30 November 2005

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Business Today

Avoiding a race to the bottom

Labour MEP Joseph Muscat represents that breed of ‘new labour’ that believes in the free market but has no qualms in proposing radical direct action by government in the economy to ensure the standard of workers’ rights and conditions are raised across the board.
But his is not a discourse wrapped in the Mintoffian philosophy that the economy is the government and vice versa. Muscat recognises that globalisation, or the free movement of capital from the rich west to the poorer east and south at the whims of large multi-national corporations is a major challenge for Europe and Malta.
The MEP, however, cautions against engaging in a “race to the bottom”. He insists that to be competitive Europe should not lower its standards as the political right is suggesting.
“With the phenomenon of globalisation there is no level playing field and the solution often proposed by the political right is to create a level playing field by lowering Europe’s standards. What we should be doing is completely opposite to what the right is suggesting. We have to raise the standards of the game,” Muscat says.
And Muscat is unwavering in his belief that government should have mitigated the costs that are hounding factories like Denim and Lloyds shoes by subsidising them to avoid mass redundancies. He says: “Can we leave these people lose their job lock stock and barrel? Subsidies can be given to the company to modernise its production or to train people. The EU does not allow operating subsidies which would directly finance wages but other methods can be found to help the company.”

Why is the Socialist group in the European Parliament against the liberalisation of port worker services?
The Socialist group, and we as the Maltese delegation agree completely with the stand, is opposing this directive because it opens the door to lower working standards and cheap labour practices since a ship owner would be able to use the sailors on board the ship to load and off-load cargo. There is already a lot of concern about the working conditions and remuneration of sailors and liberalising port services in this way will simply instigate a race to the bottom.
Rather then raising standards and seeing that workers get better working conditions, liberalisation and competition is leading to lower labour standards.

Isn’t this Europe’s dilemma as an economic bloc competing on the world stage with countries like China, Vietnam, India and others where labour costs are minimal?
It is a fact that Europe’s social model is being challenged but that is an additional reason for promoting it further.
I believe in fair competition where a competitor wins or loses depending on the ability to produce something innovative or cheaper because of better production methods, lower costs and better brains. But with the phenomenon of globalisation there is no level playing field and the solution often proposed by the political right is to create a level playing field by lowering Europe’s standards.
What we should be doing is completely opposite to what the right is suggesting. We have to raise the standards of the game.
The REACH directive on registration of chemicals is one such example of raising standards outside the EU. Although I would have preferred a more stringent directive it requires all products sold in the EU to be certified as safe for the environment and human health as regards toxicity of chemicals used in production.
This means that producer companies, not only within the EU but also outside the bloc, would have to comply with the new standards.
REACH is the first step to having an environmental marking for products. In the EU there is also a suggestion to develop a social marking system that certifies the product on sale as having been produced by employees with decent working conditions. Admittedly, European companies are dead set against such a suggestion but it is a longer term vision with which I agree.
The social democratic government of Sweden is currently embroiled in a court case at the European Court with a Latvian construction company over a similar issue. This construction company won a contract in Sweden and utilised Latvian construction workers. The Swedish construction workers’ union blockaded the construction site because they insisted the Latvian contractor abide by the working conditions as enshrined in Swedish law. The Latvian company refused to do so and the blockade continued, supported by the Swedish government. Eventually the company went bankrupt and the issue is now in front of the European Court of Justice.
Strictly speaking the Latvian construction company did everything above board since the employees were on a self-employed basis and it abided by existing EU directives.
But the message the Swedish government wanted to deliver is that the standards of the game have to be raised. A bigger EU should not mean cross-border abuse of workers’ rights otherwise we will be undermining what has been built during the years.

Would you advocate a European Union that acts like an economic fortress preventing imports from countries with dismal working conditions?
On the contrary, I advocate a more open Union. I am not advocating more subsidies to protect European products. I want standards to be raised across the board.
Take agriculture for example; the current arrangement in the EU does not make sense. We are subsidising Finnish sugar cane cultivators, who certainly require no help, to purchase sugar from them instead of third world countries.
We are buying crops grown in European countries that are not economically viable to produce instead of purchasing similar products from poorer African countries.
The EU literally spends more money on a cow than it does on a sick or poor child. This is the dilemma currently facing the EU and that is why the budget needs to be reformed. Almost 50 per cent of Europe’s budget goes to finance large agricultural producers who produce the infamous butter mountains and milk rivers. Europe also subsidises tobacco growers, which to me is unacceptable.

