The European Social Model of Corporate Governance: Prospects for Success in an Enlarged Europe. © Professor Irene Lynch Fannon, Faculty of Law, University College Cork, IRELAND. This abstract and paper is for presentation at the EUSA Conference in Austin Texas, 30th March-2nd April. Please do not quote or cite without acknowledgement of the author. The European Social Model of Corporate Governance: Prospects for Success in an Enlarged Europe. © Professor Irene Lynch Fannon, Faculty of Law, University College Cork, IRELAND. Abstract: Now comprising 25 member states the European Union has embraced an aggressive competitiveness policy whilst continuing to pursue its social policy. The stated goal of the European Union is "that no one gets left behind as it strives to become the world's most competitive and dynamic knowledge -based economy." The framework supporting the attainment of this goal is the European Lisbon Agenda, which is designed to link economic, employment and social policies. Fundamental to the expressed connection between competitiveness, employment and social policies is the 'stakeholder model of corporate governance' or 'social model of corporate governance' as distinct from the shareholder model of corporate governance espoused in the United States. Despite the ambitions of the European Commission, the competitiveness and social policies face considerable pressures. ? Evidence of continued US economic success supports claims that the US shareholder value model is more sustainable in the long term. ? This conflict has been internalised within the European Union, evidenced in the reports of the Company Law High Level Group of the European Commission (DG-Internal Market) on corporate law, espousing a shareholder rather than stakeholder model of corporate governance, reflecting the broader debate on achieving European competitiveness goals. Nevertheless, in the following year, the Commission DG for Employment and Social Affairs restated its commitment to the Lisbon Agenda and commitment to the Lisbon Agenda has been reiterated in documents released this year. ? Finally, many of the Eastern bloc countries face considerable challenges in adopting the European social model of corporate governance as they strive to achieve economic success and competitiveness. The European Social Model of Corporate Governance: Prospects for Success in an Enlarged Europe. "The Lisbon strategy is even more urgent today as the growth gap with North America and Asia has widened, while Europe must meet the combined challenges of low population growth and ageing. Time is running out and there can be no room for complacency. Better implementation is needed to make up for lost time." Introduction This paper will consider the competitiveness goal of the European Union as outlined at the Council Summit in Lisbon in 2000 summarised in the statement "that no one gets left behind as it strives to become the world's most competitive and dynamic knowledge -based economy." The express linking of competitiveness with employment and social policies, a cornerstone of the Lisbon agenda or strategy, presents us with an imperative to consider simultaneously the issues of economic growth, employment and social policy from a number of different perspectives. This article will focus on corporate governance and labour market regulation as perspectives that will provide us with the tools to understand where the European Union is seeking to place itself along a spectrum of potential approaches to these issues and to assess the effectiveness of the strategy. The corporate governance perspective highlights the uniquely European understanding of the proper role of Europe's corporations in supporting achievement of these goals. Part I will proffer a definition of the European 'social model of corporate governance' as compared with other governance systems, in particular the US model, with the proviso that classification systems currently adopted by corporate governance scholars do not necessarily capture significant variations of type. Part II will consider continued development of the European policies both before and after Lisbon in 2000, with particular emphasis on the 'mid-term review' of Lisbon this year, and on evidence of an intra-institutional debate regarding the Lisbon goals. Part III will highlight the difficulties in establishing exact correlative connections or more problematically actual causative connections between both corporate governance systems, elements of the Lisbon agenda, particularly those relating to labour market regulation and economic and social outcomes. Part IV will focus on particular challenges faced in the context of the 2004 enlargement to include 10 new eastern European states. The Conclusion will follow. Part I De minimis classification of corporate governance systems would identify two categories of governance structures. The first the 'arms length financial model' of corporate governance that relies significantly on the capital markets as an accountability and monitoring device. This model is also described as an 'outsider' model with the emphasis on shareholders, on the shareholder-management relationship and on the market as a monitoring device. This is the US model. In the last decade or so increased emphasis on shareholder wealth maximisation has underlined an increasingly robust approach in the US to the resolution of conflicts between 'other stakeholders' and shareholders in favour of shareholders. In contrast there is the 'relational finance' model relying on close internally constructed relationships between the corporation and the providers of capital including both shareholders and bankers or other financial institutions. This model is also described as an 'insider' model as it gives internal recognition, through for example representative board membership, for stakeholders in addition to shareholders. Such stakeholders include creditors (financiers) and employees. This type of model is exemplified both by the Japanese experience and in continental Europe. Whilst many corporate governance scholars, particularly academics in the United States describe the 'arms length financial model' as being Anglo-American in character with the common law being identified as its legal progenitor, I have argued elsewhere that this classification ignores the significant shift in understanding of the appropriate corporate response to employees as stakeholders which has taken place in the United Kingdom and the British Isles since the beginning of the last century, and accelerated as a result of membership of the European Union since 1972 . Furthermore it underestimates significant local variations even in apparently similar corporate law rules governing, for example, the rights of minority shareholders. Similarly, within the broad category of 'relational finance models' there are also significant local variations of these governance systems. This is true of continental European countries where differences are found as between member states of the European Union in relation to the recognition of workers interests and rights, in relation to recognition of minority shareholder rights and in relation to the recognition of the rights of creditors. Nevertheless in a transatlantic context and in the context of the subject matter of this paper, the European Social Model of Governance differs from the US model of corporate governance in two fundamental and significant ways Firstly, at a theoretical level there is a completely different understanding of the relationship of the corporation to the state in terms of the achievement of what are considered to be broader policy goals, such as those outlined in considerable detail in the European Union's Lisbon Strategy. Under European policy the corporation is seen as the appropriate subject of state regulation, where the object of this regulation is to achieve broadly sketched social, employment or economic policies as distinct from simply delivering an acceptable level of corporate behaviour. Such policies and subsequent legislation can include legislation designed to assist in achieving goals in relation to eliminating social exclusion or poverty, such