DEEPENING THE EMU: HOW TO MAINTAIN AND DEVELOP THE EUROPEAN SOCIAL MODEL? A STUDY FOR THE FEDERAL CHANCELLERY OF AUSTRIA Sofia Fernandes and Kristina Maslauskaite Foreword by Jacques Delors OCTOBER 2013 STUDIES & REPORTS 101 The authors thank Yves Bertoncini (Director of “Notre-Europe-Jacques Delors Institute – NE-JDI”), Marjorie Jouen (Adviser of “NE-JDI”), Maria João Rodrigues (Member of the Board of Directors of “NE-JDI”) and Eulalia Rubio (Senior Research Fellow at “NE-JDI”) for their valuable comments and ideas, which helped to improve the quality of this study. The authors are grateful to the following experts for the fruitful exchange of views on the social dimension of the Economic and Monetary Union: Pervenche Berès (Chair of Committee on Employment and Social Affairs, European Parliament), Muriel Lacoue-Labarthe (Advisor for European and international finance affairs of the French Minister of Finance and Economic Affairs Pierre Moscovici), Philippe Pochet (General Director of the European Trade Union Institute), Franck Vandenbroucke (Affiliate Professor to the Den Uyl Chair at the University of Amsterdam) and Laurence Weerts (Member of Cabinet of Commissioner for Employment, Social Affairs and Inclusion Laszlo Andor). This paper benefited from a discussion held at the Federal Chancellery of Austria on 6 March 2013. We are grateful to participants, in particular to Dr. Stefan Imhof and Dr. Christa Peutl for their contributions to discussions held on that occasion. We are grateful to Marie Billotte for diligent and effective research assistance in the preparation of this study and to Emanuel Gyger for the final revision of this publication. The views expressed in this study are those of the authors and do not necessarily reflect those of the contractual partners DEEPENING THE ECONOMIC AND MONETARY UNION: HOW TO MAINTAIN AND DEVELOP THE EUROPEAN SOCIAL MODEL? A STUDY FOR THE FEDERAL CHANCELLERY OF AUSTRIA Sofia Fernandes and Kristina Maslauskaite Foreword by Jacques Delors DEEPENING THE ECONOMIC AND MONETARY UNION: HOW TO MAINTAIN AND DEVELOP THE EUROPEAN SOCIAL MODEL? TABLE OF CONTENTS FOREWORD 10 EXECUTIVE SUMMARY 14 INTRODUCTION 17 PART I THE STATE OF SOCIAL EUROPE TODAY 22 1. Welfare diversity and the european social model 23 1.1. Typology of welfare state regimes 23 1.2. Mapping out welfare diversity within the EMU 27 1.3. European Social Model: more than just a common denominator 31 2. European social policy before the crisis 34 2.1. A brief history of Social Europe 34 2.2. Europe 2020: an integrated political agenda for Europe’s future 38 3. The impact of the new economic governance on employment and social policies 40 3.1. The coordination of employment and social policies in the new economic governance framework 41 3.2. A differentiated impact depending on the situation of each member state 44 3.3. The impact of reinforced fiscal surveillance on national social expenditure 46 DEEPENING THE ECONOMIC AND MONETARY UNION: HOW TO MAINTAIN AND DEVELOP THE EUROPEAN SOCIAL MODEL? 3.3.1. Short-term impact on social spending 48 3.3.2. Long-term viability of social protection systems 48 3.4. Socio-indicators in the scoreboard of the Macroeconomic Imbalances Procedure 50 3.5. The new crisis resolution instruments 52 4. The impact of the global economic crisis on EU welfare states 55 4.1. Growing divergences between member states 55 4.2. Social policies as the adjustment variable in the euro area periphery 61 4.3. The crisis as a catalyst of pension and labour market reforms 66 PART II THE SOCIAL DIMENSION OF A GENUINE ECONOMIC AND MONETARY UNION 71 5. Why must the EMU have a social dimension? 72 5.1. A case for a reinforced social dimension for the EU28 72 5.2. Reasons for a new EMU’s social dimension 74 5.2.1. Functional arguments: a social dimension for a more sustainable EMU 74 5.2.2. Political arguments: a social dimension for a more legitimate EMU 76 5.3. Connecting Social Europe to EMU’s social dimension 77 6. EMU’s reinforcement: where are we heading? 80 6.1. Main challenges for the EMU today 80 DEEPENING THE ECONOMIC AND MONETARY UNION: HOW TO MAINTAIN AND DEVELOP THE EUROPEAN SOCIAL MODEL? 6.2. Policy choices for the future of the EMU 83 7. Scenario A 86 7.1. Assumptions 86 7.2. EU/EMU policy initiatives 89 7.2.1. Fiscal and economic union 89 7.2.2. Banking union 92 7.2.3. Political union 94 7.2.4. Social dimension 95 7.3. Pros and cons of scenario A for the general functioning of the EMU 98 7.4. Impact on national welfare states 100 8. Scenario B 104 8.1. Assumptions 104 8.2. EU/EMU Policy initiatives 105 8.2.1. Fiscal and economic union 105 8.2.2. Banking union 110 8.2.3. Political union 111 8.2.4. Social dimension 113 8.3. Pros and cons of scenario B for the general functioning of the EMU 114 DEEPENING THE ECONOMIC AND MONETARY UNION: HOW TO MAINTAIN AND DEVELOP THE EUROPEAN SOCIAL MODEL? 