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GLOBALIZATION AND REFORM OF
EUROPEAN SOCIAL MODEL (ESM)
Author ANDRE SAPIR for ECOFIN
(9 September 2005)
Prepared by GIULIO LICO
GLOBALIZATION AND REFORM OF ESM
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Key issues/challenges of Europe in globalized world
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EU: Key Performance Indicators (KPI ) priorities in “one world”
–
EU: enlargement deepening trade-off
–
Gauge of overall un-sustainability / unfitness of ESM
ESM’s reform toward more flexibility is pivotal to EU’s future
–
Different LMSP recipes in MSs, suitable to each ESM’s taste
–
EU pushing through SMP, while MSs focusing on LMSP
–
Micro reforms (supply side) / macro ones coordination
EU policies/history and perspective
–
SMP not fully implemented/rooted in yesterday’s thinking
–
Missed labour market reform hampers growth perspective
–
Missing ingredients Main policy equation to boost Europe
EU Key Performance Indicators KPI priorities in “one world”
 Growth #1 in Europe to sustain peace and prosperity
 Today growth driven by innovation economy/flexible society
 Developing countries catch-up by trade/GDP/income distribution
1970
SHARE OF IMPORTS
MANUF.GOODS IN DEVELOPED
COUNTRIES FROM DEVELOPING
ONES
10%
SHARE % W. POPULATION
50%
11%
7%
5%
100%
TODAY
45%
2%
FROM CHINA
DEVELOPING ASIA
G7
EU-25
US
WORLD
1985
% W GDP PPP
25%
45%
21%
21%
100%
15%
EXPECTED P.A. GDP GROWTH
NEXT YEARS
6%
2%
3%
4%
Globalization is faster than EU institutional achievements
Choice for EU is to make globalization an opportunity or a threat
EU: Enlargement-Deepening trade off
•SMP 27 for attractiveness of EU/ for comparative advantage
•Rosy scenario by “elites”: enlargement as positive sum game if MSs labour market &
social policies (LMSP) are conducive to change in specialization
•as opposed to
•Grey scenario NMS by “citizens”: enlargement as zero sum game where gains of new
member states come at expense of old ones
•Pan European industrial reorganization as threat / ↑ competition ↑ delocalization
↑ immigration
•Enlargement by increasing social/economic
completion/deepening of single market
disparities
is
pit
against
the
•Dysfunctional LMSP is a threat to currency union (€)
•Public discontent/lack of consensus, yet surfaced in referendums and service directive,
put single market project (SMP) in stalemate
Gauge of overall un-sustainability/unfitness of ESM
oNordic countries (Denmark, Finland, Sweden, Netherland)
oHighest level of social protection expenditures
oExtensive fiscal intervention on labour markets “active policy”
oCompressed wage structure, low income disparities
oAnglo-Saxon countries (UK, Ireland)
oLarge social assistance of last resort
oCash transfer primarily to working age people
oConditional access to regular employment benefits
oWeak unions, wide wage dispersion, high incidence of low-paid
oContinental countries (Austria, Belgium, France, Germany, Luxembourg)
oInsurance based unemployment benefits and old age pensions
oStrong union and extensive coverage of collective bargaining
oLow income disparities
oMediterranean countries (Italy, Greece, Portugal, Spain)
oSocial spending on old age pensions
oSocial welfare on employment protection and early retirements
oWage structure compressed, collective bargaining, strong unions
oReduction of income inequality and poverty
REDISTRIBUTION / VIA TAXES /
TRANSFERS
POVERTY AFTER TAXES /
TRANSFERS
NORDIC
42%
12%
CONT
39%
12%
ANGLO
39%
20%
MED
35%
20%
POVERTY < 60% AVERAGE DISPOSABLE INCOME
Gauge of overall un-sustainability/unfitness of ESM
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Protection against uninsurable market risks provided by EPL and UB:
Insiders (those with a stable and regular job) prefer EPL to UB
•
USA with lower unemployment => less social / more market insurance
Gauge of overall un-sustainability/unfitness of ESM
•
Rewards to labour market participation
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Equity VS efficiency trade off
The stricter the EPL of a model, the lower the employment rate
The UB generosity plays a secondary role
Poverty rate is weakly correlated with redistributive policy but mostly to distribution of
human capital in the market, since the lower the level of secondary education, the higher
the risk of poverty
Gauge of overall un-sustainability/unfitness of ESM
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Inefficient models are not sustainable in face of strains on public finances from
globalization, tech. change, aging population
DEBT/GDP RATIO MED 81% CONT 73% NORDIC 49% ANGLO 36%
Non equitable model can be sustainable provided they reflect a viable political choice
MED and CONT models must be reformed to efficiency by reducing disincentives to work
and to growth with chosen path depending on political equilibrium (CONT to NORDIC, MED
to ANGLO or....)
