From Bretton-Woods to Maastricht: the creation of the Eurozone

This is an excerpt from the economic discussion document launched by MEP Matt Carthy on October 27, entitled The Future of the Eurozone. Download the full document for a referenced version of Chapter Two, below.

WHEN AN economic downturn affects a country, for whatever reason, a government usually has three key tools to stimulate the economy and restore full employment – lowering interest rates, devaluing the country’s currency (or allowing it to depreciate), or using macroeconomic policy (eg, lowering taxes and boosting public spending). In a currency union, the first two options are dependent on the policy choices imposed by the union’s supranational institutions instead of national bodies.

If all of the economies within the currency union are sufficiently similar in nature, this should theoretically not be a problem. But the economies of the 19 member states of the Eurozone vary widely in their characteristics. At any given moment, the value of the euro vis-à-vis other currencies may be beneficial for some states’ economies but damaging for others. Likewise, the Eurozone-wide interest rates set by the ECB may boost some economies but depress others.

An economic crisis that affects a monetary union comprised of diverse economies will affect different countries in different ways. The designers of the Eurozone were aware of this possibility of “asymmetric shocks” having a different impact on different member states, motivating their development of the so-called convergence criteria. However, for ideological reasons, they chose to focus only on the issue of budgetary divergence, controlling member states’ national debt and deficits. This singular focus on controlling fiscal policy – despite overwhelming evidence that public spending cuts have a contractionary impact during downturns, and with no corresponding focus on the external current account (trade) balance of member states – has caused an increase in inequality and contributed to divergence instead of convergence among the Eurozone’s economies since the introduction of the currency peg.

While left-wing political movements and parties in Europe have focused on campaigning against the policy choices enacted by the EU institutions since the crisis, particularly the imposition of fiscal austerity, there is an urgent need to also examine – and explain – how the very structure of the Eurozone has contributed to inequality and divergence, prolonged and deepened the financial crisis and sovereign debt crisis, and makes future sovereign debt crises inevitable.

The gold standard currency peg

The euro is a currency peg system, which lacks the institutions that have allowed a common currency to work in other parts of the world – ie, in federal states such as the United States, Canada and Australia. Under a peg system, a currency’s value is fixed relative to a commodity, or to another currency.

Before the 20th century the global monetary system was characterised by the gold standard, where the value of different countries’ currencies were pegged to the value of gold, and to each other. The reason there was widespread support for fixing a state’s currency relative to gold was so that governments would not be able to print more money in response to economic conditions to their short-term political benefit. It was intended to deliver price stability. If there was more money pumped into the economy, it would cause prices to rise – causing inflation, reducing the purchasing power of working people, and making it harder for businesses to export their goods. Governments fixed their currencies at a set exchange rate, fixed the rate for exchange of these currencies with gold, and fixed the amount of money they could print with the small and reliable amount of gold entering the economy each year due to new discoveries of the precious metal.

For many decades during the 18th and 19th centuries, the US used a fixed gold standard and at other times relied on fiat money (money backed by a government guarantee instead of being backed by gold) – at times floating, and at times fixed to gold. The scarcity of gold in the late 19th century led to falling prices, deflation and depression in the US; debt became more difficult to repay. During the First World War the Gold Exchange Standard was temporarily suspended. But in spite of these problems and temporary suspensions, the Gold Exchange Standard was still being used by the capitalist countries when the Wall Street stock market crashed in 1929.

This currency peg worsened the Great Depression for the countries that clung to it because it prevented their governments from printing more money to stop banks and businesses failing, and generally to stop a deflationary spiral developing; those who exited the currency peg earlier recovered quicker. The two central lessons of 1929 and governments’ response to it, almost universally accepted by economists today, are that both inflexible exchange rates and austerity measures in response to a sharp downturn will deepen and prolong the crisis.

When a state’s money is flexible it works as a form of shock absorber, but fixed exchange rates remove a key way that economies can adjust to shocks or trade imbalances. Instead of abandoning the gold standard in response to the Great Depression, US President Hoover raised trade tariffs, contributing to a rise in protectionism and a decline in global trade. Some countries who had walked away from the gold standard retaliated by engaging in competitive devaluations of their currencies, in an example of ‘beggar-thy-neighbour’ economic policies. These ‘currency wars’, as they were known, saw countries cause the exchange rate of their currency to fall in relation to other currencies in order to gain a trade advantage – i.e., in order to boost their exports at the expense of other economies. When Franklin Delano Roosevelt won the US presidential elections in 1932, he promptly took the US out of the gold standard, largely ending the common currency system of the era. But the damage had been done, and the slump in the global economy continued until the massive public investment into the “industrial scale carnage” brought about by the Second World War.

The golden era of Bretton-Woods, 1944-1967

The decision to create the euro in 1992 was based on different motivations among its proponents in different countries. But one of the key goals shared by all of the participants was to create a replacement for the Bretton-Woods system that had underpinned the global economy since the end of the Second World War. Bretton-Woods disintegrated in August 1971 with the ‘Nixon Shock’, the announcement by then-US President Richard Nixon that the US was abandoning its commitment to propping up the global economy with the dollar.

The post-war global financial and monetary system was devised and agreed at a three-week conference attended by representatives of 44 Allied countries in the town of Bretton-Woods, New Hampshire, in the US in July 1944 as the Second World War neared its end. It aimed to bring an end to the inter-war global financial volatility that had led to the Great Depression and the collapse of the gold standard, as well as the post-Depression rise of protectionism and competitive currency devaluations.

Bretton Woods

Delegates Mikhail Stepanovich Stepanov (USSR), John Maynard Keynes (Britain) and Vladimir Rybar (Yugoslavia) at the Bretton Woods conference in 1944

The leading figures formulating the agreement were John Maynard Keynes on behalf of the British Treasury, and his more powerful counterpart from the US, Harry Dexter White, representing President Roosevelt. In addition to creating the International Monetary Fund and the International Bank for Reconstruction and Development (which later became known as the World Bank), the agreement also included a commitment to a global fixed-exchange rate system, underpinned by the American dollar, in turn backed by gold. Restrictions were placed on international capital flows in order to prevent currency speculation. The IBRD was to act as an international investment bank with the goal of promoting economic recovery from the war.

As part of the agreement, the US committed to guaranteeing this fixed exchange rate and the convertibility between the dollar and the gold it held, at the price of $35 per ounce of gold. There was a limited option for a country’s exchange rate to be renegotiated if it was clearly impossible to maintain. Within the fixed exchange rate, governments would be required to keep fluctuations within a band of plus or minus one per cent, by buying or selling their own dollar reserves.

The main reason the pre-war gold standard had collapsed was that it was unsustainable for countries to continue to keep such a high value for their currencies when their current account, or trade account, was in a deep deficit. Then, as now, there are balance-of-payment creditor economies with a trade surplus, meaning they export more than they import, and debtor economies with a trade deficit, meaning they import more than they export. A surplus in one country must equal a deficit in another, and every deficit must be financed, usually by borrowing. Economies with a trade surplus find themselves holding large quantities of money in their banks, who lend it to the deficit countries which need to finance their imports. As money is scarce in deficit countries, the interest rate will be higher, meaning it is more profitable for banks to lend to borrowers in these debtor nations. This lending by banks recycles the surpluses – but during a downturn such lending dries up.

The role of the IMF, according to the Bretton-Woods agreement, was to (partially) address this problem for debtor countries by acting as a lender of last resort. White, representing the world’s largest creditor country, scuttled Keynes’s proposals for measures to be taken to adjust trade imbalances on the part of creditor nations, and for a new global currency, the bancor, to be created to underpin an international balance-of-payments clearing mechanism.

However, White and Roosevelt did understand that such a global fixed exchange rate would remove a shock absorber for the global economy and would have the potential to turn a future downturn in the value of the dollar into a global recession. They aimed to establish a mechanism to avoid this. They believed strong regional currencies, backed by heavy industry, needed to be developed in both Europe and Asia. Very quickly after the war was over the US turned to its former foes to act as these strong regional currencies to support the dollar. In March 1947 then-President Harry Truman made a speech calling on the US Congress to intervene in Greece’s civil war by plugging the gap left by the British in providing financial support to pro-monarchist forces fighting Greek communists. The speech marked the arrival of the Truman Doctrine, opening the Cold War era, and it also marked the beginning of a US-backed industrial revival in its former enemies-turned-protégés, West Germany and Japan.

The Marshall Plan, officially known as the European Recovery Program, was launched shortly after the Truman Doctrine was announced and saw the US pump in more than 2 per cent of its national income in aid to western European economies to assist in recovering from the war, but also to ensure their dollarisation. The final factor that ensured Germany’s revival was the role of the US at the London Debt conference of 1953, in which it pressured other European countries to write down, or even write off, Germany’s pre-war debts.

In his book on the changing role of the US in the global economy throughout the 20th century, former Greek finance minister Yanis Varoufakis writes that Keynes’s proposal for an International Currency Union was overruled by Roosevelt’s New Dealers because they had an alternative plan: “The dollar would effectively become the world currency and the US would export goods and capital to Europe and Japan in return for direct investment and political patronage”. The US would run a massive trade surplus with the rest of the world, but it would also use this surplus to directly finance its protégés through aid and investment – meaning that demand for US products would be sustained in these countries. It would also support its key regional currency partners, West Germany and Japan, in their development of trade surpluses with their neighbours at a regional level.

In other words, the US was committed to ensuring it benefited from its position of a strong trade surplus, but made a simultaneous commitment to recycle a large part of its own surplus – in order to bolster other capitalist countries during the Cold War, and to ensure the stability of the new monetary system. The Bretton Woods structure “plainly recognized the asymmetry of the world as it was”, according to US economist and former Federal Reserve chair Paul Volcker, speaking in 1978. “The US, in effect, held an umbrella over the system.”

