity politics.

The new form of EU economic governance is, what’s more, increasingly undemocratic as it is largely based upon intergovernmental cooperation to the exclusion of the European Parliament. The EU offers its citizens a democracy in line with market requirements instead of a market subject to democratic control. And the citizens can see this: election and referendum results appear to be more and more giving legitimacy to leaving the Union or renationalization as viable alternative options.

Divergence, not convergence

Until the start of the euro crisis EU member states had been converging economically, supported by European structural and investment funds as well as by cohesion funds. This process was abruptly curtailed by the financial and economic crisis of 2008.

For Europe’s employed persons this had grave effects. Until 2009 real wages continued to rise, most of all in accession countries with Romania at the head (105.7%), followed by the Baltic states, the Czech Republic, Bulgaria, Slovakia, Slovenia and Hungary. Only Germany displayed a minus (of 5.6%).

This development, ended by the financial and economic crisis – a condition which continues today. Between 2010 and 2015 Greece, Cyprus, Portugal, Romania, Spain, Ireland, Great Britain, Slovenia, Hungary and Austria saw declines of between 19% (Greece) and 0.8% (Austria).

The drifting apart of member states is exemplified by ever-greater wages discrepancy: in 2018 the minimum wage at purchasing power parities reached €3.28 an hour in Bulgaria at the lower end of the scale and €9.37 in Luxembourg at the upper end.

This negative development in wages and divergence in incomes can also be ascribed to the increasing loss of government powers of intervention. Bank rescues cost the member states dear. In Germany the costs amounted to €68 billion, in Great Britain £76bn. Deutsche Bank Research calculated the reduction in global GDP caused by the crisis as 4 trillion US dollars.

As a result, government debt in the EU rose markedly. After declining in the period 1996-2007, the level of government debt rose between 2010 and 2014 from 78.9 to 86.5% of GDP. In 2018 it remains at 84% on average in the eurozone. Bigger economies such as Italy, France and Spain show levels of debt between 98% and 133%, well over the objective of at most 60% set by the Stability & Growth Pact.

EU labor markets were also dragged down by the global financial and economic crisis. Between 2004 and 2008 the unemployment rate of the EU-28 dropped four times in a row from 9.3% to 7.0%. The crisis brought this shuddering to a halt. The countries being bailed out above all and thereby subjected to the Troika’s measures showed a drastic rise from below 10% pre-crisis to over 20% in Greece and Spain. Even big member states like France and Italy experienced a jump to over 10%. The picture is even more dramatic when it comes to youth unemployment: Greece, Spain and Italy showed values of over 30% – indeed in Greece it is stuck at just under 40% and that’s nine years after the financial crisis and with the economic crisis supposedly overcome.

Rising unemployment and divergence in wages development have brought about deepening divides in member state societies. A small percentage of billionaires face an army of precarious workers; in Europe 40% of working relations can be so described.

But, instead of rebooting the concepts of joint progress and convergence, the member states seem trapped still in the dilemma dictated by the EU Stability & Growth Pact: more of the same fake medicine or the retreat from investment and public spending, removal of social security and raising ‘state competitiveness’ through tax competition along with social and wages dumping. Even the International Monetary Fund (IMF) has declared that growing inequality in incomes and wealth is not only a social problem but a genuine obstacle to Europe’s economic progress.

Monetary policy unites no continent

The euro was created without being put under the oversight of European law-makers. Monetary and fiscal policy is managed as it were anonymously in the interplay between European Central Bank (ECB), European Commission and European Council. The state as a risk factor – that was the basis for this construct. Anxiety about excessive inflation rates and interventionist economic policy led to the establishment of an independent ECB whose mission is price stability and only secondarily support for growth and employment.

Consequently, the European Economic and Monetary Union (EMU) is under the thumb of the ECB’s monetary policy which acts as one size fits all while economic conditions within the member states develop unevenly and are unequally secured against asymmetric shocks. The financial crisis of 2008 fully exposed the euro's flawed construction. The lack of any safety net at European level for mitigating an unexpected economic crisis was provisionally compensated for by the ad hoc construction of the ‘rescue parachute’. The Troika, a body of experts from the European Commission, IMF and ECB, became the symbol of undemocratic European economic governance: it imposed cuts in negotiated and minimum wages, the dismantling of collective bargaining, the flexibilization of protection against redundancy and much more in return for financial support for member states in severe difficulties. Designated as ‘structural reforms’, this one-sided focus on withering away the state in favor of the invisible hand of the market thereby took on a new dimension: a policy of welfare cutbacks.

The mantra of austerity policy and the focus on government debts as set out in the Maastricht Treaty and EU fiscal pact have turned out to be catalysts for centrifugal forces in Europe. Each member state that does not adhere to the convergence criteria of maximum government debt at 60% or budget deficit at 3% of GDP is threatened with an excessive deficit procedure, in the worst case with a fine up to a maximum 0.1% of GDP.

