SOCIAL POLICIES AND STRUCTURAL REFORMS IN EUROPE

ROMANIAN JOURNAL OF EUROPEAN AFFAIRS

VOL. 6, NO. 4 2006

SOCIAL POLICIES AND STRUCTURAL REFORMS IN EUROPE FERRAN BRUNET CID* MAR LÎPEZ RANCAÑO Abstract**. This paper considers the social and structural policies in contemporary Europe. The presentation is organized in four sections. First, we discuss the emerging Europe, the new unity based on democracy and the market economy, the special European Union formula, and comparisons with America. Second, we analyze the dynamics of the European economy, the convergence process, the gaps between United States in productivity and standard of living, competitiveness issues, and the emergence of a new European economy and new European policy mix. Third, we consider European social conditions, the stationary and aging population, Europe’s low employment rate and permanently high unemployment. European economic growth could draw on two major sources: the labor reserves and reforms in factor, product and service markets. In a monetary union, advanced industrial relations should promote labor mobility and salary flexibility. The social security systems permit the redistribution and cohesion which defines the European model. Fourth, for the new Europe, the structural reform strategy is the way forward for the challenge of European economic policy and social policy: more and better jobs thanks to sustainable growth in a dynamic and competitive knowledge-based economy, favoring greater social cohesion. Keywords: Europe, Economic Policy, Social Policy, Structural Reforms, European Integration. JEL F15, I30, J21, O52. I. EUROPE AND THE EMERGING EUROPEAN UNION What is Europe? What is it to be European? Finding answers to these questions is not so simple. What route should Europe follow? What is the best approach for the West: modernity and/or post-modernity? A. The emerging Europe Europe is at a sweet moment of its contemporary history. On May 1st 2004,

ten new countries joined the European Union. The division of Europe into two opposing political and economic systems is now a thing of the past. The European integration process forging a new political and economic Union has been a major success, due to the ‘miracle’ of economic growth during the second half of the 20th century and, then, the quiet death of the Soviet Union and real socialism. For Europeans the European Union (EU) has emerged as

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Ferran Brunet Cid is Professor at the Faculty of Economics, Universitat Autònoma de Barcelona, University Campus, Building B, E-08193 Bellaterra, Spain . Mar López Rancaño is Professor at Faculty of Economics, Universidad Nacional de Educación a Distancia, Vapor Universitari, Colom 114, E-08221 Terrassa, Spain . ** This paper was presented to the Fifteenth International Conference of the U. S. Council of European Studies, Chicago, Il, March 29-April 2, 2006.

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FERRAN BRUNET CID & MAR LÎPEZ RANCAÑO

the means to maintain freedom and improve economic and social conditions. The EU now comprises two types of countries: the 15 Western European Member States (MS) and the ten new Central and Eastern European MS. These new MS represent 16.2 per cent of the overall EU population, 22.8 per cent of total EU territory, and 4.6 per cent of total EU Gross Domestic Product (GDP); yet their average GDP per capita is 52.6 per cent of the EU15 average. The EU10 have major development and structural problems. The EU15 share a long common history –including many great and even world wars– and are relatively well integrated, though less so in cultural and political terms. Its MS abide by the EU rules –European laws prevailing from the MS laws. The Treaty establishing a Constitution for Europe which is now being presented for ratification by MS codify the European legal system and underlines the visibility and effectiveness of European rights. Europe has largely been a recipient of the output of the United States of America (USA, US), from US aid in the Second World War to the European democracies against Nazi Germany to the contemporary US corporate presence, investments, trade flows, technological advances, culture, politics, and news. The global instability of recent years has clouded transatlantic relationships, yet the soft power (Keohane & Nye, 2001, and Nye, 2002) of the US in Europe is solid. European countries share many structures, systems and institutions, while there are 1

differences to country size, to long separate histories –perhaps wars, to different languages and cultures. The different MS cultures and institutions are essentially different combinations of the same ingredients. B. The European Union Way The EU’s1 development has been highly successful. It is precisely this success that has led to certain problems: all the neighboring countries are knocking at the EU door, keen to become MS and acquire the stability, democracy and standard of living denied to them for centuries. The objectives of the EU are accumulative, from peace to human rights, economic growth and sustainability, as reflected in the European Constitution. The European unification process is political in its objectives and in its means, but its implementation is first and foremost economic: gradualism is a feature of the EU. EU development is guided by a number of steering principles: non discrimination for reasons of nationality, equal treatment for all, transparency, respect for difference, minority cultures and diversity, subsidiarity. (Constitution for Europe, 2004) The EU functions along the lines of a confederal institution: the Council of the Union comprising State ministers on the relevant topic, assisted by a directlyelected Parliament (since 1979). The European Commission proposes and executes the common policies and regulations, and the legality of all is supervised and ensured by the Court of Justice. There is a Court of Auditors, an

The EU develops from 1950 by six States (France, Germany, Italy, the Netherlands, Belgium, and Luxembourg) that created successively the European Communities and was enlarged by some other States (Great Britain, Ireland, Denmark, Greece, Portugal, Spain, Sweden, Finland, and Austria). It include the almost territory of Western Europe. In 2004 eight States of Central and East Europe (Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Slovenia, Slovakia) and two islands of the Mediterranean sea (Cyprus and Malta) adheres to the EU and form the EU25. Bulgaria, Romania, some countries of the former Yugoslavia, as Croatia, and Turkey would enlarge the EU.

