The General Framework or Primacy of the Social Dimension (Principles)
TOWARDS AN HUMAN-DEVELOPMENTAL INTERPRETATION OF THE EU’S ECONOMIC CONSTITUTION
The Economic Constitution under Pressure: The Impact of the Financial Crisis
The neoclassical turn taken by the EU in the 1990s and 2000s has had far-reaching consequences not just for labour law and social policy, but for the direction of economic policy more generally. The Court’s validation of the neoclassical constitution in Viking and Laval nevertheless came at a very late stage in the process of its diffusion, when its limits and contradictions were becoming clear. The judgments were handed down a few weeks after the beginning of the credit crunch of 2007 and within nine months of the onset of the global financial crisis in the autumn of 2008. Events, rather than theoretical refutations, shift paradigms and the idea of the self-equilibrating market has come under severe pressure following the near-collapse of the global financial system in September 2008. A major depression was averted only by the use of traditional Keynesian measures of fiscal expansion, and by the automatic stabilisers provided by welfare states and employment protection laws.31 Discredited ideas take a time to fade away, however, and as the immediate crisis passed, much of the impetus for policy reform was lost.
For the EU, the need to consider alternative approaches to the neoclassical orthodoxy is nevertheless an urgent one. The post-Maastricht economic constitution has begun to unravel as a consequence of the financial crisis.
The Member States have been locked into an economic model which stresses price stability and fiscal conservatism above all else, and which treats the welfare state as a fetter on the operation of the self-equilibrating market.32 Under these circumstances, there are very strong pressures for a race to the bottom in labour and social standards and macroeconomic policy. Notwithstanding the deepening of market integration, economic growth in the EU Member States has been at historically low levels since the 1980s, below the trend in the period of Keynesian policy dominance from the 1940s to the 1970s, and inequality has increased in more or less all countries along with the share of national product allocated to wages.33
In the circumstances of the current crisis, the operation of the currency union will most likely exacerbate these trends. The Member States most severely affected by the crisis cannot restore economic growth through exchange rate adjustments as they would previously have done. They have few options for reducing fiscal deficits. One route, to which they are guided by the terms of the Maastricht criteria, is through internally-generated deflation and a further downgrading of the protections provided by the welfare state. According to neoclassical theory, and to the current orthodoxy in EU economic and monetary policy, the removal of internal barriers to growth through ‘structural’ reforms should facilitate a private sector revival which will permit growth to resume. This is a highly optimistic scenario.
It is at least as likely that deficit-reduction policies will lower growth rates while exacerbating social inequalities. However, this is precisely the policy which the EU now seems set on enforcing through the agenda of financial stabilisation which emerged in the course of 2010-2011.
The reaction to the sovereign debt crises in Greece, Ireland and Portugal has taken the form of concerted efforts on the part of the EU institutions (including the Council, the Commission and the ECB) and the Euro-area Member States to put in place mechanisms for ensuring financial stability in the Eurozone which have potentially far-reaching implications for social policy.34 The Memorandum of Understanding agreed between the IMF, the European Commission, acting on behalf of the Eurozone states, and Greece in May 2010 included provisions under which the Greek Government agreed to introduce reforms designed to ‘render labour and product markets more efficient and flexible’.35 Changes subsequently introduced to labour legislation in Greece have, among other things, narrowed the scope of application of sector-level collective bargaining and weakened employment protection legislation. In Ireland, the National Recovery Plan agreed in December 2011 as a condition of financial aid from the IMF and EU Member States also incorporates a social policy dimension.36 In the course of 2010 and 2011, the Irish Government used emergency legislative powers to restrict the scope of collective bargaining and to make cuts to the minimum wage, social security benefits and the wages of public sector workers. In Portugal, financial aid provided by the Eurozone states was made conditional on an economic policy programme drawn up within the framework of the newly established European Financial Stabilisation Mechanism (EFSM).37 The March 2011 European Council meeting proposed a permanent European Stability Mechanism (ESM) which would in due course replace the EFSM.
The ESM is designed to provide a basis for financial support for Eurozone states on a basis of conditionality, that is to say, the imposition strict macroeconomic and fiscal policy disciplines on any Member States receiving aid.
