Putting The Social Dimension At The Heart Of European Economic Governance

JanssenThere is no social dimension if the regime of economic governance does not change. Nor will the idea of placing social benchmarking alongside the existing system of economic governance be sufficient to change things in a fundamental way (see here).

In order to really control economic governance and its instruments of economic torture, clear limits need to be set on the system of economic governance itself. The almost unlimited power the masters of finance (EU finance ministers council, DG ECFIN) and money (ECB and IMF) have managed to obtain over national economic and social policy making needs to be constrained from the very beginning and from inside the system itself.

Even if the roadmap for a ‘genuine’ Economic Union that is currently being constructed has the opposite intention of strengthening the powers of the economic pillar even more (for an analysis see here), this roadmap can be used as a way to set social limits to economic governance.

Coordinate reforms to ensure coherence with the single currency

Let’s start with the roadmap’s proposal to coordinate all major structural reforms before they have been decided at the national level. Instead of focussing on those reforms that build the conservative’s ideal of a totally flexible labour market in which business is in no way constrained by collective bargaining, minimum wages and workers’ rights, one should think of going for a different form of coordination: This coordination should instead ensure coherence between, on the one hand, the reform policies of 17 different member states and, on the other hand, the needs of the Euro Area as a whole. Indeed, if there’s anything the euro crisis is teaching us, it is that the single currency is not sustainable if member states continuously are moving in opposite directions.

In this respect, three reform domains are of particular importance: Irrespective of whether they concern labour market policy, tax policy or social policy, all reforms that have the potential of constituting a ‘beggar-thy-neighbour’ policy, aiming to poach jobs and activity from other member states, should be scrutinized. Such reforms carry the risk of triggering a race to the bottom across wide parts of the Euro area, thereby undermining total aggregate demand dynamics without improving relative competitiveness positions.

The second are for coordination at Euro Area level are all structural reforms that could threaten the single currency’s price stability target from below. The danger of deflation should be recognized as just as important a risk as somewhat higher inflation.

Finally, Euro Area policy makers should be watchful of all types of reforms that may drive member states into dangerous debt and asset price booms. In particular, this concerns reforms that create dysfunctional labour markets by driving out ‘good’ jobs with ‘bad’ contracts. Combined with a liberalization of financial markets (which then aims to sustain aggregate demand through credit booms in the face of a lack of decent wages and jobs), such reforms  are a recipe for another round of financial instability.

Contractual arrangements: Putting DG ECFIN on a social leash

Contractual arrangements, as proposed by the Economic Union roadmap, may very well provide DG ECFIN with even greater power to impose specific policy choices on member states, including policy that amounts to getting rid of long standing social rights and social protection.

This danger can be avoided or limited by explicitly stipulating that these contractual arrangements need to strictly and fully respect all of the social principles of the European Treaty as well as the provisions of the legally binding Charter of Fundamental Rights.

Indeed, the European Treaty contains quite a number of principles that allow and even force European policy makers to balance the economic dimension with the social dimension. There are the objectives to promote a high level of employment (TFEU article 151), to improve and harmonize living and working conditions (TFEU article 151), to have proper social protection (EU article 2). There’s the obligation of the Union to promote social justice and protection (EU article 3), and the obligation of the Union to facilitate dialogue between social partners, while respecting their autonomy as well as the diversity of industrial relations systems. There is all the fact that the Union has no competence on pay (Article 153 TFEU). Finally, there’s the horizontal social clause forcing the Union to take the promotion of employment, adequate social protection and the values of democracy and equality into account when defining and implementing its policies (article 9 TFEU).

If we judge by the contents of the bailout packages for the distressed countries or the Commission’s country specific recommendations, these key social principles seem to have been forgotten in the turmoil of the euro crisis. However, as stressed, they are part of the European Treaty and the Charter of Fundamental Rights and one way to make them operational is to include specific references to these social principles when writing the legal texts on contractual arrangements.

Contractual arrangements: A Social Europe that bites

Even if a systematical reference to the social dimension is important, this is only a first step. In order to ensure that the references to social objectives do not, in the end, remain mere lip service, it is also necessary to provide for effective processes and procedures forcing DG ECFIN and finance ministers to take social Europe seriously when constructing policy programs or contracts for member states.

One such policy proposal is the construction of an European observatory on the European Social Aquis with social partners. The idea of such an observatory is to ensure a structural follow up, per member state, of the letter and the spirit of the European social directives, the social agreements and the social principles in the European Treaty. An annual high level conference would discuss and negotiate with employers those cases that need urgent correction.

In a next step, the European Court of Justice is to be given the power to declare a contractual arrangement and the corresponding sanctions invalid if the contract is found to be in fundamental breach with the social objectives guaranteed by the Treaty.

If we do not fight, we have already lost”  

The proposals presented above may be seen as being quite ambitious in terms of political viability. Here however, there are two things to be taken into account. One is the rising resistance amongst broad parts of the European population against the policies of austerity and deregulation. This constitutes a significant political lever to press policy makers to take these proposals into serious consideration. The other one is that there already exists a precedent: The wage safeguard clause in the regulation on excessive macro economic imbalances stating that this regulation shall not infringe on the freedom to bargain and the right to take action and that national systems of wage formation are to be fully respected.