Nixon Shock: ‘It’s our currency but it’s your problem’

The Bretton Woods era saw two decades of post-war growth and relative stability. But the US had designed this global architecture in the mistaken belief that it would always be in the position of being a trade surplus country. The growth in the industrial capacity of West Germany and Japan in the following decades, combined with a massive rise in US government debt as a result of the costs to the US Treasury of the Vietnam War, started to shake the system by the mid-to-late 1960s. The global trade balance experienced an inversion and the US entered a deficit. Only the US was allowed to print more dollars under the Bretton Woods system, but the fixed exchange rate meant that other currencies pegged to the dollar started to suffer the consequences of US monetary policies. The rising amount of dollars was causing inflation in Europe and elsewhere, and in order to keep the fixed exchange rate in place, European governments had to increase the volume of their own currencies. Currency speculators predicted that the price of gold could not be maintained at $35, and frenetically purchased stocks of gold, worsening the situation.

Germany, France and Britain in particular began to signal their displeasure at the rising quantity of dollars in global markets. From the early 1960s, the Bundesbank resisted printing more Deutschmarks to defend the currency peg. In 1967, the British government under Labour Prime Minister Harold Wilson made an extreme deviation from the one-per-cent fluctuation limit set by Bretton Woods and devalued the pound sterling by 14 per cent. And most dramatically of all, France sent a warship filled with US dollars to New York harbour in early August 1971 with instructions to claim its gold held in the US Federal Reserve and Fort Knox. Britain immediately followed suit – minus the warship – and requested that $3 billion it held in US dollars be redeemed for gold.

Within days, US President Richard Nixon announced the end of gold convertibility on 15 August 1971, in a move that became known as the Nixon Shock and which marked an abrupt collapse of the Bretton Woods system. The US was cutting the rest of the world loose from the dollar zone. The regions that had benefited most from the system, Europe and Japan, would suffer the most from this unceremonious ejection. The US Treasury Secretary, John Connally, famously told a group of European finance ministers that the dollar “is our currency, but it’s your problem”.

Richard Nixon at a news conference

Former US President Richard Nixon

The idea of suspending gold convertibility was proposed to Nixon by Paul Volcker as a kind of ‘Plan B’ in May 1971; Nixon had appointed him as undersecretary of treasury in 1970. At a speech Volcker made in 1978, he reflected: “In the end, the inherent contradictions in the system were too great. With the benefit of hindsight, it would seem that an erosion of the US competitive position was implicit in the post-war arrangements. Europe and later Japan brought its industrial capacity close to US. It took some twenty years, but eventually the US payments position was irreparably undermined.” In the same speech he also said that US policymakers in 1971 believed that “controlled disintegration” of the global economy was a “legitimate goal”. The price of gold and commodities rose drastically and the 1970s were marked by a period of so-called ‘stagflation’ where high unemployment combined with high levels of inflation.

Varoufakis offers a convincing analysis and description of the reversal in global capital flows that followed the Nixon Shock. The US now had both a government deficit and a trade deficit, which policymakers resolved to find ways of making the rest of the world finance. The surpluses generated by the former US beneficiaries, Germany and Japan, needed to be redistributed towards the US somehow. Varoufakis argues that there were “two prerequisites for the reversal of global capital flows, which would see the world’s capital stream into Wall Street for the purpose of financing the expanding US twin deficits” – a rise in the competitiveness of US firms against their competitors in Europe and Japan, and a steep rise in interest rates in the US that would attract capital flows to the US by increasing profitability, but damage other countries’ economies and its own population.

This motivation underpinned the tight constraint of average real wages in the US since the 1970s – which to this day have not regained the real purchasing power they had in 1973 – and unleashed the wave of financial deregulation that was then implemented with enthusiasm by President Ronald Reagan. Capital gravitated towards the dollar in the aftermath of the Nixon Shock, purchasing US Treasury bills and investing in Wall Street. As net capital flows reversed – flowing into the US rather than out of it – the surplus capital of other countries was recycled as the US government and consumers then bought the exports of these same countries. The US played the complete reverse role it had during Bretton Woods but its leading role in recycling trade surpluses in order to maintain a semblance of balance continued. An expansion in the access to credit as a result of capital flows into Wall Street meant working people in the US increasingly went into debt to compensate for their stagnating wages, a pattern that was soon to be replicated in Europe.

The Union is born – as a price-fixing cartel

Understanding the Bretton Woods system, and the reversal in global capital flows that followed its collapse, is crucial to understanding the structures and beliefs underpinning the Eurozone – because the creation of the Eurozone was largely an attempt to recreate the Bretton Woods system.

The European Coal and Steel Community (ECSC), created in 1951, was the first step towards a European Union (EU). In 1950, French foreign minister Robert Schuman proposed that “Franco-German production of coal and steel as a whole be placed under a common High Authority, within the framework of an organisation open to the participation of the other countries of Europe”, which later became the ECSC with the Treaty of Paris in 1951, signed by West Germany, France, Italy, Belgium, the Netherlands and Luxembourg. This “High Authority” of 1951 became known as the European Commission.

Although the leaders of the ECSC participant countries of 1951, and the EU leaders of today, would express horror at such a characterisation, the reality is that the EU began life as a US-devised price-fixing cartel, which “openly and legally controlled prices and output by means of a multinational bureaucracy vested with legal and political powers superseding national parliaments and democratic processes”, according to Varoufakis in his book on the history of the Eurozone and the crisis. France and other countries also aimed to ensure the post-war scarcity of coal and steel did not work to Germany’s advantage. The ECSC fixed the price of coal and steel, and later moved to remove tariffs on coal and steel between members, and then on all goods.

The Treaty of Rome created the European Economic Community (EEC) in 1957. The objections of farmers, particularly in France, to the lowering or elimination of tariffs led to the creation of the Common Agricultural Policy from 1962 onwards, where part of the profits made by the heavy industry cartel were distributed to farmers as subsidies in order to gain their compliance with further economic integration and a customs union. A monetary union was first raised in the Marjolin Memorandum in 1962, authored by the European Commission. This memorandum initiated the first discussion on monetary integration in the EEC and proposed that the customs union should lead to fixed exchange rates between the currencies of its members. But as the Bretton Woods system was working reasonably well at the time to ensure exchange rate stability, there was little follow-up on the proposal in the short term. The first call for a common currency from a political leader came in 1964 – from then-French finance minister (and later President) Valéry Giscard d’Estaing.

A defining moment in the development of a common currency was the publication in 1970 of the Werner Report (to the Council and Commission of the European Communities) “on the realization by stages of economic and monetary union in the Community”. This report, produced against the backdrop of an increasingly strained, and soon to be destroyed, Bretton Woods system, proposed the main elements necessary for monetary union: full and irreversible convertibility of the currencies of the union; elimination of fluctuations in exchange rates; complete freedom of movement of capital; and the centralisation of monetary policy. National currencies could be maintained under the system, the report stated, or a single Community currency could be created, “but psychological and political factors weigh the scale in favour of adopting a single currency that would demonstrate the irreversible nature of the undertaking” (my emphasis).

A snake in a tunnel

The first practical attempt at creating a European currency peg, known as the ‘snake in the tunnel’, began in 1972. The metaphor was grim but apt – the snake was a currency’s exchange rate, and the tunnel was the narrow band in which the rate could fluctuate. Several members of the EEC, plus Britain, Ireland, Denmark and Norway, agreed to limit the margin of fluctuation between their currencies to a difference of no more than 2.25 per cent. It was a clear and open attempt to replicate the Bretton Woods fixed exchange rate regime in order to regain price stability between the European currencies after the collapse of the dollar-backed system the year before.

The Nixon Shock had caused the value of the dollar to fall but the Deutschmark to rise significantly, meaning the price of West Germany’s exports were becoming increasingly expensive. The Deutschmark’s soaring value strained the attempts to manage (or fix) the prices of Europe’s heavy industry and agricultural sectors, the raison dêtre of the EEC. The oil shock – a huge and sudden rise in energy costs – of 1973 forced the deficit countries to emerge from the tunnel. France, Italy, Britain and Ireland could not maintain these fixed exchange rates with the Deutschmark. The only way these deficit countries could maintain such an exchange rate was to increase their interest rates to attract foreign capital and to cut public spending to increase ‘confidence’ that government debt could be repaid, both of which would have significant negative effects on their own populations. By the late 1970s, only the Deutschmark, the Danish Krona and the Benelux countries’ currencies – Belgium, Luxembourg and the Netherlands – were still members of the snake in the tunnel system.

The road to Maastricht

As is the case with all major developments in the history of the EU, the creation of the European Monetary System (EMS) enacted in 1979 was the product of a political compromise between Germany and France. The German and French leaders had announced the creation of the EMS in September 1978. The EMS set a European Currency Unit (ECU) as a “basket” of currencies, and it established an Exchange Rate Mechanism (ERM), which was based on fixed exchange rate margins – but with a degree of variation possible within those margins. There was no official “anchor” currency of the EMS, which lasted for two decades until 1999. But indisputably the Deutschmark was the anchor, and the policies and approach of the system were heavily influenced by the Bundesbank’s phobia of inflation.

There were four key phases of the EMS according to an expert report carried out for the European Commission. The first phase, 1979-1985, included the retention of capital controls by several member countries. The inflation differentials, combined with fixed nominal exchange rates, required “frequent adjustment of the official parities”. The Irish state joined the EMS in 1979, and was required to break the punt’s parity with sterling in order to do so, as sterling – not in the ERM – was appreciating against the ERM currencies. Parity with sterling would have taken the punt outside of the agreed band, so it had to be broken as a condition for Irish entry into the ERM.

During the second phase, 1986-1992, the EMS was referred to by many as the “Deutschmark Area” because members of the system were forced to give up their own monetary policies in order to implement the anti-inflation policies of the Bundesbank and reduce their inflation levels to “German” levels. The so-called Mundell–Fleming trilemma (developed by Robert Mundell and Marcus Fleming, also referred to as the “impossible trinity”) holds that it is impossible for an economy to simultaneously maintain a fixed exchange rate, free movement of capital, and an independent monetary policy. The Commission report agrees: “Owing to the impossible trinity all central banks participating in the ERM had de facto renounced an independent monetary policy”.

