3 December 2018

Who’s afraid of the European Social Union? A contribution to the ESU debate

Untold lessons from the Great Recession call for a transformation in the Eurozone governance regime from a ‘disciplining device’ over member welfare states into a European Social Union (ESU) as a ‘holding environment’ for active welfare states to prosper.


The most competitive economies of the European Union (EU) spend more on social policy and public services than less successful ones. Knowledge economies and ageing societies require European welfare states to focus as much – if not more – on ex-ante social investment capacitation than on ex-post social security compensation. To make way and sustain for 21st-century social investment progress, untold lessons from the Great Recession call for a transformation in the Eurozone governance regime from a ‘disciplining device’ over member welfare states into a European Social Union (ESU) as a ‘holding environment’ for active welfare states to prosper.

A decade after the first deep economic crisis of 21st-century capitalism, Europe has passed the nadir of the aftershocks unleashed by the 2008 global downturn. Time to count our blessings: a rerun of the Great Depression has been avoided, and recovery is underway. The jury is still out on whether employment growth will return to pre-crisis levels. Unemployment remains very high, especially, in the Eurozone economies most adversely affected by the crisis. The political aftershocks of the Great Recession, the rise of populism across the continent, Brexit, and illiberal nationalist turns in Hungary, Poland and Romania, confront the European Union (EU) with an existential crisis. Most precipitously, the EU’s fall from grace as an even-keeled project of regional economic cooperation, committed, in the words of the Lisbon Treaty, to the ‘social market economy’, fostering economic prosperity and social solidarity in tandem, within and between member states, has fueled anti-globalization discontent, rising national welfare chauvinism and increased support for xenophobic and popular anti-EU populist in national and European parliament elections.

Can Europe’s unique ‘double commitment’ to inclusive social citizenship at the level of the nation-state and progressive economic integration on the European level be rescued in the years ahead? Is there political room for a more assertive social reform agenda, bolstered by EU policy instruments and institutions, to countenance both the ‘efficient market hypothesis’, falsified by the serious 2008 financial crash and the equally threadbare protectionist welfare populist backlash? These two questions figure prominently in Frank Vandenbroucke’s introductory contribution the ‘European Social Union (ESU) debate’, followed by Maurizio Ferrera’s call to craft a viable political roadmap for delivery, together with Manos Matsaganis’ warnings on the ‘snakes and ladders’ the detours ahead.

The European Pillar of Social Rights: from promise to delivery – An introduction to the ESU public forum debate

We need an effective ‘roadmap for delivery’ of the European Pillar of Social Rights, based on the complementarity of existing EU instruments and a well-considered selection of priority initiatives.

 

Reflecting on the prospects of a more robust ESU, at a time when the Commission is about to embark on an “excessive deficit procedure” against Italy’s the populist coalition government of Cinque Stelle and the Lega over its flat-out rejection to further comply with fiscal commitments made by previous governments to lower Italy’s public debt, can easily come across as early out of synch with political reality. Ongoing blame gaming between Eurozone creditor and debtor countries continues to leave the burden of keeping the single currency afloat entirely to the ECB. Additional finger-pointing between refugee frontline states and unaffected Central and East European countries anxious to protect cultural homogeneity, if need be, by trampling with the rule of law, does not bode well for enlarging the future political space for European solidarity. Still, numerous experts ponder on a European Monetary Fund (EMF), the introduction of an EU rainy day infrastructural investment facility, or a joint Eurozone unemployment re-insurance layer, as advocated by Frank Vandenbroucke in his contributions. Are these intellectual endeavours in vain? I think not.

Manos Matsaginis aptly reminds us that Lord Beveridge wrote his reports on full employment (1944) during the World War II when Winston Churchill’s more immediate concern was ending the war rather than crafting the postwar consensus behind a more inclusive welfare state. Good ideas may not be expedient, but they are never wasted. Searching exploration may come in handy when additional contingencies appear. Taking heed from the Beveridge reports, the ESU debate should obviously start with a proper diagnosis of the 2008 crash, and the Eurozone crisis more in particular that follow suit. Concurrently, due attention should to the pace of transformative demographic and techno-economic change and the inescapable depth of economic interdependence, fast-forwarded by European integration over the past three decades.

In a nutshell, the Eurozone crisis critically exposed the naïve policy theory-in-use of deepening European economic inter-dependence without an adequate safety net. By constitutionally committing the union to the no-bailout principle in fiscal policy and low inflation prerogative in monetary policy, the architects of the single market and the single currency thought that the European project was best served by disciplining member states to keep their ‘wasteful’ welfare states in check.

Snakes and ladders on the road to the ESU

I will focus on three topics: the constraints placed by diversity, and how to overcome them; the limits of unemployment (re)insurance, and the need to address new forms of ‘worklessness’; and the contribution of a European Social Union to the goal of coping with the transformations of work.

