First very preliminary draft – comments welcome
Retrenchment or social investments? The Great Recession, the European Union and Policies of Austerity in Europe
Jon Kvist
Centre for Welfare State Research
University of Southern Denmark
ESPAnet 10th Annual conference
Edinburgh University
6-8 September 2012
Abstract
This paper argues that the agenda and policies of European welfare state reforms have changed fundamentally within the last dozen years. The paper offers a framework for macro-comparative analysis of social investments and returns. Using this framework the paper examines current developments in EU strategies and national welfare reforms undertaken and scheduled in view of ageing populations, the debt crisis, EU general demands and country specific recommendations. The analysis concerns reforms of early childhood education and care, life-long learning and active labour market policies as well as pension reforms. Based on up-to-date material from national experts and reports in these three areas the comparative analysis shows that most countries see different types of reforms. Permanent austerity, stagnation of productivity growth and ageing population is likely to further the direction of reforms, if, and when the economic crisis is over. The Nordic social investment model with an extensive childcare and early childhood education, free tertiary education and life-long learning and active labour market policies, and active ageing is no longer the blueprint for the European social model and national welfare reforms. The social costs of the crisis are likely to be long-lasting in terms of greater generational imbalances and less competitive and socially cohesive populations.
Introduction
Unprecedented welfare reforms have taken place over the last 12 years. The type, pace and scope of European welfare reforms intensified first towards expansion and most recently towards retrenchment and restructuring. Albeit varying widely between countries, most countries undertook the ambitious agenda in part formulated by the European Union (EU) of so reforming national welfare policies – a catch term for social, labor, family, education, health and tax policies – as to make more citizens active, active in production and active in reproduction. From 2000 to 2008 the agenda was one of consolidation of social insurance and in many countries also of expansion of services, albeit in childcare, employment services, long-term care and health services. However, this development may have come to an abrupt halt, at best, when the crisis hit Europe in 2008. In many countries the agenda of consolidation and expansion was even replaced by an agenda of retrenchment of both social insurance and services as governments try to balance budgets.
In the first expansionary period the rationale and policies of the Nordic welfare model was one source of inspiration. Especially elements of EU strategies to some extent reflected the Nordic welfare models aim of enabling individuals and groups to realize their full human potential, in particular that of participating in the labor market. The rationale is that participation is good both for the individual and for the community. Many policies aim to get people into work through formation, maintenance and utilization of skills. Children and youth, parents, employed and unemployed, sick-listed persons and persons with disabilities as well as migrants and immigrants are all legitimate target groups for such policy measures. Policies should not only ameliorate problems once they have occurred but also try to prevent such problems from happening in the first place. Many structural factors are significant for the individual’s life chances by shaping the conditions for his or her choices and adjustments. Basic conditions include when one was born, where one was born and who one’s parents are, conditions over which no person has any influence. In a EU context such concerns have resulted in policy recommendations of activating policies, including policies reconciling work and family life, flexicurity and pension reforms.
Historically social investments in welfare reforms have been left to national governments. The EU regulatory framework mainly regulated the coordination of migrant workers social rights and equal treatment but was often pushed forward by the European Court of Justice to gradually encroaching on mainland welfare state territory (Pierson and Leibfried 1995, Kvist and Saari 2007, Martinsen 20XX). In general, however, social investment goals and policies were left to national governments and in the EU to open methods of coordination on employment, education and social inclusion and social protection (de la Porte and Jacobsson 2012).
Today social investment goals and policies are to a certain extent reflected in the current EU2020 strategy of “Smart, sustainable and inclusive growth”. Four of the five headline targets relate to a social investment strategy when broadly defined, i.e.: Employment (75% of the 20-64 year-olds to be employed); Research Development (RD) (3% of the EU's Gross Domestic Product (GDP) to be invested in R&D); Education (reducing school drop-out rates below 10%, at least 40% of 30-34–year-olds completing third level education), and; Poverty/social exclusion (at least 20 million fewer people in or at risk of poverty and social exclusion). These goals have been translated into indicators and into national targets. As part of the European Semester countries write national reform programs about how they meet previous years goals and work towards new ones.
At the same time as EU and national policy agendas became more ambitious in terms of social investment there has also been a marked shift in the EU coordination of economic policies brought about by the great recession.[1]
Many countries had bad public finances before the crisis, and few are not challenged today. Table 1 shows the development in the government deficits and debt as percentage of gross domestic product (GDP) in the EU countries where the Stability and Growth Pact (SGP) defines 3% deficit and 60% debt as the thresholds for good public finances. In 2000 using these criteria as yardsticks Greece, Portugal and Hungary had problems on both accounts and six more countries had larger debt, namely Italy, Belgium, Germany, Finland, France, Malta and Austria. As the crisis hit the number of countries with deficits above 3% of GDP immediately rose to twelve in 2008 over 22 countries in 2009 and 2010 and down to 17 countries in 2011.
---- TABLE 1 IN HERE - Government deficit/surplus and debt ----
Historically, many countries ran even large deficits and debts, but this is no longer feasible. Today, financial markets have repeatedly punished governments and countries not seen to be economically sustainable, politically reliable, or both by not buying their bonds. This pushes up interest rates up to high levels, what is known as the ‘sovereign risk premium’. In some countries the sovereign risk premium is formidable and may especially in situations of high public debt endanger the national economy.
