The Social Consequences of EMU

Iain Begg*



I - INTRODUCTION

Economic and monetary union (EMU) can be seen as the culmination of the process of economic integration in Western Europe. By providing a framework for common macroeconomic policies, it complements and consolidates the establishment of a common market in the EU. It consequently opens the way for more coherent, stable and efficient management of economies, and should thus ensure an improved performance which will permit an enhancement of social welfare. This, at least, is the vision put forward by the more ardent supporters of EMU, some of whom display an enthusiasm worthy of Voltaire's ever-optimistic hero, Dr Pangloss.

An alternative view is that EMU merely changes the institutional context in which policy is defined and implemented, while enabling some minor gains because of diminished transactions costs. From this perspective, EMU is not an end in itself, so much as a setting in which a wide range of policy stances can be envisaged. Thus, although EMU promises a more stable macro-economic environment, it will neither automatically improve employment prospects nor generate more resources for social policy. In fact, there is a risk that if too little attention is paid to wider objectives, support for EMU will be undermined. This would not only jeopardise the potential gains from EMU, but could also cast doubt on the value of economic integration more generally.

For these reasons, social issues are likely to be high on the agenda of the 1996 inter-governmental conference. This article aims to identify some of the most critical social challenges and to point to possible ways to address these. The next section explores some of the `social' challenges facing the EU, and appraises their significance in the integration process. Policy implications are then discussed and developed to suggest options for the EU.


II - SOCIAL CHALLENGES FACING THE EU

The White Paper published in July 1994 on `European Social Policy' is subtitled `a way forward for the union'. This could be interpreted to mean that social policy is a means of consolidating the Union, but also (by the use of the indefinite article `a') one of many options for the future development of the Union. It can be argued that this ambiguity accurately reflects the ambivalence in many quarters about whether social policy should figure more prominently on the agenda of the EU and in the competences of the European tier.

Even if the long-term advantages of EMU are accepted without qualification, it is generally conceded that the transition will cause dislocations that may have adverse consequences in the short- and medium-term. A key factor in this regard is the obligation on Member States to meet the five convergence criteria as a condition for participation in EMU. In practice, this is likely to mean relatively more `austere' economic policies for most Member States in circumstances where unemployment is already at intolerable levels in many regions. Although the criteria can reasonably be portrayed as sound principles for macroeconomic policy, the speed and vigour with which they are implemented are crucial. If policies are too harsh, especially in the short-term, the fragile recovery from the recession of the last two years could be compromised.

In addition, the need to deal with the consequences of high and persistent unemployment will test the resources of some Member States. Unemployment in the EU is already at a record level and annual average growth in GDP in the first half of the 1990s will barely reach 1%. This lacklustre economic performance reflects poorly on European policy, and there are legitimate fears that these disappointing economic trends will continue during the second stage of EMU. Put more bluntly, there is a risk that the performance of the `real' economy may suffer in order to improve `nominal' indicators.

Other things being equal, the demand for social benefits would rise, while incomes and revenues fall. With this conjunction, there will be strong pressures to diminish the quality and coverage of social protection. These risks for the least favoured Member States are partly offset by `flanking' policies, such as income from the Structural Funds, loans from the EIB and the prospect of increased technology transfers as a result of closer economic union. However, the scale of these flows is modest, so that although they pave the way for improved economic performance in future, they cannot be expected to play a substantial role in boosting current incomes at the macroeconomic level. In any case, the scale of adjustment required by some of the least-favoured Member States is greater than for most of the better-off nations.

A second social challenge is reform of the financing and scope of social protection. This has several dimensions. A first is that concerns about the EU's competitiveness have led to demands for a shift away from taxes on labour which raise employers' costs. However, because alternative sources of funding also impinge directly or indirectly on costs, the room for manoeuvre here is much more limited than some of the more glib assessments allow. Although the very high charges in some Member States may well put them at a disadvantage, the wage component of labour costs will tend to be higher where the burden of financing social protection falls on general taxpayers rather than employers. In Denmark, as an illustration, explicit `social' charges are low, but the share in GDP of expenditure on the welfare state is amongst the highest in the EU. Because Danish taxpayers have to finance this, they expect higher pre-tax wages in order to maintain disposable incomes.

The budgetary difficulties facing most Member States in meeting the EMU targets are compounded by growing demand for social protection, for instance because of the ageing of the population. In some countries, a shrinking base of contributors is being expected to support a growing dependent population. Not surprisingly, therefore, there are mounting pres-sures for structural reforms of systems of social protection these have already resulted in many initiatives.

