Much heat has been generated recently,
on both sides of the Atlantic, over
the mobility of jobs and labor. In the
United States, there has been a strong
political reaction against the phenomenon
of "outsourcing" work to low-wage
countries, which, if the scaremongers are
to be believed, threaten to move tens of
thousands of U.S. jobs to India or China.
In Europe, the preoccupying concern has
been that citizens from Central and Eastern
Europe might flood westwards, taking
either jobs or welfare payments.
Warm words of welcome for the enlargement
of the European Union this
spring were undermined by an array of
temporary defensive measures by the 15
older EU member states against citizens
of the ten new members. These measures
range in severity from denying entitlement
to social security to refusing access
to the labor market.
But if both sides of the Atlantic are
capable of job insecurity and even protectionism,
why is it that the debate over
outsourcing has not achieved the same
intensity in Europe that it has in the
United States?
With perhaps a dash of insouciance,
a recent paper on industrial policy produced
by the European Commission's
Enterprise department remarked: "A debate
is under way in the United States on
the economic impact of relocation in
terms of jobs and productivity."
The paper was in part a response to
instructions from EU leaders, meeting
last October, to come up with proposals
"with a view to avoiding de-industrialization."
But the Commission's report
questions its premise. "It is not possible
to conclude that Europe is experiencing
genuine de-industrialization," it argues,
although it does see problems of lower
production and employment in certain
traditional industrial sectors.
The nuances of the paper suggest
that a debate is under way in Europe, as
in America, but that it is neither so widespread
nor as politically-charged. At
least, not yet.
"Not yet" is superficially the easiest
way to explain the Transatlantic difference.
It could be that the United States is
simply a year or two ahead of the European
Union in its approach to outsourcing.
Europe will lag behind, just as it did
in the heady days of the dotcom bubble.
Industry analysis of outsourcing
suggests that it is a trend that has still to
take off in Europe. Forrester Research
entitled a November 2003 report on information
technology services spending
"Forecasting Europe's Outsourcing
Stampede," clearly putting growth in the
future. Forrester admitted that earlier
predictions of a recovery in spending
during 2003 had been undermined by
poor economic growth in Europe's
major economies. It predicted a surge in
pent-up demand in late 2004 and early
2005. As a share of European IT services
spending, outsourcing would grow from
29 percent in 2002 to 43 percent in 2008.
Gartner Dataquest, in an analysis of
market trends in outsourcing of business
processes, forecasts a compound annual
growth rate of 9.6 percent of outsourcing
in Europe between 2002 and 2007.
That would increase the value of outsourced
services from $24.8 billion to
$39.2 billion over the five-year period.
Gartner says that the UK has been far
ahead of the rest of Europe in outsourcing
business processes, accounting for half
the European market in 2002. Some tasks,
such as payrolls, check processing and
benefit administration, have long been
contracted out. Outsourcing is now being
extended to processes like recruitment
and procurement. Although Gartner forecasts
strong growth in Italy, France and
the Netherlands, it still envisages that in
2007 the UK will account for $19 billion
of a $31 billion market in Western
Europe for process management.
But timing is not the only difference
between the European Union and the
United States. There are good economic
reasons to suppose that outsourcing will
not have the same impact in Europe as
in the United States. First, demand for
services is greater in the United States
and the price of services is higher. That
means that the potential savings for
business from outsourcing are bigger in
the United States than in Europe.
Second, there are significant regional
variations in employment costs. An outsourcing
IT center in India might enjoy a
significant advantage over employing
people in Denmark, but there will be a
much smaller advantage over wage costs
in Portugal, Greece, Spain or even Italy.
And there is a still smaller gap between
wages in outsourcing centers in developing
countries and the lower-wage
economies of Eastern Europe.
Third, the costs of getting rid of existing
employees are much greater in Europe
than in the United States. If people
are expensive to fire, then the cost savings
achieved by outsourcing switching
work from the domestic labor force to
India or China, for example are correspondingly
reduced.