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SOCIAL POLICIES AND STRUCTURAL REFORMS IN EUROPE

Economic and Social Committee, a Committee of the Regions and the European Central Bank. All this institutional framework reflects the implicit aim of the founding MS to achieve European integration on a federal basis. The main channel for EU action is the regulation. European law enacted by the Council or Commission prevails over individual MS law, and is direct in effect. Here we can appreciate a democratic deficit, which will continue to be insurmountable as long as the EU remains confederal. The EU budget is limited to 1.24 per cent of GDP and this causes an administrative deficit: it does not have the means to meet its ambitions. European ambitions go far beyond EU means. Almost half of the EU budget goes towards funding the Common Agricultural Policy (which fixes prices) and a third is redistributed under the Common Regional Policy. The remaining European policies, such as competition, industry, foreign trade, and monetary policy are also the exclusive competence of the EU and generate a large body of EU-wide binding regulations. In social issues, in justice and policing, and in foreign affairs, individual MS still hold the main powers. Inter-state coordination is developing slowly. The nature of the European integration process (Brunet, 2004) tends to intensify EU policies. European enlargement reinforces the Common policies, as seen in regional and structural policies with the first (Atlantic MS), second and third (Mediterranean countries), and fourth enlargement (Baltic countries). The recent entry of Central and Eastern European countries is in many ways a political enlargement. The institutional arrangements required to manage an EU of 25 and more MS are partially determined by the European Constitution. However, a contradiction is beginning to emerge

between enlargement and intensification. The number and diversity of members is affecting the integration process. Quantity tends to have a bearing on quality. Now the question is the future functioning of the EU and whether the proposed future enlargements to include non European and widely diverse countries in terms of economics, c u l t u r e , language, religion and n a t i o n a l i s t sentiment will accentuate or not the contradiction between enlargement and intensification. Should such enlargements occur, the EU will change its very nature, the federal objective will disappear, the States will enact their own laws, and the European dream of a political federation based on freedom will vanish in a nightmare of confused civilizations. (Garton Ash, 2004). The EU’s limitations may also be its assets. Non federal but inter-state unanimity is frequently required for action and rarely achieved. Lengthy discussions often end in an impasse and lack of action. This is welcome when the action proposed is war. Peace is always preferable to war. But in other cases, an impasse represents a serious problem. (Elazar, 1991, and Calleo, 2001). C. America vs. Europe: Dreams or Realities, Models & Development The emergence of a Europe engaged in a process of unification invites us to reread its history, economy, politics, society, in a half-scientific, half ideological bid to define its spirit, its identity, the reality of Europe. Is Europe reality or dream? Is it the last possible utopia or will it eventually lead to mere confusion? Excellence is always perceived as being obtained from afar: America, utopia, God, … Intellectual rapport between America and Europe is perhaps not the outcome of objective criteria so much as ideas and feelings, attraction or/and 7


repulsion.2 America is always the mirror of Europe, and occasionally Europe may be the mirror of America. For this reason, we Europeanists like America. For the Europeans the dream was (and is)… America; for some Americans the dream is (or will be) Europe. For the Europeanist dream the future of Europe is America or the US, for some Americans the American dream is Europe or the EU. In this way America and Europe seem to be in contrast. Which of the two dreams is best? The American dream, the American way of life? Or the European dream, the European social model? The American frontier or Euroland? Recently Jeremy Rifkin states this contraposition (Rifkin, 2004): the European dream excels the American dream. The American dream may have been excellent; however, Rifkin sustains, Europe now represents all that is best about that dream and it will spread it to the entire world. This European dream is welcome; all the more welcome if it is the work of an American analyst (Rifkin). People may need dreams and ideals if they are to develop.3 Certainly, the EU faces a challenge in shaping a common identity, while the US does not. However, reality contradicts the dream, although this is of the essence of dreams and reality: being different, even in opposition. What is Europe and what is a European? Europe must also face the challenges posed by unity and diversity. 2

At least 51 independent states occupy territorial space in the continent of Europe, a fact which complicates things for the European Security Conference; just as EU25 complicates things for the European Union.4 In Europe we have doubts and must ask questions such as ‘Who are we?’ (Huntington, 2004). In Europe, we have the problem of knowing exactly what Europe is. Europe is not defined by political frontiers or by territory, not by a single language, culture or history. Rather what bind European countries are their common and parallel development and a convergence to similar patterns. D. The Old and the New Europe This is a cliché. All Europe is old, historical; yet all in Europe is new, contemporary. The contradiction between Europe as community and Europe as diversity is decreasing due to convergence. Not only will the future common policies be different, policies changed before the accession of the new MS, from the mid 1990’s on, as the aspirants abandoned their socialist systems and entered accession negotiations with the EU. But European regional policy –the most European ‘social’ policy– is no longer what it used to be, especially in terms of benefits for the original 15 MS. ‘Europe’, i.e., the EU, today comprises two major groups of countries: the 15 older MS and the 10 new MS.

From philosophy to transatlantic affairs, from Alexis de Tocqueville (1835-1840) to Kagan (2003), Read (2004) and Reid (2004). 3 Renewing the historical sentence “We have created Italy, now we need to create the Italian people”, now it’s said: “We have created Europe, now we need to create the European people”. Economic integration (market, capital) and some social and political measures (free circulation of people, a new additional European common law and some common institutions), favors this community. Nevertheless the fragmentation of Europe in languages, cultural expressions, and politic life make this a large process. (Brunet, 2005) 4 The differences between the European countries are enormous: Turkey have a GDP per capita of 25.4 per cent of medium of the EU15, Luxembourg the 194.6 per cent, Spain the 87.3 per cent, Poland the 42.2 per cent.

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Table 1 Economic and Social Issues and Problems in the European Union – the original 15 old developed MS and the 10 new developing MS

These two groups of MS represent very different economic and social conditions: on the one hand, the problems of contemporary advanced capitalism –the most similar to the issues facing American society– and on the other, the problems of transition and developing capitalism. The social conditions of 15 advanced MS generate maturity problems (aging, structural reforms). The social conditions of the 10 transition MS generate problems of changing social relations, stark social disequilibria and development. Thus, the EU comprises a group of MS with mass consumption and welfare states, and a group of MS undergoing economic upheaval and social restructuring. In

strategic and political terms, the new MS adopt attitudes which are more transatlantic in outlook than some of the original EU states. II. THE DYNAMICS OF EUROPEAN ECONOMY

THE

Europe’s catching up on American productivity came to a stop in 1990. The gap between US and EU standards of living is growing due to low European employment rates. The EU has important sources of growth, e.g., labor reserves and structural reforms needed to improve competitiveness. A new integrated European economy may emerge, more integrated and competitive, together with 9


a new European policy mix, and a stable monetary policy. A. Long Term Dynamics From a long term perspective, economic development may be represented as the growth of Gross Domestic Product (GDP) and employment. The difference between GDP and employment, productivity, is a strategic

indicator of development, reflecting capacity to produce. As shown in figure 1, the profiles of Europe and America could hardly differ more: – In America the growth of employment explains the growth of GDP. – In Europe the growth of productivity explains the growth of GDP.

