Resilient Welfare States in the European Union

Anton Hemerijck, Robin Huguenot-Noël

• Publisher: Agenda Publishing
• Year: 2022
• Print ISBN: 9781788214865
• eBook ISBN: 9781788214889
• Topic: Politics & International Relations
• Subtopic: Social Policy
• Index: Politics & International Relations

The European welfare systems, established after the Second World War, have been under sustained attack since the late 1970s from the neoliberal drive towards a small state and from the market as the foremost instrument for the efficient allocation of scarce resources. After the 2008 financial crash, Europe's high tax and generous benefits welfare states were, once again, blamed for economic stagnation and political immobilism. If anything, however, the long decade of the Great Recession proved that the welfare state remained a fundamental asset in hard times, stabilizing the economy, protecting households and individuals from poverty, reconciling gendered work and family life, while improving the skills and competences needed in Europe's knowledge economy and ageing society. Finally, the spread of the Covid-19 pandemic has, unsuprisingly, brought back into the limelight the productive role of welfare systems in guaranteeing basic security, human capabilities, economic opportunities, and democratic freedoms.

In this important contribution, Anton Hemerijck and Robin Huguenot-Noël examine the nature of European welfare provision and the untruths that surround it. They evaluate the impact of the austerity measures that followed the Great Recession, and consider its future design to better equip European societies to face social change, from global competition to accelerated demographic ageing, the digitalization of work and climate change.

1

The comeback of the welfare state

Covid-19 and the false necessity of the equity and efficiency trade-off

Barely having had the time to digest the economic and social aftershocks of the Great Recession, Europe has been confronted with an even more disruptive exogenous shock, the Covid-19 pandemic, threatening human life and entailing job losses for many as a consequence of the “freezing of the economy” through lockdown measures. The economy was massively hit: in the European Union, GDP shrank by 6 per cent in 2020 and the government debt-to-GDP ratio increased from 77 per cent at the end of 2019 to 90 per cent at the end of 2020. While unemployment peaked at about 15 per cent in the United States in April 2020, government intervention in the EU helped contain this rate to below 10 per cent over the same period. This headline indicator yet hides considerable differences across countries and segments of the population affected.

Before the Covid-19 virus struck, the aftermath of the Great Recession was already raising existential questions for future welfare provision, as it had deepened already existing social vulnerabilities, unemployment, inequality and poverty, within and between EU member states. Nonetheless, despite several invitations made by well-renowned scholars to rethink our economies and the way in which our societal progress is conceived – reiterated in the wake of an increased awareness of the challenges posed by climate change – it is fair to say that the global financial crisis was not sufficiently utilized as a window of opportunity for progressive welfare reforms.

Now, the social aftershocks of Covid-19 crisis management already point to undermined employment opportunities for millennials as well as an identification of the disproportionate burden of household and care chores on women. And, although the high-skilled were able to work from home to reduce Covid-19 virus transmission risks, medium-skilled production and construction workers were temporarily put on furlough schemes, without knowing for how long. At the same time, low-paid workers in “essential services”, such as health care, retail, delivery, public transport and waste disposal, were doomed to face high contagion risks. All this has important consequences for the overall perception of the increasing uncertainty within which citizens and institutions are called upon to live.

If the welfare state emerged as the “unsung hero” of the Great Recession, Covid-19 ushered in the unthinkable: a far more assertive reappraisal of the European welfare state for the twenty-first century than we could have imagined. The political response to the pandemic and its adverse economic fallout was markedly more vigorous, both at the EU level and across the member states. The “freezing of the economy” by lockdown restrictions and social distancing was aggressively counteracted by a bonanza of furlough schemes, wage subsidies and fiscal stimulus measures. In March 2021, exactly one year after the coronavirus outbreak had been declared a pandemic, an article in The Economist described the Covid-19 fiscal stimulus packages as the greatest expansion of the welfare state “in living memory”, making “even the interventions of the global financial crisis look like minnows” (Economist 2021).

