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Why the European Social Model is still relevant

"In some countries, key elements of the ESM have been radically transformed, and sometimes dismantled, even though they clearly were not the cause of the crisis or the budgetary deficits," says ILO Senior labour economist Daniel Vaughan-Whitehead.

Comment | 19 March 2014
By Daniel Vaughan-Whitehead, Senior labour economist at the ILO

GENEVA - The European Social Model (ESM) is struggling in some European countries after the adoption of fiscal consolidation policies during the financial and economic crisis.

As a comprehensive set of social policies to promote inclusive economic growth, high living standards and decent working conditions, the ESM played a key role in shaping European societies in the post-war years.

The importance of these policies was clearly illustrated in the first phase of the crisis, when elements like social protection helped cushion the impact in terms of growth, unemployment and poverty. In several countries social partners, through social dialogue, were able to set up short-time work sharing schemes that reduced layoffs, often with government support. This was the case in Germany, Belgium, Luxembourg, Austria and several others.

But from 2010, rising concerns over sovereign debt levels and fiscal deficits, led many countries to introduce fiscal consolidation policies. While public social expenditure acted as an automatic stabilizer, and its increase in 2009 limited the fall in citizens’ purchasing power and global domestic demand, the situation reversed in 2011, when EU 27 public social expenditure declined by about 1.5 per cent since to 2010. In some countries, public expenditure was cut to below pre-crisis levels.

This shift in public policies presents clear consequences for the ESM. The evidence shows that beyond the diversity of national situations – the European Social Model being resilient in some countries, while in others it has been strongly weakened – the changes observed have been significant and have affected all the main pillars of the European Social Model.

While such changes have raised concerns among citizens and workers in Europe, it is also largely acknowledged that the ESM, in its current format, is not flawless. Both the ILO and the European Commission have recognized that certain elements of the ESM need to be reformed in the face of challenges such as increased competition in globalized markets and the ageing of European societies.

The question is whether fiscal consolidation policies in Europe pushed the changes forward too quickly in some countries or, in some cases, if the reforms introduced didn’t deviate from their initial objectives of ensuring greater effectiveness and sustainability of social policies. In some countries, key elements of the ESM have been radically transformed, and sometimes dismantled, even though they clearly were not the cause of the crisis or the budgetary deficits.

The countries under direct influence of the Troika were requested to reduce unit labour costs through changes in wages and collective bargaining. Social protection systems became often less generous and sometimes less universal through reduced access to unemployment benefits and to universal benefits such as child, housing or sickness allowances. Labour market reforms accelerated with a view to improving employment rates, notably by increasing flexibility through changes in hiring and dismissal rules that have, as expected, reduced job security of the employed. Cutbacks in public expenditure have affected the quality and outreach of public services in many places.

Greater flexibility in the labour market combined with a reduction in the coverage and level of social protection may have a negative impact in terms of poverty, human capital and equality. It has to be noted that the percentage of working poor in Europe reached 9.1 per cent in 2012. While effective collective bargaining and social dialogue have proven to be strong assets to mitigate and overcome the crisis, it is of concern that measures taken in several countries have negatively affected these institutions.

In some countries, the effectiveness of policies aimed to increase competiveness by only cutting labour costs should be questioned. The challenge of competiveness in southern Europe is closely related to closing technological gaps.

These are some of the issues that were at the centre of a meeting in Brussels on the future of the ESM. The meeting also featured a discussion on an upcoming book, titled “The European Social Model in times of Economic Crisis and Austerity Policies”.

The ESM is a source of inspiration for several emerging economies like China, Brazil, Indonesia and Morocco. It is now crucial that the EU itself expresses strong views and adopts the necessary decisions on preserving the social model that has played such a central role in its history.