Select Committee on European Union Sixth Report


CHAPTER 7: WILL THERE BE A "RACE TO THE BOTTOM"?

133.  "In its current form the draft Services Directive is impractical, dangerous and certainly unworkable and is an invitation for abuse and manipulation and threatens to undermine the European Social Model". This is the evaluation that Amicus gave us in written evidence to this inquiry.

134.  The view held by Amicus sums up widespread concern that has made the draft Services Directive a hotly debated subject in Brussels and in Member States. It is difficult to define clearly what is meant by the "European Social Model". The term is used by many with different meanings. As the Minister, Mr Douglas Alexander told us: "one of the points that emerges when discussions take place on the European Social Model is that it is more often discussed than defined" (Q 486).

135.  Jacques Delors, the former Commission President speaking before the French referendum on the EU Constitutional Treaty used the term in the following way: "there is a European Social Model in the sense that we refuse the triumphant individualism of some and the excessive oppression of society in others". He went on to say "But we have a Scandinavian model, a Blairist model, a German model, and the French state model. Each one has its own system which guards its diversity."[42] This illustrates the vague definition of the term. Most often it appears to relate to a relatively liberal market economy with strong social norms embedded within it. Most Europeans could sign up to the broad concept. It is the balance and relationship between the liberal market economy and the extent and means of achieving social objectives that brings differences of judgement.

136.  Interestingly, the first three proposed amendments to the draft Directive proposed by the European Parliament Committee Report of May 2005 all refer to "preserving" or "upholding the European social model" without defining that term or in what ways the draft Directive impacts upon it. Discussions on the draft Directive have become caught up in wider political debates to the detriment of the belief in an open, single market in the European Union.

137.  It is clear from this that the draft Directive has exposed grave concerns, that often reach well beyond its scope, about the state of the European Union and its future as a Union of 25 Member States. The concern most often expressed, is that if the new Member States can compete on an equal economic basis without applying the often higher social security norms of the "15", they will undermine further the foundations of the welfare state as it exists in most of the "15". The critics of the draft Directive, like Amicus, argue that the principles of Country of Origin and of Mutual Acceptance will mean that the lowest level of pay and social protection will become the norm.

138.  This chapter analyses these concerns and concludes that they have been exaggerated.

EMPLOYMENT RIGHTS

139.  To analyse and dispel the concern that the Services Directive will cause a "race to the bottom", it is necessary first to consider the relationship between the draft Directive and the application of the Posting of Workers Directive which was agreed in 1996. For, as will be shown, the Services Directive establishes a complex relationship between it and the Posting of Workers Directive. It is possible that it is the application of the Posting of Workers Directive, rather than the Services Directive, which is the true target of much of the criticism.

140.  The Posting of Workers Directive[43] requires that if a worker is posted temporarily to another Member State (the host Member State) by his or her employer, the terms of that employment will be the minimum terms and conditions in the host Member State. The purpose of this Directive is that any foreign EU worker is bound by the employment laws where the work is carried out, even if the employment conditions in his/her own country are less stringent. The DTI defines a posted worker as: "one who, for a limited period, carries out his work in the territory of a European Community Member State other than the State in which he normally works."[44]

141.  The draft Services Directive derogates to the Posting of Workers Directive in respect of the Country of Origin Principle under Article 17 (5). That is to say, the draft Directive is only relevant for services provided temporarily by those who are not employed by others, i.e. self employed persons. We return to this matter later.

142.  Since the Posting of Workers Directive covers employment rights such as statutory minimum rates of pay, maximum hours of work, health and safety, non-discrimination and other well established employment rights, posted workers automatically benefit from host country conditions for the time that they work in the host Member State.[45] Workers from a different Member State working in the UK would therefore be bound by the UK rate of minimum wage, European law on working time[46] and UK non-discrimination law.

143.  The only way therefore that workers from a different Member State would be able to undercut host country workers is if it were customary for employment to be provided on more generous terms than the legal minimum. In the United Kingdom, there are some examples of such collective agreements that offer better employment conditions than the minimum required and which are not legally binding agreements.

144.  In those Member States where some of the above employment measures are not in place some undercutting of the host market is more likely. Our witnesses in Germany provided us with an example: Germany has no legally binding national minimum wage, instead minimum rates of payment are agreed collectively across sectors. Thus it becomes more likely that a workforce posted to Germany which is not subject to the national collective agreement that exists for German workers, is able to undercut the German workforce by being cheaper by the hour. However, this is not a legitimate criticism of the Services Directive, but rather of the Posting of Workers Directive which fails to address the particularity of the German system of establishing employment rights.

