The European welfare state and the European Union (EU) find themselves caught up in a double bind in the aftermath of the global financial crisis. On the one hand, domestically, EU members are politically bound by widely cherished national social contracts on welfare provision, which in hard economic times are especially difficult to renege upon. On the other hand, at the supranational level, the (reinforced) rules-based macroeconomic governance structure of the EU, giving priority to low inflation and budget consolidation, commits its members to a long-term project of negative market integration, which in a downturn implies intrusive austerity reform of their welfare systems.
This is especially pertinent for the so-called ‘Troika economies’— the eurozone countries of Greece, Ireland, and Portugal (and to a lesser extent Spain), which under the surveillance of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) have been forced to drastically cut minimum wages, pensions, education, health and old age care expenditure and deregulate their labour markets and wage bargaining structures. When and where stagnation prevails, mass unemployment and rising poverty and inequality are the breeding grounds for Europhobic political extremism.
Between rising anti-establishment populism and the EU’s intrusive imposition of fiscal austerity, a ‘political-institutional vacuum’ has emerged at the heart of the European integration project, between the Northern ‘core’ economies and the embattled Southern ‘periphery’ as well as within national political arenas between mainstream parties and Eurosceptic populist movements. This political vacuum, brought home with a vengeance by the results of the elections to the European Parliament, especially the victory of the far-right National Front in France, considerably jeopardises solutions to the incomplete architecture of the Economic and Monetary Union (EMU).
By 2014, as the existential economic crisis of the euro has somewhat abated, the new policy imperative for Member States and the EU more generally is to manage the social aftershocks of the global financial crisis. On average, 12% of the eurozone workforce is jobless, a quarter of economically active young Europeans are unemployed, and inequality and poverty levels are rising. Without a long-term strategic focus on improving human capital and capabilities, expanding employment opportunities, and easing labour-market and life-course transitions for individuals and families, the EU risks becoming entrapped in permanent stagnation. Deep economic crises are often moments of political truth; so the history of the 20th Century teaches us. While the social aftershocks of the euro crisis are putting grim economic and political strains on national welfare states and EU institutions, this could also engender more positive consequences, as the unsettling of beliefs sometimes inspires ground-breaking policy recalibration.
Social Policy In The Aftermath Of The Euro Crisis
The aftermath of the euro crisis has, I believe, ushered in a period of transition. Since the onslaught of the sovereign debt crisis, we have observed impressive ‘economic governance’ change, including the introduction of the Six-pack and Two-pack as well as the Euro Plus Pact, reinforcing stricter EU control of Member State public finances. A number of fiscal backstops have been introduced ad hoc under significant pressures from bond markets. In October 2011 the European Financial Stability Facility (EFSF) was ratified and its successor, the more permanent European Stability Mechanism (ESM), became fully operational in 2013. The new ‘European Semester’ feeds into Member States’ national reform programmes (NRPs) and is meant to speed up recovery. By the summer of 2012, the ECB committed itself ‘to do whatever it takes’ in the words of Mario Draghi, by announcing the purchase of eurozone government bonds in the secondary market in an attempt to stave off new speculative attacks. Coined as Outright Monetary Transactions (OMT), this instrument in effect turned the ECB into a ‘lender of last resort’. Meanwhile a Banking Union is under construction. These examples go to show that the E(M)U’s macroeconomic policy regime in recent years has undergone a major – although half-hearted, haphazard and incremental – change.
Although the new monitoring procedures charting real economic performance are welcome, to date the overriding policy recipes have remained ruggedly pro-cyclical, potentially defeating the purpose of sustainable and inclusive growth as laid down in the Europe 2020 agenda. I agree that the glass is more half-empty than half-full. But I also believe that the macro change away from a single focus on inflation targeting and deficit and debt reduction by pro-cyclical market deregulation and retrenchment, should be taken very seriously by social actors in national and EU policy-making arenas anxious to mitigate social hardship and foster long-term social and economic progress in tandem.
There are a small number – admittedly too few – ‘silver linings’ to build on for such an endeavour, more consistent with Europe 2020 strategic objectives than the current policy of permanent austerity. These are: (1) the wave of reconstructive welfare reforms under constrained macro-economic conditions over the past decade in most Member States; (2) the strong and renewed efforts by the European Commission for upholding and encouraging the shift towards productive and active welfare states, exemplified by the launch of the ‘Social Investment Package’ in February 2013; (3) the rekindling of the debate about the social dimension of EMU in recent years.
The onslaught of the euro crisis calls into question whether different varieties of welfare capitalism can really be made to operate under a single currency union. Since the late 1980s, a majority of European governments have come to enact a wave of social reforms to make their social policy systems more efficient and employment-friendly. Alongside retrenchments, there have been deliberate attempts to rebuild social programmes and institutions and thereby accommodate welfare policy repertoires to the new economic and social realities of the knowledge-based economy. The overall extent of change has varied widely across the Member States of the European Union. With their tradition of high quality child-care and high employment rates for older workers, the Scandinavian countries performed particularly well throughout the past quarter century, both in terms of efficiency and equity. In the period leading up to the financial crisis, we also observed, however, reconstructive change in countries such as the Netherlands (social activation), Germany (dual earner family support), France (minimum income protection for labour market outsiders), the United Kingdom (fighting child poverty), Ireland (much improved education) and Spain (negotiated pension recalibration.
In the process, European welfare states did not become the sort of lean welfare states that European central bankers and fiscal policy authorities in Frankfurt and Brussels hoped EMU would deliver; instead they became ‘active welfare states’ at higher-than-before levels of employment, some even with a competitiveness bonus attached to the new policy mix! The experience in welfare recalibration in Austria, Finland, Germany, and the Netherlands, moreover, shows that a common currency can be made perfectly compatible with generous and inclusive welfare provision and balanced budgets.
