EU intervenes in national wage developments

During 2011, against the background of the continuing economic and debt crisis, the EU has intervened to an unprecedented extent in pay developments in the member states. It has issued a series of recommendations aimed at achieving moderate wage growth and reform of wage-setting mechanisms.

On this page:
The EU and pay
Increased EU economic coordination
Recommendations and guidance on wages
Eurozone wage restraint
Employers' views
Trade union positions.

The EU and pay

EU employment policy and legislation has never dealt directly with pay levels or wage setting, and art.153.5 of the Treaty on the Functioning of the European Union (TFEU) explicitly excludes pay (along with trade union and strike rights) from the areas in which the EU can legislate and otherwise act to support and complement member states' activities in the social policy field. The only area of wages where the EU is explicitly allowed to act is equal pay for women and men.

The ban on EU involvement in pay issues means, for example, that, even if there were a political wish to introduce an EU-wide minimum wage, legislation could not be proposed to introduce one without changes to the TFEU.

However, outside the strictly defined employment and social policy field, the greater coordination of EU economic policy, especially since the start of the global downturn in 2008, has brought an increasing focus by the EU institutions on wage developments. Wages are seen as an important variable in tackling the economic crisis facing many member states. Wage trends influence the prospects for recovery by playing a role in promoting both competitiveness and demand. In the 17 EU member states that have adopted the euro single currency, and thereby lost the possibility of devaluing their currency as a response to the crisis, wage movements are one of the few mechanisms still available for adjusting national economies and making them more competitive.

During 2011, the EU has taken a number of economic policy initiatives with a direct impact on wage growth and setting in the member states. The rationale of this developing strategy is that restoring growth and competitiveness requires:

• wage moderation, with pay rises linked to increases in productivity; and
• the relaxation or abolition of certain wage-setting institutions, such as automatic indexation of pay to inflation and centralised collective bargaining at sector or higher level.

Increased EU economic coordination

In 2011, in the light of the recession and public debt crises in a number of member states, the EU introduced a new system of economic policy coordination surveillance aimed at preventing excessive debts, deficits and imbalances. This includes a mechanism known as the "European semester", whereby each year member states coordinate their budgetary, economic and structural reform policies in advance, in line with the stability and growth pact (the agreement on fiscal policy that underpins the eurozone) and the Europe 2020 jobs and growth strategy.

The European semester begins each January with the publication by the European Commission of an "annual growth survey". This survey evaluates the economic situation and the main challenges that the EU must address, and makes broad recommendations to the member states aimed at achieving economic growth. The survey is debated by the Council of the EU (made up of national ministers) and the European Parliament. Then, each March, the European Council (the meeting of EU heads of state and government) identifies the main economic challenges, mainly based on the survey, and gives strategic advice on policies.

In April, taking account of the European Council's guidance, the member states present their medium-term budgetary strategies and "national reform programmes" in areas such as employment. These strategies and programmes are then assessed by the Commission. In June and July, on the basis of the Commission's assessments, the Council of the EU issues country-specific recommendations, including guidance to member states whose policies and budgets are seen as inappropriate. In July, the European Council and the Council of the EU provide policy advice before member states finalise their budgets for the following year.

This EU economic governance system will be further strengthened in the near future, following a deal in September 2011 between the Council of the EU and the Parliament on a new set of measures, which will introduce further controls to prevent excessive budget deficits, debts and imbalances, with stronger enforcement by the Commission. One of these measures is a Regulation creating a mechanism for detecting and correcting economic imbalances in the member states, whereby the Council of the EU can issue recommendations to national Governments to take preventive or corrective action.

Recommendations and guidance on wages

The first annual growth survey, published in January 2011, included a recommendation from the Commission that member states with large current account deficits and high levels of indebtedness should present concrete corrective measures, which could include "strict and sustained" wage moderation, including the revision of pay-indexation clauses in bargaining systems.