145.  In its written evidence, the Transport and General Workers Union (TGWU) raises a number of other employment rights relating to such matters as unfair dismissal, redundancy, trade union related protections as well as others, that it asserts would be undermined by the Services Directive. As the preceding paragraphs illustrate, these rights are not threatened by the Services Directive. Moreover, as we have seen with "offshore" call centres, service providers can move such activities around the globe with or without the Services Directive and may well continue to do so if they feel employment costs in the EU become too high. It is important to bear in mind the main aim of the Services Directive which is to make the EU more competitive. As Mr Joyce of the Architects' Council told us, "a number of the efficiencies that could be delivered to this sector would give the European construction sector an edge in a global marketplace and in the context of WTO—I do not wish to complicate the debate, but if we are more competitive, we get more contracts" (Q 233).

146.  We do not believe the TGWU's concern is justified. The Services Directive would not change the present situation for posted workers in the UK or any other Member State where statutory minimum employment standards are set. Just as now, under the Directive there would be some workers employed with collective agreements above the statutory minimum and others who were not and were therefore cheaper to employ.

147.  As we have already mentioned, the Services Directive and the position of self-employed persons is complex and must be further analysed. Self employed persons working for consumers directly are subject to the derogation from Country of Origin Principle in Article 17 (21). This means that they provide services under UK law in the UK. It is therefore only those who take on self-employed businesses providing a service for a business customer in a different Member State that they come under the aegis of the Country of Origin Principle. In this situation the Services Directive stipulates that the parties can then choose the law applicable to their contract. We are aware that the Government wishes to raise points of detail on the current draft of the Services Directive in this particular area, but we are hopeful that a satisfactory compromise can be reached by the Government on this particular matter.

ENVIRONMENTAL STANDARDS

148.  It is argued that a race for the bottom can take on other forms such as environmental standards. However, we see no grounds for concern in this area, since these are covered by an extensive body of EU legislation, the Acquis Communitaire, with which all Member States must comply.

WEB OF CONTRACTS

149.  Another concern that was raised during our inquiry was that of a web of contracts. In the construction industry, particular projects often may involve a number of groups of workers which are each covered by their own contract. It is clear that costly difficulties may arise if the law of a number of Member States can be invoked in relation to particular parts of a big construction contract. Therefore, from the limited evidence that we received on this point, we would assume that the lead contractor would choose the law applicable and that this law would cover the entire series of contracts that make up the construction project.

QUALITY ASSURANCE

150.  During our inquiry we were confronted with an attitude of natural patriotism from many of our witnesses who appeared to view other countries' service providers with some suspicion. On the face of it, this tendency could be mistaken for a belief that other Member States could not offer the same quality service as a national provider, but when probed it often came down to uncertainty due to different national approaches to the regulation of services and who may provide them. Each Member State has a different historical tradition and preserves aspects of that in relation to the legal framework relating to service provision. The main difference between Member States which we discerned was between approaches to quality assurance.

151.  In general the UK Government takes a relaxed or consumer-focussed approach to the issue of quality assurance. Except in the professions and special cases such as gasfitters, the UK Government are content to allow consumers to determine quality. So for instance, in the United Kingdom it is not necessary to have a relevant qualification to set up in business as a hairdresser. The UK's approach to quality assurance in this case would be that if in fact the hairdresser knows little of hairdressing, it is likely that their haircuts will be of poor quality and the salon is unlikely to prosper.

152.  By contrast in Germany, a hairdresser must, in order to call themselves a Friseur (hairdresser), have had an extensive training. Therefore, it is relatively unlikely that a poor haircut will be sold, but the price may be higher (this effect may apply particularly in professions where training requirements severely restrict entry). There is of course no necessary link between the higher price and better quality of the haircut, and the UK Government are content to let the consumer decide which hairdresser to patronise. The Institute for Chartered Surveyors made a similar point with regard to the service provision of architects: "A more liberalised market such as already exists in the UK and Ireland will not lead to a lowering of standards or put the public interest at risk. It is clear, for example, that buildings in the UK and Ireland are no less safe than those designed, constructed and maintained elsewhere in the EU." (RICS)

153.  Mr Bretz of Clifford Chance reinforced this point: "Once you have a free trade area such as the European Union and you have case law of the European Court of Justice that provides for the free movement of services, it is inevitable for an unregulated service to be provided on the basis of country of origin and therefore there will be a trade-off between the price and the quality of the service" (Q 565). He then went on to say: "The whole concept underlying the free movement of unregulated services is that you will increase welfare ultimately by allowing … more service providers to provide services at different price levels. There may be variations in quality".

