THE DIRECTIVE ON INTERNAL SERVICES AND SOCIAL DUMPING - 23-03-2004

The controversy over the Directive on internal services, also called « Directive Bolckenstein » after the name of the Commissioner who conceived it, has brought back on the front stage of European politics the concept of « social dumping » to qualify the competition  that the new member States of the European Union (EU) could bring to bear on the older ones through this Directive.  représenterait les nouveaux pays membres de l'Union européenne (UE). The controversy also calls for a revision of the economic governance of the EU.

The Directive proposes to facilitate free circulation of people and enterprises supplying services in the Single Market, through the same rule of free circulation that already applies to persons in general, goods and capital.  It would allow suppliers of services to apply salaries and social benefits of the home country to any operation undertaken in any other member country. The Directive is justified on the following grounds : (1) the underlying principle stems from the Rome Treaty adopted in 1958 and its application to the service industry seems long overdue ; (2) the service industry represents  70% of the European economy and is the main driving force in economic growth and employment (*) ; and (3), SME's suffer particularly from the administrative hurdles imposed by the national administrations and pressure groups, while multinationals overcome more easily these obstacles.  

In the light of these facts, one understands now why the creation of the Single Market and the launch of the euro had so little effect on the EU economic growth : 70% of the economy remains under control of national administrations that have been shown to be important obstacles to the free circulation of businesses in the EU. Note also that New Zealand, for instance, emerged from a prolonged economic slowdown by submitting its public services to greater competition.  

Those who oppose the Directive  raise the following argument : (1) massive competition from the new member States will raise unemployment in the older member States (**) ; (2) the Commission adopted too radical a proposal without properly consulting local stakeholders and generalising the Directive from the onset too all economic sectors ; (3) companies will chose to establish themselves in countries with low social charges and fiscality, resulting in "social dumping".

The two first objections are either exagerated or can be settled through negociation, and, hence are less relevant to a discussion of the opposition to the basic foundation of the Directive. The use of the terms of "dumping" are on the contrary particularly damaging, because genuine "dumping" is condemned by international rules of trade. The term is, however, here clearly misused.  « Dumping » implies selling a product or service at below production cost, usually measured by the price observed on the domestic market. This is not the case here. One could label competition to be "social dumping" if the incriminated country was not respecting working conditions specified in the universal declaration of human rights, or those required to ensure proper security, as is indeed the case today in the maritime sector, or the European environmental norms. Since the competition concerned here will originate from EU member countries, whose legislation must be compatible with that of the EU, this accusation is here not acceptable, at least in theory.

Admittedly, the competition will come from persons or corporates applying lower salaries and, possibly also, social advantages, because their country of origin is less wealthy than those of the older EU member States. That competition, however, is in the order of things and inherent in the process of European integration which has traditionally sought a "harmonious development" of its economy, implying a reduction of income disparities through the application of the principles of « social market economy where competition is free ». By adding « social » to the basic principle of « market economy », the new Constitutional Treaty cannot be invoked to limit competition from EU fellow-citizens.  

Furthermore, it should not be forgotten that the favourable social regimes of some "older" member States have not always been acquire without resorting to a true "social dumping". Before the creation of the euro, EU countries with a « weak currency », for instance, have acquired their favourable social conditions through regular devaluations that allowed them to maintain their market share despite uncompetitive domestic prices. Today, this practice can be considered to be continued through excessive public deficits and debt. These practices result in countries offering abroad products and services at prices that are not sustainable in terms of their production costs. They end up "sending abroad their unemployment : countries that import these products - mainly the underdeveloped countries - will suffer the high unemployment rates that should have been borne by the exporting country if it had not devalued its currency or had had to maintain sound public finances. Accusing of "social dumping" the central European countries which underwent particularly severe structural adjustments to become competitive on the European market is therefore misplaced, especially when this accusation comes from countries that refrain from adjusting to globalisation and maintain so-called "acquired rights" through disputable practices.  

If the accusation of « social  dumping» is indeed excessive, on the contrary, the opponents to the Directive are right to express fears that the absence of a regulatory authority at European level could lead to excesses in its application. The fact that economic and social affairs are kelp under national authority, has clearly become incompatible with further European integration.  An agreement on a common economic governance in the Constitutional Treaty would have lessened the fear of abuses implied in the liberalisation of the services market. Raising the European budget to finance a sort of Marshall Plan to rapidly reduce income disparities in the EU would also have helped reduce the dangers of desperate competition.  

This, however, does not justify opposing the Directive in its principles since it will help redress the pathetic economic performance of the EU : only countries having undergone structural adjustments show today decent growth rates and low unemployment. The EU was always built through opportunistic measures : the Single Market and the euro should not have been launched before member States had agreed on a common socio-economic culture. In this way, Bolkestein does nothing more than following the footsteps of Jacques Delors.

(*)Two independent studies estimate that applying the Directive would create  600 000 jobs and reduce significantly consumer prices, stimulating hereby internal demand and hence growth.

(**) Similar fears, however, raised at the time of the adhesion of these new countries, due to massive imports of cheap labour did not materialise so far.
            Jean-Jacques SCHUL