as legislation facilitating and supporting part-time workers to increase labour market participation, initiatives to support a better work-life balance for employees, or indeed legislation ensuring environmental protection and sustainable development. In this context, from the European perspective the corporation is seen as one of a number of social partners, all of whom have a role to play in contributing to the planning of both macroeconomic and social outcomes. In addition the European approach considers it not only appropriate to regulate external corporate relationships with stakeholders such as employees or the community (environment), but also considers it appropriate to regulate governance structures within the corporation, to reinforce recognition of stakeholders' rights specifically through mandated representation of stakeholders, creditors and/or employees, on boards of management. "the Lisbon agenda must be owned by all stakeholders at EU, national, regional and local level; Member States, European citizens, parliaments, social partners and civil society and all Community institutions. They should all contribute to construct Europe's future." In contrast in the United States this level of managed planning is not present. In addition, the 'free market' ideal militates against regarding the corporation as some sort of tool of state or government planning. Furthermore the broader European concept of 'social partnership' is completely lacking. In theoretical terms this has been described in earlier research as a contrasting view from both sides of the Atlantic of the corporation as a public or private actor and some examination of the significant philosophical and political theories underlying these particularly different approaches has been carried out. Secondly, this theoretical understanding is given concrete pragmatic expression in extensive regulation of corporate activity which is not aimed at regulating normal or mainstream governance relationships between shareholders and management but which is aimed at regulating the relationship of the corporation to its non-shareholding stakeholders, stakeholders that would be considered in the US as external to the core activities of the corporation, and in its relationship to the state, in particular in the context of the Lisbon Agenda in relation to its role in contributing to the objectives. In the European Union the question is not whether the corporation should be regulated to achieve these goals, an issue which would still spark a pretty lively debate in the United States, but how and to what extent corporate activity should be regulated or corporations co-opted in the delivery of these important economic and social goals. Thus regulation is seen as a proper and appropriate area of enquiry in the context of the mid-term review of the Lisbon Agenda. Questions are raised as to the quality of the regulatory environment, the need to create appropriate "incentives for business, cutting unnecessary costs and removing obstacles to adaptability and innovation" . Labour market regulation is a specific example of legislative activity central to some of the goals of the Lisbon Agenda, including the creation of 'more and better jobs' and making Europe 'a more attractive place to invest and work'. In conclusion therefore the European model of the relationship of the corporation to the state, in this context stands in stark contrast to the view of the appropriate corporation-state relationship in the United States. Policy documents and legislation influencing the domestic legislation of all member states, including the 10 new members since May 2004 has significantly altered the regulatory landscape, particularly in relation to employment and social protection and will continue to do so as the Lisbon Agenda is continued into the immediate future. Yet some corporate governance scholars have described this European model as 'a failed social model' and it is timely to reflect on that diagnoses and consider what the issues are. Part II Lisbon and Beyond The period for achieving the ambitious Lisbon strategy described in the introduction to this paper was the first decade of this century concluding in 2010. This year, 2005 has prompted much soul searching, research and positioning as a 'mid-term' review of the Lisbon Agenda was embarked upon. A number of key documents presented by the EU will be considered in this section including the High Level Group Report and most recently in February 2005 communications from the President of the European Commission, President Barroso and Communications from the Commission on the Social Agenda. In its report on the future of European Social Policy in an enlarged Europe, the High Level Group appointed by the Commission noted in keeping with the observations made in Part I that 'there is a distinct European social model' marked by 'the consistency between economic efficiency and social progress.' The Group identified three significant features of the social model, which are firstly a compromise between the state and the market, reflecting a theoretical opting for regulation as distinct from what a US law and economics scholar would describe as a 'free market approach.' Secondly, a compromise between labour and capital is accepted and finally a compromise must be made between the welfare state and individual responsibility. In describing the social model in these terms the report notes that in the 1960s when the distinctively European approach was being developed by the original six the 'conditions were excellent' with strong economic growth, low inflation, confidence in public affairs as well as in individual rights. The report also notes that law and collective bargaining played a 'key role.' However, these conditions no longer persist and this presents a challenge to adapt 'the balance between economic efficiency and social progress' to take account of a changing economic environment and social context.' The High Level Group report reiterates a commitment to the three-pronged integrated approach to social, economic and employment policy. It describes how from 1995 onwards and towards Lisbon the EU and its member states "started revisiting their approach to social policy: affirmation of employment as an objective, and not only as an outcome of economic policy; increasing attention paid to social policy as an investment (and not only as a cost) and to the 'productive' role of social policy within the framework of a virtuous circle combining flexibility and security, adaptability and employability." The report emphasises the importance of developments of the EU in this direction from the mid 90s with the accession of the Sweden and Finland, acknowledging the Scandinavian influence on thinking on these matters, on to Maastricht (1992) and the Social Charter and on to Amsterdam (1997) when the Maastricht Protocol was incorporated into the Treaty, and finally to Lisbon "with the affirmation of the integrated objectives and the launching of the open method of co-ordination as a new instrument to address social policy issues." The integrated approach, which was fully articulated at Lisbon emphasises an understanding that these objectives and policies are not in conflict but can reinforce each other. By the mid-term review period of 2005 however, the statements as described in the Lisbon strategy seem to be theoretically rather than pragmatically based. Unemployment still remains a significant problem in the European Union averaging at 9%, compared with a much lower 4-5% in the United States labour market participation figures compare unfavourably with the United States outside the core group of male workers of prime age and GDP growth has been lower than the projected annual rate of 3%, with figures for the US being much healthier. Yet despite these negative indicators and despite ominous statements from the Kok Report published in 2003 on the performance of the Lisbon Agenda in the context of enlargement, the Report of the High Level Group states (in a surprisingly confident manner) that the first phase of the implementation of the Lisbon strategy is now almost complete. It does acknowledge that 'many actors stress the gap between statement and reality.' The following table is instructive: Table A: GDP, employment, productivity comparison EU15 and US annual average change over the periods indicated in %. 