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Identifying some myths: the misleadingly named European Social Model

February 20, 2017

 

Left ‘remain’ supporters are fond of citing the EU’s so-called ‘social democratic’ approach to economic policy, sometimes referred to as the European Social Model (ESM), as a key reason why the UK should vote to stay in the EU on the 23rd of June. Unfortunately, the reality of the EU does not support this perception. If the ESM was ever true, it now seems an out of date perception. The truth is, in the EU neo-liberalism is the dominant policy paradigm. The EU has developed what Fritz Scharpf has called the 'European Market Economy' - EME (Scharpf, 2010, pg 235).

 

The EU has always had a strong market focus. A key reason behind the centrality of the market to the EU is the role the market plays in helping the EU achieve its ultimate political goal. Political union was and is intended to be achieved on the back of ‘economic integration’. The theory went something along the following lines: each instance of economic integration (i.e. round of market liberalisation) instigated by the EU Treaties and policies created the ‘compelling logic’ for the next stage of political integration because t was the 'only' way to govern the ever-liberalising market. This created a self-reinforcing justification for more liberalisation followed by more supra-national regulation. What was initially economic regulation was then expanded to include other policy areas such as the environment, social and employment policy, criminal justice, defence and foreign affairs.

 

Economists Philip Whyman and Mark Bainbridge and political scientist Andrew Mullen have suggested that the so-called ESM was seen by some as a pan-continental version of the German Social Market Economy (Whyman, et al, 2014). However, as Whyman et al point out, there isn't a single model of capitalism in the EU. There are, in fact, a wide range of models of national political economy among the Member States of the EU. These numerous models are finding themselves 'squeezed', indeed taken over, by what is in fact an EME not an ESM. The EME is a political economy considerably more market orientated than many of the welfare-capitalist models in Member States. Further, the rationale for the growth of the EME and away from the diversity of models of national political economy is not a strong one. So far, one has failed to be identified. For example:

  • No one has robustly identified any fundamental failings in the many other variants of organising capitalism, such as the Scandinavian models.

  • Where are the significant benefits that have accrued as a result of the development of the EME compared to what the national models were already delivering? Few can point to any in the historical record.

Given the general success over the post-war period of a number of the national welfare capitalist models, the evidence of the need for convergence on a more pan-EU model to improve economic performance or redistributive outcomes is scant.

 

The EU's EME is failing on its own terms i.e. it is not achieving what any model of political economy that is supposed to be socially just should be aiming to achieve. The EME is worse than just the 'straight jacketing' of EU Member States within a political economic system failing on its own terms, the EME actively constrains democratic socialist economic policy options available to Member State governments and preventing measures which would enhance capital accumulation in Member States. 

 

Now, of course, several PhDs could be written about the failures of the EU’s economy, and hundreds of books and articles no doubt already have been. Yet, the myth seems to persist that the EU is some social democratic political economy paradise. This post, in the remaining hours before the referendum vote, is one last attempt to help debunk this ESM myth. Given the constraints it is necessarily brief. Unfortunately there is not enough time to explore all the myths. Nor can it look into each myth in as much depth as it would like. 

 

Growth and unemployment

 

A genuine ESM would aim for full employment. In order to achieve this high and sustained levels of growth are needed. Yet, as a whole, the economies of the EU in general and those in the Eurozone in particular, have performed rather poorly on both these grounds. 

 

Annual GDP growth across the EU, since shortly after the creation of the Single Market i.e. between 1996 and 2015 inclusive, has averaged around 1.68% (Tradingeconomic.com, http://www.tradingeconomics.com/european-union/gdp-annual-growth-rate ). In stark contrast, in the post-war period the average real GDP growth rate of OECD economies was around 4% in the 1950s and nearly 5% in the 1960s.

 

For the countries in the Eurozone, economic performance has been even worse. Between 1996, when Member States were in the early stages of preparation for the launch of the Euro three years later, and 2016 the average annual growth rate has been 0.36% (Tradingeconomics.com, http://www.tradingeconomics.com/euro-area/gdp-growth ).  

