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The Adaptive Capacities of Welfare States

The welfare state as financial crisis casualty?

The welfare state has people worried in the aftermath of the deepest economic crisis since the Great Depression. For the member states of the European Union, where coverage of the social risks of unemployment, poverty, ill- health, and old age, adding up to 50 per cent of government spending, is fairly comprehensive, the long-term social and economic consequences of the 2007-11 financial crisis conjure up a serious 'stress test' for twenty-first century welfare provision. Costly bank bail-outs and other stimulus packages, required to pre-empt economic meltdown in 2008 and 2009, have drained the public purse. A 'double bind' of rising social benefit expenditures combined with declining government revenues, is forcing policymakers to make significant cuts in welfare services and social transfers to the poor, the unemployed, and pensioners, in order to shore up public finance solvency. Are European welfare states at risk of becoming a crisis casualty in the cascade of violent economic, social, and political aftershocks, unleashed by the global financial crisis? Or, will the aftermath of the crisis mark a new opportunity to relegitimize modern social policy (Hemerijck, 2011a)?

The social repercussions of the global financial crash of 2008 have been dramatic. Considerable employment growth across the EU over the past decades has been wiped out overnight while unemployment soared to 23 million people. Joblessness rose from 6.5 per cent in 2008 to about 10 per cent across the EU in 2011 and, most draconically, to 22 per cent in Spain by 2011, with Greece trailing behind at 17 per cent, followed by the Baltic states at 16-18 per cent, then 14 per cent and 15 per cent in Ireland and Slovakia respectively, and 12 per cent and 11 per cent in Portugal and Italy. Most worrisome is the surge in youth unemployment in Latvia, Italy, Greece, Sweden, Estonia, Hungary, Lithuania, France, Ireland, and Belgium. One in five under the age of 25 in the European labour force is out of work, again with Spain leading at a staggering rate of close to one in two youngsters. In other troubled economies, Greece, Portugal, Ireland, and Italy, youth unemployment figures hover around 30 per cent. Joblessness has also become more structural. In Italy half those out of work have been unemployed for more than a year. Youth and long-term unemployment leave deep scars in terms of falling income and earning capacities, social-psychological distress, lower life expectancy, skill erosion, and strained public finances. Because of low expected growth, unemployment levels are likely to remain high over the next few years. In old age pensions, public systems have suffered losses of financing and contributions, due to the effect of the crisis in employment, while funded systems have been more vulnerable to the sharp fall in equity markets, which has adversely affected the value of pension fund assets. Like any other deep recession, the crisis has disproportionally affected the most vulnerable groups in society, i.e. those with limited links to the labour market. There is clear evidence of increases in the number of people at risk of income poverty, including old age pensioners, people dependent on social benefits, low-skilled workers, and single-parent households. Most worrisome is the rise in child poverty (European Commission, 2011c).

Over the past four years, Europe went through three interconnected crises: a banking crisis in 2008, followed by a severe economic recession in 2009, which in turn invoked a fiscal crisis of the state in its wake, exemplified by the sovereign debt crises in Greece, Ireland, and Portugal. After the EU, together with the IMF, bailed out Greece in the spring of 2010, and later Ireland and Portugal, these countries, together with Spain, staged impressive fiscal consolidation programmes, including significant welfare retrenchment and labour market reform. Soon afterwards, conservative governments in Germany, France, Italy, the UK, and the Netherlands launched austerity programmes. As I wrote the final pages of this book in December 2011, the aftermath of the global financial crisis entered a new critical phase for the European Union. Financial markets have become increasingly doubtful about the EU's willingness to accept and ability to enact much tighter political economic coordination. What started with a seemingly manageable sovereign debt problem in Greece in early 2010 has since turned into an existential crisis of the single currency. Observers such as Wolfgang Munchau and Martin Wolf of the Financial Times fear that a dangerous process of interlocking sovereign debt contagion, running from the embattled European periphery to the larger core eurozone economies, including Italy and France, confronted with higher interest rates on their debts, coupled with a general embrace of shortterm budgetary austerity, could plausibly end with the break-up of the eurozone because of political indecision. If this should happen, the adverse social and distributive implications for all European citizens, workers, and families would truly be calamitous. A downward spiral of pro-cyclical austerity, weakening demand, higher unemployment, and poor fiscal outcomes, would surely set the scene for much harsher welfare retrenchment than is currently on offer, which, in turn, would probably trigger further social conflict and political unrest. The eurozone must also create policies for growth and adjustment, including social and labour market policy innovation.

