As global economic turmoil spreads, protectionist murmurings are straining relations among EU member states and testing the idea of flexible labour in a single market

Having celebrated its 50th anniversary just two years ago, the European Union has seen discord among member states all trying to steady the financial ship at home and protect their own workers and national economies. "It is easier to be liberal about all sorts of policies when things are in expansion, when people aren't taking jobs and we have workers coming in from overseas," says James Flynn QC at Brick Court Chambers in London. "But then suddenly times get tough and you get strikes at the oil refineries and people calling for 'British jobs for British workers'."

Gordon Brown unintentionally armed wildcat strikers with a suitable slogan when he called for "British jobs for British workers" at the 2007 Labour conference. The prime minister has since said he was talking about creating work opportunities for British people by making sure they had the appropriate skills to compete in an open market, not calling for a return to protectionism.

"This was a piece of rhetoric, but what we are really saying these days is European jobs for European workers," says David Whincup, head of the human capital practice at law firm Hammonds. "Once you are in the EU, unless we reverse umpteen years' worth of the idea of what Europe stands for, then we have to have a degree of free movement and competition," he says. The wildcat strikes at Lindsey Oil Refinery in Lincolnshire were reminiscent of yesteryear and were followed by protests in Nottinghamshire and in Kent. Lindsey, owned by French oil company Total, hired Californian group Jacobs that in turn sub-contracted to Italy's IREM, which shipped in 100 of its permanent Italian and Portuguese staff. All within EU rules, but workers in Lincolnshire, which has seen a huge rise in unemployment over the past year, were upset they had been overlooked for the jobs and claimed foreign labour was undercutting local workers.

At the heart of the debate is the Posted Workers' Directive, EU legislation that allows European employers to take their workforce to another country without being charged with discrimination against local labour. It also affords protection to the posted worker, defined as an employee who for a limited time carries out work in a different EU state to the one where he is normally employed. Posted workers are entitled to terms and conditions similar to nationals of that country but foreign firms enjoy the right to pay overseas workers at foreign rates subject to the local minimum wage, posing a risk to higher skilled employees such as refinery workers.

In Lincolnshire, a deal was struck to create more jobs for local people, but the dispute tested one of the founding principles of the EU-free movement of labour. "Norman Tebbit said 'if you can't get a job, get on your bike'. That is what the free market is about and if continental European workers can't get a job at home, why would you stop them trying to get one somewhere else?" asks Whincup. "Or, as an employer, why should I have to pay a Brit a salary that I wouldn't have to pay to get a Spaniard?"

Flynn agrees: "It wouldn't be much of a European market if an Italian company couldn't win a contract in the North East of England. There's no requirement in community rules—and it would be against them—that says 50 per cent of labour you take on must be local. That would be against the whole idea of a single market benefit."

According to business secretary Lord Mandelson there are 47,000 British workers posted in Europe temporarily, compared with 15,000 European workers in the UK. Britain, he says, benefits tremendously from Europe. "More than 300,000 British companies are operating across the European Union and many thousands of British workers are in contracts around the EU. With our specialist skills, in many cases we are out-competing our neighbours and bringing significant benefits to the UK economy," he says.

France became the first EU member state to flirt with protectionism when President Nicolas Sarkozy suggested French car manufacturers should pull their plants out of the Czech Republic, provoking a furious response from Czech prime minister Miroslav Topolanek. Sarkozy's pledge in February to grant the French automotive industry financial aid of €9bn (£8.2bn) was the subject of scrutiny by the European Commission as the aid came with the stipulation that French jobs should be protected.

Whincup says Sarkozy's claims may have been mere politicking. "Their manufacturing is in the Czech Republic for good reasons: cost and compliance. If it comes back to France it will be more expensive and the employer will be damaged. As long as France requires goods to be produced in France they won't sell them because Germany is allowing its goods to be produced in the Czech Republic."

Flynn is not surprised by Sarkozy's actions: "The French will always try to push the envelope and try to re-introduce industrial policy considerations and champion national considerations," he says. But, he adds, EC rules for state aid are now stricter, clearer and more rigorously enforced than they were 20 years ago. "In the past there was a certain amount of political flexibility and the Commission was not strong on enforcing the rules in respect to certain countries, but throughout the 1990s it has made a real effort to toughen up and it is more transparent and vigorous. That has all come with a growing confidence," he says. He expects the EC to stand firm even in an unprecedented crisis such as this. "While the scale of the financial crisis is bigger than anything the rules are clear and there's a belief that you don't have to abandon all the rules to get through this."

Lord Mandelson insists that protectionism is not the answer to the crisis. "The shock to the international financial system is testing financial institutions and markets across the globe, and people will raise questions about how we should respond to this in the EU," he says. "The solution is to work with European counterparts to oppose protectionism." This, he says, includes making a commitment to global fiscal stimuli, and to overhaul accounting and prudential standards as well as rethinking regulation for global finance.

Flynn believes the tension in the EU will continue for some time. "Everyone would agree that a co-ordinated Europe would be more likely to produce results than a lot of in-fighting," he says. "Here we are with echoes of the late 1970s, people going on strike because of foreign workers and car companies asking for money. It really is a case of 'here we go again'." Business must guard against rise of economic nationalism

While the world is trying to deal with the bigger picture of a global recession, businesses need to handle issues such as outsourcing and the use of foreign workers sensitively. The advice to business leaders from Andrew Fairburn, right, a director with reputation, strategy and management consultancy Regester Larkin, is to be honest with staff.

"In a recession, calls for protectionism will always arise and I think this is a particularly deep recession and [we're in] particularly difficult times, and therefore the calls will be stronger this time," says Fairburn.

He believes businesses have a big part to play in helping to overcome sentiments of economic nationalism. "The government has to set the national tone and it has to make sure rules and regulations are right, but for companies—especially high-profile companies—to think that they can hide behind the government is wrong and dangerous," says Fairburn. "Companies have to identify potential flashpoints and handle them sensitively. They will not win friends anywhere if they are seen to mishandle these situations."

He thinks that bosses must communicate clearly during this difficult time. "The thing that often happens is that companies know that there are issues bubbling away—a few foreign workers, a bit of outsourcing—and when they don't manage it properly rumours take hold," he says. "You have got to explain to workers what is going on. If you have good news to tell, fantastic, but if it is bad news the benefits of getting it out are often even greater as you are being proactive."

Staff, he says, will understand if you take action for the greater good of the company and the wider economy. "There will be people who understand things have to be done and they will champion leaders on that, but they won't do that if it is mismanaged, rumours have taken hold and positions entrenched," he adds.