Social policy and economic performance

Padraig Flynn*

Over the lifetime of the Union, we have more than doubled living standards in Europe. We are the largest, most productive, economic entity in the world. We produce a fifth of the world's output with 6% of its population. That economic success is built on deep social foundations. We have steered a unique course in the world, between excessive liberalism - which risks social fragmentation; and excessive paternalism - which stifles initiative and innovation.

That balance has equipped us to embrace continuous structural economic change - at work, in the home, and in society at large. It has proved the oil of change at important moments in our history, at times of great upheaval.

This combination, of supportive social policies and positive economic policies, has enabled the Union to establish Europe's place in the world; driving enlargements, past and pending. Attracting richer and poorer neighbours, and welcoming all of them equally.

Today, that model is under threat - from three sides:  

- From those who take a narrow, selfish, view - who feel they would do better in a free-for-all world, where society's responsibilities, the notion of society, go out of the window.

- From those who recognise value in developed social policies, but believe we can no longer afford them in the modern, competitive, global economy.

The coming three years will determine whether we succeed, or fail, in maintaining the economic and social balance on which the Union is founded. We have important political milestones and economic tasks, around the next corner. They offer contradictions for social policy perspectives.

On one hand, citizens will be asked to vote on the future of Europe - in general elections, European Parliament elections, and national referenda following the IGC. There are no doubts about what citizens think. They demand that governments and the European Union do more to get Europe to work, especially our young. They demand fairness for those damaged by structural change, with all that means for social policy investment.

At the same time, almost every government is struggling with deficits in public finances. Austerity has been the key word so far, and social protection is under attack.

These milestones, these contradictions, these pressures, make this a defining moment. How do we respond, to bring these contradictory strains, which all have credence, together into one policy perspective?

 How do we respond?

- by rebuffing robustly those whose so-called intellectual framework, whose definition of competitiveness, finds it possible to situate economic health in a social wasteland;

- by making quite plain the rude health, and strong prospects, of the European economy;

- and by calling strongly for renewal of the various facets of our Social Model, to equip it for its new economic and social tasks, rather than just venerate some glorious past.

Let me return to the three threats I have defined.

To those who take the narrow, selfish, view of social policy, I say two things:  

- First, don't assume you will inevitably succeed in life's endeavour. With wealth and health, you may do better than average. But we all need insurance against what the future might auger. Much social spending - on social protection, the unemployed, pensions, and health - is a form of insurance. If it is more costly than private insurance-if it is-that's not because private insurance is more efficient, but because it's selective, before you join, and when things go wrong.

- Secondly, do not take the social order for granted. The social order - the laws, practices, and institutions, of life - provides constant support and vigilant protection for all of us:

It enables the ambitious to succeed, the vast majority to aspire, and the less fortunate to survive.

That unwritten contract, is built on many decades of political, economic, and social investment. Don't take this for granted. If we do not maintain our systems, the thread of the contract may break. The more the system weakens, the more the costs fall back on the individual.

The bill is simply re-drawn, as a guard dog economy.

If we want civilised societies, we must invest in our societies. If we want a value-added economy, we must equip workers to add value. The selfish view is a myopic view. It fails as a societal and as an economic solution.

To the competitiveness pessimists.

I could reply in polemical terms - that there is nothing competitive about poor levels of education and poverty, and high levels of crime. But I will answer in economic terms. The critics are wrong in economic terms.

Being competitive means being able to pay your way in the World. Europe does. We have a current account surplus with the rest of the world of over 1% of GDP. We have surpluses, or balanced trade, with all the main regions - including the Newly Industrialised Countries, Central and Eastern Europe and the U.S. It means being attractive to foreign direct investment. It means being smart enough to invest where we trade. We are attractive. We are smart. And we are in balance, with similar flows, each of over 20 billion ecus each year, into and out of, the Community.

Being competitive means keeping costs and prices down. We do. Inflation averages under 3% a year across the Union, with no sign of pressures to increase. And sustained wage moderation over the last decade means Union profitability is back to the level of the early 1970s

And that's not the full story. Real improvements in living standards don't depend on comparative competitiveness. They depend on absolute levels of productivity. Producing more output for the capital and labour invested is the basis of a better life. We have a sound record here - producing productivity improvements of 2% over each of the last 20 years, when US productivity growth has been more like half-a-percent a year.

But, you might ask, aren't Europe's labour costs much higher than the United States? No.

First, unit labour costs depend, not just on wages, but on productivity. If productivity is higher, wages can be higher. And when we consider trade between countries, unit labour costs in national currencies are adjusted by exchange rates.

These factors equalise comparative labour costs between countries. They make the discussion one of facts, not opinion. Another fact is that countries with high wages, high levels of investment, and high living standards perform better than countries with low wages, low investment and low social standards.

Secondly, non-wage labour costs. We hear that Europe must be uncompetitive, because employers have to pay high non-wage costs on top of wages to fund our burdensome social security systems.