Maastricht Treaty draft

Prime Minister Aníbal Cavaco Silva of Portugal; Prime Minister Ruud Lubbers of the Netherlands; Foreign Minister Hans-Dietrich Genscher of Germany; and Jacques Delors, the president of the European Commission toast a draft of the Maastricht Treaty in February 1992 (Jerry Lampen/Reuters)

During this second phase, the Single European Act was passed in 1986, moving towards a single market in the EEC. The then-Commission President, Jacques Delors, established a committee to examine a possible future monetary union, which produced the ‘Delors Report’ in 1989 – the document that led to the Maastricht Treaty of 1992 (endorsed by EEC governments in 1991 but ratified in referenda in Denmark and France in 1992). The Delors Report promoted the view that there was a need for national budget deficit rules, which became the Maastricht convergence criteria, and proposed a new institution, independent of member states, with responsibility for monetary policy – the European Central Bank. In 1990, following the Delors Report’s roadmap, capital controls among members of the EMS were abolished. These developments occurred against the backdrop of the disintegration of the Soviet Union and of German reunification.

From September 1992 until March 1993 the EMS experienced a severe crisis. Some of the members of the EMS were experiencing rising inflation which they were unable to reduce. Currency speculators targeted the over-valued currencies. Fears that voters would reject the Maastricht Treaty on a monetary union, proposed in 1991, contributed to the speculative currency attacks. In June 1992 the Treaty was rejected by 50.7 per cent of Danish voters in a referendum. A similar referendum was held in France, which narrowly endorsed the Maastricht Treaty in September 1992, with 51 per cent of voters supporting it. But massive speculative pressure in the lead-up to the French referendum contributed to the worst crisis in the history of the EMS, which led to the forced ejection of the pound sterling and Italian lira from the ERM, the devaluation of Spain’s peseta, and threats of forced devaluation of other currencies. The fluctuation margin of the EMS was widened to an enormous plus or minus 15 per cent in 1993 in a bid to stop other currencies, particularly the franc, from having to exit. Italy later rejoined the ERM in 1996.

The final phase of the EMS lasted from 1993 until 1999 when the Eurozone was launched by its original 11 member states – Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. Greece joined the Eurozone in 2001, Slovenia in 2007, Cyprus and Malta in 2008, Slovakia in 2009, Estonia in 2011, Latvia in 2014, and finally Lithuania in 2015. An ERM II is in place, supposedly to draw non-Eurozone members of the EU into an alignment of exchange rates, but only the Danish Krona is a member currently. The single market was completed in 1993, allowing the free movement of capital, labour, goods and services, becoming formalised in 1994 by the European Economic Area (EEA) agreement.

Eurozone’s permanent austerity based on failed ideology

This is an excerpt from the economic discussion document launched by MEP Matt Carthy on October 27, entitled The Future of the Eurozone. Download the full document for a referenced version of Chapter One, below.

BACK IN 1929 when the Wall Street crash hit, the response of then-US President Herbert Hoover was to restrict government spending – an action now almost universally acknowledged as having turned the stock market crash into the Great Depression.

The free-market ideology underpinning Hoover’s austerity policies held that an economy with high unemployment could return to full employment through market forces alone. Instead of boosting public spending, the government should do the reverse. By cutting government spending and increasing taxes, the government deficit would be reduced, which would restore market “confidence”. This restoration of confidence would lead to increased private investment, and the market would adjust itself to return to full employment.

The confidence fairy

The confidence theory was demonstrated back in 1929 to be incredibly damaging and to achieve precisely the opposite effect of what it aimed to achieve. The actual effect of implementing austerity in a period of economic downturn was to cause a contraction in the economy, thus weakening the economy further, causing tax revenues and national income to fall, and the deficit to increase. The contractionary impact of austerity policies during a downturn was explained by John Maynard Keynes during the 1930s, and Keynesian models have proved to be a reliable predictor of growth (or lack thereof) in the wake of the 2007-2008 crisis.

Countless books, academic studies and articles have outlined how the programmes imposed by the Troika – the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) – on the Eurozone’s “peripheral” economies since 2008 have exacerbated the crisis. In the decades before the global financial crisis, these same policies had caused the exact same devastating contractionary effects when imposed under the guise of “structural adjustment programs” by the IMF across Africa, Asia and Latin America.

But while Keynesianism was experiencing an academic and policy revival internationally following the global financial crisis, Europeans somehow managed to cling to the confidence theory, which persisted in the decades beyond the Great Depression to this day. It is the dominant theory that has shaped both the structure of the Eurozone and European Union (EU), and the EU response to the global financial crisis of 2008.

In 2011 at the height of the Eurozone crisis, Nobel Prize-winning economist Paul Krugman memorably dismissed this theory as the “confidence fairy”. Two years later, commenting on the theory’s persistence in the face of overwhelming evidence to the contrary, he added: “European leaders seem determined to learn nothing, which makes this more than a tragedy; it’s an outrage.” Fellow Nobel Prize-winning economist Joseph Stiglitz has dubbed the free-market fundamentalists’ obsession with reducing deficits as “deficit fetishism”, pointing out that “no serious macroeconomic model, not even those employed by the most neoliberal central banks, embraces this theory in the models they use to predict GDP”.

Europe’s lost decade

It is common for scholars to refer to the results of the IMF structural adjustment programmes from the 1970s-1990s in Latin America, Asia and Africa as having caused these continents “a lost decade” or “lost decades”. Europe has lost a decade but there is a danger that it may lose several more – not only because of the policy responses to the crisis but because of the actual structure of the Eurozone. The results of the European response to the crisis are damning. Three patterns are obvious: the Eurozone countries have in general fared far worse in terms in terms of recovery than countries outside of the common currency; the recovery within the Eurozone has been sharply asymmetrical, with divergence between strong and weak countries increasing; and there has been a significant rise in inequality across Europe.

Growth in the US and Britain has been weak since the crisis but it has far outpaced the Eurozone recovery. It is difficult to even use the word “recovery” to describe the Eurozone experience – only last year did Eurozone GDP reach its pre-crisis level. In June 2016, the Eurozone unemployment rate was still in the double figures at 10.1 per cent; while the EU-28 had unemployment of 7.7 per cent. But the unemployment figures in several of the crisis countries remains double the Eurozone average – in Greece by 2017 the unemployment rate was 21.7 per cent while at the same time in Spain the jobless rate was 17.8 per cent. The figures are masked by the huge levels of emigration that the crisis countries experienced as well as the fact that number of hours worked per worker has declined across the Eurozone.

Stiglitz notes that youth unemployment persists at twice the level of overall unemployment. “The persistence of high unemployment among youth will have long-lasting effects – these young people will never achieve the incomes they would have if job prospects had been better upon graduation from school.”

While the Eurozone stagnated for a full decade following 2007, countries within the EU but outside the Eurozone had a GDP 8.1 per cent higher than in 2007 by 2015. The United States had a GDP almost 10 per cent higher in 2015 than in 2007. Over the same period, the Eurozone’s GDP grew by just 0.6 per cent.

When measuring living standards it is more accurate to examine GDP per capita than GDP overall, and while in the US GDP per capita increased by more than 3 per cent from 2007-2015, while over the same period in the Eurozone it actually declined by 1.8 per cent. As living standards have declined – devastatingly in crisis countries, and especially in Greece – income inequality has also risen drastically. In its Economic Forecast last autumn, the European Commission warned of a potential “vicious circle” as expectations of long-term low growth affect investment decisions, and that “the projected pace of GDP growth may not be sufficient to prevent the cyclical impact of the crisis from becoming permanent”.

The declining level of growth in the British economy since the Brexit vote means a “strong downward revision of euro area foreign demand”, while the “sizeable depreciation of sterling vis-à-vis the euro is expected to have an adverse direct impact on euro area exports to the UK”. Eurozone exports were forecast to decrease slightly this year and stagnate in 2018, while possible financial crashes in China or the US and the ongoing non-performing loan banking crisis in the Eurozone pose serious risks.

Despite these sober warnings, European leaders and the financial press have raucously celebrated the anemic growth in the Eurozone’s GDP in the first two quarters of this year, of 0.5 per cent and 0.6 per cent respectively – crucially, driven by a slow increase in domestic demand as opposed to export-led growth. But this celebration ignores the fact that in normal circumstances, these figures would be viewed as abysmal, and that global economic forces pose serious threats to this fragile recovery.

Fairies and leprechauns

Predictably, these feeble shoots of growth are described as being the result of austerity policies by those who have claimed for the past 10 years that austerity will start to work any day now. A slightly recalibrated confidence theory has been proposed by a small number of economists associated with the neoliberal school of thought since the 2008 crisis – that of an “expansionary fiscal contraction”, with Harvard’s Alberto Alesina and Goldman Sachs’s Silvia Ardagna leading the charge with their joint paper in 2009. What they are actually recommending largely amounts to recovery through beggar-thy-neighbour competitive devaluations (or in the common currency, internal devaluation).

Stiglitz points out that these instances of economic recovery are actually cases where certain countries had “extraordinarily good luck” in that “just as they cut back on government spending, their neighbours started going through a boom, so increased exports to their neighbours more than filled the vacuum left by reduced government spending”. Several papers from the IMF itself have backed up this analysis.

This is largely what happened in the Irish economic recovery, which has become the EU’s poster child for austerity policies. The narrative goes that the Irish state followed the German model – it followed all of the EU rules and implemented the Troika’s structural reforms, slashed government spending to reduce the deficit, cut wages to increase competitiveness, and as a result restored market confidence, depressed domestic consumption and experienced a corresponding rise in exports.

