The Sovereign Debt Crisis, the EU and Welfare State Reform

Caroline De La Porte, Elke Heins, Caroline De La Porte, Elke Heins

• Publisher: Palgrave Macmillan
• Year: 2016
• Print ISBN: 9781137581785
• eBook ISBN: 9781137581792
• Topic: Politique et relations internationales
• Subtopic: Politique comparée

This book offers a much-needed analysis of how the European Union (EU) has affected welfare state reforms in the Member States most severely hit by the 2008 economic crisis. Bringing together leading European social policy researchers, it shows that the EU's responses to the sovereign debt crisis have changed the nature of EU intervention into domestic welfare states, with an enhanced focus on fiscal consolidation, increased surveillance and enforcement of EU measures. The authors demonstrate how this represents an unprecedented degree of EU involvement in domestic social and labour market policies. Readers will also discover how greater demands to attain balanced budgets have been institutionalized, leading to tensions with the EU's social investment strategy. This highly informative edited collection will engage students, social policy practitioners and researchers, scholars of the welfare state and political scientists.

<

© The Author(s) 2016

Caroline De La Porte and Elke Heins (eds.)The Sovereign Debt Crisis, the EU and Welfare State ReformWork and Welfare in Europe10.1057/978-1-137-58179-2_1

Begin Abstract

1. Introduction: Is the European Union More Involved in Welfare State Reform Following the Sovereign Debt Crisis?

Caroline de la Porte¹ and Elke Heins²

(1)

Department of Business and Politics, Copenhagen Business School, Copenhagen, Denmark

(2)

School of Social and Political Science, University of Edinburgh, Edinburgh, UK

End Abstract

This book analyses how the EU—through formal rules, informal pressure and new initiatives—has affected welfare state reforms in EU Member States following the sovereign debt crisis. The findings of the single and comparative country chapters in this book show that the nature of EU intervention into domestic welfare states has changed, with more focus on fiscal consolidation, and importantly, more constraints in terms of policy, politics and governance.

When our special issue entitled ‘The Sovereign Debt Crisis, the EU and Welfare State Reform’, on which this book is based, was in press, numerous other contributions were being written in parallel. In this introductory chapter we pick up on some of their insights to contextualize our contribution to this vibrant literature. This book builds on at least three strands of partially overlapping literature. First is the burgeoning literature on what is dubbed the ‘Great Recession’ (Reinhart and Rogoff 2009) that focuses on ideologies and the relationship between states and markets in reform responses to the crisis (especially the euro crisis) in modern industrialized democracies. The second body of relevant literature is on welfare state reform in a comparative perspective that contextualizes policy responses in crisis situations with institutional alterations made over the last decades across European welfare states. The third strand of literature is on European integration and on Europeanization, respectively focusing on EU changes in policy areas associated with the crisis and in analysing the causal impact of the EU on reforms during the crisis. The literature on European integration in the context of the crisis focuses particularly on areas that have previously been considered to be of national competence only, such as banking, financial sector regulation and, not least, welfare state reform. The literature analysing the impact of these EU-level alterations, the subject of which this book mainly relates to, is just emerging (Matthijs and Blyth 2015; Wandhöfer 2014). There is a consensus among scholars that, compared to before the crisis, Europe has more leverage in areas linked to managing markets and states and, related to this, that these areas are more Europeanized.

Concerning the literature on the ideological and historical location of the Great Recession, Streeck (2014) focuses on the contradictions—between market principles and social rights—within democratic capitalism. He analyses how inflation, public debt and private indebtedness have successively been used by states over the last four decades to gain (not yet existing) resources for distributive policies. He further argues that high levels of debt, through increasing deregulation of the financial markets, have merely been ‘temporary stopgaps’ for governments that have supported gains on capitalist markets with continued welfare state development. The Great Recession has altered this situation, as public debt can no longer be used with as much elasticity as before 2007. As a result, austerity has become the dominant policy response, signifying that governments have now developed long-term plans of (public) savings to ensure that international creditors consider the governments’ economies a safe investment. In the context of the sovereign debt crisis, national sovereignty has been surrendered to supranational institutions, which are ‘deaf to democracy’ (Streeck 2014, p. 96), to insulate ‘the markets’ from contradictory democratic demands for social justice. These democratic legitimacy problems notwithstanding, the EU measures taken in response to the crisis have helped prevent bankruptcy in some of the most heavily crisis-ridden economies, even if the austerity policies have been widely criticized (Scharpf 2011; Armingeon and Baccaro 2012a, b). In the Stability and Growth Pact (SGP)—set out to govern policies for a well-functioning Eurozone—more attention is now paid to public debt in both the preventive and corrective parts of the SGP. This turnaround in policy towards public debt is embodied in new initiatives layered onto the existing institutional framework of the EMU (Verdun 2015; de la Porte and Heins, Chap. 2).