A fundamental question, therefore, is how national income in any Member State is distributed between those active in the labour market and those who, for whatever reason, are inactive (retired, unemployed, temporarily out of the labour force, etc.). As the EU economy becomes increasingly integrated, difficult choices will also have to be made about responsibilities and mechanisms for mediating this distribution. Even though social protection has, hitherto, been seen as a competence exclusively for Member States, if the effects of integration are spatially unbalanced, this may have to be reappraised.

How this is resolved goes to the heart of what is meant by `Union' in the EU. If it means little more than a free market with a limited set of common policies, the development of policies to redistribute or to pool the burden of social protection would not be warranted. But if the EU aims to assume at least some `federal' responsibilities, notwithstanding the entrenched opposition of some of the Member States, it is difficult to see how redistributive issues can be neglected.

On a more mundane level, social protection systems need to adapt to the complications of a labour market that is not confined by national boundaries. Because national social systems are the product of complex accommodations between different interests, the mix of benefits and obligations varies from one Member State to another. Where these act to deter labour mobility or affect employers' location decisions, it can be argued that the principles of a single market are being traduced. A further social challenge is, consequently, to ensure that such obstacles can be overcome.


III - IMPLICATIONS FOR POLICY

Social policy is, in many respects, the poor relation of European integration, despite the fact that some dimensions of the term `social' have long been the subject of policy at the European level. Thus, there has been no shortage of initiatives affecting working conditions while the Social Fund is clearly an important instrument of Commission policy. But few policy developments at the European level could be said to have had much effect on the redistribution of current income.

Article 2 of the Treaty does, nevertheless, identify `a high level of employment and of social protection' as one of the principles the EU seeks to respect, providing a clear signal that this is an area of primary importance for the development of the Union. Even though price stability is highlighted in the Treaty as the principal objective of monetary policy, complementary policy instruments can be used to fulfil other objectives. One interpretation of what was agreed at Maastricht, therefore, is that it establishes a clear, if ambitious, agenda for economic union, makes some progress on political union, but makes scant headway on social union.

Up to now, social policies at the European level have taken effect through funding, legislation or exchanges of information. Proposals for some form of financial solidarity fund at the European level, linked to social protection, have consistently been rejected, including in the Treaty. As a result, the main focus of Union social policy is on free movement of workers and its implications for social security for migrants, equal pay, and health and safety. The issue that now has to be confronted is whether this limited response is consistent with the wider aims of Union.

The common ground in EU policy on social protection is articulated in Recommendation 92/442/EEC of July 1992 from the Council of Ministers. This proposed that there should be a convergence in the objectives of social protection, but that the implementation and funding of systems should be left entirely to the Member States. It is argued by the Commission that this approach is wholly consistent with the principle of subsidiarity, but that it also presages a new European model for social protection which brings together the desirable features of both the Bismarckian and Beveridge models. The Treaty also updates rules affecting the entitlements of EU migrants in respect of social protection.

The approach can be viewed both as a culmination and as a starting-point for further development. It is open to question, however, whether it goes far enough, given the significance of social protection today. Social spending accounts for a substantial share of total employment and income - an average of 25% of GDP in the EU, and over 30% in some Member States - and is a major element in public expenditure. It is also, as the Commission Report Social Protection in Europe notes, `at the heart of the debate on competitiveness, growth and employment'. The issue, then, is how to move forward.

There are manifestly many obstacles to a widening of the agenda of European integration to include social policy. Nevertheless, the various aspects of the interplay between EMU and social policy discussed in this paper point to a number of key issues that need to be resolved and suggest that fundamental questions about the evolution of social protection and the rules underpinning it in the EU will have to be confronted sooner rather than later. These include:

Progress on these will inevitably require a major shake-up in social policy, yet this appears to be a fairly remote prospect. At European level, wide-ranging, if somewhat unspecific agreements on areas for intervention are set out in the Social Protocol annexed to the Treaty. Amongst these, social security and social protection, together with employment protection are areas requiring unanimity rather than qualified majority voting. This suggests that any agreements on such measures will be hard to achieve and will be slow to materialise. Thus, although the Council Recommendation goes surprisingly far, the fact that it is no stronger than a recommendation is a recipe for equivocation. In addition, the focus on objectives rather than convergence in systems may be insufficient to satisfy the expectations of workers.