The reality is more complex, and is based on a combination of growth in jobs in the indigenous sector, including the services sector, arising from favourable exchange rates for the Irish state; and on the illusory “growth” of GDP caused by the industrial-scale corporate tax avoidance strategies undertaken by US multinationals in the technology, pharmaceutical and aircraft-leasing sectors.

There has also been a certain level of export-led growth since 2009 but it has been hugely exaggerated and difficult to reliably quantify. But this export-led growth did not in any way fit into the German model and “expansionary austerity” narrative of an internal devaluation based on lowering wages and domestic demand. Rather than being based on manufactured exports with a competitive edge because of wage cuts, export growth took place among firms in high-wage service sectors such as technology and finance during a period in which wages in these sectors were going up.

Of course, last year’s ludicrous announcement that Irish GDP had grown by more than 26 per cent in 2015 raised an enormous red flag that all may not be what it seems in Ireland’s economic recovery. Krugman, coiner of the “confidence fairy” term, found another apt folkloric description for the occasion: “leprechaun economics”.

These figures were so detached from reality that they were cause for serious alarm but, incredibly, the Irish government welcomed them. According to the figures, per capita income apparently rose to 130,000 in 2015, and the state’s industrial base doubled in just one year. But the Net National Income grew by 6.5 per cent in 2015 while consumer spending rose by 4.5 per cent. These income and consumption figures are a far more accurate reflection of real economic activity and growth. Official GDP figures have a major and serious role to play in fiscal planning, spending and borrowing. They need to be credible and a measurement of real economic activity.

Most alarmingly, the figures reveal a glimpse at the level of dubious accountancy tricks being played by multinationals in Ireland during a period in which the Irish government claimed it was committed to playing its part in the global crackdown on tax avoidance. The Irish Central Statistics Office (CSO) identified relocations and inversions by multinational enterprises as the major contributing factors to the so-called growth. It seems as though there was a rush by multinationals to ‘turn Irish’ in 2015 in the context of global action on tax avoidance and tax havens, through inversions – where a multinational corporation changes tax domicile after it buys up a smaller Irish-registered company. The transfer of financial assets and intellectual property patents into Ireland does nothing to actually create jobs or contribute to growth in the real economy.

In response to the fantasy figures for 2015, the Central Bank of Ireland published a study stating that to measure growth or activity without the reality being skewed by the activities of multinationals, GNI* (Gross National Income, modified) should be used instead. GDP and Gross National Income differ as a result of the “net factor income from abroad” (eg, repatriated profits and dividends of multinationals). While GDP is a measurement of the income generated by the economy, GNI measures the income actually available to its residents. Irish GDP is more than 20 per cent greater than GNI, one of the largest differences among all economies globally (the two figures can usually be used interchangeably).

But even using GNI is not sufficient to get an accurate picture of real economic activity according to the CSO, which developed a measure of “modified gross national income” or GNI*. GNI* is Gross National Income “adjusted for retained earnings of re-domiciled firms and depreciation on foreign-owned domestic capital assets” – ie, modified to account for depreciation on intellectual property owned by technology and pharmaceutical firms. When GNI* is used to measure the Irish economic recovery, the picture is not so rosy. “The Irish economy is about a third smaller than expected. The country’s current account surplus is actually a deficit. And its debt level is at least a quarter higher than taxpayers have been led to believe,” the Financial Times reported on the first set of “de-globalised” data on the Irish economy in July this year.

For 2016, the value of the Irish economy according to its GDP was €275 billion, but according to its GNI* its value was €190 billion – a huge difference that indicates that not only is the Irish economy not nearly as strong as the official narrative portrays, but also that the Irish state may have facilitated multinationals in avoiding up to €85 billion in tax in one year alone. The CSO reported that in 2015, government debt was 79 per cent of GDP but 100 per cent of GNI*; and that while the state’s fiscal deficit was 1.9 per cent of GDP, it was 3.4 per cent of GNI*, well above the 3 per cent limit imposed by the EU’s fiscal rules.

There has also been growth in employment over the past three years in the Irish indigenous sector. For example, job growth took place in the agriculture and food sectors, and in accommodation and tourism. This growth was based on two related factors. The first was the depreciation of the euro against the dollar and sterling as a result of the crisis, and the second was the relatively higher economic growth in Britain and the US, the Irish state’s two largest trading partners. The (temporary) lower value of the euro was critical to the recovery experienced in the Irish indigenous sector. The relative growth in the US and Britain was also influenced by the fact that these two states are not constrained by the Fiscal Compact rules – borrowing in the US and Britain did not fall below 3 per cent since 2008.

But the specific circumstances of the Irish state’s trading patterns mean that this “recovery” cannot be transposed or replicated in other member states of the EU. It also poses significant risks, especially the risk of a significant fall in the value of sterling as a consequence of Brexit. A sharp depreciation of sterling against the euro – something we are already beginning to see – would likely jettison this recovery. Worrying signs of a technology bubble, a new Irish housing bubble and a massive shadow banking sector are all factors that may also influence this recovery. Crucially, the structure of the Eurozone itself, and the austerity ideology it has enshrined, make another economic slump inevitable.

The evidence shows that the Irish recovery happened in spite of, not because of, the EU austerity recipe – and it would have happened sooner, and with far less pain to the Irish people, had ideologically driven deficit fetishism been rejected.

A fiscal straitjacket

In 1992 the member states of the European Economic Community (EEC) signed up to the Maastricht Treaty, which laid the foundation for the common currency. The Maastricht Treaty enshrined the so-called convergence criteria – a set of rules members and potential members of the common currency were obliged to follow. To join the Economic and Monetary Union (EMU), states had to pledge to control inflation, and government debt and deficits, and commit to exchange rate stability and the convergence of interest rates. The blanket, one-size-fits-all fiscal rules in the criteria – that member states must keep public debt limited to 60 per cent of GDP and annual deficits to below 3 per cent of GDP – were proposed by Germany, based on its national Stability and Growth Pact.

The convergence criteria, as the term suggests, were aimed at achieving convergence among the diverse economies that were to form the Eurozone. The founders of the euro acknowledged the tendency for economic shocks to hit diverse economies asymmetrically in a monetary union. Without convergence, a common currency won’t work – for example, with diverse economies the interest rate set by the ECB for the entire Eurozone may impact positively on one country but negatively on another country with different economic characteristics. Without convergence, it would be difficult if not impossible to ensure full employment and current account (external) balance among different economies at the same time.

There are many spillover effects that one economy can have on another in a monetary union – for example trade imbalances and internal devaluations – but the only one that the Maastricht Treaty focused on was members’ fiscal policy. “Somehow they seemed to believe that, in the absence of excessive government deficits and debts, these disparities would miraculously not arise and there would be growth and stability throughout the Eurozone; somehow they believed that trade imbalances would not be a problem so long as there were not government imbalances,” Stiglitz comments.

Governments facing an economic downturn have three main ways they can aim to restore the economy to full employment: to stimulate exports by devaluing their currency; to stimulate private investment and consumption by lowering interest rates; or to use tax-and-spending policies – increase spending or lower taxes. Membership of the Eurozone automatically rules out using the first two mechanisms, and the fiscal rules largely remove the third option from governments.

(The confidence fairy is almost always accompanied by a fervent belief in “monetarism” among neoliberals – ie, that only monetary policy by an independent central bank should play any role in economic adjustment, and anything else would amount to dreaded government intervention in the economy.)

When a Eurozone member state experienced a downturn, its deficit would inevitably rise as a result of lower tax revenue and higher expenditure on social security. But when the convergence criteria kicked in, causing governments to cut spending or raise taxes, it would invariably worsen the downturn by dampening demand. Moreover, debt and deficits did not, and do not, cause economic crises. Ireland and Spain were running surpluses when they experienced a crisis, and both had low public debt.

The convergence criteria are purely ideological and economically unsound. But as the European Central Bank (ECB) was preparing to begin operating to control inflation and interest rates, Germany pushed for the adoption of an EU-wide Stability and Growth Pact in 1997, including non-Eurozone members, to enshrine the fiscal control aspects of Maastricht, and more generally to increase EU surveillance and control over member states’ national budgets.

The Stability and Growth Pact has been called a lot of names in its day – the “Stupidity Pact”, a “Suicide Pact”, the “Instability Pact”, and more. And it is deserving of each one. In 2002, then-President of the European Commission Romano Prodi told reporters the pact was “stupid”, while French Commissioner Pascal Lamy called it “crude and medieval”. In practice, the Stability and Growth Pact has proved to achieve the opposite effects it claims to aim for. Cuts to government spending have a contractionary effect and cause the economy to shrink; when the national income shrinks, spending on unemployment benefits have to rise, and the situation gets worse. This is exactly what happened in the aftermath of the recessions in Ireland, Spain, Greece and Portugal.

Early in the 2000s, both Germany and France repeatedly breached the fiscal rules. But they were not penalised, and were always provided with an extension to try to meet the targets. Almost all EU member states have breached the rules at some point – during the recession only Luxembourg did not go over the 3 per cent deficit target. Fiscal contraction will exacerbate unemployment, but it may eventually restore a current external account balance – when demand for imports becomes so low as a result of the recession that exports catch up.

University of London Professor George Irvin has described German Chancellor Angela Merkel’s insistence that government profligacy is at the root of the Eurozone crisis as betraying “near-total ignorance of how economies work”. “Budget balance for a national economy is fundamentally different from that of the household or the firm. Why? Because budgetary (or fiscal) balance is one of three interconnected savings balances for the national economy. The other two fundamental economic balances are the current external account balance… and the private sector savings-investment balance. If any one account is out of balance, an equal and opposite imbalance must exist for one or both of the remaining accounts,” he wrote.

But despite the vast evidence that the Stability and Growth Pact was counterproductive and unenforceable, Germany pushed for the fiscal rules to be tightened yet again in 2012 through the Fiscal Compact Treaty, which created the obligation for the convergence criteria targets to be inserted into the national law of the ratifying states.