8.4. Impact on national welfare states 118 9. Scenario C 121 9.1. Assumptions 121 9.2. EU/EMU policy initiatives 125 9.2.1. Fiscal and economic union 125 9.2.2. Banking union 132 9.2.3. Political union 132 9.2.4. Social dimension 133 9.3. Pros and cons of scenario C for the general functioning of the EMU 139 9.4. Impact on national welfare states 142 CONCLUSION 145 REFERENCES 156 ON THE SAME THEMES… 163 AUTHORS 164 DEEPENING THE ECONOMIC AND MONETARY UNION: HOW TO MAINTAIN AND DEVELOP THE EUROPEAN SOCIAL MODEL? LIST OF BOXES, GRAPHS AND TABLES Table 1 Types of welfare wtate in Europe 25 Figure 1 Social protection spending in EMU countries as % of GDP, 2010 28 Table 2 Main functions of social expenditure in EMU countries as a % of total public spending, 2011 29 Figure 2 The weight of social contributions on labour costs, 2011 30 Figure 3 Strictness of employment protection – individual and collective dismissals (regular contracts), 2010 31 Figure 4 Expenditure on social protection in EU27, UK, Ireland, China and US 32 Box 1 Social Europe: financial instruments 37 Box 2 Europe 2020 Strategy 39 Box 3 The European Semester 41 Table 3 Situation of EU countries concerning fiscal and macro-economic surveillance (2013) 45 Figure 5 Trends in unit labour costs among ‘non-convergent’ countries (Index 2000=100) 50 Box 4 Macroeconomic Imbalances Procedure Scoreboard 51 Box 5 The instruments of EMU’s crisis resolution capacity since 2010 53 Figure 6 Divergence in economic performance (measured by output gap in selected countries) 57 Figure 7 Unemployment Rate (for age groups 15-74, annual average) a) Unemployment rate in EMU “periphery” 58 b) Unemployment rate in EMU “core” 58 Figure 8 People at risk of poverty or social exclusion (% of total population) 59 Figure 9 Final expenditure of households a) Final expenditure of households in EMU “periphery” (% change) 60 b) Final expenditure of households in EMU “core” (% change) 60 Figure 10 Changes in real public social spending in core EMU countries (Index 2007=100) 62 Figure 11 Changes in real public social spending in peripheral EMU countries (Index 2007=100) 62 Table 5 Main measures to reduce social spending adopted in Greece, Ireland, Portugal, and Spain during 2009-2013 (April 2013) 64 Table 6 Reforms introduced in EU pension systems, 2008-2012 68 DEEPENING THE ECONOMIC AND MONETARY UNION: HOW TO MAINTAIN AND DEVELOP THE EUROPEAN SOCIAL MODEL? Table 7 Approved and/or adopted reforms in industrial relations/collective bargaining systems and certain aspects of labour law, 2010-2012 70 Figure 12 10-year government bond yields and adoption of new initiatives in the euro area 87 Figure 13 Average interest rate of non-financial corporation loans in March 2013 93 Box 6 Temporary debt mutualisation schemes 107 Box 7 The Single Resolution Mechanism 111 Figure 14 GDP at purchasing power parity per capita (market prices) 116 Table 8 Actual and projected top 10 economies ranked based on GDP in PPP terms 122 Box 8 A cyclical adjustment capacity for the EMU 126 Box 9 Advantages of a permanent debt mutualization scheme in the euro area 127 Figure 15 Relationship between social protection spending (excluding pensions, relative to GDP) and relative reduction in the share of population (aged 0-64) at risk of poverty (2010) 133 Figure 16 Minimum wage as proportion of national average wage, 2011 137 Table 9 Summary of policy initiatives adopted / to be adopted according to the three scenarios 153 DEEPENING THE ECONOMIC AND MONETARY UNION: HOW TO MAINTAIN AND DEVELOP THE EUROPEAN SOCIAL MODEL? FOREWORD by Jacques Delors ational welfare states, to which Europe’s citizens feel immensely N attached, play a central role in EU countries whatever the differences there may be among the member states. Even before the current crisis, the welfare state was facing a dual challenge in terms both of funding and of effec- tiveness, two key issues for national social models’ long-term viability. The financial, economic and social crisis that has been rocking Europe since 2007 has only worsened the tension weighing down on the welfare state. First of all, the crisis is having a strong social impact, especially in those peripheral countries in the euro area where unemployment (particularly youth unemployment) and the people at risk of poverty have both shot up while the average household income has dropped. Yet while it is the welfare state’s task to come up with a solution to these growing problems, its own funding problem has intensified.