Social investment now

A- A A+

The time is right to invest in human capital and the workforce, and European fiscal rules should encourage countries to do so.

Just lip-service up to now

For almost two decades EU institutions have professed their support for welfare provision, from the idea of ‘social policy as a productive factor’ in the 1997 Amsterdam Treaty, through Social Affairs Commissioner Laszlo Andor’s ‘social investment package’ in 2013, to the principles laid down in the 2017 European Pillar of Social Rights.

However, in practice, the social investment impetus consistently has been put on ice. There is no justification for this continued schizophrenic policy orientation. Today, the evidence on social investment returns is stronger than ever before. Moreover, structurally low interest rates present us with a post-crisis opportunity not to be wasted. Not least, European publics expect pro-EU political forces to put their money where their mouth is in terms of enabling citizens to live dignified, secure lives. It is about time for EU-institutions to come out of the closet of austerity and make a real commitment to social investment.

Stability during catastrophe

When the going gets really tough, as it did in the aftermath of Greece’s near-default in 2010, EU member states agree to intrusive measures to keep the single currency afloat, with fiscal support for besieged countries, backed up by ‘whatever-it-takes’ ECB monetary policy.

More than any crisis before, the Great Recession revealed that the active, big-spending welfare states of north-western Europe were the most successful in absorbing the global credit crunch and the eurozone crisis.

To prosper in the 21st century knowledge economy, then, it is thus imperative to create a European social model that aligns the Eurozone’s adaptive capabilities with domestic national-level welfare reform.

The importance of employability and productivity

The number (quantity) and productivity (quality) of current and future employees and taxpayers are central to the long-term financial sustainability of the welfare state. Maximizing employment, employability and productivity helps to sustain the ‘carrying capacity’ of the modern welfare state.

To do this, states need to effectively coordinate the following three policy objectives: (1) raising and maintaining the employment ‘stock’ (human capital, skills, health of population); (2) facilitating ‘flows’ between various labour market and (gendered) life-course transitions; and (3) using ‘buffers’ for social risks (unemployment, sickness) mitigation through income protection and economic stabilization.

Commitments in these areas produce mutually reinforcing positive effects over the life cycle. They generate aggregate economic growth and social well-being at the individual and household levels, and are key to making social investment work.

A public investment strike

Foolishly, the rule book of the Stability and Growth Pact (SGP) disqualifies public investments in lifelong education and training in the knowledge economy as wasteful consumptive expenditures.

The eurozone austerity reflex since 2010 has resulted in a public investment strike, most unfortunately in the area of human capital stock capabilities, lifelong education, training and healthcare, with adverse consequences on economic growth, employment, productivity, well-being and equality across Europe.

It’s time to invest. Now.

We must ratchet up domestic social investment with EMU support by exempting human capital ‘stock’ investments from the rules of the SGP. The post-crisis collapse in interest rates should be put to use to establish, consolidate and expand social investments that benefit future generations and consolidate fiscal health, especially in the face of adverse demographic trends.

I propose a ‘golden rule’ of exempting human capital  ‘stock’ spending from the Eurozone fiscal rule book for 1,5% of GDP for about one decade, as a flagship initiative of the new European Commission.

A viable plan

A viable division of responsibilities between the EU and the member states is possible without trespassing on treasured national welfare state jealousies.

Social security ‘buffers,’ the core prerogative of the national welfare state, should remain in the remit of national welfare provision. The ‘flow’ function, concerning labour market regulation and collective bargaining in sync with work-life balance, gender equality and family-friendly employment relations, is best served by mutual learning and monitoring processes of open coordination at national and EU level, engaging national governments with relevant experts and the social partners in sharing good practices.

We are thus left with guaranteeing social investment in lifelong human capital ‘stock’. Here the EU needs to change the fiscal rules in the SGP regarding social investment.  Citizens all over the EU are craving support for social investments, and the financial costs are minimal given the short and long-term profitability of the economic and social returns.

If not now, when?


Anton Hemerijck is Professor of Political Science and Sociology in the Department of Political and Social Sciences at the EUI. He researches and publishes on social policy, social investment and the welfare state, and is a frequent advisor to the European Commission on those issues. A more complete discussion of this article may be found in his recent policy paper Making social investment happen in the Eurozone.