The Fiscal Compact

In 2010, Germany proposed the reform of the Stability and Growth Pact to make it stricter, and “in return” pledged to support the creation of a Eurozone bailout fund that member states could draw upon if they were in dire straits – with strict fiscal conditions attached, of course. The reforms aimed at enforcing compliance of the Stability and Growth Pact known as the “Six-Pack” and “Two-Pack” of additional regulations and directives were adopted at EU level.

In 2012, an intergovernmental treaty – the Treaty on Stability, Coordination and Growth – was signed by all EU Member States with the exception of Britain and the Czech Republic. (When Croatia joined the EU in 2013, it declined to sign.) The Treaty, known as the Fiscal Compact, incorporated the Stability and Growth Pact, the Six-Pack and Two-Pack requirements, and more. Its central principle is that member states’ budgets must be in balance or in surplus, which the Treaty defines as not exceeding 3 per cent of GDP.

Critics of the Stability and Growth Pact had called on the EU to focus not on the general deficit but rather the structural deficit – what the deficit would be if the economy were at full employment. But instead of dropping the general deficit limit, the Fiscal Compact has adopted rules on both the general deficit and the structural deficit. The structural deficit limits are set by the Commission on a country-by-country basis and must not exceed 0.5 per cent of GDP for states with debt-to-GDP ratios of more than the 60 per cent limit, and must not exceed one per cent of GDP for states within the debt levels.

The “debt-brake” rule is the convergence criteria rule that government debt cannot exceed 60 per cent of GDP. The Fiscal Compact enshrines the rule that members in excess of this limit are obliged to reduce their debt level above 60 per cent at an average of at least 5 per cent per year. The structural deficit rule – called the “balanced budget rule” – must be incorporated into the national law of signatory states under the Fiscal Compact. An “automatic correction mechanism”, which is to be established at member state level and kicks in when “significant deviation” from the balanced budget rule is observed, must also be incorporated into national law.

Of all the member states who signed the intergovernmental treaty, only the Irish state put the Fiscal Compact to a referendum. The Fiscal Compact Treaty was adopted by just over 60 per cent of the voting electorate, with around 50 per cent turnout. The Fine Gael/Labour government’s decision to hold a referendum was not based on a belief in the right of the Irish people to have their say on their economic future, but rather their desire to go one step beyond simply incorporating the permanent austerity rules into legislation, and to insert them into the Constitution – despite the fact that the government’s Fiscal Advisory Council recommended the legislation option. Fine Gael, Fianna Fáil and Labour representatives urged the people to vote yes, dangling the carrot of access to the new bailout fund. The vote in favour was hailed by the government as an endorsement of its austerity policies.

The reality is that the Irish electorate was blackmailed into voting in favour of a proposal that endorsed a damaging austerity framework based on free-market fundamentalism as a result of the threat of crisis funds being withheld in future, and by the promise of the debt burden being relieved through the direct recapitalisation of the failed Irish banks by the future European Stability Mechanism. And after the approval of the Fiscal Compact Treaty and the constitutionalisation of austerity in Ireland, the Fine Gael-led government quietly dropped its call for the EU to recapitalise the Irish banks. Unbelievably, by 2015, the same Irish government representatives who had urged voters to approve the Fiscal Compact Treaty were pleading with EU authorities for more flexibility for Ireland’s implementation of the rules.

Irvin points out that Germany’s debt-brake cannot be good for other Eurozone countries, or even possible, for three reasons – that Germany’s exports to the Eurozone are by definition another member state’s imports; that there is insufficient global demand to sustain all Eurozone economies becoming net exporters like Germany; and that the public debt-brake completely ignores the problem of private debt, especially in the over-leveraged banking sector.

In a scathing critique of the Fiscal Compact, Francesco Saraceno and Gustavo Piga highlight that “no other country in the world has ever considered [such a rule], and with good reason” and say that the adoption of the Fiscal Compact has been “untimely, unfortunate and unequivocally wrong”. “Its uniquely negative effects, as the experience of Italy clearly shows, lie in the perverse features whereby, even if a government is allowed to renege year after year on the promised path toward a balanced budget, it is still required, every year, to recommit to a medium term (3-4 years) adjustment toward that balance. In so doing, business expectations are negatively affected, private investment plans are postponed, and stagnation becomes a permanent feature of the economy,” they write.

Return fiscal powers to member states

There have been repeated efforts, led by Germany, to exercise control over the budgets of member states. For several decades now, France’s demand for a European monetary union was always met with the German response that it must be accompanied by fiscal union, or German-led surveillance and control over national budgets. The same argument continues today, based on the same flawed ideology.

There have been several important proposals to reform the Fiscal Compact – for example, to focus only on the structural deficit; or to exclude capital investment from the rules. But while these proposals may loosen the straitjacket a little, it would be better to just take it off. As part of the Fiscal Compact treaty, the Council is required to adopt a formal decision on the Fiscal Compact by 1 January 2018 on whether or not to insert it into the EU Treaty. Saraceno and Piga argue: “If a number of important countries were to veto that move, this could set in motion a profound rethink of the appropriate fiscal policy infrastructure supporting the euro zone in future, one consistent with recent developments in macroeconomics.”

The Fiscal Compact has already been proven to be unworkable. The European Council voted last year to adopt the Commission’s recommendation to impose no fines for excessive deficits on Spain and Portugal in a clearly politically motivated decision. The austerity lie is losing its power, with even the IMF and the Commission questioning its benefits after a decade of stagnation. Barry Eichengreen and Charles Wyplosz argue that the attempt to centralise fiscal policy at the EU level is “doomed” and should be abandoned. In a paper on minimum conditions for the survival of the Eurozone, they write: “The fiction that fiscal policy can be centralised should be abandoned, and the Eurozone should acknowledge that, having forsaken national monetary policies, national control of fiscal policy is all the more important for stabilisation.”

What Spain’s King means when he calls for the Constitution to be upheld

This is a brief outline of some of the key relevant legal issues in the Spanish Constitution and the Treaty on the Functioning of the European Union in relation to the crisis in Catalonia.

The King of Spain made a speech tonight (October 3) which is seriously concerning. The notes below are not intended to address the fascinating political situation in Catalonia right now, but simply aim to outline some of the key legal issues and constitutional articles you may have heard bandied about regarding the Spanish Constitution and the EU Treaty.

Speech by King Felipe

Leaving aside his description of Catalans as being “unacceptably disloyal”, and his failure to condemn the violence on Sunday, King Felipe VI made repeated calls on the Spanish government to act. He stated repeatedly that the duty of the Spanish state is to uphold the Constitution, and to ensure the constitutional basis for Catalonia and its institutions.

The Spanish Constitution (adopted in 1978 during the so-called “Transition” from Francoist fascism) includes several relevant and well-known articles – namely Articles 2, 8 and 155 – which have led Catalans and observers to believe this amounts to a call for the suspension of the Catalan government at the very least; the likely imposition of a state of exception (emergency); or an outright military coup at worst.

Article 2 of the Spanish Constitution affirms the “indissoluble unity” of “the Spanish nation”.

Article 8 states it is the mission of the Armed Forces to “defend the territorial integrity” of Spain. Usually, in the international arena, this means defending the state from external attack, but in the Spanish state is has been interpreted politically and legally to mean defending the state from both invasion and secession.

The United Nation’s Independent Expert on the Promotion of a Democratic and Equitable Social Order, Alfred De Zayas, yesterday tweeted: “The principle of territorial integrity protects States from other States, but cannot prohibit the self-determination of peoples”.

And Article 155, the most important in this case, states that if any of the autonomous communities fail to meet their obligations under the law and Constitution,  or “act in a way seriously prejudicing the general interests of Spain”, the Government can control of the bodies of the autonomous government and impose  the “measures necessary in order to compel the latter forcibly to meet said obligations, or in order to protect the above mentioned general interests” of the Spanish state.

In other words, Article 155 is the Direct Rule provision. Of course, the suspension of the Catalan government in this way would probably have to be backed up by jailing the government representatives, and the likely mass deployment of the Guardia Civil, and possibly troops, given the mass mobilisation of Catalan society.

To me the King’s speech sounded very much like an indication that Art 155 will be triggered. The leader of Ciudadanos has already called for Art 155 to be triggered in order to prevent a declaration of independence by the Catalan government.

The Catalan government has not yet declared independence following the results of Sunday’s vote. Obviously they must be engaged in behind the scenes efforts with the international community in particular, but they run the risk their government will be suspended before the declaration.

Tonight Catalan President Carles Puigdemont told the BBC that the Catalan government will declare independence “at the end of this week or the beginning of next”.

Sanctioning of EU Member State under EU Treaty

The other issue I wanted to reflect on is the possibility to initiate action against Spain under the Treaty on the Functioning of the EU (TFEU) in response to Sunday’s violence, or in response to the possible future triggering of Art 155 of the Spanish constitution/a state of exception/martial law being imposed in Catalonia.

Some Catalan representatives and international supporters have called for the triggering of Article 7 of the TFEU against Spain in response to the violence in Catalonia.

This is definitely something European progressives should call for in relation to both their own governments and the European Parliament.

However, the EU procedure is designed to be so difficult and to require such a strong majority that it makes it virtually meaningless (surprise).

It has never yet been invoked, despite the possibility of it being raised in relation to Hungary and Poland recently.

Article 7 can be invoked in order to defend the “EU values” specified in Article 2 of the TFEU.

These are: respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities.

Article 7 has three stages of procedure ending in sanctions:

1) A procedure to declare the existence of a clear risk of a “serious breach” of Article 2 values. The procedure must be invoked by a “reasoned proposal” by either: one-third of Member States/the European Parliament/the Commission.

So a call for the European Parliament to make a reasoned proposal is definitely an option; as is a call for the Irish government or other EU governments to make such a reasoned proposal to the Council and seek the support for at least one third of Member States.