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From here on, cognitive inertia prevented a generation of European policymakers from recognizing that greater cross-national heterogeneity also allows for better joint-insurance, thereby raising and reinforcing the potential economic benefits of European integration, under the proviso of an adequate institutional apparatus of contribution enforcement and behavioural conditionality on the member states (Schelkle, 2018). To be sure, politically, in the European context of highly popular national welfare states, EU conditions of contributory obligations and/or behavioural constraints attached to potentially more effective European insurance instruments are not readily seen as fair and legitimate. The political myth of national welfare state sovereignty runs deep.

Crafting a viable roadmap for the ESU, from this point of view, has to engage in an arena of strongly embedded audiences, from the cognitive expertise of the hegemonic market-making policy philosophy behind European economic economic integration, to the two-level institutional division of labour between member states and EU institutions, based on the ‘permissive consensus’ of relegating social policy to the jurisdiction of the nation-state and market and currency regulation to EU institutions, and, finally, unto European electorates with strong political sentiments about national welfare sovereignty. These are the fearful audiences with path-dependent privilege that ESU advocates have to persuade and convince with strong socioeconomic evidence and normative-political grounds. This is not undoable, as many post-crisis trends point in this direction, but they have yet to come together in a codified manner in the form of an assertive and articular ESU.

In the subsequent paragraphs, I take on the staying power of prevailing cognitions, institutional orientations, and national political sentiments from the perspective of some untold lessons learnt from the Great Recession and the Euro crisis aftermath. I finish with a modest proposal to give the ESU much-needed policy bite.

Untold lessons from Europe’s experience with the Great Recession


When ten years ago the global financial crisis reached Europe, it did not cause immediate unrest. In 2008, the sentiment was that the European economy was in relatively good shape, with overall sound public finances, low inflation, and gradually rising levels of employment. Soon, however, it proved imperative for Ireland, the Netherlands, the United Kingdom, and Spain to salvage quite a few – ‘too big to fail’ – international banks and insurance companies, that were heavily implicated in the US credit bubble that burst with the fall of Lehman Brothers. Overnight increases in public deficits and national debt, European political leaders quickly agreed, could only be restored by further sobering up the welfare state, especially so after the Greek fiscal crisis threatened to break up the euro. With some delay and procrastination, EU leaders and institutions managed to avoid the collapse of the Eurozone economy, with quite unorthodox crisis management, principally by ECB after 2012. Arguably, for reasons of cognitive inertia, the most successful feat of mid-twentieth century social engineering – the European welfare state – was mistakenly left in disregard in the crisis management exercise.

With the benefit of hindsight, it is evident that the countries that were best able to absorb the economic and, more particular, the social aftershocks of the financial crisis the best, were the more inclusive welfare states of Northwest Europe, from Finland and Sweden to the Netherlands, Germany and Austria. This should not really surprise us, as the post-war Keynesian-Beveridgean welfare state was designed precisely as a shock-absorber to ‘buffer’ the macro-economy at large and household incomes at the micro-level in the case of a sizeable financial crisis.

Ignorant of the proficiency of strong safety nets, mainstream post-2008 crisis management, essentially harked back to stagflation crisis in the 1970s and 1980s, advocating welfare retrenchment and labour market deregulation on the presumption that ‘moral hazard’ and ‘adverse selection’ predicaments of generous benefits and strong job protection thwart efficient labour market allocation. Admittedly, the cost-containment policy response was adequate in the 1980s with benefit levels trending up to 80% per cent of last earner wages without activation requirements. But even then, countries like Denmark and Netherlands opted for a ‘flexicurity’ policy mix – labour market flexibility in combination with inclusive, but highly activating, social security, which proved surprisingly proficient in raising (especially female and older worker) employment without dismantling social insurance commitments, including pensions.

Notwithstanding Danish and Dutch successes, in mainstream OECD policy thinking the ‘flexicurity’ success was instantly relegated to the world of ‘exceptions to the rule’ of subtractive labour market flexibility and lean welfare provision (OECD, 1994; Hemerijck, 2013). Moreover, in the European context, fighting inflation, balanced budgets and market liberalisation gained constitutional privilege in EU Treaties. As the single market and the single currency were negotiated at a time when the ‘supply side’ revolution in macroeconomics was riding high, the architects of the Single European Act (SEA) and the Economic and Monetary Union (EMU) naïvely presumed that wider and deeper economic integration would inescapably discipline member states to keep their ‘wasteful’ welfare states in check. The presumption was that the obligations to keep public deficits below 3% GDP and government debt under 60% of GDP, in complete disregard of the composition of public spending between infrastructural investments or more consumptive outlays, would ultimately foster EU-wide socio-economic convergence.

 

The Eurozone crisis further exposed the weakness of the market-making theory-in-use of deepening economic interdependence without a safety net to preempt the ‘moral hazard’ and ‘adverse selection quandaries from festering across member countries (Pisani-Ferri, 2014). In the early year of the euro, Germany undershot the ECB’s inflation target. At the same time, the Mediterranean countries and Ireland struggled with high inflation at fortuitous catch-up growth. Although Spain and Ireland continued to adhere to fiscal conservatism, lower interest rates and easy credit stimulated a construction bubble, financed by massive private debt, which ultimately burst. For Italy and Greece, with their troubled public finances, a different scenario unfolded. After they had secured safe entry into EMU, ‘structural reform’ incentives waned as public borrowing grew excessively cheap. Paradoxically, membership to EMU acted as a ‘reform tranquillizer’, reducing rather than reinforcing pressures to enact structural reforms to bring their fiscal houses in order. As a result, capacitating, social investment oriented, welfare reform never took off where it was needed the most, in the Southern periphery of insider-biased labour markets and male-breadwinner pension-heavy welfare states.

