Commission: Raising the social issues that can make or break the monetary union

Press conference by László Andor, Member of the EC in charge of Employment, Social Affairs and Inclusion on the Annual Report on Economic and Social Development in Europe. (EC Audiovisual Services, 21/1/2014).

For the first time the European Commission recognises that the severe austerity measures enforced in the crisis hit Eurozone countries in the south of Europe, in Ireland and elsewhere, have undermined not only the well-being and the level of social protection there, but undercut also the very ability of those member states to regain non-cost (labour) competitiveness or introduce investment enhancing incentives. This is the main conclusion of the ‘Annual Review on Employment and Social Developments’ released yesterday by the Commission, highlighting the need to address the risks of increasing in-work poverty.

The report concludes that “In the absence of the currency devaluation option, euro area countries attempting to regain cost competitiveness have to rely on internal devaluation (wage and price containment). This policy, however, has its limitations and downsides not least in terms of increased unemployment and social hardship, and its effectiveness depends on many factors such as the openness of the economy, the strength of external demand, and the presence of policies and investments enhancing non-cost competitiveness”.

The neglected social dimensions

As they say better late than ever. Hopefully, with this report the EU sets more holistic principles in confronting future rescues of entire EU countries, in the era after the reign of the ‘Troika’. The publication of this Review coincides with the European Parliament’s proposal to relinquish the ‘Troika’ of EC-ECB-IMF, which undertook the task of bailing-out, auditing and guiding the Eurozone countries in distress during the past four years. The legislators have concluded that the ECB and the IMF have not contributed positively in the effort to guide the ‘programme’ countries safely out of the sovereign and bank debts traps. The ‘Troika’ failed to confront the over-indebtedness problem in a holistic manner, focused only on financial issues and failed to take into account factors like the economic and social structures of those economies.

This year’s Review of Employment and Social Developments that Commissioner László Andor presented yesterday, reveals also that the austerity policies followed all over the EU in general and the Eurozone in particular, led to a substantial increase of the poverty risk, even amongst working people. Ostensibly he attributes it to the economic crisis, but it’s more than evident that the report blames also the fast rise of part-time work, which is encouraged in member states like Germany and Britain. The relevant passage states, “A significant increase in poverty among the working age population is one of the most tangible social consequences of the economic crisis. A gradual reduction of unemployment levels may not be enough to reverse this situation if wage polarisation continues, notably due to a rise in part-time work”.

It’s unbelievable but true that “The review shows how taking up a job can help people to get out of poverty, but only in half of the cases”. This is a straight forward admission that finding a job doesn’t change much for a person’s economic and social condition. Evidently it’s the quality of the available jobs that has to be blamed for that. However a deeper analysis also shows that the labour market policies favouring more relaxed forms of employment are equally responsible for the worsening conditions of an increasing part of the working population. For example in the German economy, advertised as an exemplary ‘model’ of competitiveness, the percentage of population in risk of poverty increased from 12 to 17 percent during the past few years.

Austerity doesn’t help competitiveness

Last but not least the Review tries to dispel the long-established ideological belief that increased social protection, leads to higher unemployment by undermining the incentive to work. In the same line of thinking Europe is wrongly thought to ‘suffer’ from excess social protection, which arguably leads to lower competitiveness in international markets. This is at least a half lie.

All this old-fashioned liberalism ignores the high level of motivation of the well-trained and educated European labour force. The few examples of undue exploitation of the social protection system, by some marginal minorities shouldn’t be used to defame the European model. To change that, the Review also features an analysis showing that, “contrary to commonly held beliefs, people receiving unemployment benefits are more like to get a job than people not receiving benefits. This especially applies to well-designed benefit systems”.

Reaching the deep causes

In view of all that the Commission takes its analysis to the very basics. It concludes that, “The still growing macroeconomic, employment and social divergences (between member states) threaten the core objectives of the EU as set out in the Treaties, namely to benefit all its members by promoting economic convergence and to improve the lives of citizens in the Member State”. In this way the Commission repels the egotistic Germanic way, where ‘everybody is responsible for himself’.

The Review stresses that the mutualisation of financial obligations is more needed in the Eurozone. It reiterates that, “Enhanced surveillance of employment and social developments was proposed by the Commission in its October 2013 Communication on the Social Dimension of European Monetary Union”. The Commission goes as far as to stress that, “In the long-term and after Treaty changes, an EMU-wide fiscal capacity with a shock absorption function could complement existing policy coordination instruments”.

In short the EU’s executive arm tells everybody that a strong Union has to be based on common shock absorption mechanisms, like the currently under discussion Single Resolution Mechanism for failing banks. The final arrangement on this last issue will show the world, if the EU has the willingness and the means to stay united. There is no better way, at least for Eurozone, to regain the confidence of markets and people.