Figure 1 Trends In American, European, And Japanese Growth: GDP, Employment, And Productivity, 1960-2005

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From this dynamic we can postulate three shared temporal phases: a) The ‘miracle’ phase 1960-1975: with annual growth rates surpassing 6 per cent. b) Long-term recession 1975-1990: deindustrialization, some years growth, employment and productivity were in negative figures. Figure 2 Economic Convergence Process: Catching-Up Between America, Europe, And Japan, 1950-2005

c) Recovery phase 1990-2005: with three sub-phases 1990-1 to 1995, the buoyant 1996-2000 and then after 2000-1. To sum up, from high growth rates to low growth rates, to booming economy to stationary economy. From the indicators considered, we can establish: – GDP growth: in general, the growth of GDP dropped from levels of 6 per cent per year during the 1960’s to 2-3 per cent at present. – Employment growth: employment dropped many years. Comparison of GDP and employment growth (saw and columns, respectively) shows that employment explains most US growth. In the EU however, employment frequently falls whereas in America it grows. – Productivity growth: considered as the difference between growth of GDP and growth of employment, productivity growth is the cause of the growth of GDP in the EU. Thus, Europe reduces the economic gap between itself and the US by means of high productivity growth, investment and by reducing employment. We can draw important conclusions regarding these two economic zones: – Europe: GDP growth is due to growth in productivity. EU growths are relatively stable. – America: GDP growth is due to growth in employment. US growth rates are more unstable, and some indicators even show decreases for various years. B. Convergence and Catching-up in Production The consequence of Europe’s greater growth is convergence, reduction of the gap. Figure 2 sets out the convergence process. Two indicators are used: GDP per hour worked and GDP per capita. The first expresses productive capacity, the second consumption level. Examination of the economic evolution of America and Europe permits us to draw many conclusions: – GDP per worked hour rises from 59 per cent in 1950 to 91 per cent in 1990. But this convergence in productivity ends in 1990. 11


– Comparison of European and American GDP per capita shows stability between 67 and 75 per cent. – Thus the economic gap between Europe and America in productivity fell until 1990, but the gap in per capita consumption levels was maintained. – Thus the question for the European economy is why the gap between productivity and consumption per capita? – Analyzing the evolution of major European countries such as Germany, France, Italy, Great Britain and Spain (as in Panel B of figure 2), we find an accentuation of the trends: economic convergence is so strong, especially in productivity, that American levels are even surpassed, – Three periods are evident in the economic dynamics of all the represented countries: in 1975, enormous growth and catching-up; the 1980’s, where per capita consumption does not match production, and the 1990’s and after 2000, where the major new American growth is in contrast to Europe’s relative slump. Convergence between the EU and the US, Europe’s catching-up on America, is not only in economic performances but also in economic structures, e.g. in competition and enterprise law. (Wilensky, 1998) Convergence is also occurring in other areas, society and politics, for instance. The US and the EU15 have economies based on capitalist and market structures, and democratic societies with high productivity levels. This permits a system of economic relations devoted to mass consumption, the welfare state and well-being. C. The Gap between Productivity and the Standard of Living Having examined growth trends in Europe and America, and the catchingup and convergence phenomena, it is now of interest to analyze differences between productivity and standards of living. For this we will draw on the conceptual framework set out in figure 3. As many people are aware, salaries and productivity in some EU countries are 12

higher than in the US. (US Bureau of Labor, 2005) Yet European GDP per capita is a third lower than the US figure. Certainly, Europeans work fewer hours per year than Americans, they ‘prefer leisure’ (Gordon, 2002 & 2004). However, a closer look reveals that Europe’s activity rate is 10% lower, the employment rate 15% lower, and the female employment rate 20% lower (OECD, 2003a). Figure 3 shows a double process: – From productivity per employee to standard of living, income drops 47 per cent in America and 51 per cent in Europe. – Europe is lagging behind: productivity is 22% lower and standard of living 28% lower. Other aspects can also be determined from this diagram. European salaries are higher than in the US (+ 5.8 %) and productivity per employee is lower in Europe (-22 %). Health spending is higher in the US (although public funding of this spending is lower), education spending is similar and spending on pensions lower. The result is that social spending in the US amounts to 33% of GDP and to 34.1% in the UE. Consumption of electricity and materials is much higher in the US than in Europe, as is capitalization. Pollution and waste is also higher in the US. The European employment rate (60.2 % of the population between 15 and 64 years of age) is much lower than that of the US (70.1 %). D. Low European Employment Rates and European Competitiveness The lower European employment rate is the origin of the gap between the productivity of the European economy (similar to that of the US) and Europe’s standard of living (a third lower): due to a lower employment rate, European production is 10 per cent less than the US figure, and the proportion receiving a pension is 10 per cent higher (OECD, 2004a) (see figure 3).


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The gap between productivity (GDP per worked hour) and the standard of living (GDP per capita) is the price Europeans pay for the European welfare state, which is generous with the non active. And perhaps it is also the price paid for an economic policy which is not sufficiently efficient to create jobs, favor growth and accumulation and investment of capital. These are average values. Analysis of the European employment rate could also be taken to the level of age, gender and individual country. We find that the lower European employment rate tends to be concentrated in certain groupings and areas: – In younger and older age groups. This is one of the more evident differences in employment patterns between the EU and the US. European unemployment among those seeking their first job and among older exemployees is markedly higher. – Among females; the female employment rate being ten per cent lower than the general rate. Female inactivity and unemployment rates double the general rates. – In the Mediterranean countries. In Italy, Spain, Portugal and Greece, general employment rates are around 50 per cent, female employment rates being around 42 per cent.5 In 1992 the European Commission headed by Jacques Delors published a White Paper on competition, occupation and growth known as the European Growth Initiative (Delors, dir., 1993). Prepared in the context of the resurgence of European vigor following the Single European Act and in the aftermath of the 1975-1985 recession, this initiative placed a priority on employment. Increased employment demands growth and growth demands 5

Eurostat (2005).