1991-1996 1997-2002 EU15 US EU15 US GDP 1.5 3.2 2.4 3.0 Employment -0.3 1.7 1.4 1.0 Apparent Labour Productivity 1.9 1.4 1.0 1.9 Hourly Labour Productivity 2.2 1.4 1.5 2.2 Source: Annex 2: Statistical Information: Kok Report 2003. Primary sources: DGECFIN's Ameco database, Commission Service, latest updates to Commission's 2003 Spring Forecasts, Eurostat and OECD for average hours worked. The Report of the High Level Group was considered and responded to in discussions taking place during the Dutch Presidency, in the latter part of 2004 and by the Commission in the 2005 documents indicated above. Both Commission documents considered here focus on the labour market and the gap between the aspirations of Lisbon and the real characteristics of the European labour market at this time. The Communication from President Barroso acknowledges the difficult economic conditions which have occurred since Lisbon was launched mentioned in the High Level Group report, but more significantly the President also notes that the failure of Lisbon to meet its mid term goals can also be attributed to a 'policy agenda which has become overloaded, failing co-ordination and sometimes conflicting priorities' . In fact the Presidential address was quite overt in reflecting criticisms that had been levelled against the Lisbon Agenda regarding the burgeoning bureaucratic nature of the attempt to move Europe forward, the core objective of which had translated into 28 core objectives and 117 indicators. The Presidential address reiterated the main focus of Lisbon as being on 'growth and jobs' and in this context outlines three major strategies or goals going forward. These are to ensure that Europe is a more attractive place to invest and work; that knowledge and innovation are the heart of European growth and to ensure that policies are developed which allow businesses to create more and better jobs. The Communication from the Commission on the Social Agenda identifies the importance of the agenda in 'promoting the social dimension of economic growth.' Two priority areas are identified: Moving towards full employment, increasing the quality and productivity of work and anticipating and managing change. A more cohesive society: equal opportunities or all. Putting Lisbon back on Track The various documents try to identify cause and effect factors in attempts to reach solutions to the mid-term problems faced by Lisbon. What is not clear is the extent to which these cause and effect issues have been tested either on a statistical basis or an empirical basis. One criticism which can be made is that even though references to comparative economic experience is made these references tend to be fleeting and there does not seem to be any evidence of a sustained comparative analysis or indeed of a sustained internal analysis. The yardstick against which the European Union measures itself tends to be the performance of other large economic blocks such as the United States and Japan, but even though some comparative figures are given there is little evidence of an attempt to understand the reality of these comparative figures or to question what these comparative figures might teach us. That is not to say that supporting research has not been carried out, the criticism being more based on the fact that the reader cannot assess the potential impact of solutions proffered even where these are expressed in more than vague aspirational terms, because of the fact that the articulation of the issues of the likely effect of proposed solutions is not precise. Following on from this is a further criticism and that is that although the European policy makers are theoretically very confident of the European 'social model' and its virtues, there seems to be a crisis of confidence when comparative economic figures are actually considered. This crisis of confidence is considered in this section, whilst the difficulties surrounding cause and effect between regulatory and other policies on the one hand and economic outcomes on the other will be returned to in Part III. High unemployment. In all of the mid-term review documents there is a continued commitment to the three-pronged Lisbon approach, to the European 'social model' and to the pursuit of a particularly European strategy to employment, economic and social policies going forward. The crisis of confidence in the European mission is however more evident in the detail. This paper proposes to consider the problem of continuing high unemployment and possible solutions proffered in the documents to illustrate the issues surrounding confidence in the European mission. Further assessment of the position of Europe in Kok forecasts an overall unemployment rate for EU15 of 8%, with some of the member states in this group displaying lower than the average and others displaying figures higher than this. Show Table B: The following 2004 report of the High Level Group identified a number of factors contributing to the relatively high unemployment figures in the EU as compared with the US. Thus low participation amongst younger people and comparatively (with US) amongst women are identified as significant factors in contributing to an overall higher unemployment figure as compared with US. The report notes that for the core age group 25-54 the figures as between EU15, EU25 and USA, percentages of population in employment are similar at around 95-96%. For women in this age group the employment differential as between the US and EU15 or EU25 the differential seems to be at about 10%. However the biggest differential as between the US and EU15 or EU 25 is in the age group of 15-24 where the employment differential is 13.4%. A similar differential is present in relation to workers aged 55-64. Show Table C: (from HLG) Therefore it is proposed in the report to address the European high unemployment rate by increasing employment of young people aged 15-24, women generally and older people aged 55-64. Proposed solutions for young people focus on matching skills with jobs, to develop educational and workplace training in tandem, and to encourage 'both public authorities and social partners (employer and unions amongst others) to foster a lasting integration of young people into the labour market.' In relation to female participation it is proposed to increase the availability of childcare and eldercare, to remove financial disincentives to women to participate in the labour market and to improve on flexible working arrangements. Similarly in relation to the participation of older workers the report recommends decreasing of incentives in the social security systems for early retirement and promoting later retirement through pension reforms. Again the involvement of the social partners, and in particular (in the corporate governance context) corporate involvement is invoked to 'promote the implementation of lifelong learning for older workers' 'to improve working conditions and to organise work structures differently', reiterating points made in the earlier part regarding a different perspective on the role of the corporation in relation to social and economic planning as compared with the prevalent view in the United States. Taking the problem of youth participation in the labour market, there is no examination or analysis of what factors in the United States propel youthful labour market participation. To my knowledge there is no managed planning in the United States involving 'matching skills with jobs' or involving 'local authorities and social partnership' (a concept which is alien to most Americans) to foster lasting integration of young people into the market. Secondly even if studies were to identify what causes American youth to work the next question is whether Europeans are willing to actually take these on board. This brings us to a second criticism and that is that the acute tension between the requirements of Lisbon and the policies that have led to situations that are now considered