EMU and UK industrial relations

At the end of October 1997, the UK Government announced that it would not join EU Economic and Monetary Union (EMU) in 1999. After some initial confusion and inconsistency, the Government has spent the past few months clarifying its position. This article assesses the likely impact of the Government's position on labour market and industrial relations issues.

The UK - then led by a Conservative Government - was one of two European Union (EU) Member States (along with Denmark) that decided to "opt out" of the Economic and Monetary Union (EMU) which was agreed as part of the Maastricht Treaty on European Union of 1992. The third stage of EMU, involving a single currency - the euro - is due to get underway at the beginning of 1999.

The EMU policy of the Labour Government which came to power in May 1997 was set out by the Chancellor of the Exchequer, Gordon Brown, in a speech to Parliament on 27 October 1997. According to the Chancellor, the present Government, unlike the previous admnistration, feels that there could be substantial benefits for both economic growth and employment if the UK economy were to join a successful EMU. However, for EMU to be of benefit, the UK economy would need to be sufficiently and durably converged with those of the other members and flexible enough to respond to shocks and other changes that will occur over time.

The Government states that at present the UK economy is not synchronised with the rest of Europe, nor is it sufficiently flexible to make joining EMU desirable in the near future. It believes that the combination of a new UK macroeconomic policy framework, wider developments within Europe and the structural policies that it has put in place will increase flexibility and convergence, but that such policies generally, take time to have their effect. "Therefore", stated Mr Brown, "barring some fundamental and unforeseen change in economic circumstances, making a decision, during this Parliament, to join is not realistic. It is also therefore sensible for business and the country to plan on the basis that, in this Parliament, we do not propose to enter a single currency."

In the area of industrial relations, one of the clear problems facing the Government with regard to EMU concerns the flexibility of labour markets. The Government feels that with the loss of domestic control over monetary policy and exchange rates as a means of adjusting to shocks, a greater burden of adjustment will fall on labour markets.

The labour market

In a recent report - UK membership of the single currency: an assessment of the five economic tests, HM Treasury (1997)- the Government states its concern that unemployment in Europe is largely a structural problem. Although it believes that the UK has one of the more flexible labour markets, it still feels that structural factors such as the creation of internal labour markets are a barrier to the flexibility and adaptability needed to make EMU a success. Therefore the Government intends concentrating on three main areas to increase the effectiveness of labour markets in meeting structural changes, without damaging effects on employment and living standards:

  • wage flexibility;
  • employment flexibility; and
  • employability and lifelong learning.

Wage flexibility

It is clear that the prospect of a return to spiralling wage inflation as unemployment falls is a major worry to the Government. The UK labour market has one of the most decentralised systems of wage determination in Europe and the Government believes that this feature of the labour market helps to ensure that wages are sensitive to specific demand conditions. This ought to place the UK economy in a relatively good position to reap the benefits of increased competition in a single currency area, but the Government feels that the UK labour market has not improved sufficiently on this score to enable it successfully to participate in a single currency. Instead the Government wishes to continue to monitor the behaviour of skills shortages, real wages and unemployment to see whether the historical problem of recurrent cycles of wage inflation and unemployment has been addressed.

Employment flexibility

The Government also feels that the UK labour market is very flexible. The UK labour market has always been relatively unregulated compared with other EU countries: for example, it has a wider range of hours of work than anywhere else in the EU, with only 10% of employees working a "standard" 40 hour week, compared with 25% in Germany and 45% in France and Italy. The UK also has less restrictive hiring and firing rules than other EU countries.

In terms of EU-wide labour mobility, while capital is highly mobile both inside and outside the EU, the extent of cross-border labour migration is low and tends to be focused on highly paid professionals - social, economic and cultural barriers to labour mobility (notably language barriers) remain high. Within the UK, there are important links between housing and labour mobility. The UK has a relatively high level of owner-occupation and, in recent years, negative equity and volatility in house prices have also been factors hindering labour mobility. Stability in house prices is an important element underpinning flexibility in the labour market.

Employability and lifelong learning

The Government also recognises that flexibility can lead to insecurity. One way to address this is to install a minimum floor of rights, such as those which are laid down in the Social Charter, and for which the EU Treaty's "social chapter" provides a framework. Another way of avoiding insecurity is the concept of "lifelong learning", and this is particularly relevant to the debate about EMU. The ability to adapt to structural change and increased competition depends on people having the basic skills needed to compete for a wide and changing range of jobs. And individuals need the opportunity to retrain in new skills to reflect the changing pattern of labour demand. Therefore, the Government is targeting particular vulnerable groups through its "Welfare to Work" initiative (UK9707143F):

  • long-term unemployed people;
  • young unemployed people;
  • lone parents; and
  • people with long-term sickness and disabilities.

All of the above flexibility measures are aimed at achieving low inflation and at generating the confidence that it will remain low. Overall, though, the Government still feels that the UK is not ready to be able to cope adequately with potential shocks that might arise in EMU.

Reactions to the Government's announcement

The two main social partners - the Trades Union Congress (TUC) and Confederation of British Industry (CBI) - clearly support the UK's inclusion in EMU, but opinion in general is more difficult to gauge. Even so trade union, business and finance leaders alike expressed dismay at the Government's initial statement on EMU, which seemed to them to be full of inconsistencies. Some fear that what they see as the Government's indecision will cause organisations to hold back from preparing for EMU. This is considered dangerous as many organisations will be affected by EMU, even though the UK has chosen not to join at this stage. The social partners' opinions are summarised below.

