Europe made me do it – Labour market reforms in Europe

Marco Scipioni |

views expressed in this article are those of the author and not UACES

In these times of crisis for EU Member States, labour market reforms in a handful of countries have come to be seen as the final turning point for the so-called ‘Euro-crisis’. This is because labour market reforms are those ‘structural reforms‘ that have been regarded as necessary ingredients in the recipe to put Southern Member States’ economies on firmer grounds. Taking the case of Italy, at the very centre of the Eurozone crisis since at least the summer 2011, with an unemployment rate of 9.3 percent of the labour force (and reaching 31.9 percent for the under 25 years old) as of February 2012, one has indeed the unavoidable impression that there is something flawed in Italian labour market. In addition, labour market reforms in Italy have been seen, both internally and externally, as the much-needed counterpart to an austerity package that if, on the one hand, has re-given Italy credibility, on the other has seriously put at risk its chances of growth.

Having said that, this article is not about the need for a labour market reform in Italy. Nor it is about the impact that such reform would have on Italy’s chances of growth. By contrasting the external pressures with the actual choices taken by Monti’s government, this article aims at showing the political, and not technocratic, nature of that government, and the remaining leeway European governments still enjoy at a time when ‘EU diktats’ seem to rule European politics.

The rhetoric of the reform.

Labour market reforms are inherently highly symbolic. The definition of the rules and the respective institutional bargaining power between labour force and employers is something deeply political whose symbolic force can hardly be underestimated (connected as it is to ideas of fairness, exploitation, etc.).

However, this time such symbolic dimension is also true in a European perspective. Firstly, because national governments do not, reportedly, look exclusively to their domestic forces as determinant for the outcome of the reform, but to a much broader audience composed by ‘the markets’ and ‘Europe’. Secondly, and beyond this sense of constraint, there is a sense of international responsibility, which depicts the future of European economy – if not the world economy – dependent on states’ resoluteness to act. Obviously, these two interpretations overlap.

Labour market reforms are complex matters. In the current case of Italy, this is further complicated by the fact that, so far, the reform is yet to be thoroughly spelled out (it is likely to start its journey in Italy’s two Chambers on 11.04.2012). Schematically, two well-known Italian economists argued that there were four important points to be tackled: the entry into and exit from the labour market, the reorganisation of the welfare provisions related to the labour market, and the two-tier system. These elements fit nicely into both the letter that Mario Draghi and Jean-Cleaude Trichet sent to the then Italian prime Minister Silvio Berlusconi in early August 2011 and with the further demands for clarification that EU Commissioner Olli Rehn sent to the same recipient. These two communications are very important.  Both have been used by Berlusconi and Monti to justify much of the policies implemented in this period of crisis – the usual formulation being that ‘Europe has asked us that …’. On the other hand, these letters have been seen as the symbol of an external intrusion, a further loss of sovereignty, through the intervention of EU institutions in Italian internal affairs.

The crucial point we aim to clarify here is: do the planned reforms of Monti’s government appropriately match the stated purposes of complying with EU demands?

The requests from the EU and Europe to Italy concerning labour market are mainly about credibility, boosting growth and long-term sustainability. Demands from the EU are detailed, but can be briefly resumed in Draghi and Trichet’s letter: “A thorough review of the rules regulating the hiring and dismissal of employees should be adopted in conjunction with the establishment of an unemployment insurance system and a set of active labour market policies capable of easing the reallocation of resources towards the more competitive firms and sectors” (point 1.c; emphasis added).

The content of the reform.

Let us now have a closer look at the labour market reforms along the four lines mentioned before, starting with what in the public discourse has been pictured as the most contentious one, the exit conditions.

A frequently remarked positive consequence of labour market reforms on growth in Italy is that a quicker and certain way of settling disputes concerning dismissing personnel would trigger more foreign investments in Italy. The assumption is that foreign firms are affected by the uncertainty of not being able to get rid of workforce if needs be, because the judicial procedures are slow, apparently not clear, and sometimes not leading to the actual removal of personnel. Actually, if the judge finds that the worker with an open-ended contract has been made redundant for discriminatory, disciplinary or economic reasons (under Art. 18), that act is considered void, and therefore the employer has to restore the previous conditions, i.e. allowing the worker to return to his or her workplace (plus sanctions). The consequences of such protection are object of contested debate. Some commentators maintain that such different protection is the cause of a two-tiered labour market, where some workers enjoy high protection, and others high insecurity. According to CGIA, the contentious article applies only to 3% of Italian firms (namely, workers with open-ended contracts and in firms with more than 15 employees), but affect 65% of the employees. The proposed reform aims at changing the rules governing the dismissal for economic and disciplinary reasons, with the goal of imposing, in case of an irregular behaviour by the employer, only the possibility of sanctioning, but not of re-gaining the previous job for the worker.  These rules are considered by the government to be more in line with other European states, and hence making Italy more attractive for foreign investments. Therefore, this measure should act both on growth and long-term sustainability (by creating ‘business-friendlier environments’). Interestingly, the idea that Art. 18 negatively influences investment (both domestic and foreign) is neither the opinion of the newly elected President of Confindustria (the biggest employers associations), Giorgio Squinzi, who holds instead that what is really impeding Italy to take off are excessive bureaucracy, gaps in infrastructures, and costs of energy, nor of IKEA, which announced a €1 bn investment plan in Italy as the debate was developing and explicitly stated that Art. 18 was irrelevant for that decision.