But, what is this money used for? Education, health, pensions, social insurance, which employees in other regimes fund from take-home pay. They pay from a different pot, but they pay. The total share of wages - all wage costs, including non-wage costs - in total value-added, total GDP if you like, is virtually identical in Europe, the United States and Japan.

Can I turn from our critics to our supporters.

I share your values. But we cannot live in the past. Only far-reaching reforms will enable our systems to continue to deliver value, and command the future. Our systems of: education and training; taxation; social security; labour law and collective bargaining, were built on assumptions about work and society which are no longer valid. They still reflect a world of single job and skill, of mass manufacturing, with stable family structures and male breadwinners.

Today's reality is one of; multi-skilling; process not product; down-sizing and contracting out; more women needing and wanting to work; and the spread of the one-parent family. That's why we need structural reforms to help more people into work. New approaches to skills, work organisation and the integration of those hit by structural upheaval back into the labour market.

This is not about discarding or dismantling social provision. It is about recognising that we cannot continue with growing deficits; an ever bigger share of public expenditures spent on interest rates; more payments to the best-off members of our society; and less and less to social protection, or the future structure of needs.

Public policy must be purposeful and supportive, shifting from soft, benefit-orientated, policies, to strongly employment-oriented policies. Continuing to ensure that change in the economy is socially accepted, and prosperity is widely shared. This means, not just financial and legislative changes, but new partnerships between government, business and organised labour, and a new focus on investment in people for productivity growth and competitive success.

If you are not convinced by looking around us today, look at the implications of demographic change, especially for training, health and pension expenditure. Over the next generation, the age structure of Europe will change dramatically. By 2025, the number of people over 60 will increase by nearly 50%. Maybe that seems too far from today.

What about 8 years from now, when the balance of the population of working age - from 20 to 65 years - will already have changed significantly, with 17% less of the age group most attractive to employers, the 20-30 year olds, and a 12% increase in the least attractive age group, the 50-60 year olds. Our workforce is ageing, with important implications for traditional hire and fire assumptions, training assumptions, and inter-generational contract assumptions.

The consequences for pensions and health expenditure are dramatic. Those over 75 years old currently consume five times, per capita, the annual health expenditures of the younger age groups. 40% of health expenditure is consumed by the retired.

These facts are not an attack on older people, or on those of us, here, whose applications for membership are well advanced. We intend, and our economies must plan for, an active and productive third age. Providers of goods and services would do well to examine the market potential of such a great wave of healthy, active, pensioners.

These demographic developments need not mean disaster for public budgets. We must, in any case, reduce avoidable health expenditures through positive, preventative, health care in younger age groups. And we should concentrate on policy choices, and not be confused by technical red herrings which, sometimes disingenuously, cloud the debate, for example, over unfunded, versus funded, pensions.

But let's not underestimate the task, not least in terms of the responsibility of social policy to equip the whole workforce to achieve its productive potential, to make the arithmetic work.

Two conclusions can be drawn.

First, Europe's social models have not created economic weakness - rather the contrary.

Secondly, reforms are essential, to cope with the new shape of working life, and demographic change.But, how far can we resolve our difficulties through reductions in provision, better targeting and increased efficiency? And how far by increasing available resources through stronger economic growth and high levels of employment?

Here, we must consider two things, Europe's economic position in the world economy, and our economic prospects in the coming years. Despite our prominent role in World trade and international affairs, Europe - just like, the United States - is a relatively self-contained economic entity.92% of our demand is met from European production, only 8% through imports from outside the EU. Those 8% imports are matched by a little over 8% in exports. More to the point, trade within the Union has doubled in 30 years, particularly through the Internal Market. It will increase further as remaining barriers are removed, and as more domestically-focused European businesses plan for Europe as their market, rather than the national economy. 

But what does this mean for social policies?

It means we have a choice about the social model we pursue. We are not at the mercy of international forces.

We are competitive in the world. More importantly, that competition is nothing like as significant as internal European competition. In that market, Europe, we make the rules.

We have already decided many things about how we compete within the Union - rules of competition, monopolies, rates of VAT, product and service standards - with other issues on the agenda. We, as Member States, collectively or individually, can choose what we want of social models, without fear of external consequences.

Social policy is often presented in terms of efficiency versus equity, creating an artificial language of opposites. But Europe can demonstrate efficiency and equity in its social policies. They are not perfect, but they are not fundamentally flawed. They need to be adapted, but they remain fundamentally sound.

If that is so: 

why does Europe have 11% of its registered workforce unemployed?

Unemployment is Europe's Achille's heel. But we must be clear why we are in this situation. And what the prospects are for the future. Europe's employment problems are primarily the result of errors of past economic management.

Job losses are concentrated in three periods of recession over the last two decades, from which we were very slow to re - emerge.

Our problems come from a mixture of tight monetary policies and lax budgetary policies, which pushed up real interest rates, and discouraged investment, including in the late 1980s, when growth was strong. And from currency turmoil during difficult stages in the ERM, when the markets exploited every weakness, as we sought to bring our respective national economic polices into line.

We also failed to recognise the consequences of increased economic inter-dependence within the Union, and failed to act together to maintain demand and employment. There was too much emphasis on the supply side alone.

