The Unnecessary European Social Model - Chatham House

1 downloads 0 Views 66KB Size Report
Jan 1, 2006 - As to the first, an efficient (read slim) welfare state is a .... database for labour market reforms (LABREF) counts 10 reforms in Germany in the.
IEP BN 06/01

January 2006

The Unnecessary European Social Model Benedicta Marzinotto, Chatham House

Summary •

From 19 to 21 January 2006, the European ministers for Employment and Social Affairs meet to discuss the relationship between the European Social Model and competitiveness.



A single version of the welfare state for the EU is both unnecessary and undesirable.

The economic case for European social policy

coordination has not been made. •

At present market forces have not led to welfare convergence and there is little sign that they will in the future if differences between varieties of ‘capitalism’ in the EU persist.



Any welfare reform should be designed in a fashion that meets the needs of individual countries. Across-the-board retrenchment is not the answer. Reformers need to improve the relative flexibility of labour market institutions while respecting national specificities and preferences.



Reform plans should foresee incentives and compensations from vested interest groups. They should also be implemented in a consistent and transparent fashion to avoid an unintended weakening of consumer and business confidence.

The unnecessary European social model Benedicta Marzinotto

IEP BN 06/01

Setting the scene

When the European Union's political leaders meet to discuss the European Social Model on 19 January 2006, they should keep two points in mind. First, the imposition of a single welfare state model is unjustified from an economic perspective and undesirable politically. Welfare states in the EU are national prerogatives, and they should continue as such, considering that EU member states differ from each other with respect to demographic profiles, labour force structures and sustainability of public finances – not to mention social preferences and values. In this respect, ’Social Europe’ remains a misnomer. Second, any discussion about the compatibility of the European social model with competitiveness is unlikely to lead to groundbreaking results. The reality is that interfirm competition is about much more than relative non-wage labour costs, state spending or welfare state institutions. It is about the quality of infrastructures and human capital, innovation and research, working conditions and work-time flexibility, corporate culture and managerial leadership. The challenge is not to find the perfect social model for a competitive economy. Rather, it is to find formulas for competitiveness that can maximize the comparative advantages of different social contexts. EU institutions’ insistence on the need to come up with a model for a Social Europe rests on the assumption that convergence towards one model is desirable both economically and politically. As to the first, an efficient (read slim) welfare state is a guarantee for fiscal discipline in the medium to long run. And indeed, the economic philosophy behind the whole EMU project has been concerned with the provision of a sound macroeconomic policy framework. Secondly, the imposition of fiscal discipline through a hard-law instrument such as the Stability Pact has forced welfare retrenchment in many Eurozone member states. Consequently the EU now feels responsible for providing social policy guidelines that support European countries in dealing with the effects of austerity, whether or not these are considered positive or negative.

2

The unnecessary European social model Benedicta Marzinotto

IEP BN 06/01

The e conomic argument against social policy coordination

If the insistence of the EU on social policy coordination is perfectly understandable, there are no empirical economic arguments that support the need for it. Coordination would be desirable in the presence of economies of scale and spill-over effects. It might be argued that it is efficient to have similar welfare institutions in the EU that serve a large number of citizens. It would allow the exploitation of economies of scale. Reasonable though it may sound, however, the argument is not supported by the evidence. Small countries have a better redistribution record than large countries. They have proved better able to reduce poverty, protect citizens against risks such as unemployment and reward labour market participation. This is probably because in smaller entities local information is more easily available – this is effectively an argument in favour of social policy decentralization. Another argument put forward in favour of coordination in social policy rests on the idea that extreme diversification in welfare provision within a single European market would have spill-over effects, of which the most dreaded is social dumping. But here again, there is little evidence of a race-to-the-bottom of welfare states in the EU. To put it differently, the rapid internationalization of national economies has not led to convergence on one welfare state model, either with regard to size – measured as the proportion of GDP devoted to social spending – or in terms of its composition (with the exception of a mild harmonization in the area of social assistance and unemployment benefits). The fact that market forces have not induced convergence on one welfare model also has some implications for the relationship between social security and competitiveness. If it were true that, by pushing non-wage labour costs up, generous welfare states represented a constraint on competitiveness, then recent years should have witnessed retrenchment across the board as member states had to face the consequences of the rapid and massive internationalization of the economy. But this is not the case. This seems to suggest that the relationship between welfare provision and competitive performance is a complex one, at best. There are even more extreme cases where the generosity of social protection has been associated