The same Council meeting proposed an amendment to Article 136 TFEU to incorporate the future ESM into the framework of EU law.38
Further institutional changes along these lines occurred throughout 2011. The Euro Plus Pact, which was agreed in the course of the European Council meeting of March 2011, committed the Eurozone states to a regime of economic surveillance with direct implications for labour law.39 The Pact envisages regular monitoring of unit labour costs at national level, with the aim of ensuring that they evolve ‘in line with productivity’;40 the setting of targets for long-term and youth unemployment and labour market participation rates; and the taking of steps to ensure that state expenditures in the areas of pensions, health care and social security benefits do not threaten the ‘sustainability’ of public finances. Since the Pact primarily addresses ‘areas that fall under national competence’41 it implies a further extension of economic and monetary policy at EU level into the area of social policy which had previously been understood to be largely the domain of the Member States. The Pact is intended to operate through a version of the OMC, with each state free to adopt specific policy measures but with a view to achieving the common goals of wage competitiveness, employment growth and financial sustainability.42 Thus the Pact contemplates oversight of wage-setting arrangements and while stopping short of ruling out wage indexation, requires the degree of centralisation of wage bargaining to be kept under review. Its provisions on employment growth make reference to the desirability of labour market reforms aimed at promoting ‘flexicurity’ and to the need for reform of employment taxation systems. In the autumn of 2011 further institutional reforms were made, in the form of the ‘six pack’ of measures amending and extending the budgetary and macroeconomic surveillance mechanisms originally put in place under the Stability and Growth Pact in the late 1990s.43 These measures have few direct implications for labour law and social policy, but their indirect impact in embedding a regime of monetary and fiscal discipline at the level of the Member States is likely to prove considerably in coming years. The December 2011 European Council failed to reach agreement on additional changes that would have led to a further tightening of economic surveillance mechanisms, but the ‘EU-26’ (that is, the Member States aside from the United Kingdom) agreed a ‘fiscal compact’ embodying these rules and putting in place a commitment to balanced budgets.44
Thus the context of the financial crisis has given the debate about the role of social policy in the EU a new and very hard edge. Social policy can no longer be seen as a marginal issue for the EU. Defenders of the current orthodoxy will press for further and more rapid deregulation of labour law at Member State level, and for a deepening of the Viking/Laval approach at the transnational level, as means of allowing labour markets to adjust and re-equilibrate more quickly to the shock of the crisis. An emerging counter-critique, given some validation by the IMF and the ILO in their joint paper of August 2010,45 runs as follows. The financial crisis was not an exogenous shock or freak event but was brought about by the application of deregulatory policies to financial, product and labour markets, and triggered by the inequalities and imbalances which characterised the neoliberal growth regime of the 1990s and 2000s. Such is the severity of the crisis that, in the short run, national governments should continue to adopt policies of fiscal expansion; deficit reduction would lead only to a continuation and deepening of the recession. In the longer run, economies should be put on to a more stable growth path. In the labour market context, this implies a combination of measures aimed at restoring real wage growth, limiting income inequality and providing the basis for long-term productive investment in skills and resources. This option, while in principle capable of offering a coherent, socially progressive response to the crisis, is not currently on the policy agenda as far as the EU is concerned, because it is incompatible with the post-Maastricht economic settlement. Whether the EU’s position will change in the immediate future seems doubtful, but the tensions inherent in the current policy make it likely that there will be a reevaluation of the relationship between social and economic policy at some point. When that occurs, alternative approaches will be back on the policy agenda.
A Human-developmental View of Labour Law Reform
One such alternative is the ‘human-developmental’ view of labour law. This uses the notion of human development to inform policy goals and the means of their implementation. The use of human development goals to benchmark national social and economic performance is not just relevant in the context of so-called emerging or transition systems. It cannot be assumed that ‘development’ is a state of affairs which mature economic systems, such as those of the Member States of the EU, have safely achieved. So-called advanced or developed systems are increasingly unable to ensure that basic developmental outcomes are being met for all their citizens. Since the rise of neoliberal policies from the early 1980s, inequality has increased in the advanced industrial economies, along with unemployment and social exclusion. The recent recession has seen a rapid rise in the poverty rate in some of the countries most severely exposed to the financial shock, including the UK and the US, which were also the systems in which neoliberal policy prescriptions had previously had their greatest impact.46
In the human development perspective, the role of social and economic policy is to provide a framework within which individual ‘capabilities’, understood as substantive economic freedoms, are advanced within the constraints set by given resources. Institutions, such as markets and other mechanisms of economic coordination, on the one hand, are viewed as potential means to this end, and not as ends in themselves. The same principle applies to social rights and to the redistributive and protective mechanisms of the welfare state: they are means of enhancing the freedom of action of individuals.