Concerning the content of reform, it is important to remark that:

a) Already in 2004, in a comprehensive review of the existing literature on the subject, the OECD was arguing that “the net impact of EPL [employment protection legislation] on aggregate unemployment is therefore ambiguous a priori, and can only be resolved by empirical investigation. However, the numerous empirical studies of this issue lead to conflicting results, and moreover their robustness has been questioned”. If the consequences for overall employments are debated, even more so are the consequences for economic growth.

b) It is debatable that Italy needs more “flexibility” in its labour market. The latest OECD elaboration classified Italy as with comparatively low “strictness of employment protection” rates, with a decreasing trend since 1997, and much below the OECD average.

However, if we limit our investigation to European demands, the proposed reform surprisingly has a mixed result. Some economists have argued that actually the reform, by providing more powers to judges, is in effect increasing uncertainty – and this in a context where the reform of justice is lagging behind and the shortening of the length of trials is nowhere in sight. In addition, the negative effect that the slowness of Italian judicial system has on labour market and consequently on the economy is something that, by common sense, should be firstly the object of reform of the judicial, and not of labour market. Therefore, if the “thorough review” mentioned before was aimed at streamlining the dismissal procedure and reducing guarantees, the reform has accomplished just the latter.

On the other side of the spectrum, i.e. the entry conditions in the labour market, employers and young workers (to whom this part of the reform should have arguably appealed more) have not shown much enthusiasm either. Confindustria has claimed that the proposed reform will lead to even more “bureaucratisation” of the hiring procedure, possibly driving even more enterprises into irregular work practices. This is a serious challenge to economic growth and long-term sustainability, because if one thinks of the size of the shadow economy and the effects that the connected tax evasion has on the level of fiscal pressure, such charge should not go overlooked. To defuse such concerns, a parallel effort should be put into labour-market controls, which is not on the agenda. What is more, the single open-ended contract proposed by the Commission, and which was referred to at the beginning of the negotiations as that comprehensive tool able to substitute the damaging fragmentation of labour market entry conditions, is again nowhere in sight.

A third point is about social security provisions. As it is recognised that in Italy these were already below standards, it is possible to suppose that, in the minds of Draghi and Trichet, the reform should have been in an expansive way. Accordingly, they do not talk about a reform of the system. Rather radically, they propose the very “establishment” of a system. However, the proposed reform only partially broadens the scope of the already existing tools and surely fails to make them universal. Even more to the point, if one of the overarching goals of the reform was to improve the living condition of the young workers, there is a manifest failure in securing their economic safety when unemployed, if it is taken into account that much of them work under flexible contracts, and these are not covered by the new provisions.

Fourthly, Monti has called into question the long-term sustainability of such a “two-tier” labour market. And rightly so. However, it is debatable that long-term sustainability is actually independent from a reduction of inequalities in a given society. However, the OECD in his latest report on “Growing Income Inequalities”, has argued that the effect of less stringent employment protection legislation on wage dispersion and employment rate is, respectively, negative and irrelevant.

Furthermore, and expanding on the previous point about the entry conditions, the proposed legislation does little to reduce the number of possible job contracts. This is an important point, as it was present in the above-mentioned Draghi-Trichet letter. As in Italy there are dozens of different possible contracts, it has been recognised that a reduction would be an improvement. This is confirmed also by the subsequent Rehn’s letter, which argued that in order to “tackle labour market segmentation”, a reduction of the “high (46) number of labour contract typologies” would have been desirable (point 19). Actually, reading carefully between the lines of Rehn’s document, this is one of the few instances where the Commission actually takes a stance concerning the direction of the reform. To be fair, the government has taken steps as to make the use and abuse of such contracts more difficult, mainly through fiscal disincentives (answering to point 20 of Rehn’s letter). Also, it has made clear that its priority is to make the ‘apprenticeship’ contract the main route into the labour market. However, the fact that the reform only marginally reduced the number of contracts is significant, and arguably goes into a different direction from EU’s indications. This is even clearer if such stance is compared to the resoluteness adopted in the firing dispositions.