 

This economic under-performance has resulted in persistently high levels of unemployment across the EU as a whole and in the Eurozone in particular:

  • Unemployment in the EU has averaged around 21.5 million between the year 2000 and 2016.

  • As a percentage of those in the labour force looking for work, this equates to around 9.11% on average across the period 2000 to 2016 (Tradingeconomics.com, http://www.tradingeconomics.com/european-union/unemployment-rate );

  • As of April 2016 the unemployment rate in the Eurozone countries stood at 10.2%. This equates to over 16 million people (Tradingeconomics.com, http://www.tradingeconomics.com/euro-area/youth-unemployment-rate );

  • Between 1995 and 2016 it averaged 9.78%. The two worst effected countries are Greece, where unemployment was nearly a quarter of the workforce in February 2016 and just over a fifth in Spain (Tradingeconomics.com, http://www.tradingeconomics.com/european-union/unemployment-rate );

Average youth unemployment is even worse, across both the EU and Eurozone:

 

  • Within the EU, youth unemployment averaged 19.53%, between the year 2000 and 2016.

  • Youth unemployment in the Eurozone countries hovered just above the EU-wide figure at 19.55% between the years 1993 (six years before the Euro began) and 2016.  (Tradingeconomics.com, http://www.tradingeconomics.com/euro-area/youth-unemployment-rate ).

Finally, it is worth noting that in 2013, the International Labour Organisation highlighted that a staggering quarter (24%) of the population of the then European Union Members (pre-Croatia’s accession) were at risk of poverty and social exclusion. (ILO, pg 37)

 

It is fair to say that the so-called ESM is not delivering on the basic metrics of any half decent economic policy, never mind one which explicitly aims to deliver socially just  outcomes. The policies of the European Union are helping confine millions to poverty and low-wage precarious work.

 

It must be clear to anyone who has taken even half an interest in policy issues that the direction of the EU and the measures supposedly boosting the EU economy e.g. the ongoing implementation of more and more Single Market policies, are not working. At some point someone must look at the data and see that it’s not doing what was claimed for it. Rather than fixating on the 'mythical ESM' (as Whyman et al term it) it would be much more use to the unemployed of the EU for left-wingers to think more radically about the ongoing and significant economic failures. Instead of prescribing more of the same policies that have created the current unemployment catastrophe i.e. more 'Single Market', some different thinking might be in order. A good start would be to acknowledge that economic policy is best run by national governments accountable to electorates unconstrained by supra-national laws.

 

However, there is a significant barrier to this sort of change in policy direction. That barrier is the neo-liberalism and the orthodox economic philosophy that is built into the DNA of the EU. Market liberalisation is embedded in the constitution of the EU i.e. the Treaties.

 

The constitutional reality is that EU law is the supreme law of the UK, as pointed out by Lord Justice Hoffman’s in his judgment in Stoke-on-Trent City Council v B&Q PLC [1990]:

 

The EC Treaty is the supreme law of the UK taking precedence over Acts of Parliament. Entry into the EC meant Parliament surrendered its...right to legislate contrary to the provisions of the Treaty on matters...which the Treaty regulated’.

 

Consequently, neo-liberal economic policy is unchangeable by the British Parliament and electroate. The position is the same in the other Member states too. Therefore the only way to, in the words of academic Peter Mullen, reclaim economic sovereignty (Mullen, 2010, pg 173-182) and all the tools of economic policy that come with such a reclamation and which are required by any Government that wanted to create a social market Britain, is to leave the EU.

 

As the next section shows, the kinds of policy tools that would be reclaimed, include:

  • Macro-economic policy;

  • Regulation;

  • Trade Union rights;

  • Public Ownership;

  • Industrial policy.

Constitutional neo-liberalism

 

Academic Fritz Scharpf has highlighted how the power of the Court of Justice combined with the underlying ideology of neo-liberalism embedded within the Treaties and institutions of the EU have driven an economic liberalising agenda across the EU. In his paper 'The asymmetry of European integration' he illustrates how this ‘ideology’ is undermining the different welfare capitalism models of many of the Member States (Scharpf, 2010, pg 211).  