The further deepening of the euro crisis reveals how profoundly interdependent the European political economy had become and at the same time how difficult it had also become to manage EU institutions in hard economic times. The Greek fiscal crisis of 2010 spread contagion risks to EMU sovereigns in fiscal duress, such as Italy, Spain and Portugal, countries that found themselves trapped in a “bad equilibrium”, unable to respond to problems in their national banking system, but also incapable of mitigating rising unemployment through countercyclical buffers, due to lack of fiscal space, high public debt, and fragmented safety nets, further dampening the prospects for recovery (De Grauwe, 2011). Unsurprisingly, the ‘straightjacket’solution deepened competitive divergences and social imbalances, with mass (youth) unemployment, rising (child) poverty and a widening intergenerational divide, thus further defeating the very purpose of fiscal austerity, as prescribed by the Commission, the ECB and the IMF.

Next, the social crisis spilled over into a political backlash with ‘creditor’-countries calling for a tightening of the fiscal straitjackets on ‘debtor’-countries in the Eurozone periphery, fueling, in turn, the rise of anti-EU populism. To the extent that the Great Recession did not end in a deep depression, as in the 1930s, it is because, on the one hand, E(M)U countries with more inclusive safety net ‘buffered’ the shock proficiently, and, on the other hand, because responsible policymakers ultimately dared to breach the doctrines enshrined in the treaties, and make way for the rescue of Greece, Ireland, Portugal and Spain, backed by unorthodox ECB monetary policy. Only when the ECB announced its program of Outright Monetary Transaction (OMT) was confidence in sovereign bond markets restored and the downward spiral broken.

For four decades, government interference in the economy was seen as detrimental to dynamic dynamism, but since 2008 the mixed economy is back, but not with a vengeance instead as a blessing in disguise. And while state intervention in monetary policy and financial regulation has been restored in the wake of the Euro crisis, there is, more troublesome, no equivalent intellectual revival of the welfare state, contributing to economic security and political stability in times of need, underway. The present condition conjures up a gaping cognitive and empirical failure! Today the most successful European economies, according to the Global Competitiveness Index of the World Economic Forum (WEF), are high-spending welfare states, including, Finland, Germany, the Netherlands, and Sweden, with levels of social spending hovering between 25 per cent and 30 per cent of GDP and between 30 per cent and 50 per cent of public expenditure (Hemerijck and Ronchi, forthcoming).

Figure 1 surveys a selection of 22 EU countries and the US according to their employment rates and levels of equality after taxes and transfers (we use the reverse Gini index), while also giving an idea of the size of each country’s welfare state in terms of public social spending (the larger the surface circle, the ‘bigger’ the welfare state) (Hemerijck and Ronchi, forthcoming).

The 1980s notion of an inevitable trade-off between economic efficiency and social equity, coined by Arthur Okun (1975), no longer applies to many advanced 21st century economies. If anything, the trade-off logic today appears the exception rather than the rule. Countries showing record employment levels are today among the bigger welfare spenders. The encompassing welfare states of Northern Europe, with the partial exception of Finland, attain levels of employment well above the 70 per cent Lisbon target (dashed line). The same is true for the continental countries Germany, the Netherland, Austria and the Czech Republic, which have caught up rapidly in the last decade.

The prowess of competitive welfare states, it should be emphasised, does not merely lie in their ‘automatic buffering’ capabilities. It seems that greater service intensity in welfare provision, in the areas of childcare, activation, training and long-term care, seems intimately related to high employment. Ex negativo, there are a few big-spending welfare states, such as France and Belgium, that remain trapped in a ‘welfare without work’ predicament: they do well concerning inequality, but have failed to raise employment levels, precisely because of a lack of capacitating family and employment services. Most worryingly, Southern European countries, especially Italy and Greece, face both low employment and high levels of inequality despite high overall welfare spending. In short, the evidence that high social spending correlates with competitiveness, high employment and low (child) poverty, presses us to cognitively reconsider, not merely the quantity of social protection spending, but even more so the quality of capacitating social services, in the ESU debate.

Prioritising social investment in the European Social Union


Admittedly, the Juncker Commission has taken on an ambitious swath of social policy initiatives, consistent with my observation above, including the Youth Guarantee, the Erasmus initiative for cross-border initiatives, the New Skills Agenda for Europe, the European Pillar of Social Rights, the Social Scoreboard for assessing progress towards a social ‘triple-A’ for the EU. However, many initiatives have been pursued in an uncoordinated ad hoc manner. And what’s more, time and again, concerns about inequality, poverty and mass (youth-)unemployment are relegated to ‘auxiliary’ status, and subordinated to the Six-Pack (2011), the Fiscal Compact (2012) and the Two-Pack (2013), prescribing balanced budgets irrespective of urgent needs.