The method of the reform

Monti’s government has taken a resolute stance when coming to deal with labour market regulations. Was it because trade unions took the view that the planned labour market reform was detrimental to their interests (and hopefully of the workers represented)? This does not seem to be the case. An agreement seemed to be at reach for much of the negotiations, according to many participants. However, this scenario radically changed towards the end of March (21.03.2012) when the Prime Minister backed an intransigent position of the Welfare Minister, Elsa Fornero, who adopted an uncompromising stance towards a highly symbolic article (the previously mentioned Art. 18) upon which substantial agreement had already been reached among all parties. This left the biggest Italian trade union (CGIL) with no other option than to immediately call a nationwide strike. Finally, on Wednesday 05.04.2012, Fornero and Monti (partially) backtracked on the reform of the firing dispositions of the reform, to meet the demands coming from the left-wing party and trade unions.

Disregarding one’s preferences about the method regulating the relationships between the executive and social actors, one can rightly wonder why Mario Monti took such determined stance. A Prime Minister who, as an Italian newspaper put it, backed out on the face of a taxi-drivers’ nation-wide strike on a announced liberalisation reform, but decided to relentlessly go ahead on the biggest reform of the labour market in a decade (and possibly since the 1970s), indeed gives the impression of double standards. The same aforementioned newspaper suggests that the answer has to be found in the attention that the Prime Minister pays to Europe, Asia and ‘the markets’. It has to be remembered that Monti has been called to serve his country in a moment of boiling tension with Europe and the EU. He is the Prime Minister who Europe has thereafter much praised, and has built upon this special relationship much of his authoritative consensus (even if there are now signs that this honeymoon is over). The Asian markets, where Monti flew in the middle of the negotiations for a planned visit, are now considered as life belt for cash-strapped EU countries desperately in need of tapping into their foreign currency reserves. What Monti has apparently decided is to offer to this audience the evidence of a government capable of bringing home the “scalp” of Italian trade unions (a disgusting image that has unfortunately mushroomed in Italian newspapers). However, it is crucial to recognise that this stance, which reminds many of a Thatcherite idea of civil society, far from any rhetoric about growth, long-term sustainability and fairness, is not the consequence of a technocratic, value-free idea of economy, but a product of political vision. If, at the structural level, bringing down wages to regain competitiveness and consequently growth is apparently becoming the common strategy to solve the economic problems of Southern Europe, the collateral implication at the symbolic level is the ability to publicly show to be able to tame civil society and its representative bodies. This symbolic dimension is further reinforced by noting that the much commented link between labour market reforms and growth is likely to be even weaker in a context of recession, as the Greek example shows.

It only strengthens this point to remark that, as other commentators have done, the reference to the imposition by the Europe in the specific case of firing rules is difficult to hold. The Draghi-Trichet letter makes explicit reference to a reform of the hiring and firing conditions in Italian labour market, and so does Rehn’s. But the choice of the points upon which focusing more is entirely political. This is even clearer if the political risk of such contentious reform is taken into account. Domestically, Monti’s government could have fallen because of that proposal, losing the support of the left-wing parties, and the final backtrack happened only after a 7-hour long meeting with the head of the left-wing party, Pierluigi Bersani. Internationally, however, the reform of the firing conditions in line with the ‘German model’ could not have been easily attacked in Europe (exactly because of the current authority of the original template), hence depriving the government, at the domestic level, of the usual reference to the ‘European diktat’.

The European and domestic politics of a technocratic government

The selectivity with which the Italian caretaker government has picked its European inputs shows two things. If politics is about allocating values and resources in society, then the Italian caretaker government has shown not to be technocratic, in the commonly assumed meaning of being neutral concerning the ends and efficient concerning the means, but overtly political. One can honestly object that it is hard for a labour market reform not to contain any distributional element. This is fair point, and one which usefully highlights the limits of the very idea of a ‘technocratic government‘. However, it is perhaps a criticism more appropriate to the content of the reform, rather than the methods with which it was agreed. Secondly, as the discrepancies between EU requests and Italian proposals on hiring and firing dispositions, labour-related social security provisions and two-tier system have hopefully shown, in case of necessity but also for simpler political opportunity, the EU and European dimensions can easily be exploited to justify programmes that politicians intend anyway to carry out.