A Europen Social Union: 10 tough nuts to crack | Spring 2014 1 A EUROPEAN SOCIAL UNION: 10 TOUGH NUTS TO CRACK by Frank Vandenbroucke with Bart Vanhercke Background report for the Friends of Europe High-Level Group on 'Social Union' Spring 2014 with the support of 2 Friends of Europe | Life Quality Reproduction in whole or in part is permitted, provided that full credit is given to Friends of Europe and the author. Any reproduction, whether in whole or in part, is not sold unless incorporated in other works. Author: Frank Vandenbroucke Co-Author: Bart Vanhercke Publisher: Geert Cami Director: Nathalie Furrer Programme Manager: Lindsay Digneffe Design: Cristina Frauca © Friends of Europe - Spring 2014 This report is printed on responsibly produced paper A Europen Social Union: 10 tough nuts to crack | Spring 2014 3 A EUROPEAN SOCIAL UNION: 10 TOUGH NUTS TO CRACK Frank Vandenbroucke1 with Bart Vanhercke Background report for the Friends of Europe High-Level Group on 'Social Union' Spring 2014 Brussels 1 This report draws on joint research with Bart Vanhercke (European Social Observatory and CESO, KULeuven), who co-authored the introduction and sections II, III, IV and V. Section I benefited from an essential contribution by Terry Ward (Applica), who provided the data in Appendix I and II. We are much indebted to John Morley, who drafted the executive summary and provided inspiring discussions and detailed comments. Many thanks to Tony Atkinson, Fabrizio Barca, Thomas Bender, Vincent Corluy, Christophe Degryse, Anton Hemerijck, Peter Lelie, Sebastiano Sabato, Loukas Tsoukalis, Anne Van Lancker, Rudi Van Dam, HerwigVerschueren, Pascale Vielle, Jonathan Zeitlin, several OSE researchers and Friends of Europe staff members for their critical feedback. OSE interns Valentina Recalcati, Francesca Cattarin and Antonino Sorrenti provided valuable research assistance. All interpretations and any errors that remain are the sole responsibility of the authors. Corresponding author: [email protected] 4 Friends of Europe | Life Quality Table of contents Foreword 6 Executive summary 7 Introduction: Purpose and Scope 24 I. Five years of economic crisis: An unsettling legacy 28 - Economic and social developments in Europe: 10 worrying observations 28 - Social spending and Europe's economic performance in the world 35 - A map of the social performance of European welfare states 38 The human capital asymmetry: - Disparate levels of educational achievements 40 - Increased labour migration 44 - The social investment imperative 47 II. Why a basic consensus on the European Social Model is a necessity 49 - A social dimension for the Eurozone: Functional, political and economic arguments 49 - A social dimension for the EU28: Restoring regulatory capacity 52 - The de facto regulatory capacity of welfare states and social dumping 53 - Reduced legal authority 56 - A shared notion of solidarity 60 - The necessity of a European Social Union 62 III. The EU's social dimension five decades on 64 - The traditional Community method and the Court's activism 65 - The EU distributional mode 69 - Policy coordination 73 - European Social Dialogue 80 A Europen Social Union: 10 tough nuts to crack | Spring 2014 5 IV. Towards a European Social Union: 10 tough nuts to crack 86 - Is social convergence necessary? 87 - Social investment as a common agenda? 88 - Mainstreaming social policy objectives in the overall governance architecture of EMU? 90 - Enhanced compliance in exchange for more solidarity 91 - A stabilisation mechanism for EMU? 96 - An agreement on minimum wages to support sustainable mobility? 97 - Increasing the effectiveness of minimum income protection by EU initiatives? 99 - Strengthening social dialogue? 100 - Improving the EMU's democratic legitimacy through better social governance? 101 - Education as the pan-European social investment priority 102 V. From a sense of survival to a sense of common purpose 103 High-Level Group's Members 105 Bibliography 107 APPENDIX I - Economic and social developments over the crisis 119 APPENDIX II - Europe's trade performance 146 List of abbreviations 157 6 Friends of Europe | Life Quality Foreword This Friends of Europe background report has a dual function; it is intended as a stimulus to widen the debate about the European Union's social policy options once a new Commission and Parliament are in place, and it is also a basis for discussion by the 30 or so senior experts who make up the Friends of Europe High-Level Group* on the topic. This High-Level Group of authoritative and representative voices is comprised of social partners, independent experts and high profile political actors. The report is authored by Frank Vandenbroucke, who chairs the High-Level Group. It is published as his personal view of the social challenges that confront the EU, and their possible solutions. His assessment of the "Ten Tough Nuts to Crack" makes disturbing reading, and is an important contribution to the social