The fear of high sovereign risk premiums, bankruptcy, EU country specific recommendations or direct requirements by international loan agencies make national governments put welfare reforms on the agenda in two ways that were unthinkable just a few years ago. First governments engage in EU coordination of finance policies that has earlier been seen as sacrosanct to national governments, namely that of tax and spending. Through still harder versions of the open method of coordination (OMC) with country specific recommendations and through crisis packages stipulating reform demands in exchange of financial assistance. With the Financial Act there are stricter limits on national public finances for the 25 of the 27 EU countries that signed the Act. To some extent the EU has taken action and diminished the problem of the sovereign risk premium by agreeing on the Financial act. However, with the Financial Act signatory countries also oblige themselves to stricter public finance criteria. The Stability and Growth Pact (SGP) criteria of debt of 60% and deficit of 3% of GDP are turned into, respectively, 60% but with a automatic mechanism of getting 1/20 off of the excessive debt pro anno, and 0.5% of GDP with the possibility of fines imposed by the European Court of Justice. Also independent monitoring of policies and collection of national statistics.
Second, governments design reforms tax and spending policies are key to welfare reforms and measures that involved higher taxation and lesser social spending were largely seen as unpopular and therefore secure of fundamental reforms. Also countries outside the Financial Act are under a much stricter fiscal regime as they fear high sovereign risk premiums.
Most of the studies in a rapidly growing body of ’crisis literature’ assess the crisis’ direct socio-economic or macro-economic impact. The majority of studies investigating the socio-economic impact are thus concerned with the direct effects of the crisis from rising unemployment and its distribution in sectors of the labour market and in different socio-economic groups on age, gender, skills, and migratory status. So far few studies have examined the changes at policy level and analyzed their consequences. In this paper we thus examine what may be called second-order or indirect effects of the crisis, i.e. how the crisis create policy responses that in turn have effects on individuals.
In particular this paper attempts to help clarify whether on-going policies constitute retrenchment or social investments – a dismantlement or development of the European social. To serve that purpose the paper has a theoretical and a empirical aim. Theoretically, the aim is to provide a conceptual framework for comparative macro-analysis of social investment policies and returns to better evaluate whether current cuts and policy reforms constitute retrenchment of social investment policies that may be detrimental also for future generations of Europeans. Empirically, the aim is to examine whether EU policy strategies and current welfare reforms follow a social investment approach. The focus is not so much on how much national governments are cutting or saving as part of austerity packages but rather what policies or austerity amounts to, retrenchments or social investments. We define retrenchment as policy changes that cut social expenditures in the short to medium term with no regard to skill formation, maintenance or utilization. We define social investments as policy changes bringing about mainly more or better creation, maintenance or use of skills.
In the next section, Method and data, we describe, first, the design of the study involving comparisons of social investment policies and returns over time of EU strategies and cross-nationally in three stages of the life course, and, second, the rationale for choosing nine indicators on social investments in children and youth, prime aged and older people to provide a valid and robust picture of recent policy trends. In the following section we set out the social investment approach as a framework for analysis. This framework is then applied in three sections each analyzing social investment policies in one stage of the life course, i.e. childhood and youth, prime age and old age. Finally, we discuss whether current policy developments indicate a development or a dismantlement of a Social Europe based on social investment strategy by comparing findings from the three analysis and situate these in the current European economic and demographic context.
Method and data
We investigate the nature and scope of recent EU strategies and reforms in Europe by comparing the situation and developments cross-nationally in the 27 EU member states. To examine whether the ageing populations and, especially, the great recession has a role in changing the nature of policies in austerity we compare the situation before and after the great recession which we for the sake of convenience set to start in 2008. Only by comparing the situation in the period before and after the crisis can we establish whether the recent developments constitute a continuation or change of course.
We investigate the changing nature of welfare reforms and their social effects by establishing a framework for analyzing social investment policies over the life course, for more details see next section. This framework highlights different types of social investment policies as well as their associated social and economic effects or returns.
We make results more robust by comparing the results of the analysis of policies and return at the different stages over the life cycle under the social investment approach, i.e. childhood and youth, prime age and old age. When examining results from only one stage we risk that the findings cannot be inferred more generally to recent reforms. The three stages also allow us to study policy issues that are at the core of the EU strategies dominant in the first half of the 2000s and in EU 2020. All the three stages encompass both benefits in kind and benefits in cash.
We use EU policy documents from the European Council and the European Commission to investigate whether the dominant discourse after 2000 promoted a social investment approach de facto although perhaps phrased and framed differently. To assess whether actual policy recommendations are expressions of cuts or investments we investigate the country specific recommendations in connection with national reform programs of the EU2020 strategy as well as the country specific recommendations that are part of the Excessive Deficit Procedure (EDP) under the SGP or Memorandums of Understanding (MoUs) linked to financial assistance packages given by the troika of the European Commission (EC), European Central Bank (ECB), and the International Monetary Fund (IMF). We use policy and statistical information from national experts, embassies, Eurostat, the EC as well as from national and international agencies to examine recent national policy changes and socio-economic development.