The Voxholm Case – does this show that free movement of services within the European Union is not possible?

Free movement of services is one of the most debated issues in the European Union at the moment. It is recognised that this is the area where most of the reforms need to be implemented if the EU wants to move towards the goals set out in the Lisbon Strategy. Even more, liberalising the services market is seen as a necessary precondition for improving the competitiveness of the European Economy. Even more it is also considered to be one of the tools which could help to bring the European economy out of stagnation by providing growth and additional work places. Where do we stand at the moment? We have Article 49 of the EC Treaty which is supposed to safeguard the free movement of services within the European Union. However, there are many cases which show that it does not work. One has to understand that the services market is of a vital interest for the national states. The concept of providing services cannot be separated from the issue of employment. And employment is one of the cornerstones of most of the social security systems of the old EU Member States. The old EU Member States are allowed to safeguard their employment markets (all of them except the UK, Ireland and Sweden have used the possibility not to open up their markets to workers coming from the new EU Member States – in these cases the free movement of workers provisions of the Treaty do not apply during the transition period). However, no such transitional period is foreseen for the free movement of services. Nevertheless, many of the old EU Member States have tried to use all the opportunities available to them to put obstacles against the free movement of services (mainly coming from the new EU Member States). It appears that it has not been too difficult for them to find the necessary support amongst their own nationals – it is important to realise that the attitude towards the European Union after the referenda in France and the Netherlands is very negative. So it is a widespread practice within the Member States at the moment to blame the European Union for all the troubles there are. The Commission has realised that Article 49 will not alone be able to dismantle such obstacles. Therefore, a new services directive is in the process of becoming a reality. So far the progress has been promising. However, the Voxholm case is threatening to halt this progress and tear Europe apart concerning the question of how far liberalisation of the services market is desirable. As an introduction to the case one needs to think of the following issues. Firstly, can the liberalisation of services market threaten the existing social security systems of several Member States? Secondly, is liberalisation of the market of services possible/desirable considering the fact that the social security systems in different Member States are so different (this is especially so after the enlargement – one simply cannot compare the social security systems of for example Poland and Germany)? The facts of the Voxholm case are the following. In 2004 a Latvian building company won a public tender for repairing a school in the Swedish town of Voxholm. The most important issue in this case is that the firm was registered in Latvia, it did not have a subsidiary in Sweden and was not present at the Swedish market over a considerable period of time. This is an essential factor, since this means that under the EC legal regime this case must be seen as a case of free movement of services and not anything else (it should especially not be confused with the free movement of workers). Obviously, the most important reason why the Latvian firm won the tender was that it offered much lower prices than the Swedish building firms. This was possible since all the workers working on the building site came from Latvia (and were employed under the Latvian law). It did not come as a surprise that those Latvian workers were paid much less than any Swedish worker; however, the wages were still considerably higher than those workers would earn in Latvia. At this point one has to give a simplified version of the Swedish social security system (excuse me if some of the things are oversimplified). It has historically developed so in Sweden that the trade unions are the ones which take care that certain standards are observed in treatment of workers. For example, the government does not set a minimum wage; the trade unions are the ones which determine what the minimum amount of money to be paid to workers is. The trade unions have gained enormous powers. They have a great influence in the party which forms the government in Sweden at the moment, the Social Democrats. Even more, the trade unions are the ones who have the rights to appoint half of the judges in the Employment Tribunal. As a result, to say that the Swedish social security system is very worker-friendly would not be an exaggeration. The fact that the trade unions have set very high minimum wages for people employed in the Swedish building sector was exactly the cause for the dispute between the Latvian building firm and the Swedish trade unions: workers working at the building site were paid less than the minimum wage set by the trade unions. The position of the Latvian firm was clear: the workers were employed under the Latvian law and as a result the provisions of Latvian law concerning the minimum pay were applicable. One can also understand this – the firm was not permanently present on the Swedish market. Even more, would a firm coming from Latvia be able to enter the Swedish market at all if they had to pay the same wages as for Swedish workers? One has to take into account that a firm is incurring extra expenses when it is operating abroad – such as travel costs, extra legal costs, etc. This automatically puts firms providing services abroad at a comparative disadvantage comparing to local firms. The result of the dispute was the following. The Swedish trade unions carried out a blockade of the building site where the Latvian firm was working (the trade unions are the ones who must take care that the minimum wage set by them is observed; under the Swedish law they are also entitled to carry out such actions as blockades). The Latvian firm stood firmly behind its position and initiated a case in the Employment Tribunal against the Swedish trade unions. One of the things the firm asked for was a temporary injunction against the trade unions until the decision is made by the court, so that they would be obliged to stop the blockade. The Employment Tribunal (where as I noted