 

The Court of Justice’s has constitutionalised the Treaties over the six decades of its existence (Stone Sweet, 2004, pg 66). This enables the Court, when interpreting the already market-biased EU Treaty provisions, often pushes the 'liberalistion' further, increasing the strength and the extent of the policy constraints on Member States. To understand how the Court of Justice can do this it is crucial to know that Court of Justice decisions interpreting Treaty provision have constitutional status, and:

 

‘…political attempts to use legislation…to limit the reach of liberalisation are easily blocked…[legislation cannot]…bind the Court…’ (Scharpf, 2010, pg 227).

 

Legal scholar Danny Nicol has written extensively about the detail of the constraints which the EU places on many of the policies that would be considered standard for a social market or welfare capitalism model of political economy. By doing this it illustrates clearly how the ESM or rather EME actively works against the existing welfare capitalism models of EU Member States.

 

Neo-liberal Treaties

 

The EU Treaties require Member States to adopt:

 

‘…an economic policy…conducted in accordance with an open market economy with free competition’ (Article 119 TFEU, cited by Nicol, 2010, pg 105).

 

The Treaties do not stop there. Member States treaty bound to:

 

‘…prioritise as ‘…guiding principles for this economic policy ‘stable prices, sound public finances and monetary condition…’’ (Article 119 TFEU, cited in Nicol, 2010, pg 105).

 

And Article 120 of the TFEU requires Member States to:

 

‘…act in accordance with the principle of an open market economy with free competition, favouring a free allocation of resources and in compliance with the principles set out in Article 119’ (Nicol, 2010, pg 105).

 

Article 121 TFEU ‘…mandates Member States to regard their economic policies as matters if common concern and co-ordinate them in the Council’ (Nicol, 2010, pg 105).

 

Further, Article 121 has established a multinational surveillance procedure giving the:

 

‘…Council…[powers]…to issue broad guidelines for the economic policies of each of the Member States…if a Member State deviates from these guidelines, the Council may, on a qualified majority following a recommendation from the Commission, make the necessary recommendation to the Member State’ (Nicol, 2010, pg 105).

 

Given the status of EU law as supreme in the UK and its constitutionalised position across the EU, these are potentially significant legal obligations on any Member State to follow orthodox neo-liberal macro-policies. While macro-economic policy is broadly orthodox in the UK currently, in a different context, with a Government wanting to pursue a more Keynesian macro-economic policy, potential difficulties are not hard to identify.     

 

Lawyer-led de-regulation

 

With the essential components of direct effect and primacy of EU (then EEC) law over that of Member States put in place by the mid-1960s by the Court of Justice (without authorisation in the Treaty of Rome) a constant stream of lawyers and litigants have been bringing cases, which have spread markets and undermined national ‘firewalls’ against the ever more rapid circulation of capital, goods and labour. All to the benefit of ‘big capital’ but as we saw in the growth and unemployment figures above, not for the ordinary working people of the EU Member States.

 

Seminal Court of Justice rulings like Casis de Dijon established a rule of ‘mutual recognition’ for goods, which effectively constitutionalised the ability of businesses in one country to ‘bulldoze’ any product passed Member State regulations which might hinder its ability to be sold in that Member State. The result was an undermining of ‘…the bargaining power [in other Member States]…of opponents to liberalisation’ (Scharpf, 2010, pg 226).

 

Rulings such as Casis create a dynamic in the EU’s institutions whereby under the auspices of merely codifying the case law the Commission, Council of Ministers and Parliament pass new Regulations and Directives confirming and consolidating the liberalisation originally instigated by the Court of Justice. Further, some of the legislative activity gets overtaken by additional jurisprudence by the Court. Two examples are the Takeover Directive where a limited instrument based on earlier Court of Justice case law on ‘golden shares’ was overtaken by judicial liberalisation (Scharpf, 2010, pg 226). Similar dynamics have taken place in relation to the liberalisation of services within the EU (Sharpf, 2010, g 226-7).