Treating government debt as a useful indicator for the economic power and prosperity of a country is a fallacy. Much more important is, rather, the question of debt sustainability and the nature of the country’s creditors. The more foreign currency and external debts a country has the more it has to depend upon the confidence of international investors. Debts are therefore not all the same.

The second fallacy is that it is only a monetary policy with the objective of price stability that can set financial markets on the right course and enable the necessary investments for the economy. For around four years the ECB has been pursuing a zero-interest rate policy. Even so, the expected boost to the economy has been inadequate. Banks would rather place their money at negative returns at the ECB. On the other hand, the eurozone has no available budget to spur investment and strengthen domestic demand. It therefore lacks an investment tool to promote economic stability. At the same time, an EU unemployment (re)insurance scheme would be another necessary automatic stabiliser that, in the event of an unexpected economic shock, would enable mitigation of the impacts of the crisis upon EU citizens when they lose their jobs.

So long as the common currency is defined as the recipe for boosting export opportunities the euro will cause division. By turning it into no more than a purely competitive instrument, linked to the hope that financial markets may make the right decisions, it serves to boost capital accumulation rather than redistribution.

The Internal market and the patchwork 'social dimension'

The increasing inequality in incomes and assets has two sides to it. On the one hand, employees are more and more being played off against each other. On the other hand, the longing for a safe space in which private sector, commercial and market interests do not dominate but there is a balance between market and state gets stronger (see Björn Hacker’s Less Market, More Politics, Rehabilitate Europe). Art 3 Para 3 of the EU Treaty (TEU) holds out that promise: an internal market for the sustainable development of Europe, an extremely competitive social market economy that aims at full employment and social progress.

But there’s no sign of this promise being met.

That’s because the European Court of Justice (CJEU) raised the economic freedoms, i.e. of goods, services and capital, to constitutional status. They are endowed with the effective sword of competition law. It intervenes swiftly and efficiently wherever cross-border abuse of a market-dominant position, anti-competitive cartels or state aids as limitations upon trade between countries can be determined. European commercial law is thereby a cohesive set of rules linked to harsh sanctions against any breaches. The penalties can run to up to 1% of annual turnover.

It looks very different when it comes to EU legislation on minimum social standards: this has remained unsystematic and fragmentary. Attempts to ease the tense relationship between freedom of services and/or establishment and social aspects have proven thin on the ground. One of the most important principles for cross-border working, i.e. ‘equal pay for equal work at the same place’, was set down by EU legislators in the posted workers’ directive but subsequently via CJEU rulings so watered down that de facto it has been reduced to the same legal minimum wage in all countries in which there are no comprehensive collective agreements. The reform of the posted workers’ directive has been undertaken through the efforts of the legislative arm to get rid of this deplorable state of affairs so now remuneration of posted workers has to conform to all remunerative elements under national law AND collective bargains of the recipient country. Yet the CJEU has already opened a new front: in the Čepelnik case it concluded that the Austrian law on combating black market working restricts freedom of services – it viewed the obligation to deposit €5000 in advance of any sentence as excessive punishment.

The European Commission signalled in the immediate wake of this judgment that it would examine member states’ national regulations on putting the principle of ‘equal pay for equal work at the same place’ into effect as to their proportionality and, in the case of ‘excessive penalties’, commence treaty violation proceedings against the member states concerned.

The guiding principle as before is that protective measures for workers restrict freedom of establishment and/or services and therefore must be reduced to their very minimum. That spurs new business models such as letterbox firms, bogus self-employment and bogus posting of workers to fob off employees with the lowest possible wages. Despite all the fine treaty talk about various EU measures taking into account social aspects, EU internal market policy is as focussed as ever on deregulation, flexibilization, removal of effective controls and dismantling of preventive measures. In this entire complex trade union and collective agreements are still viewed as ‘administrative barriers’ and ‘protectionist instruments’.

European Pillar of Social Rights

EU policy was carried out from the start of the new millennium on the ‘TINA’ principle – ‘There Is No Alternative’ –, marked by inadequate acknowledgment of central socio-economic problem positions and human insecurities. Wages and social dumping in this narrative are defined as sensible allocation of work factors. ‘What’s social is what creates jobs’.

The weakness of positive integration, i.e. deficient European employment- and social policy legislation, is one reason why neither fiscal competition nor social and wages dumping can be regulated effectively. The power of negative integration caused by CJEU rulings, Troika measures and the EU fiscal pact produces, on the contrary, a strong push for liberalization and inter-state competition. At the same time, it limits member state room for maneuver in enacting social and economic policy. Nation states may have lost their ability to shape policy domestically but this has not been compensated for at European level.

The Commission President, Jean-Claude Juncker, took office in 2014 with the promise of implementing social rights in Europe. The EU member states should now strive for a ‘Social Triple A’. The Commission has set in train its model of a social pact in the form of the European Pillar of Social Rights (EPSR). By explicitly embedding social objectives it should ensure that national welfare state achievements are not completely written off in favor of market-based competition requirements.