Related to this, this literature highlights that the source of the asymmetrical impact of the crisis in Europe is due to distinct growth models and institutions of political economy between the periphery and the core of Europe. In particular, the demand-led model in the periphery does not square well with the EMU, which is implicitly tailored to the export-led models that are dominant in Northern Europe. There is a consensus that these distinct models were not built into the structure of the EMU or EMU membership conditions (Hall 2014; Regan 2015). Regan (2015), furthermore, argues that the institutionalization of this mismatch among the countries of the Eurozone exacerbates the imbalance of capitalisms in the Eurozone. Commentators and analysts argue that the future of the Eurozone should expand beyond a narrow understanding of ‘Ordoliberalism’—state creation of market design to ensure ‘optimal’ functioning (Nedergaard 2013)—that underlies the policies in the EMU (Lechevalier 2015). The implication is that in the future the Eurozone should not reinforce a one-size-fits-all supply-side solution, implicitly expecting convergence towards the export-led model. Instead, it should shift towards transnational institutions flexible enough to support diversified social and economic models and, with it, broader and more diversified ideological paths within Europe (Hall 2014; Regan 2015). Thus far, the dominating one-size-fits-all model initially led to a rather narrow framing of the challenges at the EU level—seeing sovereign debt as the core problem. This is reflected in changes in the new institutional and governance framework linked to the EMU and in the bilateral agreements between European and international institutions with debt-ridden countries. The austerity policies prompted strongly by the EU/International Monetary Fund (IMF) during the crisis—while preventing default of the crisis-hit economies—are criticized for exacerbating the differences between the core and the periphery in the crisis context (Armingeon and Baccaro 2012a, b; Hacker 2015; Regan 2015).

The second body of literature, comparative welfare state reform, points to reform responses in terms of policy, ideas, politics and institutional change. The authors note that despite a brief wave of Keynesian-type stimulus policies immediately after the outbreak of the financial crisis in 2007, governments have relied predominantly on austerity measures: tax cuts to stimulate the economy and spending cuts to achieve fiscal consolidation (Bermeo and Pontusson 2012; Farnsworth and Irving 2011, 2012; Greve 2012). Farnsworth and Irving (2012, p. 145) boldly argue that ’austerity’ has become the new hegemon within a neo-liberal paradigm because ‘for the first time in the modern history of the welfare state, austerity has come to unite politics and economics’. This chimes with explanations for ‘the strange non-death of neoliberalism’ (Crouch 2011) and the ‘resilience of neo-liberalism’ in Europe’s political economy (Schmidt and Thatcher 2013). In this light, welfare reforms have been similar in direction—cost-containment—although within different institutional configurations (Farnsworth and Irving 2011, 2012). Overall, the responses of European welfare states are re-enforcing developments that were initiated before the crisis. This includes the use of flexible contracts to facilitate labour market participation but, biased to the advantage of employers, toughened access to unemployment and other benefits, as well as curtailing public expenditure in the areas of healthcare, pensions and education (Bermeo and Pontusson 2012; Bonoli and Natali 2012; Emmenegger et al. 2012; Greve 2012). The welfare state is still a key institution in modern capitalist democracies, but it has undoubtedly changed in character—more lean, more mean—following the sovereign debt crisis.