In spite of the post-crisis lip service paid to social investment by the European Commission, the ‘default’ policy theory of market liberalization, balanced budgets, hard currency, and welfare retrenchment, has not not been subjected to more intense scrutiny, with the exception of financial re-regulation and unorthodox monetary policy intervention, mentioned earlier. Beyond lip service, concerning ‘revealed preference’, EU institutions were not really ready to defend the ‘productivity-enhancing’, ‘participation-raising’, ‘employability-friendly’, ‘family-capacitating’ social investments for the greater good of a more prosperous, equitable and caring Europe. This goes to show how much current economic and social imbalances are tied to embedded policy thinking and practice, for which there are no quick fixes on offer.

In Frank Vandenbroucke inspiring and incisive contribution to the ESU debate, the proficiency of advancing in the direction of some kind of ‘re-insurance scheme’ for national unemployment insurance systems, to provide fiscal breathing space for countries asymmetrically affected by a downturn, acting as an automatic stabilizer, especially for the Eurozone, is given considerable pre-eminence (see also Andor, 2016; Beblavy et al., 2015; Dullien, 2014).

 

I wholeheartedly agree with his focus on the Eurozone, as indeed the EMU deliberately lacks the option of currency devaluation as a safety-valve in the case of a rude economic shock. For a sustainable currency union, it follows, there is an obvious need to reflect on alternative fall-back options. An added advantage to Vandenbroucke proposal is the intimate affinity with arguments about the Banking Union and the Capital Markets Union, which are increasingly framed as Eurozone re-insurance devices, not least by Mario Draghi (2018). Recent developments towards completing the banking union and the capital markets union all highlight the importance of ex ante and ex post collective risk-sharing insurance mechanisms to provide for significant stabilization that can help offset significant losses in recession-hit regions with gains in the better performing parts of the currency union, while at the same being able to continue to provide credit to sound borrowers.

The overriding important – Keynesian – lesson from the European experience of the Great Recession was the unavailability of a policy instrument for Eurozone shock absorption. However, the experience of the Euro crisis also suggests that novel risk-reducing and risk-sharing instruments are not readily accepted by all the relevant actors at both the national and the Eurozone level. Notwithstanding trials and tribulations, there is progress underway. The European Stability Mechanism (ESM) and OMT have been effective in keeping the Eurozone together, while regulatory reforms have strengthened the banking sector with high leverage ratios, and the creation of a banking union has brought about a more uniform approach to banking supervision and the new EU resolution framework has shifted the cost of bank failures from sovereigns onto private financial institutions themselves.

Notwithstanding progress in financial regulation and monetary policy, there is a real need for additional fiscal instruments to stabilise the economy during large shocks to the system. To the extent that inclusive social security is evidently more robust in buffering asymmetric shocks, in comparison to any kind of banking resolution mechanism currently under discussion, there is room to generalise a re-insurance logic to the Eurozone collectivity of national welfare states partaking in the currency union. If such an EMU social re-insurance mechanism could be layered on top of existing national safety nets, all the participating member countries would – in theory – be more protected and thus better able to bounce back and recover in the aftermath of a sizeable asymmetric economic crisis. But there is an institutional twist to this argument of utmost importance.

A central institutional predicament for any effective Eurozone social re-insurance facility, Vandenbroucke acknowledges, impinges on the specific designs of the partaking national unemployment insurance systems, particularly concerning the extent to which prevailing social security systems are able to buffer large cohorts in the working-age population. As such, Vandenbroucke concedes the need for some minimal institutional convergence in the scope and operational routines of national social insurance systems for the smooth operation of the envisaged Eurozone unemployment re-insurance, touching on social security coverage, activation support, minimum wage legislation, income protection for households with a weak attachment to the labour market, etc. An additional concern is that social insurance systems typically protect insiders rather than outsiders. From the perspective of current socioeconomic imbalances, arguably, outsiders, ranging from youngsters, women, and the long-term unemployed, rather than insiders, have disproportionately borne the brunt of the social aftershocks of the crisis. Also, a Eurozone social re-insurance layer, however much effective in the event of future asymmetric shocks, does little to address the problem socioeconomic divergence, exposed by the Euro crisis.

Somewhat in passing, Vandenbroucke confesses that ‘space forbids’ him to elaborate on social investment, which he strongly advocates in numerous other publications (Vandenbroucke, 2002; Vandenbroucke and Vanhercke, 2014; Vandenbroucke, 2017; Vandenbroucke et al., 2011; Vandenbroucke and Hemerijck, 2012). Indeed, at first sight, social investment understood as a capacitating supply-side welfare reform strategy does not come across as immediately relevant to the demand-side solution of a Eurozone facility that reinsures national social insurance systems in times of demand-deficient mass unemployment. However, in light of the evidence surveyed before, I would not like to discard the importance of social investment reform for macro-level effective demand, especially regarding (female) employment and micro-level household resilience inherent to the shift to dual-earner families. Besides, there is an argument to be made that social investment progress could help resolve the institutional predicament of minimal welfare state and labour market convergence.