The Covid-19-induced endorsement of resilient welfare provision is somewhat surprising. Ever since the establishment of the modern welfare state, there has been a consistent stream of welfare intervention criticisms, along three lines of argumentation. First, there is the dominant economic perversity argument, with its strong antecedents in the writings of Friedrich von Hayek (1944) and Milton Friedman (1962). Assuming markets to be self-regulating, welfare intervention impairs economic efficiency. Social inequality, according to Hayek and Friedman, is crucial for productivity growth, as it constitutes an incentive for improving economic efficiency, ensuring that labour supply and demand are swiftly matched. Against the background of the 1970s stagflation crisis, the American economist Arthur Okun reasoned, on similar grounds, that there is an inescapable “big trade-off” between equality and efficiency (Okun 1975). In the late 1990s the political economists Torben Iversen and Ann Wren conceptualized that advanced welfare states were not so much confronted with an inescapable “trade-off” between equality and efficiency but, rather, faced the tragic predicament of the “trilemma of the social service economy” (Iversen & Wren 1998). The gist of this trilemma is that, with the shift from an industrial to a service economy, it has become ever more difficult for welfare states simultaneously to attain the triple goals of budgetary restraint, earnings equality and job growth. Government may pursue any two of these goals but no longer all three at the same time. Within a tight budgetary framework, private employment growth can be accomplished only at the cost of wage inequality. If wage equality is a prime objective, employment growth can be generated only through the public sector, at the cost of higher taxes or public borrowing (ibid.: 508). As global competition and technological innovation restrict job creation in the exposed (mainly manufacturing) sector, employment growth in advanced economies may be achieved either in well-paid public services, thereby undercutting budgetary restraint, or in low-paid private services, whereby earnings equality is sacrificed. A more recent example of the economic perversity thesis was entertained by German chancellor Angela Merkel in an interview with The Financial Times (Financial Times 2012). She dramatized the European welfare predicament by highlighting that the continent “represents 7% of the world’s population, 25% of the world’s GDP and 50% of the world’s social spending”, suggesting that these ratios are unsustainable in an era of intensive global competition.

The second line of critical argumentation is political, suggesting that, with the expansion of social policy since the Second World War, clientele groups and dependent electorates capture the welfare state, thereby making it immune to change, irrespective of ongoing economic, social and demographic change. This argument of the political “mobilization of bias”, going back to the classic political writings of Harold Lasswell (1958 [1936]) and Elmer Eric Schattschneider (1960), finds its most radical renditions in a seminal article by the leading welfare politics scholar Paul Pierson, aptly titled “Irresistible forces, immovable objects: post-industrial welfare states confront permanent austerity”. In this article, Pierson (1998) deems “irresistible” economic trade-offs and trilemmas of welfare overload irrelevant because, once the welfare state had expanded over the long period of postwar growth, social politics simply trumps economic reason and demographic imperatives. Mature welfare states, in a fundamental sense, become “immovable objects”. Intrusive reforms invariably fail as political reformers face electoral retribution and opposition from vested interests. In the early days of the Great Recession Pierson (2011) made the surprising apodictic conjecture that the welfare state would not survive this final blow, because the defensive politics that had turned the postwar welfare state into an immovable object during the 1980s and 1990s had run its course. Overwhelmed by the global financial crisis, according to Pierson, the age of “real austerity” had finally commenced.

The third and final line of argumentative charge against the welfare state, emphasizing the unintended consequences of mistargeting, is more sociological in nature. Herman Deleeck (1979) and Julien Le Grand (1982) found how, in Belgium and the United Kingdom, welfare transfers and services are disproportionately appropriated by more well-off social groups at the expense of the disadvantaged, for whom these social provisions were originally intended. In other words, social privilege thus begets further privilege, a phenomenon that has been described as the “Matthew effect” after the Gospel of Matthew (Merton 1968). In recent decades the regressive jeopardy of the Matthew effect has been associated with the general reform shift towards social investment, the privileging of active labour market policies (ALMPs), family servicing and work–life balance reconciliation, thus leading to neglect of the pro-poor passive social protection function of the welfare state. In the same vein, Bea Cantillon (2011) suggests that social investments to stimulate job growth by activation and capacitating social services undermines the redistributive social security designed to mitigate inequality.

What is striking is that all three currents of economic, political and sociological critiques conspire around redistribution as the core function of the welfare state. From equity and fairness being lost at the expense of efficiency and competitiveness in welfare economics, to distributive struggles between powerful insiders and electorally irrelevant outsider cleavages, conspiring behind frozen welfare landscapes, in political science and, finally social investment reform simply reinforcing middle-class privileges at the expense of the poor, a reductive zero-sum picture shines through.