Overriding reasons to reform inefficient welfare states
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Perceived un-sustainability
Un-sustainability of CONT/MED to 2/3 of EU 25 and 90% of EU12 vs. Impairing EU.
ESM reform towards more flexibility is pivotal to EU’s future
•
Given the structure of European governance, is there a case of coordination?
– of labour market reforms (LMSP) among EU countries
– of LMSP at national level with product/capital one at EU level
– of structural reforms (supply side) with macroeconomic policy (with fiscal policy within
responsibility of members states MS and monetary policy managed by ECB)
Different LMSP recipes in MS, suitable to each ESM’s taste
 EES (European Employment Strategy) vs. OECD (Organization of Economic Cooperation
Development) benchmarking.
 Conceiving/engineering LMSP reforms by MSs according to their own economic, social,
political reality
 Coordination more an obstacle than a catalyst since it blurs, among public, responsibility
about who is in charge of LMSP
 No votes in referendum as reactions of fear of unemployment, labour market reforms,
globalization, privatization and consolidation of welfare states
 Disaffection is the primary political problem for European governments, since it’s directed
both against poor economic performance and against reform measures designed to improve
it
 Since surmounting EU deficit perception is difficult political problem for national
governments, placing responsibility where power lies is crucial, so to MS’s
EU pushing through full SMP, while MS focusing on LMSP
 Mutual interaction between product/capital market structure and labour market
one
 In principle national labour market are domestic issue for MS with no spill-over,
but since they interact with single market: the better they operate, the easier is to
reform single market and vice versa.
 Chicken and egg dilemma is
either
to concentrate on EU product and capital market liberalization and expect that this
will trigger labour market reforms at national levels through some “TINA” (There Is
No Alternative) process
or
to act simultaneously at EU level and at national one with more synergy
 Lisbon agenda, as an attempt to enhance this two handed coordination, so far has
poorly delivered
Micro reforms (supply side) / macro ones coordination
 EU12 euro-zone share common currency, therefore common interest rate set by ECB with
respect to average inflation in euro-zone
 To the extent, therefore, that structural reforms in one (or more) country affect the average
inflation of euro-zone, there is scope for coordinating structural reforms
 Importance of coordination since reforms are costly in short term
 Therefore reforms are easier while accompanied by monetary expansion (to offset their effect
on monetary demand) and by fiscal relaxation (to compensate the losers)
 ECB is unwilling to engage in formal coordination (it is independent) with the government of
euro-zone
 Governments needs to act first to convince ECB they are serious about economics reforms;
the more credible the reforms the greater the likelihood of a move by ECB
 Coordinated structural reforms would be a powerful signal for ECB and would help
governments to bridge the confidence gap between EU governance and its citizens
EU policies/history and perspectives
 SMP not fully implemented/rooted in yesterday’s thinking
– Since 1993 only goods not yet services.
– Focused on large internal market / economies of scale.
– Less focused on today’s priority: new markets, labour retraining, R&D, education.
 Missed labour market reform hampers growth perspective
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Without labour mobility at national level SMP is impaired.
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The watered down Bolkenstein directive impairs 70% of EU GDP employment growth
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Rigidity in services limits competitiveness of manufacturing sector and discourages
foreign multinational investments
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“polish plumber”; difficult reconciling between SMP in EU27 with economic social
disparities with preservation of ESM for old MSs
EU policies/history and perspectives
•
It is not the single market that threatens the “European Social Model”, but the inability
to reform it in the face of rapid global changes, because “the freedom to provide
services within the European Community” and world can’t be stopped:
• Manufacturing in China and back offices in India
• Manufacturing and services by NMS in proximity
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Main policy equation to boost Europe
– Full SMP + SGP reform + quality budget at EU level and LMSP reform at MS level, thereby:
sustaining suitable ESM
exploiting EU comparative advantage in the world
– Europe at crossroad between two options
Full integration with political will
or
Free trade area with less political will