to be problematic, are not articulated. In relation to the first question, why do young people in the US participate more frequently in the labour market as compared with Europeans, a noted US economist has described the non-participation of European youth in the labour market as the problem of the 'lazy European youth', but the fact is that a stated European social goal is to ensure that young people stay in fulltime education both at secondary and tertiary level. Where both high quality secondary and tertiary education are publicly provided the financial incentive for young people to participate in the labour market is low, unlike in the United States where the cost of third level education would certainly be prohibitive for most young people without some level of labour market participation. So we cannot fall into the temptation of explaining profoundly different outcomes by reference to easily constructed cultural stereotypes. One of the core values of the European social model was to protect young people from having to work, to encourage young people to stay in full-time education, to facilitate that broad availability of state funded third level education and furthermore to ensure that young people, at least in some European countries performed some kind of civic duty, traditionally military service but now different kinds of service before taking up employment. No such centralised planning is present in the US, particularly once high school graduation is completed. Participation in tertiary education, particularly high quality tertiary education is much more a function of the consumer operating in a free market for education, where the ability to purchase this good is a private choice, privately funded. In relation to high school completion, certainly a public good supported by all developed areas, interestingly figures for the percentage of upper secondary graduates to the population as provided by the OECD for 2002 do indicate a differential between the United States, where the figure is 73% and main European countries where the figure ranges from 82% for Italy and France to as high as 100% in Denmark and 93%, 97% in Germany and Norway. This differential of almost 10% accounts for youthful participation differentials as far as 16-19 year olds are concerned, leaving a much smaller differential to be concerned about in the overall bracket of 15/16-24 year olds. Similarly in relation to older workers, it is not clear what sort of specific detailed reform of taxation structures or say social security structures are envisaged. In relation to the relationship between social protection systems and high unemployment both the High Level Group and the later Commission Communication from President Barroso attempt to identify in better detail what is required. The High Level Group however has already pointed out a difficulty with this goal (generally acknowledged) and that is that "Within the EU competence for organising and financing social protection systems belongs to the Member states. Each Member State has a collective system which protects people against social risks hereby preventing and reducing poverty." The report diagnoses a broad problem experienced in many member states, specifically that the high cost of social security currently borne by employer and employee contributions deducted at source 'negatively affects growth and employment creation and promotes the persistence of unemployment' by both creating a disincentive for employers to create jobs and creating a disincentive to work. The Presidential communication states that "Moving people from unemployment or inactivity back to employment and giving incentives to stay longer in the workforce all require the modernisation of social protection systems." It continues that "Member States should modernise social protection systems (most importantly pensions and health care systems) and strengthen their employment policies…[which]…should aim at attracting more people into employment (notably through tax and benefit reforms) to remove unemployment and wage traps, improved use of active labour market policies and active ageing strategies" Moving forward in the next phase of the Lisbon strategy from 2006-2010 the problem of conflict between social protection policies pursued throughout the union and the impetus towards employment is adumbrated. Unfortunately despite the diagnosis the problem is that essentially the devil is in the detail of social protection structures. This is also acknowledged at Commission level. "Conflict between employment and social protection often arises on account of the detailed features of policy. The switch from individual to family-based unemployment benefits, for example, has inadvertently caused a serious disincentive to work for the partners of unemployed person." Yet, if the policy makers at the centre are clear as to what needs to be done it would have been helpful to facilitate reform with a clear identification from the highest level of particular features of each domestic tax or social security system which require reform or even to provide a state to state comparison as guidance. Perhaps the level of detail is deliberate for the simple reason that if we consider what is being proposed for more than a moment, it is clear that a dismantling of what the European public consider to be the 'social model' of Europe is what is intended. Political pragmatism over-rides the need to be specifically critical of particular legislative supports. Perhaps this is particularly the case when The European Constitution must be approved by public referendums in many of the member states in the coming year. The adoption of OMC provides a neat if not entirely goal centred political solution to these tensions. Similarly in relation to female participation in the workplace, incentives to stay at home with children, which are both financial and legally supported (these are discussed in the next section) in the European Union yield results which are then considered to be alarming when it comes to considering labour market participation rates. It is argued here that concerns regarding the non-performance of the Lisbon Agenda most importantly illustrate an internal intra institutional conflict between stated policy goals in some areas, monitored by one set of institutional players and economic outcomes monitored by another. Despite the overt commitment to the Lisbon three pronged approach it is clear that the European Union must face and consider a difficult question. Either it takes the European social model seriously and lives with some of the consequences or it accepts that when it comes to employment rates we actually want to look more like the US than we thought we did. Further analysis must take place to answer coherently several awkward questions. How do we really compare with the US economically, what do GDP figures indicate? What about higher unemployment figures? Is full employment a realistic or even desired goal? What about the interface between social protection measures and the operation of the labour market? What about the interface between publicly provided services such as education and health, which decreases the incentive to work and the lack of full employment participation? Europe does not look like the US, so why do we expect similar results when we look at one particular issue? In conclusion, policy choices made over the last 40 years throughout the member states (both original and recently acceding) have yielded particular results but yet the alarms bells are ringing across Europe when the social policy goals have succeeded but the economic outcomes seem less palatable. Part III: Causative or correlative determination As stated the failure of Lisbon to achieve its mid-term goals is often described if not always overtly, in a comparative context. In this comparative context it must be acknowledged that economic figures do not tell the whole story. For example comparative GDP figures as between the US and EU15 and EU25 do not automatically indicate a clear triumph of the US model over the European model. However, it is interesting that the documents to which I have referred seem to accept