It is easy to say we should raise standards but with the textile industry moving to countries like Morocco and Vietnam, what can the EU do to raise the standards of workers in these countries?
This is not something that can be done in the short term. I advocate a longer term vision. Let’s take the Denim issue as a case in point. Nobody is saying the owners of Denim should be arrested and made to stay in Malta by force.
But what I expect from the EU is that the amount of money that is spent on a cow is at least spent on the re-training of employees that are made redundant because of globalisation. It is only now that Europe is discussing a fund for the victims of globalisation.
I think it was a good idea that government took up the suggestion to enter into a discussion with the banks for a moratorium on loan repayments for Denim employees. But this benefit has to be structured into the system because there are numerous other employees passing through the same ordeal as the Denim workers but their situation is not as dramatic because the company for which they work for is small.
The Labour Party is proposing a scheme whereby when a person ends up unemployed, government would act as a guarantor so that any loan repayment with commercial banks would be waived for up to a year to give that person a chance to find alternative employment. At the end of it all this is only one way of mitigating the pain of redundancies.
The solution is more productive investment that creates jobs.

How correct was Minister Austin Gatt when he said that in 10 years’ time he foresees a situation where the textile industry is no more in Malta?
Austin Gatt and the Nationalist Party had once said they saw no hope for industry in Malta, forecasting an economy totally dependent on services.
Denim had remained in Malta because it had a specific production process that gave it a cutting edge. Every industry evolves and we have to aim for those industrial processes that provide value added irrespective of whether we’re talking about textiles, IT or moulds.
We have to aim for smaller production facilities with high value added. My fear at the moment is that Malta is economically dependent on one or two large industrial companies. It is economic colonialism by multi-national companies.

The recent lay-offs from Denim and Lloyds shoes were probably the single largest mass redundancies in recent years. What could government have done?
Government should have analysed the reasons, cost-wise, why the company was going to leave the country and mitigate those costs in a direct or indirect way.

Do you mean subsidies?
There is not much left to do. Can we leave these people lose their job lock stock and barrel? Subsidies can be given to the company to modernise its production or to train people. The EU does not allow operating subsidies which would directly finance wages but other methods can be found to help the company.
What bothers me is that this has been coming for a long time. Denim’s problems did not materialise over night. Alfred Sant had mentioned the company prior to the referendum.
People aware of the cost structures of certain companies operating in Malta know that once costs reach a certain red line these companies would seriously consider relocating elsewhere.
The French government in view of all the liberalisation that is going on in Europe issued a list of companies which in its opinion should not be sold to foreign owners. This position is being challenged by the EU but it’s all a question of having a concrete vision and defending it irrespective of the prevailing situation.
This vision is coming from a conservative right wing government but if somebody were to make a similar declaration in Malta the person would be labelled a Marxist.
The Nationalist government believes that the free market should be left to its own devices. I do not subscribe to such a position.
The market has a fundamental role to play. Government has to ensure a level playing field but it cannot stand back and allow the market to dictate matters otherwise there would be no role for the State in this country.

When Alfred Sant stated that a Labour government would fiddle (inbazwru) with the EU’s regulations did he mean going around regulations like you are suggesting?
I think yes. You have to ask him to see what he had in mind exactly. But as a country we have to be flexible in the way regulations are interpreted. We need to have a pro-active government that does all it can to help local industry flourish.
Unfortunately, the fiddling (tbazwir) that is happening at the moment is of a different kind.
Maybe the word Alfred Sant used was not the most appropriate. Being pro-active is more like it. Take for example the issue raised by Poland for justifying state aid for shipyards. The Poles asked the Commission to approve additional state aid to the country’s shipyards because the South Korean government is subsidising its shipyards hence creating unfair competition. The Commission saw the point and gave its go ahead for Poland to continue providing state aid to the shipyards. The Maltese government has not made a similar case yet.
Government cannot be dogmatic about EU regulations. It needs to interpret them and even if the rules still do not suit us then we have to challenge the situation. Now is the moment for change in the EU. Now is the time to take the lead on certain issues because the EU is passing through a crisis.