I fully concur with Frank Vandenbroucke that the Eurozone needs urgently redress the ‘bad equilibria’ exposed by the Euro crisis, and indeed to shift gears to welfare reforms that contribute to more sustainable socioeconomic convergence. Central to the long-term financial sustainability of the welfare state is the number (quantity) and productivity (quality) of current and future employees and taxpayers. To the extent that welfare policy in a knowledge economy is geared towards maximising employment and employability and productivity, this helps to sustain the so-called ‘carrying capacity’ of the modern welfare state (Esping-Andersen et al., 2002).

With the massive expansion of women’s employment over the past quarter-century, the work-income-family nexus is very much the ‘lynchpin’ of the social investment paradigm. More flexible labour markets and skill-biased technological change, but also higher divorce rates and lone-parenthood, make equal access to employment for women (economic independence) a prerequisite. Absent possibilities of externalising child and elderly care, rising numbers of female workers face ‘broken careers’ and postponed motherhood, resulting in lower fertility, thereby intensifying the ageing burden in pensions and healthcare. Policies such as early child education and care (ECEC), education and training over the life-course, (capacitating) active labour market policies (ALMP), work-life balance (WLB) policies like (paid) parental leave, flexible employment relations and work schedules, lifelong learning (LLL) and long-term care (LTC), all share objectives that transcend the compensatory logic of income-support, originally developed to protect (predominantly male) workers and their (stable) families against market exigencies.

The social investment approach tilts the welfare balance to social risk prevention rather than compensation in times of economic or personal hardship. The key objective is to break the intergenerational transmission of poverty through interventions that help ‘capacitate’ individuals, families and societies to respond to the changing nature of social risks, by investing in human capabilities from early childhood through old age, while improving career-life balance provision for working families, in particular for working women.

Three complementary policy functions underpin the social investment edifice: (1) raising and maintaining the ‘stock’ of human capital and capabilities; (2) easing the ‘flow’ of contemporary labour market and life-course transitions; (3) using ‘buffers’ such as income protection and economic stabilization as inclusive safety nets (Hemerijck, 2015; 2018). Aggregate evidence on welfare performance – before and after the crisis – indeed corroborates the effectiveness of social investment, as surveyed previously. Countries with a strong and integrated portfolio of ‘stock’, ‘flow’ and ‘buffers’ policies are best able to reconcile economic competitiveness and social inclusion (Hemerijck and Ronchi, forthcoming).

Evidently, the human capital ‘stock’ function, referring to a broad set of capabilities, including knowledge, skills, intelligence, aptitude and health, features most prominently in the social investment perspective. By comparison, the post-war Keynesian-Beveridgean welfare state prioritised social protection ‘buffers’, while the conservative-liberal critique of the interventionist-welfare state of the 1980s gave primacy to ‘flow’, understood as efficient labour market allocation, undistorted by the ‘moral hazard’ predicament of social benefits.

 

In the social investment perspective, more critically, the relationship between the functions of ‘stock’, ‘flow’ and ‘buffer’ is not simply intimate; each of the three functions individually takes on a specific substantive disposition. In the social investment perspective, buffers are required to undergird far more volatile and precarious labour markets, and also to cover periods of training and more gendered childrearing and care obligations for frail family members. As such, the substantive emphasis is on ‘inclusive’ income protection ‘buffers’ rather than employment-related social security for labour market insiders. Similarly, while ‘flows’ in the conservative-liberal critique are premised on lean social protection and deregulated labour markets to ensure optimal market flexibility, satisfactory flows in the social investment perspective are inherently related to ‘work-life balance’ and ‘family reconciliation’ requirements, which entails an element of (re-)regulation of (gendered) employment relations.

Finally, human capital ‘stock’ exigencies in both the Keynesian-Beveridgean post-war welfare state and the conservative-liberal critique of the interventionist-welfare state from the 1980s did not reach far beyond compulsory primary and secondary education. By contrast, the ‘stock’ effort in the social investment perspective embraces a ‘lifelong’ commitment to human capital acquisition from early childhood to old age. It follows that for social investment to work, effective policy coordination is essential. Inclusive ‘buffers’, gender-family-balanced ‘flows’ and lifelong ‘stocks’ can be made to work together to produce synergetic effects. The resulting policy complementarity can be mutually reinforcing both at the time of delivery and longitudinally over the life course, and also, in terms of aggregative economic and social wellbeing (Hemerijck, 2018).

The notion of policy complementarity goes far beyond ‘stocks’, ‘flows’ and ‘buffers’. In the past, welfare economists believed that the case for increasing government spending, beyond automatic stabilisers, was relatively weak. Again the aftermath of the Great Recession reveals that expansionary and fiscal and monetary policies cannot really replace strong and inclusive safety nets. The US experience, with its on more aggressive fiscal and monetary policy stance of the US, as compared to Europe, seemingly has had a stronger effect on credit growth and asset price inflation than on overall job creation and economic security, inadvertently weakening rather than strengthening the structure of the US economy (Rajan, 2010).