earlier half of judges are appointed by the same trade unions) decided not to issue such an injunction. This had only one consequence for the Latvian building firm: since its work was paralysed it had to withdraw from the Swedish market, not having completed the obligations under the contract. In the mean time the Employment Tribunal has stayed the proceedings and forwarded a question to the European Court of Justice under the preliminary ruling procedure. To put it simple the tribunal asks the ECJ to clarify if the Swedish law which allows trade unions to set minimum wages and to enforce them on foreign enterprises offering services in Sweden is compatible with the European Law. Unfortunately it will take one to two years until we get the decision from the European Court of Justice. For the Latvian building firm this will not have important meaning: they have withdrawn from the Swedish market a long time ago already. The most they can hope for is applying for damages against Sweden. It is important to stress that this can also not be framed as a trade dispute between Latvia and Sweden: even though both governments were very keen on taking sides and accusing each other of going against the ideas of the European integration this is essentially a dispute between a trade union and a private firm. One should rather see this case as one which is capable of having considerable influence on the future of the European integration and the European Union in general. The implications of the case so far are very significant. The dispute has already managed to divide the Swedish society in two hostile camps. On the one hand there is the camp led by the government which claims that if the ECJ was to decide against Sweden it would lead to an unjustifiable intervention of the EU into the social system of Sweden. On the other hand the Swedish Builders Association (sorry if this is the wrong translation) has decided to support the Latvian firm. Even more, this support will not only be moral but also financial. They claim that the trade unions have overregulated the building market in Sweden. The result of this is that workers receive disproportionately high wages, there is a surplus of qualified workforce and the biggest losers are consumers who have to pay very high prices. It is claimed that the Swedish building market is on a verge of a boom which at the moment is only halted by the high prices. Furthermore, this case has also split up the European Commission. Several weeks ago Charlie McCreevy, Commissioner in charge of internal market, expressed his opinion that the Commission should support the Latvian building firm in the ECJ. The reaction from the Swedish government and from the left-wing political groups in the European Parliament was swift: within days the Commission was attacked severely and it was claimed that the Commission was moving towards the lowest common denominator in the social protection. The Swedish government even threatened to withdraw its signature under the new services directive if this was the case. The president of the Commission, Jose Manuel Barroso, in his response stressed that the Commission was not going to attack the different social models of the Member States. Even though he also pointed out that it was the job of the Commission to safeguard the basic freedom of the Community it appears that he was supporting the opinion that the Commission should stay neutral in this issue. Currently it is not a good time for the process of the European integration. The European Union is experiencing one defeat after the other (the negative referenda, inability to agree on the new budget etc.). Even more, there are very few countries at the moment where the public opinion towards the EU is not derogating. And there are logical consequences of that. In my opinion, the most important is that the Commission becomes increasingly incapable of pushing through the Council new proposals for improving the process of the European integration. It is clear that especially in such a sensitive area as the free movement of services a notable development over the next couple of years will not be achieved. I have the feeling that in certain aspects we are approaching the situation the EU experienced during the period of Luxembourg Accords. This time was very special because the Commission was almost completely paralysed in its efforts to implement new proposals. The reason for that was that the Council would not agree otherwise than by unanimity. Consequently the main driving force behind the European integration for several years became the ECJ. My personal opinion is that the ECJ should act as the driving force behind the European integration in the Voxholm case as well. If the decision in this case goes against the Latvian building firm this will be another defeat for the EU. And there is fear that even more of similar defeats could paralyse the EU completely: the worst possible scenario in this case would be a stagnation of the EU. Do we really need a union that is not giving us anything – a union with a stagnating economy, an economy which is simply not capable to cope with the pressure exerted by globalisation; an economy with huge social problems especially unemployment? Going back to the Voxholm case, I have tried to give a simplified version of my opinion. Obviously this issue is too complicated to have a clear yes or no answer. However, there are many issues which I find worrying in how the trade unions in Sweden are acting. Whose interests are they supporting: is it workers’ interests in general or is it rather the rich workers’ interests (until this moment I have not understood what benefits Latvian workers in general had from the fact that the Latvian building firm had to leave the Swedish market; I see only disadvantages, the main one being that they were deprived of an opportunity to earn more money in Sweden than in Latvia). Maybe the claim that the so-called “unique” Swedish model of social security is able to function just because there are the rich and the poor true? The idea I wanted to put forward here was that the European Union is experiencing several enormous problems at the moment – and I don’t think that it is because of the recent enlargement. Cases like the Voxholm case just show how serious they are. I think the first thing each Member State should do is to answer the question whether we need the “European Project” at all. If the answer is yes then the aims set out in the Lisbon Strategy should be followed. But this means reforms and I think that the old EU Member States currently are much more in need of substantial reforms than the new ones.