policy debate. Frank Vandenbroucke needs no introduction in EU circles, having served as Belgium's Minister for Employment, Pensions and Social Affairs and as Deputy Prime Minister. No longer engaged in active politics, Frank's activities include a professorship at the Universities of Leuven, Antwerp and Amsterdam. The report’s co-author, Bart Vanhercke, is Director of the European Social Observatory (OSE) and affiliated at the University of Leuven. Friends of Europe's High-Level Group aims to place the social dimension of EU policymaking in a wider context by bringing together senior experts from a wide range of professional backgrounds and political affiliations. This report hopes to fuel their deliberations, but is not intended as a blueprint for their conclusions. It is intended that the High-Level Group should deliver a set of policy recommendations in its own report this autumn, in time to help define the EU social policy agenda for the coming five years and beyond. Giles Merritt Geert Cami Secretary-General Co-Founder & Director Friends of Europe Friends of Europe (*) The full list of the High-Level Group's members is available at pag. 105 A Europen Social Union: 10 tough nuts to crack | Spring 2014 7 EXECUTIVE SUMMARY The European Union and its Member States are failing to deliver on the fundamental goals of the European project: the simultaneous pursuit of economic progress and social progress - both within countries through the progressive development of welfare states, and between countries through upward convergence across the Union. In reality, average real household incomes per head EU28 were lower in 2012 than they had been in 2004, with divergence between countries in the Eurozone instead of convergence. Although a recovery is now announced, the legacy of the crisis in social and budgetary terms, the risk of persistent low economic growth for several years, and the challenge of demographic ageing, makes the pursuit of economic progress and social cohesion even more challenging. With the EU being held largely responsible by public opinion for the current state of affairs, there is rising euroscepticism in many Member States, and decreasing interest in European elections. Hence there is an urgent need to review the scope and purpose of the Union’s social objectives, and the way they can be pursued and achieved. That is why Friends of Europe – an independent think-tank for EU policy analysis and debate – has launched a high-level Group on a ‘European Social Union’ aimed at bringing these concerns to the top of the political agenda. A final report will be produced by the autumn of 2014, which will include a set of recommendations for the incoming European Commission and European Parliament. That report will focus primarily on the EU’s employment and social policies, and will not dwell on other concerns such as macro-economic policy and financial markets, banking supervision, furthering internal market integration, external trade policy, taxation and environmental issues etc. – important as it will be to maintain compatibility with them. Moreover, the aim is to provide a roadmap rather than a detailed agenda on specific social policies. This background report focuses particularly on the Eurozone problematic since constitute a crucial challenge for the social significance of the European project, but the report by the Group should provide a balanced message for citizens in the (*) The full list of the High-Level Group's members is available at pag. 105 8 Friends of Europe | Life Quality Eurozone and those living in other Member States since all European countries face major challenges in terms of the future of their welfare states, whether they belong to the Eurozone or not. I. Five years of economic crisis: An unsettling legacy A recovery of the European economy is announced, but the jury is still out regarding its robustness and scope. The major social setbacks of recent years need to be tackled. A series of challenges are identified, as addressed below. Labour markets, welfare and social investment Employment rates in the EU were lower in 2012 than 8 years earlier, including in EU15 as a whole when we exclude Germany, with the employment gap between southern EU15 countries and others growing larger. GDP per head was only marginally higher in 2012 than in 2004. In EU15 excluding Germany it was no higher than 8 years earlier; in the southern EU15 Member States, and in 7 of the 13 new Member States it was lower. Changes in household income per head show a different pattern from GDP per head. There was a significant fall in real household income per head in 2008- 2010 (in line with the fall in GDP per head) but with an even bigger decline in the subsequent two years, reflecting the decline in average earnings along with the rise in unemployment. Data on material deprivation, as measured by financial stress and lack of access to basic goods and services, adds to the disquiet on living standards.