The welfare state in Europe must become a social-investment state if the broken European social contract is to be renewed.

The new European Commission, set to take office on November 1st, will face a daunting future.

Today, many people feel that the main pillars of the social contract which kept Europe together after World War II—guarantees of peace and wellbeing—have been broken, while young people no longer expect to live a life better than their parents’. According to Eurobarometer, in 2018 almost 75 per cent of Europeans expected the economic situation to remain the same or deteriorate in the year ahead and, when asked about the impact of the recent economic crisis on the job market, about 45 per cent responded that the worst had yet to come.

To regains people’s trust, the newly formed commission should place at the heart of its agenda the empowerment of modern, dual-earner households. It should push for a radical transformation of welfare provisions into social investments, exempting the required funding from the Stability and Growth Pact (SGP).

Social-investment imperative

For two decades, EU institutions have paid lip-service to such a transformation of welfare—from the idea of ‘social policy as a productive factor’ in the 1997 Amsterdam treaty, to the ‘social investment package’ launched by the then commissioner László Andor in 2013, up to the activation principles laid down in the 2017 European Pillar of Social Rights. The 2009-11 great recession corroborated the social-investment imperative, as the high-spending welfare states of north-western Europe—with comprehensive services in cash and kind—proved the most proficient in absorbing the global credit crunch and the eurozone crisis. The time has come for the next commission to put its money where its mouth is.

Traditionally, welfare states have included measures to help people withstand periods of uncertainty and duress. Unemployment benefits help workers after they lose their job and pensions support people after they retire. Today, however, European countries need a new welfare state, which invests in current and future generations before they need help.

New-style welfare should include early, high-quality childhood care, which maximises the chances of children growing up healthy and knowledgeable; education and training over the lifetime, which ensure young adults can withstand ever-changing labour markets, and good parental leave for both women and men to improve the work-life balance of modern families. As neuroscientists and economists point out, early years are critical for a child’s social and cognitive skills and future life-chances and, in the aggregate, child development pays off in terms of economic performance.

Three complementary policy functions underpin the new social-investment edifice. First, it should raise and maintain the ‘stock’ of human capital, including skillsets and health. Secondly, it should facilitate the ‘flows’ between various labour markets and the negotiation of life-course transitions. Thirdly, it should ‘buffer’ against and mitigate social risks, such as unemployment and sickness, through income protection and economic stabilisation. Resting on these foundations, the new system of welfare will produce mutually-reinforcing effects over the life-cycle by generating employment growth and social wellbeing at the individual and household level.

Not easy

Social-investment policies should be accounted for as an investment, not treated as current spending. Foolishly, the SGP disqualifies public investments in lifelong education and training as if wasteful consumption expenditures. As it is, transforming traditional welfare policies into social investments during times of slow growth, tight budgets and increasing life expectancy will not be easy.

The current Italian government, for example, has found it more politically convenient to go in the opposite direction. Its ‘Threshold 100’ reform allows workers to retire when they are 62, having worked for 38 years. Financed by increasing the budget deficit, this shifts to the coming generations of Italians the burden of paying for today’s early retirees, condemning youngsters to walk through life with the ball and chain of a public debt to repay.

The new commission’s policy platform should instead build the case that investing more in our families now will generate large savings in the future—an effort that will require technical innovations as well as adaptive changes in the mindset of national policy-makers. Rather than sentencing our children to a fiscally overburdened future, we must invest in them.

The collapse in interest rates after the onset of the recession must be put to use to establish, consolidate and expand social investments which benefit future generations and consolidate long-term fiscal health, in the face of adverse demography. The new commission should therefore introduce a ‘golden rule’ of exempting human-capital ‘stock’ spending from the eurozone fiscal rulebook, to the extent of 1.5 per cent of gross domestic product for at least ten years. By doing so, domestic social investment could be ratcheted up within the context of economic and monetary union.

Risk prevention

Social investment shifts the welfare balance from the traditional model of male-breadwinner compensation for realised social and economic risks, experienced by families during hard times, to the prevention of old and new risks. Families ought to be enabled to withstand the ever-increasing industrial automation which replaces traditional male-dominated jobs, such as those of metalworkers, as well as the delocalisation of jobs traditionally performed by women, such as in the textile industry.

The research is clear that the best guarantee against child poverty is when mothers work. And it is no surprise that in countries at the vanguard of the ICT revolution men and women work the most, obsolete jobs are converted and innovation helps create new fields associated with higher productivity.

A new social contract in Europe, anchored in social investment, must empower and enable people to care and provide for their families. A basic safety net for all is a sine qua non. But the social-investment contract not merely reinforces a sense of security during labour-market and life-course transitions but also assertively offers families a renewed sense of autonomy in the 21st century.