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competitiveness. Krugman (1994) responded with a paper that earned him celebrity –competitiveness can be a dangerous obsession, he said. Through a combination of approaches, Krugman’s paper warned of the main European problem: the lower the general employment rates, the higher the unemployment rate. As a consequence, Europe has less productive capacity and higher social expenses. Europe’s problems are its aging population, its low employment rate, especially among woman, both young and old, its high unemployment rates, its low number of worked hours and its limited competition in basic activities (European Commission, many years). The gap between real and potential GDP is an accurate reflection of these economic problems. E. The New European Economy and the New Policy Mix The European economy looks new: a monetary union between 12 MS, a more integrated product market, a new policy mix. As we see, GDP growth fizzled out somewhat but social and territorial cohesion continues to work. The new European economy is also the product of the new European policy mix in the style of the ‘Washington consensus’ and the OECD recommendations. The Maastricht criteria for access to the European monetary union involves strict limits on inflation, interest rates, budget deficit and public debt, unemployment and salary costs. Maintenance of the Maastricht criteria after monetary union is the basis of the Pact for Growth and Stability and of the Stability and Convergence Program (European Commission, DG Economic and Financial Affairs, 2005). The bases of the new European policy mix are the MS: the European level, and the such


institutions as the Council, the Commission and the European Central Bank only work in subsidiary way. In an effort to overcome the basic structural deficits generated by the 1975-1985 recession in the labor market (unemployment), finance (inflation), the public sector (budget deficit and public debt), and partly as a result of the new liberal winds in economic policy arriving from America, the new European policy mix prepared the way for structural reforms, making them more acceptable in a context of stability, cohesion and context. This new European policy mix, national and cooperative, is performing successfully in terms of price and foreign trade stability. Even if the euro exchange rate is not used as a commercial instrument, Europe has a positive current balance. This is undoubtedly an important and positive difference in Europe’s favor as opposed to the US case. However, some EU countries are beginning to show signs of difficulties with the foreign trade balance, including France. The continuity of the dollar shutdown may cause major problems for the EU (European Central Bank, 2005, and Blanchard, Giavazzi, and Sa, 2005). Comparing salaries, the European position was untenable, especially in tradable manufactures –even in comparison with the US, where salary levels are also very high. Maastricht established that MS public deficits must be under 3 per cent of GDP, yet budget discipline is never seriously discussed in proposed reforms of the Stability Pact. In terms of the three sides of the economic triangle, the new European economy and policy mix works well in terms of stability and cohesion, but there

is room for improvement in the area of economic growth (Viñals, 2005). In the short and medium term, the European economy is stable, as are macroeconomic and microeconomic considerations. Social and regional cohesion is also wellfounded, aided by MS social security systems and EU structural funds for regional investment. The problem it seems, is clearly growth and employment. Despite the Krugman (1994) position, productivity and competitiveness are of major concern to certain agents.6 Competition by price, in fact by cost, especially labor cost –hourly salary, has a direct effect on tradable manufactures with a similar level of technology and labor component. (Aiginger and Landesmann, 2002) In fact, although it is less competitive, the EU has a foreign current surplus, whereas the US has a large deficit. (Council of Economic Advisers, many years, and European Commission, many years a). F. The Sources of European Growth: New Economy, Labor Reserves, and Structural Reforms The so called ‘New Economy’ modifies the conditions of growth: capital-technology investment and the innovation capacity of the entrepreneurial system are critical. (Rodrigues, 2002) The New Economy accentuates the role of technological aspects and labor-saving investments, and thus increases the European employment problem and the technology gap with America. (van Ark and al., 2003) This explains why European economic performance was worse after 2000, and why convergence ceased.

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There is a very competitive industry to produce reports on country competitiveness: See some of this excellent products: Conference Board (2005), European Commission (many years), Hughes (2005), International Labour Office (2005), ICON Group International, Inc. (2004), International Institute for Management Development (2004), NTC Research (2004), O’Mahony and van Ark, eds. (2004), Sharpe (2003), US Labor Statistics (2005), and World Economic Forum (2004).

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Figure 4 Policy Mix Performance in America and Europe

Europe’s growth has one main source and a number of secondary sources. The main source is its large unemployed labor force. Thirty-two million additional workers need to be employed to match the US employment rate. The other sources of European growth are productivity-related: technology, leading to more sharply focused research and development investment, and regulation that facilitates competition in factor, product and services markets, especially in labor and industrial relations.7 (OECD, 2003a, Nicoletti and al., 2001, and Baily and Kirkegaard, 2004) This was the purpose of the proposals accorded in 2000 by the European Council in Lisbon: “to become the most dynamic and competitive knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion, and respect for the 7

environment.” (Council of the EU, 2000).8 To realize this “strategic goal for the next decade”, the EU established a program of structural reforms until 2010 to create jobs by ensuring full competition in all markets, generating growth and raising employment. The Lisbon strategy added decisively to European economic policy. The problem is that the EU does not have the instruments to implement this strategy. The MS have a number of instruments but also face the traditional social opposition to changes and no incentives.9 The European economy needs to create employment if it is not only to maintain its current economic conditions with a minimum of growth but also to converge to the US level. Employment is the major challenge facing European industrial restructuring. Globalization and EU enlargement to East and Central Europe will increase relocation problems.

For America an evident source of growth as per Europe is employment, which should be the economy in energy and material consumption, certainly disproportioned and not sustainable. (World Resources Institute, 1997 and 2004) 8 See the Lisbon strategy special website . 9 EU Economic Policy Committee (various years) and European Commission - DG for Economic and Financial Affairs (2005b).

