The COVID-19 welfare wake-up call
The coronavirus pandemic hit when the world was still reeling from the Great Recession, delivering a serious blow to economies everywhere. Economic crisis management tactics have wrought their own damage, undermining employment opportunities for millennials, reinforcing low-wage stagnation for essential workers, and intensifying work-life balance challenges, especially for women. Will European welfare states be able to absorb this new shock?
Welfare states no longer on the defensive
As obvious as it may seem in the COVID-19-induced context, the reappraisal of resilient welfare provision comes somehow as a surprise. Ever since the late 1970s, politically and intellectually, social policy had indeed been on the defensive. With no empirical grounding, leading economists have repeatedly argued that Europe’s overprotective welfare states, based on high taxes, generous pensions, high unemployment benefits, trade union influence and insider-biased job protection, set the stage for economic and political decline.
However, the pandemic, like the Great Recession before it, highlights both the protective and the productive functions of social policy and evidences the benefits of allowing welfare states to prosper in the EU environment. More specifically, the COVID-19 crisis 1) drew both public and political attention to the importance of competent welfare states and resilient health care systems; (2) rekindled normative arguments about social fairness on the wing of an existential sentiment of human frailty; and (3) forced more effective EU cooperation and fiscal solidarity. Now that both evidence and political expectations conjure up a strong case for further EU support to active welfare states, institutions should adapt accordingly. In effect, pressed by Covid-19, a ‘new (European) social contract’ is in the making.
The efficacy of active welfare states
Europe’s inclusive welfare states were the unsung heroes of the Great Recession. Recent macro-evidence on welfare developments since 2000 clearly highlight that people in the most inclusive, high-spending welfare states of north and western Europe weathered the economic downturn with fewer ill effects. By contrast, the more segmented welfare states of southern Europe, especially pension-heavy Greece and Italy, were less successful both in terms of buffering shocks and mitigating inequalities.
What was the key to the success of these countries? With the social investment reforms of the 1990s, welfare states shifted from passive policies focused on here-and-now redistribution to more active policies committed to the centrality of paid work. Key to the approach were actions aimed at interrupting the intergenerational transmission of poverty by investing in human capabilities from early childhood through old age, while improving career-life balance provisions for working families.
As during the Great Recession, the welfare state has also played a crucial role in mitigating the impact of the pandemic. First on the front lines were health care systems, followed soon after by traditional (sick leave, unemployment schemes) and more modern social policy provisions (such as the furlough schemes). As these social programmes covered the breach, countries were able to impose lock-down measures to contain the spread of the virus.
Human fragility, social fairness and secure capabilities
The COVID-19 pandemic has accelerated a number of labour market transformations, including teleworking and transition to digital services – which will impact some segments of the populations (women, young people) more drastically than others. But the pandemic also generated a great sense of vulnerability and uncertainty across European societies, inspiring normative debate about ‘social fairness’. Now, how can state intervention prevent a crisis like COVID-19 from causing the permanent devastation of life chances for individuals and families? What kind of welfare states can enable sustained well-being through diverse life course transitions? Here, as mentioned above, it pays to take the long view.
The EU started taking a dynamic, long-term perspective on social justice with the 2017 European Pillar of Social Rights. The Social Pillar set out 20 key principles, defined in terms of rights regarding equal access to fair and well-functioning labour markets and welfare systems. Yet, so far, this new normative framework has remained largely constrained in its implementation due to the 1990’s spirit of the Economic and Monetary Union (EMU) as a ‘disciplining device’ of welfare states. Limited by spending caps, some of the countries most in need of welfare state reform are paradoxically most constrained in their efforts to do so.
Greater cooperation and fiscal solidarity in the EU
The new corona virus, recognised as a force majeure, opened the door to a more united fiscal policy in the EU. The European Central Bank (ECB), under the helm of Christine Lagarde, acted swiftly to contain interest rate spreads across the Eurozone. In a real watershead, on 22 July, after four days of negotiations, EU governments agreed on a EUR 750 billion recovery fund, composed of grants (EUR 390 billion) and loans (EUR 360 billion), largely for the aid of weaker member states. The deal constitutes an historical breakthrough for the EU as it notably allows the Union to borrow in the markets to fund EU expenditures.
Squaring the social investment and macroeconomic circle now
The new economic governance environment in the EU may prove a game changer, but will this be enough? The costs of the health emergency and the economic support measures add to debt and deficits, and will have to be managed over time. While many will advocate for spending cuts and tax increases, social investment reform, constructed to deliver returns over the life-course, should be seen as a more viable alternative, better aligned with the needs of a ‘just transition’. In the FEPS report mentioned above, we present a concrete way to discount social investment human capital ‘stock’ expenditures from the fiscal criteria of the Stability and Growth Pact. This would enable countries to secure financing for long-term objectives in lifelong education and public health systems without breaching Eurozone fiscal governance agreements.
Proposals for even higher levels of EU solidarity or steps to implement social investment reforms will undoubtedly face (some) domestic resistance. Yet, to the extent that large majorities in virtually all member states wish to live in a ‘protective’ and prosperous EU, there is certainly a case for convincing European citizens that, in an inter-dependent Union, the (market) opportunities of some largely rely on the (welfare) capabilities of others.
Anton Hemerijck is Professor of Political Science and Sociology at the European University Institute. He researches and publishes on social policy, social investment and the welfare state, and is a frequent advisor to the European Commission. Robin Huguenot-Noel is a Ph.D. researcher at the European University Institute and a former advisor on tax and investment policy to the UK Treasury and the German development agency (GIZ). Their latest publication ‘Who is afraid of the Welfare State now?’ will shortly be published by the Joint Research Centre of the European Commission.