3

The unnecessary European social model Benedicta Marzinotto

IEP BN 06/01

with above-average export performance. Scandinavian countries are a case in point, considering that, first as members of the European Monetary System (EMS) and now of Economic and Monetary Union (EMU), they have been unable to improve competitiveness using the easy instrument of the exchange rate. Flexibility instead of retrenchment Nevertheless, in the last three years or so socio-economic contexts have changed in a direction that indicates that flexibility of non-wage labour costs is a better instrument to respond to competitive challenges than unconditional cuts to payroll taxes. In the 1990s, most EU countries benefited from wage moderation thanks either to formal income policy agreements or to the tacit support of trade unions. With wage costs kept to a minimum, it was inevitable that non-wage labour costs were blamed for the EU economy’s disappointing competitiveness record relative to that of the US. But wage militancy has recently regained lost ground, albeit with some important differences between sectors. Rather than being an excuse for intervening more dramatically on social security contributions, the latest developments support the argument that flexibility is what welfare reform should aim at. For example, there is certainly a need to focus on education and training. In Germany, the rigid distinction between high-skilled and low-skilled workers that constrained horizontal mobility had made workers extremely sensitive to cyclical unemployment. Measures introduced in 2004 that aim to modernize the national training system should improve the situation, but further reforms are needed. The difficult road to welfare restructuring: incentives and good communication Welfare restructuring is thus preferable to retrenchment, but it is not necessarily easier. The benefits from welfare reform tend to be diffuse and visible only in the long term, whereas its costs are concentrated on the same generation of wage earners that would pay for implementing reform but miss the benefits from it. Where reform is regarded as necessary – and the need for it is not so obvious – then any realistic programme should incorporate a number of incentives and compensations. Wage earners have to see the advantages of reform and be compensated for the burden that is unavoidably imposed upon them. At the same time, labour market outsiders and youth should be mobilized in support of reform.

4

The unnecessary European social model Benedicta Marzinotto

IEP BN 06/01

Up to now, things have not gone well. A system of incentives and compensations has been mostly lacking in previous reform plans; similarly, in the rhetoric there has been an unnecessary attention to efficiency that has left issues of equity and fair play in the background. As a result, national reforms have been managed in such a timid and inconsistent way that their immediate tangible effect has been to undermine consumer confidence, creating uncertainty about the future. This happened in Germany, where the recent reforms in pension, healthcare and unemployment benefits induced citizens to save above the necessary level: net household savings grew rapidly, from 6.3% of GDP in 1999 to 7.1% in 2003. This had detrimental effects not only for investment ratios but also for national public accounts. At the same time, it is not necessarily true that all EMU countries need reform. Large countries such as Germany and Italy appear to be doing worse than small countries as far as growth rates and competitiveness indicators are concerned. But the public debate tends to ignore the fact that many labour market reforms have been implemented in both those countries. The EU Commission’s newly compiled database for labour market reforms (LABREF) counts 10 reforms in Germany in the year 2004. Germany’s Hartz IV reform package, which came into force at the beginning of 2005, contains measures that improve flexibility and others that reduce the generosity of unemployment benefits to limit the incidence of long-term unemployment. However, it may take a while until reforms finally deliver. Despite receiving the title of sick man of Europe in 2005, Italy has not been less active. In 2004, the government implemented 13 labour market reforms. This has accompanied a change in the structure of employment. Short-term contracts have prevailed, leading to a steep rise in the labour participation rate that bodes well for the medium-term sustainability of the welfare state. Even if the public debate revolves around the limits of the Italian welfare state, in fact the country’s most serious struc tural problems concern product and capital rather than labour markets. The way forward

To conclude, it is unrealistic to think of one European social model that fits such diverse systems as those of the different member states. Moreover, welfare state reform is not necessary everywhere; thus it is important to identify with precision and

5

The unnecessary European social model Benedicta Marzinotto

IEP BN 06/01

certainty who needs it and who does not. Once established that some welfare restructuring is required, implementation should follow a consistent path. Public opinion should be informed of the benefits and costs of reform and made aware of the fact that it is not only about efficiency. Finally, policy-makers need to conceive compensations for losers (i.e. wage earners) and incentives for labour market outsiders (e.g. youth and knowledge workers) who remain largely unaware of their rights, thus falling short of exploiting their mobilization potential.

Benedicta Marzinotto received her doctorate in Political Economy from the London School of Economics and is currently Research Associate at Chatham House and Lecturer in Political Economy at the University of Udine, Italy.

Chatham House (The Royal Institute of International Affairs) is an independent body which promotes the rigorous study of international questions and does not express opinions of its own. The opinions expressed in this publication are the responsibility of the author. © The Royal Institute of International Affairs, 2006. All rights reserved. This material is offered free of charge for personal and non-commercial use, provided the source is acknowledged. For commercial or any other use, prior written permission must be obtained from the Royal Institute of International Affairs. In no case may this material be altered, sold or rented. Contact: Paola Subacchi, Head, International Economics Programme, [email protected] Chatham House 10 St James’s Square London SW1Y 4LE T: +44 (0) 20 7957 5700 F: +44 (0) 20 7957 5710 www.chathamhouse.org.uk Charity Registration No: 208 223

6