As we will show empirically in this book, all three of the above, intuitively appealing argumentative claims are half-truths at best, treacherously misleading at worst. On economic perversity, the empirical evidence of trade-off and trilemmas is quite limited – to say the least. True, welfare reform is difficult, but it does happen. As such, the political immobilism argument flies in the faces of the ever-expanding literature of long-term transformative welfare state change over the past decades in response to structural economic, social and demographic change, despite obvious political opposition. With respect to the Matthew effect predicament, we counter the charge that the middle classes disproportionally benefit from capacitating social investments. Where they do exist, Matthew effects can be overcome. Moreover, any inclusive welfare state, for reasons of political legitimacy, should not only cater for the poor but also provide social support to middle-class constituencies.

Without denying the overriding importance to mitigate social inequality, contemporary welfare states combine far more complex portfolios of interdependent, complementary and interacting policy provisions, far beyond here-and-now redistributive effort. Given that welfare provision is generally paid for through social insurance contributions and income taxes, central to any understanding of the long-term financial sustainability of the welfare state is the number (quantity) and productivity (quality) of current and future employees as taxpayers. More than ever, any resilient welfare state must carve out an intricate balance between economic prosperity and security, protect the vulnerable, foster public health, achieve employment opportunities for many in a gender-balanced manner and develop the human capital needed to sustain an inclusive welfare state.

Resilient welfare states in the twenty-first century

Our argument in this book is that the evidence on socio-economic developments in the European Union since the turn of the century forces a rethink of the extant (negative) welfare paradigm at both national and EU levels. The general availability of the welfare state, however much it had been maligned in the past, was undoubtedly an asset in buffering not just the Great Recession but the Covid-19 pandemic as well. Breaking away from austerity required hard-won changes on the basis of slow learning processes. Recognizing this new reality now offers a breeding ground for resilient welfare states – able to buffer economic shocks, adapt to the evolving reality of modern societies and anticipate new macro-trends – to eventually prosper.

In the wake of the Covid-19 pandemic, our aim is not to complacently champion the triumphant return of the welfare state but to ponder more humbly on the question of the kind of welfare state needed to future-proof the twenty-first century. Welfare state resilience is not merely a question of the effective pooling of resources for a rainy day and future-oriented human capital instrumentation. Effective social policy relies heavily on shared normative orientations and a sense of cultural belonging as additional resources to overcome intertemporal trade-offs, when short-term pains are required for less tangible distant returns, to bolster fair burden sharing and to capacitate and help emancipate the less well off as full members of our ever more heterogeneous communities.

The relationship between the state and the market has been the conceptual backbone of an important part of the economic thinking in Europe since the twentieth century. It should therefore come as no surprise that a tension remains at the heart of the European Union’s project for economic integration between these two dimensions. On the one hand, the advanced welfare states, which grew in number and scope between the 1950s and the 1970s, prioritized national solidarity and domestic political responsibility for tackling poverty, fighting unemployment and mitigating inequality, based on a logic of protection from market failures. On the other hand, the drive to expand European economic integration, which started from the idea of safeguarding peace through economic interdependence, then moved on to a wider agenda of liberalizing supply-side reforms in the 1980s and 1990s, anchored in a neoclassical design for economic and monetary union (EMU) and for the single market. The commitment in the 1992 Maastricht Treaty with reference to “a high level of employment and social protection” in article 2 is, in this respect, ambivalent at best. To be sure, the single market and the single currency were built on a solid base of heavily institutionalized safeguards regarding the extent to which EU institutions could intervene in domestic social policy. Nevertheless, domestic requirements for a viable EMU required considerable sacrifices on the part of member states’ governments in terms of welfare state sustainability. In terms of governance, the European Central Bank (ECB) received the mandate to maintain price stability, whereas the Stability and Growth Pact (SGP) was to guarantee fiscal sustainability, underwritten by the Maastricht Treaty’s “no bailout” clause. Setting monetary policy at the EU level while leaving fiscal policy in the province of individual member states did not cause major problems under the benign economic conditions of the late 1990s and early 2000s, but it turned into the institutional Achilles heel during the sovereign debt crisis in 2009.