This way of thinking about the goals and functions of labour law can help to clarify its relationship to issues of economic efficiency and growth. An economic efficiency-based case for labour law can be made. Certain labour law rules serve to constitute and underpin labour-market relations and to counteract externalities which would otherwise result in the misallocation of resources.47 At the same time, labour law systems also aim at outcomes which cannot be rationalised in purely economic terms. Economic growth can, under certain circumstances, is compatible with increased inequality of income. Such inequality is a principal cause of inferior developmental outcomes in terms of the health, wellbeing and autonomy of individuals.48 Protective labour law rules and solidaristic forms of collective bargaining are highly effective in maintaining conditions of equality of outcome, and their weakening invariably brings about greater inequality.49 Thus labour law rules and social policy mechanisms more generally, play a critical role in market economies of channelling economic policy in favour of a set of human developmental objectives which go beyond a narrow focus on growth. This tension between economic growth and human developmental goals should not be overstated. Over the long run, growth regimes which perpetuate inequality are not sustainable. Because the market is not a ‘natural’ order but is embedded in society and instituted by the legal system, a pattern of economic growth which erodes solidarity and social cohesion, and which places the impartiality of the legal system under strain, cannot be indefinitely maintained. How ‘long’ the long run is, however, is not certain, and the point at which a growth regime based on inequality begins to unravel cannot be precisely predicted. The experience of the economic crisis suggests that we are now living through just such a period. Had labour law systems been more effective in limiting the adverse consequences for social cohesion of the financially driven growth of the past three decades, it is unlikely that the recent shock to the system would have been so severe. This is already becoming clear from the greater capacity to absorb the social and economic effects of the crisis of those national systems which had stronger social safety nets in place.50
The case for labour law and social policy mechanisms more generally, then, is that they seek to reconcile economic growth and developmental goals, that is, to make them mutually complementary. If growth at the expense of human development is ultimately unsustainable, it is equally the case that the mere articulation of developmental goals, through formal social rights and labour codes, is insufficient for their achievement. Labour law involves a search for mechanisms which can render social rights compatible, as far as possible, with economic growth regimes which make the best use of society’s available resources, in such a way as to ensure their mutual, long-run sustainability.
31. See IMF/ILO (2010) The Challenges of Growth, Employment and Social Cohesion
Discussion Document, Joint ILO-IMF conference in cooperation with the office of the Prime Minister of Norway, Oslo, August 2010 (www.osloconference2010.org/discussionpaper.pdf).
32. Schettkat, ‘Will Only an Earthquake?’ (n 29).
33. S Deakin and F Wilkinson, ‘Marchés du travail, crise financière et nouvelle réglementation: les futures orientations du droit du travail’ in L’Homme et la société (forthcoming).
34. See Bruun, ‘Economic Governance’ (ch 8 in this volume).
35. Greece: Memorandum of Economic and Financial Policies, 3 May 2010, available at:
36. The government of Ireland, The National Recovery Plan 2011–14 (Dublin: Stationery Office,2010).
37. Council Regulation (EU) No 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism, OJ L/118, 12.05.2010, pp 1–4.
38. See Bruun, ‘Economic Governance’ (ch 8 in this volume).
39. European Council, 24/25 March 2011, Conclusions, EUCO 10/1/11 REV 1, Annex I.
40. EUCO 10/1/11 REV 1, at p 16.
41. EUCO 10/1/11 REV 1, at p 14.
42. ‘Progress towards the common objectives … will be monitored politically by the Heads of State or Government on the basis of a series of indicators covering competitiveness, employment, fiscal sustainability and financial stability. Countries facing major challenges in any of these areas will be identified and will have to commit to addressing these challenges in a given timeframe’: EUCO 10/1/11 REV 1, at p 15.
43. For an overview of these measures, see C Barnard, ‘The Financial Crisis and the Euro Plus Pact: A (Labour) Lawyer’s Perspective’ (2012) 41 Industrial Law Journal, March, forthcoming.
45. IMF/ILO, The Challenges of Growth (n 31).
46. Deakin and Wilkinson, ‘Marchés du travail’ (n 33).
47. S Deakin and F Wilkinson, ‘Labour Law and Economic Theory: A Reappraisal’ in G De Geest, J Siegers and R van den Bergh (eds), Law and Economics and the Labour Market (Cheltenham: Edward Elgar, 1999).
48. R Wilkinson and K Pickett, The Spirit Level: Why More Equal Societies Almost Always Do Better (London: Allen Lane, 2009
49. R Freeman, ‘Labour Market Institutions without Blinders: the Debate over Flexibility
and Labour Market Performance’ NBER Working Paper No 11286 (2005).
50. ILO, ‘Building an Employment-Oriented Framework for Strong, Sustainable and Balanced Growth’ in The Challenges of Growth, Employment and Social Cohesion, Discussion Document, Joint ILO-IMF conference in cooperation with the office of the Prime Minister of Norway, Oslo, August 2010 (www.osloconference2010.org/discussionpaper.pdf).