Then the Council, acting by a majority of 4/5 of its members, and after getting European Parliament consent, “may determine that there is a clear risk of a serious breach by a Member State of the values referred to in Article 2”.

Before making such a determination, the Council will allow the relevant Member State to respond, and may propose recommendations to the State.

2) The second phase is a procedure to determine whether a “serious and persistent breach” of Article 2 values has occurred. This requires the Commission or one-third of Member States to call on the Council to declare unanimously that a breach has occurred, with the European Parliament’s consent.

This is where the process goes from unlikely to virtually impossible given the strong backing of the Spanish position by both conservative and social-democratic forces in power across the EU.

3) The third step is sanctions. If the conditions of (1) and (2) are met, the Council can suspend rights of the relevant Member State with a qualified majority, which includes suspending the Member State’s voting rights in Council.

Let me finish by reiterating the point above – that despite the legal obstacles, progressives should absolutely attempt to invoke Article 7 of the TFEU.

But the limitations on progressive actions imposed by the EU’s architecture, treaties and procedures are similar to the limitations of achieving progressive change under the Spanish Constitution.

We certainly can’t rely in the slightest on the legal or procedural mechanisms of the EU in order to effectively display solidarity with the Catalan struggle for self-determination.

We need to do this with the tried and tested methods of old – pressuring our governments and EU leaders to support the Catalan people by all available means, including by exerting maximum pressure on the streets, and in local, state, EU and international political institutions; and by pressuring national governments to summon Spanish ambassadors and to suspend diplomatic ties with Madrid.

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SPANISH CONSTITUTION

Article 2

The Constitution is based on the indissoluble unity of the Spanish nation, the common and indivisible country of all Spaniards; it recognises and guarantees the right to autonomy of the nationalities and regions of which it is composed, and the solidarity amongst them all

Article 8

1. The mission of the Armed Forces, comprising the Army, the Navy and the Air Force, is to guarantee the sovereignty and independence of Spain and to defend its territorial integrity and the constitutional order.

Article 155

1. If an Autonomous Community does not fulfil the obligations imposed upon it by the Constitution or other laws, or acts in a way seriously prejudicing the general interests of Spain, the Government, after lodging a complaint with the President of the Autonomous Community and failing to receive satisfaction therefore, may, following approval granted by an absolute majority of the Senate, take the measures necessary in order to compel the latter forcibly to meet said obligations, or in order to protect the above-mentioned general interests.

TREATY ON THE FUNCTIONING OF THE EU

Article 2

The Union is founded on the values of respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities. These values are common to the Member States in a society in which pluralism, non-discrimination, tolerance, justice, solidarity and equality between women and men prevail.

Article 7

1.   On a reasoned proposal by one third of the Member States, by the European Parliament or by the European Commission, the Council, acting by a majority of four fifths of its members after obtaining the consent of the European Parliament, may determine that there is a clear risk of a serious breach by a Member State of the values referred to in Article 2.

Before making such a determination, the Council shall hear the Member State in question and may address recommendations to it, acting in accordance with the same procedure.

The Council shall regularly verify that the grounds on which such a determination was made continue to apply.

2.   The European Council, acting by unanimity on a proposal by one third of the Member States or by the Commission and after obtaining the consent of the European Parliament, may determine the existence of a serious and persistent breach by a Member State of the values referred to in Article 2, after inviting the Member State in question to submit its observations.

3.   Where a determination under paragraph 2 has been made, the Council, acting by a qualified majority, may decide to suspend certain of the rights deriving from the application of the Treaties to the Member State in question, including the voting rights of the representative of the government of that Member State in the Council. In doing so, the Council shall take into account the possible consequences of such a suspension on the rights and obligations of natural and legal persons.

The obligations of the Member State in question under the Treaties shall in any case continue to be binding on that State.

4.   The Council, acting by a qualified majority, may decide subsequently to vary or revoke measures taken under paragraph 3 in response to changes in the situation which led to their being imposed.

5. The voting arrangements applying to the European Parliament, the European Council and the Council for the purposes of this Article are laid down in Article 354 of the Treaty on the Functioning of the European Union.

The (grim) state of the Union

Juncker’s vision is for full EU control over members’ economies

Some quick first impressions of the economic aspects of today’s State of the EU address by European Commission President Jean-Claude Juncker.

Jean-Claude Juncker’s State of the Union address was remarkable for its strident, defensive and utterly oblivious tone, but for little else.

On deepening the Economic and Monetary Union, he outlined several proposals that have already been floated several times by the Commission in recent years. The most significant of these are to introduce a euro-area budget line within the EU budget, and to create a European Monetary Fund and a European Finance Minister to take over responsibility for administering the EU’s debt and deficit criteria – the austerity agenda currently administered by the Commission.

There are two main goals evident in the Commission’s proposal. The first is to ensure that the current informal economic governance structure that exists in the Eurozone – outside of the Treaties and beyond democratic oversight – is extended across the EU as a whole in order to pressure the non-euro member states to join the common currency as soon as possible, and to give the Eurogroup the veneer of legitimacy.

The second is to implant Germany’s failed and ideologically-driven deficit fetishism ever more firmly in the structure of the EU by creating a Ministry to surveil and structurally reform the economies of Member States, and to surveil and control their spending, taxation and borrowing through budgetary control.

After the election of President Macron in France this year, Germany and France set up a working group to discuss the creation of a European Monetary Fund, or EMF, to deal with future crises. The states who may require the aid of the European Monetary Fund are those of us in the periphery of the EU – the Irish state, Greece, Spain, Portugal – who are suffering debt crises largely as a result of Germany’s massive and damaging current account surplus.

Yesterday, El País reported that Germany is proposing that a German-dominated EMF take fiscal oversight away from the Commission – but that it is attempting to win the support of France and Italy for the move by including the promise that Germany, France, and Italy can each have a veto over its decisions. This will essentially give Germany strict control over the oversight of budgets of all the EU states who require the assistance of the fund, with only France and Italy having the right to reject the EMF’s conditions.

The French side has been pushing for the EMF to also require more risk-sharing and debt-sharing, which would benefit the peripheral states more. The Commission’s final proposal regarding turning the current crisis fund, the European Stability Mechanism, into an EMF, will be published in December. It is unclear from Juncker’s speech and its accompanying documents which aspects of the German and French proposals will form the basis of the detail of the EMF proposal – but if Juncker’s other proposals are an indication of the general balance of power, it’s safe to bet on the German proposal winning the day.

For several decades now, France’s demand for a European monetary union was always met with the German response that it must be accompanied by fiscal union, or German-led surveillance and control over national budgets. The same argument continues today, based on the same failed ideology.

Juncker’s speech was as significant in what it didn’t propose as what it did propose – it looks like the Commission is already walking back from, or at least stalling on, ideas it had previously floated in its ‘reflection paper’ on deepening the Economic and Monetary Union released earlier this year. These included ideas of creating a European unemployment insurance scheme and an investment protection scheme, both of which would go some way towards meeting longstanding French calls for some form of financial transfers from the core (Germany) to the small and mid-sized economies in the EU, albeit with destructive conditions attached.

There was no mention of these proposals today, and Juncker firmly told the periphery states that their hope for a common bank deposit insurance scheme (which would amount to one form of financial transfer from the core to periphery) is on ice until they start following Germany’s orders on risk-reduction. His exact words were: “To get access to a common deposit insurance scheme you first need to do your homework.”

Over decades of core vs periphery fights over debt and investment, the outcome is always the same – the so-called peripheral states surrender more and power over their spending, borrowing and taxation to German-dominated institutions in exchange for the promise of aid or financial transfers that simply never come.

So, no big surprises here: just confirmation that the brief talk of fundamental change of the structure of the EU that followed Macron’s election was just that – talk.

 

 

The future of the Eurozone

Eurotower

Below is an abridged version of a speech I gave on behalf of Sinn Féin at a GUE/NGL conference on the ‘Future of the EU’ in Donostia/San Sebastian on 5 June 2017.

Last week the Commission released a ‘reflection paper’ on deepening the Economic and Monetary Union (EMU).

There is one positive element of this reflection paper – the Commission finally admits that the status quo, and the divergence it has led to, is unsustainable and has to change.

But the proposals to deepen the EMU entirely fail to address the problems caused by the structural flaws of the euro, which are becoming clearer and clearer and are now acknowledged by mainstream economists.

The reflection paper is not so much a new proposal from the Commission as it is the product of a political compromise between German chancellor Angela Merkel and French President Emmanuel Macron arising from their recent discussions.

Reading between the lines, we can see that the longstanding French demand for some limited financial transfers is proposed, in exchange for not taking any action against the massive and destructive German current account surplus, and for handing over yet further economic powers to the Commission.

The German surplus is the cause of existing debt crises in the Eurozone and will be the cause of future crises. If one country is constantly exporting more than it imports, other countries – in this case, the EU peripheral countries – will have to import more than they export.

This doesn’t just hurt the so-called periphery, or the South – German workers are also suffering the consequences of this strategy as their wages are kept permanently low, often at poverty level.

But while the EU’s “rules” set a limit for current account balances of plus-six per cent of GDP, no sanctions have been imposed against Berlin despite the fact Germany has exceeded this limit for 21 consecutive quarters and for 31 out of 40 quarters since the start of 2007.

The idea that every Eurozone country should adopt an export-led growth model should not only be rejected because it’s based on exploitation, but also because it’s just not economically possible.

Ireland, poster child for austerity

The Irish state is the poster child for the memorandum countries in terms of its recent economic recovery. The narrative goes that the Irish state followed all of the EU rules, swallowed the structural reforms and experienced export-led growth.

Leaving aside last year’s ludicrous 26% growth rate in GDP, based on Ireland’s facilitation of massive levels of corporate tax avoidance, there has been a certain of level of growth in employment over the past two years.