 

The upshot of such rulings by the Court and the use of EU legislation is to liberalise sectors and ensure that:

 

Corporate rights...[are]…essentially…enshrined in constitutional law’ (Nicol, 2010, pg 98).

 

This lawyer-led liberalisation has been accompanied by what Danny Nicol has called the ‘privatisation of governance’ by, for example, the delegation of product standards to private bodies such as the European Committee for Standardisation (Nicol, 2010, pgs 99-100).

 

Attacks on Trades Union

 

Perhaps the most obvious example of why the EU is not, nor ever will develop, any credible ESM is the attack on Trades Union rights in a series of Court of Justice cases in the mid and late 2000s. A social market model should not value labour less than capital. An ESM, if it is anything, is surely about negotiating through the inherent tensions between capital and labour and finding balanced solutions when those strains manifest themselves. Yet the EU has decided which side of the fence it stands on, that of ‘big capital’.

 

In the Viking, Laval, Ruffert and Commission v Luxembourg cases before the Court of Justice the latter placed the freedom of business to establish in another Member Sate (Article 49 Treaty on the Functioning of the European Union - TFEU) and the freedom to provide services (Article 56 TFEU) above the right to take industrial action and of collectively agreed standards and conditions.

 

As a result of the Viking case, Trades Union action can now, in effect, be dictated by the courts, who can test the proportionality of the relevant planned industrial action.

 

In Ruffert, public works contractors were not required to comply with collective agreements that were not universally applicable. While in Commission v Luxembourg, Member States were prohibited from requiring posted workers to comply with relevant collective agreements.

 

In countries like Denmark, Sweden and Finland, where minimum standards are often set by collective agreemen, rather than in legislation, the Court of Justice has driven something of a coach and horses through their models of welfare capitalism. Further, for everyone else, where collective agreements exist the basis for their undermining has been established. And further, through Viking and Laval in particular, the Court of Justice, has:

 

‘…emphatically subordinate[d]…this right [to strike] to its ‘right of rights’ – the free movement of economic actors’ (Nicol, 2010, pg 103).

 

Restrictions on public ownership

 

Danny Nicol has argued that:

 

The relationship between public undertakings and EU competition law goes to the heart of the constitutional power of the EU to control the economic, social and political choices of Member States’ (Edward and Hoskins, 1995 cited in Nicol, 2010, pg 107).

 

EU legislation has and continues to consolidate privatisation where it has already happened and marketise new areas.

 

Wholesale re-nationalising of energy, telecoms and postal service is no longer tenable under EU Directives. These sectors are being opened-up to competition in all Member States. In the UK, the disastrous privatisation of the railways was in-part driven by the requirements of EU law. The forthcoming Fourth Railway Package will enforce railway privatisation of passenger services across all the EU (RMT, 2016).

 

The Court of Justice (again) has been interpreting Article 106 TFEU in such a way as to  narrow the space for publicly owned monopolies to operate:

 

The case law shows that the interpretation of Article 106 has moved discernibly in the direction of a presumption of illegality of special or exclusive rights…In fact, it can be argued that over the last two decades the ECJ has…encouraged private companies to take advantage of the direct effect of Article 106 in order to undermine…state reservations of exclusivity’ (Nicol, 2010, pg 108).

 

Further:

 

As Craig and de Burca have put it, ‘agnosticism as to forms of economic organisation has been replaced by a…strident belief in the operation of free markets…’ (Craig and de Burce, 2008 cited in Nicol, 2010, pg 110).

 

Perhaps one of the most visible liberalisations has been in postal services, where a series of EU Directives have slowly reduced the value of post that the incumbent monopoly provider has sole responsibility for, enabling private providers to enter the market. Directive 2008/6/EC:

 

Article 7 provides that ‘Member States shall not grant or maintain in force exclusive or special rights for the establishment and provision of postal services’ (Nicol, 2010, pg 113).

