The Covid-19 wake-up call to buttress social investment

The temptation to cut welfare expenditures to reduce deficits inflated by the pandemic must be resisted.

Barely having had time to absorb the economic and social aftershocks of the Great Recession, the world is confronted with an even more disruptive exogenous shock—the coronavirus pandemic, costing above all human lives but also causing massive dislocation. As employment opportunities for Millennials are undermined, low-wage stagnation for essential workers is reinforced and work-life balance stresses for women are intensified, the resilience of the European welfare state is under scrutiny. 

Yet this reappraisal comes as a surprise. Ever since the late 1970s, politically and intellectually, social policy had been on the defensive. Leading economists repeatedly argued that Europe’s ‘feather-bedded’ welfare states—based on high taxes, with generous pensions, high unemployment benefits, trade union influence and insider-biased job protection—set the stage for economic and political decline. These claims held sway despite the absence of evidence to sustain them.

The pandemic, as with the Great Recession, indeed reaffirms solid evidence supporting the opposite contention—that social policy is a productive investment in times of uncertainty and that a more supportive macroeconomic environment is needed in the Europe Union for welfare states to flourish. Amid the human clouds have come three inter-related silver linings:

• an explicit revaluation of competent (welfare) states and resilient healthcare systems,
• a rekindling of normative argument about social fairness, linked to existential awareness of human fragility, and
• emergence of more effective EU co-operation and (fiscal) solidarity. 

Crucial role

Public-health relief and traditional sick leave and unemployment insurance—as well as ‘furlough’ schemes and short-time working—have undeniably played a crucial role in mitigating the impact of the pandemic. As these social programmes stepped into the breach, to address the immediate health emergency and to buffer economic security, they also proved politically effective in the maintenance of social distancing and acceptance of lockdown measures. 

Already the Great Recession exposed the utility of resilient welfare provision. In hindsight, Europe’s inclusive welfare state should be considered its unsung hero. The most inclusive, high-spending welfare states of north and western Europe admirably cushioned household incomes during the downturn. By contrast, the more segmented welfare states of southern Europe, especially pension-heavy Greece and Italy, were less proficient in buffering shocks and mitigating inequalities.

Key to success since the 1990s has been a shift from a predominantly passive welfare state, narrowly focused on here-and-now redistribution, to a more active regime, oriented towards social investment and supported by renewed commitment to the centrality of paid work. This approach breaks the intergenerational transmission of poverty through interventions which help individuals, households and societies acquire the capacity to respond to the changing nature of social risks. It entails investing in human capabilities from early childhood through to old age, while improving gendered work-life balance for families. 

The Covid-19 pandemic has brought into view the fundamental relationship between health and social and economic participation. Achieving high levels of employment, to fund the welfare state, requires not only a well-skilled workforce but also a healthy one. Health risks and job precariousness and unemployment are inter-related. The welfare state not only provides a social safety net to protect citizens against income loss as a consequence of illness; equally important is healthcare provision strengthening and safeguarding physical and mental capacity across the life course.

Social vulnerability

The deep sense of social vulnerability which Covid-19 generated across European societies, the consciousness of human frailty, inspired a reawakening of reasoning about ‘social fairness’. For the pandemic will surely reinforce the clustering of social disadvantage, accelerated by consequential shifts in the economy, relating to (less) commuting, (more) home-working, digital servicing and delivery (expansion) and (less) international travel. From a social-investment perspective, personal wellbeing cannot be defined in terms of social—working and living—conditions at any snapshot moment. We have to take the long view of the prospects of every citizen to sustain wellbeing over heterogeneous life-course transitions.

At the EU level, the renewed interest in questions of social justice in a dynamic perspective can be traced back to the endorsement in 2017 by the European Council of the European Pillar of Social Rights. This set of 20 principles, supporting fair and well-functioning labour markets and welfare systems, covers a well-balanced portfolio of ‘level-playing-field’ social services and employment regulation as secure capabilities for all. 

From a governance point of view, the social pillar represents a quintessential EU support structure for (active) welfare states to progress. Yet, so far, this normative framework has remained constrained in practice by the 1990s design of economic and monetary union (EMU) as a ‘disciplining device’ for ‘wasteful’ welfare states.

Game-changer

The progressive emergence of a new economic governance in the EU may prove a game-changer. The EMU arrangements were negotiated at a time when the ‘supply-side’ revolution in macroeconomics, disdaining Keynesian demand management, was riding high, translating into the ‘no-bailout’ clause and other stringent fiscal rules. With the benefit of hindsight, the euro was always headed for trouble. 

Yet the very fact that the Great Recession did not end in a deep depression, as in the 1930s, may be attributed to EU policy-makers ultimately daring to challenge the doctrines enshrined in the treaties. And the paradigmatic turnaround by the former president of the European Central Bank, Mario Draghi, inspired his successor, Christine Lagarde, to act swiftly, albeit with some hesitation, in early March, in the face of exponential Covid-19 contagion—especially in Italy, Spain and France—to contain interest-rate spreads across the eurozone. 

The real novelty, a force majeure, is EU fiscal policy at long last stepping into the breach. On July 22nd, after four days of bickering, the heads of government agreed a €750 billion recovery fund, composed of grants (€390 billion) and loans (€360 billion), largely targeting weaker member states. The deal suggests an historic breakthrough, allowing the EU as it does to borrow in the markets to fund union expenditures.

Fiscal footprint

Yet will this be enough? A critical Covid-19 aftershock will be the fiscal footprint of all the health-emergency and economic-support measures. High deficits will have to be managed over time and many will advocate spending cuts to bring down debt. 

Social investment should be seen as an alternative. Low interest rates ease the short-term fiscal burden of investments with longer-term returns, allowing governments to engage in productivity-enhancing measures which provide for gradual fiscal consolidation, rather than imposing further austerity shocks.

Proposals to manifest greater EU solidarity and support crucial social investments will undoubtedly face (some) domestic resistance. Yet, to the extent that large majorities in virtually all member states wish to live in a ‘protective’ and prosperous EU, European citizens can be convinced that, in an interdependent union, the (market) opportunities of some largely rely on the (welfare) capabilities of others. 

How can we align the social pillar to the new macroeconomic-policy consensus? In a forthcoming report for the European Commission, we propose a concrete way to discount ‘stock’ public expenditures—social investment in human capital rather than the ‘flow’ of spending on services—from the fiscal criteria of the Stability and Growth Pact. This would enable countries with a social-investment deficit to secure future-proof financing of their social infrastructures, from lifelong education to public-health systems, without trampling per se on eurozone governance agreements.

This is part of a series on the coronavirus crisis and the welfare state supported by the Friedrich Ebert Stiftung