that for the moment EU15 is less economically successful than expected. This section focuses on a more difficult question, the relationship between regulation and social and economic outcomes. In previous research regarding comparative distinctions between both US and EU corporate governance models and US and EU patterns of labour market regulation it seemed clear that there are unresolved questions regarding the connectivity between structures and economic outcomes. Thus for example it cannot be assumed that a particular corporate governance structure delivers economic success or vice versa, nor can it be assumed that particular types of labour market regulation or deregulation have particular economic consequences in all cases. Furthermore, most corporate governance scholars now accept the path-dependency of corporate governance models and the proposition that there is no 'one size fits all' approach to corporate governance questions. In fact it seems to be the case that governance failures are present in many systems and that perhaps bad governance features are more readily identifiable rather than good governance features. Furthermore that it is much more complicated than we first thought to answer the question of what are the essential elements to a good governance structure rather than a bad. Building on this research on the comparative effect of particular regulatory structures the correlation between labour market regulation and specific outcomes in the context of the mid term assessment of Lisbon will be considered here. As a case study a second big issue for Europe going forward will be considered, namely significant projected demographic changes. These will be considered in light of the US experience. The European baby: a near extinct species? The European Union is grappling with a dropping fertility rate throughout the member states, coupled with relatively (to the US at any rate) lower female labour market participation rates. Similar questions to those that have been raised regarding the correlation between both existing and proposed policies and the reduction of unemployment rates arise in relation to this issue. Similarly also some reservations may be made regarding a loss of confidence in the direction which Europe has chosen over the last few decades. In the context of family-work balance throughout the 1980s, 1990s and going forward into Lisbon in 2000 the level of labour market regulation present throughout the European Union presented a significantly different picture from that present in the United States. At this point it is timely to point out a significant feature of this kind of regulation and that is that in the European Union, policies of harmonisation ensure that inter-state competition for location of industry will not be based on a 'race to the bottom' particularly significant in the context of enlargement. (Unlike the problems presented regard regulation of social protection matters, employment regulation is within the competence of the EC). In contrast in the US there is of course very little regulation of the labour market taking place at Federal level, in particular there is very little federal regulation designed to accord individual employment rights to employees, (as distinct from the regulation of trade unionism which takes place at a Federal level in the US). The leave rights provided for in the Family Medical Leave Act 1994 in the United States are minimal compared with European countries and are not available to significant numbers of employees. The EU Directives impose significant burdens on employers in relation to facilitating leave for all employees in relation to maternity leave and parental leave. Harmonised standards across the EU ensure that these rights are available to all employees. However, in many European countries the harmonisation of labour market regulation at EU level, represents a de minimis situation where workers' rights and entitlements in many member states are significantly better than the minimum required under EC Directives. Furthermore Europeans as we know enjoy mandated rights to four weeks annual vacation and there are also considerable regulation of working hours. Childcare provision is publicly funded and supported in Europe whereas in the United States a system of tax credits seems to be the primary source of financial support for childcare. Typically the European countries have early school starting ages, much more so than in the US. Despite the apparent support for families in the European model, the demographic figures belie the expected impact these initiatives have had on the birth rate. Total fertility trends in the EU-15 and EU 25 show a similar decline from the 1970s to 2000 where the average birthrate for both groups has declined to 1.5 per woman during the 1990s and into 2000. This figure seems to be levelling off. In the US the overall figure is much nearer 2 births per woman. Show Table D: (HLG) The High Level Group report notes that whilst fertility rates increased in most of Europe up to the mid-1960s they suffered a sharp decline afterwards. France is significant here as there has been a trend in very recent times towards some recovery but some evidence of a recovery in some Member States, most significantly in France, has had a limited impact on the overall rate which has increased only marginally from 1999-2001 from 1.45 to 1.47. Furthermore the report notes that although the new member states had a "sort of baby boom in the 1970s and 1980s (notably Poland)" the decline in birthrates afterwards was also very marked. Figures in the new member states indicate a birth rate of between 1.1 to 1.3 i.e. levels similar or even lower than the Mediterranean Member States. The report acknowledges that in this question there are broader social and cultural issues at play, but also notes that in surveys there is a gap between the actual number and the desired number of children women have. Effectively the picture is that despite considerable proactive positions in relation to protection against gender discrimination and the legalisation of positive discrimination provisions in favour of women and despite generous mandated leave rights both relating to birth, childcare and annual leave, European women are choosing to stay at work and not have families. Older European women are choosing not to work at all. In this regard the policies and resulting legislation seem to have had no positive impact. When looked at in a comparative light the relationship between family friendly policies, including legislation and other state funded and voluntary initiatives, does not make any sense at all. The US presents an entirely different picture, indeed a labour market that some have described as downright 'hostile' to the family and certainly very little planned support, yet a higher birth rate. Similarly in both the UK and Ireland, the birth rate is higher than the European average despite de minimis support comparatively in Europe. The report does acknowledge the impact of cultural and social contexts. There is for example an interesting, but slightly misguided comment in the report about social acceptability of births outside marriage having an impact on birth rates. Here it seems that perhaps age of marriage is a factor and when the picture is more closely examined a surprising further element reveals itself. Reliable contraceptive use is more readily available in European countries than in the US because of the impact of socialised medical structures. The average age of marriage in EU15 is 29 whereas in the United States the average age is a younger 27. Show Table E: (from prb) Nevertheless the solutions proposed by the EU policy makers revert go back to the old belief that more regulation and more support will deliver, when already existing support has achieved very little. The experience of France in recent years and of the Nordic member countries are cited to support this approach, the report noting that "that France and the Nordic member states have higher fertility rates because of better provisions for combining child care and work, and partly because of family friendly policies." Interestingly the Commission