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III. THE EUROPEAN SOCIAL CONDITIONS AND THE EUROPEAN SOCIAL SYSTEM This section will consider five social factors which are related to the dynamics of the economy and which influence European social conditions. These are the population, employment, the labor market, social security and distribution. Figure 5 Employment and Unemployment Rates Dynamics in America, Europe, and Japan, 1960-2005

A. Towards a Stationary Population: The Problems of an Aging Society Europe is heading towards a stationary population. Fertility does not assure reproduction of the European population. What are the consequences of this? Short-term, the process of population aging has already led to relative increases in the 15-64 agegroup, i.e., the potential active population. This is why advanced countries experience an increase in the active population, and perhaps an increase in the numbers in employment also. (Rand Corporation, 2004) The decrease in European birth rates is compensated to some extent by immigration from third countries. As in the US, European immigration has its problems, the main one being the illegal nature of much of the immigration. This makes immigration-related issues a delicate issue, subject to the dictates of what is politically correct. But there is evidence that European social conditions and policies are changing due to the immigration phenomenon. (Eurostat, 2004a and 2004b) Naturally, the scale of this immigration is not only due to the aging Western societies but also to globalization of the world economy, to relatively open borders, social and economic breakdown in the origin countries, and political conditions that do not permit persecution of illegal immigrants. In addition, in Europe with its free internal circulation of citizens, there is a flow between permissive and prohibitive MS. Immigrants tend to enter via the more permissive MS, then make their way to more attractive EU countries. The aging population requires more personal care, leading to increased social services and health spending. (Mc Morrow and Roeger, 1999) The impact of an aging population on the 17


social security systems is important, threatening the base of Western welfare systems. (OECD, 2000) The directly economics-related aspects of social conditions in Western Europe are relatively stable. This is the case of class distribution, salarization rate, distribution by activity sectors, and territorial distribution. The major changes to this situation are brought about by factory closure and relocation, normally to non European countries. B. The Low European Employment Rate The dynamics of employment, the number and proportion of employed persons, are strategic economic and social variables. They affect production capacity and consumption constraints. The relation between those in employment and the population aged 15-64 years, the general employment rate, is low in Europe. The gap between European and US employment rates was as high as 15 per cent in the 1990’s. (Eurostat, 2004a) Figure 5 shows the evolution of EU and US employment rates over recent decades. Over the 1970-1995 period, European employment rates fell from 65 to 60 per cent. Indeed, Europe has only just recovered the initial rate. In the US the situation is the opposite: from 1970 to 2000, the employment rate grew by ten points, later dropping to 70 per cent. As seen earlier, the US economy has a great capacity to create employment. (Wilensky, 1992) The EU economy creates unemployment, growth in GDP being due to productivity gains and catching-up. The employment rate evolves in the opposite direction to its complement, the unemployment rate. What underlies such low employment/high unemployment rates? Is it regulations that militate against job creation, or insufficient growth? And, if so, what is the cause of the shortfall in growth? Over-regulation? Excessively 18

high salaries? (Schettkat, 2003, and Cox and Alm, 2004). Combining age and sex statistics reveals some important details: employment is lower among the younger and older cohorts than among the middle-aged. Among women, the years of highest fertility are the years with the lowest employment rates. In fact, the most serious employment problem is among females of reproductive age. Adding country details to the mix reveals that the main employment problems are among females in Southern European countries, Portugal Spain, Italy and Greece, with employment rates between 42.1 and 47.8 per cent; in the US the figure is 70.7 per cent. C. …and the Permanently High European Unemployment Rate The other side of the employment coin is unemployment, Europe’s main social, economic and political problem. It continues to be high, especially in the afore-mentioned South European countries. The hysteresis effect meant that unemployment stayed high after recession had ended (OECD, 2002). In this situation, it is clear that it is necessary to move away from passive policies e.g., subsidies, to active policies that improve the skills and employability of the unemployed. The maintenance of employment rate differentials between countries reflects the immobility of the European labor force. Calls for labor market reforms to favor flexibility are widespread. The unemployment problem has led to many interventions in the form of modified work contracts. That labor market reform is needed seems unquestionable. However, in social and economic policy the gap between statement and action, objectives and results, is vast. Analysis of unemployment –and thus Economic


Policy Analysis and proposals– was largely changed with the introduction of: The Philips Curve, originally a relationship opposing unemployment and price inflation. This offers a range of possibilities to policy makers: selecting the combination of unemployment and inflation they wish to explore. The notion of a natural unemployment rate, proceeding to the more neo-classical approaches, and of a Non-Accelerating Inflation Rate of Unemployment (NAIRU) and a Non-Accelerating Wage Rate of Unemployment (NAWRU). Calculations of these rates shows a substantial difference from the effective unemployment rate that the policy mix should achieve (European Commission, many years).

American figure (US Bureau of Labor, 2005, OECD, 2005b, and ILO, 2005). As we know (see figure 2), hours worked in the EU15 are also fewer than in the US. This is why European productivity per employee remains below the American level. Related to salaries, the European questions are as follows: Figure 6 Employment Rates in a Range of Countries

D. Labor Market and Salaries: Immobility and Inflexibility The European labor market is not one: nor indeed is it even 25; for not only is each state a case apart, in many cases there are also intra-state regional labor markets. European workers are in effect decidedly imm o b i l e .10 This contemporary immobility is in contrast with previous times when European immigrants were numerous, not only in America but also in other European countries, even after the Second World War. Now immigration is a matter of non-EU countries. Salary inflexibility is the other threat to the European labor market. The concept of salary flexibility – either upward in response to growth or downward with drops in productivity, or to business, supply and demand factors is not accepted by European unions. Under these two problems, Europe cannot aspire to become an optimum monetary zone, despite the monetary union in existence since 1999. The hourly salary in some European countries surpasses the average 10

Only 1.6 per cent of Europeans live in a different country to the one in which they were born (OECD, 2003b).

