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The lost decade: in search of “Social Europe”

22 September 2014
by Guest author

EU social jsutice reportToday’s post was written by Craig J. Willy for the Bertelsmann Foundation which will also be publishing it.

The Bertelsmann Stiftung’s new EU Social Justice Index is unequivocal: social conditions, notably in terms of poverty and unemployment, have worsened in most EU countries since 2009, often significantly so. This reflects the financial and economic crisis, but also the eurozone’s response to it, as “the rigid austerity policies pursued during the crisis and the structural reforms aimed at economic and budgetary stabilization have had, in most countries, negative effects with regard to social justice.” The Index adds: “the cuts induced by the crisis are not administered in a balanced way throughout the population.” Only three countries – Luxembourg, Germany and Poland – have seen significant improvement in recent years.

Much of Europe appears to be settling into a “lost decade” characterized by high long-term unemployment and underemployment, and weak or no economic growth (indeed the eurozone experienced zero percent growth in the second quarter of 2014, while Italy and Germany shrank 0.2 percent). The poverty rate has risen 1.7 points to 25.4 percent, including 28 percent of children in the EU. Unemployment has reached notoriously high levels in many countries.

The Social Justice Index notes that even where there is low unemployment “the emergence of a dual labour market has been increasingly evident, with poor vertical permeability from ‘atypical’ employment relationships (enlarged low-wage sector, temporary employment) to ‘normal working conditions’.” Just as Western Europe’s unionized working class has shrunk enormously, its postwar middle class appears to also be declining.

The challenges of a multinational union

The EU has been attempting to address these problems and has had some success in stabilizing the eurozone, but European officials are painfully aware of the challenges in creating a genuine “social Europe” and addressing the flaws of the common currency.

The first problem is the difficulty in managing a multinational union: it is far easier to have public support for solidarity (risk-sharing, wealth transfers) and shared government (respect for common rules) within a country than between them. As European Central Bank (ECB) President Mario Draghi laconically noted: “The Dutch have a problem with paying for the Greeks, but not with paying for other Dutch.”

The second problem is institutional: the EU and eurozone are not a federal state or a genuine government which might decisively tackle issues one way or the other. Instead, one has to work with rules laid out in the European Treaties, with any necessary changes to account for new problems requiring unanimity among national governments and legal creativity. This leads to a lot of procrastination on the road to consensus and brinkmanship as each government extracts maximum concessions for its agreement.

Putting aside the eurozone, the social challenges of the EU as such are probably manageable. Broadly speaking, inequality in EU countries is low by global standards, certainly much lower than in the United States or the BRICS, and Europeans are attached to social models which are diverse in implementation but similar in their concern for social equity and balance between solidarity and liberty.

True, low-wage competition from Central-Eastern Europe, either in the form of delocalization or immigration, may put downward pressure on wages in certain areas and sectors. This pressure will diminish as these nations develop, and indeed some Central-Eastern European countries – notably the Czech Republic, Slovenia, and Estonia – already score higher than many Western European countries on the Social Justice Index. There is also evidence that EU migration is a net positive for national coffers of the recipient country. The gradual increase in EU-wide social standards through legislation, already seen in the Social Charter and the Working Time Directive, is plausible.

“The Delors Paradox”

Things are more challenging for the eurozone. European Commissioner for Social Affairs László Andor has argued that any effect of the EU’s social standards legislation have tended to be counteracted by the existing deficiencies of the common currency, terming this “the Delors Paradox”: “On the one hand, we introduce social legislation to improve labour standards and create fair competition in the EU. On the other hand, we settle with a monetary union which, in the long run, deepens asymmetries in the community and erodes the fiscal base for national welfare states.”

The eurozone then needs reform and policy coherence. But the currency union’s management is notoriously complex – monetary policy run by the ECB, bailouts by national ministers by unanimity, the bulk of government spending at national level, but with deficit limits enforced by the European Commission and national judges – becoming confusing even for European political leaders. French President François Hollande for example, after the EU parliamentary elections in May, seemed to confess even he was at a loss with the euro-regime: “Europe has become unreadable, I’m aware of this, distant and to be frank incomprehensible, even for the States.”

There is consensus that significant reform is necessary. Europe’s Socialist and Social-Democratic parties have said that the elitist management of the eurozone’s “Troika” bailout/reform programs – headed by the European Commission, the ECB and the International Monetary Fund – should be replaced by something more democratically accountable. The new president of the European Commission, Jean-Claude Juncker, said in his political priorities: “We have to re-balance the relationship between elected politicians and the European Central Bank in the daily management of the Eurozone,” including a permanent president of the Euro Group of eurozone finance ministers.

In the long-term, many seem to want something like a fully-fledged government for the currency area. French economist Thomas Piketty, who has attracted global attention for his work on inequality, has taken the view that at least a “Eurozone Parliament” is necessary, collectively keeping the government accountable and deciding deficit levels and the amount of common debt issued by a European Treasury. And Jörg Asmussen, state secretary in the German Ministry of Labor and Social Affairs recently wrote: “And in my view the core of integration is the Eurozone with its own parliament and its own budget provided from its own revenue sources – with Germany and France in a position of special responsibility for integration.”

The Bertelsmann Stiftung has further studied the possibility of a substantial eurozone budget through an EU unemployment benefits scheme, which would both stabilize the currency area during economic shocks and help to address social concerns.

No conceptually cohesive strategy targeting social justice across the EU

Unfortunately, agreeing that reform is needed is not the same as agreeing what those reforms should be. In many countries there is little appetite for the laborious process of Treaty change, which would entail a major continent-wide debate and unanimous ratification by the 28 member nations, including possible referenda. With eurosceptic sentiment at an all-time high in many countries, transferring even more power to European institutions may be difficult to justify to voters.

EU and national leaders will then likely have to “muddle through” in the current framework for the time being and address citizens’ economic and social demands as best they can. Time is of the essence, as the Social Justice Index notes: “Should these social divisions persist for some time, or even worsen further, this will endanger the future viability of the entire European integration project”. But so far “a conceptually cohesive strategy explicitly targeting social justice across the EU has yet to be formulated.”

Useful links

OECD work on inequality

 

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