The global financial crisis of 2008 – the deepest economic crisis since the Great Depression – surely conjured up a critical “stress test” not simply for European welfare states individually but for the E(M)U architecture as a whole. Considerable employment growth across the European Union, achieved through intelligent social and economic reforms since the 1990s, was wiped out in a couple of months. The prospects for young people dramatically worsened as difficulties in finding a job and even of getting an apprenticeship or any other kind of training were aggravated. Thus, the share of young people neither in employment nor in education and training rose to up to a fifth of this age group in Italy, Greece, Ireland, and Spain – twice as high as it had been in the early 2000s! These developments not only conjured up a picture of a “lost generation”, prefiguring that of the Covid-19 era. For these countries in particular, it also resulted in an incommensurable waste of human capital potential and rising outward migration, all adding further pressure on the sustainability of welfare provisions in the context of demographic ageing. The massive increases in fiscal deficits and public debt required to pre-empt a more dramatic economic meltdown forced national policy-makers to consider cuts in welfare services, including health, education and social transfers to the poor, the unemployed and the retired. Faced with a “double bind” of rising social benefit expenditure in combination with declining revenues, many commentators intimated that Europe’s comprehensive welfare states – channelling up to a fourth of all public spending – would become a prime casualty in the violent economic, social and political aftershocks unleashed by the 2008 financial downturn. Paul Pierson (2011), one of the leading experts in comparative welfare state research, maintained that the welfare state would not survive the blow, simply because its defensive politics, which had turned the postwar welfare state into an immovable object over the 1980s and 1990s, would be overwhelmed by exhaustion. In other words, the pressures unleashed by the financial crisis would greatly exceed welfare states’ capacity for reform.

Today, after a decade of empirical hindsight, we observe that the Great Recession, in effect, confronted EU countries with a novel reality. The Great Recession was triggered by a financial crisis, just like the Great Depression in the 1930s, and not a stagflation real economy crisis, as in the 1970s and 1980s. As such, it marked a test case for the Beveridgean–Keynesian welfare state, validating the extent to which compulsory social insurance, regularly challenged by the neoliberal intermezzo, would remain proficient to act as an automatic stabilizer. How did welfare states rise to this challenge? In a nutshell, the Great Recession revealed that the active, big-spending welfare states of northwestern Europe were the most successful in absorbing the global credit crunch and the eurozone crisis that followed. By contrast, the debt-prone welfare states of southern Europe, notably Greece and Italy, were less proficient, not only in fairly distributing the crisis burden across risk groups but also because of the limited stabilization capacities of their highly segmented, pension-biased social protection systems. The growing debt burden in these countries was also associated with large spending cuts in some of the most productive government programmes (research and development, education, infrastructure), thereby reinforcing divergence across the euro area. By contrast, elsewhere in Europe, the welfare state emerged largely intact. In all European countries (bar Hungary, Ireland and Malta) and in the United Kingdom, social spending was higher as a share of GDP in 2017 than it had been in 2007. Our takeaway message is that Europe’s inclusive welfare state should really be thought of as the “unsung hero” of the Great Recession.

Many books and articles have been written on financial reregulation and the eurozone sovereign debt crisis, but little attention has been given to how existing welfare systems buffered the blows of the global financial crisis. In the wake of the Covid-19 pandemic, at long last, public health and welfare are considered as part and parcel of the solution to the pandemic, rather than the problem. It seems indeed that the drastic shift in perceptions towards the role of state interception has reached even those usually inclined to see governments as the root of most troubles. In March 2021 the liberally minded The Economist thus dedicated a special edition entitled “Bouncing back – a welfare state for the post-covid world” in which its editorial board acknowledged that “the...

Table of contents

• Cover
• Half Title
• Series Information
• Title Page
• Copyright Page
• Dedication Page
• Contents
• Preface
• Abbreviations
• Figures, tables and equations
• Foreword
• 1 The comeback of the welfare state
• 2 Welfare recalibration under E(M)U integration
• 3 Social investment and secure capabilities
• 4 Towards a eurozone insurance union
• 5 How Covid-19 bolsters welfare resilience
• References
• Index