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– To what extent are salaries linked to the dynamics of productivity? – High personal taxation rates and social security payments have the effect of raising salaries, especially in less well paid categories, thus limiting employability. In this light, the European Commission has been calling for some time now on MS to limit social welfare payments in the case of the low paid. EU productivity downturns are structural in nature. The bulk of the deterioration results from an outdated and inflexible industrial structure which has been slow to adapt to the intensifying pressures of globalization and rapid technological change (Denis and al., 2005). The EU’s productivity problems are driven by the combined effect of: – An excessive focus on low and medium-technology industries (with declining productivity growth rates and a globalization-induced contraction in investment levels); – An inability to seriously challenge US dominance in large areas of the ICT industry, as reflected in the relatively small scale of its ICT production sector; and finally, – Its apparent slowness in reaping the productivity enhancing benefits of ICT in a range of ICT-linked industries, although measurement issues severely hinder assessment of the gains from ICT production and diffusion. Most labor market policies aim to flexibilize access to and exit from employment. It is interesting to see how each MS labor market performs. Better results are obtained by countries in which labor market reform began early and in which active rather than passive policies were applied. This is the case of the United Kingdom and the Baltic countries, respectively. (Schulmeister, 2000, and Madsen, 2002). Undoubtedly, labor market reform is the main challenge in European States. The power of the unions limits 20

changes in a system designed under conditions of full employment and lower levels of social protection. E. The Social Security Systems The European welfare state is based on redistribution of income produced by the tax and social security system (SSS). The MS SSS are guided by distributive criteria and not by capitalization. In Europe, there is a multiplicity of State SSS: each system is independent but all are similar, in that their function is to redistribute income between the active and inactive population. European SSS are currently undergoing reform, with introduction of private and capitalization criteria. But the task is beyond the capacity of the financial system as the funds needed for capitalization would be enormous. (Feldstein and Siebert, eds., 2002, and Wolff, 2002b) Furthermore, SSS capitalization involves a political obligation to develop a non contributive fund, which i s difficult to finance. Figure 7 Social Expenditure and Pensioners in a Range of Countries


Data Data for 2004 from Eurostat (many years b), OECD (2004 and 2005b), and US fedStats (2006).

This explains the relative stability of the contemporary SSS. The aging population will accentuate the SSS financing problem. The SSS redistributive function will be more evident and this will make capitalization more difficult. (Krugman, 2005) In contemporary economies the financial impact of the SSS is huge. Public pensions represent just slightly less than a quarter of GDP, and those receiving pensions represent 50.7 per cent of the population aged 15-64 years (see figure 7 and Atkinson, 2000) F. Distribution and Re-distribution: Trends in Stocks and Income What are the trends in (re)distribution? The primary distribution of income follows the trends of increased production and productivity to bring about an absolute increase in

salaries and profits, leading to a widening of the gaps between rich and poor and greater inequality in income and stock distribution. US11 and European data (Atkinson, 2002) provide evidence of a double process: an increased gap in stock distribution and a decreasing gap in final income distribution. What are the distributive impacts of economic development and of the policy mix on distribution? Are there changes in social structures due to the new (European) economy, the new (European, economic and social) policy (mix)? The ratio of total income of the highest-earning 20 % of the population (top quintile) to that received by the lowest-earning 20 % (lowest quintile) evolved for EU15 from 5.1 in 1998 to 4.4 in 2003 (European Commission, 2005a). There are different ways to fight poverty. (Alesina and Glaeser, 2005) As in the US, EU15 population riskof-poverty is decreasing. Those with an equivalized disposable income set at 60 % of the national average equivalized disposable income before social transfers represented 26 per cent in 1995 and 24 % in 2001. If we consider income after social transfers the figures are 17 per cent in 1995 and 15 per cent in 2001. (European Commission, 2005a). Remember the scale of the redistribution impact is 9 per cent of disposable income. G. Discussion on the American/ European Economic/Social Model A typical American and European discussion is along the lines of does America’s/Europe’s Economic/Social model/reality provide better economic performance/well-being? The basis of this discussion, whether among lay people or academics, is the idea that

11

See Katz (1990), Jones and Weinberg (2000), Karger and Stoesz (2001), Wolff (2002a), Appelbaum, Bernhardt & Murname (eds.) (2003), and Baumol and Others (2003).

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America performs better economically whereas Europe wins in social terms. European catching-up on America ceased in the 1970’s in terms of GDP per capita and in GDP per employee after 2000. The gap between GDP per hour of work and GDP per capita finances Europe’s lower employment rate and its social protection. With productivity per employee at 20 per cent lower than that of the US, Western Europe works less time and supports a higher unemployed, inactive, retired and pensioned population, thus having a per capita GDP which comes in at a third lower than the American. EU 15 performs less well than the US in economic terms, its production per employee and per capita thus being lower; its social protection and redistributive institutions lead to a more egalitarian final distribution of the lower consumption levels. Social cohesion is perhaps greater in Europe, but at a consumption level which is lower than the US. As we shall see, European Social Policy is not one, but 15, and even 25 with the new MS. And what is most surprising about these social policies is their similarity despite their independence from one another. And what we find in social policy, we also find in education and in health.12 The major contemporary question is whether the ‘European social model’ is the problem or the solution? The ‘European social model’ is a consequence of the special economic and social conditions existing in Europe after the Second World War: a major social conflict arising from the division of Europe into two political, social and economic areas. (Aiginger, 2004). 12

Europe may aspire to American economic performance; America may aspire to match Europe’s social cohesion. However, of course, the economy and society are intertwined: you cannot choose the American model for economic issues and the European for the social dimension. It is probably the financial impact of the ‘European social model’ that underlies the European shortfall with respect to American standards of production and living. IV. ON EUROPEAN POLICIES

SOCIAL

Some aspects of European social policy will be considered here: the structures and competence of European MS social policies, the impact of European economic policy, contradictions with other policies, new paths in European development and European policies. A. Structures and Competences of Social Policy in Europe According to the sovereignty and subsidiarity principles, the EU has limited competences in social policy.13 Unions, salaries and SSS are all matters for the individual MS. Nevertheless the application of the non discrimination by nationality principle to labor gave rise to the second economic liberty: the free circulation of salaried workers, latter extended to include the entire European citizenship as provided for by the European Union Treaty (1993). To realize this principle, coordination of MS SSS went ahead under the terms of international labor law. Now Europeans are covered by the SSS of their own MS in all other

Estevez-Abe, Iversen, and Soskice (2001) and Michie and Sheenan (2003).

13

Thus issues of sovereignty are in principle excluded. When the expansive momentum of integration attributes further fields to the EU, unanimity is need. Subsidiarity orders the MS to develop itself first the EU objectives.