The third body of literature, that brings in European integration and Europeanization, analyses how the EMU focuses on public expenditure-shaped domestic reforms. The EU does intervene preventively or correctively on EMU members through the SGP in a two-level game (de la Porte and Natali 2014). Dølvik and Martin (2014) argue, in line with existing research, that the way European social models are institutionalized affects crises, and crises can, in turn, affect social models. Their edited volume focuses, from a historical perspective, on the intervening role of the EMU in changed patterns of employment and equality. The argument, which is novel compared to existing literature, is that macroeconomic conditions, and particularly budgetary requirements of EMU membership, are more important in determining employment and distributive outcomes in EU Member States than the social model institutions themselves. This is a point that has been on the margins of academic debate surrounding the construction of the EMU, although there have been warnings about the in-built asymmetry of the EMU and the dangers of centralizing monetary policy while leaving fiscal policy to be decided at the Member State level (Scharpf 2011). Earlier literature concluded that the EMU did present a theoretical threat to welfare states (Begg and Nectoux 1995). However, in-depth analyses have found that despite this asymmetry, there were only minor alterations to welfare states to meet EMU membership conditions, either because reform plans were not so ambitious to begin with or because the plans were altered in domestic political processes (Bolukbasi 2009).

Findings about welfare state change over the last two decades clearly indicate that EU Member States, which have incrementally responded to challenges of aging populations, globalization and the emergence of new social risks, have been better geared to meet the crisis that emerged in 2007. Germany has been a showcase example, where part of the success is due to changes to the labour market model prior to the crisis, embodied in the Hartz reforms—a series of reforms developed to make the labour market more flexible through atypical and fixed-term jobs. However, a side effect has been a change in the composition of the labour force with a growth of low-wage service sector jobs and a much higher degree of precariousness (Carlin et al. 2014). In France, by contrast, the social model and labour market regulation were not sufficiently adapted to meet challenges related to globalization and population aging although investments in childcare have enabled reconciliation of family and working life. The crisis was thus a lever leading to (necessary) welfare reforms that were undertaken in the shadow of EU and financial market hierarchy (Hassenteufel and Palier, Chap. 8; Le Cacheux and Ross 2014).

There is no literature specifically on the causal impact of the EMU on (welfare) reform efforts in this present crisis context, which this book focuses on. The literature thus far suggests that EMU countries are under more pressure with regard to budgetary constraints than non-EMU countries. Figure 1.1 shows that there is a more pronounced decrease of budget deficits in the 19 Eurozone countries, compared to the 9 countries that are not Eurozone members. This data needs to be interpreted with caution, as the development of budget deficits does not depend only on deliberate policy measures. However, the data does indicate that EU pressure for reform—through an excessive deficit procedure (EDP) and Memorandum of Understandings (MoUs)—has undoubtedly been higher in the Eurozone countries throughout the crisis, although the pressure of markets is likely to have been even more significant for Member State governments as a lever for reform. The crucial point, for all countries, is that the pressure to undertake reforms has been higher during the Great Recession compared to before the crisis, due to possible adverse reactions by markets (Fig. 1.1).

Fig. 1.1

Budget deficits (as % of GDP) in Eurozone and n...

Table of contents

• Cover
• Frontmatter
• 1. Introduction: Is the European Union More Involved in Welfare State Reform Following the Sovereign Debt Crisis?
• 2. A New Era of European Integration? Governance of Labour Market and Social Policy Since the Sovereign Debt Crisis
• 3. A Framework for Social Investment Strategies: Integrating Generational, Life Course and Gender Perspectives in the EU Social Investment Strategy
• 4. ‘Pushing Against an Open Door’: Reinforcing the Neo-liberal Policy Paradigm in Ireland and the Impact of EU Intrusion
• 5. National Social and Labour Market Policy Reforms in the Shadow of EU Bailout Conditionality: The Cases of Greece and Portugal
• 6. From Austerity to Permanent Strain? The European Union and Welfare State Reform in Italy and Spain
• 7. Conditionality by Other Means: European Union Involvement in Italy’s Structural Reforms in the Sovereign Debt Crisis
• 8. Still the Sound of Silence? Towards a New Phase in the Europeanization of Welfare State Policies in France
• 9. Depleted European Social Models Following the Crisis: Towards a Brighter Future?
• Backmatter