Wrong readings of the Chapter: Social issues alone divide Britain's political parties on Europe. But it's a false contrast, warns Vincent Cable

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THERE is only one issue in the European elections on which there is a recognisable divide between the British government and opposition, between right and left. This is over what might be called Social Europe: the Social Chapter of the Maastricht treaty.

But this clarity is deceptive. The Government is advancing good policy for bad reasons; the Opposition is advancing bad policy for good reasons. And while the rest of the EU loudly proclaims a political consensus about the Social Chapter, governments of the right (France, Italy) and the left (Spain) are quietly undermining it through the deregulation of their labour markets.

A sea-change is taking place among European policy-makers, if not yet at the level of public opinion. There is increasing recognition that the level of unemployment is linked to the cost of employment. Minds are being concentrated by approaching monetary union. It will soon be impossible for firms in individual member states to pass on relative increases in wages and the costs of improved conditions through higher prices and a depreciating exchange rate. The result of 'uncompetitiveness' is unemployment.

The demands of the Social Chapter for harmonised, inflexible labour conditions will hamper adjustment to the market, especially by weaker European economies. But even the stronger EU economies are becoming alarmed about their cost structures in relation to non-EU countries.

Against this background, the British government should be getting a respectful hearing in Europe. It isn't. One reason is that the double 'opt-out' - from the Chapter and from the exchange rate mechanism - has largely removed Britain from the debate on deepening the EU. Another is that monetary union may be approaching faster than any British politician will publicly admit.

The Government spoils its case by arguing that the cost burdens associated with the Social Chapter will deter inward direct investment. Inward investment is one of the Government's successes, but there is little evidence that Japanese and US investors come to Britain to avoid giving more maternity leave or because of Britain's enthusiasm for overtime. The main attractions are guaranteed access to the EU market (not helped by public debates over abandoning or diluting membership) from a reasonably stable and congenial country where the natives speak English. Where higher social charges could genuinely bite - in farming, garment assembly, catering and retailing - inward investment is largely irrelevant.

The most trenchant opposition to the Chapter comes not from foreign investors but from British- based multinationals, concerned less about the cost of better working conditions (which they probably meet anyway) than about having to defer to workers' councils.

The Opposition has not thought through the economic implications of its European social commitments. The impression has somehow been created that the Social Chapter is the intellectual property of the 'progressive', socially caring wing of European politics. Nothing could be farther from the truth. Its most eager advocates include the German and Benelux Christian Democrats, who are deeply concerned that as Europe moves towards monetary union the main burden of adjustment in the EU should not fall on their own employers and high-cost labour. Persuading their main trading partners to adopt the same high-cost structures, and intimidating those who will not with accusations of 'social dumping', are their ways of addressing that concern.

The real divide is not between right and left but between the stronger economies of the EU and those (among them probably Britain) which could have great difficulty with a more tightly integrated union. Those of the latter group who have signed up for the Social Chapter in apparent denial of their long-term self-interest - such as Italy and Greece - make little secret of the fact that the provisions are often unenforceable in the large informal sectors that drive their economies.

So far as Britain is concerned, the economic consequences of the Social Chapter are being fudged. If its provisions are to be effective (that is, if they are to be more than token, not evaded, and have a real effect on wage costs), they must hit British-based companies in one of two ways. Either the higher costs will cut into cash flow, reducing investment or prompting redundancies; or they will be passed on, reducing competitiveness - at least in international activities. The result will be to improve the lot of those workers who keep their jobs, at the expense of the unemployed.

There are several 'middle', non-ideological, ways forward. First, there are good reasons, largely uncontroversial, for having a strong European social policy. The single market will work better, and benefit workers as well as business, if European workers can take their pensions across Europe with them, have their training and educational qualifications widely accepted, be eligible for public housing wherever they work in Europe, and can fall sick when working abroad without forfeiting good treatment.

Second, there are some items in the Social Chapter on which the Government's arguments may be theoretically valid, but which it should gracefully concede. For example, the cost to employers of longer maternity leave is trivial compared with the importance of the signal that women are welcome to compete in the labour market without discrimination.

Third, there are some areas where the Government is right to dig in its heels, and it should be given credit for doing so. There is no justification, for instance, for imposing a uniform maximum working week.

Finally, the Opposition's attempts to cure Britain's social ills through European labour market regulation are buying short-term popularity at the expense of long-

term economic credibility. Its laudable concern with alleviating family poverty and personal economic insecurity would be much better dealt with by a commitment to minimum family incomes, topping up wages with benefits and good social services - paid for, honestly, through personal taxation. The European solution of hidden taxes on employment, disguised as labour protection, is potentially deadly.

The author is head of the International Economics Programme of the Royal Institute of International Affairs.

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