22


MS, and can choose to collect and spend their pensions in the EU country of their choice. The EU also has important competences regarding safety conditions at work, in professional education, and in equal treatment for both genders. The European Commission applies its administrative power to many other matters, including poverty and lower income groups (compensative approach), cancer and personal rights (demonstrative approach). EU social policy issues are set out in tables 2 and 3. The major issues of social policy (pensions, health, and education) and their orientation (expansive, regressive, deregulation, privatization, etc.) remain at State level. Also, if there is any new trend in Europe regarding allocation of competences in social policy matters, it is from top-down, i.e., from MS to regional and local level, as opposed to bottom-up, from MS to EU. In Europe, social protection is universal, and mainly covered by the MS SSS. Each MS fixes citizens’ entitlements and also funding mechanisms. No harmonization is needed, except in the area of working conditions affecting manufacturing costs. Thus some important social areas, as well as immigration policy and family policy, remain underdeveloped: population, housing policy, social compensatory services may not exist in some European countries. however, social dumping is not occurring, MS competences in the labor market, salaries, and SSS are not managed to improve the MS share of European manufacture. The combination of all these questions could be potentially explosive: the European Union is suffering from a social deficit. The EU, rather than an institution with an interest in social matters and people, should really be

seen as focused on economic and State interests. However, although the European Union continues to fail to exercise major social policy(ies), the citizens of Europe are highly enthused by the European integration process. B. Social Policy, Economic Policy, and other EU Policies The EU plays little major role in social policy and this has no means of change. There is one exception to this. The EU needs to implement a strong employment policy –unemployment being Europe’s most pressing problem. And it is at precisely EU level where this policy can best be implemented. However, this policy has had few immediate or visible effects, and perhaps would require such politically difficult measures as policies aiming to strengthen competitiveness. This unpopularity is what underlies the reluctance to undertake structural reforms in Europe. (Bourrinet and Nazet-Allouche, 2005) The main objective of European economic policy is the same as that of European social policy: employment. And the way to achieve employment is through growth, reform of the labor market, making it more flexible and promoting labor mobility and salary flexibility, and through increasing competition in product and service markets. In socio-political debate, economic policy frequently appears to be in opposition to social policy: resources should be assigned elsewhere. In fact, the opposition is not between all economic policy and all social policy, but between a style of economic policy and a style of social policy. However, can an orthodox economic policy favor an innovative social policy? The aim of economic policy is to maintain growth at a level between 2 and 4 per cent per annum. Stabilization is the second Western 23


objective. In a micro sense (price stability) and in a macro sense (counter cycle), this means no inflation and no unemployment. (Boyer, 2002, and Solow, dir., 2002). Orthodox policy mixes are

combinations of no public deficit, veritable cost, no price inflation, no tax bands, privatization, responsibility, and private-sector criteria in public management.

Table 2 European Union Social Policies Priorities and Objectives  The Social Agenda Employment  European employment strategy (EES)  Employment analysis  EURES: European employment services  Local development European Social Fund  European social fund (ESF)  EQUAL: Community initiatives  Innovative measures Working conditions and work organizations  Social dialogue  Corporate social responsibility  Labour law and work organization  Health & safety at work  Free movement of workers  Coordination of social security schemes

Inclusive Society  Social situation and demography  Social inclusion  Social protection in the EU  MISSOC: Social Protection in the Member States  Anti-discrimination and Relations with Civil Society  Civil Society  Disability issues Gender Equality  Equality between women and men Horizontal activities  Enlargement  International Affairs  Knowledge society  Evaluation  Socio-Economic Research

Source: European Commission - Directorate General of Employment, Social Affairs and Equal Opportunities.

C. The Lisbon Strategy for Structural Reform, Competitiveness, and Employment Freedom to make choices within economic policy is limited. In advanced countries the de-industrialization crisis was seen as a crisis of supply, thus economic policy turns to the supply side and to monetarism. The new Western rightwing political orientation works to consolidate this policy. The fall of the Berlin wall and real socialism

24

around the world, and the move towards a global economy make the new economic policy unassailable. In fact there is a program of Economic Policy: Europe needs structural reforms permitting it to increase employment and competition. Labor market reform to activate employment policies was among the essential features of this structural policy. Another major component was support for research and development investment.


25


26


The key elements of the Lisbon strategy are as follows: Effective Internal Market: to complete the Single European Act. Free and fair trade: to open the European economy to the world. Better regulation: to improve European governance. Improving European infrastructure: a twofold objective, competitiveness and employment. Investing in Research and Development - the New Economy. Boosting innovation Creating a strong industrial base: the basis for competitiveness. More and better jobs: to increase employment. Adaptable workforce: mobility and flexibility in the labor market. Better education and skills: overcoming the challenges in education.

Figure 8 Productivity & Standard of Living in a Range of Countries

The Lisbon Strategy does not set individual targets for economic performance. However, a sound economy is a precondition for achieving its objectives. That is why particular emphasis has been placed on the Stability and Growth Pact and on structural reforms intended to raise the growth and employment potential of the Union. The Lisbon approach implies: That if the Lisbon measures are implemented against a sound macroeconomic background, an average growth rate of around 3 per cent per year should be a realistic prospect. That Member States’ budgets are kept close to balance or in surplus over the medium term, ensuring the longterm sustainability of public finances. That public expenditure is redirected towards increasing the relative importance of capital accumulation (physical and human) and supporting research and development, innovation,

Data from Eurostat (2006) and US fedStats (2006).

and information and communication technology. The Lisbon objectives in terms of employment, as expressed in the

27


European Employment Strategy, cover the three overarching objectives of full employment, improving quality and productivity at work, and strengthening social cohesion. This in specific terms means: – An overall employment rate of 70 per cent in 2010 (67 per cent in 2005). – A female employment rate of 60 per cent in 2010 (57 per cent in 2005). – An employment rate for older workers (aged 55-64) in 2010 of 50 per cent. – An increase by 2010 of five years in the average age at which people leave the labor market. – Availability of childcare by 2010 for 90 per cent of children between 3 years and compulsory school-going age, and 33 per cent of children under 3 years. For MS four priority areas were identified: a) Attracting more people into employment; b) Increasing the adaptability of workers and enterprises; c) Investing in human capital and making life-long learning a reality; and d) Improving the implementation of reforms through better governance. (European Commission, 2003 and 2005) But development of the Lisbon strategy has been very slow due to Euro-pessimism, the preparations for the EU enlargement to the East,1 the difficulties in transatlantic relations over recent years, and the growing differences between the MS. The need to pursue the Lisbon strategy was widely agreed. However, the reaction against reforms in Germany, France and other countries hindered progress. Two official reports propose a relaunching of the Lisbon strategy, first on EU budget prospects (Sapir, dir., 1