report shies away from pursuing what it describes as a 'natalist policy', although in some respects it seems that the relative success in France is as a result of certain policies giving significant financial support to women. The conclusion in this section is that attempts to tackle this big issue facing Europe again place faith in centralised managed planning, whether this is given expression in further regulation, adoption of further publicly funded social policies or a mixture of both. The question raised is whether it is possible to deliver these outcomes in light of the social and cultural context and furthermore to ask whether imposing additional burdens on business and taxpayers can be justified in light of the doubts raised regarding correlation between regulation and outcome to date. Taking a slightly different tack it must also be pointed out that even where planning does seem to have effects, there seems to be a crisis of confidence, as there is regarding youthful abstention from the workplace, between the outcomes of social policies pursued over the last four decades and what is now considered to be desirable economically. Perhaps it is timely for those assessing the Lisbon strategy to clearly articulate its vision for Europe without yielding to what seems to be an institutional case of profound ambivalence. Part IV Looking to the future and the impact of enlargement. Put succinctly, in terms of both of the areas which this paper has highlighted: high unemployment and falling birth rates, the situation in Eastern Europe is more of the same only worse. Show Table F and G (HLG) As EU-15 struggles with these problems so will EU-25. At this initial phase however other concerns arise. The first regards the impact the addition of huge levels of population will have on a labour market, which is already under strain. The HLG report however notes "Globally, all these fears do not appear founded: the impact of the 10 new Member States will only be of the order of 75 millions on population and about 30 millions on employment." Show Table H Further concerns arise in relation to competition from low wage countries that are now internal to the market. Balanced against that concern is the provision of services and goods to the market, which will reduce cost structures for established businesses in addition to the provision of more opportunity in relation to the expanded market. One of the most important of all of the challenges and vital to the success of the enlargement is the problem of the acquis and the problem of competition or 'race to the bottom' however illusory and illegal this may be. This is referred to in the Report of the High Level Group and a number of particular issues are identified. In particular from a lawyer's perspective there is a considerable challenge faced by all accession states in implementing the acquis communautaire and this must be distinguished from the more formulaic process of transposing the acquis. Particular areas of concern include implementation of health and safety standards and legislation on equal treatment as between men and women. Considerable difficulties will be faced both in terms of costs imposed on SMEs and costs generally in relation to modernising an industrial infrastructure to meet current EU health and safety standards. Beyond these particular problems the HLG report noted that there were several broad ranging issues facing implementation of the acquis communautaire described as the problem of ' the four gaps'. These are the difference between the broad integrated approach adopted in Lisbon and the more narrowly defined understanding of social policies adopted in the accession process; the problem that social dialogue structures will not be strong enough to support implementation of the social acquis in new member states, given what is expected of these structures, particularly from employers and particular sectors; the tension between the character of the social policies as developed from Amsterdam to Lisbon and beyond and 'the trend to a liberal neglect of social policies in some new Member States in the recent past'; and finally a gap between on the other hand 'the strong egalitarian expectations of major parts of the population in the new Member States' and 'the economic and political realities'. These are effectively challenges to achieving one of the core objectives to redress the relationship between social protection and economic growth and acknowledgement of the problems presented by lack of competence and doubts as to whether OMC can deliver Conclusion In terms of the new revised and restated goals at the mid-term review point for Lisbon the European social model faces more difficulties than one would have first envisaged. Economic indicators have led to a crisis of confidence amongst the policy makers giving rise to tension between continued assertions of the core values of the Lisbon Agenda and goals which are identified as necessary to achieve in the next five years before 2010. This tension or conflict does not seem to have been resolved by the documents describing the strategy going forward. This conflict is reflected intra – institutionally at Commission level. On the one hand there is a willingness to be impressed by economic indicators from the US without asking important questions regarding the underlying realities and without articulating substantially different contexts. Similarly those within the Commission who are solely concerned with economic or competitiveness matters espouse policies which are more reflective of US theoretical and political policy approaches. This is indicated in the report of the High Level Group on Company law. On the other hand various parts of the Commission bureaucracy and perhaps a majority of the European body politic continue to place their faith in Europe's social model of governance and the integrated approach expressed in Lisbon to economic, employment and social policies. Furthermore correlation and in particular causative connections between proposed solutions and expected outcomes do not seem to be particularly well articulated in these review documents. This is particularly the case when considered in the comparative US context, despite the fact that comparative economic indicators are readily referred to. Finally, two political and legal problems face Lisbon going forward. The first problem is presented in the context of proposed reforms necessary on a state-by-state basis of social protection which have been identified as a matter of urgency. The federal structure and the lack of competence, which the EU has in relation to these issues, raise questions about the ability of the EU to deliver. How can member states be persuaded to dismantle or at least reform certain aspects of social protection systems which have as their stated object creating incentives for people to return to work? Will this be politically acceptable in Europe? At some point is can be predicted that certain kinds of reforms which perhaps some would call for will be seen not only by the body politic but also by member state governments as a dismantling of 'social Europe'. Will the OMC adopted in 2005 be successful in facilitating a creation of more modern social protection systems? Given accepted difficulties generally throughout the European Union with enforcement and implementation of actual legal standards and given the perceived difficulties with the 'four gaps' one can only be doubtful. The second problem relates to enlargement and the difficulties faced by the new member states and the EU institutions in relation to the enforcement of the acquis. Only time will tell how this particular issue will resolve itself. Whether the 'four gaps' result in profound disagreement or rather simply a period of catch-up played out by the new accession states is something one cannot accurately predict. There is no reason to assume that this will be a passive process on the part of the accession states. On the contrary it is entirely possible that some influence towards change may well be exerted by the accession countries and that the resultant Lisbon Agenda is changed from where it started in 2000. © Professor