I contend that social investment should figure far more prominently in the ESU debate. From a demand-side perspective, effective social investment reform can produce significant leaps forward in economic demand, both from the perspective of the macroeconomic performance and household income and social resilience. In the transition from a low-employment male breadwinner model to a high employment dual-earner model, for both the Netherlands and Germany, policy combinations of (exposed sector) wage moderation, labour market liberalization, and work-life balance improvement and family services’ expansion, not only contributed to significant service sector employment growth, but also more indirectly, through better labour market allocation and higher productivity, bolstered exposed sector competitiveness and growth, while, at the same time, making dual-earner households – no longer dependent on single breadwinners – more resilient. Obviously, successes in dual-earner household resilience, have to flanked with more target support provision for single-parent families.

 

Frank Vandenbroucke correctly raises the issue that any effective Eurozone reinsurance of national unemployment insurance systems requires some elements of convergence in critical features of the participating member states’ social and employment policies. This begs the critical question of how to fast forward requisite institutional convergence. Can an assertive Eurozone-wide social impetus help to prepare the way for improved institutional convergence, whereby, over time, ‘enabling’ and ‘protective’ policies reinforce each other to foster more resilient welfare systems. The extent that an assertive social investment impetus effectively contributes to institutional convergence, in terms of policy sequencing, this could pave the way, at a later stage, for layering the Eurozone social reinsurance facility on top of convergent social investment policy portfolios, to further bolster the overall resilience of the currency union. In my reasoning, therefore, ex-post reinsurance has to follow ex-ante investment progress, brought forward by an explicit Eurozone-wide policy strategy, which is the subject of the next section.

Exempting social investment ‘stock’ spending from the Stability Pact


EU institutions, and especially the Commission, should be given credit for raising the stakes of social investment over the past two decades. Against the tide of fashionable tragic trade-offs conjectures, ever since the Amsterdam Summit of 1997, the Commission contributed to build the edifice of social investment, from the stepping stones in the Lisbon Agenda of 2000 to a fully-fledged welfare paradigm with the publication of the Social Investment Package in 2013.

In terms of political commitment, Frank Vandenbroucke and Maurizio Ferrera judge the European Pillar of Social Rights by the European Commission in 2017 as a key milestone in the direction of the ESU . The Social Pillar sets out 20 key principles, defined in terms of rights in support of fair and well-functioning labour markets and welfare systems. All in all, the 20 principles cover a well-balanced portfolio of ‘fair-playing-field’ social and employment regulatory provisos. These include equal treatment, gender equality, work-life balance, health and safety, minimum wages and social security rights. Ample attention is also devoted to ‘capacitating’ social investment oriented rights, such as the right to essential public services, inclusive education and training over the life course, active labour market policy support, childcare and family benefits, the inclusion of people with disabilities, long-term care, and housing assistance.

Consistent with my previous argumentation, concerning ESU delivery, I vouch for a strong reinvigoration of social investment reform, bolstered by a concrete EU-level initiative, embedded in a long-term monitoring progress exercise, than currently on offer in Commission reports and documents. My specific proposal is to discount social investment human capital ‘stock’ expenditures from the fiscal criteria of the Stability and Growth Pact (SGP) and the Fiscal Compact to create the necessary fiscal space, within a bound of 1 to 2 per cent of GDP, for at least a decade. If, in thinking through an appropriate design of the EU impetus, we take into consideration the three social investment policy functions for the vantage point of a viable division of responsibilities between the EU and the member states, then the function of social security ‘buffers’ – the core prerogative of national welfare states, jealously guarded by domestic politicians, clienteles and electorates – should clearly remain in the remit of national welfare provision.

The ‘flow’ function, concerning labour market regulation and employment relations, in synch with work-life balance and gender equality, with the aim of fostering adaptable family-friendly careers in knowledge economies and ageing societies, could conceivably be served rather well by mutual learning and monitoring processes. The latter can be modelled after the Open Method of Coordination (OMC), engaging national ministries, EU administrative directorates, relevant expert committees and the social partners in sharing virtuous, but also more unfortunate, practices for domestic reform inspiration. This brings me to the overriding importance of expensive and lifelong human capital ‘stock’ investments.

Again, unfortunately, the Eurozone austerity reflex after 2010, has resulted in a public investment strike in the area of human capital stock capabilities, lifelong education and training, with significant negative spillovers for future growth, employment and productivity. Here is where the EU could press its formidable institutional weight without trampling on national welfare state jealousies. Granting more fiscal room (within bounds) on human capital ‘stock’ improvement to countries that have experienced excessive social and macroeconomic imbalances, would enable them to secure future-oriented financing of their social infrastructures of lifelong education and skill upgrading systems, before the ageing predicament becomes truly overwhelming, as is the case in most Mediterranean member states. Exempting social ‘stock’ investments from SGP deficit requirements would render increased fiscal space to member state government wishing to pursue social investment reform, without trampling per se on Eurozone fiscal governance agreements.