The proclamation of this Social Pillar in 2017 can be interpreted as an urgently necessary U-turn. It may, with member states’ political will, become the basis for binding rights at EU level. It is a binding declaration in international law on the part of the European Commission, European Parliament and European Council (along with member state governments) that the 20 basic principles set out in the Pillar will be enacted, embraced within three chapters, namely equality of opportunity and labour market access, fair working conditions and social protection and inclusion.

These basic principles embrace important elements for creating harmonized European labor and social law. The Pillar’s second important function is its potential protective role: in future member states may, vis-à-vis the CJEU, call upon the protective rights embedded therein whenever national labor and social law is being balanced against freedom of services and establishment. As an accompaniment, the Commission has set up a Social Scoreboard to operate in the European Semester with a set of 14 indicators regularly updating the state of play as regards labor market access, poverty risks and income inequalities. And target values rather than, as now, average values shall be enshrined.

Finally, the third impact is the political signal that the EU's social dimension should not just remain a patchwork of secondary law. The EPSR can be interpreted as the first step away from a purely competition-based union to one based on solidarity. Its success thereby depends upon how far the Commission itself acts bindingly according to the Pillar’s principles.

This is all the more urgent because the Commission alone has the right to initiate EU legislation and is the core player within the new EU economic governance (fiscal pact, Two- and Six Pack). It thereby bears a great part of the responsibility for the success or failure of the EPSR and must be held to account for that. Right now, the problem is the breach of social rights through EU policy itself.

Therefore, the European Pillar of Social Rights may serve as the basis for a more social approach but is not enough in itself to constitute a remedy for the threats to the foundations of the social model posed by internal market freedoms, competition law, EU debt brake, Troika and deficit procedures. The latter rest, unlike the EPSR, on statutory requirements that can be implemented by law or via sanctions.

Social progress protocol

The European Pillar of Social Rights must therefore be strengthened by an EU social progress protocol. The objectives of social progress and of equally balanced upwards convergence in economic and social outcomes must be set down within the framework of the EU Treaty. The ETUC and DGB in 2008 proposed a social progress protocol that would ban any deregulation of social and labor law via internal market freedoms. It came in the wake of several CJEU decisions on the relationship between the economic regulations in EU primary and secondary legislation on the one hand and basic social rights (especially the right to strike as protected by freedom of assembly and free collective bargaining) on the other.

This was prompted by 2007 CJEU judgments (Viking/Laval) that ruled that entrepreneurial freedom in the internal market, in case of doubt, is ranked higher than trade union rights.

In trade union eyes these and subsequent rulings award an unjustifiable priority to commercial internal market freedoms against the social rights of workers. The DGB and ETUC subsequently proposed the protocol. An appendix to the Lisbon Treaty should ensure that protective and worker rights should enjoy in EU law at least the same weight as internal market freedoms. In case of doubt, basic social rights take priority. The form of a protocol was deliberately chosen because it can be appended to the EU Treaty more easily. All it needs is the ‘yes’ of EU heads of state and government. On the other hand, a treaty change would have to be approved in some EU countries by a referendum.

The DGB and ETUC proposal sets out in concrete terms what is understood by ‘social progress’ and formulates very tough, enforceable rights that may be introduced and at any time extended. That means inter alia the guarantee of the right to negotiate, agree and implement collective agreements and to take collective action. The protocol contains a non-regression clause in current EU secondary law and confirms the principle that problem positions and human insecurities ‘gold-plating’ is permissible.

It suggests that no treaty definition, especially economic freedoms and competition rules, should have priority over fundamental social rights and erodes the ‘three step test’ developed by the CJEU. This subjects every national measure to examination to see whether it is appropriate, proportionate and expedient in a way that justifies interference with one of the basic economic freedoms. Here the CJEU enjoys unlimited discretionary power which it exploits to the full. Practically, it is setting judges’ law in this area for as long as the EU lawmaker does not make good with offsetting protective rights.

Some legal experts reject such priority for employee rights by appealing to the law of considering co-equal, abstract constitutional rights according to the principle of proportionality. A counter-proposal brings into play a ‘de-constitutionalization’ or a downgrading of internal market freedoms in secondary law and/or the exemption of workers' rights.

In trade union eyes an exemption is too meagre. CJEU legal rulings always engender a huge imbalance whenever they are about basic economic freedoms. In truth, the court’s examination is bogus as even the constitutional rights within the European Charter of Fundamental Rights rarely figure. Workers’ rights – like the right to information and consultation within a firm, to collective bargaining and collective action, to protection from unfair dismissal, to fair and decent working conditions – are in the DGB’s view rights that derive from the European Charter of Fundamental Rights. With this human right an unconditional priority is constitutionally de rigueur without any consideration of other basic rights.

Prospects

The painful Brexit process of the UK has brought the EU-27 closer together. The negotiations on it have exposed the seriously damaging effects going it alone can have on the economy and society of a member state. The low-point of the European Union – the exit of a member state – can yet become a positive impulse for agreement on a social progress protocol.