It’s important to note that these growth areas for jobs have not come from FDI or the Irish government’s tax-haven strategy.

Growth took place in the agriculture and food sectors, and in accommodation and tourism.

This growth was based on two related factors. The first was the devaluation of the euro as a result of the crisis, and the second was the relatively higher economic growth in Britain and the US, the Irish state’s two largest trading partners.

Devaluation of the euro was critical to the recovery experienced in the Irish indigenous sector.  The relative growth in the US and Britain was also influenced by the fact that these two states are not constrained by the Fiscal Compact rules – borrowing in the US and Britain did not fall below 3% since 2008.

But the specific circumstances of the Irish state also mean that this recovery cannot be transposed or replicated in other member states of the EU.

It also poses significant risks, especially the risk of a significant devaluation of sterling as a result of Brexit. The devaluation of sterling post-Brexit would likely have a devastating impact on this fragile recovery.

The Irish recovery happened in spite of, not because of the EU austerity recipe.

What Ireland is actually a poster child for is the role currency devaluation can play in recovery, when you’re trading predominantly with other currencies.

Transfers in exchange for rights?

Despite acknowledging that the status quo of the EMU is unsustainable, the Commission declares its firm support for the continuation of the European Semester and the Fiscal Compact.

Probably the three most significant aspects of the reflection paper from our point of view – all of which have been floated before – are its proposal of the creation of a European Unemployment Insurance Scheme, the proposal for an EU finance minister, and for an ‘investment protection programme’ to ensure public investment is maintained during an economic downturn.

In typical Commission fashion, the idea of a European Unemployment Insurance Scheme is dangled to gain public support – while the trade-off is the ‘harmonisation’ of labour relations and anti-worker reforms.

As for the proposed ‘investment scheme’, it is contradictory nonsense to create a scheme to protect investment during economic downturns while at the same time insisting on keeping the macroeconomic straitjacket of the Fiscal Compact firmly in place.

Limited transfers would require permanent structural reforms for Member States under the supervision of an EU finance minister.

We don’t oppose redistributive transfers to the so-called peripheral states to correct the imbalances that damage our economies, and of course we’re in favour of protecting investment levels in the crisis-hit countries.

But the point is that these measures are both utterly insufficient to address the underlying structural problems in the EMU, and they all demand trade-offs in rights, democracy and popular sovereignty.

So there will be a deepening of two major discussions in the EU in the near future – one on the EU budgetary capacity and one on improving social rights, linked to the Social Pillar but also linked to these proposals in the reflection paper, such as the unemployment insurance scheme.

We don’t oppose transfers to correct imbalances caused by the euro – but we will definitely oppose them if they are linked to conditionality. Social rights cannot be dependent on economic performance or a state’s following of the fiscal rules. Rights are rights.

The left in Europe shouldn’t fall for the trap of surrendering more ground to the Commission in exchange for these crumbs from the table.

New drive towards deregulation

 At the same time as you have these plans for deepening and completion of the EMU based on permanent austerity, and the dubious economic model of export-led growth, we also have a drive to dismantle the limited financial regulation that was enacted after the crisis.

We have a new drive too for the public to bail out the banks – we can see it both in the Commission green-lighting the Italian bailout last week using a loophole in the Banking Union legislation that you could drive a truck through, and through the EBA and ECB recently pushing the idea that public funds should be used to solve the ‘non-performing loan’ problem.

So taking all of this into account, the challenges for the left in the coming period will continue to be on the one hand defensive in order to try to halt the march of permanent austerity. We need to prevent the deepening and expansion of the EMU.

In the short term we need to campaign for effective sanctions against current account surpluses; for investment to be excluded from the fiscal rules; to try to reject the attempt to incorporate the Fiscal Compact into the Treaties at the end of this year; and for a real public investment plan to stimulate growth. We’re open to examining options for fundamental reform of the euro towards flexibility mechanisms or other possibilities. Some of the ideas outlined in Joseph Stiglitz’s book on the future of the euro are definitely worthy of consideration by the left.

But the option of an exit from the eurozone should also be viable and supported for member states that choose to do this as a result of their economic circumstances, just as states who want to remain within the eurozone should not be blackmailed or kicked out of the common currency against their will.

I’ll finish with a few comments on some recent and current election campaigns. We’ve all seen the elites across the EU celebrating the election results in the Netherlands and France, fostering a sense of triumphalism and complacency when what we should all be experiencing is alarm at the growth of the far right. But it is not inevitable that popular anger at the status quo is channelled into the far right.

We face the urgent challenge of developing, communicating and organizing around a programme that can win popular support, and the effective, bold and principled Labour campaign in Britain under the leadership of Jeremy Corbyn is something we can learn a lot from across Europe. Corbyn successfully managed to shift the debate from a narrow discussion on the terms of the British exit at the start of the campaign to one about what kind of country do people want to live in, what kind of world?

Social dumping and the revision of the Posting of Workers Directive

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The current proposal from the European Commission to revise the Posting of Workers Directive will not establish ‘equal pay for equal work in the same place’ nor effectively combat social dumping, and it needs to be significantly strengthened in order to have any impact.

The European Commission adopted a proposal for a Directive amending the 1996 ‘Directive on the posting of workers in the framework of the provision of services’ (Posted Workers Directive) on 8 March 2016. This ‘targeted revision’ of the PWD was announced as part of the Labour Mobility Package in the Commission’s Work Programme for 2016. The other two items in the Labour Mobility Package are a Communication on labour mobility and the revision of the Regulation on social security coordination – and the latter has now been postponed until after the British referendum on EU membership scheduled for 23 June 2016.

The Commission proposal for a Directive amending the PWD was referred to the European Parliament’s Employment and Social Affairs Committee. Since then, the ’yellow card’ procedure has been invoked by certain Member States against the revision of the PWD.

The stated goal of the 1996 PWD, which came into force in 1999, was to combat social dumping and prevent distortions of competition in the context of expanded European integration and increased posting of workers. Its central principle was that the pay and working conditions in effect in a Member State should be applicable both to local and posted workers.

The limitations of the original PWD, together with a very narrow interpretation of the rights it conferred by the European Court of Justice (ECJ), combined to make sure that the PWD only provided posted workers with a legal right to the basic minimum rights and conditions, and was largely ineffectual as a measure to combat social dumping.

Campaigns, in particular by the ETUC, for a revision of the PWD in light of the ECJ rulings were long ignored by the Commission, which eventually proposed an Enforcement Directive containing only marginal improvements to reduce abuse of posted workers in 2014. The deadline for the transposition of the Enforcement Directive by Member States is 18 June 2016.

A push in 2014 by several Member States for a revision of the PWD to establish the principle of ‘equal pay for equal work in the same place’ led to the current Commission proposal for a Directive amending the PWD.

Yellow card procedure invoked

By 10 May 2016 – the deadline for the ‘subsidiarity’ check by Member State parliaments on the Commission’s legislative proposal to amend the PWD – enough Member States had objected to the proposal on the grounds of subsidiarity for the ‘yellow card’ procedure to be invoked.

Under the yellow card system introduced as a protocol to the Lisbon Treaty, each Member State parliament can review draft EU legislation within eight weeks of receiving a proposal and produce a “reasoned opinion” objecting to the draft legislative act if it is believed the proposal breaches the principle of subsidiarity.

One-third of the total votes (at least 19 out of the total 56) is the threshold required to invoke the yellow card. In this case 11 Member States cast 22 votes for a review of the proposal. These were: Bulgaria, Croatia, Czech Republic, Denmark, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia. Five of these states also claimed the proposal was in breach of the principle of proportionality. Their submissions can be read here.

The Commission as the author of the draft legislation is now required to review the proposal, after which it may proceed to maintain, amend or withdraw the draft, and it must provide reasons for its decision. The EP’s rules of procedure mean it cannot move forward with the proposal until the author has stated “how it intends to proceed”. There is no time limit on the review.

Posted workers and social dumping

A ‘posted’ worker is one sent by his/her employer to work for that employer on a temporary basis in an undertaking the employer has established in another Member State.  The Commission claims that these are citizens “providing a service” in another Member State, and that they do not integrate into the labour market of the host state. A posted worker is paid by the company they were recruited by in their home state, and their social security contributions continue to be paid to their home state.

According to the Commission’s 2014 figures, there are more than 1.9 million posted workers in the EU, up by 10% from 2013 and up by 44% since 2010. Germany, France and Belgium were the top three destination states, receiving more than half of all posted workers, with EU-15 Member States the destination for 86% of all posted workers.

Poland, Germany and France are the top three states posting workers to other Member States. Construction accounts for more than 40% of all postings. There are three cross-border situations that the PWD covers: subcontracting, intra-corporate transfers and posting of temporary agency workers.

There is not an agreed definition of social dumping in the EU institutions but Eurofound (2012) defines it as “a practice involving the export of goods from a country with weak or poorly enforced labour standards, where the exporter’s costs are artificially lower than its competitors in countries with higher standards, hence representing an unfair advantage in international trade”. An alternative definition from the ETUI (2014) defines it as “the practice, undertaken by self-interested market participants, of undermining or evading existing social regulations with the aim of gaining a short-term advantage over their competitors”.

The tendency is for companies to use posted workers for labour-intensive jobs in low value chains, particularly in construction and transport, and for the company to pay only the minimum rate of pay legally required in the host Member State (or to illegally avoid observance of the host state’s labour laws and standards). As well as wage dumping, companies reduce other working conditions to make savings and require employees to pay high charges, for example for housing.

Concerns over the use of posted workers for social dumping within the European market became a political issue in the late 1980s and early 1990s as cross-border service provision expanded following the incorporation of Greece, Spain and Portugal. The first major ruling issued by the ECJ on the rights of posted workers versus the right to provide services was Rush Portuguesa, in which a Portuguese company posted workers to France under Portuguese pay and conditions, and was challenged by the French government for doing so without its authorisation.