CBI

Its director general, Adair Turner, told a CBI conference in January 1998 that the majority opinion of business and the CBI is in favour of EMU. He welcomed Labour's intention to join EMU at some point, though he was critical of the confusion apparently caused by "off the record" briefings on the Government's EMU position.

The conference became something of a battleground of opinion as leaders of major organisations expressed their support for or opposition to the CBI's stance. The supporting camp included the following:

  • Unilever chair, Niall Fitzgerald, who attacked the "superior, sceptical adjustment" that he said had dominated British thinking on Europe for the past 50 years, causing many lost opportunities. He said that monetary union would bring open and better competition, price transparency and lower inflation;
  • the chair of BMW, Bernd Pischetrieder, who said that failure to take part in EMU might threaten investment from overseas. The recent case of Toyota's decision to build a new plant in France rather than the UK is seen as a prime example (UK9712188N); and
  • others who warned that the strength of the pound is damaging to export companies. Ian Campbell, director general of the Institute of Export, said that "the recent strength of sterling and the costs and difficulties of transferring funds from overseas have clearly prompted a much stronger positive vote for single European currency than is the case among the public at large."

The opposing camp included Martin Taylor, chief executive of Barclays Bank, who argued that Britain's participation would cut wages and destroy jobs because, without the buffer of exchange rate fluctuations, only labour markets would be able to take the consequences of economic adjustments. Further arguments advanced by opponents were that: increased regulation would be a further burden on business; and EMU would tie Britain to some of the lowest wages in Europe.

Survey results

A recent report by the Abbey National building society indicated that more than three-fifths of the public do not know that EMU begins in 1999 and that 36% are unaware of the euro currency. However, overall the latest results of surveys show a marked tendency towards acceptance of EMU.

Early replies from a poll of 2,000 CBI member companies point towards a strong "yes" vote in favour of EMU. The CBI believes that Chancellor Brown was wrong in ruling out entry before the next general election. Provisional results of the survey show that almost 75% of the British businesses surveyed support membership of EMU, given the right conditions. Only 16% were in outright opposition. The results also disclose high levels of readiness for the single currency among companies: 68% declared that they would be adequately prepared for monetary union if the single currency met its 1999 deadline, while only 13% said that they would not be ready and 17% said that they did not know.

A recent Barclays Bank survey of companies that already do business in Europe found that 65% had still done nothing to prepare for the euro, while 60% said that they do not intend to prepare. However, according to the October 1997 DHL Quarterly Export Indicator, Britain's manufacturing exporters strongly support the single currency, with two-thirds of those surveyed thinking that EMU would be beneficial - a level of support markedly up on a year ago. Nearly one in five of the companies expected job losses if the pound remained at its current strong level.

An Engineering Employers' Federation (EEF) survey, conducted in conjunction with Lloyds Bank and published in December 1997, found that only one in 10 of over 800 engineering companies surveyed were opposed to EMU, but also that only one in 10 had made any plans for EMU. Most companies said that lack of government direction, likely changes to government policy and insufficient information were the reasons for their lack of planning.

TUC

The TUC clearly feels that there has been insufficient debate and too much "scaremongering" over EMU. Its general secretary, John Monks, said: "While we may not yet know exactly when we will sign up to EMU, it is imperative that we start preparing for it now. The EMU debate so far has been misrepresented with scare stories making people anxious and turning them off. Preparing for the EMU needs a practical approach - people want to know what the euro will mean for them."

The TUC argues that government will only win support for EMU if it fully embraces the "social chapter". According to Mr Monks: "Winning popular support for the single currency will need an active social policy at European level. A People's Europe will not be based on a single market and a single currency alone. It must include an active job creation policy and an active programme for greater fairness at work."

The TUC is taking a leading role in developing local partnerships and preparing for the introduction of the euro through a series of regional seminars which will be open to trade unionists and local business, as well as representatives from the voluntary and public sector. The seminars will concentrate on practical issues including how the euro will work and the role that unions, business and local communities need to play to gear up for the euro's introduction in the UK.

Commentary

The employment effects of EMU are indeterminate and the debates - as with those over the national minimum wage (UK9711177F) - cause more confusion than they resolve. According to an article in the Observer newspaper on 18 November 1997, taking labour market rigidity as a measure of vulnerability, it is possible to see which parts of Europe are likely to gain from EMU. The evidence shows that if the UK were to join at the start, it would have three of the 10 most vulnerable regions among the five largest European countries. At the same time, however, it would also have two out of the 10 regions most likely to benefit from EMU. The article states that EMU is likely to have an impact on the most peripheral and depressed regions, so may need to be accompanied by regional policies.

Employment and training are areas where the social partners are likely to agree. However, the CBI supports EMU largely from the point of view of its impact on competition. It is less likely to support any further moves to legislate on social policy issues. On the other hand, the TUC sees the success of EMU as being intrinsically linked with basic rights for workers.

This means that the Government is faced with a fine balancing act in its bid for convergence. While it embraces notions of flexible labour markets in order to control inflation and create jobs and growth, it also sees the need for intervention in planning, basic rights, training and investment. (MW Gilman, IRRU)

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