Vulnerable workers in Central and East Europe: between European economic growth targets and offshoring

Introduction

The financial crisis that started when Europe slipped into recession in 2008/2009 raised a host of questions regarding productivity and employment. Potential problems deriving from the economic crisis, such as the decline of competitiveness, have been managed both through austerity policies and European programmes of loans to Central and European Countries (CEE).
As part of these measures, the EU, empowered by the EU Treaty and the principle of mutual assistance, adopted borrowing programmes, such as the Balance-of-Payments (BoP), specifically addressed to non-Eurozone Member States.). At the same time, because of austerity policies, taxes increased in the whole of Europe and the economic position of the most vulnerable Member States was made worse since this decreased their competitiveness and attractiveness to Foreign Direct Investment (FDI). Simultaneously, economies of developing countries, such as those in CEE, which were characterised by lower corporate taxes and limited wages, increasingly attracted FDI.
European stability, as promoted by the programmes of loans, seems to contrast with austerity policies which led to an increase in offshoring. In particular, because of higher taxes and increasing expenses in vulnerable Member States, many firms moved part of their production abroad, thereby exploiting the different levels of competitiveness between Member States. In this way, offshoring became a popular practice, since companies choose to outsource their production on the basis of lower labour costs and higher profitability. However, it can be argued that competitive edge and flexibility negatively impact worker protection, especially in those countries with lower social security standards. In fact, there is a correlation between vulnerability in working conditions and lower labour costs; in the host countries where enterprises relocate their productivity, the vulnerability of workers tends to be high. At the same time, within those European Member States which are outsourcing production, offshoring creates more job insecurity and precariousness.
It is suggested that it is only through European policies directed to ensure a minimum wage and adequate social protection to vulnerable workers that tangible levels of unemployment, job insecurity and unacceptable working conditions can be addressed. Moreover, these variations can, in fact, be the turning point for an improvement in the EU’s economy.

The Balance-of-Payments Facility (BoPF) and austerity policies

In the wake of 2008/2009 financial crisis austerity measures were announced in many EU Member States. Governments were called to implement credible adjustments in order to correct budget deficits and achieve the long term goals of ‘smart, sustainable and inclusive growth’ set out in the Europe 2020 Strategy . The States worst hit by the crisis were Latvia, Romania, and Hungary, which, as indicated above, received financial assistance from the European Union. Other European countries, within the Eurozone, had to undertake austerity policies, thereby encountering significant problems. In particular, the vulnerable states faced a large trade deficit and became unable to combat their substantial trade imbalances. This is aggravated by the fact that, since they are part of the Eurozone, they were unable to restore their competitiveness by devaluating their currency which is a typical measure adopted in these cases.
Art. 143 TFEU introduces a Balance-of-Payments (BoP) assistance programme aimed at strengthening the macroeconomic, fiscal and financial stability of non-Eurozone Member States and increasing the resilience and growth potential of their economies. As outlined in the Commission Work Programme 2014 and more widely in the Europe 2020 Strategy, the EU’s priority is to promote growth and job creation, particularly in small businesses. In line with this Strategy, medium-term financial assistance, established by Council Regulation (EC) No 332/2002 under the terms of specific legal duties of cooperation, has been provided to countries outside the Eurozone, even if the content and the legal implications of these duties are vague. Recently, €16 billion have been disbursed to Hungary (until 2010), Romania (until 2015), and Latvia (until 2012 before it adopted the euro).
However, the ongoing negotiations on the BoP show contrasting views on the actual effectiveness of these measures. There is an acknowledgement that loans programmes usually result in a general improvement in the overall economic situation. On the other hand, the financial stability and the growth perspectives of CEE countries remains an issue. In fact, the Commission criticised Hungary and Romania for their lack of political will to implement structural reforms. The last precautionary financial assistance programme for Romania was formally agreed upon in October 2013 (following two previous ones in 2009 and 2011 respectively). It is planned to extend until September 2015 providing general structural reforms largely related to improvements of equality, transparency in fiscal governance, public debit, monetary policies and FDI for innovations.
However, this EU programme fails to address the problem of labour exploitation. Probably, this lack of clarity creates a grey zone currently used by companies to take advantage of the differences in labour costs between Member States. In turn, this also affected the rights of workers in vulnerable states significantly, since they were pushed to review their policies on expenditure and taxes, to detriment of companies and workers. The political debates on the austerity measures focused mainly on the effects of the fiscal adjustments and the recession, while protecting the labour force has not been sufficiently taken into consideration, especially in terms of preventing their vulnerability

Offshoring to Central and Eastern Europe (CEE) and workers’ vulnerability

A strategy adopted by European companies to achieve competitiveness has been offshoring, that is, the relocation of production outside their own country. As noted above, this has allowed them to take advantage of lower taxes and less protective labour laws in order to reduce costs. In fact, the higher cost of doing business and the inflexibility of the labour market as a consequence of austerity policies encouraged companies to go abroad to manufacture (entirely or in part) their goods. The CEE countries are outside the euro zone and are close enough for the transport conditions to be favourable. These elements allow offshoring companies to exploit the differences in unit labour costs (ULCs) and labour productivity. Indeed, during the last decade CEE countries have received a significant amount of capital inflow to invest in productivity processes, especially in the manufacturing sector.
At the same time, in CEE countries the job quality has been measured as low and characterised as vulnerable. Indeed, according to the Organisation for Economic Co-operation and Development (OECD), workers’ vulnerability is a condition that is often simultaneously present with a certain level of poverty. Leschke et al. confirm this, reporting that there is a higher probability of low paid, unhealthy working conditions and unfair dismissal in the countries with the least adequate social protection systems. Offshoring seems to take advantage of the less favourable conditions of workers in CEE countries, thereby increasing their vulnerability. This practice is not illegal and part of the economic literature considers that, in the long term, it could be advantageous for both the offshoring and the target countries. However, when offshoring is driven by a cheaper labour force its intrinsic vulnerability becomes the main reason behind this choice of production.
Therefore, the European Union should be called to intervene on this point. The European Union has provided financial assistance to CEE countries, focusing on structural changes and political commitments, but it has not dealt with their working conditions. In particular, within the BoP framework, the Memorandum of Understanding concluded between the Commission and the Member States only mentions the ‘Economic policy conditions’, which include structural reform measures to improve business environment and support growth. Unfortunately, economic growth is not sustainable when it is based on poor and unsafe working conditions which encourage working poverty and inequalities. Accordingly, the ILO has provided evidence on how good quality jobs and social protection can in fact support economic growth.

Conclusion

Offshoring seems to take advantage of those conditions which are unfavourable to vulnerable workers. In order to protect these workers, a commitment to establishing a minimum wage and basic health, safety and welfare requirements should be written into contracts with providers, and measured and audited periodically. Interestingly, although the European Commission is highly committed to measuring competitiveness across Member States and the CEE countries, working conditions which generate this competitiveness seem to be largely ignored. Leaving aside any political considerations, the measures dealing with relocation should not be shaped around less favourable working conditions. Therefore, in promoting competitiveness the EU should seek to address specific policies to specific problems, rather than merely providing a service of strict economic surveillance over at risk countries or simply supporting non -Eurozone countries with loans.

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