It is in this respect that we compare badly with the more pro-active macro-economic policy stance in the United States, not in terms of labour and social policies. But, we do have to adapt our employment systems, to address existing problems, and to position ourselves for the future. We must move, more dynamically, from old skills to new skills.

We cannot compete in the world, while offering only 10% of those unemployed new skills, and leaving the other 90% languishing in de-learning.

We cannot compete, while sending 20% of our young people into the labour market without recognised, marketable qualifications.

We cannot train and motivate our workforce, the engine of our prosperity, if the necessity of flexibility, of new forms of work organisation, is taken as crude code for "thank you and goodbye".

And we cannot meet our productive potential, with a labour market still segregated by gender, still fraught with barriers to reconciliation of work, family and life long learning.

These flaws in the functioning of our systems must be addressed as a matter of efficiency as well as equity.

Demonstrate confidence in our real achievements

The economic fundamentals of the Union are sound - with our trade surplus, low inflation and high profitability. We need to act on these facts, to invest for the future - in both capital and people. The Dublin Council has been a great spur to this message.

In the view of my colleague, Yves de Silguy, responsible for economic affairs, there is nothing to stop the EU economy growing at 3 - 3% a year - which it achieved from 1985 to 1990 - for the next 5 to 10 years, if we increase our rate of investment, to provide the additional productive capacity. That could bring us not only much improved employment levels - remembering that we created 10 million jobs in the late 1980s - but much improved public budgets.That will only happen if we stop knocking Europe, and start to sell our strengths - which lie in our social policies as well as our economic ones.

If American politicians and businesses talked about their economy and society as some of ours talk about Europe, we would hear only about murder rates in cities, drugs and weapons in schools, functional illiteracy in large sections of the workforce, endemic insecurity, and continually rising costs of transfers to the working poor.

We should demonstrate confidence in our real achievements, and in our ability to build an even stronger Europe, based on a level playing field for society and economy .

We are entering a new phase of the European project.

Integration - developed through the single market - will be strengthened by monetary union. A single market and a single currency will bring us some of the real competitive advantages that the United States has had for well over 100 years.

The new Treaty, post-IGC, will extend and consolidate the Union, and prepare enlargement. A new financial structure will reflect changing responsibilities, and ensure Community resources strengthen Union performance. In planning that future, we must stop being coy about the consequences of economic integration for social issues. The first responsibility in the employment and social fields rests with Member States.

But Europe, as an entity, creates a potential, a need, for common action. Social policy thinking is adjusting to this new reality, and I am delighted to offer you the future of social protection as a very appropriate example of recognition of European added-value.

It is an issue which is, clearly, a Member State responsibility, but just as clearly, subject to common challenges of design, purpose and funding.

It is an issue which is now a matter of common reflection, endeavour, and development, as we move from the Commission's " Framework for Debate on the Future of Social Protection" of last October, and build on the strong appreciation of the Member States for its contribution.

I am very pleased to announce here that the next step in this important process is now in train. The Commission will present, next month, a Communication on " Improving Social Protection in the Union". Its purpose is to use the process we have gone through together, of analysis and discussion, of agreements on the elements of the European Employment Strategy, to take the next step.

To map out how the 28% of Union GDP, and the staggering 1,800 Billion Ecus which that represents, can be better deployed, not least to get people back to work.

I welcome this enhanced collaboration, this sharing of common problems and responses. Because we ignore at our peril, the need to consider, much more, the social consequences - and opportunities - which flow from, and which enable, economic integration.

* * *

In our work, at local, national, or at European level, we sometimes have difficulty convincing people that what we are doing is relevant to them. Not this time, not this issue.

The theme of this Conference has deep resonance for citizens of the Union, whether consumers, workers, entrepreneurs or investors. We, here, may wrestle, intellectually or arithmetically, with the notion of social policy as a productive factor. Citizens have no problem with this principle. They see us as guardians of their values, not just their taxes. They look to us to help ensure a civilised and productive European society.

They have the power to enforce that demand.

Citizens know it is crucial to develop the monetary, institutional, and financial building blocks of the enlargement and modernisation of the Union. But they know that the cement of this edifice, the social cohesion social policy represents, must receive the attention it deserves. Because, without it, there is no integration. They know that Europe can afford it. They know that social provision, from safety at work to child and elderly care, from upgrading skills to collective arrangements in the workplace, are integral to their sense of a productive European society. They can't quite understand why people like me seem to have to take a slightly defensive stance in the face of collective tangible prosperity and prospects, without recourse to statistics. And of noisily, almost rudely, obvious connections between investment in people, over 40 years, and the Union's economic success. Can you, in this room?

The citizens of Europe are not party to the political negotiations now unfolding. But they will soon be presented with the opportunity to judge how well we have defined the future of social policy on their behalf. They will tell us then how well we have understood the equation of interdependence between social policy and economic performance, and whether we have found the balance they require.

This meeting, and the work which will follow, must anticipate their will in planning the next phase of European construction. Thank you.