Austerity: endangering the Welfare States, endangering Europe?

By Piera Sciama | 4 February 2013

To quote this document: Piera Sciama, “Austerity: endangering the Welfare States, endangering Europe?”, Nouvelle Europe [en ligne], Monday 4 February 2013, http://www.nouvelle-europe.eu/node/1639, displayed on 28 February 2020

 

This article intends to discuss the effects of austerity measures on national welfare states and ultimately on the image of the European Union . It advocates for a change of paradigm of austerity in order to defend a European model at a time when it is being strongly challenged. It recalls that dismantling of social services is harshly affecting the legitimacy of the European Union by raising the fear of a long term recession when the Union is expected to bring about economic stability.

 

Austerity measures: affecting welfare states, affecting the legitimacy of the EU

The 2008 crisis led to widespread measures of austerity in most European countries no matter what kind of social model they adopted (Continental, Southern, Anglo Saxon, Eastern European). These cuts are described in a paper by Zachary Laven and Federico Santi from the European Institute in Washington. Here are some examples: In August 2011, France revealed a plan to achieve a 11 billion euro deficit reduction counting with specific tax increases including VAT or pension reform raising the retirement age from 60 to 62. Greece reduced by 22% its minimum wage, applied public investment cuts of 400 million euro and reduced tax exemptions, it also raised its retirement age from 61 to 65 years old. In Spain, public wages, public hiring and minimum wages were frozen and measures introduced in April 2012 imposed a cut of 10 billion euro per year in healthcare and education benefits. In the UK, infrastructure investment was increased but there was a cut in family policies and the introduction of a single tier pension for future retires despite the reduction of corporate tax. In Romania, public sector wages were cut by 25%, pensions by 15% and the VAT was increased by 24%.

Rapidly, popular opinion realized those measures were supported or even pushed by the European Union. Indeed, austerity measures might be justified as a solution to achieve fiscal consolidation precluded by the Stability and Growth Pact and particularly by the Golden Rule which became compulsory with the recent Fiscal Compact signed in March 2012 by every Member State except the Czech Republic and the United Kingdom. The Union found itself in a dual situation: while recalling that those measures are taken by national governments, it also offers the basis to justify them. It also should not be forgotten that in the particular case of Greece, Italy and Spain, the Union is an active part of the Troika, the set of institutions administrating international loans and acting upon national economies through sets of particular demands pushing for austerity measures involving harsh spending cuts .

The main problem is that even if some cuts are necessary to improve the efficiency of the economy and stabilize it, other cuts affect the poorer layer of the population and the middle class being therefore unpopular and perceived as illegitimate.

The European Welfare State, the austerity and the crisis: myths and realities

Although austerity measures are justified by the need of fighting economic inefficiencies and provide fiscal consolidation allowing to  regain the trust of financial market and stabilize the economic situation, it is clearly dismantling the social welfare although not all countries are affected in the same way. Particular intensive effects are felt in Greece and Spain where the unemployment rate reached, according to the Eurostat figures of March 2012, 26.8% and 26%. In order to justify and further develop austerity measures, academic voices started to blame the crisis on an excessive presence of the welfare state in European countries that was seen as an excessively costly tool allowing Europeans to live above their means.

This interpretation raises a few problems. First of all, this does not acknowledge the situation of countries where the problem was private debt such as Spain or Ireland. Secondly, the economist Dean Baker recalls that social welfare is not the responsible for the crisis : “ If we just take the measure of spending relative to GDP, the leaders would be countries like Sweden, France and Denmark, all of which are surviving the crisis reasonably well.” Findings by economists Francesco Saraceno and Jean Paul Fitoussi further support the argument that the main trigger of the current economic situation is inequality and that the welfare state is a tool to correct such unbalance.

But most importantly and most dangerously, although it was presented by European leaders as the only solution, austerity did not contribute as much to fiscal consolidation as expected and raised the risk of long term recession. Using the data of the National Institute of Social Research (NISR) based in London the journalist Julio Godoy affirms that austerity is self defeating “the most benign scenario for 2013 forecasts a worsening of the present depression. According to calculations, the austerity programmes will have a negative impact on the debt growth ratios of 8.9% in Greece, 7.7% in Portugal, 4.2% in Spain and 1.9% in Italy”.

Beyond Austerity, economic reform

The defenders of austerity suffered an additional backlash as the IMF, one of the institutions of the troika and promoters of this kind of policy, admitted in its World Economic Outlook that it has underestimated the negative effect of the measures it advocated. In October 2012, its chief, Christine Lagarde, even expressed a preference of extending deadlines for bailout countries such as Portugal, Spain and even Greece rather than impose additional cuts.

The question is not whether more cuts are necessary or whether the European Social Model is doomed (I believe  it is not).The question revolves around the type of reforms to be held.  A typical example is Greece which has undertaken a set of policy reforms but in an underperforming system with major dysfunctions such as restrictive job markets. The main problem nevertheless is that the outcome of all these reforms are unpredictable and can sometime lead to a loss of productive capacity in certain countries (lack of investments in education and infrastructure, long term unemployment). Therefore, to prevent them to have such negative effects, governments should promote policies contributing to increase long-term competitiveness. This includes child care, training schemes or health programmes. Unfortunately, most of them were already weak in some countries even before the crisis or were affected by current austerity programs.

Conclusion

The 2008 financial crisis followed by the sovereign debt crisis have had profound effects on European economies and on the image of the European Union. More specifically, it has affected welfare states through measures of austerity. Diverse academics and politicians disagree on the utility of austerity measures. In this article, I have tried to show that to use the crisis as a justification for dismantling the welfare state is a dangerous strategy: not only does it affect the legitimacy of national governments and of the European Union, but it also affects national economies through possible loss of productive capacity. If welfare state reforms are clearly necessary in times of national budget constraints, those reforms must be directed to channel the welfare state as a tool to recover economic productivity and safeguarding the well being of the most vulnerable population, which are in general and ironically the most affected by austerity. A Social Europe could rise again and the European Union would have the opportunity to redeem itself, recovering some popularity and legitimacy. It could play an important role by coordinating and channelling investment notably in the areas of formation and infrastructure as well as spreading best practices that could be replicated or inspirational from one country to another. The challenge now is, in a hostile context, to give priority to a Social Europe which was never exactly the case in the history of European integration. If European leaders do not have the courage to go against the flow, if an effective economic and social cooperation between Member States is still curbed, there are risks for austerity to push for a longer recession and for the EU to become more and more unpopular, more and more illegitimate and more and more at stake.

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Photo Source: Gerard Garitan (September 2010) : Grève Européenne 2010 à Bruxelles, les transfrontaliers de OGB-L et Barroso. Wiki Commons. http://commons.wikimedia.org/wiki/File:Bruxelles_2010_OGB_2710.JPG?usela...

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