Many proposals have been put forward to promote convergence in social policy that goes further than the Council Recommendation. Perhaps the best developed is the `social snake' scheme advocated by Michel Dispersyn and his colleagues at the Université Libre de Bruxelles, under which agreed minimum standards would be gradually raised towards those prevailing in the Member States with the best developed systems of social protection. If necessary, this would include transfers of resources from richer to poorer Member States.

Another proposal is `The Thirteenth State', suggested by Danny Pieters from Leuven, a scheme to create a system of social insurance operated at the supra-national level, and aimed primarily at migrant workers. This is advocated as an alternative to the complexities of regulations governing the entitlements of those who move between national jurisdictions, and would involve the establishment of a system administered at the supra-national level which would operate alongside existing national ones.

Both the social snake and the 13th State would require major institutional changes and a strong commitment from Member States. Less comprehensive schemes have mainly focused on unemployment. These would establish a European system of unemployment insurance which would be funded from a proportion of the social charges levied in Member States. Such schemes would have the obvious equitable merit of being targeted at individuals in need rather than regions. Even these less ambitious schemes would, however, require that the Member States concede a critical point, namely that cross-border transfers for income support rather than structural purposes are justifiable. Linking cross-border payments exclusively to unemployment may, moreover, be unfair to those in employment but on low incomes or to the economically inactive.


IV - CONCLUDING REMARKS

Whether social issues are central or peripheral to economic integration in general, and monetary union in particular, is a question that elicits extensive, if inconclusive debate. There are those who consider that the distribution of costs and benefits are secondary issues, while others see social concerns as central such that failure rapidly to address social issues will risk a fragmentation of the EU. However, political realities cannot be disregarded. As things stand, proposals for a European welfare state would command little support and would severely test the capacity of EU institutions.

Given that there is no compelling reason to expect the European tier to be any more efficient in the delivery of social protection, the case for EU involvement hinges largely on the acceptability of cross-border transfers. This, in turn, requires that there be a willingness on the part of citizens throughout the EU to accept responsibility for the well-being of their fellow citizens in other Member States. Within Member States, such solidarity has been established over several decades and is part of the fabric of the nation-state. German EMU in 1990 required and obtained substantial transfers from the West to the new Länder, and this was, essentially, politically acceptable. Yet at the European level, both the political will and cross-border solidarity are lacking.

However, it can also be justified as a response to common problems. Thus, recent trends suggest that the role of social protection will have to be widened to incorporate action to promote employment and address exclusion. In other words, the boundary between social protection policy and labour market policies is becoming increasingly blurred as social protection aims to do more than provide replacement income. The establishment of an agency for social protection at the EU level could, consequently, provide a valuable complement to the activities of the Social Fund in these domains. Moreover, it need not be directly accountable to the Commission, but could instead have a separate legal status in the same way as the putative European Central Bank.

Political realism suggests that there will be stiff resistance to any call for common social policy. For this reason alone, the introduction of far-reaching schemes such as the Thirteenth State or the social snake is unlikely to be welcome. While it is essential to make progress in developing EU social policies, particularly in relation to distributive questions, these need to evolve slowly in order both to be politically acceptable and to allow time for `policy learning' by the EU tier. This suggests that a gradualist approach, albeit one with ambitious strategic aims, will be most fruitful. In time, this will nevertheless imply a transfer of responsibility to the EU tier, if not for implementation, at least for part of the funding of social policy and the setting of standards.

A first requirement is political effort to improve solidarity and the sense of citizenship and belonging to Europe. Following on from this, the principle that cross-border transfers mediated by the highest tier of government are a necessary feature of an economic union has to be established and progressively implemented. A possible first step towards this would be the creation of a new fund aimed at the unemployed. In the longer-term, this would pave the way for an effective redistribution at the level of households, and not just regions. There is also a need to build on existing provision for migrants, both to promote the efficient operation of the single market (especially the labour market) and to avoid difficulties arising from inconsistencies in entitlements and charges.

The conclusion of this paper is that the current mixture of Member State and EU responsibilities in the social field will no longer be appropriate as the European economies become more integrated. Changing this will require bold decisions about what form of Union the EU is to become. Questions also need to be answered about the `social model' Europe wants. These must be regarded as fitting topics for the agenda of the inter-governmental conference due to take place in 1996.

21-12-1994


(*) Professor of International Economics, South Bank University, 103 Borough Road, London SE1 0AA. This article draws on work done by the author for the European Parliament, but the views expressed are his own and do not necessarily accord with those of the Parliament.

BACKHOME CONTACT NEXT