Rift deepens as workers' rights report toned down

An ideological battle within the European Commission over the extent to which governments should legislate to protect workers looks set to rage on following a decision that a controversial report on EU competitiveness will be toned down prior to publication next week, writes Katherine Butler.

The Commission's industry division, headed by Germany's Martin Bangemann, was last night said to be "unhappy" after the majority of Commissioners including Commission President Jacques Santer agreed to publication of the disputed report - but without data which claimed a causal link between unemployment and the cost of firing employees.

European employers and industrialists have accused the Commission of "suppressing" the most contentious chapter of the report because it would advance the case for stripping the EU of labour market rigidities. The timing of the row will fuel Euro-sceptic charges of interference by Brussels in employment matters, coming just days before the EU court ruling on Britain's 48 hour maximum working week. The unpublished draft of the report contains graphs and tables which could be interpreted to prove that labour costs and regulation are heaping costs on EU employers, hampering their ability to compete.

But the social affairs directorate of the Commission claims that the evidence is unreliable because it fails to take account of variables such as the numbers of women in the workforce and the duration of average employment contracts. The disputed draft said the rates of severance pay or the cost of firing workers, higher everywhere in Europe than in the US or Japan, is destroying jobs.

"For every increase of one month in the cost of termination, the employment rate falls by close to two per cent. It appears therefore that high employment costs do indeed lead to cautious recruitment policies. It appears therefore that when termination costs are high firms tend to adopt a cautious recruitment policy..." Following a series of acrimonious meetings the report will be published next week but will not take the industry view that labour costs are the main reason for the EU's failure to compete with the US or Japan. The claim in relation to firing costs was rejected during one meeting yesterday as "utterly dishonest".

A spokesman for Social Affairs commissioner Padraig Flynn categorically denied that he had "suppressed" any part of the report.

Mr Flynn has come under sustained personal attack since the row broke out some weeks ago. The spokesman said senior officials in the social affairs directorate had challenged the statistical analysis used by industry officials and therefore some of the conclusions to be drawn from the report. The data they claimed was flawed, came originally from a report produced by two independent economists in the US which one source said was "rubbish" and based on "sloppy analysis".

The Social Affairs wing of the Commission claims to have no problem with claims that labour costs are higher in the EU, that over-regulation is bad, and even that high redundancy costs inhibit recruitment. But it does not agree with the industry view that severance protection for workers causes a fall in employment rates. "The report as originally drafted was more interested in, rhetoric than in fact" said one source.

Mr Bangemann's industry division of the Commission was accused yesterday by some officials in other divisions of pursuing a "fanatical agenda" which would not end until it had stripped away all safeguards for workers while ignoring the social costs of low pay.

The toned-down version will focus on the range of problems which are impeding EU competitiveness, such as the failure of innovation, research and development rather than just the labour market. It will admit that in manufacturing, higher unit labour costs are not helping and that excessive regulation might block job creation.