Social Progress In Europe Depends On Economic Reform

The social challenges in Europe are clear and will not easily be overcome over the next half decade: 25 million Europeans are unemployed, with unemployment rates at surreal levels in several Mediterranean countries and youth unemployment robbing a generation of their chance to determine their own fate. At the same time several countries see stagnating or falling wages (not least due to so-called internal devaluation), rising inequality, and public services that have been crippled by austerity.

More than ever, the European Union must have an ambitious social agenda with measurable objectives of social progress. The EU cannot solely focus on economic, competition and trade policy – what several heads of state, most notably David Cameron, wants it to be relegated to – but must have a strong social dimension. If not, we will have cooperation in the monetary and fiscal sphere but downward competition when it comes to wages, labour market standards and welfare arrangements.

However, and though it might appear counterintuitive, social progress and a truly successful social dimension of the EU depends first of all on economic policy-making and reform of economic governance. In the current context of either low growth, stagnation or outright depression, depending on where in Europe you are, isolated social policy initiatives will only be tinkering at the margins. It is indeed still the economy, stupid! If growth, employment and positive wage developments are not re-established at higher levels, there will basically be no scope for social policy and progress.

Social Progress, Benign Investment Policies And Fiscal Coordination

The most central part in need of change is the prevailing philosophy determining fiscal policy and the EU’s framework for economic governance. With the changes to the Stability and Growth Pact as well as in the introduction of the Fiscal Pact, the EU has increased its surveillance of the public finances of its member states. But as has been proven several times over the last couple of years, these vehicles of austerity have prolonged the crisis and subdued growth.

The EU must rethink its economic governance. Rather than obsessing with fiscal consolidation and limiting its member states’ autonomy to pursue different economic policies, it should develop new tools for coordinating fiscal policies and investing together. A European Investment Pact, with a few clear principles, could provide the framework for this and give Europe the policy alternatives needed to break with the crisis, rising unemployment and social collapse.

In the ideal situation, such a pact would replace the present austerity regime. But it could also have an effect as either a protocol to the present agreements or as a new pact that complements the already existing arrangements.

For a European Investment Pact to work it should have a few but clear principles. The following four principles would be the most important ones:

1)  An explicit exception of public investment in infrastructure in the broadest term, including certain technologies and similar growth-enhancing arrangements, as well as one-time investments in research, development and education from the Fiscal Compact’s rules for structural deficits (of 0,5 per cent of GDP) and the strengthening of compliance with the Stability and Growth Pact’s rules for yearly deficits (of 3 per cent of GDP).

2)  A clarification regarding the acceptable level of public deficits, which should only apply during ‘normal circumstances’. There should be various criteria to determine such a situation. These could be related to drops in GDP in the EU as a whole and in a group of member states, stagnating growth and persistent unemployment.

3)  A commitment to coordinate fiscal policy to a larger extent than what has happened so far. Economic downturns should be prevented through stronger expansive fiscal policy from all countries at the same time, just as possible over-heating of the economy should be prevented through adequate consolidation in all countries. This commitment should also mean that all countries do not necessarily move in the same direction at the same time – one group of countries can expand while a another consolidates its public finances.

4)  A commitment to investing together in the objectives of the EU2020 strategy and future strategies. It is estimated that common and coordinated investment by a group of EU-countries enhances the growth effect of such investments by close to a factor of two. Hence, when growth is expected to be low and unemployment high, the EU-countries would counter that situation by investing together.

A European Investment Pact or a similar change in policy would ensure that the economic governance and coordination in Europe moves from simple surveillance of individual countries’ public finances to using common strengths and acting together. This would enable the EU to steer the European economies safely through different economic cycles, not least crises and recessions. In the present context it would offer much needed support to growth and job creation.

If the regime is not changed it will be impossible for many EU-countries to pursue the most appropriate and suitable policies. It will, for example, be impossible for a country to finance investment in research, education and infrastructure through debt for a period of time even though the economic and social gains of such policies would be obvious. Insisting that budgets should always be balanced – except in very severe emergencies – is akin to saying that governments should have no investment function in the economy. Neither to support growth, to achieve social goals nor to develop welfare institutions.

Hence, the EU must institutionalise benign investment policies and fiscal cooperation.

Better coordination of investment-generating activities is key for Europe, according to Kristian Weise (photo credit: LendingMemo.com)

A New Mandate For The ECB

In the same vain, the European Central Bank (ECB) should be given a new and extended mandate. Today, the sole aim of the central bank is to ensure price stability and low inflation. Growth and employment, however, are not to be found in its mission statement. This is in stark contrast to the US, where the Federal Reserve has both an unemployment and an inflation target. The ECB could benefit from including the pursuit of stable growth and full employment in its mandate and its mission. And if it were to be really ambitious on social progress, it could include an objective of real wage growth at an aggregate EU-level.

As an addition to these new mandates, the inflation target of the ECB should be adjusted. The current aim is to maintain “price stability” and thereby keeping inflation within a 0-2 per cent range. However, during periods of low growth, where the risks of deflation are more prominent, it would be appropriate to have an inflation target of exactly 2 per cent a year instead.

Socially Balanced Wage Developments And More Secure Employment

The labour market is the most direct determinant of the social condition of the majority of people. However, fierce wage competition within the EU and subsequent downward pressure on wages has increased inequality in  individual member states and meant that the middle class has been hollowed out in several countries. Indeed, allegedly successful countries like Germany have seen an increase in workers who are unable to make a living on their salaries, also known as the ‘working poor’.

To improve the transfer of social progress through the labour market, EU member states should cooperate on the following issues:

Strengthening minimum wages, either by law or collective bargaining, and making an extra effort to ensure decent wages or what is often called a ‘living wage’. Improving opportunities for concluding collective agreements, not least across boarders and involving workers in more than one member state. And counteracting the development in many countries by which the labour market is made more ‘flexible’ but the result is that new groups of low wage, precarious and casual workers are created.

Europe will not achieve social progress unless the economic objectives of the European union and the underlying philosophy of economic policy-making are changed. What is needed is a fitness-and-diet-type of approach, where social health is achieved through several reconfigurations of core policy priorities rather than a cure-all panacea of one or two social policy initiatives. These changes will be difficult to get. But the citizens of Europe are in dire need of them if they are to see any social progress in the next years.