The Socialist Group is putting up stiff resistance in the EU parliament against the proposed Services Directive which aims to concretise the free movement of services. Why?
I have serious reservations about the services directive because it will hit hard those individuals who are not regularised or do not form part of a professional body.
This directive has its positive aspects such as the suggestion to have a one-stop shop for licensing requirements, even if we do not need an EU directive to do this.
But the negative aspect is the issue relating to the country of origin, which means that a Latvian service provider will be able to offer his services in Malta according to regulations existing in his country of origin. At present any service provider would have to abide by the host country’s regulations.
The problem is that we have 25 different countries with different systems and which will make it difficult for the consumer to challenge any wrongdoing.
Such a directive as is being proposed will negatively impinge on those Maltese service providers that cater for the local market, are not affiliated with any professional body and who are experiencing an economic downturn. These will be competing with other service providers not on a level playing field.

Does this mean you are in favour of more market integration in the EU?
This is the solution being proposed by the Socialist group. It is a long term solution that seeks to gradually move towards mutual recognition and convergence. Currently the EU does not even have a uniform recognition system of qualifications and if the services directive passes as is it would create havoc. It would simply be another race to the bottom.
I am not against foreigners coming here to compete but they should compete with the same rules that apply for Maltese businesses and service providers. Similarly, competing in Germany would mean applying German rules.
Over the medium term we have to reach a situation whereby all regulations in the 25 countries are similar to the extent that it would not be a problem to completely liberalise the market because there would be a level playing field.
This is a realistic way of applying brakes to the free market.

What you are saying goes against what the Labour Party used to say that rules that work well for the large countries might not necessarily apply for a small country like Malta. Integration means that one set of rules applies for all countries across the board. Isn’t the current situation more akin to what the Labour Party advocates?
The Labour Party’s opposition was intrinsically linked to the principle that change could not happen overnight. In 1997 the Labour government had started working on an industrial free trade zone with the EU. The idea behind that arrangement was to eventually achieve an open market with the EU over a period of years.
I am particularly averse to shock therapy treatment and if the services directive passes as is being suggested by some liberals in the EU parliament it would mean that what was negotiated by Malta as regards control over foreign labour would all be in vain.

Government is aiming for adoption of the Euro by 1 January 2008. What is your opinion on the issue?
This is my personal opinion. Firstly, I believe government was mistaken in the way it went about ERMII membership. It should have consulted the MCESD in a meaningful way. As things stand it seems that government took the decision to join ERMII in a unilateral way. I am not saying that government should have discussed certain technical issues that might have led to speculation on the currency but the decision should have been taken with a little bit more transparency.
Secondly, I have serious reservations on the pegging rate adopted upon ERMII membership. I believe it is too high a rate and it could create a competitive disadvantage for us.

Do you agree with Professor Edward Scicluna’s argument that government should have retained the 15 per cent fluctuation band allowed by ERMII?
We should have retained a certain amount of flexibility and even if somebody wanted to peg at a fixed rate, the chosen rate is too high.
If government finds that the pegged rate is too high and consequently having a negative impact on our economy, we might be in for a shock nearer to the conversion.
While other countries with faster developing economies are moving towards convergence with a sense of caution, I believe government is rushing. We could find ourselves in a similar situation as Greece and Italy, countries that rushed to meet the three per cent deficit criteria and which are only now experiencing the problems that were created by the way the single currency was introduced.
Nobody in the Labour Party is saying the Euro should not enter. But the timing is crucial. I personally believe Lawrence Gonzi wants to be remembered as the Prime Minister who introduced the Euro. God forbid this is the reason behind the rush but the way things have developed that is the only justification that springs to mind.

Joseph Muscat was
interviewed by Kurt Sansone

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