The Report also argues that:

the essential thrust of economic integration in its various forms – from trade liberalization to enhanced labour and capital mobility – can be summarized thus: while generally desirable, it usually has adverse consequences for relatively inefficient producers. The interaction between social policy and economic integration becomes particularly obvious whenever it is the poorer members of EU countries who lose out. In such cases, integration is likely to lead to demands for greater social protection.

The effectiveness of national social policy is also affected by the degree of economic integration. Coordination may be required if such policies are to be effective. Governments could use them strategically to benefit their own citizens at the expense of foreigners: by offering less regulation and lower social protection in order to encourage inflows of capital – otherwise known as ‘social dumping’. If unchecked, this will result in lower levels of social protection all round – though to the extent that current national social policies in Europe are ill-designed or fail to protect the most disadvantaged members of society, this could be a positive outcome.

The Report draws on the lessons of past EU integration, in particular, the enlargement including the poorer Mediterranean countries and Ireland. The Report goes on to discuss the implementation of national and EU social policies in the context of the continued EU deepening associated with the single market and the introduction of the euro, as well as the consequences of widening to the East. It concludes that continued integration accentuates the pressure both for reform, and for greater coordination and harmonization of social policies. While EU-level policies are not particularly binding at present, they may become a more significant factor in future.

Increased labour market flexibility would be a welcome development in seeking to minimize high persistent unemployment. The so-called European model has involved the maintenance of both a high level of labour market rigidity and a high level of social protection. In an environment of increasing competition, this model becomes increasingly more costly in terms of unemployment and it risks serious problems of sustainability of the welfare state. So a drive for harmonization should not stand in the way of reform.

But harmonization only makes sense between countries at similar standards of development and with similar social preferences in the trade-off between efficiency and redistribution to the poor. Income disparities are already large among the current EU members and will dramatically increase with the next enlargement. There are also large disparities in labour market regulations and in the organization of social policies. Since these are present even among countries with similar income levels, they constitute compelling evidence for different national preferences in the efficiency versus redistribution trade-off, which should be respected. Hence, the most that policy-makers should strive for is minimum standards that are acceptable to all countries.

Fostering a dialogue between the representatives of employers and employees at the European level so that EU social policy is based on consensus is a good idea, since most measures that are harmful to a firm’s ability to compete in increasingly integrated markets will be rejected. But it should be kept in mind that European federations of unions, like their national counterparts, will tend to represent employees rather than the unemployed. Similarly, European federations of employers are more likely to represent the interests of large corporations than of small and medium-sized firms. It seems that only politicians can represent the unemployed and owners of small firms at the European level.

These arguments indicate what types of social harmonization have the highest potential for welfare improvement. But are there examples of desirable and undesirable measures?

Establishing a single minimum wage or a single unemployment benefit level throughout the EU would not make sense since an average level would be too low for the richest countries and too high for the poorest ones, with the potential of causing even higher unemployment.

Measures fostering mobility are desirable, such as those suppressing any discrimination against migrant workers or any unwarranted formal or informal barriers to the mutual recognition of diplomas. By the same token, measures that clearly deter mobility for protectionist reasons, such as the Posted Workers Directive, are a bad idea. Mobility enhancing measures should nevertheless reduce incentives for ‘benefit shopping’.

Measures designed to overcome problems of imperfect or asymmetric information are also potentially desirable, such as the obligation to provide representatives of workers with notice and information on collective redundancies or to foster exchanges of information among employees of multinationals in different countries. But if social harmonization were to evolve into measures obstructing the shift of production sites across countries, then this would harm the competitiveness of firms and would be counterproductive. Problems of asymmetric information may also be overcome by regulations on health and safety, but imposing the same working conditions across countries in a way that runs counter to different national tastes and customs is undesirable.

Notes for Editors:

CEPR is a network of over 450 Research Fellows based throughout Europe, who collaborate through the Centre in research and its dissemination. CEPR helps its Research Fellows to develop projects, obtain their funding, administer them and disseminate their results. The Centre’s research ranges from open economy macroeconomics to trade policy, from the economic transformation of Central and Eastern Europe to regionalism in the world economy. For further information about CEPR, please contact Rita Gilbert, External Relations Officer, Tel: 44 20 7878 2917 or email: rgilbert@cepr.org

Monitoring European Integration is an annual Report published by CEPR. The eighth Report was prepared by a team of CEPR Research Fellows, comprising Charles Bean, London School of Economics and CEPR, Samuel Bentolila, CEMFI, Madrid and CEPR, Giuseppe Bertola, University of Turin, European University Institute, Florence and CEPR, and Juan Dolado, University Carlos III, Madrid, and CEPR.

Social Europe: One for All?
Monitoring European Integration No. 8
Charles Bean, Samuel Bentolila, Giuseppe Bertola
and Juan Dolado

ISBN 1 898128 33 2–– £10.00 / $14.95/€15

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