The court ruled that the Company had the right to post its own workers to France under the ‘freedom to provide services’ contained in the Treaty of Rome, but also that France had the right to enforce the application of French labour laws.

Posted Workers Directive

The 1996 Directive was introduced as a result of the public debate and concerns of trade unions and some Member States regarding unfair competition on wages and working conditions arising from the posting of workers. It established a set of regulations aimed at ensuring minimum protection in destination Member States. Specifically, it guarantees the application of the host Member State’s statutory and regulatory provisions relating to:

*maximum work periods and minimum rest periods;
*minimum paid annual holidays;
*the minimum rates of pay, including overtime rates (excluding supplementary occupational retirement pension schemes);
*the conditions of hiring-out of workers, in particular the supply of workers by temporary employment undertakings;
*health, safety and hygiene at work;
*protective measures with regard to the terms and conditions of employment of pregnant women or women who have recently given birth, of children and of young people; and
*equality of treatment between men and women and other provisions on non-discrimination.

There are exceptions to the right to these minimum provisions for postings lasting less than a month, for the crew of merchant ships, for staff involved in the initial assembly, and where the amount of work to be done is “not significant”. The “temporary” nature of the posting was not defined by a time limit in the Directive.

In the construction sector “collective agreements or arbitration awards which have been declared universally applicable” must also be applied.

Interpretation of PWD as a maximum directive

While the 1990 Rush Portuguesa ruling suggested EEC members could actually extend all employment laws and regulations to posted workers, the ‘minimum’ rights outlined in the PWD and subsequent rulings by the ECJ in the 2000s enabled companies to exploit “the difference between minimum and standard levels of protection”.

The court has held that host Member States cannot require posting employers to comply with standards that go beyond the terms of the PWD – ie, posting employers cannot be required to pay wages at rates higher than the legal minimum, and cannot be required to adhere to standards not included in the minimum list of provisions above. It has also held that the right of workers and union to take collective action, including the right to strike, is subject to the right to freedom to provide services and freedom of establishment.

Some of the most significant cases include:

Laval: In 2004, Latvian firm Laval posted Latvian construction workers to Sweden and refused to acknowledge the existing collective agreement with the Swedish Building Workers’ Union. As Sweden had a well-functioning collective bargaining and agreement system and did not have an across-the-board minimum wage bound in law, Laval claimed that it was not obliged to pay the rates collectively agreed in the building sector.

The Swedish building union took collective industrial action. Laval claimed to the ECJ that it was being discriminated against on the grounds of nationality and that the Swedish union was infringing upon its right to provide services.

The court found that companies or “service providers” from another EU state are obliged to abide by the host agreement but collective action must be “proportional”. This means that the ECJ believes workers do have the right to take industrial action – but only when the minimum wage or conditions of the host country, or the minimum working conditions set out in the Posting of Workers Directive are being breached by the employer. The Laval case is viewed as the moment the PWD switched from being viewed as a minimum to a maximum directive.

Viking: In order to cut costs, the Finnish shipping company Viking Line attempted to re-flag its ships as Estonian and operate out of Estonia. When two Finnish maritime unions organised a blockade of Viking Line, Viking took its case to the ECJ: again, the claim was that the company’s right to freedom of movement was being restricted by the industrial action of the workers. In December 2007, while the court found that collective action to protect posted workers from exploitation was legal, the unions had restricted Viking Line’s right of establishment.

Rüffert: German company Objekt und Bauregie employed a Polish sub-contractor to employ Polish building workers, posted to Germany, on less than half the minimum wage agreed by German trade unions and employer associations. In 2008, the ECJ ruled that O&B should not be bound by the local Lower Saxony law that states public building contractors must abide by the existing collective agreements.

The court found that while member states may impose minimum pay rates on foreign companies posting workers in their state, the local law restricted the “freedom to provide services” and was not justified by the aim of protecting the workers because workers in the private sector were not covered by such protections.

In essence, this ruling prevents above-minimum wages and conditions being included in public tender contracts, conflicting with ILO Convention 94, which takes the approach that  public procurement contracts should not be used to exert downward pressure on wages or conditions.

Luxembourg: The European Commission took Luxembourg to the ECJ claiming that by imposing its labour law provisions – especially the mandatory indexation of wages – on all workers, including posted workers, the Luxembourg government was going beyond what was allowed under the PWD. The Luxembourg government argued that the application of these laws to posted workers was in the interests of ‘public policy’.

The court held that for public policy reasons to justify enforcing above-minimum standards, such standards must be “crucial for the protection of the political, social or economic order (in such a way) as to require compliance by all persons present on the national territory, regardless of their nationality”.

However, in February 2015 the ETUC welcomed the ruling in Sähköalojen ammattiliitto ry, which diverged from Laval and found that a host Member State can require posting companies to pay holiday allowances, daily flat-rate allowances to compensate workers for posting, and compensation for travelling time, on equal terms as local workers; and that if binding collective agreements set different pay levels for different groups of employees, these should be considered as being in line with the PWD.

Impact of ECJ’s PWD case law on right to take collective action

Overall the case law (with the exception of the more recent Sähköalojen ruling) highlights the following problems with the PWD in relation to collective action:

The right to take collective industrial action, including the right to strike, is not in fact guaranteed in the EU as it is subject to “Community law and national laws and practices”, which means it can be restricted.

The right to take collective action to prevent the exploitation of posted workers by foreign service providers is subject to the company’s right to freedom of movement and establishment under the EU Services Directive – a right which the ECJ has repeatedly and consistently upheld as being superior to workers’ rights. The Court now says that the freedom of establishment “may be relied on by a private undertaking against a trade union or an association of trade unions”. This means employers can take unions to court for any collective action by arguing it is violating their economic freedoms.

The collective action of workers and unions taken against posting companies is only deemed legitimate if it is “proportional” – that is, in defence of the most basic minimum conditions agreed on by EU bodies or set in law by the host country. The higher-than-average conditions that may be included in public sector agreements are an infringement of the right to establishment.

Enforcement Directive 2014

In response to calls for a revision of the PWD in light of the ECJ jurisprudence, the Commission claimed up until 2014 that such a revision was not necessary due to the introduction of Better Law-Making and REFIT, and that an Enforcement Directive on the PWD would resolve outstanding issues. The deadline for transposition of the Enforcement Directive is 18 June 2016.

The Enforcement Directive:

*lists criteria characterising the existence of a genuine link between the employer and the Member State of establishment (to combat ‘letterbox companies’)
*defines Member States’ responsibilities to verify compliance with the rules on posting of workers
*lists national control measures that the Member States may apply when monitoring compliance with the working conditions applicable to posted workers
*sets requirements for posting companies to facilitate transparency of information and inspections
*empowers trade unions and other parties to lodge complaints and take legal and/or administrative action against the employers of posted workers, if their rights are not respected
*ensures the application of administrative penalties and fines across the Member States if the requirements of EU law on posting are not respected.

The Enforcement Directive partially addresses a key problem with the application of the PWD in relation to subcontractors by introducing joint liability on the main contractor. This will set out who can be held liable for payment of wages, but does not determine what the wage of posted workers within a subcontracting chain should be.

The fundamental problems with the design of the PWD and its interpretation by the ECJ that have been outlined above were not addressed in the Enforcement Directive, which limited its scope to addressing fraud, circumvention of rules, and exchange of information between the Member States.

Commission’s new proposal has many limitations

In 2014, a group of Member States led by France campaigned for a revision of the PWD. Austria, Belgium, France, Germany, Luxembourg, the Netherlands and Sweden  signed a joint letter to the Commission calling for such a revision in order to establish in EU law the principle of ‘equal pay for equal work in the same place’, a demand supported by the ETUC and most European trade union federations. In response to this pressure, the Commission brought forward its proposal for a targeted revision of the 1996 Directive in March.

In doing so, the Commission finally admitted the existence of social dumping in the EU and its relationship with the PWD. In its Impact Assessment on the new proposal for a Directive amending the PWD, the Commission admits: “The 1996 Posting of Workers Directive establishes a structural differentiation of wage rules applying to posted and local workers which is the institutional source of an un-level playing field between posting and local companies, as well as of segmentation in the labour market,” and states that “the existing Directive has an in-built structural wage gap between posted and local workers”.

The key aspects of its proposal are:

*The ‘limited time’ a posted worker counts as a posted worker is defined as being 24 months or less, after which s/he will be covered by the labour law of the host state.
*The same rules on remuneration will apply to local and posted workers – but only if these are set by law or by universally applicable collective agreements.
*The rules set by universally applicable collective agreements become mandatory for posted workers in all economic sectors.
*Within sub-contracting chains, Member States will have the option to apply to posted workers the same rules on remuneration that are binding on the main contractor and even if these rules result from collective agreements that are not universally applicable.
*The principle of equal treatment with local temporary agency workers will also be applied to posted temporary agency workers, aligning the current legislation on domestic temporary agency work.

The key limitation of the Commission’s proposed revision is that it will not establish equal pay for equal work in the same place. The ‘same rules’ on remuneration will apply only when the standard is enshrined in law or in a universally applicable collective agreement, which is some Member States excludes the vast majority of collective agreements.

The two-year period before assimilation into the local labour market means most posted workers will be excluded as 90 per cent of posted workers are posted for less than 24 months at an average of 4 months.

It does not address the conflict between the right to take collective action and the right to freedom to provide services.

It also does not address the tension on the role of public procurement contracts between the Rüffert  case, the Public Procurement Directive  and ILO Convention  94, which states that conditions  under  public procurement contracts should not be less favourable than those established  for  the  same  work  in  the  same  area  by  collective agreement  or  similar  instrument.

The proposal does not make the general contractor liability at all stages of the subcontracting chain binding, and it does not require adequate proof of a pre-existing labour relationship before posting providing a service of similar nature.

All of these issues should be addressed through the process of revising the PWD in order to ensure it actually finally becomes an effective instrument to combat social dumping.