Irene Lynch Fannon, Faculty of Law, University College Cork, IRELAND. Bibliography Corporate Governance Report of the High Level Group on Company Law. COM (2003) 284/final [21.5.2003]. Dorresteijn A, et al, European Company Law (Kluwer, Deventer, The Netherlands, 1994) Ch. 7 Fama, Eugene F, "Agency Problems and the Theory of the Firm." (1988) 88 Journal of Political Economy 288. "Efficient Capital Markets" (1991) 46 Journal of Finance 1575 Hansmann H, and Kraakman R, "The End of History for Corporate Law" (2001) 89 Georgetown Law Journal 371. Gilson, Ronald J. and Roe, Mark, " Understanding the Japanese Kereitsu: Overlaps between Corporate Governance and Industrial Organisation" (1993) 102 Yale Law Journal 871. La Porta, R, Lopez-de-Silanes F, Shliefer A, and Vishny R, " Corporate Ownership Around the World" (1999) 54 Journal of Finance 1131. Lynch-Fannon I, "Employees as Corporate Stakeholders: Theory and Reality in a Transatlantic Context. (2004) Journal of Corporate Law Studies 155. Lynch-Fannon I, "A Transatlantic Case: The Derivative Action as a Corporate Governance Device" forthcoming (2005) Dublin University Law Journal. R. Nolan, 'Indirect Investors: A Greater Say in the Company?' (2003) 3 JCLS 73 Lynch-Fannon I: Working Within Two Kinds of Capitalism (Hart Publications, 2003) See further corporate governance bibliography in this text. Millon D, " Why is Corporate Management Obsessed with Quarterly Earnings and What Should be Done About It?" (2002) 70 George Washington Law Review 890. Mitchell, L. E. Corporate Irresponsibility: America's Newest Export (New Haven and London, Yale University Press, 2001). Roe, Mark, The Political Determinants of Corporate Governance (Oxford University Press, 2003). UNECE Roundtable on Corporate Governance, February 9th, 2005. http://www.unece.org/ie/wp8/documents/for05cgppt.html Labour Market Regulation Coale AJ, "Age of Entry into marriage and date of initiation of voluntary birth control. (1992) Demorgraph XXIX 333-342 Craig and de Burca: EU Law: Text, Cases and Materials (OUP, 2003). Lynch-Fannon I: Working Within Two Kinds of Capitalism (Hart Publications, 2003) INSEE: La situation demographique en 2002. http://www.ined.fr www.caf.fr Willliams, JC " The Family-Hostile Corporation" (2002) 70 George Washington Law Review 921. Yadav, S.S.; Badari, V.S. : Age at effective marriage and fertility: An analysis of data for North Kanara. The Journal of Family Welfare. September 1997. 43(3). p. 61-66. Location: SNDT Churchgate. Commission publications on Lisbon Kok Report on the Lisbon Strategy in an Enlarged Europe, November 2003. The Social Situation in the European Union. European Commission 2004. Report of the High Level Group on the future of social policy in an enlarged European Union. European Commission: DG for Employment and Social Affairs. May 2004. COM (2005) 24 final Working Together For Growth And Jobs: A New Start For The Lisbon Strategy: Communication from President Barroso in agreement with the Vice-President Verheugen. COM (2005) 33 final entitled The 2005 Review of the EU Sustainable Development Strategy: Initial Stocktaking and Future Orientations. EC Legislation Directives 97/81/EC OJ (L 14) and 98/23/EC OJ (L 131) on Part-Time and Fixed Term Workers Directives 92/85/EC OJ (L 348) on Maternity Leave. Directive 96/34/EC OJ (L 145) on Parental Leave. Directive 93/104/EC, the Organisation of Working Time Directive. Directive 2001/86/ EC on worker representation on the board of the European company provided for under Council Regulation 2157/2001: the Statute for the European Company. EC Directive 76/207/EC Decisions of the European Court of Justice Case-450/93 Kalanke v Freie Hanestadt Bremen [1995] ECR I-3051 Case C-409/95 Hellmut Marschall v Land Nordhein Westfalen [1997] ECR I- 6363. Case 184/83 Hofman v Barmer Ersatzkasse [1984] ECR 3047. US Legislation Family and Medical Leave Act 1994. Economic Indicators Freeman, R: "Towards and Apartheid Economy (1996) Harvard Business Review 108. Gordon R, "Two Centuries of Economic Growth: Europe Chasing the American Frontier" http://faculty-web.at.northwestern.edu/economics/gordon/2Cent-CEPR.pdf p. 14/58 Robert Gordon: Why Europe Was Left at the Station when America's Productivity Locomotive Departed? August 2004, NBER Working Paper Series w10661. http://faculty-web.at.northwestern.edu/economics/gordon/P368-CEPR.pdf The OECD Database. http://www.oecd.org/dataoecd The US National Center for Educational Statistics. http://nces.ed.gov www.un.org http://www.europa.eu.int/pol/socio/index_en.htm Lynch-Fannon I: Working Within Two Kinds of Capitalism (Hart Publications, 2003) for a description of the comparative issues. COM (2003) 284/final [21.5.2003]. Report of the High Level Group on the future of social policy in an enlarged European Union. European Commission: DG for Employment and Social Affairs. May 2004. See further COM (2005) 24 final Working Together For Growth And Jobs: A New Start For The Lisbon Strategy: Communication from President Barroso in agreement with the Vice-President Verheugen and COM (2005) 33 final entitled The 2005 Review of the EU Sustainable Development Strategy: Initial Stocktaking and Future Orientations. Nevertheless a recent report from the Commission again states that the 'new Member States will fit into the European social model…and are well placed in the long term to become major drivers of economic growth and social improvement.' http://europa.eu.int/comm/employment_social/news/2004/oct/socsit_report_en.html The Social Situation in the European Union. European Commission 2004. Wim Kok quoted in COM (2005) 24 final at p. 4, Fama, Eugene F, "Agency Problems and the Theory of the Firm." (1988) 88 Journal of Political Economy 288. "Efficient Capital Markets" (1991) 46 Journal of Finance 1575. There is a considerable body of literature on the efficacy of the capital markets as a monitoring device. Mitchell, L. E. Corporate Irresponsibility: America's Newest Export (New Haven and London, Yale University Press, 2001). See also Millon D, " Why is Corporate Management Obsessed with Quarterly Earnings and What Should be Done About It?" (2002) 70 George Washington Law Review 890. See further Gilson, Ronald J. and Roe, Mark, " Understanding the Japanese Kereitsu: Overlaps between Corporate Governance and Industrial Organisation" (1993) 102 Yale Law Journal 871. La Porta, R, Lopez-de-Silanes F, Shliefer A, and Vishny R, " Corporate Ownership Around the World" (1999) 54 Journal of Finance 1131. Lynch-Fannon I, "Employees as Corporate Stakeholders: Theory and Reality in a Transatlantic Context. (2004) Journal of Corporate Law Studies 155. Lynch-Fannon I, "A Transatlantic Case: The Derivative Action as a Corporate Governance Device" forthcoming (2005) Dublin University Law Journal. R. Nolan, 'Indirect Investors: A Greater Say in the Company?' (2003) 3 JCLS 73 See COM (2003) 284/final [21.5.2003]. Reports of the Company Law High Level Group of the European Commission (DG-Internal Market) Directives 97/81/EC OJ (L 14) and 98/23/EC OJ (L 131) on Part-Time and Fixed Term Workers Directives 92/85/EC OJ (L 348) on Maternity Leave, Directive 96/34/EC OJ (L 145) on Parental Leave and Directive 93/104/EC, the Organisation of Working Time Directive. See Directives 2001/86/ EC on worker representation on the board of the European company provided for under Council Regulation 2157/2001: the Statute for the European Company. See further Dorresteijn A, et al, European Company Law (Kluwer, Deventer, The Netherlands, 1994) Ch. 7. COM (2005) 24 final p. 12 Lynch-Fannon I, Working Within Two Kinds of Capitalism (Hart Publications, 2003) Ch. 6. COM (2005) 24 final p. 19 COM (2005) 24 final p.8. H. Hansmann and R Kraakman, "The End of History for Corporate Law" (2001) 89 Georgetown Law Journal 371. COM (2005) 24 final: Communication to the Spring European Council: Working Together for growth and jobs. A new start for the Lisbon Strategy. COM (2005) 33 final: Communication from the Commission on the Social Agenda. The Commission issued documents on other matters less central to this discussion such as the Communication on Sustainable Development. COM (2005) 37 final: Communication from