2003), second on European economic reforms (Kok, dir., 2004). D. The Common Task of European Economic Policy and European Social Policy: The Employment There is a European consensus: employment is Europe’s priority. The problem is how to solve it: by growth or by regulation, by promoting economic dynamism or protecting social benefits? When the approach has been settled, they key will be promotion of the conditions which will increase growth. And again, a question will arise: what is the correct balance between EU and MS action? This is a paradigmatic situation of social policies: in Europe there is unanimity regarding analyses and objectives, but there is no means to act, to progress. The central role of employment policy and structural reforms is evident yet there is no action at MS or EU level. Thus progress is extremely slow (see figure 6). In this situation, there is no contradiction between the objectives of economic policy and social policy –i.e., structural reform and employment. But the problem is the limitations of social policies: their entry into conflict with other sector policies, the trade-off between: – Social policy and regional policy: both serve for cohesion and inclusion objectives. Yet, as seen in table 3, the financial impact of regional policy is greater than that of social policy. Social policies are the competence of MS. – Social policy and industrial policy: The EU does not have a strong industrial policy. There is an implicit industrial policy due to competition policy and sector difficulties. European industrial policy comprises foreign

The new MS are in transition to some ports: merchant eonomy, political democracy, and EU rules. (van Ark and Piatkowski, 2004)

28


protection, social compensation and the common actions supporting research and development. – Social policy and trade policy: Social protection needs foreign protection but trade policy exigencies affect the employment and thus social cohesion. (Baily and Lawrence, 2004, and Baily and Kirkegaard, 2004) However, consensus exists concerning the need to complete the traditional social policies (passive, social security, unemployment) with the advanced social policies (active, employment and specific by age, sex,

and condition: aging, poverty, low income, less skilled, immigration). The more active employment-oriented policies produce the best results in employment creation. V. Conclusions We present our conclusions in the form of a series of epigraphs. The reader is asked to bear in mind the contextual setting for each. The conclusions are set out in three separate fields and total thirty epigraphs.

On Europe and the EU I. Europe and Social Policy: Identity questions. Problems: created by non identity. Solutions: will emerge from complexity, from preservation of the small and the different. II. The EU’s objectives are peace, democracy, personal, human and civil rights, non discrimination, growth, competition, welfare, sustainability. An Economic Union from 1956-7, a Political Union from 1991-3, and a Monetary Union from 1999. IIII. The unique nature of the EU: Inter-State (international) origins and Direct (domestic) effects. IV. The first priority in EU development is the Economy. Procedural patterns in the EU: State consensus, Gradualism, non MS nationality discrimination, subsidiarity. Instruments of the EU: law, budget: 1% GDP. V. The EU had a number of ‘deficits’: democratic, social and administrative. There is also a policy deficit, especially in economic policy and in social policy. VI. The EU: a Non-Identified Political Object or a Post-modern State? It is an Open and Transparent new level of Administrative Policy. VII. There is an EU Contradiction between Enlargement (more countries, the World) and Intensification (concentration and effectiveness of policies). VIII. 25 MS and maybe more: the economic, social, cultural and politic differences and interests may be so large as to sterilize the common purposes. IX. There are great problems associated with EU dynamics. On the European Economy and the Economic Policy I. Economic Dynamics: Growth in GDP, Employment Stagnation and Catchingup in Productivity. II. Dialectics of the EU vs US: EU: less growth, more social cohesion and stability. US: greater capacity, especially in technology and economics, more competition. 29


III. Analysis of the Gap between Productivity (GDP per hour worked US=100, EU= 78) and Standard of Living (GDP per capita US=100, EU= 48.7). The gap EU/US in economic performance is important and growing. IV. The Sources of European Growth: Increasing Employment Rate, Structural Reform and Integration of Economies and Policies. V. The New Western Policy Mix: from correcting Structural Deficits (unemployment, inflation, public deficit and foreign trade deficit) to a European Monetary Policy, and towards a Cooperative European Economic Policy. VI. A New European Economy: more integrated, with a growing European Economic Policy. VII. Is there an Optimal Monetary Area? Impact of European Monetary Union on the Labor Market and on Social Policy. VII. The European Labor Market: Geographical Immobility and Salary Inflexibility. There are at least 25 MS labor markets, although more since there are regional and city-specific markets. On European Society and Social Policies I. Europe vs America: Dreams and Nightmares, Models and Realities, Ideas and Analysis. II. The Central position of the MS (25) in European Social Policy and Welfare. III. Does Social Cohesion exist? Is the EU a Political Union or is it tending towards an Alliance of Civilizations? It may end up where it began: a Free Trade Area. IV. The Structure of European Employment: lower participation by Women, and Younger and Older Workers. V. The American Job Machine vs the European Unemployment Machine: What are the consequences of American Dynamism and European Protectionism? VI. (Re)distribution affects 4.5 per cent of GDP: this offsets concentration but poverty survives for 5/15 per cent of the EU MS population. VII. The central role of employment policy in European developments and policy. VIII. The Lisbon Strategy: Structural Reforms of factor, product and service markets to generate employment, growth and social cohesion in the most economically competitive and high performing area of the world. IX. Equilibrium between MS Social Dumping and EU Social Harmonization. X. From Welfare to Workfare? From passive to active employment policies. Innovation and good practices in MS. XI. The European Social Model: SSS (public health and pensions), education, labor market regulation. XII. Complementarities in European policy objectives: growth, employment, stability, social cohesion, domestic protection and foreign trade protection, sustainability, non-discrimination. XIII. Trade-off between European policy instruments: EU vs MS, regulation vs budget, economy vs social, social vs industrial, social vs regional. References Aiginger, Karl, 2004, “The three tier strategy followed by successful European countries in the 1990s”, International Review of Applied Economics, October, vol. 18, no. 4, pp. 399-422. 30


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