What about the Southern members of the Eurozone? Alongside domestic reform failures, I associate reform fatigue in the pension-heavy and segmented welfare systems of Southern Europe with the adverse effects of the incomplete governance structure of EMU, perversely confronting Italy, Portugal and Spain with extremely low interest rates which in turn dis-incentivised the reform momentum since the late 1990s. In other words, today’s poorly performing Mediterranean welfare states are not necessarily structurally incapable of effective welfare recalibration under the umbrella of a single currency.
The Social Investment Package Could Be A Game Changer
A second silver lining, inspired by the experience of proactive and reconstructive welfare state recalibration, has recently culminated in the launch of the ‘Social Investment Package for Growth and Social Cohesion’ by the European Commission in early 2013. An emphasis on the productive function of social policy stands out as the distinguishing feature of the social investment perspective, highlighting policies aimed at preparing individuals, families and societies to respond to the new risks linked to a competitive knowledge economy, by investing in human capital and capabilities from early childhood through to old age. The extensive background documentation of the ‘Social Investment Package’ makes a strong case for social investment no longer being dismissed as ‘fair weather’ policy when times get rough, which is what happened with the Lisbon Agenda. The overall message boils down to not allowing human capital to go to waste through semi-permanent inactivity, as was the case in the 1980s and 1990s in many continental European welfare systems.
Given the ageing predicament, European welfare states are confronted with a formidable social investment challenge. A careful reading of the package reveals a quiet paradigm revolution. On various occasions, DG Employment, Social Affairs and Inclusion explicitly distances itself from the traditional stable money, fiscal austerity and structural reform paradigm by explicitly arguing that active social policies ‘crowd in’ economic growth and competitiveness, high productivity job creation and tax revenues, thereby reducing long-term fiscal pressures. In the context especially of demographic ageing, attention should not only be paid to social expenditure and the costs of ageing populations, but also to exploring and exploiting new sources of revenue from high-quality childcare in promoting talent, reducing early school dropout, and improving employment opportunities for adult family members, especially mothers. The ‘Social Investment Package’ in effect and at long last breaks away from the negative theory of the (welfare) state by underscoring the key importance of activating social services as core providers for dual-earner families and labour markets.
It is important to underscore that the social investment agenda is in essence a supply-side strategy and therefore cannot serve as a real alternative to effective macro-economic policy. Under current conditions, to the eurozone member countries of the Mediterranean in dire fiscal straits and social malaise, the social investment message is entirely lost. Fiscal consolidation, prescribed by the Troika, MoUs, and the reinforced SGP, requires them to slash active labour market policies and retrench preventive health care programmes – a strategy which we know, in the long run, critically erodes job opportunities and thereby undermines the capacity of the economy to shoulder the ageing burden. This is where the third and final silver lining of the rekindling of the debate about a genuine ‘social dimension’ of the EMU, in line with the social investment prerogative, gains importance.
Over the past two years, the absence of a Eurozone-wide counter-cyclical stabilisation capacity has slowly but surely come to be recognised as a critical design flaw in the EMU architecture. To the extent that capacitating welfare provision adds to economic competitiveness and social progress, it is in the interest of European policy-makers to support domestic authorities in maximising the return on social investments. What is therefore needed is a balanced macro-economic coordination process inciting governments to pursue medium-term budgetary discipline and long-term social investment reforms by giving greater breathing space with tangible support to Member States that opt for social investment strategies based on well-defined Europe 2020 ambitions, while making maximum use of mutual learning.
A number of proposals have already been put forward, some emphasizing a structured solidarity ‘interstate insurance’ instrument using Eurobonds, protecting Member States from self-fulfilling solvency crises coupled with strong conditionality requirements to pre-empt moral hazard. Others argue for a European unemployment insurance scheme to mitigate asymmetric and symmetric business cycle shocks. I prefer a macro-economic demand stabilisation device that incentivises Member States to pursue supply side social investment reforms in sync. In the context of the European Semester, it is essential for embattled countries opting for a social investment strategy to receive the support necessary to enable them to move forward by taking on reform ownership. Conditional social investment contracts, bolstered perhaps by specially designed social investment project bonds, could be based on generous access to structural funds at low interest rates. Another strategy would be to discount social investments in national budget accounts, thereby exempting them from SGP deficit requirements.
The three silver linings – the recent wave of proactive and reconstructive welfare reforms, the renewed endorsement of the social investment perspective by the Commission, and the rekindling of the social dimension of EMU – surely do not constitute silver bullets for overcoming the deeper fault lines of austerity deflation, intergovernmental drift, and raging national welfare chauvinism with which the EU is confronted today. They are merely hopeful seeds of policy redirection at an early stage of gradual transformative change towards a more robust and sustainable European social market economy, as laid down in the Lisbon Treaty.
The decisive factor, ultimately, will be the political resources and institutional backing that the EU is able to muster behind a novel macroeconomic policy regime, able to make high and robust social investment returns viable for the entire eurozone. More than ever before, the eurozone is in need of a substantive political consensus on the social order that a monetary union should serve, not in the form of a precursor of a ‘European welfare state’ in the making, but rather a systemic support structure at the EU level for active welfare state sustainability at the national level, based on a strong political commitment to a ‘caring and capacitating’ European social market economy as a common purpose, on a par with the complementary prerogatives of price stability and fiscal discipline over the economic cycle and free market competition.
Anton Hemerijck is professor of political science and sociology at the European University Institute. He researches and publishes on social policy, social investment and the welfare state and is a frequent adviser to the European Commission.