the Commission to the Council and the European Parliament: The 2005 Review of the EU Sustainable Development Strategy: Initial Stocktaking and Future Orientation. Report of the High Level Group on the future of social policy in an enlarged European Union. European Commission for Employment and Social Affairs. May 2004. p. 27, para. 1.3.2 supra n. 23 p. 28, para. 1.3.2 Ibid p.30, para.2.1.1 For a description of what is involved in the OMC see the Report p. 35 para. 2.2.2. In addition the OMC procedure will be included in the Constitution in relation to social policy under Article III-107. See Report ibid p. 36. The relationship between reform of social protection and the introduction of OMC is considered in relation to legal and political challenges facing the Lisbon strategy. Report p. 31 Although note the complicating factor of social protection provisions in making comparisons. US, EU15 and EU25 figures for men of prime age between 25-54 are similar. The differential between total comparable figures is explained by the higher rate of labour market participation of younger people (aged 15/16-24) and women of prime age in the US. See High Level Group Report p. 42 with figures from Eurostat, European Foundation for Living and Working Conditions and OECD. "…according to the Lisbon conclusions (*6) 'an average economic growth rate of around 3% should be a realistic prospect for the coming years.' Since 2001, we are facing an economic slowdown: the European Union growth rate which has been of 3.5% in 2000, has only been of 1.6% in 2001. 1.1% in 2002, and 1.3% in 2003. The forecast for 2004 is 2.3%." The Report goes on to observe that 3% does not look like " a realistic prospect for the coming years." p. 37 para. 2.3 Note however, that some differences in GDP growth as between the US and EU can be explained by factors which are particular to the economic structures of both trading blocs. See also Robert Gordon: Why Europe Was Left at the Station when America's Productivity Locomotive Departed? August 2004, NBER Working Paper Series w10661. http://faculty-web.at.northwestern.edu/economics/gordon/P368-CEPR.pdf p.31 It seems that here President Barroso is calling for greater focus than that achieved by the High Level Group where the group in its report went well beyond the more focussed goals as expressed by the President and included in an Annex to the report a great deal of matters and policy initiatives pursued under the umbrella of the Lisbon Agenda, ranging from Information Society initiatives, Environmental initiative, Education and so on. See Annex 3 for a full list of policies considered as being relevant to the Lisbon Strategy. See commentary Irish Times, March 7th, 2005. COM (2005) 33 final p. 2 Ibid. p.6. Ibid. p. 9. Kok Report Annex 2: Chart 3: Forecast unemployment rates in 2003 for Member States and New Member States (% of Labour Force). Primary sources: Commission Services, DG ECFIN autumn forecast 2003, unemployment rates. Ireland, Luxembourg, Sweden, UK, Portugal, Austria, Netherlands and Denmark. Most notably France, Germany, Greece, Spain and Italy. High Level Group Report p. 44 http://www.oecd.org/dataoecd Accessed on March 15th, 2005. The US National Center for Educational Statistics states that for 2000 10.9% of the 34.6 million 16-24 year olds in the US were High school dropouts. http://nces.ed.gov p.55 p.24 Barroso COM p. 25 Gordon R, "Two Centuries of Economic Growth: Europe Chasing the American Frontier" where he observes that 'a significant fraction of GDP in the US does not improve welfare' but rather involves fighting the environment, and involves other activities such as home and business security, maintaining 2 million people in prison, highways and so forth. http://faculty-web.at.northwestern.edu/economics/gordon/2Cent-CEPR.pdf p. 14/58 Furthermore the fact that significant areas of human activity, health care and third level education are provided extensively on a publicly funded basis in Europe, included at basic cost value in GDP figures usually, whereas this is not the case in the US, will also account for some part of the differential. In fact most corporate governance scholarship is now concerned with the unusual rather than the usual. So for example, why did Ireland's economic miracle happen against a backdrop of increased labour market regulation and indeed regulation of all kinds including increased corporate regulation, environmental regulation and so forth? Similarly why is it that in some highly regulated European labour markets, most notably Sweden and in particular Norway does economic success seem sustainable whereas this is not the case in others. The conclusion seems to be that regulation is one, perhaps relatively insignificant factor in contributing to economic success. Scandals such as WORLDCOM, Enron, Barings Bank Tyco and so forth have shaken confidence in the capital markets model of corporate governance. At a recent UNECE Roundtable on Corporate Governance it was agreed by many contributors that different governance structures deliver different things and can be valued differently accordingly. UNECE Roundtable on Corporate Governance, February 9th, 2005. http://www.unece.org/ie/wp8/documents/for05cgppt.html I. Lynch-Fannon, supra n. pp.45-47 supra n. Organisation of Working Time Directive supra n. Note that a new law in France, 2005 has provided more flexibility to the cap on 35 hours working week, which had existed in France that had opted for a more rigorous option, provided for under the Directive than other countries. Report of the High Level Group on the future of social policy in an enlarged European Union, May 2004. Graph 2: Total Fertility trends in the EU-15 and EU-25, 1950-2000 and 1995-2000. In France the birth rate had fallen to 1.6 per woman by the early 1990s but has increased over the late 1990s and into this decade to between 1.8 and 1.9. The French figures also note a later average maternity age of 29.6 years and also note that over 83% of these births occurred to exclusively French couples, as distinct from births to non-nationals that were at 7.1%. INSEE: La situation demographique en 2002. Projected figures are provided for 2003/2004. http://www.ined.fr Accessed March 15th, 2005. In the context of the EU as a whole it is instructive to consider Articles 2(3) and Articles 2 (4) of the EC Directive 76/207 implementing equal treatment of men and women. These two provisions exempt both maternity provision and positive discrimination provisions from the principle of equal treatment. Decisions of the European Court of Justice have approved of positive discrimination measures in favour of working women adopted in some member states, Case-450/93 Kalanke v Freie Hanestadt Bremen [1995] ECR I- 3051 and Case C-409/95 Hellmut Marschall v Land Nordhein Westfalen [1997] ECR I-6363. . Furthermore the ECJ has approved favourable treatment granted to women workers in the context of maternity, where such favourable treatment is specifically exempted from the broader gender equality agenda. See Case 184/83 Hofman v Barmer Ersatzkasse [1984] ECR 3047. See further Craig and de Burca, EU Law: Text, Cases and Materials (OUP, 2003) Chapter 20. Williams, JC " The Family-Hostile Corporation" (2002) 70 George Washington Law Review 921. Ireland and UK display an average birth-rate of Yadav, S.S.; Badari, V.S. : Age at effective marriage and fertility: An analysis of data for North Kanara. The Journal of Family Welfare. September 1997. 43(3).p. 61-66. Location : SNDT Churchgate. Coale attributes the decline in marital fertility in late-marrying populations to not only the longstanding social conditions that accounted for the tradition of late marriage in Western Europe, but the favourable attitude for early adoption of contraceptives. Coale AJ, "Age of Entry into marriage and date of initiation of voluntary birth control. (1992) Demorgraph XXIX 333-342 See www.caf.fr for a complete list of specific financial supports provided under the French social security system ranging from allowances for each child, allowances for childcare, for annual return to school and so forth. Accessed on March 15th, 2005. P. 14 HLG Report 1.1.3 Freeman R, 1