A meeting of the Employment, Social Policy, Health and Consumer Affairs Council on 7 March 2011 responded to the growth survey by agreeing political guidance on member states' employment policies. This included a request that, in drawing up their national reform programmes, member states should include appropriate measures aimed at ensuring that labour costs develop in line with labour productivity and in a way compatible with low levels of inflation, though respecting the role of the social partners (employers and trade unions) regarding wage setting.

The annual joint employment report for 2011, agreed in March by the Council of the EU and the Commission as part of the Europe 2020 strategy, included recommendations that member states should:

• improve the responsiveness of wage-setting processes to market developments, in conjunction with the social partners, so that wages properly reflect labour productivity in the medium term and ensure the EU's competitive position vis-à-vis the rest of the world, as well as competitiveness inside the EU and within member states; and
• enhance flexibility in setting entry wages (that is, the pay of new recruits), while ensuring decent pay and respecting the role of social partners in the decision-making process.

The country-specific recommendations issued in July 2011 to eight member states - Belgium, Bulgaria, Cyprus, France, Italy, Luxembourg, Malta and Spain - included calls for Governments, in consultation with the social partners and in accordance with national practice, to reform aspects of wage setting. The countries involved include all the member states that have systems of automatically indexing pay to inflation, along with some that have centralised pay bargaining systems. The recommendations were as follows:

• Belgium, Cyprus, Luxembourg and Malta should reform their systems of wage bargaining and indexation, to ensure that wage growth better reflects developments in labour productivity and competitiveness.
• Spain should implement a comprehensive reform of the bargaining process and wage-indexation system to ensure that wage growth better reflects productivity developments as well as local- and firm-level conditions, and to give firms enough flexibility to adapt working conditions to changes in the economic environment.
• Italy should ensure that wage growth better reflects productivity developments as well as local and company conditions, including measures to allow firm-level collective bargaining to proceed in this direction.
• Bulgaria should promote policies to ensure that wage growth better reflects developments in productivity and sustains competitiveness while paying attention to ongoing convergence with the rest of the EU.
• France should ensure that development of its national minimum wage is supportive of job creation.

Eurozone wage restraint

In March 2011, the Governments of the 17 eurozone countries agreed a "Euro-plus pact", setting out a new economic policy coordination mechanism, aimed at improving competitiveness in the context of the eurozone debt crisis. The 17 eurozone countries are: Austria; Belgium; Cyprus; Estonia; Finland; France; Germany; Greece; Ireland; Italy; Luxembourg; Malta; the Netherlands; Portugal; the Slovak Republic; Slovenia; and Spain. Six further countries - Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania - have also signed up to the new pact, which remains open for the other EU member states to join.

The pact provides that the participating member states will take all necessary measures to foster competitiveness and employment, improve the sustainability of public finances and reinforce financial stability. Among the commitments relating to competitiveness is an agreement to assess whether or not wages are evolving in line with productivity. Unit labour costs (the average cost of labour per unit of output) in each country will be monitored and compared with developments in other eurozone countries and the country's main comparable trading partners.

The pact states that "large and sustained increases" in unit labour costs may lead to an erosion of competitiveness. While each country remains responsible for choosing specific policy actions to foster competitiveness, all countries will give particular attention - while "respecting national traditions of social dialogue and industrial relations" - to measures ensuring that labour costs develop in line with productivity. These include:

• reviewing wage-setting arrangements and, where necessary, the degree of centralisation in the collective bargaining process and any pay-indexation mechanisms, while maintaining the "autonomy of the social partners" in the bargaining process; and
• ensuring that wage settlements in the public sector support competitiveness efforts in the private sector (bearing in mind the "important signalling effect" of public sector wages).

In July 2011, the Council of the EU adopted an additional set of "country-specific" recommendations under the European semester process, addressed to the eurozone countries as a whole. This document reiterated the call for Governments, where necessary, to adjust wage-setting arrangements and indexation mechanisms, in consultation with social partners and in accordance with national practices, to ensure that wages are evolving in line with productivity, competitiveness and the employment situation.