 

Thereby abolishing the last vestiges of state run monopoly postal services.

 

Limitations on industrial policy

 

An ESM would generally be thought to have a central place for industrial policy to encourage industries falling behind get back on their feet or support nascent sectors to develop and get ahead. However, this kind of interventionist industrial policy is not possible while in the EU.

 

Why not, well the simple answer is ‘state aid’ rules (Article 107 TFEU). These place severe restrictions on what Member States can and cannot do to help their economy. Yet, the Treaties require the EU to approve all state aids and has strict rules to prevent activity that they see as ‘distorting’ their ‘unified market’ across all 28 Member States. The rules go further than just putting the decision in the hands of EU Commission officials, it enables corporations to challenge the state aid measures that a Member State may deem necessary (Nicol, 2010, pgs 117 - 124).

 

Strict rules also apply to the procurement of services by Government. No longer can this be a tool of industrial policy to encourage infant industries or to ensure regional economic development. EU law requires that tenders are awarded based upon principles of non-discrimination. In other words, they cannot be awarded to a company just because they are based in a Member State, where that domestic business obtaining the contract may (in-turn) help sustain a local economy. The rigidity of the non-discrimination rules were confirmed by the Court of Justice in a case called Telaustria [2000] (Nicol, 2010, pg 115). This decision gave courts the power to review the impartiality of procurement procedures in relation to non-discrimination, shifting a potentially key aspect of economic policy making from democratically elected decision makers to judges. Further, the fact that the Court of Justice made the decision in TelAustrai [2000] on the basis of:

 

‘...fundamental rules of the Treaty…constitutes a profound entrenchment of public procurement policy’ (Arrowsmith, 2004 cited in Nicol, 2010, pg 116).

 

Underlying these policy positions, enshrined in EU law, is the orthodox economic idea that minimising distortions in markets is both necessary and desirable. It comes straight from orthodox micro-economics 101. It relies on the fanciful idea that markets work efficiently and equilibriate. Yet, because of the constitutional position of EU law, outlined earlier, this policy position (contestable an idea as it might be) is supreme law in the UK. No individual UK Government can do anything about it.

 

References

 

Case 120/78 Rewe-Zentrale AG v Bundesmonopolverwaltung fur Branntwein [1979] ECR 649.

 

Case C-324/94 Telaustria Verlags GmbH and Telefondadress GmbH v Telekon Austria AD [1996] ECR I-10745.

 

Case C-438/05 International Transport Workers Federation v Viking Line ABP [2007] ECR I-10779.

 

C-341/05 Laval un Partneri Ltd v Svenska Byggnadsarbetareforbundet [2007] ECR I-11767.

 

Case C-324/ 98 Ruffert v Land Niedersachsen [2008] 2 CMLR 39.

 

Case C-319/ 06 Commission of the European Union v Grand Duchy of Luxembourg [2008] ECR I-6097.

 

International Labour Organisation (2015). ‘World Employment Social Outlook’.

 

Mullen, A (2010). ‘Reclaiming Sovereignty: the Progressive Case’ in ‘Britain in a Global World: Options for a New Beginning’ eds Baimbridge, M, Whyman, Philip B and Burkitt, B.

 

Nicol, D (2010). ‘The Constitutional Protection of Capitalism’.

 

RMT (2016). ‘As EU Imposes Rail Privatisation – RMT say Vote to Leave’.

 

Scharpf, F W (2010). ‘The asymmetry of European integration, or why the EU cannot be a ‘social market economy’, in Socio-Economic Review, Vol 8, pgs 211 – 250.

 

Stoke-on-Trent City Council v B&Q PLC [1990] 3 CMLR 897

 

Stone Sweet, A (2004). ‘The Judicial Construction of Europe’.

 

Trading Economics (No date given), can be accessed at: http://www.tradingeconomics.com/

 

Whyman, P B Baimbridge, M and Mullen, A (2014). ‘The Political Economy of the European Social Model’.

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