Given that current divergences are particularly large among EMU member states and problematic in terms the sustainability of the single currency, my proposal of discounting social investment ‘stock’ spending from the SGP should, like Frank Vandenbroucke’s social reinsurance facility, be targeted to the Eurozone. For countries struggling to commit to a balanced budget such exemptions could foster immediate gains in early childhood, female employment, improved work-life balance and reduced levels of early school leaving, without abandoning extant ‘buffering’ social protection commitments, with positive medium-term outcomes in employment growth, productivity through higher educational attainment, and ultimately a lower pension burden resulting from higher levels of employment.

 

Is this proposal any different from the Commission (2017) communication on flexibility in EU fiscal governance? Very much so; this for six – if not more – reasons.

Politically, in the first place, the proposal is explicit substantively with a future-oriented social focus on long-term EU action, consistent with delivering on the ESU. We are not talking about some underspecified discretionary fiscal wiggle-room for countries in budgetary difficulties on a year-to-year basis. To wit, already the current flexibility clause of the Commission is looked upon with suspicion by some of the more fiscally austere Northern member states governments, currently organised under the so-called Hanseatic League of the Netherlands, Finland, Denmark and Austria.

Second, the proposal concerns a concrete commitment to human capital ‘stock’ improvement and is therefore easily monitored and more likely also to engender stronger member-state legitimacy to EU action.

Third, in our era of nationalist resurgence, domestic reform ownership is crucial. That’s why in this proposal the political initiative explicitly lies with responsible national political actors with considerable freedom of policy choice. Italy and Spain could, inter alia, opt for the creation of immediate (and primarily female) jobs by making major investments in high-quality childcare centres, while France would be able to pursue a radical improvement of its system of vocational education and training, based on the German example, and Belgium, the Netherlands and Slovenia could ramp up their rather regressive lifelong learning arrangements, after the Finnish model. The investment aid would strongly incentivise countries fiscally constrained to join the bandwagon of social investment reform, while conditionality would reassure countries in better fiscal shape. It goes without saying that discounting human capital ‘stock’ investments must be closely monitored through the European Semester in terms of effective open coordination with regard to labour market regulation and employment relations that help ease labour market and life course ‘flows’ for individuals and families, together with progress towards make social security ‘buffers’ more ‘inclusive’ across the member states. The third reason touches on the conundrum that political commitments to long-term investment, in a context of short-span electoral cycles, are tough to get off the ground. Especially today, there is a need for institutional levers of more long-term orientation. Voters are most concerned about today’s policy consequences than about longer term consequence, as they face essential informational constraints to make prospective (rather than retrospective) inferences.

Likewise, and in the fourth place political elites’ craving for popular consensus is also drawn into immediate problems. As political problems whose consequences have not yet emerged are less likely to emit attention-generating signals and are, as such, at a disadvantage in the political competition for investment decisions (Jacobs, 2011). Given that the EU is somewhat more shielded from the immediate domestic political tussle, it potentially allows for a longer time horizon, as the partial successes of the single market and the single currency suggest. Mario Monti is purported to have labelled the EU as the “trade union of the next generation”. Today, arguably, the EU, and more in particular the Eurozone, is not doing an outstanding job for its youngsters. However, given the relatively strong evidence of employment growth through upward social investment recalibration, this predicament of temporal inconsistency can possibly be breached by an EU policy strategy that allows member states to explicitly commit to long-term social investment.

Fifth, anticipated institutional convergence through social investment progress, aligned with improved work-life ‘flows’ and more inclusive social security ‘buffers’, as I have argued above, can feature as a precursor to the introduction of ex post social re-insurance mechanisms, as suggested by Vandenbroucke, with the cumulative advantage of strengthening the long-term resilience of the Eurozone.

Finally, to the extent that, over time, the Eurozone would thus turn into a credible ESU, this would surely attract, not so much the likes of Vitor Orbán and Jaroslaw Kaczyński to join the Eurozone, but more likely younger voters in Hungary and Poland wishing to be member of a single market and currency union with significant future-oriented and inclusive social wellbeing bite. In this sense, turning the Euro into a social success is key to the future success of the larger European project.

The political contours of the European Social Model


Any policy proposal that touching on the sensitive area of work, family, care, social security and distribution, has to pass not merely the tests of policy effectiveness and efficiency, but ultimately alternative policy proposals have to be seen as fair, as both Ferrera and Vandenbroucke. When the EU is invoked as a critical lever of progress in a context of deeply cherished ‘legitimate diversity’, such proposals have to convince in terms of institutional appropriateness (Scharpf, 2002; Ferrera, 2005). In the current predicament, electorates continue to hold national politicians accountable for socio-economic (mis)fortune, not EU institutions. What’s more, the failure to structurally resolve the euro crisis at the supranational level has increasingly been met by rising Eurosceptic domestic pressures to water down ruling governments’ commitments to European solutions, especially so in the more politically sensitive field of welfare provision.