Employers' views

Against this backdrop of unprecedented EU intervention in national pay matters, the European Commission organised on 15 September 2011 a conference on wage trends in Europe, bringing together policy-makers, researchers and social partner representatives. The aim was to contribute to a joint analysis of pay developments and policy issues in the European context, and examine how wage determination at national level can contribute to preventing and rectifying macroeconomic imbalances and enhancing competitiveness.

In its contribution to the conference, BusinessEurope, the main European-level employers' body (which represents national confederations such as the UK's CBI), emphasised that the EU has no role in the area of wages from a social/employment policy point of view, as stated in the TFEU. Its role in this area is only to monitor economic developments in the member states and establish effective tools to prevent macroeconomic imbalances. BusinessEurope sees the Euro-plus pact as consistent with this role, and supports the pact because it recognises the importance of avoiding macroeconomic imbalances, including those which are due to wages, and respects the autonomy of national social partners and the proper competences of the EU.

BusinessEurope stresses that wage bargaining is the main responsibility of social partners. There is a major diversity of collective bargaining systems in the EU, with company-level bargaining dominant in the UK and 11 of the 12 post-2004 new member states, and higher-level bargaining dominant in the "old" EU (except for the UK) and Slovenia. This diversity of systems and the role of social partners in them must be respected.

On the wider issue of wage trends, BusinessEurope believes that keeping the growth of real wages in line with labour productivity is a necessary condition for long-term macroeconomic stability. At the same time, wage flexibility is an essential element of European companies' competitiveness to win markets at global level and create employment in Europe. BusinessEurope points out that, before the recent crisis, there were countries in which wages rose in line with productivity and others in which wages increased more rapidly than productivity gains. It argues that "it is not by coincidence that those who have followed a wage moderation path are those recording today the best results in terms of growth and jobs", while "wages beyond productivity in some countries have by contrast contributed to macroeconomic imbalances now shaking the eurozone".

In order to ensure that wages reflect productivity, BusinessEurope argues that the decentralisation of collective bargaining is essential to allow companies to adapt wages to their performance. By contrast, pay indexation is counterproductive, creating self-perpetuating inflationary spirals that prevents job creation and lead to unemployment. The employers' body also supports the diversification of forms of employee compensation in some member states, for example through financial participation.

Trade union positions

The European Trade Union Confederation (ETUC) and national unions in many countries are strongly opposed to EU intervention in national collective bargaining and pay-determination systems. ETUC and other union representatives at the September conference argued that the new European semester process and Euro-plus pact pose a threat to the social partners' collective bargaining autonomy, which is already becoming a reality in a number of countries, where trade unions have seen "a shift in the collective bargaining terrain". According to the unions, EU economic governance must fully respect national wage-setting systems and the autonomy of the social partners.

On the content of the developing EU wage agenda, the ETUC expressed concern at the conference about what it saw as a single-minded focus on pay as a key economic adjustment mechanism in those countries regarded as suffering from macroeconomic imbalances. It argues that "wages are not the enemy of the economy but their engine", and that unleashing a "race to the bottom" on wages will undermine demand and threaten deflation. The ETUC believes that the main thrust of the Euro-plus pact is "a policy of squeezing wages across Europe" and that the initiative is "designed to exert downward pressure on wages, by limiting pay increases to productivity and implicitly barring wages from reflecting increases in prices".

Trade unions also defend the pay indexation and centralised bargaining that exist in some national industrial relations systems, and deny that these mechanisms play a significant role in hindering competiveness and growth.

Trade union opposition to intervention by the EU economic governance system in national bargaining and wage-setting achieved some results in September 2011. The new Regulation on preventing and correcting economic imbalances includes, at the European Parliament's behest (following trade union lobbying), a clause stating that recommendations made to member states under the Regulation will "respect national practices and institutions for wage formation".

This article was written by Mark Carley, international editor.

International policy, practice and law, October 2011