154.  We believe the trade-off as Mr Bretz describes it above is clear. Under the draft Services Directive, the consumer will be allowed more choice and entry in the market is made easier, which is likely to drive the cost of services down.

155.  We understand that some Member States are concerned that an internal market in services may require changes to certain local, regional, or national systems of service providers, but it may prove an inevitable concession to consumer pressure for change towards greater choice. It must not be assumed that a cheaper service can be equated with an inferior service. Just as with goods, the Which? Best Buy is not necessarily the most expensive.

156.  As we argued in Chapter 4, it must be recognised that professionals also employ arguments about quality to limit others from entering into their professional activity. This is understandable since they have spent time and effort training for the activity and desire a return on that training. Therefore we must be alert to the difference between genuine concerns about quality and concerns about the economic interests of particular groups.

157.  There is a clear difference between disallowing those who are not adequately trained from engaging in a particular activity and disallowing all those who do not possess a particular title from engaging in that activity. This was a point made to us forcibly by the Chartered Surveyors who told us that a RICS building surveyor in the UK and Ireland can design buildings, whereas in many other Member States this would need to be done by a professional qualified as an architect. A further example illustrating this difference is that in Greece 80% of roads are built by appropriately qualified surveyors, whereas in most other Member States a road builder would be expected to be qualified as a civil engineer (Q 246).

158.  The Chartered Surveyors went on to say that in a number of EU countries professionally qualified and highly experienced RICS valuers are unable to provide their valuation services for bank lending, insurance and financial reporting because these activities are reserved for those who hold the title of architect. Removing such monopolies will bring greater competition in the professions and so lead to better choice and value for clients, as well as a more efficient internal market. We agree that such obstacles to an internal market in services do little to help purchasers and removing them will lead to the EU becoming more competitive.

"BRASS PLATING"

159.  A final concern about a mechanism by which there might be a "race for the bottom" is if companies decided to move to a regime with the least onerous controls and with the least effective surveillance in order then to operate under the Country of Origin Principle in Member States with more restrictive regulatory systems.

160.  The Government response to this question was that much of the legislation that protects European Union citizens either as employees or as consumers is already harmonised at some level within the European Union. Consequently, service providers will be bound by this legislation regardless of which Member State they are established in. Those Member States who have recently joined the European Union are committed to implementing all current European Union legislation. The Government went on to argue that all Member States have an interest in maintaining high standards of domestic legislation to protect their own consumers and workers. For these reasons there is little or no prospect of a movement to reduce standards amongst Member States, all of which must meet at least the standards required by the Acquis Communitaire.

161.  The draft directive safeguards against the possibility of businesses opening a "letterbox", "post-box" or "brass plate" in a Member State where some aspects of the regulatory environment were perceived as advantageous as an "established" base from which then to operate on a temporary basis in other Member States under the directive. The Directive makes it clear that it will not be sufficient for a business to register a "post box" in one Member State to qualify as established there. Businesses must be carrying out genuine economic activity in the Member State in question.

162.  One extreme form of this would be brass-plating whereby companies abuse the fundamental freedoms in the EC Treaty and therefore look at the practicality of introducing a provision on the "evasion of home country legislation". According to the Government such a provision would stop service providers from setting up in another Member State with the primary objective of offering services back to their home Member State thereby avoiding home Member State legislation. This proposal is based on a similar provision included in the E-commerce Directive agreed in 2001.

163.  Subject to this provision proposed by the UK Government, we accept their reassurance on this issue.

164.  It must be remembered also that the country of origin basis of business operations does not apply to more permanent, established operations in a country. The Country of Origin Principle is largely to the benefit of small, self employed businesses looking to explore and break into new markets. Larger businesses will, as before, operate substantially on an established basis. For them, it is the sections of the directive dealing with simplification of establishment and creating a level playing field for all established businesses with a Member State that will benefit them.

165.  In summary, our arguments reject the contention that the draft Services Directive would lead to a race to the bottom. In particular, we do not accept the implicit argument of many critics of the draft Directive that competition in service provision on the basis of temporary operation under the Country of Origin Principle inevitably undermines the "European Social Model", or indeed the way of life of any particular Member State.


42   Reported in the Financial Times, 25 May 2005. Back

43   Directive 96/71/EC Back

44   www.dti.gov.uk/er/directive.htm  Back

45   It may be that an unscrupulous employer would seek not to provide even the statutory provision, but such an employer would be proceeding illegally in any case. Back

46   The European Working Time Directive, 93/104/EC which stipulates a maximum week of 48 hours on average calculated over six months. Back


 
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