Today EU-skeptic right-populist parties are, to wit, the most ardent defenders of the post-1945 social contract for ‘native’ nationals only, proclaiming that retirement at 65 can be sustained through protectionism, a ban on migration, often in conjunction with bidding farewell to the internal market and the single currency. At the same time, fiscal conservatives continue to champion intrusive cost-containment to make up for a lost decade in ‘structural reform’ in the Eurozone periphery. Between right-populist welfare chauvinism and on-going calls for overnight budgetary consolidation, a ‘political-institutional vacuum’ has emerged at the heart of the European project (Marks and Hooghe, 2009). The aftermath of the Euro crisis has caught governments in dire fiscal straits in between Scylla and Charybdis. Pressures for deficit reduction constrained the domestic policy space for social investment reform, while populist, successful with disenchanted electorates, increasingly resist abiding by austerity compromises made in Brussels.

The Italian conundrum that I referred to in the introduction is a tragic case in point. If a Eurozone social investment impetus facility had been available for the government coalitions from Enrico Letta to Paolo Gentiloni, between 2013 and 2018, very likely, significant investments in the social infrastructure would have been underway with pride in reform ownership and also significant (female) employment gains. By having barred this option, the EU today is confronted with an EU-skeptic populist government with 2019 budget of expanding passive social protection spending while lowering the retirement age, at the price of a higher deficit, in breach with earlier fiscal commitment. The proposed tax cuts and spending increases in a highly indebted country do not measure up to a viable growth strategy in the knowledge economy and a rapidly ageing society, where investments in youngsters are imperative to sustain popular welfare states and pensions commitments. Admittedly, the Italian predicament of economic stagnation, low (female) employment and high poverty principally has home-grown roots. However, protracted economic stagnation in the wake of the global financial crash is also related to how the Euro crisis, coming to a head in 2012, panned out from different European welfare states.

Looking ahead, Europe is in dire need of a growth strategy that is economically viable, politically legitimate and seen as socially fair. Given the magnitude of the hangover from the sovereign debt crisis and the dismal experience of social investment reform in Southern Europe before the Euro crisis, there are no quick fixes.

The good news is that, as domestic social investment programs are being institutionalised across the European continent, the evidence of higher employment participation and labour productivity has become ever stronger. By implication, employment and productivity growth also allows for suststaining standing commitments. In other words, political space is opening up for putting popular European welfare states on a more sustainable fiscal footing with Eurozone policy support. By the same token, it follows, that there is no existential material interest from the Eurozone perspective, that eurozone member countries in dire fiscal straits should cut active labour market policies, vocational training, and family and childcare services. That would, in the long run, constrain job opportunities for men, women, and youngsters erode, resulting in higher levels of (child) poverty at declining levels of fertility, undermining the carrying capacity of popular welfare states to shoulder the ageing burden.

Given the overall sound evidence of how dynamic social investment can help achieve prime EU political objectives of growth, jobs, competitiveness and social inclusion, without crowding out elementary social safety nets, I plead, in conclusion, for an ESU that pro-actively support national administrations to better align the three social investment welfare functions of stocks, flows, and buffers within in their highly diverse domestic economic, social and institutional context.

In my monograph Changing Welfare States, I coined the notion of an assertive ‘holding environment’ as a quintessential EU support structure for (active) welfare states to progress in the single market and the currency union. The ESU could transform into such a ‘holding environment’ as a zone of resilience based on shared values and a common political purpose, matched by competent institutions, in times of painful adaptation. The ESU ‘holding environment’ for sustainable and active welfare provision, contrasts sharply with the notion of the single market and the single currency as a welfare state ‘disciplining device’, for which the evidence is increasingly threadbare. By truthfully giving formidable weight to social wellbeing in the governance architecture of the EMU, national social citizenship regimes become embedded in a ‘holding environment’ that commits, bonds and integrates the EU and member states to a shared welfare policy commitment of civilised living in the ageing societies and knowledge economies of the EU.

In terms of future policy delivery, the degree that ex-post social (re-)insurance facility is made conditional on ex-ante social investment progress, made possible by (temporarily) breaching the deficit rules on the condition that government use the additional fiscal space to fast forward capacitating social investment ‘stock’ improvement, which in turn could reinforce elementary institutional convergence, required in anticipation of a supranational social reinsurance facility at the level of the EU, could ultimately to foster greater Eurozone resilience. Obviously, complex issue- and policy-linkage have to be explained in public debate by all relevant political actors, as their logics are not self-evident in the complex political-institutional reality created by national welfare state expansion cum deepening European economic integration.

To the extent that large majorities in virtually all member states wish to live in a prosperous EU, why not try to convince European citizens that EU social investment progress requires elements of fiscal discipline and that, eventually, Eurozone social re-insurance is in the national interest, even though it involves short-run costs? There are no apriori reasons to be afraid that European electorates are not ready to listen to sound evidence and sophisticated arguments that support an inclusive ESU (Genschel and Hemerijck, 2018).

Photo credits: Carlos ZGZ

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