Will 2011 go down in history as the year of procrastination in which the mere fear of the consequences of a break-up kept the euro afloat? Will 2012 see the grand bargain, including 'quantitative easing' by the ECB and the longterm issuance of Eurobonds in exchange for strong fiscal and political integration, through which the single currency will be saved? Over a series of fifteen crisis summits over 2010 and 2011, European leaders, it is true, have failed to convince financial markets that they were fully committed to shoring up the eurozone. On a more positive note, a temporal solution for Greece was grafted, the firepower of the eurozone's rescue funds was strengthened, and European banks were put on a more stable footing by ECB aid. And at the latest summit of 8 and 9 December 2011, overshadowed as it was by the British veto of a European Union-wide treaty change, eurozone leaders took an important step towards a fiscal 'compact', with binding rules on public finances, backed by automatic sanctions.

In the past, European integration has progressed on the wing of immanent political and economic pressures with appropriate institutions and political support catching up at a later stage. Can this history be repeated at a time when popular anti-EU discontent is riding high? Over the past two decades, European economics has become truly global, but European politics has remained almost exclusively national. The 27-member EU eurozone is made up of lively democracies with different histories, divergent opinions on how to resolve the sovereign debt crisis, and contradictory preferences about the role of EU institutions in the process. When this book went to press in late December 2011, a double dip recession for the eurozone with severe adverse spillover effects for the welfare state seemed plausible. It is surely evident that the global financial crisis of 2008 will last for more than just a few bad years for the European economy, conjuring up an image worse than Japan's 'lost decade' in the 1990s (Koo, 2008).

Signs that European welfare states are on shaky ground are not new. Since the mid-1970s, academic observers, policymakers, and opinion leaders have been permanently engaged in a highly politicized debate over the welfare state in crisis. Numerous publications have argued the demise of generous social policy provision in the age of globalization. Ridiculing the so-called 'European Social Model' became a particularly favourite pastime of international business elites, political leaders, and economic experts in the 1990s. From the 1980s onwards, the European welfare state system took the blame for the region's slow economic growth and lagging competitiveness and technological innovation, as a consequence of overprotective job security, rigid wages, expensive social insurance, and employer-unfriendly collective bargaining that developed over the post-war period. Unemployment 'hysteresis', preserving the jobs for those already employed, prevented real wages from falling enough to restore full employment. From this perspective, the overall conclusion was that the European 'social market economy'—a free market tempered by a generous welfare state, consensus-building politics, and cooperative labour relations, based on the firm's accountability to a diversity of stakeholders beyond shareholders, such as unions and local communities—had become an anachronism in the world of intense global competition, premised on quicksilver capital movements.

At some point, no doubt, the current crisis is likely to recede. Before that happens, European welfare states will face a number of long-run economic and social changes, already apparent before the onslaught of the 2008 global credit crunch. To be sure, the economic downturn affecting Europe and the world since 2007-8 put pressing new constraints on public social policy provision. But beyond the imperative of fiscal consolidation, demographic ageing, new family forms, and labour market changes, associated with the shift towards the knowledge-based service economy, pose equally, if not more, dramatic challenges to the sustainability of the welfare state.

Various trends have since the 1980s fundamentally altered the policy environment of Europe's modern welfare states (Esping-Andersen etal., 2002). Under moderate economic growth levels, fiscal pressures have increased, not least because of greater capital mobility and accelerated European economic integration. In addition, population ageing and declining fertility, together with a trend towards early retirement of baby-boomers, have severely burdened pension systems. Rapid technological change, together with accelerated economic internationalization, has reduced the demand for low-skill work in advanced economies. While the shift towards post-industrial labour markets has opened up job opportunities for women, deindustrialization has come with declining levels of steady lifetime jobs and rising job precariousness. Changing family structures and gender roles, with longer education spells, later childbirth, and lone parenthood, have created new tensions between work and family life. As a consequence, rising levels of female labour-market participation have raised new demands for the provision of social care, especially for young children and the frail elderly. The new risks of social exclusion both within and outside the labour market, moreover, have triggered growing income polarization between highly skilled, dual-earner families and low-skilled, male-breadwinner and single-parent households.

Although the drivers behind long-term social and economic change are common across Europe, the pressures they create for existing social portfolios, together with the policy responses they trigger vary from country to country.

While some welfare systems have been quite successful in updating their policy repertoires to these social transformations, others have fared less well, for various reasons, in modernizing welfare provision over the past decades. Add to this the differential impact of the global financial crisis, and it is easy to see that European welfare states have entered a new era of flux, of major reform, and adaptation to unfolding long-term social changes and shortterm economic imperatives. The aftermath of the crisis has surely raised the problem load of twenty-first century welfare provision in most European countries, but the overall contours of social policy change in the years to come are far from clear. The global financial crisis has brought advanced European welfare states into unchartered territory.

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