To understand the EU’s neo-liberal character and why it enforces austerity so rigorously, we have to go back to the Single European Act of 1986. This set the legal framework for the EU as it exists today. 

The drafters of this Act were ministers from Thatcher’s government in Britain and the conservative government of Chancellor Helmut Kohl in Germany. Each government had its own objectives. Thatcher’s ministers wanted to open up European financial services to the City of London, making London the European base for US banks. In this they were strongly supported from the US by President Reagan. Kohl’s ministers wanted to create an all-European market for Germany’s giant industrial companies at a time when the German economy was slowing. Both governments were ideologically on the right and were united in seeking to use the new framework to limit the scope for future social democratic governments to introduce progressive left-wing policies anywhere in Europe.

The stated object of the Single European Act (SEA) was to eliminate all obstacles to the free movement of capital, labour, goods and services within the boundaries of the EU. This included the elimination of public ‘monopolies’ created by state owned companies, any obstacles to the free flow of labour that might be created by exclusive national systems of occupational qualification, and any distortion of markets by state subsidies (i.e. by public sector investment in particular firms or industries) or by the contracting practices of local or national governments. The SEA also set the objective of a Single European Currency to ensure full transparency of pricing.

It was claimed that these objectives would maximise the size of markets, eliminate wasteful production and thereby increase growth and employment. Indeed, the EU’s Cecchini Report (1988) promised that the completion of the Single European Market in 1992 would create up to five million extra jobs across the EU – though only if workers took advantage of the new freedoms to move to where the new jobs were.

In reality, however, the forecasts of extra growth and employment turned out to be hugely overblown. Economic growth was less than half the promised rate, while the number of jobs increased by just 1 per cent over the following decade. At the same time, the market free-for-all helped destroy millions of jobs in productive industry, many of them in Britain.  

Unemployment as the new economic regulator

The key but tacit assumption of the Single European Act (and in Britain of the Thatcher government) was that of neo-liberal economics: that unemployment would again become the basic regulator for the economy as it had been before 1945. 

During the post-war years European governments had intervened on Keynesian lines to boost demand whenever economic growth slackened. This produced three decades of high growth, full employment and mass consumer demand. It also secured a degree of income redistribution in favour of workers. The provisions of the Stability and Growth Pact in the 1992 Maastricht Treaty put an end to such intervention. 

Annual deficits had to be held below 3 per cent of GDP and overall National Debt to 60 per cent – far lower than during the post-war decades. The underlying assumptions were those of 1930s.. Unemployment should be allowed to rise unhindered. The economy would then rebalance itself automatically as wages fell and provided businesses with the incentive to re-invest.

Directives stemming from the Single European Act in the 1990s and 2000s required:

An end to the public ownership of basic utilities such as rail and road. transport, postal services, communications, energy and banks.
An end to ‘state aid’ for industry.
The introduction of compulsory competitive tendering in the public sector.
An end to local government direct labour schemes.
Introduction of private pension schemes.
Ultimately, the opening of public services such as education and health to the private sector. 

However, even on its own terms, the assumptions of the Single Market were fatally flawed. 

The first flaw concerned free competition. In reality, production in the EU is not ‘free’ and competitive, but highly monopolised. Dominant producers are concentrated in a handful of core EU countries: industrial goods in Germany, Sweden, Austria and the Netherlands, utilities and luxury goods in France, financial services in Britain. The weaker economies of the southern and eastern Europe could not compete once their markets had been fully opened up. The Single Market simply meant further concentration of market control and ownership and, most dangerously, growing economic imbalances between different EU countries (see Table 3 below). The weaker economies became increasingly indebted. 

The second flaw concerned banking and credit. The Stability and Growth Pact restricted public borrowing by governments. It did not control private sector lending and the creation of credit by banks. 

In fact, the whole point of the Single European Act, at least for Britain, was to free up the operation of banking services. It wilfully ignored the fact that Europe’s economy was not just monopolised but was also becoming increasingly financialised. The privatisation of services, pensions and housing provision saw banking profits increasingly made through short-term speculative lending wherever risk – and therefore profits – were highest. Banks lent to the poor because the interest rates were higher – and they lent to the poorer countries in southern Europe for the same reason. And they did so at higher and higher rates of leverage – borrowing at lower rates from other banks.  

The third false assumption concerned the nature of European labour markets. These were not ‘flexible’, as assumed by the Single European Act, but among the most densely organised in the world. Collective bargaining agreements covered the great bulk of the labour force. So when unemployment rose, those still in work were generally able to defend their wages and conditions.

As a result the neo-liberal ‘recovery’ – through lower wages – did not happen. Capital did not shift to the periphery. Nor did unemployed workers on the periphery move to the centre (or at least not on the scale that the neo-liberal model required).

Of the three false assumptions underpinning the Single Currency, EU leaders ignored the two concerning capital – both the monopolisation of production and the unlimited extension of speculative bank credit. Instead, they focused with increasing intensity on labour, labour mobility and what they described as the need to reform labour markets. 

The chief measures have been introduced as follows:

2000: The Lisbon Programme. Originating from a report commissioned by Tony Blair and the Italian Prime Minister D’Alema, it required governments to introduce National Reform Programmes which report on steps taken to create a ‘competitive’ and flexible labour market. These programmes have targeted benefit levels (‘disincentives to work’ in EU jargon), pension levels (‘sustainability’) and retirement ages (‘early exit from employment’). Britain’s current programme can be accessed at  

2005: Updated Lisbon Programme. This required annual reports on steps to secure competitive labour markets. In 2010, the programme was further updated as Europe 2020.

2006: Services Directive. Covering over two-thirds of all EU employment, the directive sought both to open public services to private capital and, particularly, to enhance cross-border labour mobility. Companies were now permitted to employ workers in other member states at levels of pay and conditions below those which had been collectively bargained locally. 

2007-08 EU Court of Justice rulings: Viking, Laval, Ruffert, Luxemburg
When workers sought to defend local employment standards by strike action, the European Court of Justice ruled that such action was in contravention of the ‘free movement’ prescriptions with the EU Treaty. The series of judgements in 2007-08 – Laval, Viking, Ruffert and Luxemburg – marked the first direct attack by the EU on the right of workers and national governments to take action against the super-exploitation of imported labour to undercut pay and terms and conditions of employment. The Laval and Ruffert judgements barred trade unionists from using collective action; the Ruffert and Luxemburg judgements barred regional and national governments from requiring the payment of locally collectively bargained wage rates.

2007: Green Paper on Modernising Labour Law. This set out guidelines for new contractual relations between workers and employers. These, it argued, should be individual and flexible. Collective bargaining and contracts that gave long-term security were, it claimed, excluding new workers from employment and directly responsible for rising unemployment. Instead, the new goal should be ‘flexicurity’. All workers, whether previously permanent or temporary, should have the same individual contracts combining flexible employment with a basic minimum of state provision when employment was terminated.


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