Tuesday, 2 September 2003

EU reforms to curb economic flexibility

The European Union’s draft constitution has profound implications for its economy and for the euro. On the one hand, it creates a much-needed political authority, capable of co-ordinating the budgetary policies of the countries of the eurozone. On the other, by elevating the EU’s social chapter – a list of good intentions – into a binding “bill of social rights”, it threatens to stall the liberalising forces that are making markets more competitive. The future of the euro hinges on how these tensions are resolved before the constitution is adopted.

The stability and growth pact is supposed to provide a mechanism for co-ordinating national budgetary policies within monetary union. But the process lacks a central figure with sufficient political authority to shape the necessary compromises that co-ordination requires. The commissioner for economic and monetary affairs is an unelected official. The European Council, comprising heads of state and government, is hamstrung by unanimous decision-making and the transience of its six-month rotating presidency.

Part one of the constitution ensures that the European Council will be able to act. A president, elected by majority vote for up to five years, will replace the rotating presidency. Binding decisions will be taken in the Council of Ministers, in all but a few areas, by a double majority requiring more than 50 per cent of the individual nations and 60 per cent of the EU population. Other provisions enhance the powers of the European parliament and make the Commission more like the government of a parliamentary state. The ability of these structures to support the sometimes painful co-ordination of national budgetary policies will enhance the long-term viability of the euro.

However, part two of the constitution presents a serious step backwards for competitiveness and flexibility. It creates a bill of social rights, enforceable by the European Court of Justice. The 12 rights burden businesses and the state. Article 34, for instance, recognises an entitlement to a cornucopia of social benefits, without regard to cost, in a long list of circumstances including old age and loss of employment.

The social right that is potentially the most damaging to economic competitiveness is the right to protection against “unjustified dismissal”. In the competitive environment of today’s global economy, companies must be able to close unprofitable plants and respond quickly to new markets. When courts or governments block that process, they condemn their economies to slow growth and low employment.

The flexibility that the bill of social rights will curtail is particularly important for the future of the euro. Its members have forgone the quick fix of devaluation and must therefore tackle the root causes of a lack of competitiveness at the microeconomic level. If these economies are also prevented from restructuring, the eurozone will become a patchwork of depressed regions living on assistance from Brussels.

The constitutions of France, Germany and Italy formally protect laws and rules strictly regulating everything from hiring and firing to working hours and shopping hours. These limit the creation of new companies and the capacity of old ones to adapt. The British have, for more than a decade, fought the harmonisation of EU social policies around these principles. Reform-minded governments in France, Germany and Italy are struggling to dismantle the most rigid of these protections, in order to promote growth and employment. The irony is that, in enshrining these rights, the constitution is imposing on the EU the very social market model that these governments are trying to reform.

The drafters of the constitution contend that enforcement of these social rights will be restricted to actions resulting from an EU law. But that is cold comfort. In time, the reach of those laws will inevitably expand and reforming the welfare state will become a much more arduous task.

When EU leaders at last decide on the text of a new constitutional treaty, they will have to make a critical choice. If they want a Union that encourages rather than inhibits growth, they should adopt the political and institutional provisions of part one largely in their present form. But they should remove the social rights from the body of the constitution and restore them to their status as aspirations. The future of the euro depends on it.

Georges de Menil

The writer is professor of economics at the Ecole des Hautes Etudes en Sciences Sociales, Paris

This article first appeared on www.ft.com