And in many European countries, it
is not only expensive to fire workers, it is
also more difficult than in America, as a
result of job protection regulations negotiated
over the years by powerful labor
unions. "Germany is a much more protectionist
environment [than Britain or
the United States]. It's much more difficult
to make an outsourcing deal in Germany,"
says Andrew Parker of Forrester
Research's Amsterdam research center.
On top of these cost-benefit calculations
and legal hurdles, there are also
cultural differences. Europeans do not
have the same expectations of 24-hour,
seven-days-a-week services as Americans.
It is common in European countries
for shops to close relatively early in
the evening and not to open on Sundays.
And if European customers do not share
the same expectations of permanently
available services, businesses in turn are
not obliged to staff call-centers and provide
support round the clock.
Outsourcing European services is
also complicated by differing language
requirements. Asia can offer thousands
of proficient English-speakers, but the
supply of those who can read or speak
French, German or Italian is more limited.
The language issue, says Mr. Parker,
is "ever present." Cultural affinities also
influence outsourcing destinations.
Nordic businesses in Denmark or Sweden
might be readier to see work go to
fellow-Baltic new EU member countries,
such as Estonia and Latvia, or, outside
the European Union, to Russia, than to
contemplate a switch to Asia.
India's Wipro has certainly won significant
contracts from several UK companies,
but it is unclear whether it can
sustain the same level of success in other
European markets. Deutsche Bank has
contracted work out to St. Petersburg
and Moscow. Romania, which hopes to
join the EU in 2007, is now talked about
as a destination for outsourcing IT services.
All of which suggests that the pattern
of relocation in Europe is more
complicated than in America. It cannot
necessarily be described as "anti-European,"
in the way in which it is sometimes
denounced as "anti-American" in
the United States, particularly in a Presidential
election year.
Then there is the issue of expectations.
The idea of moving jobs from
Western Europe to Eastern Europe is not
a new idea. It has long been the case that
multinationals would look elsewhere before
employing large numbers of workers
in Western Europe. If they do set up
in Western Europe, they usually demand
tax breaks and/or state aid to sweeten the
pill. So EU leaders are perhaps more reconciled
to external competition, whether
from their Eastern neighbors or further
a field.
Such considerations are familiar issues
in European politics. It is not that
Europe is happy to be losing jobs
abroad, but the rumbling is more constrained.
"Compared to the United
States, it is simmering under the surface,"
says Mr. Parker.
Occasionally, the discontent bubbles
up. German Chancellor Gerhard
Schroeder criticized the giant German
multinational Siemens as "unpatriotic"
after it decided to contract work out to
Central and Eastern Europe. The French
administration recently exhibited similar
chauvinism when deterring the Swiss
pharmaceutical company Novartis from
interfering with a bid by the French
company Sanofi for another French
company Aventis. The government was
trying to ensure that Aventis and its jobs
stayed in France.
But such appeals to patriotism are
often characterized here in Brussels as
"un-European." The principles of the
European Union's single market, that
people should be free to work, travel or
set up business anywhere within its territories,
have obliged national politicians
to accept that jobs will disappear across
national borders.
Whether they can prevent jobs
traversing the external borders of the
European Union has yet to be fully
tested. But a straightforward appeal to
national interest will probably not be
enough. Instead European politicians
might resort to more devious gambits,
perhaps including recourse to the European
Union's rules on data protection, in
an attempt to stem the flow of jobs
abroad.
They will not get any help from the
European Commission. As Frits Bolkestein,
Commissioner for the Internal
Market, has said: "Too many leaders of
'old' member states have become preoccupied
with the phenomenon of 'deindustrialisation'
or 'off-shoring' and
ways of stopping it from happening.
They are wrong on two counts. First, we
cannot prevent 'off-shoring' from happening
to a certain degree, it is inevitable,
even desirable. Second, the
policy measures which they advocate to
stop it are outdated and ineffective."
Tim King is a business journalist reporting on
EU affairs in Brussels.
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